New higher cedi notes anchored
Ghanaians have smoothly adjusted to the introduction of the new currency denominations, both notes and coins, introduced by the Bank of Ghana in November 2019.
Even though they had no forewarning and unsurprisingly, public policy commentators, economists and even the political class came up with all sorts of perspectives on the issue, the citizenry has taken the new currency denominations in their stride.
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This is partly because so far, very few of the new denominations have found their way into the hands of the average Ghanaian.
This is only to be expected, since the newly issued GHc100 and GHc200 notes are meant to be used primarily by businesses and relatively affluent households who engage in large-sized cash transactions.
Most Ghanaians, whose transactions are mainly retail ones, have no need for the largest denominations now in issue and the central bank is well aware of this.
Sooner than later, however, the new GHc2 coin will find its way into the hands of even the poorest households since they can be conveniently used for retail transactions.
But even this will be limited; there have always been very few GHc1 coins in circulation compared to GHc1 notes, ever since the domestic currency was denominated in 2007.
Major concerns
When the higher denominations were introduced in November 2019, the major concerns were whether the central bank would be able to manage the liquidity implications of the new notes so that it did not inject more liquidity than was required to support economic and activity for the year.
The second concern was whether public education and public acceptance of the new notes would be effective enough to prevent a discounting of lower denominations which would create a rounding up effect and undermine price stability.
Three months on, there is nothing to suggest that the introduction of the higher denomination notes have had any negative impact on price stability or currency stability.
Interestingly, local currency liquidity appears to have tightened over the past week or two. This indicates that the central bank has a firm handle on the liquidity situation despite the introduction of the new higher notes.
Tight cedi
Senior Economist at Databank, Mr Courage Kingsley Martey, says the prevailing tight Ghana cedi liquidity has contributed to the cedi's strong performance so far in 2020 because key traders are selling their dollars in favour of the cedi.
“This has created more demand for the cedi at the expense of foreign currencies, thereby making the cedi stronger”, he said.
On a year-to-date basis, the Ghana Cedi has appreciated by 4.65 per cent against the dollar with similar trend against the Euro and the British Pounds.
Mr Martey believes the introduction of the new notes has been managed well enough to avert liquidity overhang.
Then again, the higher denominations are not widely circulated and so its use is restricted to only high-valued transactions.
This efficient currency management process has helped to generate a seamless introduction of the new higher denominations without shocks to price stability in goods market and foreign exchange market.
Effectively, the new denomination currency notes are aimed at the upper end of the economic spectrum while the new currency coin denomination is aimed at the lower end.
Convergent issues
But the introduction of both raises convergent issues and implications in two ways.
First is the rationale for the introduction of higher denominations.
Simply put, the cedi’s depreciation over the past 12 years has eroded their value in both dollar and local purchasing power terms.
In 2007, when the GHc50 note was first introduced, it was worth more than US$50. Today, it is worth less than US$10.
This defeats the main reason for the denomination in the first place – the need to eliminate the necessity of carrying huge bundles of cash in order to execute large-sized transactions.
Indeed, even the GHc200, which is now the largest cedi denomination, is not worth what the GHc50 note was when it was first introduced.
Similarly, the GHc1 coin as the largest coin denomination was worth more than $1, but now is worth less than 20 cents.
Even the new GHc2 coin is only worth less than 40 cents, less than half the value of the former highest denomination of coin.
Currency value
Added to this is the fact that currency production costs have risen in real terms even as the monetary value of the currency produced has fallen; changing from GHc2 note to coin thus reduces currency production costs significantly.
Critics have questioned the sense in circulating coins that have more value than the lowest denomination of note but effectively, this is of no consequence.
The reason for the disappearance of the one pesewa and five pesewa coins is their lack of sufficient value to buy anything and this has not yet extended to the GHc1 coin, so both notes and coins of that denomination will continue to be willingly accepted by all, at least for now.
But this is related to the second issue around the new denominations – their effect on inflation.
The conventional wisdom among opponents of the 2007 redenomination exercise is that it fuelled inflation, which is why the two smallest currency coin denominations, of one pesewa and five pesewas, are no longer accepted.
Proponents of this argument expect this to happen all over again following the latest introduction of new denominations.
The argument
But the verdict is still out on this argument. The question that is still unanswered conclusively is: is redenomination or introduction of new denominations the cause of inflation or the effect, the latter as claimed by the monetary authorities themselves.
It is still uncertain whether redenomination is why inflation rose to make the smallest denominations useless or whether inflation (including that caused by cedi depreciation) did that all on its own.
This is crucial because if the former is the case, then the new denominations will fuel inflation irrespective of all the other factors that influence price levels; but if the latter is the case, inflation will not rise inordinately in the wake of the introduction of the new denominations.
Actually though, the situation is even more complicated, made so by yet another unanswered question, which is: How does redenomination affect money supply?
The simple answer to this is that it has no effect because the BoG simply replaces existing currency notes and coins with the new ones to the same overall value.
However, there are two conspiracy theories – both of which are plausible but not in any way verified – that suggest this is not the case.
Printing extra
One is that, the incumbent government and the management of the central bank, use the opportunity to print a little extra for themselves, which obviously would not reflect in any official data, including money supply growth statistics.
Unsurprisingly, this allegation is spread by the political opposition at the time of redenomination or introduction of new denominations.
The other is that the incumbent government deliberately uses the opportunity to increase money supply to increase liquidity in the economy with a view to making voters happy.
This argument is supported – but by no means conclusively – by the fact that redenomination or the introduction of new denominations tends to come barely a year to the next general election.
Redenomination by the Kufuor administration was done in 2007, ahead of the 2008 elections; new issuances of the GHc50 note was done by the BoG under the Mahama administration in 2016, months to that year’s general election; and now the BoG has introduced new denominations barely a year to the 2020 general election.
Price growth
Increased money supply supports increased inflation, so this could be the reason for accelerated price growth, rather than simply the introduction of higher currency denominations.
Unfortunately, the answers to the several uncertainties are most unlikely to be definitively answered in the near future.
For now, in the area of price stability on the goods market as measured by CPI inflation, headline inflation has dropped further to 7.8 per cent in January 2020. This also indicates that concerns of potential liquidity overhang from the new notes may have been exaggerated.
All we need now is to ensure that spending pressures leading to the elections do not soften the stance on measured introduction of the new higher denominations.
