By Samuel Lartey (Prof.)
As the festive season approaches, the Bank of Ghana (BoG) has announced proactive measures aimed at fortifying its reserves to address the persistent depreciation of the cedi against major global currencies.
This intervention comes at a critical time, as the Ghanaian cedi currently stands at approximately GH¢17 to one US dollar, reflecting a concerning year-to-date depreciation of 24.3%. The central bank’s strategy aims to reassure both the business community and everyday consumers while working to stabilize the cedi.
Rising Foreign Exchange Demand and Strategic Response
The demand for foreign currency tends to surge during the holiday season as businesses ramp up imports and consumers increase spending on goods and services. This demand puts immense pressure on the cedi, further exacerbating its depreciation.
In response, the BoG’s measures are designed to increase the country’s foreign exchange reserves, which are crucial for supporting the cedi. By enhancing its reserve position, the central bank seeks to create a buffer against volatility, ensuring that the local currency does not experience extreme fluctuations.
Dr. Ernest Addison, Governor of the Bank of Ghana, emphasized the central bank’s determination to manage the cedi-dollar exchange rate effectively. In recent statements, he highlighted the importance of building a strong reserve position to support the economy.
The BoG’s recent reserve augmentation efforts include purchasing domestic gold, which has been integrated into Ghana’s monetary strategy. This innovative approach is expected to provide medium-term relief and strengthen the cedi’s stability.
The Broader Economic Impact
The operationalization of these measures has significant implications for Ghana’s economy and its citizens. First and foremost, a more stable cedi will benefit import-dependent businesses by reducing the cost of importing goods. This cost efficiency can lead to lower prices for consumers, especially in a season when demand for goods and services is high.
Additionally, a stronger cedi will ease inflationary pressures, which have plagued the economy in recent years. According to the Ghana Statistical Service, inflation was recorded at 40.1% as of October 2023, and currency stability could contribute to moderating these levels.
Furthermore, businesses that rely on foreign exchange for operational expenses will find more predictability in planning and budgeting. This stability can also attract foreign investors who may have been deterred by the volatility of the local currency. By creating a more favorable investment climate, the BoG’s measures could stimulate economic growth and job creation.
The significance of these interventions cannot be understated, given the financial realities Ghana faces. As of the end of 2023, Ghana’s external debt stood at approximately $29 billion, and servicing this debt requires significant foreign exchange. Strengthening reserves ensures that the government can meet these obligations without putting undue pressure on the cedi.
Moreover, the $100 billion in mobile money transactions recorded in 2021 underscores the growing importance of financial stability in a digital economy where currency fluctuations can have ripple effects.
The Citizen’s Perspective
For the average Ghanaian, currency stability translates to more stable prices for goods and services, particularly essential imports like fuel, medicine, and food. The depreciation of the cedi in recent years has eroded purchasing power, making everyday life more expensive for many.
By bolstering reserves and stabilizing the currency, the BoG’s actions aim to restore some measure of economic security for Ghanaian households.
However, these measures also come with challenges. Increasing reserves may require the central bank to intervene in the foreign exchange market more frequently, which could have implications for interest rates.
Higher interest rates may, in turn, affect borrowing costs for businesses and consumers. The BoG will need to strike a careful balance between stabilizing the currency and ensuring that economic growth is not stifled.
Conclusion
As the festive season looms, the Bank of Ghana’s proactive measures to stabilize the cedi are a crucial step toward economic resilience. While the journey to complete stability will require continuous effort and innovation, the immediate impact of these measures could bring much-needed relief to businesses and citizens alike.
By focusing on strengthening reserves and employing strategic interventions, the BoG aims to safeguard Ghana’s financial ecosystem and pave the way for sustainable economic growth. The coming months will be a testament to the effectiveness of these strategies and their lasting impact on the Ghanaian economy.
