Although Ghana’s push to build foreign exchange reserves to 15 months of import cover under the Ghana Accelerated National Reserve Accumulation Policy (GANRAP) has been widely described as bold and forward-looking, the country will have to make some sacrifices to achieve this aim.
In effect, there are some real opportunity costs beneath this ambition, meaning the government will have to give up on some things to build this buffer.
In an interaction with The High Street Journal on the new policy, U.S.-based finance professor Williams Kwasi Peprah of Andrews University explains that reserve accumulation is not cost-free.
He emphasized that it carries measurable fiscal and economic trade-offs that policymakers must carefully weigh.
“Reserve accumulation has real fiscal and economic costs,” Professor Peprah revealed.
The Direct Opportunity Cost: Money Sitting “Idle”
For many countries, foreign exchange reserves are typically invested in highly liquid, low-risk assets. These investment opportunities include short-term U.S. Treasury securities.
Although they offer relatively low returns, they are considered to be safe instruments. This situation, Prof. Peprah explains, that it creates the first opportunity cost, which is the foregone return from alternative uses of the same funds.
To put it simply, every dollar parked in low-yield reserve assets is a dollar that could have been invested in infrastructure or used to expand irrigation or energy capacity.
The same could also be channelled into education, healthcare, or applied toward reducing public debt
If those alternative uses generate higher economic returns than reserve assets, then the country sacrifices potential growth to build financial buffers.
“The direct opportunity cost is the foregone return from alternative uses (public investment, debt reduction) versus the low yields on liquid reserve assets,” the finance professor noted.
The Debt Reduction Trade-Off
Another opportunity, the finance academic reveals, lies in debt management. If Ghana borrows at higher interest rates while simultaneously accumulating reserves that earn lower returns, the country effectively pays a spread.
This is a gap between borrowing costs and investment returns. That spread represents a real fiscal cost.
Practically, if the government pays 8% to borrow but earns 2–3% on reserve assets, the difference becomes an implicit expense borne by taxpayers.
The Quasi-Fiscal Cost: Sterilization and Crowding Out
Professor Peprah also points to quasi-fiscal costs, which are the indirect financial pressures that arise from reserve accumulation.
When foreign currency inflows are converted into cedis, excess liquidity can build up in the banking system. To prevent inflation, authorities may “sterilize” that liquidity by issuing domestic bonds or absorbing funds through monetary operations.
This sterilization, he notes, does not come on a silver platter. It can lead to higher domestic interest rates and increased government borrowing costs. It could also lead to crowding out of the private sector in the credit market.
In effect, businesses may face tighter credit conditions as the government absorbs liquidity to manage macroeconomic stability.
“The quasi-fiscal cost can show up as higher borrowing costs or crowding-out if sterilization is required,” Prof. Peprah explained.
The Measurable Cost to the Economy
The academic further reveals that studies on large-scale reserve accumulation suggest that the annual implicit social cost can range between 0.2 percent and 1 percent of GDP, depending on financing methods and interest rate spreads.
For an economy the size of Ghana’s, even the lower end of that range represents hundreds of millions of dollars each year.
This is the measurable trade-off between security or insurance for the economy and immediate economic deployment.
The Case for Insurance vs The Case for Investment
Despite the trade-offs, Profs Peprah does not dismiss the policy. Instead, he frames it as a cost-benefit calculation.
Large reserves, he says, function like insurance. The premium may be visible and ongoing. But the benefit emerges during a crisis, when sudden capital outflows, commodity shocks, or currency pressures could otherwise force painful adjustments.
The true comparison, he argues, is not between reserves and spending alone. It is between the cost of building buffers and the potentially far larger economic losses from an external crisis.
An external shock can wipe out years of growth, trigger sharp currency depreciation, spike inflation, and necessitate emergency borrowing at punitive rates. Against that backdrop, he believes the reserve accumulation may be expensive, but crisis recovery is often far more so.
“Estimates typically put the social opportunity cost of large reserve accumulation in the range of a non-trivial fraction of GDP. Studies report varying annual implicit costs in the order of 0.2–1% of GDP, depending on financing and interest rate spreads. That cost must be weighed against the insurance value of avoiding a costly external crisis,” he explained.
He added, “In short, the opportunity cost is real and measurable, but may be economically justified if the reserves prevent much larger crisis losses.”
The Bottomline
As the finance professor maintains, Ghana’s new reserve target is ambitious. Achieving it will require sustained foreign exchange inflows and fiscal discipline.
However, all is not that rosy, as the country will have to let go of some things in order to build the insurance needed to cushion the economy against external shocks.
For him, large reserve accumulation is not merely a technical monetary exercise. It is a strategic economic choice about how much today’s growth Ghana is willing to defer to safeguard tomorrow’s stability.
