1. Bank of Ghana’s Murky Explanations for the GHC100 and GHC200 Notes
The Bank of Ghana (BoG) on November 29th, 2019, released a document justifying the need for the introduction of “higher-value denomination” currency (HVD) notes.
The question of whether HVD notes are warranted at any point in time is not a merely conceptual one. It is, in fact, a highly empirical enquiry to be approached from a careful analysis of considerable amounts of data about the proportional use of different notes and the differential costs of security and distribution. One cannot have random opinions about such a subject and expect to be taken seriously.
I don’t have any data on the contemporary usage patterns of the different Ghana Cedi (GHS) notes in circulation or about the costs of printing different notes. Like most Ghanaians, therefore, I did not have too much difficulty delegating all thinking about the issue to the fine technocrats at the central bank. Until now.
A bunch of controversies arising from the refusal of major supermarkets and even banks to accept the new notes because they lack the means to validate their authenticity compelled me to finally take a look at the BoG’s explanatory documents today. After all, item authentication has been a decade-and-half interest of mine.
Having now read the BoG document and subsequent BoG press releases on the subject, I am suddenly completely unsure of my earlier faith in the central bank to do all our thinking for us in this matter. I will simply lay out the worrying things I found and let readers of this blog judge for themselves.
- The most problematic element of the BoG’s analysis is the central reason it offers for introducing the HVD notes. In the very first paragraph of the original Q&A-formatted release, it states as follows:
High levels of inflation and currency depreciation in the past have eroded some of the gains from redenomination. The deadweight burden, reflected in high transaction cost has re-emerged.
In this one statement is contained all the alarm bells about the depth of technical preparation that should have gone into this exercise.
- Except in cases of hyperinflation and hyper-depreciation requiring a new currency series, high-value denomination notes are almost never justified by the need to counter or offset routine inflationary pressures over time. For example, when the $100 was first introduced in the US in 1869 (and reintroduced as a federal reserve note in 1914), it was for a time the highest in circulation. In due course, larger denominations surfaced, mostly as a result of wartime and other contingent exigencies. By 1946, a firm decision to stop the issuing of HVD notes had been taken and, by 1969, all currencies higher than $100 were being removed from active circulation to reduce the costs of fighting counterfeiting and money laundering. Today, the $100 bill is worth only $4 if measured against its original value as a result of cumulative inflation. It remains the highest denomination in circulation purely in keeping with contemporary policy. An alternative policy of trying to preserve the face value of the $100 note at the time of the 1969 currency reforms would have required an introduction of $1000 and $2000 bills in the United States, something that cannot be countenanced in today’s anti-terror and anti-narcotics climate.
- It is easier to understand the argument when one recalls that in a floating exchange regime, currencies can rise and fall over time. Is the logic here then that should the Ghana cedi strengthen against the USD consistently over time, that would dictate the retirement of the largest of the HVD notes?
- Things are even starker in a managed exchange rate regime. Consider this fact. By the time of the 1984 budget, the official cedi – USD exchange rate was 35 cedis to the dollar. Governor J.S. Addo lowered the value to 38.5 cedis to 1 dollar, in a conclusive reversal of the last peg from 1978 (of 2.75 cedis to the dollar) then in effect. Yet, ahead of the latest round of managed devaluations in 1982, the highest note, the 50 cedi note, had been removed from circulation (or “demonetised”) ostensibly as an anti-corruption measure (echoing an earlier currency confiscation in 1979).
- When in 1984, the HVD notes of 50, 100, and 200 cedis were introduced (or, in the case of 50 cedi note, reintroduced), with no serious explanation as to why fears of corruption were no longer an issue, the effective worth of the highest-value note was officially $5. By the time of the 1985 budget, it was $3.7. More interestingly, the parallel unofficial, in actual fact market, rate was about 156 cedi/USD suggesting hence that the 50 cedi note that just 10 years earlier had been nominally worth $50 was now worth just 32 US cents ($0.32) whilst the highest circulating note was worth just $1.28. In short, the history of “face value preservation” tactics and politics in Ghana betrays a ridiculous mixture of arbitrariness and confusion. Trying to bulwark the face value of Ghana’s benighted national currency notes against depreciation and inflation trends is clearly to court absurdity, and also distrust in view of this messy track record.
- At any rate, the historical record clearly shows that Ghana’s highest-value notes have for the most part generally exchanged for low dollar amounts. In the 1985 to 1990 period, the 500 cedi note moved from $5.5 to $1.5, peak to trough. In the 1990 to 2000 period, the 10000 and 20000 notes emerged as the highest-value notes, yet at their strongest they were about $1.4 and $2.7 respectively.
- The dramatic change of affairs represented by the introduction of the 50 Ghana cedi note in July 2007, with its debut value of $54 marking the high point of Ghanaian currency face-value politics in 30 years, was a break with the past precisely because it also marked the start of a new series, effectively a new currency. Such an exceptional development cannot set a precedent for the routine preservation of the currency’s purchasing strength at some arbitrary USD rate by printing larger and larger notes to approximate the continuous appreciation of the highest notes’ nominal value(s).
- By the time of the introduction of the 100 and 200 Ghana cedi notes in late 2019, the value of the 50 Ghana cedi note in USD terms was about $9. In comparison with other HVD notes in Ghana’s history, adjusting for both US and local inflation, this amount, as has already been shown above, was big enough.
- The largest Nigerian Naira note is exchanged today for $2.75. The largest Kenyan Shilling note is exchanged for $9.91. The largest South African Rand note is exchanged for $13.8. By the time the Government of India removed HVD notes out of circulation due to purported fears about money laundering and crime, the highest Rupee note was exchanging for $14. Simply put, economies comparable to Ghana’s in various characteristics have HVD notes well within the value range of Ghana’s last version, the GHS50 note.
2. The BoG makes plausibly persuasive points about an expansion of incomes leading to an increase in preference for the then highest-value notes, the GHS20 and the GHS50. In the European common market, for instance, it is the 50 euro note, not the higher value 100 and 200 euro notes (or the 500 euro notes that are being demonetised over the usual concerns) that are in widest circulation. In the US, the highest circulation bill is the $20, whilst the highest value ($100) bill is mostly preferred outside the US. Thus, the preference for higher value notes in Ghana is a significant point. However, the point in the way it was put in the BoG release, that “GHC50 and GHC20 account for about 70% of the total demand”, is completely vague. Is this “demand” being expressed in monetary value or quantity terms? If in value terms, then it is completely unremarkable since the face value being several multiples of the face value of the lower denomination notes, their quantity could well be tiny and still constitute 70% of usage. In such a scenario, the need to print larger quantities would be far from clear, and user preference may well tilt to a medium portion of the value spectrum as is the case in many other countries.
3. It is important in connection with the above point to note that convenience is affected by both the concern about carrying large sums of low-value notes and the, almost converse, concern about finding change when counterparties pay for goods and services with large notes. Thus, preference is an entirely empirical matter and rather technically complex to compute. If the BoG wished to educate the public in this matter by releasing that statement, it ought to have been clearer.
4. Most strangely, the BoG chose to provide none of the critical information that would have best assisted curious persons in evaluating the propriety of its decision to introduce high-value denominations against the global trend of demonetizing high-value notes. At the heart of any sound analysis would be a trade-off between printing less money (and the concomitant result of users carrying less money) and creating highly tempting targets for crime.
The cost of printing higher quantities of money in the face of a rising average size of transactions in the economy reduces the seigniorage revenue of the central bank. Thus, if the average size of transactions moves upward, it makes sense to introduce more HVD notes. At the same time, such notes are more expensive than lower-value notes because they require more security features to prevent counterfeiting and more policing to suppress money laundering. For example, in the US, the most expensive notes (such as the $50 bill) can be as much as four times (4x) costlier to print than the cheapest ones (such as the $1 bill). The right balance between transactional convenience and policing cost is, as always, entirely empirical. By refusing to provide a breakdown of the costs of printing the different bills and the quantities in circulation as well as the average velocity per class and other critical monetary parameters, the BoG shows a complete disinterest in helping analysts come to any sensible conclusions about the need for these new HVD notes.
5. The weirdest of all the claims in the BoG document is the assertion that, somehow, printing high value notes will reduce the “deadweight burden” associated with current transaction costs. This claim is manifestly erroneous. There is no welfare loss context here to even warrant use of the “deadweight burden” term.
6. Lastly, we live in a time of great cynicism about the procurement practices of governments. The introduction of a new class of currency notes represents a potentially major procurement opportunity for agents and representatives of the mints and printing presses in Europe and America with whom the Republic of Ghana deals on these matters. Where the new bills are significantly more expensive than older bills, commissions may be in order, opening the door to unpleasant allegations about the real motives impelling the procurement action. It would have been reassuring had the BoG provided information about the procurement terms of this new production, whether by De La Rue, the loss-making, financially struggling, security printing firm or Crane Currency, the controversy-plagued contractor, now embroiled in corruption allegations in Liberia.
The decision to shroud all these important matters in silence, including even the name of the printer/mint, is doing very little to dispel lingering doubts and confusion about this whole HVD notes printing business.
Originally published on [https://brightsimons.com/2020/01/06/bank-of-ghanas-murky-explanations-for-the-ghc100-and-ghc200-notes/]
My friend and colleague, Selorm Branttie, forwarded to me snippets of a Facebook thread about my recent comment on the Year of Return, in which he had been tagged and expressly asked to forward to my attention.
My inclination was to ignore the thread, for obvious reasons.
First, it is Christmas for Christ’s sake! Second, I have had to switch off Facebook because it was taking too much of my time. Facebook is designed to compel conversation. I simply don’t have hours in the day to spare for casual banter anymore; the daily hustle has made sure of that. Twitter, which I have been using more and more, is, on the other hand, a broadcast medium that allows me to disseminate random thoughts with far less expenditure of time. Lastly, I recognised the key discussants on the thread as strong partisans of the ruling party in Ghana with whom I share a bit of a history.
In the past it has been virtually impossible to have a sincere debate about anything since they seem sworn to see any dissent from positions of the ruling NPP government as motivated by “cynicism” and “ill will”. In my brief and occasional dealings with such people, sincere and mutually respectful discussion of facts and figures consistently degenerated into motive-questioning and other such base exchanges.
Frankly, I have neither the time nor ability to understand what it is that make some people so loyal to political parties to the point of losing all capacity for objectivity, but, well, we live in a complex world.
I have decided to respond to the Facebook thread for only one reason: a debate over data is always worth having in the peculiar circumstances of Ghana’s development.
Having chosen to mount what amounts to a mini-campaign about the issue of the Government’s reliance on bad data to appraise the generally successful Year of Return initiative, I feel obliged to address reactions, even if they are accompanied by insults accusing me of “cynicism” and statistical ignorance, so long as they present themselves as offering counter evidence.
The “counter evidence” presented in the said Facebook thread was along these lines:
- In the thread, I was accused of presenting data covering all “international arrivals” instead of just “tourist arrivals”.
- My data is thus, according to this framing, a superset. The more relevant subset of tourist arrivals is much smaller. The data that I had culled from the CEIC and IATA datasets, and which was corroborated by Ghanaian Civic Aviation Authorities disclosures (some of which are openly available on the Ghana Airports Company website) could thus, in the view of my Facebook accusers, not be relied upon since not all international visitors are tourists.
- If the smaller tourist arrivals dataset is used, the claims by Government functionaries that $1.9 billion has been generated from the Year of Return would be justified.
This is the coherent part of the argument. How exactly the exponent of this theory jumps from these premises to satisfy the requirement of showing that $1.9 billion has been generated by the Year of Return initiative is both murky and confused.
Here is an extract from the thread so that the reader can judge for herself:
At the beginning of 2019, the Ghana Tourist Authority (GTA) projected that they were expecting 150, 000 more tourists from the African diaspora, thus making 2019 tourist number 500,000 compared to 350,000 of 2018. They estimated total spending by tourists to be about $925m.
Then in September 2019, with arrival data, the actual number was calculated at over 750,000, surpassing the 500,000. Based on the rate of arrivals, and the peaking of activities in December, they estimated 1 million tourists by year end. Note that due to the doubling of the numbers, the expected spending by tourists, also doubled to $1.9bn.
Recall that my argument was very simple:
- In 2018, international arrivals were about 984,000.
- In 2019, the most optimistic projection suggests 1 million arrivals.
- The most optimistic allotment of any increase in arrivals due to the Year of Return cannot thus exceed 15,000 extra visitors in 2019.
- Because we have a reasonably strong estimate of average spending per visitor (about $1800 in 2018), we can confidently project an additional measurable revenue gain of $30 million if we use average spending of $2000 per visitor. This of course does not account for any qualitative gains, which are almost impossible to measure in this case due to paucity of data.
- Based on both the mean rate of arrivals for the last decade and the mean rate of projected arrivals for the decade after 2017, we have no evidence that the Year of Return has boosted arrival numbers beyond anything other than the mere increase in arrivals in 2019 over the figure recorded in 2018. And even that boost is only to the extent that the growth rate exceeds the average growth rate in visits over the last couple of years, which, sadly, it does not.
The counter-argument being canvassed in the Facebook thread is that we need to use figures preferred by the Ghana Tourism authorities and that if we do we shall record 650,000 extra or additional visitors in 2019 over the 2018 figure. Presumably, the interlocutor has no objection to the use of a spend-per-tourist figure closer to the $2000 number, which should give us $1.3 billion extra yield supposedly attributable to the Year of Return. Still, no $1.9 billion in sight though.
Except that all of this seeming “analysis” is actually empty of both research value and statistical fidelity. The process of determining whether an intervention has had an “effect” is a very elementary one, taught to everyone who has ever taken the most elementary of introductory courses in statistics. It is standard “hypothesis testing”. In a situation such as this one where the means and variances are all so well known due to near-complete historical data, there is hardly any need for the kind of quibbling seen on that thread. Which brings us to the central point: data integrity and validity.
If indeed the tourist subset is about a third of the set of total arrivals, such that we had 350,000 tourists out of the 984,000 arrivals in 2018, then one can only expect 2019 to record total arrivals in excess of 3 million for the tourist component alone to hit the 1 million mark, as canvassed by our Facebook commentator. A completely absurd projection that is at variance with several Government projections.
In fact, there is no logic in holding that the arrivals data I used is the superset and that the Tourism authorities in Ghana have higher-resolution subset data that can be used to hone in on tourist numbers with better precision. Simply because such a supposition was both superfluous and easily verified to be false.
Here is the Tourism Ministry’s own set of data available from page 22 of its latest strategic plan:
This data is actually lower resolution, and includes land border arrivals that are very difficult to process due to the high translocalism of intra-African borders. My decision to focus on data that can be corroborated and triangulated using international aviation stats was driven by this very fact. That data pays as much attention as possible to pruning non-visitor noise wherever possible.
But all that is besides the point really. The most important point here is that this data does not in anyway vindicate any of the strange and statistically perverse claims made by our interlocutor on the Facebook thread. The Ministry’s tourist arrivals figure for 2016, the most recent year for which it had an actual tally is 1,202,200. Its projected figure for 2018 is 1,454,700.
Average visitor spend, according to the Ministry, for 2016, the latest year for which it had complete data, was $1,890, virtually identical to the Ministry of Finance estimate of $1,800 for 2018.
It is important to bear in mind that this average spending amount is comprehensive. To focus solely on spending on tourism activities, strictly speaking, would be to considerably shrink tourism receipt numbers since direct spending on pure tourism in Ghana is incredibly low. According to the Ghana Statistical Service’s “Trends in the Tourism Market in Ghana 2005 – 2014” report (page 15), visitor spending adjusted for inflation has actually been falling for some time:
Visitor arrivals to selected major tourist sites rose from 381,600 to 592,300 over the decade. Real revenue also rose marginally from GHȼ490,000 to GHȼ492,000 over the same period with average spend per arrival falling from 1.3 GH¢ to 0.8 GH¢. Both arrivals and real revenue grew positively in the first half of the period, at an annual average growth rate of 10.7% and 6.1% respectively, while during the second half, both categories fell every year on average by -1% and -3.3% respectively.
We are seriously talking about total earnings in the hundreds of thousands of dollars for the whole country here, and average spending in tourist sites of about a dollar and cents over the course of a full decade. One has to employ a broader definition of visitor spending for tourism revenues to make any sort of statistical sense, which points to the absurdity of trying to use a lower-resolution spec for defining “tourist arrivals”.
So, where did our commentator on Facebook find his numbers? Surely not from the Tourism Authorities, despite purporting to be filtering out tourism data. How did he construct his hypothesis that the “tourist arrivals” number used by the authorities is lower than the “international arrivals” number widely used by global observers and by the Ministry of Finance to compute tourism revenues in Ghana? Surely not from any reputable or defensible data source.
But even if we are to use the lower-resolution, looser, dataset employed by the Tourism Ministry for strategic planning, the fact remains that there is no mechanism to “extract” this strange $1.9 billion figure from any statistical manipulation known to the science.
For instance, we can use the 1.45 million arrivals projection for 2018 (as made by the Tourism Ministry in 2017 in the table reproduced above) and also use the most aggressive projection for arrivals in 2019, which is 1.5 million, and we will still only be able to come up with $100 million as the level of tourist receipts in 2019 in excess of the figure recorded in 2018. But we would then need to address the hurdle of this “increase” being lower than previous year-on-year increases. For example, the last three years has seen arrivals growth rates in the magnitude of about 10% per annum. The apparent increase in numbers in 2019 compared to 2018, would however, if we are to benchmark against the Ministry’s data, be less than 7%, suggesting lower growth in 2019 compared to the trend over the last couple of years.
In short, rather than contribute to the debate in a sincere effort of enhancing policymaking in Ghana through a promotion of facts, figures, data and analysis, the Facebook thread I referred to earlier was primarily concerned with pushing a partisan agenda, and a partisan agenda alone.
From what I can see on social media, many Ghanaians are now completely tired of this inability of politically engaged people to rise above petty partisan squabbling. I share in this frustration.
Originally published on [https://brightsimons.com/2019/12/27/a-strange-partisan-take-on-year-of-return-data/]