Economist and professor of finance at the University of Ghana, Prof Godfred Bokpin, says the Ghana cedi can only be stabilised temporarily from further depreciation in its performance against major foreign currencies.
However, the currency will continue its free fall in the long term, as witnessed for decades.
This follows moves by the Bank of Ghana to calm the forex markets, with Governor Dr Ernest Addison assuring that the central bank has built up “enough reserves to tackle the pressures” battering the cedi in recent weeks.
Speaking at the launch of the new commercial paper market, Dr Addison acknowledged the cedi has faced “some headwinds” after a period of relative stability.
He indicated that the BoG is “giving much attention” to the issue and has the firepower to intervene.
Prof. Bokpin believes the cedi’s lack of robust macroeconomic policy support has occasioned this trend.
In an interview on Monday, May 13, Prof Bokpin explained that the cedi has persistently suffered depreciation since its introduction in July 1965.
However, he anticipates intermittent periods of relative stability but underscores the likelihood of continued depreciation, even with optimal economic measures in place.
“If we do everything right, we will still expect that the cedi will depreciate by a certain margin given the relative strength of the economy.
“It’s a shame that we haven’t been able to provide the cedi with the necessary support through sound macroeconomics policy making, including responsible fiscal management and prudent monetary policy.
“As a result, we’ve denied the cedi some basic rights and then expect it to perform magic, when in reality, the cedi’s behaviour is a reflection of weak underlying fundamentals”.
Prof Bokpin mentioned that in 1964, Ghana had less than 1% inflation. At that time, Ghana did not have its national currency and used the British West African pound, limiting its monetary control.
He said that even after gaining independence, printing currency remained out of reach until the introduction of the cedi in July 1965.
However, inflation has been a continuous challenge since then.
As of today, Monday, May 13, one US dollar averages GH¢14.5 at the forex market.
Analysts envision a continuous weakening trajectory of the local currency as foreign exchange demand-supply disparity remains substantial.
They, however, anticipate improved liquidity conditions towards the end of quarter two of 2024 after the International Monetary Fund (IMF) board approves the second review of Ghana’s programme.
This will lead to a tranche disbursement of US$360 million under the IMF programme.
Meanwhile, several economists and financial analysts have proffered measures to curb the cedi.
The latest suggestion proposes dollarising Ghana’s economy to curb the cedi’s depreciation.
“Stabilising the economy is not rocket science. If we feel we cannot maintain the cedi, let us abandon it and adopt the dollar. Let us dollarise the economy,” the Director of Research at the Institute of Economic Affairs (IEA), Dr John Kwakye, stressed.
He said that the dollarisation of the economy should be a temporary measure until it rebounds, after which Ghana can create its currency.
“Dollarisation” is when a country begins to recognise the US dollar as a medium of exchange or legal tender alongside or in place of its domestic currency.
Dollarisation normally occurs when the local currency becomes unstable and begins to lose its usefulness as a medium of exchange for market transactions.