DEPRECIATING CEDI, LIQUIDITY, INFLATION, & POLICY OPTIONS A. CEDI DEPRECIATION Kwamena Essilfie Adjayes update of 12th March 2014 gives us a lot of food for thought (see shared post below). Immediately after the BoG introduced new and/or stringent Foreign Currency rules, KEA predicted that they will only lead to a supply crunch as accountholders take their forex elsewhere, especially to the black market. From his own sources, it appears that his prediction is being borne out. The feelers I picked up from the industry also bear this out. It is so bad now that banks are having to take about 2-3 weeks to find enough forex for transfers as low as US$10-15,000. They now have a weekly quota, and a backlog of transfer requests, incurring the ire of clients who even have funded US$ accounts. A week or so ago, I commented on the fact that FDIs are also being squeezed, as new, potential foreign investors, have been spooked by the new regulatory regime, and are adopting a wait-and-see attitude. In addition, existing foreign investors are holding on to already committed funds for the similar reasons. B. LIQUIDITY Not long ago, many analysts, re-stating what was then obvious to the most inexperienced student of economics, suggested that the economy may come to a screeching halt as government runs out of money (simply put). A liquidity crunch, so to speak. My interactions with senior government officials and insiders paints an even dire picture. The entire government machinery and operations is severely strained and operatives are running helter-skelter trying to unlock Chinese, Donor Budget Support, and even local borrowing options. C. INFLATION Added to all of the mix is the continued upward swing of inflation in February by about 200 basis points from Januarys. Again, about a week ago, I posted a chart mapping out the inverse relationship between money supply and inflation trends in Ghana which graphically confirmed the long-held belief among analysts that our inflation figures do not seem right. We dont know yet whether the current upswing may be a correction, but it might get worse in the near term as power/energy costs go up for businesses, and the now, formally announced, load shedding goes into full effect. D. POLICY OPTIONS The hydra-headed economic pressures require a lot more than mere rhetoric, and I do not believe that any of us would lay claim to how to fix all the keys issues effectively. It is in this context that I will proffer some ideas for consideration by government. First, I will strenuously urge government to break down the challenges into small, manageable proportions as follows: Short Term (to cover 2nd Quarter), Medium Term (3rd to 4th Quarter), and Long-Term (From 1st Quarter 2015). In the Short-Term, government should prioritize four critical measures: 1. Raising finance through syndicated local borrowing 2. Placing a temporary ban on the import of Rice, Sugar, and Chicken 3. Plugging revenue leakages at the ports, and 4. Suspend frivolous prestige/political expenditures such as the Presidential billboards The overall aim of these short-term measures are to ensure that government operations are sufficiently funded, and that inflation and the depreciating value of the cedi is halted. Trust me, despite our angst at official corruption and waste, no one wants government operations to grind to a halt. For the Medium term, the government can further supplement the short-term measures with the following: 1. Reduce public sector expenditure, first by rationalizing staffing at the Presidency and political appointments across the board. 2. Diversifying/broadening the tax base while correspondingly reducing the tax burdens on businesses. I propose: (a). A cancellation of the VAT on banking transactions (b). A reduction in corporate tax of about 300 to 500 basis points for small businesses (with revenue of less than GHc500,000 and/or staffing below 100) and about 1000 basis points for the heavy industry/manufacturing industries (c). Reduction of the Rent Tax to about 2.5% 3. A gradual unwinding of the Foreign Currency measures put in place on 5th February, particularly that covering the requirement to make withdrawals only in GHc. And for the Long-Term, I will generally say that government should release its strategy for restructuring the economy which it proposes to implement early enough so we can subject it to scrutiny before finalization. By Evron Hughes (My comments: some few lapses, but generally he has the brains)
Posted on: Sun, 16 Mar 2014 18:36:25 +0000
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