As part of the national effort to curb the prevalent depreciation of the Ghana Cedi, Economist at the Institute of Economic Affairs (IEA), Dr. John Kwakye is advocating for comprehensive measures to save the local currency from the consistent free fall.
The Director of Research at the IEA says to stabilize the cedi, there is the need for the Bank of Ghana among other initiatives, to increase the reserves for import cover to at least six months. This initiative, the economist believes will provide a robust backing for the local currency.
Speaking at the National Review and Feedback on Ghana’s IMF Supported Programme Organized by the Economic Governance Forum, Dr. Kwakye explained that the challenge with Ghana’s cedi is mainly because the demand for foreign currency far exceeds the supply creating an imbalance which is suffered by the local currency.
He is therefore calling on the Bank of Ghana to leverage the abundant natural resources to create reserve buffers that can cover up for the cedi. He further added that there is a need for the country to enhance export earnings while implementing import substitution policies to balance the demand and supply of the local currency.
“Stabilise the exchange rate on a permanent basis. We need policies that will maximize our export earnings and reduce import demand because the problem is we have a foreign exchange supply and demand gap that is persistent and we need to close that gap by addressing the supply and demand side. Bank of Ghana should also progressively build up the foreign exchange cover of the cedi,” the economist noted.
He continued that,” the current statutory [practice] is that the Bank should cover that with 40% of foreign exchange. We are suggesting that progressively, they should increase it to about 70% or at least 6 months of import cover. That will give a solid backing to the exchange rate. Where do you get the extra foreign exchange from? Our natural resources. It is there, we can get, own it, and use it to support the cedi. It’s as simple as that.”
Ghana’s current Gross International Reserves (GIR) as of June 2024 stood at $6.87 billion. This reserve can cover 3.1 months of import. It is worthy of note that the country has been steadily building on this reserve as it has consecutively recorded marginal growth in the second quarter of 2024.
The economist is convinced that with sufficient import cover for about 6 months, the volatility of the local currency could be curbed as sufficient reserves can enable the Central Bank to intervene in the event of pressure.
Aside from the exchange rate benefits, strong import cover also has the potential to boost confidence in the economy since it serves as a signal to investors and the international community the financial strength of the country to meet its external obligations including import payments and debt servicing.
