tag:theconversation.com,2011:/africa/topics/currency-depreciation-23996/articlesCurrency depreciation – The Conversation2023-10-16T14:11:34Ztag:theconversation.com,2011:article/2154872023-10-16T14:11:34Z2023-10-16T14:11:34ZKenya’s cost of living crisis: expert unpacks what’s driving it and what should be done<p><em>Kenyans are grappling with the high cost of living. Policy analyst Adan Shibia led a technical team that prepared a recent report on the <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206">state of Kenya’s economy</a>. We asked him to unpack what’s driving costs, who’s affected and what can be done about it.</em></p>
<h2>What is the cost of living crisis in Kenya and how bad is it?</h2>
<p>There has been a general increase in prices of necessities like food, transport and energy. But incomes haven’t risen as much as prices. As a result consumers have less purchasing power than before. They are being forced to consume less of everything, or reallocate spending. </p>
<p>Real earnings growth <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=23">declined</a> by an average of 2.7% between 2020 and 2022. The earnings growth rate has been lower than inflation. </p>
<p>Since 2022 Kenya has been experiencing high inflation. Between June 2022 and June 2023 overall inflation <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=67">averaged</a> 8.7%, peaking at 9.6% in October 2022. This was the highest inflation recorded since 2017.</p>
<p>The government has a <a href="https://www.treasury.go.ke/wp-content/uploads/2022/08/NOTICE-ON-PRICE-STABILITY-TARGET.pdf">policy target</a> of maintaining inflation within 2.5 percentage points above or below 5%. So the ceiling would be 7.5%. In June 2022 overall inflation rose above this ceiling, and remained above it up to June 2023. </p>
<p>Inflation is a measure of the rise in prices of a “basket” of goods selected by the Kenya National Bureau of Statistics. The main drivers of inflation were <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=36">food and transport (fuel)</a>. These on average <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=65">account</a> for 42.56% of the consumption basket for all households in Kenya. Price increases for food and fuel averaged 13.5% and 12.3% between June 2022 and June 2023. </p>
<p>The triggers for this inflationary pressure were prolonged drought in 2022 and the Russia-Ukraine war, which disrupted global supply chains of food, energy and fertiliser. </p>
<h2>Who is being affected the most?</h2>
<p>There are three groups of consumers who are affected more than others. </p>
<p>The first group are low-income earners who <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=76">spend</a> over 60% of their incomes on food. The analysis in the Kenya Economic Report 2023 shows that prices of cereals, legumes, tubers, fruits and vegetables all increased substantially. </p>
<p>Low-income earners are also affected through prices of other commodities in the <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=65">consumer basket</a>. These include housing (rent and utilities) and transport. This is particularly the case in urban areas. </p>
<p>The second group of people affected most are minimum wage earners. The rise in their incomes didn’t match inflationary trends. The minimum wage has <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=92">lagged</a> behind the living wage, which is how much a worker must earn to pay for their family’s minimum basic needs. The basic needs are food, housing, clothing, healthcare, education, water, sanitation, transport and communication.</p>
<p>Minimum wage provisions are not well enforced, especially in the informal sector, where 83% of <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=33">those employed</a> work. </p>
<p>The third group are those living in arid and semi-arid parts of the country, where rainfall is low and erratic and temperatures are high. Households in these counties generally have low incomes and face multidimensional poverty. In counties such as Turkana and Wajir households <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=99">spend</a> over 70% of their income on food. They are also more likely to be affected by climate related shocks that disrupt food supply and livelihood sources. </p>
<h2>What’s driving the rising cost of living?</h2>
<p>A confluence of factors in the domestic and global markets is responsible. </p>
<p>In the domestic market, <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=201">prolonged drought</a> in 2022 was the main trigger. This disrupted food supply, increasing reliance on imports. The <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=81">depreciation</a> of the Kenya shilling against major trading currencies like the US dollar, the euro and the pound sterling also contributed to the rise in prices of imported commodities like food, fuel and fertiliser. While Kenya is a net exporter of <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=77">unprocessed food items</a>, it is a net importer of <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=125">processed food products</a>. </p>
<p>Within the global context, the Russia-Ukraine war disrupted supply of cereals (especially wheat), edible oils, energy and fertilisers. Kenya was to a large extent <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=38">dependent</a> on imports of wheat and fertiliser from Russia and Ukraine. </p>
<p>The <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=85">surge</a> in oil prices within the global markets also trickled to <a href="https://www.epra.go.ke/services/petroleum/petroleum-prices/">pump prices</a> locally. </p>
<h2>What policy priorities could help?</h2>
<p>The long-term solution is policies that stimulate the private sector to produce and distribute goods and services more efficiently. Mechanisms to support markets include platforms for trading and access to information. A policy and legal framework that defines rules of interaction among market participants is also useful. This creates a level playing field for everyone. Markets also need clarity on property rights and incentive systems. </p>
<p>Strengthening the role of markets is vital because government has limited resources to subsidise basics like fuel, electricity and maize flour. With stronger markets, private sector players would also be more efficient in production and distribution of products. </p>
<p>Secondly, Kenya needs cushions against drought-related shocks. The key here is climate-smart agricultural practices such as improved crop varieties, adoption of early maturing crop varieties, irrigation and kitchen gardening technologies. And it’s vital to have better early warning systems, to prepare for climate change related risks. </p>
<p>The third consideration is improved infrastructure to ensure food supply: market information systems, transport and storage facilities. </p>
<p>Fourth, price fluctuations need to be addressed. The Kenyan government is currently rolling out County Aggregation Industrial Parks across the 47 counties. They are intended to support agro-processing industries by providing space, utilities, cold storage and so on. They will help even out prices of products across seasons. Processing fresh produce is essential for longer shelf lives and stable prices. </p>
<p>Fifth, the government must encourage private sector investment in the production of electric mobility vehicles. Fuel is the second key driver of inflation in Kenya. Kenyan households spend 9.65% of their income on <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=148">transport</a> and the transport sector <a href="https://kippra.or.ke/download/kenya-economic-report-2023-main-report/?wpdmdl=14955&ind=1695886127206#page=149">consumes</a> 75% of imported petroleum products. A shift to electric mobility is an opportunity to reduce exposure to global fuel price fluctuations. </p>
<p>Sixth, cushioning the vulnerable sections of the population is an area for consideration. This includes enforcement of minimum wage provisions and aligning it with the living wage. Access to affordable financial services such as credit and insurance would help households avoid falling into extreme poverty due to shocks and catastrophic expenditures such as health-related expenses. </p>
<p>Well-targeted social protection interventions are essential as policies are implemented towards market-enabled solutions for effective interactions of demand and supply.</p><img src="https://counter.theconversation.com/content/215487/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adan Shibia is affiliated with the Kenya Institute for Public Policy Research and Analysis (KIPPRA), where he works as a senior policy analyst in the private sector development department. The author declares no conflict of interest in relation to this article. </span></em></p>There’s a need to support production and efficiencies in supply and distribution of essential goods and services in Kenya.Adan Shibia, Senior Policy Analyst, The Kenya Institute for Public Policy Research and Analysis (KIPPRA)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1931532022-10-25T13:40:31Z2022-10-25T13:40:31ZGhana’s economic crisis: expert insights into how things got so bad – and what the fixes are<figure><img src="https://images.theconversation.com/files/491572/original/file-20221025-22-jcnb2p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GettyImages</span> </figcaption></figure><p>Ghana is grappling with runaway inflation as prices of basic commodities <a href="https://www.dw.com/en/ghana-and-zambia-race-to-secure-imf-bailouts/a-63511110">have spiralled</a>. Government finances are also at their weakest in years. Ghana’s local currency, the cedi, is now <a href="https://www.bloomberg.com/news/articles/2022-10-20/ghana-s-cedi-extends-world-beating-loss-on-debt-talk-worries">the world’s worst performer</a> against the US dollar - a signal of the depth of the country’s economic crisis. </p>
<p>Over the past few months, various scholars have written important articles for The Conversation Africa on the state of Ghana’s economy, how it got into this situation and on the International Monetary Fund’s involvement. Here are four essential reads.</p>
<h2>1. How Ghana got here</h2>
<p>By the year 2000, the government of Ghana had borrowed so much that the country was in debt distress. It then subscribed to the Heavily Indebted Poor Countries initiative of the International Monetary Fund and the World Bank. By the time the initiative ended in 2006, Ghana’s total public debt stock was US$780 million (25% of GDP). </p>
<p>However, the debt stock has since risen by 7000% to US$54 billion, which is 78% of GDP. In this article, economist Adu Owusu Sarkodie <a href="https://theconversation.com/ghanas-debt-makes-development-impossible-here-are-some-solutions-176580">explains</a> why, between 2017 and 2019, Ghana’s debt stock grew astronomically. He argues that, beyond the normal drivers, there were three main reasons: the country’s energy sector debt, the financial sector clean-up exercise undertaken by the country’s central bank and the impact of the COVID pandemic.</p>
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<a href="https://theconversation.com/ghanas-debt-makes-development-impossible-here-are-some-solutions-176580">Ghana's debt makes development impossible: here are some solutions</a>
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<h2>2. Demystifying IMF visits</h2>
<p>This year, Ghana began talks with the International Monetary Fund (IMF) for a bailout programme that would restore economic stability. The idea is that it would enable the country to meet its payments to the rest of the world and restore the health of government finances. Ghana is hoping to receive as much as US$3 billion. </p>
<p>But when the IMF announces a visit to a country in Africa, the news can cause concern. This is because IMF policies can have a direct impact on the lives of people living in those countries. It can also cause concern because the public gets little information about the purpose of the IMF’s visit – or its likely outcomes. In this <a href="https://theconversation.com/when-the-imf-comes-to-town-why-they-visit-and-what-to-watch-out-for-188302">article</a>, law professor Danny Bradlow removes some of the mystery surrounding IMF visits to a country. He unpacks the reasons why the IMF sends its staff on “missions” to a country and what can be expected in each case.</p>
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Read more:
<a href="https://theconversation.com/when-the-imf-comes-to-town-why-they-visit-and-what-to-watch-out-for-188302">When the IMF comes to town: why they visit and what to watch out for</a>
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<h2>3. Ghana’s recurrent failure</h2>
<p>This is the second time in the past three years – and 17th since independence in 1957 – that Ghana has turned to the IMF for help. Economist and political risk analyst Theophilus Acheampong argues that Ghana’s approaches to the IMF tell a story of recurrent failure of government to build the economy to withstand internal and external shocks. He <a href="https://theconversation.com/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems-187041">says</a> that Ghana’s lack of fiscal discipline and its recent history of dependence on foreign financing leave the country vulnerable to swings in investor sentiment and accompanying portfolio investment selloffs.</p>
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Read more:
<a href="https://theconversation.com/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems-187041">Ghana’s return to the IMF within three years underscores its deeper economic problems</a>
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<h2>4. Debt restructuring</h2>
<p>In this <a href="https://theconversation.com/ghana-and-the-imf-debt-restructuring-must-go-hand-in-hand-with-managing-finances-better-191877">article</a>, Acheampong explains how Ghana’s engagement with the IMF will require a decision to restructure the country’s massive debt. The Fund states that it won’t lend to countries that have unsustainable debts unless the member takes steps to restore debt sustainability, which can include debt restructuring. </p>
<p>He says that while debt restructuring is inevitable, the government must improve its management of the funds that are available to it. Steps include limiting borrowing from the domestic market and respecting the law on fiscal responsibility.</p>
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Read more:
<a href="https://theconversation.com/ghana-and-the-imf-debt-restructuring-must-go-hand-in-hand-with-managing-finances-better-191877">Ghana and the IMF: debt restructuring must go hand-in-hand with managing finances better</a>
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<img src="https://counter.theconversation.com/content/193153/count.gif" alt="The Conversation" width="1" height="1" />
Various scholars weigh in on the state of Ghana’s economy, how it got into this situation and on the IMF’s involvement.Moina Spooner, Assistant EditorGodfred Boafo, Commissioning Editor: GhanaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1884892022-08-21T09:58:40Z2022-08-21T09:58:40ZNigerians feel the pinch as food prices continue to spiral. There aren’t easy solutions<figure><img src="https://images.theconversation.com/files/479345/original/file-20220816-16-z5eua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Things are not rosy for Nigerians as food prices keep rising. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/general-view-of-grains-of-rice-at-paul-chinedus-shop-in-a-news-photo/1233761729?adppopup=true">Benson Ibeabuchi/AFP via Getty Images</a></span></figcaption></figure><p><em>Nigeria is grappling with rising food prices, as reflected in the spike in inflation. The <a href="https://tradingeconomics.com/nigeria/inflation-cpi">annual inflation rate</a> accelerated for a sixth straight month to 19.64% in July 2022, the highest rate since January 2017. The Conversation Africa asked economist Ndubisi Nwokoma about the spike, and what steps government can take.</em></p>
<h2>How bad is the food price issue in Nigeria?</h2>
<p>The increasing cost of food in Nigeria <a href="https://businessday.ng/business-economy/article/more-pains-for-nigerians-as-food-prices-surges-the-most-in-8months/">has significantly affected</a> the living standards of ordinary citizens. It has become a serious cause for concern. <a href="https://nigerianstat.gov.ng/elibrary/read/1241203">For instance</a>, the average price of one kilogram of beans rose on a year-on-year basis by 24.17% in June 2022. The real income of the average income earner <a href="https://theconversation.com/nigerian-workers-struggle-as-cost-of-living-outstrips-incomes-182069">has been falling consistently</a>. This implies that people can now afford fewer baskets of commodities for their livelihood and sustenance. </p>
<p>The food and non-alcoholic beverages component of inflation is by far the most important determinant as it accounts for almost 50% of the total weight of the basket of items that are used to measure price increases. </p>
<p>Food that has gone up in price includes bread, cereals, potatoes, yam and other tubers, meat, fish, fruits, oils and fats and vegetables. Average Nigerians consume these items daily, particularly bread. Yam and cassava are used for producing garri and fufu, which are widely consumed across the country. </p>
<p>According to the Organised Private Sector – manufacturers and the Lagos Chamber of Commerce and Industry – inflation is perhaps <a href="https://guardian.ng/news/rising-prices-weaken-disposable-incomes-despite-easing-inflation/">the biggest poverty accelerator</a> in the economy due to its weakening effect on people’s purchasing power. The World Bank in a <a href="https://www.worldbank.org/en/country/nigeria/publication/nigeria-development-update-ndu">recent report</a> said inflation was likely to push an additional one million Nigerians into poverty by the end of 2022. </p>
<p>The bank had warned earlier that <a href="https://www.worldbank.org/en/news/press-release/2022/06/14/a-business-unusual-approach-even-more-urgently-needed-to-reduce-inflation-lessen-fiscal-pressures-and-attract-investment">six million more Nigerians</a> would fall into poverty because of rising food prices. </p>
<h2>What’s behind inflation?</h2>
<p>The inflationary trend is largely attributable to factors that have pushed up costs such as wages and input costs such as the price of energy. For example <a href="https://guardian.ng/news/nnpc-quietly-approves-petrol-pump-price-hike-to-n179-litre/">the price of premium motor spirit</a> and <a href="https://www.premiumtimesng.com/news/top-news/527984-buharis-govt-approves-electricity-tariffs-increase-without-informing-nigerians.html">tariffs for electricity</a> have gone up.</p>
<p>Production dislocations – such as disruptions to agricultural production through invasion of farmlands by itinerant herders – have also added to the rise in prices. Herders continue to resist the ranching of their cattle. This has had <a href="https://www.africanews.com/2022/02/02/hunger-crisis-looms-in-nigeria-amid-conflict-between-farmers-herders//">negative effects on the level of food production</a> because many farmers are scared of going to farm. <a href="https://www.wfp.org/emergencies/nigeria-emergency">Over four million people</a> are facing acute hunger and 320,000 children are suffering from acute malnutrition in northeast Nigeria. </p>
<p>The disruption to supply chains caused by the war in Ukraine has affected the volume of food imports. </p>
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Read more:
<a href="https://theconversation.com/war-in-ukraine-is-pushing-global-acute-hunger-to-the-highest-level-in-this-century-181414">War in Ukraine is pushing global acute hunger to the highest level in this century</a>
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<p>The depreciating exchange rate of the naira against other foreign currencies has also played a role. A recent International Monetary Fund <a href="https://www.imf.org/-/media/Files/Publications/CR/2022/English/1NGAEA2022002.ashx">report</a> said that the naira depreciation over the 2021-2022 period was as much as 1.5 times worse than the currencies of other emerging market and developing economies. </p>
<p>The currency depreciation has meant that Nigeria is paying more for the commodities it imports, including wheat and other food items such as bread and flour. Ordinary Nigerians are picking up the tab for this. </p>
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Read more:
<a href="https://theconversation.com/inflation-should-be-viewed-as-public-enemy-number-1-heres-why-183193">Inflation should be viewed as public enemy number 1: here's why</a>
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<p>The extent of the naira’s depreciation explains why inflation is higher in Nigeria than other comparable economies. Naira depreciation affects the cost of imported inputs and leads to price increases of goods and services along the production and supply chain.</p>
<p>The exchange rate has worsened under the Buhari administration. This recurring loss in value of the naira in relation to other currencies is reducing the purchasing power of the average Nigerian. This is particularly so for items with imported components in their production and service delivery. </p>
<p>Another factor driving the rise in food prices has been the <a href="https://www.thecable.ng/border-closure-helped-nigeria-tremendously-buhari-tells-queen-of-netherlands#:%7E:text=The%20federal%20government%20had%2C%20in,reopening%20of%20four%20land%20borders">recent closure of borders</a>. Data from the <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/28608/9781464811463.pdf?sequence=6&isAllowed=y">World Bank Doing Business Indicators 2018</a> shows that border closures between Nigeria and Benin Republic significantly affected imports and prices. </p>
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Read more:
<a href="https://theconversation.com/why-the-cost-of-food-is-not-yielding-to-nigerias-government-policies-178684">Why the cost of food is not yielding to Nigeria's government policies</a>
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<p>The growing level of money supply in the economy is another factor. While it’s true that inflation has risen in developed economies such as the US and the European Union, the Nigerian situation appears to have its unique peculiarities. Broad money supply – made up of currency in circulation, demand deposits/current accounts and quasi money or the combination of savings, fixed and foreign currency deposits – <a href="https://www.vanguardngr.com/2022/06/inflation-money-supply-hits-n46-5-trn-highest-in-5-years/#:%7E:text=Financial%20Vanguard%20findings%20from%20the,12%20months%20ending%20April%202021.">grew by 21% from April 2021, to N46.5 trillion (about US$111 billion) in April 2022</a>. This is far higher than the 15.3% average growth rate recorded in four years between April 2018 and April 2021. </p>
<p>With money supply increasing at a faster rate than the level of production, food prices are bound to increase.</p>
<h2>What can the government do?</h2>
<p>In <a href="https://nairametrics.com/2022/07/19/central-bank-of-nigeria-raises-monetary-policy-rate-to-14/">July</a> the Central Bank’s <a href="https://www.cbn.gov.ng/Out/2022/CCD/Central%20Bank%20of%20Nigeria%20Communique%20No.%20143%20of%20the%20Monetary%20Policy%20Committee%20Meeting%20Held%20on%20Tuesday%2019th%20JULY%202022.pdf">Monetary Policy Committee</a> meeting tried to address the situation by increasing the monetary policy rate from 13% to 14%. This followed a 1.5 percentage point rise in May. </p>
<p>This was done to address the worsening inflationary spiral and the instability of the exchange rate.</p>
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Read more:
<a href="https://theconversation.com/nigeria-has-just-hiked-interest-rates-why-its-the-wrong-recipe-for-curbing-inflation-184090">Nigeria has just hiked interest rates: why it's the wrong recipe for curbing inflation</a>
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<p>But more work needs to be done by the authorities. First, the growth of money supply needs to be checked by drastically limiting advances or overdrafts the Central Bank issues to the fiscal authorities. </p>
<p>Second, cattle ranching should be promoted so that farmers can safely go to their farms. Third, unnecessary border closures should be avoided and the operating environment should be made more conducive for businesses to thrive.</p><img src="https://counter.theconversation.com/content/188489/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ndubisi Nwokoma does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation is perhaps the biggest poverty accelerator in the economy due to its weakening effect on people’s purchasing power.Ndubisi Nwokoma, Professor of Economics, University of LagosLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1793232022-03-16T20:55:20Z2022-03-16T20:55:20ZDebt repayment in roubles, a possible economic counterattack for Russia?<figure><img src="https://images.theconversation.com/files/452172/original/file-20220315-27-15gf38s.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C1920%2C1069&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At the heart of the economic war: the parity of the rouble.</span> <span class="attribution"><span class="source">Ulianapinto/Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The Russian response to Western sanctions took a rather original form on Monday 7 March: to draw up a <a href="https://www.euractiv.com/section/global-europe/news/russia-adopts-list-of-enemy-countries-to-which-it-will-pay-its-debts-in-rubles/">list of “hostile” countries</a> and to authorise Russian individuals and companies to repay their debts in roubles, despite the fact that the credit was contracted in another currency.</p>
<p>On this list, we find the countries of not only the European Union, the United States, the United Kingdom, Japan, but also Canada, Switzerland, Monaco and Korea.</p>
<p>The decision of the Kremlin seems in fact quite shrewd and aims to indirectly gain the support of foreign banks.</p>
<h2>Double punishment?</h2>
<p>Most of the <a href="https://www.reuters.com/markets/europe/how-financial-western-sanctions-might-target-russia-2022-01-19/">economic sanctions taken against Russia</a> are intended to financially isolate the country. The logic is simple: money is the backbone of the war. Without money, it seems extremely complicated for Russia to be able to continue its action in a sustained manner.</p>
<p>This strategy of undermining the Russian economy is partly working. On February 24, the day of the invasion, the euro/rouble parity rate was 95 (i.e., 1 euro was equivalent to 95 roubles). On Monday March 7, it had risen to 148.38. This means that a Russian who wanted to buy a product for 300 euros in France had to pay 28,423 rubles on February 24, and 44,366 rubles on March 7.</p>
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<p>The ability of Russians to trade at the international level is therefore greatly reduced. When we know that the Russians imported nearly <a href="https://www.tresor.economie.gouv.fr/Pays/RU/commerce-exterieur">240 billion dollars</a> in 2020 (about 197 billion euros), the bill will increase significantly.</p>
<p>One might think that this devaluation of the rouble would reduce Russia’s export costs to foreign countries, favouring Russian producers on the international scene. However, to counter this potential positive effect, most European countries have decided to <a href="https://www.washingtonpost.com/world/2022/03/02/boycotts-russia-invasion-ukraine/">boycott Russian exports</a>. For example, they refuse to issue export licenses for certain goods. As a result, the penalty is twofold: imports are decreasing, and exports are being blocked.</p>
<p>What are the traditional solutions to this currency depreciation for Russia? The exchange rate regime of the rouble against other currencies is a so-called floating regime, i.e. it is fixed by the laws of supply and demand on the market. To strengthen the rouble, it would be necessary to increase the demand for it, and thus to increase the number of international financial transactions in rouble… which is deliberately prevented by the sanctions that have been imposed.</p>
<p>What card is left in the hands of the Kremlin? The answer given is imaginative, to say the least: to allow the payment of Russian credits abroad in roubles.</p>
<h2>International banks in a bind</h2>
<p>In addition to the international trade players, people who have credits with foreign institutions are directly affected by the international sanctions. Let’s say you are Russian, you have borrowed 100,000 euros from a French bank, and you pay back 500 euros every month. As of February 24, this amounted to 47,530 roubles, while the same amount is 74,190 roubles as of March 7. The credit is becoming more and more complicated to repay.</p>
<p>So there is a risk of a massive increase in defaults, causing difficulties for foreign banks. This is precisely the leverage that Moscow intends to use. By allowing Russian debtors to pay for their foreign loans not in local currency but in roubles, the country’s authorities are delegating the maintenance and management of their currency from Russia’s central bank to foreign banks.</p>
<p>Let’s take our example from another point of view: you are a French bank, you hold in your assets 100,000 euros of debt issued by Russian clients, with a monthly repayment of 500 euros per month. As shown above, the repayment value of this loan between February 24 and March 7 is not the same amount in roubles, respectively 47,530 roubles and 74,190 roubles. </p>
<p>In itself, this may not seem problematic for the French bank, since in both cases it recovers the equivalent in value, namely 500 euros. However, the problem is not the value, but the currency. Once owning this amount, the bank has two options. It can decide to keep this money in rouble, but with the significant risk at the moment that it will devaluate again, and therefore that the reimbursements will not be worth 500 euros anymore. Alternatively, it can decide to go to the financial markets to exchange these roubles for euros.</p>
<p>But if everyone tries to convert their roubles at once, this will lead to an even sharper fall in the value of this currency and thus a direct devaluation of the value of the repayment. In both cases, the French bank risks a significant loss of value on its repayments.</p>
<p>The French bank therefore has every interest in ensuring that the rouble/euro parity does not lose more value than it already has. Thus, by taking this decision, Russia has ensured that international banks will seek to indirectly support the Russian economy, in order to avoid seeing their credit devalued.</p>
<p>Some might argue that another possibility for these foreign banks would be to simply refuse payment in roubles. However, this is extremely complicated from a legal point of view because the question arises as to which authority is competent to judge this case and whether the other party to the contract will recognise the legal decision issued, which is not a given. From an economic point of view, this also means increasing the probability of never being repaid should the conflict escalate…</p><img src="https://counter.theconversation.com/content/179323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>The idea: to use the credit channel by making foreign banks bear the consequences of the devaluation of the Russian currency.Jérémie Bertrand, Professeur de finance, IÉSEG School of ManagementAurore Burietz, Professeur de Finance, LEM-CNRS 9221, IÉSEG School of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1780632022-03-06T08:21:29Z2022-03-06T08:21:29ZGhana’s Cedi is under stress: some long, medium, and short term solutions<figure><img src="https://images.theconversation.com/files/449746/original/file-20220303-23-13d1lw3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Ghanaian currency is facing its worst run of depreciation in years</span> <span class="attribution"><span class="source">MaxpIxel/Wikimedia Commons</span></span></figcaption></figure><p>An economy with strong fundamentals is one that is resilient, has a well-developed exports base, is industrialised, and creates jobs. That kind of economy can mobilise resources domestically, without much reliance on external support, and can even borrow at a lower cost. The citizens of this kind of economy have good roads, good transportation, good health, and good educational systems. They are well-resourced and free from civil unrest.</p>
<p>For decades, African countries have chalked up successes but these have not been significant enough to transform their economies. Most countries on the continent are still far from achieving these indicators of an economy with strong fundamentals. They often export primary commodities and import finished products.</p>
<p>The Ghanaian economy is no exception. It is still very much the Guggisberg economy. Sir Gordon Guggisberg was a British empire colonial administrator in what was then Gold Coast (1919-1927). He designed an economy to focus on the export of raw materials and importation of finished goods. Hence the moniker. </p>
<p>A century later, cocoa and gold are still Ghana’s major exports. Ghana is Africa’s <a href="https://www.forbes.com/sites/greatspeculations/2021/06/23/updated-top-10-gold-producing-countries/?sh=122bfca2ce2e">top gold exporter</a> at 138.7 tonnes. It has since added oil and gas, and some non-traditional commodities. </p>
<p>Ghana’s reliance on exporting raw materials and importing finished products contributed to the country’s persistent demand for, and less supply of, foreign currencies. This is why, for a long time, Ghana’s cedi has been depreciating against the other major trading currencies.</p>
<h2>Why is the cedi depreciating so fast?</h2>
<p>Ghana is an import-dependent economy. Because of this, the country continues to buy foreign currency to meet its import demands, with less supply of foreign exchange from its exports. Sometimes, the country records a net gain with exports earnings exceeding import costs, but these are paper gains. The actual money is repatriated by the foreign companies that operate in the country. The retention law is not effective to restrain them from repatriating all their profits.</p>
<p>The depreciation of the cedi has always been seasonal. It’s at its worst between February to March. This is the period during which Ghana-based multinationals repatriate profits. Also, local businesses that had imported goods on credit ahead of the Christmas season settle their debts. These are the major causes of the cedi depreciation. </p>
<p>And the fundamentals have not improved significantly over the years.</p>
<p>The exchange rate was quite stable, especially during the peak of the COVID-19 period (2020-2021), because imports slowed due to border closures by most countries. But as of 28th February 2022, the Ghanaian cedi was the worst performing currency among 15 top currencies in Africa, depreciating by 7.6% within the first two months of 2022.</p>
<h2>So what has sped up the decline?</h2>
<p>The first reason for the recent depreciation is the increased demand for foreign currencies since most businesses in Ghana are now recovering from the COVID-19 shock. This is not limited to Ghana. Most businesses globally are recovering and getting into serious production.</p>
<p>The second reason is the country’s inability to borrow from the international capital market. Because Ghana isn’t able to generate enough foreign exchange through exports, successive governments have tried to manage the depreciation of the cedi through borrowing from the international capital market, issuing dollar-denominated domestic bonds, and depleting the country’s foreign exchange reserves.</p>
<p>Whenever Ghana’s sovereign bond is no longer profitable and there are not enough reserves to shore up the Cedi, the currency depreciates. The events of March 2019 provide a perfect picture. That month the US Federal Reserve increased its interest rate making it more profitable to attract investors. Investors responded by selling sovereign bonds of developing countries like Ghana.</p>
<p>The world economy is bouncing back after the pandemic, pushing global inflation up. Inflation has moved from 3.1% in 2020 to 3.8% in 2022. The US inflation has risen from 1.35% in December 2021 to 7.46% in February 2022. The US Federal Reserve has responded by increasing the interest rate, making US sovereign bonds very attractive. Many investors are now selling their bonds in developing countries like Ghana to purchase those of advanced-economies like the US. </p>
<h2>Effects of the depreciation</h2>
<p>Depreciation of any currency makes its imports more expensive and exports cheaper. Some countries intentionally devalue their currencies to make their exports cheaper. However, because Ghana‘s export sector is not significantly developed, the country is not able to take advantage of the Cedi’s depreciation by exporting more and earning more foreign exchange. The effect of currency depreciation has been an increase in the cost of imported goods. Most of the imported goods are intermediate goods that are used for local production. This has led to rising inflation.</p>
<p>For example, the ex-pump prices of fuel depend a lot on the exchange rate since a greater part of the refined fuel is imported. Currently, there is increased global demand for crude oil as most industries are now recovering from the effects of COVID. At the same time, the supply of crude oil has slowed down after the <a href="https://theconversation.com/russia-invades-ukraine-5-essential-reads-from-experts-177815">Russian invasion of Ukraine</a>. The international crude oil price is expected to continue increasing for some time. </p>
<p>The combined effect of cedi depreciation and increases in international crude oil prices means that the ex-pump price of fuel in Ghana is expected to keep rising, at least until the end of the year 2022. </p>
<p>In response to high inflation, the Bank of Ghana will increase its policy rate in an attempt to control the growth of credit. This will lead to an increase in the cost of borrowing. Higher borrowing costs will eventually lead to increased costs of production, which will further increase inflation. </p>
<h2>Solutions</h2>
<p>The long-term solution is for the country to industrialise, add value to its exports, increase local production and cut down on imports so that there will be enough foreign exchange in the country. The government’s policy of modernising agriculture, and the one-district-one-factory should be improved to speed up the process of industrialisation.</p>
<p>The medium-term solution is for the government to be able to raise more domestic revenue to be able to service its debts, and finance its development without a heavy reliance on borrowing.</p>
<p>The short-term solution is for the government to borrow externally and bring foreign currency into the country. This can only happen after the government demonstrates to the investment community its ability to mobilise domestic revenue to service debt. </p>
<p>As a matter of urgency, the government must revise the design of the electronic levy (e-levy) and pass it within the shortest possible time to access Eurobonds. According to the international credit rating agencies, the passage of the e-levy and the reversal of the 50% benchmark values at the ports will signal to international investors that government of Ghana is on the fiscal consolidation path and that it can raise domestic revenue to service its debt. </p>
<p>In the short term, government can also demonstrate its ability to mobilise domestic revenue by paying attention to other sources of revenue such as property tax, tax exemptions, and natural resources.</p><img src="https://counter.theconversation.com/content/178063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adu Owusu Sarkodie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Ghanaian currency is facing structural hurdles.Adu Owusu Sarkodie, Lecturer, Department of Economics, University of GhanaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/825692017-08-24T00:32:46Z2017-08-24T00:32:46ZThe penny may be worthless, but let’s keep it anyway<figure><img src="https://images.theconversation.com/files/183203/original/file-20170823-6591-qn13hz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The 16th U.S. president has graced the penny since 1909.</span> <span class="attribution"><span class="source">AP Photo/David Zalubowski</span></span></figcaption></figure><p>Governments have long waged a <a href="https://www.forbes.com/sites/steveforbes/2016/03/01/the-great-cash-grab/#677575704aed">war on cash</a> in an attempt to <a href="https://mises.org/library/myths-behind-war-cash">curb terrorism and tax evasion</a>. Their focus has typically been on eliminating large denominations, <a href="https://www.nytimes.com/2016/05/05/business/international/ecb-to-remove-500-bill-the-bin-laden-bank-note-criminals.html">like Europe’s €500 bill</a> or <a href="https://theconversation.com/why-a-cashless-society-would-hurt-the-poor-a-lesson-from-india-79735">India’s 1,000 rupee note</a>. </p>
<p>Two U.S. lawmakers <a href="https://www.mccain.senate.gov/public/index.cfm/press-releases?ID=A51EACC5-53BE-4A09-B1B3-0E7BF3954CB0">have a much smaller target in mind</a>: the lowly penny, perhaps most commonly found in jars and underneath couch cushions but <a href="http://gregmankiw.blogspot.com/2006/04/get-rid-of-penny.html">rarely used</a> to actually pay for things.</p>
<p>Their complaint is that the cost to mint billions of these one-cent coins every year is costing taxpayers a small fortune. </p>
<p>So is it time to end the coin’s <a href="http://www.pennies.org/index.php/penny-history">230-year run</a>?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/183254/original/file-20170824-25621-1mo01kv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A collector eyes a few rare pennies, including a coin that was made in 1909, one of the first to bear Lincoln’s visage.</span>
<span class="attribution"><span class="source">AP Photo</span></span>
</figcaption>
</figure>
<h2>A one-cent history</h2>
<p>The penny, the first currency of any type authorized by the U.S. government, <a href="http://www.pennies.org/index.php/penny-history">was initially struck</a> in 1787, though it didn’t become legal tender until 1856. Since then, more than 300 billion one-cent coins with 11 different designs have been minted. </p>
<p>Abraham Lincoln <a href="https://reagan.procon.org/view.resource.php?resourceID=003839">became the first U.S. president</a> to adorn a coin when he was put on the penny in 1909 on the 100th anniversary of his birth (he wasn’t added to the US$5 until 1914). The Lincoln penny was also the first to include the inscription, “In God We Trust.” </p>
<p>Arizona Rep. Jim Hayes first tried to get rid of the penny in 1989, under the <a href="https://www.congress.gov/bill/101st-congress/house-bill/3761/text">Price Rounding Act</a>, and <a href="http://money.cnn.com/2002/04/11/pf/q_pennies/">many others</a> have urged its elimination since, leading the TV series “The West Wing” even <a href="http://www.westwingtranscripts.com/search.php?flag=getTranscript&id=50">to mock the debate</a> in one of its episodes.</p>
<p>Former President Barack Obama <a href="https://www.youtube.com/watch?v=uef6XckoIMw">lent his voice</a> to the cause in a 2013 interview, in which he called the penny a metaphor for the government’s difficulty in getting rid of wasteful services. </p>
<p>The latest salvo came in March, when Senators John McCain and Mike Enzi <a href="https://www.mccain.senate.gov/public/index.cfm/press-releases?ID=A51EACC5-53BE-4A09-B1B3-0E7BF3954CB0">introduced legislation</a> to eliminate the minting of pennies. The bill also proposes switching the paper one-dollar bill to a coin and changing the composition of the nickel in order to bring down its cost. They said it would lead to an estimated $16 billion in savings.</p>
<p>The penny wouldn’t be the first form of currency the U.S. has eliminated. <a href="http://www.newyorker.com/magazine/2008/03/31/penny-dreadful">We got rid</a> of the half-cent in 1857.</p>
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</figure>
<h2>Why eliminate the penny</h2>
<p>One of the most compelling reasons cited for getting rid of the penny is the fact that it’s become unprofitable due to inflation and the rising cost of metals. The U.S. Mint has been losing money on every penny it’s produced since 2006. </p>
<p>Last year, it <a href="https://www.usmint.gov/wordpress/wp-content/uploads/2017/02/2016AnnualReport.pdf">cost the mint</a> 1.5 cents to produce a penny, creating what in the coin world is known as negative <a href="https://www.ecb.europa.eu/explainers/tell-me/html/seigniorage.en.html">seigniorage</a>. That amounted to a loss of almost $46 million on the <a href="https://www.usmint.gov/about/production-sales-figures">production of more than nine billion pennies</a>. </p>
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<p></p><hr><p></p>
<p>The primary reason is the soaring cost of metals. The price of zinc, which currently composes 97.5 percent of a penny, <a href="http://www.indexmundi.com/commodities/?commodity=zinc&months=360">has tripled</a> over the past 15 years. Copper, which makes up the other 2.5 percent (and once was the sole ingredient), <a href="http://www.indexmundi.com/commodities/?commodity=copper&months=360">has risen almost fourfold</a>.</p>
<p>The penny isn’t the only coin that’s underwater. The nickel, comprising three-quarters copper and one-quarter nickel, currently costs 6.3 cents to make – which is practically a steal compared with the 11 cents it cost in 2011. </p>
<p>Parts of the U.S. government have already stopped using pennies. The Army and Air Force, for example, <a href="https://www.aafes.com/exchange-stores/faq/#11">have banned pennies since 1980</a> in all overseas military exchanges, where soldiers and their families can shop, because they were too heavy to transport. </p>
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<p></p><hr><p></p>
<p><a href="http://coincollectingenterprises.com/information/coin-eliminated-by-country/">Some countries</a> have already banned one-cent and other low-value coins entirely. On a fairly recent trip to Canada, I bought a bottle of wine with cash and expected to get a few pennies back in change. Instead, the retailer simply rounded the price of my purchase up to the nearest nickel – pocketing the difference, which became the norm after Canada <a href="http://www.mint.ca/store/mint/about-the-mint/phasing-out-the-penny-6900002#.WYaDFFGQxaR">eliminated its penny in February 2013</a>. </p>
<p>Australia <a href="http://www.heraldsun.com.au/news/victoria/its-been-25-years-since-australias-smallest-coins-were-removed-from-circulation/news-story/9263c4e1fba886fddc7fbe634dfde1ac">got rid of its penny</a> in 1992 and is expected to <a href="http://www.smh.com.au/federal-politics/political-news/not-making-cents-five-cent-coin-doomed-after-50-years-of-decimal-currency-20160212-gmsl9g.html">axe its nickel</a> soon.</p>
<p>Penny opponents have other reasons besides cost. Some are concerned about the <a href="http://www.smithsonianmag.com/science-nature/penny-environmental-disaster-180959032/">environmental damage caused by mining</a> minerals for coins that are so little used.</p>
<p>Others, like physicist Jeff Gore, head of the advocacy group <a href="http://www.retirethepenny.org/">Citizens to Retire the Penny</a>, are simply annoyed that we carry around pocketfuls of low-value coins, calling it “<a href="https://www.bostonglobe.com/business/2012/04/18/mit-physicist-jeff-gore-leads-effort-scrap-penny/Xz04E54R4BTkoDTYIOpnJO/story.html">a big, horrible waste of time</a>.”</p>
<p>Walgreen’s and the National Association of Convenience Stores <a href="http://www.washingtonpost.com/wp-dyn/content/article/2006/09/24/AR2006092400946.html">tried to quantify</a> that lost time in 2006, when it estimated that handling pennies adds 2 to 2.5 seconds to every cash transaction. If every U.S. adult made just one transaction a day, that adds up to more than 60 million in hours spent fiddling with change. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=836&fit=crop&dpr=1 600w, https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=836&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=836&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1050&fit=crop&dpr=1 754w, https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1050&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/183204/original/file-20170823-6594-1om3nkz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1050&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A German artist found one way to use a penny (well, around 2,500).</span>
<span class="attribution"><span class="source">AP Photo/Bernd Kammerer</span></span>
</figcaption>
</figure>
<h2>For the love of pennies</h2>
<p>While killing off the penny may seem like a slam-dunk case, the reason we haven’t is pretty straightfoward: People love their Lincolns, as President Obama alluded to in a <a href="https://www.youtube.com/watch?v=uef6XckoIMw">2013 interview</a>. </p>
<p>When polled about their feelings in 2014, the majority of U.S. individuals <a href="https://today.yougov.com/news/2014/01/10/poll-results-pennies/">oppose the elimination</a> of either the penny or the nickel. In fact, more than two-thirds said if they saw a penny on the ground, they’d stop to pick it up (which the <a href="http://www.newyorker.com/magazine/2008/03/31/penny-dreadful">New Yorker estimated</a> in 2006 would take 6.15 seconds and pay less than the federal minimum wage).</p>
<p>Beyond sentimentality, however, there are a number of practical reasons to keep these coins. Retailers in countries that have banned the penny, as has Canada, <a href="http://www.mint.ca/store/mint/about-the-mint/rounding-6900008#.WYt2MlGQxaR">are required to round</a> cash purchases up or down to the nearest five cents. This means if a purchase is $1.01 or $1.02, then the merchant charges you only $1. If the price is $1.03 or $1.04, then the merchant charges $1.05. </p>
<p>This rounding algorithm is perfectly fair if prices are spread out evenly across the board. However, merchants usually set the price. This means that merchants who strategically set prices could make one or two extra pennies on every cash transaction. </p>
<p><a href="https://bucks.blogs.nytimes.com/2012/08/28/is-a-penny-rounded-a-penny-lost-ask-chipotle/">Chipotle Mexican Grill</a> tried this rounding method at some of its locations in 2012 to speed up lines. It faced <a href="http://www.dailymail.co.uk/news/article-2195515/Chipotle-cheating-customers-caught-STEALING-deceptive-receipt-rounding-scandal.html">customer backlash at the register</a> when people were given less change than they expected.</p>
<p>Economists call this strategic price-setting a “rounding tax.” Penn State’s Raymond Lombra estimated that eliminating the penny and rounding purchases <a href="http://www.jstor.org/stable/40326060">could cost U.S. consumers</a> at least $600 million a year. Moreover, since the poor and disadvantaged <a href="http://www.newyorker.com/business/currency/the-cost-of-cash-for-the-rich-and-the-poor">use cash more than the rich</a>, the rounding tax would fall disproportionately on them. </p>
<p><a href="https://link.springer.com/article/10.1057/eej.2007.10">Others contend</a> that sales tax and other variables lead to an even distribution of final digits that couldn’t be easily manipulated by a retailer. And some businesses, such as a <a href="http://www.coinbooks.org/club_nbs_esylum_v10n06.html">drugstore chain in Israel</a>, avoided the problem altogether by voluntarily always rounding down rather than up after the country killed off its lowest-value coin.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=383&fit=crop&dpr=1 600w, https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=383&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=383&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=481&fit=crop&dpr=1 754w, https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=481&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/183253/original/file-20170824-25626-67bs3z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=481&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Freshly made pennies tumble off a conveyor belt as they exit a machine and land in a catch bin at the U.S. Mint in Denver.</span>
<span class="attribution"><span class="source">AP Photo/David Zalubowski</span></span>
</figcaption>
</figure>
<h2>Bribes work better than bans</h2>
<p>So where does that leave our dear, beloved penny? </p>
<p>I believe opponents’ primary argument, that we’re losing money on them, is unconvincing since the government squanders taxpayer dollars on many of its activities, such as the U.S. Post Office (<a href="http://thehill.com/policy/finance/306224-us-postal-services-posts-56b-loss-for-2016">which lost $5.6 billion</a> in 2016) and <a href="https://www.cagw.org/reporting/pig-book">countless billion-dollar pork barrel projects</a>. </p>
<p>In addition, banning pennies is poor public policy because so many U.S. individuals adore the coins.</p>
<p>Rather than passing an unpopular ban, a smarter way to gradually reduce the use of low-value coins is to persuade a few major retail chains that do a lot of business in cash to round down purchases to the nearest five cents, like the Israeli drug store did.</p>
<p>Why would they do this? If the <a href="http://www.washingtonpost.com/wp-dyn/content/article/2006/09/24/AR2006092400946.html">above estimate</a> that handling pennies adds several seconds to every transaction is correct, then by rounding down, companies would increase the number of customers each cashier can handle and also make patrons happier. The increased productivity might even be enough to pay for the lost revenue.</p>
<p>Inducing people to transition away from pennies with small monetary bribes will be a far more successful strategy than forcing people to give up coins they like.</p><img src="https://counter.theconversation.com/content/82569/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It may cost more to make a penny than a penny’s worth, but a penny saved may be more than a penny earned.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/650062016-09-07T19:49:14Z2016-09-07T19:49:14ZHow the G20 can ensure the marvelous gains from globalization aren’t lost<p>The <a href="https://theconversation.com/us/topics/g20-750">G20 summit of world leaders</a> just finished two days of meetings, during which they focused primarily on the many ongoing fires threatening the global economy. These include the alleged “dumping” of Chinese steel on other nations, worsening climate change, cybersecurity and the fear of competitive devaluations. </p>
<p>But perhaps the biggest threat facing the current international economic order over the long term – as well as the enormous prosperity it has created, lifting billions out of poverty – is the backlash against globalization. As it stands, however, the G20 is focusing on the firefighting and less on the long term. </p>
<p>That’s a big mistake because the global economy is more fragile than many think, and there’s a real risk that protectionism and anti-trade sentiment could derail what has been built. Instead of remaining a fire brigade or an annual talking shop, the G20 <a href="http://www.business.rutgers.edu/business-insights/business-insight-what-g20-leaders-need-do">should use its clout</a> and resources to serve as counterweight to the backlash and articulate a global vision. </p>
<p>As a professor of international business over the past three decades, I have seen how the <a href="http://www.jec.senate.gov/public/_cache/files/fc5e8da1-a5bc-43b6-8ebe-ebbbfdf6e3fd/may-14-2015-republican-staff-analysis-consumer-trade-benefits.pdf">benefits of globalization</a> have lifted billions out of poverty in emerging countries and conferred on American consumers over US$2 trillion in savings since 1980 in the form of lower prices. While these gains have been somewhat offset by the loss of low-end manufacturing jobs in the U.S., the net benefit has been enormous.</p>
<h2>What is the G20</h2>
<p>The world is a very uneven and unequal place, made up of 193 nations, each with its own language, culture, laws, institutions and average income, <a href="https://knoema.com/sijweyg/gdp-per-capita-ranking-2016-data-and-charts">ranging from a paltry</a> $221 per person per year in South Sudan to $101,994 in Luxembourg. </p>
<p>While there are regional or global bodies like the United Nations and the European Union and trade agreements between countries, there is no world government or judiciary that can enforce its will on a sovereign nation. National sovereignty is still very much the norm.</p>
<p>That’s where the G20 comes in. </p>
<p>The G20 is a mixed bag of leaders representing 19 countries plus the EU, ranging from rich democracies like the U.S. and Germany to monarchies like Saudi Arabia and autocracies like Russia. Their economies cover <a href="http://timesofindia.indiatimes.com/business/international-business/G20-countries-account-for-85-of-global-GDP-75-of-world-trade/articleshow/47670497.cms">85 percent of the world’s economic output</a>, almost two-thirds of its population and <a href="http://www.climate-transparency.org/g20-emissions">about three-quarters of its carbon footprint</a>. But it is a small enough group that these countries can have a real impact when they put their minds to something.</p>
<p>What can the G20 leaders accomplish when they get together, other than develop personal relationships? Actually, quite a lot, because the group not only represents over three-quarters of the world economy but, being small, can hope to reach consensus, compared with absurdly unwieldy bodies such as the United Nations with its 193 members. For the past century or longer, humankind has been building a global civilization and an interconnected economy. This cannot continue without closer coordination and cooperation among its leading nations, especially with emerging threats and concerns. </p>
<p>The G20 provides a forum to address them.</p>
<h2>Threats and concerns</h2>
<p>President Xi Jinping summarized many of those threats in his <a href="http://www.globalresearch.ca/chinas-president-xi-jinpings-opening-address-of-g20-summit-a-new-blueprint-for-global-economic-growth/5543895">47-minute inaugural G20 speech</a>.</p>
<p>Most are economic, such as sluggish global growth and falling trade. Protectionist sentiment and xenophobia are on the rise, as seen in the U.K.’s Brexit referendum and the candidacy of Donald Trump. This so-called globalization backlash <a href="http://www.economist.com/news/united-states/21695855-americas-economy-benefits-hugely-trade-its-costs-have-been-amplified-policy">threatens to take us backward</a> to a more fragmented, “raise the drawbridge” world with a <a href="http://www.economist.com/news/finance-and-economics/21697023-historians-find-yet-another-way-protectionism-harms-development-toll-tariffs">lower standard of living</a> for all. </p>
<p>One of the biggest fears on this score is that countries will engage in competitive devaluations of their currencies to make their exports cheaper for other nations to buy and, as a consequence, reducing imports from its trading partners. As the world’s biggest exporter, China led the way at the summit in declaring that it would manage the value of the yuan responsibly, although it did not articulate any specific guidelines or parameters.</p>
<p>Other concerns included discrimination against foreign direct investors, the growing challenge of cybersecurity, the global oil glut and climate change. On this last problem, some progress was made as Presidents Obama and Xi <a href="http://www.scientificamerican.com/article/u-s-and-china-formally-commit-to-paris-climate-accord">reaffirmed their commitment</a> to the <a href="http://time.com/4478197/g20-climate-change-obama-xi/">Paris climate agreements</a>.</p>
<p>Except for climate change, most of the other issues tackled by the G20 are short-term in nature. This is necessary, but misses a great opportunity to build an institution that addresses the long term collective destiny of humankind.</p>
<p>The G20 should build an institution devoted to long-term issues.</p>
<p>With so many pressing problems festering across the globe, it may be difficult to focus on the long term. But that is exactly what the G20 needs to do, and is the only institution uniquely positioned to do so because of the relatively small size of member states.</p>
<p>We are, arguably, building and nurturing a global civilization, yet there is no efficient and ongoing organizational “architecture” for intergovernmental coordination and consensus. The United Nations, with 193 member states, is too large, too amorphous and too unstructured to do the job effectively. A smaller group of 20 nations – which as I noted represent about half the globe’s people and most of its output – can achieve better coordination and accomplish much more. An annual meeting is insufficient.</p>
<p>The G20 should take on this important role. It could become an articulator and formulator of strategy for long-term progress in the world economy and act as a counterweight to those who feel threatened by globalization and the rapid spread of ideas and values that are challenging traditional ones. </p>
<p>The global convergence of ideas and lifestyles distresses those whose traditional identities and <a href="http://www.tandfonline.com/doi/abs/10.3109/09540261.2014.955084?journalCode=iirp20&">self-image are threatened</a>. <a href="http://yaleglobal.yale.edu/content/globalization%E2%80%99s-angst-and-%22brexit%22-vote">Britain’s exit from the EU</a>, Trump’s rise, the spread of extreme conservatism in Islam, ultraorthodoxy in Judaism and the <a href="http://onlinelibrary.wiley.com/doi/10.1111/jora.12002/full">unnecessarily defensive attitudes</a> of the Hindu right in India are <a href="http://www.sciencedirect.com/science/article/pii/S0148296315003744">all manifestations of the reaction</a> to globalization and the psychological and sometimes real threat it poses to traditionalists around the world. </p>
<p>Globalization is also seen as a threat by workers whose skills can be replicated by others in foreign countries, doing the same work for lower wages. This was one of the main concerns of Bernie Sanders supporters. </p>
<p>To an employee in Peoria, Illinois, or Canton, Ohio, laid off because his job was transferred to Vietnam, it is small comfort to be told that his pain is more than offset for the U.S. as a whole because America’s <a href="http://www.epi.org/blog/naftas-impact-workers/">participation in trade treaties</a> has created more export or international business jobs in California and Texas. Or that the typical American household benefits because it hypothetically saves at least $800 a year because of cheaper imports.</p>
<p>What the G20 could do is not only to articulate the overall benefits of globalization to their citizens but take practical steps such as creating a joint fund and colleges or vocational schools for retraining workers displaced by globalization – and encouraging its 20 member states to do the same in their own nations.</p>
<p>That’s why the G20 is the best bet to lead a coordinated defense of globalization and its benefits. </p>
<p>Over the last 15 years, <a href="http://www.worldbank.org/en/news/press-release/2015/10/04/world-bank-forecasts-global-poverty-to-fall-below-10-for-first-time-major-hurdles-remain-in-goal-to-end-poverty-by-2030">globalization has lifted</a> about 1.25 billion people out of extreme poverty and propelled another 1 to 2 billion into the middle class. Another telling stat: In 1981, when the world population was 4.5 billion, 1.98 billion lived in abject poverty. That’s 44 percent. In 2015, even though the world population reached 7.4 billion, the abject poverty rate had plunged to 9.6 percent. Only 710 million today live in extreme poverty.</p>
<p>This is primarily because of the <a href="https://books.google.com/books?id=NR50AwAAQBAJ&printsec=frontcover&dq=kissinger+world+order&hl=en&sa=X&ved=0ahUKEwjP-IfG4PvOAhXM1IMKHa-oBWsQ6AEIHjAA#v=onepage&q=kissinger%20world%20order&f=false">spread</a> of foreign direct investment, trade, domestic and international deregulation and the (tentative and shaky) emergence of a <a href="http://www.tandfonline.com/doi/full/10.1080/0163660X.2016.1170477">rules-based world economic order</a>.</p>
<p>It is a stunning but fragile accomplishment, unprecedented in human history – which has been full of sudden blockages and U-turns.</p>
<p>The glories of Rome, Chang-An (capital of the Han dynasty, today’s Xian) and Pataliputra (capital of the Mauryan Empire in India) <a href="https://books.google.com/books?id=9RBsCQAAQBAJ&printsec=frontcover&dq=silk+road&hl=en&sa=X&sqi=2&ved=0ahUKEwizoezK4fvOAhWF0YMKHQrRDqQQ6AEIHDAA#v=onepage&q=silk%20road&f=false">interconnected by the “Silk Road,”</a> were followed by centuries of “dark ages” in Europe and fragmentation in China and India. The forces of protectionism, recidivism, excessive nationalism and tribalism lap at the shores of our fragile global economy. Who will defend it and help us build a global civilization while minimizing the pain of those hurt by globalization? </p>
<p>Even the largest countries, acting alone, are inadequate to play such a role. The G20 nations, while accounting for more four-fifths of the global economy, are nevertheless a small enough group to achieve consensus.</p>
<p>The coming decades of the 21st century call for an even greater degree of coordination, communication and joint action in pursuing fiscal policies and monetary systems, fostering innovation, balancing growth with ecological needs, tackling global warming and continuing poverty reduction. Although I’m not a big fan of big government, the G20 could be the leading espouser of global values, norms and rules and as a proponent of international business.</p><img src="https://counter.theconversation.com/content/65006/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With foes of globalization seeing their voices trumpeted by Brexit and Donald Trump’s candidacy, the G20 needs to act as a counterweight that sounds a clear vision for a connected future.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/573562016-04-07T04:33:53Z2016-04-07T04:33:53ZHow Mozambique can avoid stepping into the abyss<figure><img src="https://images.theconversation.com/files/117714/original/image-20160406-28935-3c3qvw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mozambique needs to prioritise labour-intensive sectors, including agriculture.</span> <span class="attribution"><span class="source">Reuters/file picture</span></span></figcaption></figure><p>It is unsettling how quickly the shine can come off a development success story. Only a few years ago, Mozambique was standing at the helm of sustained and <a href="https://www.wider.unu.edu/publication/jobs-and-welfare-mozambique">rapid economic growth</a>. Optimism was nurtured by high commodity prices, robust foreign direct investment and warm relations with development financing agencies. </p>
<p>Economic and social wobbles after the global financial crisis seemed to have been relegated to the past. Political minds were even discussing how to achieve annual growth rates in the double digits.</p>
<p>This has changed. Over the past year a creeping pessimism has taken hold and growth prospects have been revised downward. This has been driven by a combination of related dynamics – <a href="http://www.reuters.com/article/idUSFit952997">depreciation</a>, <a href="http://www.wsj.com/articles/tuna-and-gunships-how-850-million-in-bonds-went-bad-in-mozambique-1459675803">debt</a>, <a href="http://www.theguardian.com/global-development/2016/feb/17/mozambique-drought-hopes-harvest-evaporate">drought</a> and <a href="http://www.economist.com/news/middle-east-and-africa/21695203-scandals-and-setbacks-gas-and-fishing-industries-darken-mood-mozambique">deadly conflict</a>. Put together, these have revealed weaknesses in the pattern of growth on which Mozambique had come to rely.</p>
<h2>Currency, debt, drought and conflict</h2>
<p>Between 2011 and 2014 the Central Bank of Mozambique was able to stabilise the nominal exchange rate at about 30 meticais to the US dollar. This corresponded with a period of historically low inflation and broad-based economic confidence. </p>
<p>In 2015, the situation changed dramatically. As in other low-income countries the exchange rate dropped, to about 48 meticais to the dollar by the end of the year. This implied an annual depreciation of about 45%, making the <a href="http://www.reuters.com/article/idUSFit952997">metical </a>one of the worst performers of the year. Today, <a href="http://blogs.worldbank.org/prospects/global-daily-mozambique-inflation-rate-nearly-5-year-high">inflation rates</a> have jumped as high import costs are passed on to consumers.</p>
<p>Another contributing factor is <a href="http://www.reuters.com/article/idUSFit952997">debt</a>. Mozambique’s recent debt experience would not be out of place in a work of fiction. The main protagonist is a state-owned enterprise, <a href="http://www.bloomberg.com/news/articles/2016-03-17/mozambique-tuna-yields-rise-as-coupon-on-new-bond-set-at-10-5">Empresa Moçambicana de Atum</a> (EMATUM), established in 2013 to develop a domestic tuna fisheries industry. With hardly an office to its name, the firm raised US$850 million in a private placement of external debt to be repaid by 2020 at a cost of about $260 million each year. </p>
<p>Unsurprisingly, the fledgling enterprise has not yet generated any serious revenues, so the financing costs have fallen on the state as loan-guarantor.</p>
<p>In a surprise to investors in the EMATUM notes, a large part of the raised funds were allocated to defence spending. And a further $622 million of defence-related external commercial debt, contracted prior to EMATUM, has <a href="http://zitamar.com/mozambique-tuna-bond-scandal-almost-twice-big-thought-wsj/">come to light</a>, enraging investors and raising prospects of soured relations with foreign aid donors.</p>
<p>The finance minister, in office since last year, has been handed a poisoned chalice. He has achieved some respite by restructuring the EMATUM debt, but this only reduces the short-term costs. Some rating agencies are treating the restructuring as a <a href="http://furtherafrica.com/2016/04/01/bloomberg-mozambique-readies-eurobond-as-tuna-investors-agree-to-swap/">selective default</a>, so access to commercial capital markets is likely to be difficult over the medium term.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=500&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=500&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117720/original/image-20160406-28955-rntb1x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=500&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Drought has left hundreds of thousands are at risk of severe food insecurity.</span>
<span class="attribution"><span class="source">Reuters/Grant Lee Neuenburg</span></span>
</figcaption>
</figure>
<p>El Niño has also added to the country’s problems. Southern Africa’s drought has hit southern and central Mozambique hard. Hundreds of thousands are at risk of severe <a href="http://www.fews.net/southern-africa/mozambique/key-message-update/march-2016">food insecurity</a> and food assistance is already being delivered to some areas. While this may only be temporary, the effects are likely to last well into 2017. Critically, they underline the vulnerability of the Mozambican population.</p>
<p>Lastly, a deteriorating political climate has morphed into military confrontation between the government, led by independence party Frelimo, and its old political rival, Renamo. The conflict is sporadic, but important road connections have been disrupted and, in some areas, families have <a href="http://www.nyasatimes.com/2016/03/16/malawi-govt-opens-luwani-refugee-camp-as-mozambique-refugee-numbers-grow/">fled</a> their land and schools have closed. </p>
<p>The economic consequences could be substantial if the conflict escalates.</p>
<h2>Shaky foundations</h2>
<p>These dynamics are symptomatic of a deeper malaise, namely that Mozambique’s recent phase of economic growth has been built on shaky foundations. </p>
<p>After a highly successful period of post-conflict recovery and adjustment, the final years of the 2000s marked a shift of policy and political interest toward the natural resource sector. While Mozambique was no doubt responding to external incentives, these new opportunities were openly embraced and took centre stage.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=533&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=533&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117699/original/image-20160406-28966-1qqan69.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=533&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Accumulated stock of capital financed by foreign investment (2003-2015).</span>
</figcaption>
</figure>
<p>The graph plots estimates of the accumulated stock of capital financed by foreign investment in different sectors from 2003-2015. It illustrates a major shift from 2009 through to 2014, driven primarily by foreign investments in the extractive industries. In relation to the size of the Mozambican economy, as well as domestic investments, these flows were huge. Causality is difficult to establish, but they certainly fuelled the construction and consumption <a href="http://www.thenational.ae/business/industry-insights/economics/gas-and-oil-boom-fuels-mozambiques-big-ambitions">boom in Maputo</a> during this period. </p>
<p>In 2014 these foreign investments basically <a href="http://www.imf.org/external/np/loi/2015/moz/120215.pdf">stopped</a>. This did not reflect a shift from a start-up investment phase to operational activity and exports. In fact, many resource exploration projects are on hold or incomplete. Hard currency revenues are small and profits are virtually non-existent in this sector.</p>
<p>To put this in perspective, we cannot forget that the median Mozambican household continues to rely on smallholder, rain-fed agriculture. And this sector has been <a href="https://www.wider.unu.edu/publication/jobs-and-welfare-mozambique">neglected for decades</a>, characterised by persistently low yields and technological stasis. Some families are leaving agriculture, but they typically move to informal services such as petty commerce. As such, poverty reduction has been tepid and there is a growing <a href="https://www.wider.unu.edu/publication/understanding-mozambique%E2%80%99s-growth-experience-through-employment-lens">labour productivity gap</a> between the large “traditional” sector and a small, capital-intensive “modern” sector. </p>
<p>In this light, the government’s accumulation of significant, costly, commercial debt belied an unwarranted faith in a pattern of growth that had weak foundations.</p>
<h2>Prospects</h2>
<p>The essential challenge facing Mozambique is to achieve a <a href="https://www.wider.unu.edu/publication/jobs-and-welfare-mozambique">more balanced and robust growth path</a>. Priority must be given to development of labor-intensive sectors, including agriculture. This is essential to address past growth imbalances as well as to accommodate large expected inflows of new workers over the next generation. Stimulating a growth pattern that raises labour productivity across the economy will be vital to reap a demographic dividend. As part of this, there is an important role for capital-intensive projects. But these should not become an all-consuming economic and political logic.</p>
<p>A more immediate priority, of course, is to safeguard economic stability. This includes limiting inflation and preserving external financial support from foreign donors and other investors. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=470&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=470&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117716/original/image-20160406-29002-yw8r8b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=470&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Mozambique’s concentration of wealth and political power in the far-southern capital city of Maputo isn’t conducive to balanced growth.</span>
<span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span>
</figcaption>
</figure>
<p>How might this be achieved? Realistically, further external concessional assistance is likely to be needed. But this cannot be used to maintain the status quo. Mozambique should now take steps to break with the past and move toward maximum transparency and professionalism in its economic decision-making, including clarifying outstanding debt obligations, fiscal risks and budget allocation decisions. </p>
<p>Obscure relations with state enterprises also must be brought into the open, preferably through an independent and credible investigative process. In turn, more robust fiscal rules, monitoring and enforcement procedures should be put in place, backed by regular and detailed public information. These will be essential to regain access to commercial debt markets in future.</p>
<p>There are also grounds to promote greater political and fiscal decentralisation. Mozambique is a large, poorly connected country with diverse economic opportunities. The present concentration of political and economic wealth in the far-southern capital city of Maputo is unlikely to be conducive to sustained or balanced growth, especially since most of the rural population resides in the centre and north. Though there is no easy blueprint, a credible commitment to such a journey would be a starting point for dialogue and constructive reform.</p>
<p>It may be a failure of my imagination, but for now I hope that Mozambique avoids stepping into the abyss of a deeper crisis. I am optimistic that it can. But perhaps, by looking over the edge, a genuine commitment to address the fundamental issues will emerge.</p><img src="https://counter.theconversation.com/content/57356/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sam Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economic growth forecasts for Mozambique are being revised down. The country needs to safeguard economic stability by taking steps to break with the past.Sam Jones, Associate Professor in Development Economics, University of CopenhagenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/552532016-02-25T04:20:22Z2016-02-25T04:20:22ZWhat Museveni’s priorities must be if Uganda is to become middle income<figure><img src="https://images.theconversation.com/files/112572/original/image-20160223-16441-19sb8a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">To achieve faster growth and development Uganda must move workers from agriculture into manufacturing </span> <span class="attribution"><span class="source">REUTERS/Hudson Apunyo</span></span></figcaption></figure><p>One of the main areas of interest for Ugandans in the run up to the <a href="http://www.reuters.com/article/us-uganda-election-idUSKCN0VT08A">2016 elections</a> was the state of the economy. The Electoral Commission has declared Yoweri Museveni the winner although to date, the opposition still disputes the results. </p>
<p>In the previous decades, Uganda <a href="http://www.worldbank.org/en/country/uganda/overview">grew rapidly</a>. Thanks to this growth it managed to <a href="http://www.ug.undp.org/content/uganda/en/home/presscenter/articles/2014/12/08/uganda-poverty-status-report-2014-launched.html">reduce</a> poverty rates.</p>
<p>Uganda benefited from a favourable external environment. Factors included substantial debt relief, high commodity prices, plentiful donor financing and relatively low borrowing costs. This is now no longer the case. Instead <a href="http://www.bbc.com/news/world-africa-12421747">Museveni</a> and his new administration will have to confront some hard external realities. These include lower commodity prices, declining donor flows (especially budget support), and the need to rein in the fiscal deficit.</p>
<p>The sharp <a href="http://ugandabankers.org/here-is-why-the-uganda-shilling-is-weakening/">depreciation</a> of the Uganda Shilling (<a href="http://www.monitor.co.ug/Business/Ugandans-to-pay-more-due-to-falling-Shilling--scarce-dollars/-/688322/3051470/-/vga15z/-/index.html">about 27%</a> against the dollar between September 2014 and September 2015) has been a particular short run concern for the electorate. The weakening of the shilling led to increases in domestic prices, with annual core <a href="http://www.monitor.co.ug/News/National/Inflation-reduces-to-76-says-UBOS-report/-/688334/3058134/-/1427779z/-/index.html">inflation rate</a> at 7.1% in January 2016, compared to <a href="https://www.bou.or.ug/bou/bou-downloads/press_releases/2015/Mar/Consumer-Price-Index-for-March-2015.pd">3.7%</a> in March 2015. The depreciation reflects its current account deficit - the widening gap between what the country pays for its imports and what it earns from its exports. It is therefore a necessary adjustment to make Uganda’s exports more competitive. </p>
<p>Although there have been many calls for the Bank of Uganda to stem the depreciation of the currency its monetary policy, aimed at relieving the inflationary pressures of the depreciation, has contributed to a relatively stable macroeconomic environment. The Bank has done a stellar job in stabilising inflation through increases in <a href="http://www.bloomberg.com/news/articles/2015-10-20/uganda-raises-interest-rate-to-17-as-cpi-hits-two-year-high">interest rates</a>, beginning in April 2015. This has helped position the economy for an eventual return to trend growth, although this also means that borrowing has become more costly for the private sector in the short run. </p>
<h2>Shift towards modern industries needed</h2>
<p>Beyond this, the medium term challenge is to accelerate the pace of moving workers from jobs in agriculture and the informal sector into modern industries. This is what economists call the structural transformation of an economy. This will also be a necessary precondition to tackling the high unemployment rate as the manufacturing sector should provide more opportunities for formal employment.</p>
<p>Uganda has performed comparatively well in terms of raising its <a href="http://www.brookings.edu/%7E/media/Research/Files/Papers/2014/11/learning-to-compete/L2C_WP9_Obwona-et-al.pdf?la=en">manufacturing productivity</a>. But the sector is still characterised by limited value addition. It is also not yet contributing significantly to creating jobs, as one would predict.</p>
<p>Here urbanisation will be an enormous opportunity in the coming decade. Uganda can tap this opportunity by using economies of agglomeration to drive new industries and exports to achieve new levels in productivity. To do this, investments in urban infrastructure as well as targeted policies will be necessary <a href="https://theconversation.com/why-kampala-holds-single-biggest-growth-opportunity-for-uganda-52230">to promote density and connectivity</a>. This is the model best illustrated by the economic growth of the East Asian Tigers. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/112573/original/image-20160223-16436-hoc5de.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Museveni must help Uganda emulate East Asian Tigers.</span>
<span class="attribution"><span class="source">REUTERS/James Akena</span></span>
</figcaption>
</figure>
<p>Accelerating the economy’s structural transformation will therefore have to be one of the major focuses for Museveni’s new term.</p>
<h2>Opportunites in East Africa</h2>
<p>Regional integration will be another key route in increasing Uganda’s export competitiveness and creating jobs. Slower global growth and weaker commodity prices mean that it is in Uganda’s interest to look for more opportunities in the East Africa region. One potential area is linking firms to regional value chains, which can then function as stepping stones to global value chains. </p>
<p>But the government should also resist the temptation to try and pick and thus promote potential “winning industries”. It is not always clear where a country’s comparative advantage lies. The focus when looking to increase export competitiveness should be on investments that create a favourable environment for the private sector as a whole.</p>
<p>Agriculture, the sector that currently employs the largest share of Ugandans, should not be ignored. Raising productivity will also be important in this sector. To do this, Ugandans will need to use more inputs.</p>
<p>But, as recent <a href="http://www.theigc.org/project/dealing-with-fake-agricultural-inputs/">research</a> has shown, the big challenge here is the prevailing issue of fake inputs. Examples include substandard fertilisers and seeds that are sold on the market. These do not produce higher yields. This means that farmers, rightly so, do not want to invest in them. Tackling this problem and providing an enabling environment for farmers will raise agricultural productivity. </p>
<p>In addition, better connectivity through investments in roads and electricity as well as appropriate trade policy will bolster an enabling environment. Larger agribusiness could emerge, employing more people.</p>
<p>In his post-election interview, President Museveni <a href="http://allafrica.com/stories/201602221176.html">vowed</a> that Uganda will become a middle income country within five years. That time frame is very ambitious, but Uganda’s long-term growth prospects still look good. </p>
<p>Although current GDP growth forecast for 2015/16 is <a href="http://www.capitalmarketsinafrica.com/ugandas-gdp-forecast-slash-to-5-in-20152016-fiscal-year-imf/">below trend</a> at 5.0%, the Centre for International Development at Harvard University <a href="http://atlas.cid.harvard.edu/rankings/growth-predictions/">projects</a> that East African nations, including Uganda, will be among the fastest growing economies. They are forecast to achieve average annual growth of 5.5% between now and 2024. These forecasts are based on a measure of <a href="http://atlas.cid.harvard.edu/about/">economic complexity</a>, which takes into account the diversity and sophistication of productive capabilities used to produce a country’s exports. </p>
<p>However, Museveni will still have to realise this potential. This means not only growing the economy but, more importantly, accelerating structural change. Such a change can be achieved by creating an environment that enables firms to be created and shifts the average Ugandan from the informal to the formal economy. This will also come from investments in human capital, including quality education and health care services. Such investments will ensure that Ugandans can harness opportunities from economic growth.</p><img src="https://counter.theconversation.com/content/55253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Astrid Haas works for the International Growth Centre (IGC)</span></em></p>To achieve its ambition of becoming a middle income country, Uganda must accelerate the movement of workers from agriculture and the informal sector into modern industries.Astrid R.N. Haas, Country Economist for South Sudan and Uganda at International Growth Centre, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/530942016-01-15T04:36:31Z2016-01-15T04:36:31ZSouth Africa is on a cliff edge – just as it was in 1985<figure><img src="https://images.theconversation.com/files/108260/original/image-20160115-7341-1ej8by1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>This article was first published last year as South Africa faced a possible downgrade by rating agencies</em></p>
<p>Current developments in South Africa are reminiscent of events in 1985. In that year South Africa experienced high costs from currency depreciation and adverse political developments. At the time the country faced increasing international sanctions and isolation, while the exchange rate of the rand remained under severe pressure, recording sharp falls in the international value of the rand.</p>
<p>South Africa’s financial stability was put under severe pressure after the infamous <a href="https://www.nelsonmandela.org/omalley/index.php/site/q/03lv01538/04lv01600/05lv01638/06lv01639.htm">Rubicon speech</a> of then State President P W Botha. Before the speech, high expectations were raised internationally about the announcement of major political changes in South Africa, but these expectations did not materialise. Following the speech, foreign banks refused to roll over South African short-term foreign debt, causing further depreciation of the exchange rate of the rand.</p>
<p>In 2016 South Africa might see a slow motion repeat of the events of 1985, culminating in a debt standstill. The following events, reminiscent of developments then, could unfold: </p>
<ul>
<li><p>a continued depreciation of the rand, accelerated by the President’s inexplicable decision to <a href="http://mg.co.za/article/2015-12-09-nhlanhla-nene-removed-as-finance-minister">remove</a> his Finance Minister. The depreciation substantially increases the capital value of and interest repayments on foreign debt; and </p></li>
<li><p>a downgrading of South Africa’s credit rating to junk status that results in credit lines being withdrawn by foreign funders such as banks. </p></li>
</ul>
<p>This time we can see trouble ahead and the government should act responsibly to avert a slow motion replay of 1985.</p>
<h2>Debt standstill</h2>
<p>Currency depreciation brings certain benefits to a country. The most obvious is the fact that exports become cheaper abroad and that demand for exports are therefore stimulated.</p>
<p>Unfortunately currency depreciation does not only bring benefits. Imported goods and services also become more expensive. More expensive imports put pressure on domestic inflation that can result in increases in interest rates. In economics it has often been said: </p>
<blockquote>
<p>There is no free lunch, everything has a cost, even if then only an opportunity cost. </p>
</blockquote>
<p>Currency depreciation also increases the capital value of foreign debt in domestic currency (where foreign debt are designated in foreign curreny) and the interest burden on such debt, as interest is also paid in foreign currency.</p>
<p>In short: in 1985 an unwillingness of banks abroad to make loans to South African entities (albeit for political reasons) plus the depreciation of the currency resulted in the inability of the country to repay its foreign debt.</p>
<p>The financial crisis culminated in the “Debt Standstill”, a moratorium on the repayment of most of South Africa’s private sector foreign debt, but excluded government debt. Debt repayments were managed by a Debt Standstill Committee and rescheduled over an extended time period, with the last of the rescheduled debt repaid in 2001.</p>
<h2>The falling rand</h2>
<p>In recent months the exchange rate of the rand has shown considerable depreciation. This is actually an acceleration of a long-term declining trend. The nominal effective exchange rate of the rand has lost around 50% of its value <a href="https://www.resbank.co.za/Research/Rates/Pages/SelectedHistoricalExchangeAndInterestRates.aspx">since 2010</a>.</p>
<p>The South African Reserve Bank <a href="https://www.resbank.co.za/Research/Rates/Pages/SelectedHistoricalExchangeAndInterestRates.aspx">describes</a> the nominal effective exchange rate as </p>
<blockquote>
<p>… a weighted exchange rate of the rand measured against a basket of the currencies of South Africa’s twenty most important trading partners. The calculation is based on trade in and consumption of manufactured goods. </p>
</blockquote>
<p>On this basis, measured against 20 currencies, the rand has therefore lost about half of its value.</p>
<p>In assessing the “Debt Standstill” with the benefit of hindsight, it is important to distinguish between South Africa’s foreign debt and South African government debt, as only private sector foreign debt was caught in the standstill.</p>
<p>The country’s foreign debt is all funds borrowed abroad by South Africans, including companies, other entities and private individuals and includes the government’s foreign borrowing. By the middle of 2015 South Africa’s foreign debt amounted to some R1.7 trillion, of which 46% was denominated in <a href="https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/6999/10Statistical%20tables%20%E2%80%93%20International%20economic%20relations.pdf">foreign currency</a>. </p>
<p>South African government debt is the total of all funds borrowed by the government to balance its budget. South African government debt at present amounts to some <a href="http://www.treasury.gov.za/documents/mtbps/2015/mtbps/Technical%20annexure.pdf">R1.8 trillion</a>. Of this, some R190 billion (10%) is foreign debt, while the balance is borrowed from pension funds, banks and the like in South Africa.</p>
<p>South Africa’s foreign debt naturally includes the portion of the South African government <a href="http://www.treasury.gov.za/documents/mtbps/2015/mtbps/Technical%20annexure.pdf">debt borrowed abroad</a>, comprising about 11% of the country’s foreign debt. The balance is supplier credit, trade credit and the like. For instance: if a foreign supplier sells to a South African company and provides a six month credit line, the credit line is part of the country’s foreign debt for a period of six month. </p>
<p>This credit line has nothing to do with the South African government’s debt position, domestic or foreign. Government debt and the country’s foreign debt should not be confused.</p>
<p>Since 2007 South African foreign debt has shown a steady increase as percentage of both the gross domestic product (GDP) and total export earnings (TEE). At the same time interest payments on foreign debt as percentage of TEE have <a href="https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/6999/10Statistical%20tables%20%E2%80%93%20International%20economic%20relations.pdf">increased</a>.</p>
<h2>Possible junk status</h2>
<p>South Africa’s foreign debt position (which should not be confused with the debt of the South African government) is vulnerable in three respects. First, currency depreciation raises the capital value of the funds borrowed abroad in foreign currency, hence increasing the repayment burden on South African borrowers. Foreign debt as percentage of GDP increases owing to currency depreciation.</p>
<p>Secondly, interest payments on foreign debt increase owing to currency depreciation. This will be exacerbated by an international normalisation of interest rates. The result might be a raising TEE if the combined result of higher international rates and currency depreciation exceeds the increase in exports owing to currency depreciation.</p>
<p>These two factors were present in 1985, but were exacerbated at that time by political considerations, namely banks refusing to lend more money to South Africa after the Rubicon speech. The last element for a repeat of 1985 in slow motion might be triggered by another event some 30 years later: a credit risk downgrading to junk status of South Africa by international rating agencies.</p>
<p>If South Africa’s international risk rating is downgraded to junk status, international banks and other companies will be much more reluctant to make loans to South African entities, or will even withdraw existing credit lines.</p>
<p>This might be the seismic event similar to the withdrawal of international credit lines for political reasons in 1985, culminating in a debt standstill. The South African government should introduce in a timely fashion policies to avert a repetition on the events of 1985.</p><img src="https://counter.theconversation.com/content/53094/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s current economic situation is reminiscent of events in 1985 when the economy nearly collapsed. This article, first published last year, looks at the similarities.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.