Foreign direct investment key to cedi stability – Economist

A development economist, Dr Felix Larry Essilfie, has emphasised that foreign direct investment (FDI) plays a crucial role in strengthening the Ghanaian cedi and ensuring economic stability.

Speaking to the Zed Newsroom, Dr Essilfie explained that inflows of foreign currency from investors increase the supply of forex in the economy, reducing excess demand pressures that often fuel exchange rate volatility.

“Foreign direct investment means an inflow of forex. So for them, they are bringing in the foreign currency, meaning that they are increasing supply or availability of forex in the economy,” he said.

The development economist indicated that once these currencies, such as dollars, pounds and euros, enter the system, the Bank of Ghana, through commercial banks, receives and manages them. The investors are then issued Ghana’s legal tender, the cedi, for local transactions.

According to him, this process, which is being effectively implemented in South Africa and other African economies, has the potential to stabilise the cedi and strengthen its value.

“The stability or the strength of the cedi is going to be higher in the sense that there will be no unnecessary excess demand for foreign currencies over our local currency,” he explained.

Dr Essilfie projected that with a sustained inflow of foreign currency, the exchange rate could improve further, possibly appreciating below GHS10 to a dollar, GHS14 to a pound and GHS12 to a euro.

He also cautioned that allowing transactions in foreign currencies weakens the cedi and fuels inflation.

“If you are renting an office in dollars, the cost goes high because you need to spend more cedis to buy fewer dollars. Service providers then pass on these costs to consumers, driving up prices and increasing inflation,” Dr Essielfie noted.

The development economist highlighted that if the Bank of Ghana continues to enforce the use of the cedi as the sole legal tender, it will help bring stability to the economy, strengthen the local currency and keep prices of goods and services under control.

“Once there is sanity in the use of foreign currencies and the cedi is respected as the legal tender, there is going to be stability as far as inflation is concerned,” he stressed.