One of the most pressing economic problems faced by all postindependence Ghanaian governments was the overvaluation of the currency. The unit of currency is the cedi, which is divided into 100 pesewas. In 1961 Ghana broke with the British pound sterling and pegged the value of the cedi to the US dollar. As Ghana's terms of trade worsened in the 1960s, the real value of the cedi fell; however, successive governments feared either to float the cedi or to adjust its value, thereby raising the cost of imports and consumer prices. The overthrow of the Busia regime in 1971, following the introduction of a devaluation package, reinforced the unpopularity of such a move. The Acheampong government reversed course and revalued the cedi. It also increased the money supply to pay Ghana's debts, leading to a sharp divergence between the official and the real rates of exchange.
The overvalued cedi, on the one hand, and low, regulated prices for commodities, on the other, led to a robust smuggling industry and to an extensive black market in currency. It became common practice for Ghanaians, especially those living along the country's border, to smuggle Ghanaian produce such as cocoa and minerals into neighboring francophone countries. After selling on the local market, Ghanaians would then return home and trade their hardcurrency Central African francs for cedis on the black market, making handsome profits. Smuggling and illegal currency operations had become so extensive by 1981 that the black market rate for cedis was 9.6 times higher than the official rate, up from 1.3 in 1972. At the same time, reliable estimates placed transactions in the parallel economy at fully one-third of Ghana's GDP.
Fifteen months after the PNDC came to power, in April 1983, the government began efforts to devalue the cedi. Rawlings introduced a system of surcharges on imports and bonuses on exports that effectively devalued the currency, because the surcharges on imports amounted to 750 percent of the amount being spent, and the discounts on exports amounted to 990 percent. Further, an official devaluation began in October 1983 in which the exchange rate reached ¢90 to US$1 by March 1986. By 1993 ¢720 equaled US$1, and by late 1994, ¢1,023 equaled US$1.
In September 1986, the government sought alternative methods for establishing the value of the cedi. At that time, the government relinquished its direct role in determining the exchange rate. The rate was instead determined at regular currency auctions under the pressure of market forces on the basis of a two-tier exchange-rate system, with one rate for essentials and another for non-essentials. In April 1987, the two auctions were unified. In subsequent reforms also designed to diminish smuggling and illegal currency dealings, private foreign-exchange bureaus were permitted to trade in foreign currencies beginning at the end of March 1988. By July 1989, there were 148 such bureaus operating, ninety-nine in Accra and thirty in Ashanti Region, with the remainder in other urban centers.
In 1987 US$207 million was allocated through the auction; and in 1988, US$267 million. By comparison, the foreign-exchange bureaus in the first year of operation, ending in March 1989, traded US$77 million worth of foreign currency, or about one-fourth the amount of foreign exchange allocated through the auction. Initially, prices at the auction and those at the foreign-exchange bureaus differed greatly. Efforts to reduce the difference, however, brought the gap from 29 percent in March 1988 to approximately 6 percent by February 1991. In early 1992, the auction was closed, although no official announcement was given. Purchasers were referred to the Bank of Ghana, which used an exchange rate determined largely on the basis of market forces.
The government also successfully slowed growth in the money supply. In the late 1980s, the average annual growth rate reached 61 percent. By 1990 it had dropped to 13.3 percent but then accelerated slightly to 16.7 percent, standing at ¢317 million the following year. In 1991 the Bank of Ghana introduced a ¢1,000 note, the highest denomination issued since independence in 1957. Previously, the highest denomination had been ¢500. A total of ¢50 billion of the new notes was printed.
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