The Vice President and Chairman of the Economic Management Team, Dr Mahamudu Bawumia, has reacted to the National Democratic Congress (NDC) attack on his famous saying while in opposition in 2014 that “when your economic fundamentals are weak, the exchange rate will expose you.”
According to him, the economic situation at the time which compelled him to make the statement is not the same today, and that the fundamentals have improved under the Akufo-Addo government.
It would be recalled that Dr Bawumia, in 2014, criticised the Mahama-led administration at the time it facing serious currency depreciation and argued that the economic fundamentals of the then administration was weak and had been exposed by the exchange rate.
The NDC has now capitalised on this famous statement, saying the recent depreciation of the local currency shows that the fundamentals of the economy under Dr Bawumia are weak. But Dr Bawumia, at a Town Hall Meeting organised yesterday in Accra to discuss the progress, status and future of the country, indicated that the fundamentals of the Akufo-Addo government are strong and, hence, can’t be the basis for the depreciation of the cedi.
“You all recall that I stated in 2014 that if your fundamentals are weak, the exchange rate will expose you, that was true then, and it is true now. It is one hundred percent correct. But is not logic to draw a conclusion from that if there is depreciation in your currency then your fundamentals must be weak. It’s a very wrong logic. If the fundamentals are weak, you may be exposed, but if the exchange rate drops, you cannot jump to a conclusion that the fundamentals are weak.
“It could be other external factors that are depreciating the exchange rate. For example, if I tell you that if your leg is broken you are going to be unable to walk, and I am somewhere and someone comes to tell me that someone is unable to walk, you cannot conclude that the leg has broken. There might be other reasons why you are not able to walk,” he said.
According to the Vice President, one needs to do proper checks to know exactly the cause of the depreciation, and not jump into conclusions that the fundamentals are weak, because factors such as speculations, expectations and investor sentiments can exert pressures on the exchange rate.
“When we see pressures on the exchange rate, we first need to determine where the pressures are coming from and whether the pressures are transitory or permanent, because even with strong economic fundamentals, speculations, expectations and investor sentiments can exert pressures on the exchange rate.
“Our opponents will insist that if you are not able to walk, then it means you have broken your leg. In 2014, the exchange rate depreciated by 31.8, fiscal deposit was 10.1% of Gross Domestic Product (GDP), and public debt was 70.2% of GDP and inflation rose to 17%. This means the economic fundamentals were weakened significantly, and the depreciation easily explained it. It was not caused by dwarfs, as we were told. The exchange rate in 2014 had exposed the weak economic fundamentals.”
Giving reasons for the recent depreciation of the cedi, the Vice President explained that the exchange rate is simply the price of one currency relative to other currencies and factors such as inflation rate, balance of trade, fiscal balance, and currency supply are the fundamentals that affect the exchange rate.
He also indicated that external factors such as oil price increases can also have short term influences on the exchange rate.
He said that when one compares that of 2014 to 2018, there is a big difference between them, and the performance of the cedi in December 2017 was a depreciation of 4.9% compared to 9.6% in 2016, and this was the cedi’s best performance since 2011.
“The cedi, however, depreciated by 8.4% in 2018, largely on the accounts on emerging market pressures and the United States interest rate increases. The data on the annual rate of the depreciation of the cedi in recent times shows that the worst performance so far in 2018. That worst performance is better than the best performance of the previous government, from 2012-2016,” he said
He also noted that the start of 2019 had been characterised by another sudden depreciation of the cedi. The cedi has been rising and retreating within the week, and you can see that the Bank of Ghana has not intervened.
“But the reason for this sort of movement in the exchange rate at the beginning of the month is the time inconsistency of the IMF exit action that the country is taking. At the end of January, as part of the seven prior actions to get to the conclusion of the IMF programme, the IMF gave the country seven actions to complete before March 15.
“One of the conditions that the Bank of Ghana (BoG) had to meet was to increase net international reserves to December 2018. This means that the BoG would not sell any foreign exchange in the market, and that’s why they couldn’t intervene in the situation. So demand for foreign currency was not met by supply, as it normally happens on the day-to-day basis, and we all know that when the demand is bigger than the supply, the price will go up, so that’s what happened,” he explained.