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The Re-Denomination of the Cedi – Caution
George B.N. Ayittey, Ph.D
The planned July 2007 re-denomination of the cedi has been
greeted in some quarters with skepticism, derision and outright
opposition. For example, last week, the Committee for Joint
Action (CJA) condemned the measure, suggesting that the use of
cheques and credit cards are better alternatives. CJA even sees
it as an insidious propaganda tool by the Kufuor administration.
Such concerns need to be taken seriously because of our own
historical monetary experience.
Ghana has meddled with its currency on four occasions since
independence and the July 2007 measure will be the fifth. In the
past, each meddling created panic, economic havoc and claimed
innocent victims, mostly our illiterate folks. The most
outrageous fleecing of the people occurred during the PNDC era.
In late January, 1982, the PNDC announced that the 50 cedi note
would be demonetized. The public was given barely two weeks to
deposit these notes in their banks in return for chits that were
supposed to be redeemed later. They never were. Ghana shut its
borders for two years. The official reasons were: To mop up
excess liquidity in the system to ease inflationary pressures;
to crack down on tax evasion; to punish corrupt politicians; and
to render useless large amounts of the currency circulating
outside the country. The exercise was also intended to crush
currency smuggling and thereby shore up the external value of
the currency. The government insisted that "the withdrawal of
the 50 cedi note was not against the poor or the genuine rich
but rather it was meant to withdraw excess liquidity in the
hands of a few greedy and corrupt businessmen" (Daily Graphic,
Feb 24, 1982; p.1).
Then on February 13, 1982, exactly one day after the deadline
for the deposit of the demonetized 50 cedi notes in Ghanaian
banks, the PNDC announced that those whose bank balances
exceeded 50,000 cedis would be subject to investigative probes
to determine their compliance with tax obligations. In one
stroke, this inane policy shattered confidence in the currency
and dealt a devastating blow to the banking system, from which
it took years to recover.
Exactly the same insidious chicanery and deceit were perpetrated
on Nigerians with a currency change in 1984. The official reason
there too was that "there was too much money in circulation"
(West Africa, May 28, 1984; p.1106). The military government of
Maj-Gen. Muhammadu Buhari sealed the country's borders,
ostensibly to "catch big-time hoarders who had tucked money away
overseas" (West Africa, May 28, 1984; p.1108). [Nigeria reopened
its borders in March 1986 after two years of closure.] Nigeria's
Central Bank director of domestic operations at the time, Chief
Nwagu, explained that the change was necessary to demonetize the
2 billion naira illegally acquired by corrupt politicians and
held outside the country (West Africa, May 28, 1984; p.1107).
Then when Nigerians deposited their old currency to exchange for
the new one, "persons who had deposited up to 5,000 naira were
informed they would have to produce their tax clearance
certificates, showing that they paid their taxes over the last 3
years, before they would be allowed to withdraw any money" (West
Africa, May 28, 1984; p.1108).
To be sure, excess liquidity, tax evasion, corruption, and
currency smuggling are serious problems in Africa. But currency
changes not the appropriate measures to deal with them. They
smack of the “bazooka approach” in ridding oneself of a termite
as they inflict incalculable collateral damage.
First, they destroy confidence in the currency or the banking
system and lead to destabilizing speculations. Illiterates,
despite their lack of formal education, are no simpletons. In
Ghana, when "the news of the exercise (50 cedi note
demonetization) leaked out, many people in Accra and other parts
of the country went on shopping sprees, before the Feb 12, 1982
deadline to get rid of their notes" (West Africa, Feb 22, 1982;
p.536). The demonetization of the 50 cedi notes also prompted
speculation that the 20 cedi note would be next and some traders
even refused to accept the 20 cedi notes (Graphic, Feb 12, 1982;
p.4).
Such speculation and loss of confidence in the currency drove
people to hold physical assets and foreign currencies. In Ghana,
there was an added impetus because of the odious tax probes of
individuals whose bank balances exceed 50,000 cedis. Who on
earth would deposit more than these amounts in a bank and invite
a tax audit? The public reacted by shunning the banking system
and conducting business strictly on a cash basis. The Mirror
reported "a sharp drop in the amount of money paid by the public
into the various banks" (Jan 22, 1982; p.1). In response, the
government ordered that "businesses are to be transacted in
checks, not cash" (Graphic, May 27, 1982; p.1). Imagine. Loss of
confidence in the cedi and the subsequent flight from the
currency drove Ghanaians to hold, among other things, foreign
currencies. The results were soaring black market rates, which
meant declining external value of the cedi—a result clearly
opposite to what the demonetization exercise was intended to
achieve, namely, shoring up the external value of the cedi.
Within one year, the black market rate jumped from 40 to 100
cedis to the dollar.
Second, the official reasons given for the currency changes
(excess cash liquidity, tax evasion, and corruption) were
criminally dishonest. The source of the excess liquidity was the
government itself, which had continuously borrowed from the Bank
of Ghana to finance ever-soaring budget deficits. Its own
1978-79 Budget Statement admitted that "over the past 5 years,
more than 70 percent of every budget has been financed by the
Bank of Ghana, resulting in the injection of substantial amounts
of money into the economy" (p.2; paragraph 6). So how in
perdition does a currency change solve that fundamental deficit
problem?
Clearly, the currency change was really an attempt to fool the
public by shifting responsibility away from the government’s own
reckless over-printing of the currency and put the blame on
elsewhere. More outrageous, especially in the Nigerian case, was
the presumption that the large sums of naira abroad were
illegally taken there by corrupt politicians and greedy
businessmen. The fact of the matter is, when corrupt
politicians, or the elites generally, rape and plunder their
countries, they take their booty out in foreign exchange, not in
cedis or nairas. Those who take cedis or nairas out of the
country are generally illiterate traders and migrant workers.
With no access to foreign exchange, they use whatever currency
that is acceptable, cedis, nairas or francs, to trade along the
West African coast. Now, what had these traders and workers got
to do excess cash liquidity so that a currency change is
necessary to dispossess them of the cedis or nairas they had
worked hard to accumulate? It amounted to robbery.
Finally, a currency change imposes unnecessary, unfair, and
exorbitant costs on both the illiterate masses and the country
at large. Many illiterate rural folks toil all their lives to
legitimately accumulate savings, which they stashe away under
mats, in jars, closets, etc. Where they keep their savings is
their own prerogative. The government cannot force them to keep
their savings in banks; neither can the government force anyone
to hold a currency he/she does not want. Civilians are persuaded
to do things, not forced or ordered—a fact that is not
understood by African military governments. In 1982, many of
these rural folks had to search for their savings and then trek
miles to the nearest bank in highly inaccessible regions of the
country to exchange their money. Missing the deadline meant a
whole life savings gone down the river -- literally. Indeed,
this was exactly the case in certain parts of Ghana: “Large
bundles of 50 cedi notes were found thrown into the River Aboabo
in Kumasi. According to a Ghana Broadcasting Corporation
correspondent, several others were also thrown away near the
Kumasi railway station" (West Africa, March 1, 1982; p.618).
The country also paid dearly because of poor timing and
ineptitude. Before the currency was changed, Ghana had paid
Thomas de La Rue of London £1,266,210 to print 119 million
additional cedi notes of the "old" currency. "The currency
change therefore meant that the 119 million newly printed cedi
notes were worthless and were destroyed on orders of the SMC II"
(Ghanaian Times, Nov 12, 1981; p.3).
It took years for Ghana's banking system to recover from the
1982 economic inanity. For more than a decade after the currency
change, Ghanaians shunned the banking system, leading to large
amounts of cash being held outside the system. Which fool would
put his money in a bank and invite a tax audit? West Africa
magazine stressed exactly the same point in its May 8-14, 1995
issue:
"No sense putting money in the bank”, says Hilal El-Jamal. "Dig
a hole and bury it, or better, build something with it". Some
economists estimate that 50 percent of Ghana's currency is lying
idle, tucked away somewhere or sunk into partially completed
building. For the individual, it is a good investment. For the
country it is disastrous . . .
"That is what makes the economy worse”, says home appliance
dealer Hussein Bakri. "Everybody is hiding their money or using
it to build houses. Ghana imports rice, can you believe it? And
refined sugar, too”. (p.718)
Consequently, when cocoa farmers presented their
government-issued "Akuafo Checks" (Farmers’ Checks) to the banks
for payment, the banks had no money. In an irate editorial, the
state-owned Ghanaian Times (Jan 5, 1995) berated:
An aged farmer of a village near Offinso, Ashanti, collapsed
while in a queue at a bank to cash her “Akuafo Check”. She was
rushed to a hospital. According to the Ghana News Agency report,
the farmer had been in the queue every successive day at the
bank for two weeks up to the day of her collapse without
succeeding in cashing her check . . . Farmers in other cocoa
growing areas complained bitterly of similar experiences. Some
of them journey every day for up to three weeks before
succeeding to cash even 200,000 cedis (or $200). . . The bank
branches . . . are said to give the excuse that moneys for the
Akuafo Checks are dispatched to them in insufficient quantities
and late. (p.2)
Cocoa farmers, cheated or frustrated in their attempts to cash
their government checks, reacted by abandoning the production of
cocoa, the export of which provides the country with 50 percent
of its foreign exchange. Such a decline in cocoa exports could
be traced to an insane monetary exercise undertaken in 1982 when
the government pried into the bank accounts of private
individuals. In fact, in the same issue of The Ghanaian Times
(Jan 5, 1995), Jacob Frimpong hit the nail on the head: "The
practice in the past where private accounts were forcibly
revealed to the public should be discouraged" (p.5). I say not
discouraged but outlawed. Only then would the public have
sufficient trust in the confidentiality of bank accounts for
them to deposit moneys in the banking system, which in turn
would provide the banks with the cash needed to pay cocoa
farmers.
Like their Ghanaian counterparts, the Nigerian public reacted by
shunning the banking system. Rather than deposit their savings
at banks, "Several people went on spending sprees, buying among
other things, cars, airline tickets, anything that could later
be sold" (West Africa, May 24, 1984’ p.1106). Why should
Nigerians keep their savings commercial banks? To survive, the
banks had to offer fantastic rates to attract depositors and
invest in highly speculative ventures. Many did not make it. In
November 1992, the Central Bank of Nigeria declared 46 banks as
"insolvent”. By September 1, 1993, literally all the commercial
banks in Nigeria were unable to meet their obligations to
customers. “Depositors were in most cases not allowed to
withdraw amounts in excess of N1,000 (in some cases, even less),
irrespective of their credit balances" (African Business, Oct
1993; p.17). The banking system nearly collapsed.
Given our historical experience, it should be understandable why
the public would treat the July 2007 measure with suspicion. As
the saying goes: Once bitten, twice shy. There is no doubt that
a new currency that lops off four zeroes would greatly ease the
cost of transactions and make it unnecessary for Ghanaians to
lug around sacs containing millions of the old currency. This
was the intention in Zimbabwe, where inflation rages at the rate
of 1,200 percent per year. A piece of chicken costs over 3
million Zimbabwean dollars and shoppers have to truck large sums
of Zim dollars for every-day transactions. Sounds familiar?
In a bid to tackle hyper-inflation and ease the cost of
transactions, Zimbabwe's Reserve Bank slashed three zeroes from
its currency on July 31 and set a 21-day deadline for the old
notes to be handed over in exchange for new dollar bills. "It
returns to us stability and convenience and, of course, this is
just one monetary mechanism to help make commerce and everyday
life more convenient," said Reserve Bank chief, Gideon Gono
(Business Report, Aug 23, 2006; web posted: http://www.busrep.co.za/index.php?fArticleId=3405790).
But guess what happened.
BBC News reported that:
“People rushed to shops and banks on the day of the deadline to
spend or exchange old banknotes before they ceased to be legal
tender at midnight. Supermarket owners in the capital, Harare,
reported that business was unusually brisk for a Monday, as
people tried to spend their old cash. There were also reports
that buses and some shops were already refusing to accept the
old notes, and that long queues were forming at banks as people
tried to change their old money . . . Fears have been expressed
about residents of remote rural areas who may not have heard
about the currency change” (http://news.bbc.co.uk/2/hi/africa/5271154.stm)
Critics charge that the measure does not tackle the underlying
causes of Zimbabwe's inflation. "There is no way this is going
to arrest the economic decline," said James Johwa, an analyst
with a Harare-based economic think-tank (Business Report, Aug
23, 2006).
In Ghana, the Bank of Ghana’s statement that “New notes and
coins will be issued to replace the existing notes and coins
over a period of at least six months” does not help matters. The
six month period naturally begs many questions. Is it a
“deadline” and for whom: The Banks or the public? And what if
after the six month period, some old currency is still in
circulation, then what? Would the old currency no longer be
legal tender after that period? If it will be, then why give a
six month deadline? And what to do when traders refuse to accept
the old currency after the deadline and the rural folks who may
not have heard about the change?
This writer believes that there should be no deadline since the
very mention of a “deadline,” given our history, is apt to raise
red flags. If the old currency must be demonetized – i.e. no
longer legal tender – because of the havoc it wreaks on
accounting and computer systems, then its convertibility at
banks must be maintained. That is, a person who can no longer
use the old currency to purchase goods should be able to take it
to any bank and convert it into the new currency. And there
should be no deadline for such convertibility.
More importantly, it must be realized that the problem of too
many zeroes was not created by the public but by the government
and the Bank of Ghana in the past. They must take full
responsibility in fixing the problem without putting too much
inconvenience on the public. And to guard against any future
irresponsibility in meddling with the currency again, we should
take a page from Francophone Africa, where the central bank is
completely independent of the central government although the
central bank is tied to the French monetary system.
Consequently, this region has enjoyed relative price stability
and has performed better economically than the rest of Africa.
Perhaps not only should the independence of central banks be
enshrined in all African constitutions but also the governors of
central banks should be rotated within various regions in
Africa. For example, governors of the ECOWAS countries (West
Africa) may be rotated with say the Ghanaian governor serving a
five-year term at the central bank of Nigeria and the Nigerian
governor serving the same term in Sierra Leone or vice versa.
Such rotation would remove the governors of Central Banks from
coming under undue political pressure to print money to
accommodate profligate government spending. Only then would
currency changes become a thing of the past.
___________________
Dr. Ayittey, a native of Ghana, is a Distinguished Economist at
American University and President of the Free Africa Foundation,
both in Washington, DC. His new book is Africa Unchained
(Palgrave/MacMillan
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