Waiting To Analyse The Economy

By Sydney Casely-Hayford, Sydney@bizghana.com

Should we follow in Nigeria’s wake and hold part of our reserves currency in Chinese Yuan? The question has come up in business news more than once in recent weeks. I first commented on this on a Joy Business Trends program and I said an emphatic yes! Not just because Nigeria has done so, but also because they are ahead of us in analyzing and making the decision.

Deciding what currency to hold in foreign reserves is not a very complicated analysis when you have all the data. When asked, other analysts and ministers in Government cautioned that we should take our time, tread gently and make the decision hesitatingly. As they claim, we are a small country with too much to lose, we must take care and ensure that we make the right decision. Then one day this week on BBC World Service the African proverb was, “people who have nothing, fight over nothing”.

Last month the World Bank released project evolution figures on Ghana’s portfolio. A clear representation of where we are. $1.5 billion in awarded contracts and we have only performed 23% of the work required to release funds. Facilities are about to run out for key interventions, which we are complaining about. Roads, water, education, sanitation.

Overall, contracts have been awarded since 2004, some ending this year, some still running to 2017. Of the $1.5billion committed, we have disbursed $350million leaving $1.188billion yet to be awarded.

Let me use just 3 examples. Education sector project started March/9/2004 has been running for 7.5 years, total awarded $71million. This project run out of time on October/31/2011. We left $8.7million on the table undisbursed. We say we have an education infrastructure problem?

Urban water project, started July/27/2004, expires December/31/2012. Total sum awarded $103million. Total disbursed to date $57.7 million, with 1 year and 3 months to go we still have $52.6million to disburse. This project has been running for 7.1 years.

Urban Environmental Sanitation 2, started April/29/2004 has been going for 7.3 years. Total committed is $62million, we have disbursed $41.9million, we still have $23.6million and the facility runs out on December/31/2012. I have heard many people say that at the core of our problems is the lack of political will, or cynically and conspiratorially, the deliberate “un-will” of politicians to follow predecessor initiatives. I say it is more than that. What we are facing is monumental procrastination spiced with an unyielding colonial legacy and our main ingredient is the decision maker.

In my opinion that is the very reason why Ghana is still so under-developed. We have many qualified persons who advise on such matters. They are educated and trained (with the taxpayer’s money) in just about every discipline required and they do a good job. The politicians are not making the decisions.

But back to the case study on foreign reserves currency where I started. The principles of managing regular foreign reserves are demand driven. The currency of regular reserves is based on the currency of our imports, the currency structure of foreign debt, FDI, grants and aid money, the currency structure used by intervening in foreign exchange markets and remittances from Ghanaians in the Diaspora. Depending on the source of other available reserves, these can be factored in.

This currency structure needed for imports depends on the currency structure of imports. Our main import origins in the past have been UK, Europe, USA and Nigeria, and in the case of say China, whose major trading partners are Japan, The Republic of Korea, The Association of Southeast Asian Nations (ASEAN), Taiwan, the EU and the USA. However in recent times, the RMB (Yuan) has become more important among the traders in Eastern Asia and has actually become the main currency in the settlement of trades between ASEAN and China.

Using the IMF Currency Composition of Official Foreign Exchange Reserves (COFER) database, it is clear that currency composition of Emerging and Developing Economies has changed significantly since 2001 when 41% of all reported currencies was in US$ and unallocated (which included China currency) was 44%. Holdings in Euros was 11%. At the end of June 2011, US$ held was 23%, Euros is still 11%, but Unallocated reserves is now 61%. This shift reflects the changed pattern.

The other change in our trade is seen in our imports and the trade and travel volume between Ghana and China and the ASEAN. Our own Government is leaning more to China and ASEAN for development loans. It makes a lot of sense to hold currency in the trade pattern, especially when the volume is so significant. Clearly, this is the way we are leaning.

The technical calculation is easier for us to make now because we have more historic data available.

Once we decide to hold a certain proportion of the currency according to trade direction, step two to decide how much we need is easy. Unfortunately we hardly ever get past the first stage. We continue to look and examine until suddenly the need for a post mortem rears its head and we need a World Bank loan for a monitoring and evaluation exercise. And when that is granted, we have to make decisions about how to start the paperwork for disbursing the funds (as above).

This is not political “Un-will”, even though there is a measure of that as well, but sheer inability to determine what is timely to do and the thinking skills to make the decisions.

I would think that if you have so many children sitting under trees with no classrooms, you set up a special task force, especially when the money is already in place and solve that problem as a major priority. To leave funds undisbursed for whatever reason is criminal and disrespectful of the governed who are prevailed upon to be patient with every change of government.

Every time a trader undertakes a transaction in a particular currency, there is a fee for conversion. Every time we transact business through a bank it costs us money. I expect that policy makers will think about all the costs the private sector has to bear and address them urgently. We need a mechanism for redress.