On 29th November 2019, Bank of Ghana (BOG) Governor Ernest Addison, announced the introduction of the GHS100 and GHS200 bank notes and the 2 Ghana Cedi Coin. According to the public notice posted on the central bank’s website, the justification is to ensure customer convenience; reduce high transaction cost; ensure efficiency in high value transactions in cash; and reduce cost of printing as well as currency management including processing, transporting, and storing banknotes.
It is appropriate for BOG to introduce the 2 Ghana Cedi Coin. However, beyond saving money on printing costs and currency management, the need for the GHS100 and GHS200 notes is doubtful given the national agenda to formalize the Ghanaian economy which includes reducing the use of physical cash to settle transactions.
BOG’s own data shows that we have made considerable progress in reducing cash transactions in the Ghanaian economy. Between 2010 and 2018, currency outside banks increased from GHS2,927 million to GHS11,963 million. However, the currency outside banks as a proportion of broad money (total money supply) has witnessed a consistent annual decrease from 43% to 34% during the period. As a proportion of narrow money, it has also dropped from 34% to 20%.
High net worth individuals and businesses in Ghana are settling multi-million-cedi transactions on a daily basis using the banking system. So, who does BOG have in mind when they talk of promoting customer convenience with the GHS100 and GHS200 notes?
They must be persons who need cash in ‘Ghana Must Go’ bags. And they will fall into three categories.
The first category will be informal sector operators doing legal transactions who just prefer the use of cash. From the BOG data it can be deduced that this category of transactions may have increased in absolute terms but reduced in relative terms between 2010 and 2018. BOG policy should be making it less convenient for such persons to execute transactions with cash, not easier, so that they use the banking system.
With GHS100 and GHS200 notes there will be no need for Ghana Must Go Bags. A polythene bag or laptop bag strapped on one’s back is enough to carry substantial sums of money.
The second category will be persons doing legal transactions but using bribe money, laundered money or crime money to settle these transactions. Definitely these cannot be BOG’s intended users of the GHS100 and GHS200 notes.
The third category will be persons doing illegal transactions. Again, these cannot BOG’s intended users of the GHS100 and GHS200 note.
The GHS100 and GHS200 notes can have adverse effect on access to finance. The ability of banks to lend very much depends on the amount of deposits they mobilize. By making it easier to keep cash, informal sector operators (and potentially formal sector entities) will make less cash available for cash collections by their bankers. Less banking deposits equates to less loans.
BOG has shot itself in the foot.
Every central bank requires that for every amount of deposits mobilized, financial institutions must retain a percentage as a cash reserve. Typically, the reserve is a mix of physical cash in the bank’s vaults, balance in an account with the central bank, and liquid instruments like government treasury bills.
The higher the reserve, the lower the cash available for banks to lend, and vice versa. By making it easier to keep money outside the banking system, BOG is limiting the use of the reserve ratio to manage money supply.
So far, BOG’s justification for introducing the GHS100 and GHS200 is weak. It is not surprising there is intense public speculation that there is a hidden reason related to election 2020.