Ghana’s persistent struggle with exchange rate instability – often characterised by steep depreciations of the cedi against major international currencies be traced back to the early 1990s, following the
official adoption of a flexible exchange rate regime and the establishment of the current interbank
system.
While the exchange rate challenges of the past were largely structural, the situation that
unfolded from late 2019 into the early 2020s marked a deeper, more systemic crisis.
Ghana found itself at the throes of a trifecta of economic turmoil: a foreign exchange crisis, a fiscal policy crisis, and an unprecedented – a simultaneous default on both external and domestic debt.
This culminated in Ghana’s return to the International Monetary Fund (IMF) program for a record
17th time.
Historical precedents from other countries that have experienced sovereign defaults indicate that
such defaults can trigger a cascade of severe economic, social, and political issues making the path to
recovery very precarious.
As a result, the immediate priority for any post-default policymaker is to stabilize the macroeconomic environment of which foreign exchange management is a cornerstone.
Given the turbulent history of the gold standard and the pitfalls of poorly managed fixed exchange
rate regimes, the IMF is understandably cautious about any form of intervention in the foreign
exchange market and right to question any such suspected intervention.
Their concerns are well-grounded. After all, a negative growth, high inflation, depleted foreign reserves, a weakened currency, and a paralysed credit system, especially in the context of the country being shut out of international markets are viable grounds for severe capital flight and any attempt to defend a currency peg or
manage the exchange rate can invite speculative attacks.
However, these very vulnerabilities are precisely why a completely free-floating exchange rate, as often advocated by the IMF, may not be the optimal path forward for Ghana at this moment.
In periods of extreme macroeconomic fragility, an unchecked exchange rate volatility can erode policy credibility, heighten inflationary pressures, and destabilise an already delicate recovery.
Make no mistake, an aggressive currency intervention has its own drawbacks. Reserve depletion, reduced export competitiveness, and often a potential speculative attack on the currency is just but a few.
Amidst this policy dilemma lies a middle ground – a well-calibrated, smart, and rules-based intervention strategy that is based on research and empirical evidence.
So, while the cedis dramatic appreciation of about 30% year-to-date against the US dollar may seem quite high, it may be the needed intervention to sustain the push towards our economic recovery.
One must not be an economist to recognise that recent developments in the country suggest that such an approach is already yielding tangible benefits.
The moderate appreciation of the cedi has contributed significantly to the decline in prices of petroleum products, essential household goods, transportation fares, and producer inputs for our businessmen and farmers.
Suddenly, it’s as if the country has found an antidote to the popular macroeconomic phrase of “prices are sticky downwards”- implying prices hardly fall.
Ghanaians are reporting noticeable savings, and the positive sentiment is palpable across social media and public discourse. Talk to any Ghanaian on the street and you’ll hear about the savings they’ve made while shopping for food items or buying gas.
Check social media posts and you’ll realise even the wealthiest are celebrating our modest economic
gains, courtesy of the strong cedi.
Perhaps a silent but missing point in all this debate is that our external debts are suddenly lower in cedi equivalence meaning the country is saving millions of cedis on accumulated interest payments, and debt re-payments.
This alleviates the fiscal burden and frees up resources that would otherwise be allocated to external debt servicing. The implications of these
to our development and poverty reduction efforts cannot be ignored.
In light of these developments, we must commend and give credit to the Government, Finance Minister and Governor of the Bank of Ghana for noticing this middle ground and for pursuing a pragmatic exchange rate policy that blends stabilization with market flexibility.
Their actions reflect an understanding of the complexities of post-crisis recovery and mark a strategic shift from rigid orthodoxy to context-sensitive policymaking.
As Ghana prepares to exit its debt default status and re-enter international capital markets, the principle of stabilisation before liberalisation, commonly cited in the literature on transition economies, should guide the next phase of reforms.
While challenges undoubtedly lie ahead, recent events suggest that the country now have the leadership needed to navigate this difficult terrain.
The path to recovery is arduous, but a smart exchange rate policy may well be the cornerstone of
Ghana’s macroeconomic renewal.
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The writer of this article is Dr. Francis K. Dzikpe, School of Business and Economics University of Wisconsin-River Falls, USA.
