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Business News Fri, 20 Feb 2009

The issue of the falling Cedi

Repatriation of profit is the cause- Business Executive

A top Ghanaian business executive has attributed the falling of the cedi to the practice in which foreign companies repatriate profit and spend foreign exchange in the importation of capital goods for reinvestment.

This situation, he believes is as a result of the high level of foreign capital investment in the economy which is unhealthy for Ghana and so “we must be finding a way of balancing this with domestic capital investment otherwise the nation’s currency would continue to fall”.

Chief Executive Officer of the Engineering Systems and Services (ESS) Ltd, Benjamin Adu told the Financial Intelligence that capital investment by foreign companies in the economy coupled with their reinvestment in capital goods is largely responsible for the abysmal performance of the cedi against the major foreign currencies.

“Whenever these companies need to expand, produce or serve their clients in the country, they need to get dollars to import the inputs needed for such services, expansion and continuous operation”, Dr. Adu noted.

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He said the situation is further compounded by the base of the economy being dependent on foreign investment.

“The three pillars of every modern economy today are the financial sector, communications and energy. And these three sectors in Ghana are largely foreign investor-controlled”, he stated.

Dr. Adu noted that these sectors have become the biggest parts of Ghana’s economy, with communication as the largest of all. He noted that privatization brought foreign investors into Ghana’s communication sector.

“As at now communication has become the biggest growth factor in our economy, and there is still room to grow”, he observed, noting that, “But for them to grow, they need to put in all the investment that will make that possible”.

Dr. Adu who is a Telecommunication Engineer by training lamented the fact that all the capital goods needed for this continuous growth are from outside. “They therefore need to convert all the cedis they make from Ghana into dollars to import the capital goods for them to continue to expand and operate”, this, the Telecom engineer and business executive said is the problem the cedi continues to face.

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He said the reinvestment done by these foreign companies puts so much pressure on the cedi hence, the dwindling fortunes of the currency. His assertion seems to be supported by available data from the Ghana Investment Promotion Centre where the quarterly investment performance always has reinvestment in capital goods as a major component of recorded investment figures for each quarter

For instance, in the third quarter of 2008, out of a total investment of Gh¢ 1.58 billion, which included the Gh¢ 1.29 billion invested by Vodafone in the GT deal, reinvestment in capital goods imported alone accounted for Gh¢ 407.41 million.

This has been the trend throughout last year where available data from the GIPC indicates that for each quarter, reinvestment in imported capital goods constituted a significant percentage of recorded investment.

Dr. Adu added that due to the energy needs of the country, “we need to buy a lot of components including crude oil from outside with dollars, while we remain a non-petroleum producing country”.

The telecommunications expert believes that Ghana must find suitable substitutes to some of the things imported by these companies so as to ease the pressure on the local currency.

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He takes issues with the advantage being enjoyed by foreign banks in Ghana. He said they generate so much income that when they have to repatriate profit or make investments in infrastructure needed for operations they also need foreign currency.

He also believes that if the current global trends continue the depreciation of the Cedi will not stabilize. “We are in a vicious circle”, he stated, since according to him, the international financial crunch makes it impossible for Ghana to attract that much investment from outside, while on the local scene there is very little resource mobilization.

“It is unacceptable for a third world country in the tropics to be importing basic food items such as rice” he observed, adding that this practice does not help the value of the economy.

He called on the government to emulate the examples of Korea and other Far as countries which took the lead in investment.

Source: Financial Intelligence