UNITED NATIONS
ICAN INSTITUTE FOR ECONOMIC DEVELOPMENT AND PLANNING
DAKAR
FOREIGN TRADE
IDEP/ET/VII/342 4th Lecture D. Carnay
FOREIGN EXCHANGE AND BALANCE OF PAYMENTS THE CASE OF GHANA
(1) Ghana is vir"tually a one-export economy (cocoa) and the largest producer of that export (40%). After it cornes Nigeria (2o%) and South America (including Brazil) (12%). (These percentages relate to export tonnage in 1963).
Al though the world market for cocoa i·s a flùctuating one yet the level of its priee depends to a great extent on the output of Ghana. If Ghana was to withdraw its output from the world market the priee of cocoa would automatically rise7 and so would it if, alternatively1Brazil withdrew its output. This follows from the
fact that demand for cocoa is rather inelastic relative to the supply.
Therefore,increases in sales are likely to depress cocoa priee and earnings while deoreases in sales are likely to push up the priee and the earnings from cocoa.
Priee
D
0 Sales (ton)
This is exactly what Ghana tried to do: restriction of sales. But
i t failed.
(2) Ghana has a regime of exchange control. Its currency is not negotiable outside the country1 and wbere attempts are made to do so it fetches less than the official rate of tG 1: t 1 sterling or t01:US$ 1.
This is automatically a result of the non-negotiability of the cùrrency.
But, additionally, it could also result from an adverse balance of payments - which has also been the case in recent years.
(3) An adverse or passive balance of payments is not neceaaarily good or bad1 and is in fact inevitable in a developing country depending
IDEP/Er/VII/342 4th Lecture Page 2
on external capital supplies. It can be continued only so long as there are previously accumulated external reserves to support it.
But it cannat be maintained indefinitely as reserves must ultimately become exhausted. Renee the means for checking.an indefinite run of adverse balance of payments must be adopted. The evidence indicates that these means were either not applied, or if applied were ineffective.
(4) The means open to Ghana for correcting the adverse balance of payments were the following:
(i) Increasing the supply of foreign exchange by restriction of sales of cocoa on the world market
(ii) Restricting the demand for foreign exchange
(iii) Raising the rate of interest by the Bank of Ghana
(iv) Curtailing oredit selectively to specifie sectors of the economy - this means slowing down temporarily the rate of development spending
(v) Controlling the costs of development projects - minimize instsadof maximize them. (This means cutting dawn on
"informal" additions to contract priees and basic costs).
(vi) Negotiating for long-term loa::Js
With the exception of (ii) none of these measures was successful where applied:
(i) failed because of bilateral barter deals in cocoa with third countries (e.g. U.S.S.R.) which released them on
:._. ' \
the world market,thus depressing cocoa priees and earnings and reducing instead of increasing the supply of foreign exchange.
(ii) was adopted through i~port restriction leading to shortage of imported goods and higher priees. ( It is doubtful whether (iii) was applied at all. In any case, Ghana's investment market for funds is limited and the non-convertibility of its
currency is an addi tional handicap.)
(iv~ · :ms not adopted. Spending continued in as much volume as before, especially on development projects
(v) was not applied and unscheduled development proJects were initiated outside of the plan at higb costs, including
•
j
.. tl,
(vi)
IDEP/ET/VII/342 4th Lecture Page 3
projects which were likely to add very little,if at all,to the easing of the foreign exchange position because of their high import content.
add mu ch
Sorne of these projects were also unlikely to to net national product in the long run9 once the expenditure benefits during constructicn came to an end with the completion of the project.
was unsuccessful. Ghana tried to raise credits and loans from the IMF9 the USA and the United Kingqom9 unsucessfully. As
a re sul t9 the JJI~F' arranged to send a team of investigators to examine its financial position and make recommendations9on whose adoption would depend the willingness of the IMF to advanoe credit to ease the adverse balance of pa~nents. Such credits are,in any case,short- term and there=ore temporary7 and designed to tide the country over the period ,,:hen i t is putting into effect all the· conventional means for correctinG the disequilibrium in its balance of payments.
( 5) The ul timate step of cl1anging the official rate of exohange (iii) could be adopted but H is by no means certain that the situation in Ghana is that serious to >fD,l'2:'2.nt this s·cep. In any case,ohanging therate
of exchange is not Jikely to nelp the position of Ghana unless it can thereby increase its e;:por~s, but so long as cocoa is the principal export a
reduction in t~e rate of exchange is likely to worsen rather than improve the balance of pa~nents of Ghana, This is somewhat of a paradox since devaluation is nJrmally 0upposed to encourage exports, But the paradox disappears 1·rhen we consider the nature of the demand and the world market for oocoa. If Ghana could increase its exports of other commodities9 then devaluation of the Ghana pound could help. However 9 this is unlikely
in the short run and it is diffioult to increase exports of semi-manufactured Thus a serious balance of payments situation is likely to find Ghana in a grave dilemma from whioh escape. lies o:r..ly in increasing its exports to other African countries ,a solution which
requires much ma~~ wcrk than devaluation of the Ghana pound in order to succeed.
This is a dilemma which faces not only Ghana but also all African oountries. And until it is solved by the commonsense and self-interest of the African countries together ,we are likely to witness a proliferation of exchange control measures and bilateral trade arrangements in all African
oountries. And thus the ~attern of trade of the DAR will be extansively
duplioated while the dream of African economie integration continually reoedes.
