Weaning Ghana off its addiction to the dollar (1)

There is no silver-bullet solution to reverse dollarisation in any economy. Those who think otherwise only need to look at countries that have emerged from such a plight.

In every instance, prudent, proactive and sustained measures were taken to address fundamental problems in the economy. As such, the measures that were taken by the Bank of Ghana (BoG) in February are only but a first step in what could prove to be a long journey. 

The case for import substitution

Take, for instance, the issue of foreign imports in Ghana. One of the more significant fiscal drags on the Ghanaian economy stems from over-importation and not enough consumption of locally-made consumer goods.

This is a critical issue because unrestrained importation creates pressure on developing countries’ current account balances, resulting in trade deficits and price inflation. In addition, since most of the international trade are conducted in foreign currency, predominantly the US dollar, it means less reliance on the local currency and increased risk of currency depreciation.

All of these suggest that one of the fundamental solutions needed to wean Ghana off its dependence on the dollar is to encourage more production and consumption of locally made goods. This solution could begin with import substitution; a broad campaign to boost not only the volume of local manufacturing but also the quality of goods produced, coupled with reasonable steps to curtail the existence of competing foreign substitutes in the local market.

Obviously, in Ghana, the local poultry, textiles and rice industries would benefit substantially from such policies, given the high level of competition they face from cheap imports. In 2013, Ghana spent $1.5 billion on the importation of such consumables, according to President John Mahama in his State of the Nation Address last month. It is also worth noting that in the same speech, the president unveiled a plan to encourage the local production of jute sacks for cocoa and halt their importation.

Obviously, these solutions are not going to be implemented without complications. There are other macroeconomic forces at play. For example, should there be a slowdown in wage increases this year in Ghana, household consumption of all goods, including imports and social spending, would be affected. Reduced government subsidies are likely to have the same effect on energy and transportation costs, adding to the inflationary pressure on consumer goods.

Taking a cue from the experiences of other countries

Ghana certainly can take a cue from onetime highly dollarised countries such as Chile, Peru and Israel.  In these countries, there was no single policy addressing dollarisation but rather a gradual implementation of various disinflation and stabilisation strategies, experts say.

Enforced de-dollarisation measures are also less likely to succeed. Bolivia and Peru found this out the hard way when their governments decided, in 1982 and 1985 respectively, to enforce a mandatory conversion of foreign currency deposits into local currency. What ensued was a massive capital flight from the country and disintermediation, a drastic turn of events that eventually resulted in the governments reversing the policy.

The lesson here is simple: It is important for authorities to be systematic in their approach and to engage the business community or private sector stakeholders from the very beginning of the process.

Israel, among the most successful de-dollarised nations, began with some of the very fundamental measures taken by the Bank of Ghana to curtail dollar-denominated bank deposits.

Israel’s results were impressive but it didn’t happen overnight. According to a 2005 report published by the Inter-American Development Bank and Tel Aviv University in Israel, local-currency denominated bank deposits as a percentage of total deposits surged from three per cent in 1984 to 38 per cent in 2005. Dollar-denominated deposits, which accounted for 39 per cent of total deposits in 1984, dropped to 17 per cent in 2002.

Clearly, the Bank of Ghana’s new restrictions on foreign currency-denominated loans, repatriation of export proceeds, margin accounts for import bills and revised operating procedures for forex bureaus will take some time to work its way through the system. On the other hand, strict prohibition of offshore foreign exchange deals by resident and non-resident companies, including exporters and non-resident banks, should have a more immediate impact.

Still, more needs to be done. In Israel, for instance, a conscious effort was made to deepen the market for local-currency denominated bonds. Ghana could do the same by creating and promoting new domestic financial markets that trade predominantly in cedis. 

Source: Research Desk, City Investments Company, theHelpstation; info@cic-gh.com