Ghana's economic stability has been a topic of discussion lately, with experts weighing in on the sustainability of the cedi's performance. According to George Domfe, President of APL, the cedi's stability is partly artificial, relying heavily on interventions by the Bank of Ghana (BoG) in the foreign-exchange market. This position has attracted both support and criticism, with the World Bank and IMF later lending credence to Domfe's argument. The debate highlights the need for a more sustainable approach to economic stability.
Domfe's argument is centered on the idea that exchange-rate stability dependent on central-bank intervention cannot constitute a durable equilibrium. If the BoG's capacity or willingness to intervene is constrained, underlying pressures on the domestic currency are likely to re-emerge. To achieve sustainable stability, Domfe advocates for attention to the structural foundations of the Ghanaian economy, including expanding domestic production in agriculture and manufacturing, reducing import dependence, and strengthening export capacity. This approach would have several macroeconomic benefits, including reduced demand for foreign exchange and increased foreign-exchange earnings.
A stronger productive base would also generate employment, broaden the domestic tax base, and enhance the government's capacity to mobilize resources internally. Domfe's position has been met with criticism from some NDC commentators and CSO actors, but the fundamental economic argument remains straightforward. The recent developments in the foreign-exchange market provide a test of this argument, with the cedi showing signs of depreciation following the BoG's decision to reduce its monthly supply of foreign currency.
The BoG's decision to reduce its foreign-exchange interventions has led to a new arrangement, where the GoldBod is expected to play a greater role in foreign-exchange intermediation. Commercial banks provide credit to GoldBod to finance gold purchases, after which GoldBod provides foreign currency to the banks following the sale of gold. While this arrangement may represent a more sustainable mechanism, its effectiveness depends on the availability of gold and credit, as well as developments in international gold prices.
The reliance on gold as a source of foreign-exchange liquidity exposes the economy to significant external and domestic risks. A decline in gold supply, efforts to curb illegal mining, or a prolonged decline in international gold prices could all impact the arrangement's effectiveness. These risks highlight the need for Ghana to think beyond short-term currency stabilization mechanisms and focus on transforming the productive structure of the economy.
A long-term economic strategy should not depend excessively on commodity-based foreign-exchange inflows to sustain currency stability. Instead, the focus should be on increasing agricultural and industrial output, reducing import dependence, diversifying exports, expanding domestic value addition, and strengthening the country's capacity to generate foreign exchange through a broad range of productive activities. This approach would build a resilient economy where the cedi does not require perpetual defense.
Ultimately, the objective should be to build an economy in which the cedi does not require perpetual defense. By addressing the structural foundations of the economy, Ghana can achieve sustainable stability and reduce its reliance on artificial measures. As Domfe notes, a stronger productive base would have several important macroeconomic benefits, and it is essential to prioritize this approach to ensure long-term economic stability.
Key points
- Ghana's economic stability is partly artificial, relying heavily on Bank of Ghana interventions.
- A sustainable approach to stability requires attention to the structural foundations of the economy.
- The country's economic strategy should focus on transforming the productive structure, rather than relying on commodity-based foreign-exchange inflows.
