Currency Redenomination: The Cedi Ahead As Politics Halts The Naira

The Bank of Ghana, BoG, recently redenominated Ghana’s currency, the Cedi. The exercise, according to authorities of the BoG, was carefully implemented to forestall inflation and make the currency more competitive. The present Cedi, the Ghanaian cedi, GHc was introduced on July 1, 2007, and it is equal to 10,000 units of the old Cedi, c.

One GHc is divided into 100 Ghanaian pesewas. At present, c50 is the highest currency denomination in Ghana. Other denominations include c20, c10, c5 and c1. Also, they have 50p, 20p, 10p, 5p and 1p in coins. The new notes and coins have the same purchasing power as the earlier existing ones. The only difference is that four zeros have gone off every transaction value of the old cedi. Therefore, a commodity that sold for c20,000 under the recent past currency regime is now sold for GHc2 and what was sold for c500,000 now sells for GHc50. This is why the BoG authorities maintain that it was engineered to reduce cost and risks associated with carrying currency notes. The idea was to peg the cedi at par with the U.S. dollar.

Ghana had consistently had years of economic stability and needed a currency that is not bulky to carry about in the course of transactions since exchange in the economy is predominantly cash-based. Experience from other emerging market economies in similar situations, has shown that redenomination of currency units usually translates to significant efficiency gains especially when viewed in the context of strong economic indices and macroeconomic stability.

The cedi was first introduced in 1965, to replace the British pound. It was pegged to the pound at the rate of 2.4 cedis = 1 pound. The first cedi was replaced in 1967 by a second cedi which was worth 1.2 of the old cedi. This allowed a decimal conversion with the pound, at the rate of one pound = 2 new cedis. The value of the second cedi continued to degenerate amid high rate of inflation in the domestic economy. The crisis deepened further when the cedi is measured against major international currencies. It was so serious that between 2006 and July 2007, the exchange rate was between 9,050 and 9,600 cedis to the U.S. dollar. However, in the first week of July 2007, a third cedi was introduced.

Interestingly, the external purchasing power of the old and new cedis did not change in real terms. In other words, the cedi was neither devalued nor re-valued, but only redenominated as an extreme measure of liquidity squeeze to enhance the value of the Ghanaian currency and make it more competitive.

The hitherto existing currency regime places significant burden on the economy in terms of high transaction costs at the cashiers; increasing difficulties in maintaining book keeping and statistical records and ensuring compatibility with dbase software; and the strain on the payments system, particularly the ATMs. Also, there was increasing complexity in financial transactions, which has brought about difficulties in price labelling at shops and supermarkets as well as the inability to use vending machines and other utility metres that are inevitably part of exchange in modern economies.

Re-denomination is not without its cost, especially fixed cost in view of the fact that it takes human and material resources to implement. However, experience has shown that re-denomination is usually successful when there is macroeconomic stability, declining inflation, stable exchange rate, fiscal prudence and well anchored expectations of policy confidence.

Over the past five years, Ghana has experienced consistent macroeconomic stability; falling inflation and interest rates; and currency stability, which have among other things restored the role of the cedi as a store of value, with commitment to fiscal and monetary prudence. The redenomination also presented opportunity for the re-introduction of coins, which was a dying culture in the Ghanaian economy.

Again, there are inherent benefits as it is expected to increase the efficiency of banknote processing systems and the overall quality of banknotes in circulation with significant reduction in the volume of transactions. In terms of international value, the GHc is currently the highest valued currency unit in Africa. At the cross market rate, one GHc exchanges for N130 while one U.S. dollar exchanges for 0.9214 GHc, putting the GHc in a stronger position.

Based on this, as the West African Union continues the search for a common currency, the redenomination of the cedi has thrown up new challenges especially for Nigeria as the leading force in West Africa. Already, there are indications that Nigeria’s currency, the naira is favoured to be the ECOWAS common currency in 2009 but given the current rate of exchange between the naira and the U.S. dollar, vis-à-vis the Ghanaian cedi and the U.S. dollar, there is need for the naira to buckle up or for ECOWAS to have a rethink.

Ghana is not the only country that has re-denominated her currency in the recent past. Zimbabwe also redenominated her currency not quite long ago. Nigeria only introduced higher denominations of the naira – N200, N500 and N1000 currency notes severally – and on February 28, 2007, new currency notes of lower denomination, as well as coins were introduced – to replace existing ones. But while the Ghanaian economy is reaping copiously from a redenomination that just came in place, Nigeria is still facing a situation where the newly introduced currency notes are fast being defaced like the ones they came in to replace, just as the coins are far from being accepted and at best, not in circulation.

The direct consequence of this precarious economic experiment is that the Nigerian economy has continued to degenerate at a time that government statistics point to a gradual reduction in the rate of inflation and positive performance of other macro economic indicators. Unfortunately, this has not reflected on the real sector of the economy where unemployment rate has continued to rise and the continued reliance on crude oil has kept the economy at the behest of OPEC-regulated crude oil prices.

Significantly, this has gone down to undermine any likely benefit that could flow from the efforts of the government such that unless and until available infrastructure is strengthened and the economy diversified, it would be relatively difficult if not impossible to measure the impact of micro and macro-economic policies on the economy with certainty. And so, whatever gains attributed to any economic policy will only be on paper.

It is not surprising that the U.S. dollar value of the naira has remained under a 3-digit figure, usually between N125 and N145 to a dollar in the past 24 months when Ghana could settle the disparity in her exchange rate with appropriate policy measures. What this portends is that: it is either that we have not been sincere in the implementation of our economic policies in the past or we have not discovered the appropriate policy in which case we have to go back to the drawing board as usual to continue the search for the proper antidote to the problem of economic instability.

Could it be a coincidence that the Central Bank of Nigeria, CBN, recently came up with measures to re-denominate the naira by August 2008? The CBN governor, Professor Chukwuma Soludo while announcing the development on August 14, 2007, explained that it is part of the ongoing economic programme. But when analysed in the proper perspective, it is more of a “demonstrative effect”, which must have resulted from the experience of Ghana. Anyway, there is no crime in copying from Ghana especially when the policy is not imposed on the country by the World Bank.

As presented by the CBN boss, the redenomination will have the N20 note as the highest denomination of currency in the country, with existing higher denominations of the naira trading off double zero-units from the right as against the cedi which lost four zeros to the right. The implication, according to the CBN governor, will put the exchange rate of the naira versus the U.S. dollar at N1.25k to $1. This still puts the U.S. dollar slightly ahead of the Naira, by N0.25k when the Ghanaian cedi is already competing favourably with the U. S. dollar.

Majority of Nigerians had expected that further steps would be taken to level scores between the naira and the U.S. dollar by putting the value of the naira at par with the U.S. dollar before the exercise takes off. But as Nigerians were struggling to settle into and perhaps understand the basis for the planned redenomination, vis-à-vis the likely implication, the Justice Minister announced the indefinite suspension of the exercise citing non-compliance with ‘due process’.

On the part of Soludo, tried as he could to convince Nigerians of the benefits of the planned redenomination, the policy had to be suspended to give heed to the powers that be. The overbearing enthusiasm demonstrated by the Justice Aondoakaa in nullifying the exercise lends credence to the fact that what constitutes due process is open to several interpretations. This is because most persons opposed to the exercise did so because of unfounded or superficial considerations without giving Soludo adequate opportunity to defend his preference for the policy.

Irrespective of whatever must have transpired, majority of Nigerians still believe that the bias towards the policy was merely to protect the interest of bureau de change operators, which was erroneously perceived to be threatened by the exercise. However, it goes to demonstrate a measure of control over the CBN without weighing the options appropriately.

This is why it is necessary for the government to revisit the policy and perhaps repackage it to fill any missing link between the so-deemed unilateral, Soludo-styled redenomination and a policy that will make for a stronger naira that is much in reckoning with major international currencies at the cross exchange rate. At the same time, efforts should be made to strengthen the real sector of the economy in order to stimulate enduring growth.

There is no doubt that this will, among other benefits, make for easy control of the currency in circulation and deemphasise the tendency for most Nigerian to save in foreign accounts for lack of confidence in the naira. Again, from a psychological point of view, it would narrow the gap between the Nigerian currency and major international currencies, as well as restore confidence in the naira at the cross exchange (international) rate.