Ghana to Use Chinese yuan to ease burden of the local currency; other implications

I have recently noted that Ghana has been in the league of nations  that has pumped up money supply growth rate at over 30% in 2011 and or  2012.  (The Philippines may be included in this list where money supply rate has been above 30% for the past 8 months!)

The World Bank chart has been unavailable so I show the table instead. The above table reveals why Ghana currency, the cedi, has been in trouble. The Bank of Ghana has been printing money relentlessly since 2009.

Now reports say that the government of Ghana will now liberalize the use of the yuan in order to relieve the stress of the cedi.

From Citifmonline:

Bankers have hailed the imminent trading of the Chinese Yuan as a move that will help ease demand for the US dollar in the country’s forex market.

The value of the cedi, which has plummeted in recent times as a result of the pressure put on traders’ demand for the dollar, will see some recovery when the yuan comes in.

This will mean, businesses and traders dealing in the Sino region will not need to convert to any major currency before transacting business.

Dr. Benjamin Amoah, Head of Financial Stability at the Bank of Ghana (BoG), has said that the central bank has made significant progress in getting the yuan into the country’s currency trading system.

“Work is far advanced in getting the yuan into the system because we have seen that it is needed – and demand always creates supply, so we are trying to make it available and we are working on it; very soon it will start. I don’t want to put a time on it.

“Currently, the demand is for the yuan because a lot of people go to China,” he added.

There are two aspects to cover here. One is the role of money printing in determining the health of the domestic currency and second is the role of the US dollar as international reserve.

Of course the real reason why the demand for the US dollar has been exceedingly strong in Ghana has been due to the frenetic pace of money pumping by the central bank, the Bank of Ghana from 2009-2012, as I noted above.

But since money supply growth has reportedly  declined to 17.7% in 2013, then this should ease some of the cedi woes, with or without liberalization of the yuan. 

However such liberalization will only function as a secondary cause. Considering the competition from the yuan, the Bank of Ghana will now be forced to considerably restrain money printing, otherwise the average Ghanian will gravitate to use the yuan as store of value.

So a recovery in the cedi will come as money printing by the Bank of Ghana eases. But, imbalances brought about by previous money printing will likely surface.

The second aspect in the above story is the role of the US dollar. 

The liberalization of yuan or increased used by the Chinese currency by people in Ghana will deepen the yuan’s role as foreign currency reserve. 

Aside from Ghana, Zimbabwe has reportedly added the Chinese currency as one of the four Asian based legal tender that includes the Australian dollar, the Japanese yen and the Indian rupee (Business Day Live).

The internalization of the yuan can be seen via broadening of dim sum bond floats, numerous swap agreements with various nations, trade in yuan with trading partners as Russia. The yuan is now the eight most traded currency in the world according to the wikipedia.org

This shows why the US feels threatened by China, as the increasing exposure by the yuan in world trade and finance risks diminishing the US dollar’s privilege as the world de facto currency reserve.

Yet brinkmanship foreign policies adapted by US authorities will only accelerate the US dollar’s decline.

Why Ghana Is Poor

Excerpts below from a Wall Street Journal article addresses on why Africa (Ghana) is poor.

The Wall Street Journal (bold emphasis mine):

``Exhibit A is the case of Kosmos Energy, a U.S. company based in Texas, which has lately seen capricious government meddling in a deal to sell a $4 billion stake in a Ghanaian oil field to ExxonMobil Corp. Ghanaian Energy Minister Joe Oteng-Adjei suggested in a letter to Exxon reviewed by Journal reporter Will Connors that the government would "support the strategic intent and efforts of [Ghana National Petroleum] to acquire Kosmos's Ghana assets at a fair market value."

``By "fair market value," Mr. Oteng-Adjei means fire-sale prices. While the government insisted later that it would not block the Exxon deal, which is still in place, the desired affect was achieved. The strategy lets the government disavow its intention to directly intervene in deals while potentially scaring away potential buyers and making it possible for the government to buy the oil fields cheaply, possibly reselling them to a third party.

``That's the kind of official thuggery more frequently associated with the likes of Nigeria, where the vast oil and gas resources have driven corruption and exploitation while the people continue to live in poverty. Until Kosmos's investment uncovered the Jubilee oil field in 2007, there had been little success in exploration in Ghana.

``When Kosmos began its project under the then-ruling New Patriotic Party, the business environment seemed relatively stable with adequate protections for foreign investors. Under Ghana law, consent for a deal such as the one between Kosmos and Exxon can't be unreasonably withheld, delayed or denied. Such contract protection began to dissolve in January 2009, with the election of the leftist National Democratic Congress.

``Other foreign investors are also getting the Kosmos treatment. In 2008 Vodaphone, the British mobile phone company, bought a 70% stake in Ghana Telecom. At the time, the company issued a statement that it was "delighted" to be "working in partnership with the Government of Ghana." By April 2009, the deal was on the rocks, as Ghana's government set up a "review committee" to question the details. Earlier this month, Ghana Vice President John Dramani Mahama insisted that the government wasn't planning to break the deal despite "concerns."

``After getting a license for offshore exploration in November 2008, the Norwegian oil company Aker was told this year that its development license was invalid, though the agreement had been unanimously approved by Ghana's parliament. Aker investment manager Maria Moraeus Hanssen said the government position had "no basis in law or fact."

``Attracting foreign investment has been a pillar of Ghana's development strategy, with the government pitching itself as the "Gateway to West Africa." Spooking new investors by repudiating contracts will rapidly ruin the country's prospects for long-term development."

My comment:

The Wall Street Journal seem to err with equating Ghana for the rest of Africa (based on its title "Why Africa Is Poor").

Nevertheless, the basic sins of Ghana have been explicit: the lack of property rights, inadequate respect for contracts, a corrupt government and political instability.

To consider Ghana has one of the lowest wages in Africa, which also implies that she has one of the lowest wages in the world.

Based on the fallacious progressive belief that "low wages are stealing investments and jobs out of high cost countries", this oversimplistically posits that investors should be stampeding into Ghana at the expense of the US, Germany, Japan or even the Philippines or China.

But unfortunately, this isn't happening.

Why?

Because aside from economic factors of production (labor, land or capital), economic reality tells us that capital not only looks for a return ON investments but importantly seeks a return OF investments.

In short, the protection of property rights is a far ascendant concern for investors compared to any costs based factors (this includes the mythical notion of “low wages” driving an economy).