Reverse Directives On Dollar Ban — Bawumia Tells BoG
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Reverse Directives On Dollar Ban — Bawumia Tells BoG
01 April 2014
An economist and visiting professor of Economic Governance at the Central University College (CUC), Dr Mahamudu Bawumia, has joined other groups prevailing on the Bank of Ghana to reverse its directives on the operations of Foreign Exchange Accounts (FCA) and Foreign Exchange Account (FEA).
According to him, the directives are counter-productive and will deepen ‘black market’ activity.
Dr Bawumia, who was the running mate for the New Patriotic Party (NPP) in the 2012 presidential election, said measures such as what the Bank of Ghana issued out amounted to fighting the effects of dollarisation and not the causes and amounted to an exercise in futility.
His call comes at a time when some bodies, including the Association of Ghana Industries (AGI) and the Ghana Real Estate Development Association (GREDA), are also mounting pressure on the central bank to relax the ban on the use of the US dollar because of the impact of the ban on their operations.
Delivering a lecturer organised by the CUC, as part of its Distinguished Speaker series, on the topic “Restoring the Value of the Cedi”, Dr Bawumia attributed the fall in the value of Ghana’s currency, the cedi, to poor economic fundamentals rather than the popular reasons making the rounds such as dollarisation, the quantitative easing in the US economy and the structure of the economy, which hasn’t changed since the colonial days.
He explained worsening economic fundamentals to mean slow GDP growth rate; twin double-digit deficits in fiscal and current account balances, low growth in industry and agriculture and low gross and net international reserves, double-digit inflation, rising public debts and high levels of debt servicing as well as large and increasing central bank financing of fiscal deficits.
Dr Bawumia, one-time the first deputy governor of the Bank of Ghana, said dollarisation was a risk mitigating measure and a reaction of rational economic players to expected depreciation of a currency.
He said the law that firms should quote prices in the cedi was a good one that should be enforced, but was quick to add that “while that is so, as long as the economic fundamentals are weak, there is no law that can stop any firm or individual from wanting to hold dollars as a store of value or thinking in dollar terms even though they price in cedis.”
“Government should rather focus on pursuing policies that would stabilise the cedi and make the dollar irrelevant in domestic transactions,” he stated.
Dr Bawuma further questioned dollarisation in the economy as an explanation for the depreciation in the value of the cedi, saying even though the country had little or no dealings with the Hong Kong dollar; the East Caribbean dollar; the South Korean won and the Chinese Yuan, the cedi had recently been depreciating against them.
The Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, Prof. Peter Quartey, said the phenomenon was possible once the US dollar was the anchor for currency relativity. Therefore, a depreciation of the cedi against the dollar in a situation where those currencies appreciated against the dollar, the cedi would relatively weaken against such ancillary currencies as well.
Although Ghana trades very little in those currencies, traders first hold the dollar before going to order goods in say South Korea or China, before converting to the currencies of those economies. This would cause the value of the cedi to also depreciate relative to those currencies.
Although the Bank of Ghana was not immediately available, the bank has on various platforms defended the measure.
According to the Bank of Ghana, the measures were to cut off the artificial future demand for the US dollar, which compelled individuals and businesses to buy the dollars and keep them against future transactions.
By that measure, people will demand the dollar only when needed and supply will also increase within the banking sector.
Dr Bawumia caveated his lecture with the allusion that the causes of the cedi’s depreciation in value were economic and required careful diagnoses to reach a consensus.
However, shortly after the lecture, the economist came under a barrage of criticism for selectively analysing data, dwelling on periods when the NPP was in power to illustrate a bullish economy, while using periods of the governing NDC to paint a gloomy picture.
For instance, in his analyses on why the colonial structure of the economy could not be the reason for the cedi’s weakening value, Dr Bawumia questioned why the cedi’s 2.25 per cent average depreciation of 2004 and 2007, as well as the five per cent average depreciation of 2010 and 2011 were not blamed on the economic structure as was being done for the 2012-2014 depreciations.
Single Spine
The macroeconomist also postulated that Single Spine Salary Structure (SSSS) was neither the cause of the depreciation in the exchange rate of the cedi nor the current economic woes, saying “the wage bill as a percentage of Ghana’s Gross Domestic Product (GDP), although high, was not new to the economy.
He further challenged explanations that the current government wage bill was 42.9 per cent of total domestic revenue in 2012, which was not significantly different from the 2008 relativity of 41.3 per cent, adding that although the bill had increased, domestic revenue had increased by more than twice the increase in the wage bill.
However, GRAPHIC BUSINESS checks revealed that the budgets of 2010 to 2014 have always compared total compensation to domestic revenue.
The 2013 budget put the SSSS to domestic revenue at 69 per cent, using compensation (that comprised salaries and wages, gratuities, pensions, allowances, etc.) and not only the decoupled ‘wages and salaries’ which Dr Bawumia referred to.
In 2010, the provisional outturn for recurrent expenditure was GH¢8.05 billion, to which wages and salaries contributed GH¢3.18 billion.
Last year, compensation of employees was budgeted at GH¢9 billion, out of which GH¢7.46 billion was allocated for wages and salaries. The provisional outturn for the first three quarters of 2013 were GH¢6.6 billion for compensation, out of which GH¢5.88 billion was been allocated for wages and salaries.
In 2011, expenditure on compensation was budgeted at GH¢7.09 billion, but the actual came to GH¢7.53 billion, out of which GH¢3.91 billion was channeled to wages and salaries alone.
The 2014 budget, however, projects the compensation for public sector employees to rise to GH¢10.59 billion, out of which GH¢8.97 billion would be spent on wages and salaries.
Recommendations
Among the eight-point recommendations to the government, the economist suggested that the government had to admit that the economy was in crisis so that it could carry the country along the public support for the tough remedial measures it may have to take, stressing; “the denial should stop.”
The president at various fora has admitted the challenges the economy was faced with, but has described them as temporary, a position Dr Bawumia rejects.
The Finance Minister, Mr Seth Terkper, at the maiden Graphic-Fidelity forum on the state of the economy, did not mince words in admitting that the economy was undergoing temporary challenges.
He said the 2013 and 2014 budgets had adopted medium-term measures to resolve the economic challenges in order not to sacrifice growth.
The measures include better debt management, issuance of long-term government debt instruments to replace maturing short term instruments; another foray into the capita market to raise funds to prosecute development works, the establishment of the Infrastructure Fund to help close the infrastructure needs gap in the country and weaning off viable state-owned enterprises from government guarantee to enable them to borrow on their own balance sheets in order not to increase the debt profile of the economy, which is approaching unsustainable levels.
Source: Daily Graphic.com.gh
