By Abel NYARKO-ASOMANI & Christopher Delali DZENEY
A stable currency is crucial for economic growth and development, as it impacts inflation rates, investment, and the overall standard of living. Over the years, Ghana’s economy has been vulnerable to both internal and external shocks. This has further worsened the competitiveness of our feeble local currency to major trading currencies.
The recent persistent depreciation of the cedi, coupled with high inflationary pressures in Ghana provide clear evidence of the association. For instance, using the dollar as a reference, the interbank Ghana Cedis to U.S. Dollar exchange rate increased from 11.62 as of the end of November 2023 to 15.27 at the end of November 2024.
This indicates that the cedi depreciated by about 31.41% over the period. In addressing this, it has been a usual practice of the Bank of Ghana’s (BoG) to inject foreign currency into the economy to provide temporary relief to the local currency—a practice many experts refer to as an artificially orchestrated solution.
However, the periodic injections have ultimately proven superficial and unsustainable as pressures on the local currency keeps on re-emerging within a few days after such injections. This practice of BOG intervention has been like a vicious cycle between currency injection and cedi depreciation or appreciation in the country.
Policymakers overlook addressing the structural deficiency of the economy but rely on and resort to this firefighting approach to ease the pressure of cedi volatility. What is this structural deficiency?
The Structural Deficiency of the Economy
In fact, it must be emphasised that the real problem of the Ghanaian cedi’s instability is caused by the recurring current account deficit due to lack of export diversification and high import dependence. Therefore, any currency stability policy should address this structural deficiency as such!
A clear manifestation of this structural deficiency is the country’s exports which are mostly characterised by raw minerals such as gold, cocoa, bauxite, magnesium, and recently crude oil. These exports over the years, do not earn enough revenue for the country.
Besides, the most unfortunate aspect, especially with the extractive minerals, is the unfavourable contracts signed by successive governments. As a result, Ghana receives a peanut share of the profit from the mineral export while the foreign investor takes the lion’s share.
What can the new government do to address the unstable currency?
In his “victory speech” delivered on December 10, 2024, the then President-Elect John Dramani Mahama acknowledged that “there is much to do to salvage the country and reset it.” Indeed, democracy has once again given us another chance to start our journey of development on a fresh page. Hence, we need not to miss this chance once again! In fact, the solutions to the cedi instability are not new to us however it will take a bold step from policy makers to implement them. Some of these comprehensive and sustainable strategies are:
Value addition and investments in industrialization are essential for Ghana’s economic growth. This is perhaps one of the most important elements we need to have in our structural economy, as it has the potential to support efforts to reduce and stabilize the inflation rate and depreciation of the cedi. The government should take bold initiatives to add value to our primary exports like cocoa, gold, oil, and timber. This can only be made possible through industrialization.
Factories, processing plants, and refineries should be set up and managed efficiently for profit as well as economic benefits from trade. According to a 2024 report by the African Development Bank (AfDB), Ghana’s industrial sector has the potential to contribute up to 30% of the country’s GDP by 2025.
By promoting industrialization and value addition, Ghana can increase its economic growth and reduce its reliance on imports. It must be emphasised that value addition should be a priority in the new government’s flagship programme – the 24-Hour Economy Programme.
Massive investments in agriculture are important. By investing in agricultural mechanization, Ghana can enhance agricultural productivity and decrease its reliance on imports. Mechanization increases the volume and quality of agricultural products, which can lead to higher exports earnings and low imports.
This can address the rising food inflation in the country. The government must first intensify its support for farmers by providing seedlings, improving transport networks, and offering tax waivers and subsidies on farming chemicals (i.e., pesticides, fertilizers, weedicides), equipment, and machines.
Mechanization will not only increase agricultural productivity but also make farming more attractive to the youth. A study by the Food and Agriculture Organization (FAO) found that agricultural mechanization and proper transport networks can increase crop yields by up to 30% and reduce post-harvest losses by up to 20%.
Import substitution is crucial. To promote local economic growth and reduce dependence on imports, the government should boldly consider implementing targeted and gradual initiatives to encourage domestic production of high-demand goods such as rice, tomatoes, onions, footwear, furniture, textiles, and leather products.
By supporting local industries, the government can help stimulate economic growth, create jobs, and improve self-sufficiency. Deliberate efforts must be adopted by the government and regulatory bodies to make infant industries more competitive and efficient through tax incentives and business support services.
According to a report by the Ghana Investment Promotion Centre (GIPC), Ghana spent approximately $2.5 billion on imports in 2020 alone. Such imports included: cars, delivery trucks, refined petroleum, non-fillet frozen fish, palm oil, sugars and confectionary, rice, meat, cereals and fats and oils.
By gradually reducing imports on some of the above items (rice, meat, cereals, fish, palm oil and others) which can be produced in Ghana, we can promote local production which can help with the conservation of foreign exchange reserves and stabilize the cedi.
Sensitization on the use of Local Goods. This can be achieved through attitudinal change, public education, and media engagement. The demand for locally made goods and services can increase when consumers are educated on the benefits of patronizing locally made goods and services through advertisements, standardization, quality assurance, and packaging.
By promoting locally made goods and services, Ghana can stimulate economic growth and cut down on imports. In addition, the new Mahama government can take a cue from the “Friday Wear” practice introduced by the erstwhile John Agyekum Kuffour government in the early 2000s. The practice became nationally accepted, which significantly promoted the local garment industry.
Conclusion
The success of these strategies will require pragmatic leadership and the greatest level of political will. The incessant cedi depreciation and high inflation have far-reaching consequences on the welfare of Ghanaians. The new Mahama government must demonstrate a genuine commitment to addressing the underlying structural issues that contribute to the cedi’s volatility and high inflation.
By implementing a comprehensive and sustainable approach, Ghana can break the cycle of currency depreciation and high inflation, paving the way for long-term economic stability and growth. Stakeholders, including policymakers, businesses, and the general public, must work together to ensure the success of these initiatives and secure a brighter economic future for Ghana.
Abel is a Research Officer, IEA and Christopher is a Research Assistant, IEA
