Ghana: Devaluation and strategy for development (2)
Following the last devaluation and new exchange rate, workers of the country took to the streets of Accra and Tema to demonstrate about high cost of living. Our correspondent concludes his review published last week, of the management of the economy of the PNDC.An overvalued cedi certainly made imports cheaper. By artificially main- taining a rate of exchange, our govern- ment subsidised imports and contributed more to the desires of the urban elite and their dependents for imported items and failed to reward the toils of those who produced the bulk of the goods which earned us foreign exchange.
But the principal objection to devaluation was that it placed intolerable burdens on the average Ghanaian. Undoubtedly the series of devaluations have made deep dents into the pockets of the Ghanaian. Given the cost of living in Ghana now, a minimum wage of 90 cedis a day cannot even feed a dog.
If, on the other hand, the political leadership were to sell the need for austerity and to make imaginative proposals to assure the average Ghanaian of his basics without taking away from the objectives of the current programme, the government might be able to carry on without much pressure. But there is bound to be a problem if the people see that some do not feel the effects of the devaluation.
We have already indicated that there is a case to be made for devaluation in Ghana. But it does seem as if these exchange rate adjustments were not accompanied by the kind of reforms and measures which would have had a lasting beneficial impact on our economy. They were also coordinated with other aspects of the recovery plan to reverse the crisis in the economy and lay firm foundations for renewal. If they had been vigorously pursued between 1983 and now, the results would have been apparent. As it was, the potential for success was allowed to fritter away.
The problem was that each announce- ment of devaluation was followed by sharp price and cost rises to the extent that they wiped out any advantages the devaluation would have brought the economy. In a sellers' market, there was no way the pressures generated by a devaluation would have worked through to have a positive impact on internal performance. The recent announcement of a 90 cedi to the dollar devaluation would certainly make prices look ridiculous and generate demands from the working population for salary adjustments to cope with the cost of living, consequently adding to inflation in Ghana.
The government's inability to use economic measures to change Ghana's public and private consumption habits also meant that price rises did not really affect the public and private appetite for things which required outlays of the rather scarce foreign currency. Pressure was therefore mounted on foreign exchange resource availabilities. Since the government's own accumulation of this was limited, many Ghanaians resorted to the black market. Demand for foreign currency on this market was so high that it pulled up the unofficial rate of exchange, so that when the cedi was officially devalued, this rate of exchange looked unrealistic in comparison and was subjected to pressures of its own from the black market.
The problem was that each announcement of devaluation was followed by sharp price and cost rises.
This may help explain the regular adjustments of the cedi but it was not the only reason. In the situation described above, the most realistic options would have been for the banks to intervene on the black market to influence its rates and so help protect the official rate and/or to liberalise the foreign exchange market in Ghana. The banks have always been un- willing to do these. By 1985, unofficial holdings of convertible currency threatened to dwarf the Banks' own. If there was the opportunity to adopt these options, the time was now.
Devaluations cannot have the impact desired if they are not accompanied by a vigorous expansion of exports. In Ghana's case, it is lamentable that the years 1983-86 have seen a gradual contraction of our export values. In the case of our traditional items, production and marketing problems accounted for the slump. No new products were identified and marketed to widen and strengthen the export base of the economy. Bureaucratic restrictions have always frustrated the efforts of those who want to sell abroad. It is still easier to import than to export a basket of tropical fruits. The contraction of exports means less foreign exchange. Given the non-convertibility of the cedi, sound money also means expansion of our convertible reserve holdings which only an active export profile would create for Ghana. Thus the more foreign currency we hold, the greater the impetus towards the creation of a sound cedi. For a developing country like Ghana, foreign reserves are needed to finance current account deficits of our balance of payments.
It is simple for countries with convertible currency, who can tackle this problem by borrowing on capital markets or raising interest rates to attract foreign currency. If as in our case, our balance of payments are in a disequilibrium, the only recourse is to go to the IMF for help. Its help is conditional, among other things, adjusting the rate of exchange to reflect our payments position. The IMF's support enables us to borrow from other sources. If we are not able to implement the Fund's conditionalities with vigour and the problems of disequilibrium remain, then we will have to devalue if we are to continue to enjoy foreign support.
Thus Ghana's devaluations could have been predicted by anybody with a rudimentary knowledge of trends in the Ghanaian economy. That it was SO massive should surely indicate that all the indices determining the value of the cedi were negative. Until the PNDC is able to promote policies which will reduce inflation, generate real growth and boost exports, there will be more devaluations in the future. On the available evidence, there will have to be further adjustments of the cedi to bring the rate to about 120:1 before 1986 is out..
Of course the effect of the devaluations on import-oriented firms have been disastrous. By being forced to pay more cedis for their import requirements, they are almost in a situation where they cannot raise funds to finance their requirements. For example if in 1985, a firm needed C30 million to finance a $2 million import licence, it would now require C45 million. This would curtail his imports. Well and good if these are non-essentials.
If they are essential, the firm would have to raise prices for it to make an adequate return on his investment. It is to be expected that in this situation imports will fall. Because imports have fallen taxes and duties raised from this will be low. Add taxes on incomes which are low and duties on exports which are in decline, then you have a situation where government revenues are bound to be lower than targeted. Herein lies a reason for the low amount of receivables which have dogged government revenues for the duration of the recovery plan.
Over a 12 month period in 1985, the Retail Prices Index, as measured by a basket of necessities with 1980 as the base year, showed that rather than slow down in response to government measures, this had risen steeply. Even after adjusting for the devaluations, the underlying trend still remained high. This is what Kwesi Botchwey should be looking at in his claims that inflation had fallen. If he dared to, he would be shocked and would be forced to keep quiet.
The cumulative effects of high prices, rising public expenditure, low productivity and scarce foreign exchange have been to raise the level of inflation in Ghana. To the extent that if we do not take care, we will soon require a barrel of cedis to buy a loaf of bread. That inflation is rising faster than expected is confirmed by the recent devaluation. The fact of the matter is that the government has no effective counter-inflation strategy.
A consequence of rising prices is that even export-oriented firms cannot meet their local costs from the considerable. amount of local counterpart funds they will have exchanged for their foreign earnings. Rising costs have eaten deeply into the funds they have generated. Kwesi Botchwey please note.
MISAPPLICATION OF FOREIGN CREDITS
A charge often made against the PNDC is that they have misused the foreign financial and economic assistance that have flowed into Ghana. Instead of judiciously using these to lay the foundations for growth in the key economic sectors, eg. export sector, there are indications that they have been misapplied. A considerable amount of these credits have been used to improve need to: the security of the regime. Import licence backed by these funds have been utililsed to purchase consumer goods. In many cases they have been sold in London to people who are not interested in the economic prospects of Ghana. There were indications that as soon as the PNDC started to receive foreign assistance, it forgot it had to use this for the Economic Recovery Programme.CONCLUSIONS
The lack of discipline in the management of the recovery programme has ensured that the targets and objectives set in the plan are no longer valid. This is what mentation. should worry the multi-lateral agencies co-managing the programme on behalf of not only themselves but also the Paris Club. Unless there is a comprehensive review of current policies and practices. the considerable prospects for failure noted elsewhere in this article will be irreversible.It will be interesting to see what sort of budget follows the recent devaluation. The budget statement should show the direction the economy is taking. It should also indicate whether figures are still being massaged to convey a false picture of good prospects now that there is pressure on the PNDC to show results There is nothing, however, to shake me from the belief that Dr Kwesi Botchwey and his gurus are presiding over an unmitigated disaster.
The sad part of the current situation in Ghana is that the PNDC has had more opportunities than any previous government to carry through with fundamental reforms and to implement a programme. It has had the most goodwill Donor and sustained support from the IMF World Bank, and Western countries. And yet it had not used these strategic factors to decisive effect or advantage.
INGREDIENTS OF A SUCCESSFUL POLICY
It is not the intention of this review to tell the PNDC nor, for that matter, any government in Ghana, what it should do. But it is evident that for the successful management of any economy, there is thePersuade the political leadership to take more than a passing interest in economics and be quite clear on the strategic objectives of their economic policy. Coordinate the macro and micro aspects of economic policy in such a way as to achieve positive results.
Recognise that controlling inflation is at the centrepiece of any strategy of success: and that there is no alternative to the hard way which can only result in faster productivity growth inflation. Improve discipline in following through with policy from formulation to implementation
Sharpen decision taking skills and overall management expertise at key and critical sectors of the economy.
