Closing foreign currency accounts is a plain bad idea

E. Ablorh-Odjidja

Rumor had it last week that The Bank of Ghana was ready to close foreign currency accounts in the country in an effort to help strengthen the exchange outlook of the cedi against the dollar.

The government of Ghana, to its credit, promptly denied such a policy position.

But as reassuring as the denial is there is still a lingering suspicion that the offer is a temporary measure for now. And that as confidence in the cedi recedes in the future, foreign currency accounts in Ghana will be under attack.

Bad as the idea is, it still holds an attractive political option for this particular government and the NDC, the progenitor of which was known to have used policy fiat to confiscate monies in private bank accounts of citizens during the 1981 revolution days.

Policy makers in Ghana sometimes have ways of enacting policies because they happen to be politically convenient; not because they are economically necessary. This is so because the impact these policies generate usually falls on a narrow constituency and therefore offers the least political resistance as consequence.

Foreign currency accounts and their owners fall into this category. These belong mostly to businesses and Ghanaians living abroad. Sticking it to this politically invisible community will have very little consequence at the next poll.

Surprisingly, little thought is given to the damage that follows such policy act. The evidence is the speed with which the idea was floated and the alacrity by which it was withdrawn - a classy case of shoddy thinking on the part of the proponents.

Thankfully, the idea has been withdrawn, but the threat still hangs there; banefully because the depreciation of the purchasing power of the cedi is real.

According to the Bank of Ghana ““In the first quarter of 2012, the cedi depreciated by 8.3% against the US dollar, compared to 2% depreciation in the same period of 2011. The real effective exchange rate depreciated by 4.1% in the first quarter of 2012.”

But is the suspicion of foreign accounts as culprits the right path to firming up the cedi? The idea of limited foreign currency access has been tried in our country in the 60s. In Argentina recently, the experiment is ongoing - to a very negative outcome so far.

Reuters reports that since November 2011, “Argentine banks have seen a third of their U.S. dollar deposits withdrawn … as savers chase greenbacks in response to stiffening foreign exchange restrictions.”

As in Argentina, the same might happen In Ghana. In fact the mere suggestion of the idea may help dry up the foreign currencies in these accounts here before they are closed.

For patriotic reasons, some may want to do just that in order to convert the inflows directly into cedi usage. Unfortunately, this will bring about a shift in power that allows only officials to grant foreign currency drafts to a chosen few. You can imagine the corruption that this new power may engender.

When foreign currencies accounts were limited in the 60s in Ghana, mostly foreigners in the country had them abroad. They made money by trading foreign currency checks for cedi cash , at exorbitant interest rates, to needy merchants and citizens of Ghana. The transactions drove inflation up, and made the cedi weaker. The government of the day never benefited from the restrictions.

That was when the community of people with foreign accounts had mostly expatriate base. The law never affected them much and they made money.

Thanks to growth within the Diaspora, Ghanaian citizens now own these accounts both abroad and in Ghana. The happy point is the Diaspora accounts benefit all in the country, because the bulk of the inflow goes to support the cedi as unearned income. Thus we get to rebuild our foreign stock of currencies at no cost whatsoever to government and country!

I will think at this stage that the bulk inflow of foreign currencies helps to strengthen the cedi.

According to The African Development Bank (ADB) in a paper (Remittances Impacting Household Poverty in Ghana) the inflow is huge: “Over the past decade, migrant remittances to many less developing countries have increased substantially – much faster than foreign direct investment (FDI) and foreign aid. For example, the annual average of remittances to Ghana as a share of GDP increased by about 214 percent from 1990-1999 period to 2000-2006.”

Could the size of these accounts and the wealth in them be sparking their own envy, thereby attracting the butcher’s eye to the goose instead of the golden egg?

As the cedi depreciates, the urge to find solution, even false ones, will not seize and the envy for these foreign currency accounts will remain in focus. But beware; there will be no benefit in this direction. The economic shocks to follow any attempt for closure will be as shocking as the failure to identify the real factors that contribute to the cedi’s progressive decline.

One factor is the recent growth of the external debt. The haste to raise these loans and the baked in corruption in the acquisition of the loans are major contributors to the decline of the cedi.

Ghana Business news writes in May 23, 2012 “Government (of Ghana) is seeking parliamentary approval to secure more loans to finance various programmes …The Mills administration has so far contracted over $14 billion in loans, increasing the nation's external debt stock from almost $9 billion in 2008 to about $23 billion.”

According to the above, the percentage increase in our debt portfolio, within a short period of only three years, is 155%! Why will this steep increase in negative wealth not contribute to the rapid depreciation of the cedi?

By all means, the rebuilding of foreign reserves must be part of the battle to strengthen the cedi. It must mean fewer borrowing and a more creative use of the foreign currency available within these accounts - the free inflow of dollars made possible by the Diaspora community, again at no cost to government. This should be the thing to do.

Attempts to either fiddle or shut down these accounts, even the mere suggestion of such a possibility, can only induce mistrust for the government and the banking system of the country among the Diaspora community who would promptly shift remittances from formal bank business to informal channels. The cedis will still decline in value, this time with no visible increases in the country’s foreign currency stock.

Closing these foreign accounts, will be inane, but don’t put it past an African government!
 

E. Ablorh-Odjidja,Publsiher www.ghanadot.com, Washington, DC, June 14, 2012
Permission to publish:  Please feel free to publish or reproduce, with credits, unedited.  If posted at a website, email a copy of the web page to publisher@ghanadot.com . Or don't publish at all.