The government’s new ambition to hold 15 months of import cover in foreign reserves may sound reassuring at first glance; however, there is an additional twist.
According US-based Ghanaian Economist, Dr. Dennis Nsafoah, although bigger reserves often signal strength, stability, and preparedness, beyond a certain point, more reserves do not mean more safety; they mean more cost.
In his analysis of the newly launched Ghana Accelerated National Reserve Accumulation Programme (GANRAP), the assistant professor of Economics at Niagara University in the United States explains that when the numbers are put into perspective, it reveals the scale of the policy.
With Ghana’s monthly imports estimated at about US$2.4 billion, a 15-month target implies reserves of roughly US$36 billion. That is over US$22 billion more than current levels, which is equivalent to about 20 percent of GDP.
Such a position would place Ghana’s reserves almost at par with its external public debt and among the highest reserve-to-GDP ratios in emerging markets.
But according to Dr. Nsafoah, the key question is not whether Ghana can build such reserves; it is whether it should.
The Price of “Extra Insurance”
Dr. Nsafoah explains that reserves are often described as insurance against external shocks, such as currency pressure, commodity price swings, or sudden capital outflows.
However, insurance has a premium. Even if reserves are accumulated through gold purchases rather than borrowing, they are not free. Every dollar held in reserves is a dollar that could have been used elsewhere.
For instance, it could have been used in paying down expensive external debt, investing in infrastructure, stabilising the energy sector, or supporting productivity-enhancing projects.
If Ghana’s alternative to holding reserves is avoiding external borrowing at yields around 8 percent, then locking up an additional US$22 billion in reserves carries an implicit opportunity cost of nearly US$1.8 billion annually.
That figure represents what the country forgoes each year by holding “extra” reserves beyond already adequate levels.
Dr. Nsafoah suggests that at 5 to 8 months of import cover, the protective benefits of reserves clearly outweigh the cost. Beyond that, the extra protection declines, while the financial sacrifice rises sharply.
Gold Flows Change the Equation
The government’s reserve strategy leans heavily on gold purchases. The policy is targeting more than three tonnes weekly, largely from artisanal and small-scale mining. At current prices, this could generate foreign exchange flows exceeding US$20–25 billion annually.
But this, the economist argues, is precisely why a 15-month reserve stock may be unnecessary.
Gold is not just a one-time reserve asset; it is a continuous flow of foreign exchange. As long as Ghana maintains steady production, effective export retention mechanisms, and credible macroeconomic policies, the country already has a built-in buffer.
He adds that resilience does not come only from the stock of reserves sitting in vaults. It also comes from reliable flows of foreign exchange entering the economy.
When flows are strong and consistent, the optimal stock of reserves can be lower. Targeting extremely high levels, Dr. Nsafoah warns, risks confusing prudent insurance with costly hoarding.
“Ghana’s resilience comes not only from the stock of reserves, but from the flow of generated foreign exchange. When flows are strong and reliable, the optimal stock of reserves is lower, not higher. Targeting extremely high reserve levels in a gold-rich economy risks confusing insurance with hoarding,” he noted.
The Inflation Risk
The economist, in his analysis, further added a monetary dimension that cannot be ignored. He explains that to accumulate reserves, the central bank must purchase foreign exchange or gold.
Unless these purchases are fully sterilised, meaning the excess liquidity is mopped up, the money supply expands.
Although at moderate levels, this can be managed. However, he adds that pushing reserves aggressively toward 15 months would require either continuous issuance of domestic debt instruments or sustained high interest rates to neutralise liquidity.
Both options come with consequences. Issuing more domestic paper raises fiscal costs. Higher interest rates can slow private sector activity. And if sterilisation weakens over time, excess liquidity may spill into the economy, fuelling inflation and credit expansion.
In that case, the very policy designed to strengthen macroeconomic stability could inadvertently reintroduce inflationary pressures.
The Bottomline
For Dr. Nsafoah, strong reserves matter. They build confidence, stabilise currencies, and protect against shocks. But beyond a reasonable threshold, the trade-offs become harder to justify.
However, the economist maintains that the opportunity cost for keeping a 15-month import cover is over and above. This means that what Ghana gives up to hold exceptionally high reserves is very significant.
When roads remain unfinished, energy sector liabilities persist, and external debt remains expensive, locking billions of dollars into reserve accounts carries real economic consequences.
Dr. Dennis Nsafoah says savings are wise. But saving excessively while paying high interest elsewhere can be counterproductive.
