Bawumia’s Cedi Depreciation Math “Fatally” Flawed – Minority to Bawumia

Minority spokesperson on Finance, Cassiel Ato Forson, has asked Vice-President Dr Mahamudu Bawumia to stop misleading Ghanaians with his “fatally inaccurate” calculation of the cedi’s depreciation over the eight years of successive governments.

Dr Bawumia, over the weekend, said former President John Mahama’s recent taunts of the Akufo-Addo government as far as the strength of the cedi is concerned, “sadly demonstrates his lack of understanding on key aspects of our economy”.

The vice-president explained that “in the entire 8 years of President Kufuor’s (NPP) rule from 2001 to 2008, the price of the Cedi relative to the dollar moved from GHS0.7 to GHS1.2, representing a depreciation of 72%. However, in the 8 years rule of both Presidents Mills and Mahama (NDC) from 2009 to 2016 the Cedi depreciated by 247%, moving from GHS1.2 to GHS4.2. Such higher rate of depreciation in less than a decade is simply unacceptable and signifies high levels of incompetence.

“Although it is early days, there is much optimism for a stronger currency under the leadership of Nana Addo Dankwa Akufo-Addo. Converse to the first 18 months of many governments in which the Cedi depreciated by more than 10%, the first 18 months of this government has recorded a marginal depreciation of 7%.”

Reacting to Dr Bawumia’s comment, Mr Ato Forson said the Vice-President has shown a lack of understanding about the factors that cause volatility in the forex markets.

In a statement, the lawmaker explained that: “To determine the accurate rate of depreciation or appreciation, the current rate is subtracted from the previous rate and the answer divided by the current rate which is multiplied by 100 [(Previous Rate-Current Rate)/Current Rate] x 100.

“If Dr Bawumia minded to do an accurate and honest calculation, the respective percentage of depreciation would have been 41.6 percent under President Kufour; 71.4% under Mills/Mahama; and 6.6% for the 15 months of the Akufo Addo/Bawumia government. These figures are significantly lower than the 72%, 247% and 7% quoted by Dr Bawumia in his statement.

“Only pedestrian propaganda could have informed the Vice-President’s decision to compare 15 months of the government he is part of and 8 years of previous governments. Suffice it to say that at least since the early 2000s, Dr Bawumia was part of the Bank of Ghana team whose duty it was to ensure stability in the currency.”

Below is the full statement:

DECEITFUL BAWUMIA MUST STOP MISLEADING CLAIMS ABOUT CEDI DEPRECIATION

I have read a statement posted by Vice President Bawumia in which he sought to defend his poor handling of the exchange rate of the cedi leading to a free fall of the local currency.

Vice-President Bawumia has gained notoriety over the years for abusing public trust in his supposed credentials to peddle outrageous untruths about the Ghanaian economy. While he may have gotten away with it in opposition, the bar is significantly higher in government and he will be held to strict proof based on documented facts.

Rather than focusing on “arresting the cedi” and attending to the legitimate concerns of businesses, Dr. Bawumia has again swung into propaganda mode in reaction to a simple tweet by Former President Mahama that only sought to remind him gently about his own past views on the depreciation of the cedi.

In a release on Sunday June 17, 2018, Dr. Bawumia, in typical haughty and conceited fashion, described the Former President’s genuine reminder as a lack of understanding of key aspects of the economy. The tweet was simply about whether he has been able to “arrest the cedi” as he declared, and whether the macroeconomic fundamentals were indeed supportive of a stable currency.

Instead of a straight forward answer to this question, he purported to delve into a historical account of the depreciation of the cedi as if that was the answer to the suffering of businesses and Ghanaians as a whole, in the wake of the current nose-dive of the local currency. In case he was unaware, the rapid fall of the cedi has led to upward adjustments in fuel prices and is leading to general increases in the price of goods and services. The obviously distorted historical account does not answer these pressing issues for Ghanaians.

Regarding that historical account, it will be obvious to all who know about the exchange rate that Dr Bawumia’s calculation of the cedi’s depreciation over the 8 years of successive governments is fatally inaccurate. While it is known that the use of false methodologies is very typical of the Vice President, he could have consulted the Bank of Ghana who would confirm that the rate of change formula is not what is used to calculate exchange rate depreciation.

To determine the accurate rate of depreciation or appreciation, the current rate is subtracted from the previous rate and the answer divided by the current rate which is the multiplied by 100 [(Previous Rate-Current Rate)/Current Rate] x 100.

If Dr Bawumia was minded to do an accurate and honest calculation, the respective percentage of depreciation would have been 41.6 percent under President Kufour; 71.4% under Mills/Mahama; and 6.6% for the 15 months of the Akufo Addo/Bawumia government. These figures are significantly lower than the 72%, 247% and 7% quoted by Dr Bawumia in his statement.

Only pedestrian propaganda could have informed the vice-president’s decision to compare 15months of the government he is part of and 8 years of previous governments. Suffice it to say that at least since the early 2000s Dr Bawumia had part of the Bank of Ghana team whose duty it was to ensure stability in the currency.

While it is well documented that the Mill/Mahama administration was the victim of severe exogenous shocks, the Akufo Addo Bawumia government in comparison, has been the beneficiary of additional forex flows from increased crude supplies from the SANKOFA and TEN fields—against the background of recoveries in crude oil prices and across-the-board global growth for the first time since 2008—as well as flows from dubious loans.

In any case, it bears reminding Dr. Bawumia that comparing the first year of successive governments and drawing inferences based on exchange rate depreciation as he has done, is utterly ridiculous for a self-styled astute Economist. First of all, basic economics explains the role of policy lags in economic policy making. This simply means that policies implemented in a particular year would have its full effect in the subsequent year(s). In the case of SANKOFA and TEN, he was vociferous in publishing policies that are helping the government today.

In other words, it is wrong to expect a strict contemporaneous relationship between policy actions and their impacts, especially where policy lags are involved. Hence, the so-called lower depreciation in the first years of NPP governments (as Dr. Bawumia is claiming), is actually due to the good policy measures that were adopted in the preceding year by the former NDC government. Similarly, the fact that the first year of successive NDC governments witnessed pronounced depreciation was simply because of the reckless policies by the preceding NPP government.

As noted, an example is the Single Spine Salary Structure that was introduced by the NPP government under Former President Kufuor for implementation in 2009. A contrasting example was the performance of the Cedi in 2017, which was largely due to policy measures under the IMF Enhanced Credit Facility that started under the NDC government in 2015. Indeed, there was stability in the forex market for the most part of 2016, and which continued in 2017 after the election related uncertainties waned.

We wish to remind the self-styled astute economist that, unlike some major SSA countries, Ghana was able to avoid a recession, giving the current administration a head-start.

It is obvious from the foregoing that it is rather Dr. Bawumia who has shown a lack of understanding about the factors that cause volatility in the forex markets. Otherwise, he would not have made the statement that he had arrested the cedi in the inchoate stages of this government.

It is universally known that forex market stability in Ghana to a large extent depends on exogenous factors (and of course other endogenous factors) such as commodity price shocks, uncertainty in the financial markets, global financing conditions, energy shocks and its impact on crude oil imports, as well as other fiscal pressures.

Thus, in years such as 2008, 2013, and 2014 when such exogenous factors were pronounced, the forex market became volatile and unstable. The solution therefore is to work on our resilience to such shocks and to build the necessary buffers to absorb such shocks (as we did with substantive measures that he opposed), not through borrowing or through issuance of sovereign bonds that are channeled into consumption, not investments!

Allowing the exchange rate some more flexibility is often part of a good strategy to stem the impact of some of these exogenous shocks, especially where the shocks are persistent.

For the sake of clarity, it would be recalled that during the period before the 2008 elections, there was a sudden global surge in commodity prices as well as fiscal pressures associated with the run up to the 2008 elections that impacted adversely on the macroeconomic situation. The meltdown gave rise to the onset of the global financial crises that we alluded to earlier.

Upon assumption of office by the NDC in 2009, the government had to sign on to the IMF Extended Credit Facility (ECF) to restore macroeconomic stability from 2009-2011. The programme achieved its aims as inflation for example was reduced from 20% in 2009 to 8% in 2011, the forex market was stable and interest rates declined to near single digits.

Unfortunately, the impact of the significant wage adjustments as well as other exogenous factors impacted the economy adversely from 2012.On the global front, uncertainties in the financial markets and weak commodity prices impacted adversely, whilst the main domestic challenges included political uncertainty arising from the election petition, pressures in the fiscal and external sectors, and the severe energy crisis that confronted the country. Pressures continued to mount due to pass-through effects of petroleum and utility tariff adjustments as well as fiscal and exchange rate pressures.

In 2014, unfavourable global developments such as softening commodity prices, and volatility in financial markets and reduced FDI flows continued to impact adversely. The decline in commodity prices continued to support the rapid depreciation of the domestic currency. On the domestic front, the main challenges were the continued energy supply constraints, pressures in the foreign exchange market and fiscal imbalances.

In 2015, Ghana eventually signed a three-year Enhanced Credit Facility programme with the IMF to restore macroeconomic stability. The key tenets of the programme included fiscal consolidation, enhanced monetary policy implementation and structural reforms, especially in the public sector. The policy measures contributed significantly to reducing excessive exchange rate volatility and a trend decline in inflation from the second half of the year.

In 2016, the implementation of policy measures was continued despite difficult global and domestic conditions that posed challenges for the macro environment. These included lower commodity prices for all three exports (gold, crude oil and cocoa) and tighter external financing conditions. There were also domestic factors such as petroleum production bottlenecks, weak private sector credit growth as well as negative business and consumer sentiments relating to the general elections in December which also affected general economic outcomes. These notwithstanding, there was stability in the foreign exchange market for most part of 2016.

The Vice-President cuts the figure of a man who talks more than he delivers and who when found out chooses bluster over sobriety and reflection. His claims to better fundamentals expose his lack of candour.

The growth rates he likes to tout is well known to be due to an 80.4% increase in oil production in 2017 as compared to 2016.His other claim of a lower debt to GDP ratio is yet more manifestation of a deceptive mindset that seeks to conceal the true state of governments borrowing.

Just as the exchange rate has exposed him as more of a talkative than a doer, the astronomical borrowing of this government has belied his claims about borrowing while in opposition. He is on record to have disparaged borrowing by the previous government and claimed that a government that he is part of will harness domestic resources to develop the country.

In government, Dr Bawumia and his boss, President Akufo Addo have developed a voracious appetite for borrowing and have added a staggering GHS 40 billion to the public debt. Dr Bawumia however shamelessly is superintending the deliberate concealment of this fact by constantly understating the debt by several months’ borrowing and deceptively manipulating the country’s GDP to give the semblance of a lower debt to GDP ratio.

To achieve this, he connives with the Bank of Ghana to hold the public debt constant at February rates while dividing it over a so-called projected GDP which is yet to be realised. After this, he compares the fictitious debt to GDP ratio to the actual outturn for 2016.

It may interest Dr Bawumia that the IMF under whose auspices he presides over the Economic Management Team, are not fooled by this gambit. They peg our debt to GDP ratio at 71%

Finally, it may serve as a useful exercise for Dr Bawumia to check the macro-economic indices between 2010 and 2012 when Former President Mahama was Vice-President and Head of the Economic Management Team. Ghana had the highest ever growth rate, the longest sustained period of single digit inflation (31 months) among other stable indicators. It is a record he has not and will, in all likelihood, be unable to match. Those indices completely dwarfs the meagre offerings he seeks to tout today.

It therefore would help him greatly if he cut back on the haughtiness and focused on reining in the cedi which is in free fall at the moment and stem the anxiety and anguish of businesses and Ghanaians who are reeling under severe hardships at the moment.

CASSIEL ATO FORSON

RANKING MEMBER FINANCE COMMITTEE AND MINORITY SPOKESPERSON ON FINANCE.

18TH JUNE 2018

ACCRA

Source: ClassFMonline