Ghana’s currency, the cedi, has been on a long and troubling downward spiral. Dr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA), has proposed a comprehensive plan to address this challenge and stabilize the cedi on a lasting basis.
The Cedi’s Struggles
The cedi has depreciated significantly in recent years. In 2022, it lost 30% against the US dollar, followed by a further 27.8% depreciation in 2023. So far this year (as of May 16, 2024), it has weakened by another 13.7%. This ongoing decline represents a staggering 99.99% depreciation over the past 41 years, according to Dr. Kwakye.
A Multi-Phased Approach
Dr. Kwakye’s plan outlines measures categorized into four phases: immediate, short-term, medium-term, and long-term. These phases may overlap, with some actions implemented simultaneously for maximum impact.
Immediate Actions (To Be Taken Now):
- Debt Restructuring: Dr. Kwakye emphasizes the urgency of accelerating external debt restructuring negotiations with the IMF and creditors. This could unlock critical funds from the IMF and other development partners.
- Enforcing FX Regulations: Stricter enforcement of foreign exchange (FX) market regulations is recommended. This includes limitations on traveler’s FX carry-on amounts, requiring documentation for FX purchases, and banning the pricing of goods and services in foreign currency. These steps aim to curb speculative activity and stabilize the market.
- Combating Illegal FX Dealing: Enhanced surveillance and collaboration with security forces are crucial to tackle illegal FX transactions, further reducing the demand for foreign currency.
Short-Term Measures (2024-2025):
- Negotiating Repatriation of Profits: Dr. Kwakye suggests that the Bank of Ghana (BoG) negotiate with foreign companies to stagger the repatriation of their profits and dividends. This would help ease seasonal pressure on the FX market.
- Regulating Forward FX Trading: Stricter regulations for forward FX trading are seen as necessary to limit speculative activities that can destabilize exchange rates.
- Fiscal Discipline: Maintaining a balanced budget is critical. Persistent government deficits contribute to FX demand pressures.
Medium-Term Measures (2024-2027):
- Building Up FX Reserves: Dr. Kwakye proposes that the BoG gradually increase its FX reserves to at least 70% of the currency in circulation. This would provide a buffer to protect the cedi.
- Exploring Dollarization or Currency Board: The report explores temporary dollarization or a currency board system as options to achieve stability, although potential risks and limitations are acknowledged.
Long-Term Measures (2024-2030):
- Boosting Exports: Expanding and diversifying exports while adding value to existing exports like cocoa, minerals, and oil are crucial for long-term FX earnings stability.
- Industrialization: Building a stronger industrial base to produce goods for domestic consumption and export is seen as a key strategy to reduce reliance on imports and increase FX earnings.
- Resource Ownership: The report advocates for greater Ghanaian ownership and local processing of natural resources to maximize FX returns.
A Path Forward
Dr. Kwakye’s plan offers a roadmap for Ghana to address the cedi’s depreciation and achieve lasting currency stability. By implementing a combination of immediate, short-term, medium-term, and long-term measures, Ghana can work towards a more robust and sustainable economic future.
