Ghana has suffered another round of obtuse first half exchange rate depreciation, leaving in its trail a shift in the intercept of all the indicators that affect the citizen’s welfare except that of their income (salaries and wages). This perennial first half turbulence in the exchange rate market has created a lot of concern among policy makers, academia, social and political commentators. It was therefore with some sense of relief when Ghanaians witnessed some recovery in the lost value of the domestic currency in the recent past.
Legitimately, people have been questioning the sustainability of the incipient stability in the exchange rate market and rightly so when we seem to be in a vicious cycle. From a more balanced and nationalist perceptive, I would have wished the question was rather posed in this way: What do we do to ensure the sustainability of the current trend? In other words, how do we move the discourse a notch higher, beyond the realms of mundane politics?
Because there appears to be some asymmetry in our concerns towards exchange rate movements, possibly due to the skewed nature of exchange rate movements we normally experience.
The costs of exchange rate volatility are dire to any small open economy like Ghana and as such the management thereof should be a collective effort transcending the remits of the Central Bank and Ministry of Finance, even though the buck stops with them.
Depending on which side you may find yourself, volatility in the exchange rate may impose some form of tax on your activity. This could come in the form of an ‘appreciation tax’ on an exporter, in a period of appreciation of the currency, who may be expecting depreciation in the currency as a form of incentive to boost production for export.
Even though expected depreciation of the currency may offer some advantage to the exporter, the extent to which this logic of gains from an expected depreciation will materialize may depend largely on the domestic content (in significant portion) in the exporter’s production and/or the structural responsiveness of the economy.
On the other hand, there could be a ‘depreciation tax’ imposed on macro- and micro-economic agents in the period of exchange rate depreciation, which most Ghanaians are not oblivious of. Ghanaians are very much aware of the current deregulation in petroleum prices and the continuous indexation of domestic prices to reflect depreciation of the domestic currency.
Depreciation of the currency equally imposes depreciation taxes both on the government and individuals by increasing their respective debt burdens, especially regarding obligations in foreign currencies. In the case of the government, other essential development programmes may be compromised because more domestic resource may have to be used to meet eternal obligations. For individuals who take on obligations in foreign currencies, their debt servicing capacities would be undermined, posing threat to the stability of the financial system with potential soaring in non-performing assets. It would also be noted that importers who are unable to transfer the depreciation of the currency to their customers may witness either their margins or working capital shrinking.
It is therefore apparent that a move toward exchange rate stability is more of a desirable objective. However to address the issue as to whether we can sustain the current seeming tranquility in the exchange rate market, we may have to address ourselves to the question as to whether the current developments are supported by the fundamentals. In order words, have we closed the exchange rate gap (the difference between the observed trends in the exchange rate and its equilibrium path)? The author holds the view that, this is an empirical issue which will be addressed on a different platform.
Notwithstanding, the following questions beg for some answers: can we attribute the perennial first-half turbulence in the exchange rate market to spillovers of fiscal excesses; or excessive external demand conditions; or monetary policy inertia; or the activities of speculators; or some combination of these factors?
Suffice to say that, enquiries into the following questions may help us unlock some of the myth surrounding the perennial first-half significant depreciation of the Ghanaian currency and some lessons to guide exchange rate management.
The fiscal history of this country for more than two decades has been that of running annual budget deficits. More serious is the fact that for most of the periods, the fiscal deficit targets have been overshot, setting in motion surging external and domestic debt dynamics following from the need to finance the continuous fiscal deficits. The mounting stock of public debt affects both the debt service burden in terms of the resource outflow and the risk premium government may have to incur for future borrowings.
In some circumstances, debt sustainability analysis may suggest some inter-temporal prospects for the public debt; however this may not take account of the short term challenges associated with raising enough liquidity to finance largely social projects with long gestation periods. Related to the above is the seeming seasonality involved in government’s resource flows which are normally skewed in favour of the second half of the year. These conditions may predispose the country to such exchange rate turbulence.
In a related development, it has been quite difficult for us as a country to synchronise both our domestic production with our essential needs and also our national income with spending. In this regard, we may have to meet the domestic demand gap with either imports or foreign resource inflows. Efforts at improving domestic production to conserve some foreign exchange rate has been scarcely successful either due to weak official support or excessive exotic taste of some Ghanaians making this endeavor quite challenging. Resource reversals to meet previous foreign obligations adversely impact on the reserves position of the country, soaking liquidity in the foreign exchange market. This may not be unique to the first-half of the year, but may aggravate an already precarious situation.
Some have also attributed the first-half significant depreciation of the local currency to the lethargy of monetary authorities, for not proactively releasing its arsenals to stem the tide promptly. Others also point to the seasonal nature of foreign reserve build-up and mechanism put in place to ensure reduced volatility. In this regard, it may be said that aside the monetary policy rate (the key policy instrument), the monetary authorities may not have effectively communicated or assessed the efficacy of the other tools at their disposal in addressing the exchange rate depreciation.
Regarding the activities of speculators, I need not belabour that point because it is said that speculators are like ‘scavengers’ who operate in the midst of ‘carcasses’. In the presence of deteriorating macro-economic fundamentals, the fertile ground is created for arbitrage conditions that encourage these speculators to feed on, in order to perpetuate their rent seeking activities.
Whatever the case may be, issues on exchange rate dynamics are quite tricky and require sober reflection to appreciate the dimensions involved.
Thankfully, some tranquility is now prevailing in the exchange rate market. And it is expected that fiscal consolidation will gain traction under the Fund three-year programme.
I therefore recommend that, to help in meeting the collective desire to sustain current trends in the exchange rate movement (in order to achieve a stable exchange rate), both the monetary and fiscal authorities must speedily leverage on the prevailing calm conditions to engage key stakeholders in the academia, social and political arena to brainstorm on both the theoretical and empirical issues involved in exchange rate management with specific emphasis on the first-half myth of excessive deprecation of the domestic currency.
This, I believe will help in building consensus on key national issues such as this and foster policy ownership with the view to making policy more credible. For it is said that we either sink together or float together!
By Emmanuel Owusu-Afriyie