CURRENCY REDENOMINATION IN GHANA: WHAT EFFECTS ON INTEREST RATES?

By

Dr S. Donyina-Ameyaw Bank of Ghana

Currency redenomination is not a new experiment. Ever since the early 1960s, a host of developing countries all over the world have redenominated their currencies on approximately seventy occasions.

In fact, since the Bretton Woods system's crisis came about in 1970, Latin America has witnessed a significant number of currency redenomination exercises. But in most cases governments have been forced to repeat the experience, time and again, within a relatively short span of time, until desired results were achieved.

In less than 25 years Brazil has gone through six currency redenominations while Argentina saw four between 1970 and 1991. Nicaragua had its banknotes changed twice in less than three years, starting in 1988. Bolivia and Peru have redenominated their currencies twice since the 80s. Mexico's 1993 redenomination put an end to one of the worst financial crisis that, at the time, had contagion effects.

The current redenomination exercise in Ghana has wiped four zeroes off the national currency. The old/local currency had been rendered almost worthless by years of inflation that hit double digits a year for almost three decades. Ghanaians had to carry large sacks full of banknotes to pay for ordinary transactions. The dollar had to be exchanged for about ¢10,000. However, after the redenomination, one dollar is now almost at par with the new Cedi.

The question that most analyst and commentators are asking is “What should be done to interest rates to prevent capital flight since the Cedi’s strength now outweighs the US dollar?” Will investor’s not take advantage of the high interest rates prevailing in the country (interest rates are around 20% per annum) and shift investible funds into the money market instruments only to be siphoned back in the short run? This situation could lead to a financial crisis if interest rates do not reduce significantly within the next few months.

One analyst argues that “The Saving and Investment portion of the Ghanaian economy is quite low and as such will take time to adjust to the Redenomination. The only fear is that, foreigners may find that they could get more by investment in Ghana Treasury Bills/Money Market Instruments and getting more return (15-20% instead of 6-8%) Guaranteed. Bank of Ghana must be a little aggressive and bring rates down quickly so that we will not have a run down on the money supply”.

Another researcher argues as follows: “Ideally, I think BOG Prime rate should aim toward 9%. For the next six months as the new currency takes off. BOG should continue cutting down interest rate on new bonds and other government monetary instruments”.

A professor of economics had this to say “As for the Banks and private financial institutions, BOG should ask them to quickly adjust downwards the rates they pay their investors and customers to reflect the new cedi”.

Clearly, various professionals have different and varied thoughts on the issue. This will therefore form the bases of the discussion on this very interesting topic.

Past Events

19th April, 2007: Exchange rate management in Ghana- Towards an appreciation of the role of the Exchange Rate in a competitive export-led growth strategy. By Dr. F. A. Gockel

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