Battling the Cedi depreciation: BOG’s proactive steps

By Prof. Samuel Lartey

Introduction

THE Ghanaian cedi has long battled with depreciation against major foreign currencies, posing significant challenges to individuals, businesses, and the broader economy.

As the festive season approaches, the Bank of Ghana (BoG) has taken a series of proactive measures to bolster its reserves and stabilize the cedi in response to growing demand for foreign exchange.

With the cedi trading at nearly GH¢16.25 to the dollar as of early November 2024, reflecting a significant year-to-date depreciation of 24.3%, the BoG’s actions are crucial.

But how effective will these interventions be, and what are the broader implications for Ghanaians?

Cedi’s Year-to-Date Performance and Challenges

2024 has been a turbulent year for the cedi. The currency’s depreciation has been driven by several factors, including persistent inflationary pressures, external debt obligations, and a trade imbalance.

The significant depreciation has placed a heavy burden on Ghanaian businesses that rely on imported raw materials and goods, as well as ordinary citizens facing higher prices for consumer goods and essentials.

As of November 4, 2024, the cedi stands at around GH¢16.25 to one US dollar, which is a marked decline from the beginning of the year. This situation underscores the urgency of the BoG’s strategic measures to curb the depreciation and restore some level of stability to the currency market.

Bank of Ghana’s Proactive Measures

In an effort to mitigate the downward pressure on the cedi, the Bank of Ghana has employed a multi-pronged strategy:

1. Boosting Foreign Exchange Reserves:

The BoG has successfully increased its foreign exchange reserves by over $600 million in the first five months of 2024. This move is intended to create a buffer against shocks in the foreign exchange market and manage the heightened demand for foreign currency. By enhancing reserves, the Central Bank aims to provide a safety net that can be used to stabilize the cedi when necessary.

• Regulating the Foreign Exchange Market:

The establishment of a task force to monitor foreign exchange bureaus has been a critical step in curbing illegal operations and ensuring compliance. By sanitizing the market and reducing speculative activities, the BoG aims to minimize the erratic fluctuations that often result from non-compliant foreign exchange transactions.

• Direct Foreign Exchange Support to Businesses:

Recognizing the heavy burden on businesses that require foreign currency to import essential goods and raw materials, the BoG has been supplying foreign exchange directly to select corporate institutions. This intervention alleviates demand pressure on commercial banks and ensures that key sectors of the economy remain operational.

Impact on Individuals, Businesses, and the Economy

1. Individual Citizens:

For the average Ghanaian, the cedi’s depreciation translates to higher costs of living. Imported goods, ranging from fuel to food and consumer products, have become more expensive, straining household budgets.

If the BoG’s measures succeed in stabilizing the currency, citizens could see some relief from inflationary pressures, although significant improvement may still be some way off. The effectiveness of these interventions in cushioning citizens will depend on how swiftly inflation can be tamed.

• Businesses:

The corporate sector, particularly those engaged in manufacturing and import-dependent activities, has been severely impacted by the cedi’s depreciation. The rising cost of imported inputs has squeezed profit margins and increased the cost of doing business.

The BoG’s direct foreign exchange support provides much-needed relief, enabling companies to continue operations without the constant pressure of currency fluctuations. Additionally, stabilizing the cedi could create a more predictable business environment, encouraging investments and growth in various sectors.

• The Broader Economy:

Ghana’s economic stability is closely tied to the performance of the cedi. A depreciating currency can lead to capital flight, lower investor confidence, and increased debt servicing costs, especially when external obligations are denominated in foreign currencies.

By enhancing its reserves and regulating the foreign exchange market, the BoG aims to foster economic stability and attract foreign investment. A stable cedi could also improve Ghana’s trade balance by making exports more competitive while reducing the cost burden of imports.

Long-Term Considerations and Potential Risks

While the BoG’s measures are commendable and provide a short-term buffer, there are risks considering. Sustaining a stable exchange rate requires more than just interventions in the currency market.

Structural reforms, including boosting domestic production and reducing reliance on imports, are essential for long-term economic stability. The government must also address fiscal challenges, such as budget deficits and debt levels, to create a resilient economic foundation.

Moreover, the success of these measures will also hinge on external factors, such as global economic conditions and commodity prices. Ghana’s economy is heavily dependent on exports like gold, cocoa, and oil, which are subject to international market volatility. Any unfavorable shifts in these markets could undermine BoG’s efforts.

Conclusion

The Bank of Ghana’s proactive steps to bolster foreign exchange reserves and stabilize the cedi reflect a critical response to a long-standing economic challenge. While these measures offer hope for relief to individuals and businesses alike, they are not panacea.

The road to economic stability requires a comprehensive approach, encompassing fiscal discipline, structural reforms, and robust economic policies. As the festive season draws near, the success of the BoG’s strategy will be closely watched, with millions of Ghanaians hoping for a brighter economic outlook.

Whether these efforts will translate into tangible, lasting improvements remain to be seen, but for now, the BoG’s commitment to stabilizing the currency is a step in the right direction. The journey to a stronger, more resilient cedi is one that all stakeholders including government, businesses, and citizens must navigate together.