Paragraph 1: The Cedi’s Struggle and the Need for a New Approach
The Ghanaian cedi has been facing persistent depreciation pressures, raising concerns about the country’s economic stability. The Institute for Fiscal Studies (IFS) has identified the reliance on external borrowing as a key factor contributing to this issue. Borrowing, while providing temporary relief, has led to a mounting external debt burden and difficulties in servicing that debt, creating an unsustainable cycle. The IFS argues that this approach is fundamentally flawed and advocates for a shift towards leveraging Ghana’s own resources, specifically its gold and oil exports, to bolster the cedi’s value.
Paragraph 2: The Paradox of Export Revenues and the Cedi’s Weakness
Ghana’s significant gold and oil exports, while appearing substantial on paper and contributing to the balance of payments, have not translated into a stronger cedi. The IFS highlights a critical disconnect: a significant portion of the inflows from these exports do not return to Ghana. Even the portion that does return often does not reach the Bank of Ghana’s balance sheet, rendering it ineffective for currency management. This leakage of export revenues undermines the potential positive impact on the cedi and necessitates a fundamental change in how these resources are managed.
Paragraph 3: External Borrowing and the Cedi’s Depreciation: A Correlation Analysis
The IFS presented an analysis demonstrating the negative correlation between external borrowing and cedi depreciation. From 2017 to 2019, when the average capital and financial account balance (largely reflecting external borrowing) was US$2.51 billion, the cedi depreciated by an average of 8.7% against the US dollar. Increased Eurobond issuance between 2020 and 2021 pushed the average capital and financial account balance to US$3.1 billion, temporarily slowing the cedi’s depreciation to 4.0%. However, the inability to borrow externally in 2022 and 2023, due to credit rating downgrades, resulted in a negative capital and financial account balance and a dramatic 28.9% average depreciation of the cedi.
Paragraph 4: Rethinking Resource Control: From Concessions to Joint Ventures
The IFS proposes a radical shift in Ghana’s approach to managing its gold and oil resources. They recommend a review of existing concession agreements with multinational companies, which grant these companies significant control over export revenues. The IFS advocates for greater government control through joint venture arrangements or production sharing agreements. This would not only increase fiscal revenue for the government but also directly channel a larger share of export earnings back into the Ghanaian economy, supporting the cedi.
Paragraph 5: The Rationale for Greater State Control and its Potential Benefits
The current concession agreements, according to the IFS, allow a substantial portion of export proceeds to remain outside Ghana, hindering the country’s ability to manage its currency effectively. By taking a controlling interest, the government can ensure that a larger share of these revenues returns to the country and is available for bolstering the cedi. This would reduce dependence on external borrowing, lessen the debt burden, and provide a more sustainable mechanism for currency stabilization. Increased fiscal revenue would also allow the government to invest in critical sectors and promote broader economic development.
Paragraph 6: A Call for Strategic Resource Management and Economic Sovereignty
The IFS’s recommendations underscore the importance of strategic resource management for national economic stability. By taking greater control over its key export commodities, Ghana can break free from the cycle of external debt and currency depreciation. This shift towards greater economic sovereignty would empower the government to utilize its own resources for national development, fostering a more resilient and stable economy. The proposed changes in the management of gold and oil exports represent a crucial step towards achieving this goal and ensuring a brighter economic future for Ghana.
