ECONOMICS MADE IN GHANA

 INTRODUCTION

My favourite definition of economics is that by Lionel Robbins. According to Robbins, economics is “a science that studies human behaviour as a relationship between ends and scarce means that have alternative uses”.  Microeconomics on the other hand relates to the study of choices made by individuals and households (consumers) or firms (producers) with respect to changes in general prices of allocated goods and services as well as economic determinants such as inflation, exchange rate, interest rate and monetary policy rate.

Human behaviour is dynamic and unpredictable so economists must make theoretical assumptions using what is known in economics parlance as “ceteris paribus” that is “all things being equal”. Practically all things can never be equal with human behaviour but a getaway caveat the economists use should their predictions not work. Like the fake prophet who tells you, you will get a promotion only “if” you pray hard. If you get the promotion, he predicted it. If you do not, then you did not pray hard. Whatever the situation the prediction holds true. The economist likewise is always right and if the theory is not working then it is because it is based on a factor not being constant.

Behavioural scientists tell us that human behaviour is a function of our temperament or personality and the environment. Temperament or personality on the other hand are also subjected to both genetics and complex influences such as education, culture, social and family relationships. Black and White, Men and Women, Africans and Europeans will behave differently in given circumstances and it becomes more complex if there is a permutation of these. A black man  living in Ghana  for example is likely to make different choices from a black  male living in the United Kingdom . In Ghana, an Ashanti and a Ga will have different choices with respect to their preferences fufu and kenkey.

Adams Smith, the celebrated father of modern economics was Scottish and his study of economics would have been based on his understanding of the rational behaviour of the economic being as he had known from that part of the world. For him to make his theories universal, he had to hold certain influences constant with the methodological assumption of “ceteris paribus” to explain his economic phenomena.

An economist therefore must first study the behaviour of consumers and  producers with respect to their environment.  Once this has been done, the economist , must then adopt the known economic theories, lift the veil of ceteris paribus and adapt it to that particular environment.  In effect it is possible to have Ghanaian economics, economics made in Ghana, and by extension African economics.

So could it be that the IMF bailouts, other Development Partner Programmes and the Bank of Ghana monetary policies  have not had the intended impact because they are  applying straight-jacket economic theories based on human behaviour alien to Ghanaians?

As a Chartered Banker, having worked in banking for about 30 years and dealing with businesses and individual consumers, I have tried to understand how the Ghanaian economic being (businesses and individuals) makes choices based on changes in economic determinants. My observation is that the Ghanaian is different as an economic being and the choices we make are not based on the traditional classical economic determinants but on the interrelationship between just four economic determinants and this article is to share those thoughts.

I intend to first share my experience and stories, with entrepreneurs and consumers whilst working in banking and how they made their economic choices with respect to economic determinants of interest rates, exchange rates, inflation, fuel prices, treasury bills and monetary policy rate and to conclude that there is a branch of economics that is made in Ghana. At this point, I plead certeris paribus.

THE GHANAIAN ECONOMIC BEING

Let me start on a light note, with a story of what once happened when working with Merchant Bank (now UMB). There was once a bomb scare at the head office. Those of us in the building were not aware but saw many people in the makola market area running towards the bank. We started looking through the window to find out what was happening. We were then told they heard there was a bomb in the building. We asked why they were then running towards the building and they said to collect the cash that would be scattered. Really, who does that? The reason for this behaviour I do not know. So should there be a government policy premised on the assumption that should there be a bomb scare in the bank, people will run away from the scene, it will be flawed.

On another note and a more serious one. Once, the interest rates on loans and overdrafts dropped. I was engaging a customer who manufactured toilet rolls about why the prices of his product were the same and not reflective of the reduced rate.  He was operating an overdraft and the reduced rates had a direct effect on a lower cost of financing for the business. The response was he was not making enough margins or profit so this would cushion him. At another time interest rates went up and he immediately increased his price. Reason being that the general cost of doing business had gone up. 

Talking to a spare parts dealer in the same scenario when interest rates dropped but the prices of the parts did not drop and his reason was the unfavourable exchange rate since the parts are imported. An interaction with another trader during the period interest rates were reduced on why the prices are the same, she said transportation cost was still relatively high due to the increase in fuel prices.

A manufacturing customer had his interest rate on a loan reduced after negotiations, reducing the cost of financing hence the cost of production. The economists will tell us this must all things being equal lead to the reduction in the price of the goods produced so I asked the customer why his prices were the same. His response was electricity cost was still high.

On what basis therefore can we say that a reduction in monetary policy rate should lead to a reduction in lending rates hence reduced cost of borrowing for the consumer to benefit by way of reduced prices. There is always a reason for the Ghanaian economy not to allow the traditional economics we learn to work in Ghana.

The current exchange rate of a dollar to cedis is about twelve cedis (USD1: GHS12) which makes a USD100 equivalent to GHS1,200. Do not know about you but if I should choose between USD100 and GHS1,250, I would still opt for the USD100 despite the fact that the GHS1,250 being offered is more than the expected GHS1,200. My choice ceteris paribus makes me an irrational economic being. It was once being said in the banking circles that a Bank of Ghana Governor wanted his dollars to be changed, so he sent the personal assistant to the parallel “black” market next door. Sounds odd and maybe was a joke then but that is a rational thinking economic being for you. So should there be an economic policy based on the fact that I would opt for the GHS1,250 not the USD100 and the Governor would change his dollars at the bank, it will be flawed. What would make me or the then Governor make such financial behavioural choices has many explanations beyond this article.

Again, traditional economics tells us that where interest rates are high or increasing, bank fixed deposits, treasury bills and bonds become the most logical investment avenue with the stock market becoming non-attractive. Interestingly, in times of high interest rates we still hear the investment “gurus” asking the Ghanaian investor to invest in the stock market and trying to push even pension funds to do so. What is the economics rationale behind it apart from the fact that we just want to “emotionally” boost the stock market?  It does not make economics sense.

The point being made is that the Ghanaian as an economic being based on the way the Ghanaian economy works has a unique way of thinking and must be studied for any classical economics model to work. 

DETERMINANTS OF A CLASSICAL ADAM SMITH ECONOMY

The economics of inflation, exchange rate, interest rate and monetary policy rate work best in an environment supported by an abundance of financial products (credit, leasing, insurance, pension, mortgages) with a near-perfect knowledge of the market to allow for choices. A system that is not import dependent but has the capacity to manufacture goods to be able to respond to demand with a more formalized labour force. A system where consumer protection works and goods purchased that do not meet standards or are defective can be returned for refund or replacement. A system where the stock exchange is sensitive to economic factors and consumers are financially sophisticated to respond to financial market conditions. A system where a majority of the consumers and producers are linked to the financial system with bank accounts or transaction accounts and dependent on an available sophisticated consumer credit system.

It is under such a system that the interactions of inflation, exchange rate, monetary policy rate and interest rate with a rational thinking economic being will have an impact on an economy.

• Monetary Policy Rate, Bank Lending Rate and Inflation

Monetary policy works through a credit channel with bank-dependent borrowers.  The very reason it is a tool used by central banks and its influence being through the banking system. The relationship is also such that, there is a direct positive relationship between monetary policy rate (MPR) and bank lending rate (BLR). As MPR increases, BLR ceteris paribus increases and vice versa.  Also, the relationship is such that, there is a direct inverse relationship between monetary policy rate (MPR) and inflation. As MPR increases, inflation ceteris paribus decreases. 

It is also expected that once MPR reduces and BLR reduces, credit will become cheaper, and production costs will fall leading to lower prices of goods. For this to happen, the producer must be a bank borrower. The question is how many manufacturers or producers in Ghana get funding from bank borrowing for this to happen, to have a significant impact on the economy? What practical effect is the MPR?

In an Adams Smith non-cash, cash-lite economy, should the central bank want to squeeze borrowing by consumers or reduce inflation, the MPR will be increased, the financial credit system will increase lending rate. Consumers will in turn reduce purchases using their credit cards, hire purchase and leasing arrangements due to the fact that credit has become expensive. They cut on spending and the demand for goods and services, leading to a drop in inflation. The question is, how will this play out in a cash-based or non-credit-based economic environment in Ghana? Certainly, it would require certain adaptations of the theories.

• Exchange Rate and Inflation

This is the price at which one currency is exchanged for the other. The relationship between exchange rate and inflation is such that, between two countries, the country with a lower inflation rate should have the value of its currency relatively higher than the other. Ceteris paribus, once a country’s inflation rate drops and improves, the value of the currency relative to the other country should appreciate.

In effect, between the US and Ghana, should the inflation rate in Ghana drop relative to that of the US, the cedi should appreciate against the dollar. Does this happen in Ghana? Of course, economists will say it is not that simple and it is true hence the caveat of ceteris paribus holding all other economic factors constant.

REAL DETERMINANTS OF THE GHANAIAN ECONOMY

• Electricity and Fuel

There has always been a direct positive correlation between fuel prices and food inflation in Ghana. Food inflation always being a function of fuel prices. Once fuel prices increase, the prices of food and the provision of general goods that have an element of transportation also go up with sellers or producers seeking full recovery of the impact of any increase in fuel prices from the consumer.

Interestingly, when fuel prices fall, there is no commensurate fall in the prices of these foods or goods. The Ghanaian seller or businessperson sees it as an opportunity to cream some profit for previous losses made or plays the impact of other determinants such as the exchange rate if the goods are imported. At best the price stabilises at a new equilibrium. A fall in prices seldom happens.

All things being equal as the economists say, when fuel prices fall there should also be a direct correlation with the prices of food or goods that have transportation as a cost element falling. Unfortunately, practically it is only the reverse that holds true for the Ghanaian economy.

When electricity prices go up, the koko seller might do two things. Increase the price per serving or reduce the quantity per serving. His/her cost of paying for power has increased and must be passed on. Until both electricity and fuel prices go down simultaneously, prices of goods will not go down. 

• Exchange Rate

This is a master determinant. Everything is imported so a depreciating cedi against the dollar has a burden effect on every aspect of the economy. There is a direct positive correlation between the depreciation of the cedi against the dollar and the prices of goods. In 2016 the exchange rate of a dollar to cedis was about GHS4. Today in 2023 it is GHS12 and between this period the prices of most goods have tripled including food.

Fortunately, any appreciation of the cedi against the dollar in the long run reduces prices but not in the immediate term since the stock of goods purchased at the higher rate would have to be sold off first and importers play a “watch and see” for a while to determine the permanency of the situation. This seldom happens though, since any appreciation of the cedi to the dollar is temporary. At best, prices stabilise at the existing higher price. A case of upwards ever, downwards never.

Prices in Ghana are like climbing a staircase. As for climbing it will climb and may rest at each landing for a while, but it will still climb, at best stabilise or climb at a slow rate. The only time I ever heard prices drop drastically notwithstanding the influence of unfavourable exchange rates was the drop by the spare part dealers when President Kufour won the elections in 2000. It was not based on any economic fundamentals but an emotional response to a change in government. The Ghanaian economic being did not mind losing money. Who does that?

All things being equal, a change in government without an appreciation of the local currency against the major convertible currencies should not reduce the prices of imported goods. I wonder if Adams Smith ever thought that prices in an import-dependent economy would fall when the local currency keeps depreciating against major convertible currencies just because there has been a change in government.

• Treasury Bill Rates

It is also expected that a reduction in the MPR must lead to a reduction in BLR but this does not necessarily hold true in Ghana when treasury bill rates remain high. Depositors or investors in bank instruments have become demanding to the effect that they require interest rates above the treasury bill rates even with fixed deposits but with the same withdrawal flexibility as current accounts. Banks therefore look more at their cost of funds to determine their lending rates than the intended impact of MPR. The cost must be passed on to the borrower. It is only when treasury bill rates drop and rates paid to investors subsequently drop that MPR will have an effect, if any on BLR.

When treasury bill rates go up, the cost of every credit-related activity goes up because the Ghanaian economic being is benching marking, that as the opportunity cost of funds. MPR cannot be reduced with treasury bill rates rising for the Bank of Ghana to expect banks to reduce their lending rates. Lending business in itself is very risky in the current uncertain economic environment for the banks to reduce their lending rates when they instead need to be adding risk premium to lending in this environment. They need something more than manipulation of MPR to respond. Truthfully, banks watch the movement of treasury bill rates rather than the MPR to respond to lending.

• Inflation Rate

Inflation the economists say refers to the general increase in prices of goods and services over a period. Basically measured within a basket of prices of goods and services such as the consumer price index (CPI). The Ghanaian economy is 80% skewed towards the informal sector, import-dependent, largely operating outside the banking system. Practically, when the CPI falls, I doubt if the Ghanaian notices any corresponding positive impact on the purchasing power. What goes into the basket to determine the CPI is most important? The reason, we see inflation dropping but no corresponding impact on the purchasing power of the Ghanaian is that what might be causing the CPI to fall is not a critical determinant of the economy. Is it electricity? No. Is it fuel? No. Then forget. Even if the answer is yes, as long as the cedi keeps depreciating against the dollar, there will not be much improvement in the purchasing power of the consumer.

For me, the CPI is just a good measure of inflation for statistical purposes about what is generally happening in the Ghanaian economy for historical comparison but has little or no impact on the future economic decision-making processes on the Ghanaian and to buttress this point, this is what the president of the Ghana Union of Trade Associations (GUTA), George Ofori, said in 2006 when inflation dropped to 9.9% :

“Although inflation is at the lowest in many years, taxes on the goods we deal in, such as vehicle spare parts, used clothing and electrical have all gone up so much that we do not even think about the rate of inflation, no matter how low…low inflation is a laudable thing and a plus for the government but with high rates of taxes, cost of credit and utility tariffs going up, the effort could be easily negated”.

WAY FORWARD

Having studied human behaviour, economists use the term ceteris paribus (all things being equal) with the proviso that economic players are rational thinking beings and given certain conditions, they should behave in a particular way.

Economists in Ghana need to make the necessary adjustments and changes upon studying the unique behaviour of the Ghanaian economic being should they want to apply traditional economic models. The Ghanaian economy needs to be held as an exception to the rule ceteris paribus. That is “all things being equal” and positioned under the term “mutatis mutandis” which means “allowing other things to change accordingly”.  An adopt and adapt remodelling will have to be done since nothing can be held constant to study a particular economic factor in the Ghanaian economy. The very reason, a reduction in lending rate does not necessarily lead to a reduction in the prices of goods and an increase in monetary policy rate does not necessarily result in a reduction in inflation. The economic players are outside the banking system so will not respond to these indicators.

Ghana has her own economics that needs to be researched for any meaningful impact to be made from economic policies.

CONCLUSION

The Ghanaian economy works on a “mutatis mutandis” as against “ceteris paribus” environment since nothing can be held constant. All the factors work simultaneously and until they are all showing positive signs, the producer (entrepreneur or trader) will find a reason not to reduce prices of goods and services.

From Lionel Robbin’s definition of economics, there cannot be one size fits all economics since there is no one size fits all human behaviour though of course there are some basic underlying truths about human behaviour irrespective of environment. The Ghanaian economy has not gone beyond the basic O’level and A’level economics I learnt some 40 years ago because the Ghanaian economic being seldom responds to the classical Adams-Smith economics.  

For Ghana to work, our Adams Smith and John Keynes cloned economists must study the behaviour of the Ghanaian economic being with respect to making economic choices, and adopt and adapt the classical and Keynesian theories, for effective economic decision-making and policy formulation. The peculiarities need to be considered in the equation.

It does not surprise me that the current government, a liberal capitalist with a free-market economy orientation is now contemplating instituting an import license or permit system that was in existence during the military regimes and was abolished in 1989. There is indeed certeris paribus, economics made in Ghana.