Tuesday, 26 July 2011

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA

THE EFFECTS OF THE REDENOMINATION OF THE GHANAIAN CEDI ON THE ECONOMY OF GHANA


            Redenomination has its advantages and disadvantages for the Ghanaian currency and its people but it does not have a significant impact on the economy of Ghana and in any economy for that matter. The advantages of redenomination are multiple and worth discussing as it somehow create the illusion that it impacts the economy in a positive way. Redenomination stabilizes foreign exchange of Ghanaian cedi vis a vis the US Dollars. In 1982 foreign exchange value of the old Ghanaian cedi was 2.78 to 1 US dollar, in 2007 Ghanaian Cedi to US dollars plummeted to 9,100 Cedis to 1 US dollar. The implementation of the redenomination will reduce the foreign exchange value to several zeroes. (Mansah, 2007). Redenomination slashes out several zeroes for example, instead of paying 100,000,000 for a house, with the new redenominated currency the payment is reduced to only 1,000,000. It also facilitates business transactions because smaller amounts of money are transacted. (GNA 2006) For example lesser zeroes are dealt with by bookkeepers and bankers hence the drudgery of the many zeroes are removed (GNA, 2006), the accounting process is simplified, the volume of transactions reduced, and efficiency of payments enhanced (Ghanacedi, nd).  Portability is one advantage of the redenomination project. Carrying large bags and suitcases in the case of the old currency runs the risk of attracting robbers (GNA, 2007; Mansah, 2007). The redenomination will also re-introduce to the public the use of coins in market transactions and helps the government introduce vending machines and car parking meters that require coins (Ghanacedi, nd).


            Redenomination has a positive impact on the credibility of the currency (Agyepong et.al, 2010). One of the reasons why redenomination is undertaken in Ghana is to beat hyperinflation. In 2007, the old cedi suffered inflation at 111%. (Mansah, 2007). The new redenominated cedi will reduce inflation and the phenomenon of money illusion, which is the tendency for people to perceive that their currency has little or no value because of the many zeroes.  It also increases the confidence in the new currency because the zeroes are eliminated. This redenomination somehow signals the population that the government is serious by removing hyperinflation and that the economy is off to a better start. (GNA, 2006) The redenomination also protects the economy from currency substitution, which is the use of other currencies such as the dollar in market transactions, and reverses this behavior by the use of the new Ghana cedi. (Mansah, 2007) Finally the new cedi realigns the currency with the other West African countries that are members of the ECOWAS which uses the eco as the regional currency (Mansah, 2007). The same also happened in Europe with the introduction of the euro dollars by the European Union.


            There are costs involved in redenomination especially during the interim period when speculation happens because of the uncertainty of the new situation, fraudulent scams, when the old cedi is exchanged for the new cedi, and disruption in the market resulting from price confusion which also has an inflationary effect. Not to mention the printing cost of the new notes, the cost of minting the new coins and the cost of disposing the old currency. (GNA, 2006)


 


            Re-denomination does not have real economic effects because it does not increase a country’s GDP (Investors Iraq, 2011). GDP as we all know is the standard measure used to gauge the production of goods and services of a country. Redenomination does not affect the country’s productivity. There are three main factors that affect productivity; these are resources, technology and institutions (Investors Iraq, 2011). Note that institutional structures in Ghana is weak because of the rampant corruption that deter investors to bring investment into the country. Redenomination only creates an illusion that the prices of commodities are cheaper but it also brings the realization that wages are cheaper, thus redenomination does not increase the purchasing power of the new Ghanaian cedi. On exports and imports, the US will still pay the same for exports. The Ghanaian seemingly will look like they are paying lesser for the same product that they used to pay for more. Redenomination does not make a currency stronger because the strength and currency is determined by the demand and supply of the currency. Demand for the currency does not change because purchasing power does not change. Supply does not change because redenomination does not authorize monetary institutions to print more money. “Redenomination is just merely recalibration of the currency and does not mean that the currency has appreciated.” (Investors Iraq, 2011)


            In the end we can conclude that redenomination works well with human psychology and with its positive effect on the psychological well-being of the people it may on some significant note affect how people behave positively towards the economy with the new redenominated currency.  Restoring credibility and confidence in an economy is a step towards bringing the economy to a really new start.


REFERENCES


Agyepong, EA., Tanka, LM., Oti-Boateng, B., Owusu-Ansah., E., 2010. The Effects of the Redenomination of the Ghanaian Currency (Cedi) on Local Trade. [online] Available at: <http://ghanagraduatesconference.com/ggc-2010/ggc-2009/conference-papers/124-the-effects-of-the-redenomination-of-the-ghanaian-currency-cedi-on-local-trade.html> [Accessed 5 May].


Ghanacedi, n.d. Benefits of the Redenomination. [online] Available at: < http://www.ghanacedi.gov.gh/Re-Denomination/benefits-of-the-redenomination.html> [Accessed 5 May 2011].


GNA, 2006. Redenomination will benefit economy. [online] Available at: < http://www.ghanaweb.com/GhanaHomePage/economy/artikel.php?ID=114997> [Accessed 5 May 2011].


Investors Iraq, 2011. Currency Redenomination (removing zero’s) Impact on economy . [online] Available at: < http://www.investorsiraq.com/showthread.php?81939-Currency-Redenomination-%28removing-zero-s%29-Impact-on-economy> [Accessed 5 May 2011].

Mansah, A., 2007. The Re-denomination of the the Cedi. [online] Available at: < http://www.ghanaweb.com/GhanaHomePage/features/artikel.php?ID=116579> [Accessed 5 May 2011].


 


 


 



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