New notes not threat to inflation – Economists

December 3, 2019 / Comments (0)

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The introduction of the new high value denominations does not pose any threat to the country’s inflation rate, two economists have said.

Although there have been some public concerns that the introduction of the higher denominations may lead to inflationary pressures, the two economists maintain that in theory and principle, the introduction of high value denominations does not lead to high inflation.

In separate interviews with the GRAPHIC BUSINESS, an Associate Professor at the Department of Economics, University of Ghana, Professor Eric Osei Assibey; and a Senior Research Fellow at the Institute of Fiscal Studies (IFS), Dr Said Boakye, said the introduction of the new notes was necessary to facilitate big cash transactions.

The Bank of Ghana last Friday introduced two new higher denominations of the Ghana cedi (GH₵100 note and GH₵200 note) and a GH₵2 coin to complement the existing currencies in circulation.

Dr Said Boakye said that was necessary because the government had not been able to maintain the value of the cedi since the redenomination exercise in 2007.

“The government has not been able to maintain the value of the cedi due to high inflation, and this shows that the macroeconomic policies and fiscal policies are not working as expected.”

“When we talk about it in terms of the exchange rate against the dollar, when the redenomination was done, the cedi was pegged at GH₵1 to US$1. From then to now, the cedi has depreciated and is now around GH₵5.6 to US$1 and this represents about 82 percent reduction in the value of the cedi.

“This shows that the country’s macroeconomic policies are not working. Inflation rate and depreciation rates are too fast and the government has to do better,” he added. Advertisement

Reflection of what is on the grounds

Dr Boakye said the introduction of the new notes was therefore just a reflection of what had taken place in the past and not supposed to affect inflation.

“However, inflation is something which is not driven by reality alone. It is sometimes driven by expectations and if many people are thinking that it may lead to high inflation then it could be so but in theory and principle it’s not supposed to lead to inflation,” he said.

Loss of value

For his part, Professor Osei Assibey said the introduction of the new notes made economic sense because the cedi had lost its value over a period of time.

“Where you have your currency depreciating in value over a long period of time as a result of inflation that wears away the purchasing power of money over a period of time, it is necessary to introduce new higher denominations.”

“If you take the GH¢50 which was the highest denomination, about eight years ago, this GH¢50 could buy five bags of cement but today the same amount cannot even buy two bags of cement.”

“This means that the value has weakened so you need more of the GH¢50 notes now to buy the same five bags of cement and that makes it quite inconvenient to still be using the same GH¢50 denomination,” he explained.

In 10 years’ time, he said the GH¢50 which was the highest denomination would not be able to buy even one bag of cement.

“So it makes sense that over time, given the depreciation of the currency, you come in with high value denominations,” he said.

Don’t replace primary notes

Prof. Osei-Assibey, however, cautioned the central bank not to replace the primary unit of a currency with the new higher denominations.

“If it happens so, it discourages small value transactions because it will make it difficult to get change in smaller units and people then turn to run prices up which may lead to high inflation.”

“So these higher currencies should not be a replacement. The BoG still needs to issue the smaller units of the currencies for low value transactions. If the BoG wants to avoid any inflationary pressures, then it must continue to produce the lower unit currencies,” he advised.

Cashless society

Prof. Osei-Assibey also noted that the introduction of the new notes did not align with the government’s agenda to grow a cashless society.

“The government wants a cashless society and we are introducing more money. With high value currencies, it makes it more convenient for people to still use money as medium of payments and exchange and this does not help with the cashless agenda,” he stated.

Source: Graphic Business

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