By Dela AGBO
The Ghanaian cedi has faced persistent depreciation pressures over the years, driven by structural economic challenges, high import dependency, and global financial shocks.
In recent developments, the International Monetary Fund (IMF) approved a US$360million disbursement to Ghana after the completion of its third review under the Extended Credit Facility (ECF) program.
Concurrently, the Bank of Ghana (BoG) has injected dollars into the economy to stabilize the cedi.
While these measures provide temporary relief, their long-term effectiveness in stabilizing the currency requires deeper structural reforms. This article explores the current dynamics of the cedi, potential future movements, and strategies for sustainable stabilization.
Current Developments
- IMF Disbursement: The US$360 million injection is expected to bolster Ghana’s foreign reserves, improving the country’s ability to intervene in the foreign exchange market and support the cedi. However, its impact may be short-lived without complementary policies addressing fiscal and trade imbalances.
- BoG Dollar Injection: The central bank’s release of dollars helps meet immediate foreign exchange demand, curbing speculative activities that often exacerbate currency volatility. However, this measure is not a permanent solution and may strain reserves if sustained for too long.
Potential Movement of the Cedi
The cedi’s trajectory depends on several factors:
- Short-term: The recent interventions might stabilize the currency temporarily, reducing volatility and speculative pressures. However, sustained depreciation is likely without addressing the underlying drivers of currency instability.
- Medium to Long-term: The direction of the cedi will depend on Ghana’s ability to boost exports, attract foreign direct investments, reduce fiscal deficits, and manage inflation.
Challenges to Stabilization
- High Import Dependency: Ghana relies heavily on imports for consumer goods, industrial inputs, and energy. This creates a continuous demand for foreign currency, putting downward pressure on the cedi.
- External Debt Service: Servicing external debts requires foreign exchange, further depleting reserves.
- Limited Export Diversification: While gold, cocoa, and oil dominate exports, a lack of diversification limits foreign exchange earnings.
Strategies for Sustainable Stabilization
- Promote Export Diversification:
- Expand non-traditional exports such as horticulture, textiles, and digital services.
- Enhance value addition in gold, cocoa, and oil to boost export revenues.
- Strengthen Local Industries:
- Invest in local manufacturing to reduce import dependency.
- Support small and medium enterprises (SMEs) to produce goods for domestic consumption.
- Enhance Fiscal Discipline:
- Reduce fiscal deficits through prudent public spending and effective revenue collection.
- Limit borrowing, especially in foreign currencies, to avoid exchange rate pressures.
- Improve Foreign Exchange Management:
- Develop forward foreign exchange markets to manage currency risks.
- Encourage the use of the cedi for local transactions and contracts.
- Attract Investment:
- Improve the business environment to attract foreign direct investments (FDIs).
- Incentivize diaspora remittances and investments in long-term projects.
Conclusion
While the IMF disbursement and BoG interventions provide short-term relief, these measures alone are insufficient to stabilize the Ghana cedi sustainably. By addressing structural economic challenges, fostering local production, and diversifying exports are critical for long-term currency stability.
IF the government is able to implement these strategies, Ghana can build a resilient economy and secure the value of its currency, ensuring sustainable growth and investor confidence.
The writer is the CEO, EcoCapital
