Currency Re-denomination

First of all, I applaud the Governor for the currency re-denomination. This is long over due. But I am afraid this re-denomination may achieve the opposite result if necessary economic policies are not addressed first. The re-denomination should serve two purposes psychologically and economically.

First, I think making 10,000 cedis equal one new cedi is too drastic. The best approach should be 1000 cedis equal the new one cedi and eliminate some of the pesewas. In that case, we will have for example, 1, 5, 20, 50, and 100. Also 100 cedis should equal 1 pesewa and should be only in 1, 10 and 20 denominations. All the pesewas should be in the forms of coins. Before, they are even introduced, all the pesewas, whether in paper form or coins, have already lost their values and this will be followed by the IGHC. This is psychological. Even in the industrial world, like United States and Great Britain, small currencies and the coins have no value.

The US one dollar and coins are usually used for exchange. But let us face it, 10,000.00 can still buy something in Ghana even today. There is no doubt in mind that, the moment 10,000.00 cedis becomes the new one Ghana cedi, goods and services that were selling around 10,000.00 in the old cedi, will be selling in two to three Ghana cedi within less than a year, especially after the old cedi is out of circulation. There is potential for galloping inflation. This is one reason why three zeros should be removed as opposed to four. We need fewer denominations.

The last time I counted, there is going to be eleven different denominations. That is too many. The best approach is to remove three zeros, as I said before, and cancel some of the pesawas to bring overall denominations to about eight. This will make the transition easier. I think ATM can handle because majority of daily transactions in Ghana are between 100,000 to 100,000,000.00 cedis Comment by the Finance Minister that ? we are just taking out some of the zeros? was very sad indeed. We expected intelligent explanation than this from a Finance Minister. Then he should advocate for one million to one Ghana cedi. This is serious issue and people like him should discuss wisely.

I am also afraid of deflation in the economy cause by excess supply of money. Let us assume for example, there is hundred billion cedis money supply in the economy in July of 2007, is the government going to maintain 100 million new cedis in the economy come July 2007? I do not believe so. The government will probably put more in circulation. But since Ghanaians prefer saving in their bedrooms, it is going to take more six months to get the old cedis out of circulation. This will result in more money in circulation causing deflation and its consequences to the economy will be devastating.

I also think financial institutions need more than six months to make this transition. More needs to be done on the economic policy front before this new currency is introduced. We do not need to rush.

I think the Governor needs to answer to the public why re-denominating 10,000 cedis to one new Ghana cedi is better than 1000 cedis to one Ghana cedi. What mechanisms are going to be in place in the event of problems with the new currency? What will be the effect of introducing this new currency in January of 2008 instead of July 2007, so that the public can be educated more? What are some of the possible negative effects on re-denomination? So far, we have only heard positive side. We have to get this right the first time because the consequences of failure will be enormous. Let us not approach this like we did with educational reform in the late 80s.

Kwaku G. Poku
M.S.in Finance
Johns Hopkins University Business School
Washington DC,

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