Artificial stability or sustainable equilibrium? Rethinking the Cedi’s performance
My assessments of Ghana’s fiscal dynamics and monetary developments have consistently been grounded in the underlying economic fundamentals.
Ghana's economic stability and foreign-exchange market have been in the spotlight, prompting debates over the sustainability of the cedi's performance. Initially, the government credited fiscal consolidation for the cedi's improved status, a narrative I found lacking. Instead, I underscored the critical role of the Bank of Ghana (BoG) in maintaining this stability through market interventions.
This stance, though initially met with skepticism, gained credibility as assessments from the World Bank and the IMF echoed similar sentiments.
The President and the BoG Governor have since recognized the significance of these central-bank interventions, contrary to some earlier views. However, my stance remains that such interventions can't be the sole foundation of a robust cedi. They could appear artificial, relying on continuous central-bank involvement. This is untenable because once the central bank's ability to intervene wanes, the currency's stability could quickly unravel.
Instead, the argument should pivot towards enhancing the productive capacity of the Ghanaian economy. Expanding agriculture and manufacturing, reducing excessive import dependency, and bolstering export potential are pivotal. A healthier domestic economy would not only lessen foreign-exchange demand but also boost revenue streams through exports, thereby alleviating pressure on the BoG. This shift would foster employment, enrich the domestic tax base, and bolster the government's fiscal capacity.
Recent market shifts offer a litmus test for this argument. With the BoG's reduced monthly intervention to US$1 billion, commercial banks now play a larger role in foreign-exchange mediation through GoldBod. While potentially more sustainable, this arrangement hinges on gold supply, credit access, and international gold price trends. If gold production dwindles due to reduced mining or international price drops, the arrangement's efficacy could be jeopardized.
This scenario underscores the risks of over-reliance on a single commodity for foreign-exchange liquidity, exposing the economy to external and internal vulnerabilities. Ghana must therefore broaden its approach beyond short-term currency stabilisation. A lasting economic strategy should not hinge on commodity-driven foreign-exchange inflows.
The more prudent path involves restructuring the economy's productive foundation: boosting agricultural and industrial output, curbing import reliance, diversifying exports, intensifying domestic value addition, and fortifying the country's capacity to generate foreign exchange through multiple avenues. Ultimately, the goal should transcend merely defending the cedi; it should strive to cultivate an economy where the cedi's stability doesn't necessitate perpetual intervention.
Written by urgent.news from MyJoyOnline Ghana's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
