Dr. John Kwakye, a Senior Economist at the Institute of Economic Affairs (IEA), has proposed a multi-pronged approach to stabilize the Ghanaian cedi, which has experienced recent volatility despite pre-election gains. He emphasizes that long-term stability requires addressing the underlying structural weaknesses in the Ghanaian economy. His recommendations center on strengthening the country’s external position by boosting exports, reducing reliance on imports, and bolstering foreign exchange reserves. He also underscores the importance of increasing Ghanaian ownership of the economy and enforcing regulations in the foreign exchange market to prevent speculative activities and capital flight. This comprehensive approach aims to build resilience against external shocks and create a more stable environment for sustainable economic growth.
Dr. Kwakye’s analysis of the cedi’s performance reveals a concerning trend of depreciation despite initial improvements observed before the 2024 general elections. This underscores the fragility of short-term gains and the need for structural reforms to address the root causes of currency instability. The economist argues that a reliance on short-term measures, such as monetary policy interventions, will not be sufficient to achieve lasting stability. Instead, a more comprehensive strategy that tackles the underlying imbalances in the economy is required. This includes focusing on enhancing domestic production, particularly in export-oriented sectors, and reducing dependence on imported goods, which often contribute to the pressure on the cedi.
The economist’s proposal to promote export-oriented industries is crucial for generating foreign exchange earnings, which can strengthen the cedi’s value. This requires targeted investments in sectors where Ghana has a competitive advantage, coupled with policies that facilitate access to international markets. Simultaneously, promoting import substitution aims to reduce the demand for foreign currency by encouraging domestic production of goods currently imported. This requires identifying key import products and developing local industries capable of producing these goods competitively. By reducing reliance on imports, Ghana can curtail the outflow of foreign exchange and create a more stable currency environment.
Further bolstering the cedi’s resilience requires building up foreign exchange reserves, which can act as a buffer against external shocks and speculative attacks. These reserves provide the Central Bank with the resources to intervene in the foreign exchange market and smooth out volatility. Dr. Kwakye also highlights the importance of increasing Ghanaian ownership of the economy. This implies promoting local entrepreneurship and investment in key sectors, which can reduce the influence of external factors on the economy and strengthen domestic control over economic activities. Furthermore, enforcing foreign exchange market regulations is essential to prevent speculative activities and capital flight, which can destabilize the cedi.
In addition to addressing currency stability, Dr. Kwakye also expresses concern about the persistently high inflation in Ghana. He criticizes the ineffectiveness of the current monetary policy, arguing that the high policy rate maintained by the Bank of Ghana has failed to curb inflation. He points out that inflation has remained stubbornly high despite the high interest rates, indicating a disconnect between monetary policy tools and the underlying inflationary drivers. This, he argues, necessitates a more collaborative approach between the Bank of Ghana and the government to address the root causes of inflation.
Dr. Kwakye identifies the key drivers of inflation as food prices, energy costs, and the exchange rate. Addressing these requires a concerted effort to improve agricultural productivity, enhance energy efficiency, and stabilize the cedi. By focusing on these underlying factors, the government and the Central Bank can implement more effective policies to control inflation and create a more stable macroeconomic environment. This calls for coordinated fiscal and monetary policies that target these specific drivers of inflation. For instance, investments in agricultural infrastructure and technology can boost food production and stabilize food prices. Similarly, promoting renewable energy and improving energy efficiency can help mitigate the impact of rising energy costs. These measures, combined with the strategies for currency stabilization, can create a more stable and resilient Ghanaian economy.
