Was Dr. Kwakye Of IEA Spot On With His Analysis

Sat, 26 Jul 2014 Source: Ibrahim, Bashiru

.... Of The 2007 Redenomination And The Recent Inflation Pressures?

In an attempt to diagnose and resuscitate Ghana's ailing economy which is in a fast deteriorating condition in the INTENSIVE CARE UNIT of the Korle bu Hospital, several professional doctors (economists) and amateurs have given varying findings n recommendations. Some of the diagnoses and prescriptions perhaps seem too complicated for the handlers to appreciate and administer while others are too amateurish, laughable n normative to be taken seriously. In all this, however, the vital signs of the patient are slowly going away and the patient is in severe pain n slowly loosing breath and begging for rescue and redemption. In the wake of this, a Senior economist with IEA, Dr. Kwakye has diagnosed that Ghana's spiral inflation is ATTRIBUTABLE to a 2007 redenomination exercise. He insisted that the redenomination was politically motivated and was done to create the impression that Ghana’s currency was of a very high value. That it was an 'illusion' to have believed at the time that government could make the cedi stronger. Implication? The redenomination should not have been exercised, but after undertaking it government should have cancelled THREE ZEROS instead of FOUR ZEROS, period! His recommendation? Fiscal n monetary discipline.

MY TAKE: Observatory and normative analysis about inflationary and exchange rate pressures attributed to redenomination abounds and so Dr. Kwakye's assertion could be correct, but is he correct? I find it really amazing that all he could do was speculate instead of present evidence to support his claim. The worsening of a situation after an intervention (cosmetic in this case) was introduced to help could not be solely attributable to the intervention unless the effect of all other possible factors were neutralized (held constant) or assumed to be nonexistent. We do not know that from his claim because it was short of evidence. The common motivations for redenomination include: stability after going through periods of high inflation and stabilization programs; regain confidence (not value) and prevent dollarization or currency substitutability to a currency that inspires no confidence; making it easier to carry, compute, record and transact in a currency that has too many zeros (bulky); generate revenues by allowing a very short period for exchange of old currency for the new currency so that the amount of unchanged old currency would be revenue to government (military junta); for electoral gains especially immediately after elections or when there are several years to elections; psych down the inflationary expectations of domestic consumers and international investors etc. We cannot ask the NPP because they might be dishonest or economical with the truth but since Dr. Kwakye is not an amateur, we could probe him further by asking him some the following questions:

1. Among the motivations for redenomination, which informed the 2007 exercise? Substantiate.

2. If the 2007 government had knocked out three zeros instead of four zeros as he had argued could the inflation figures have been different? Would he have attributed the redenomination to be economical rather than political?

3. Would it have made economic sense at the time to not redenominate the cedi?

4. Did the phasing out of the 1 pesewa posed a significant inflationary pressure on the cedi? What is the evidence?

5. If redenomination is done as a cosmetic measure in response to inflation, does it not suffice to conclude that it will not cannot be a sole cause to further inflation or if it did at all, wouldn't the impact be infinitesimal?

6. Isn't the floating of money in the economy resulting from the direct consequences of the fiscal and monetary policies of an economy that BREEDS n fuels inflation or STABILIZES it?

7. How could the redenomination in 2007 be solely responsible for Ghana's recent inflation phenomenon? what happened to the inflation targeting mechanisms that led to the single digit inflation of 8.58% in 2010, 8.58% in 2011 and 8.84% in 2012?



email: abdulbasiir@yahoo.com

Columnist: Ibrahim, Bashiru