- Reserves or Roads? Economist Challenges Ghana’s Push for 15 Months of Import Cover
Ghana should reconsider its ambition to accumulate foreign exchange reserves equivalent to 15 months of imports and instead direct part of those resources towards electricity infrastructure, irrigation and roads, according to US-based economist Dennis Nsafoah, reopening a difficult debate over how the country should balance financial insurance against investment-led growth.
Dr Nsafoah, Assistant Professor of Economics at Niagara University and a member of the Research Committee of Tesah Capital, accepts that rebuilding Ghana’s external buffers is essential after the economic crisis of recent years. His concern is whether pushing reserves substantially beyond conventional adequacy levels represents the most productive use of scarce national resources when significant infrastructure deficits remain.
His intervention centres on the Ghana Accelerated National Reserve Accumulation Policy, or GANRAP, under which authorities are seeking to build a much stronger stock of foreign exchange assets. In a paper titled Why Is Ghana Cutting Capital Expenditure to Pursue Reserves Far Above the IMF’s Adequacy Benchmark?, he questions whether a 15-month import-cover target strikes the right balance between protection against shocks and the country’s development needs.
“The correct lesson is that Ghana should maintain an adequate buffer while pursuing credible fiscal policy, exchange-rate flexibility and a productive economy capable of continuously generating foreign exchange,” Dr Nsafoah said.
The argument confronts policymakers with one of the more complicated trade-offs of Ghana’s post-crisis recovery. The experience of 2022 demonstrated the danger of entering a period of global and domestic stress with weak reserves, declining investor confidence, restricted capital-market access and intense demand for foreign currency.
Foreign exchange reserves are valuable precisely because they provide insurance against such moments. They can help the Bank of Ghana meet external obligations, support confidence in the cedi and provide a cushion when commodity earnings, capital inflows or access to international financing deteriorate suddenly.
But economic insurance is not free. Every additional dollar retained in relatively liquid reserve assets is also a dollar that cannot simultaneously finance electricity transmission, irrigation schemes, transport links or other investments capable of increasing Ghana’s productive capacity.
That opportunity cost is at the centre of Dr Nsafoah’s argument. If roughly six months of import cover, supplemented by an additional prudential margin, provides adequate protection against plausible shocks, then policymakers must ask what additional economic benefit is gained from moving towards 15 months.
The answer cannot be determined by reserve size alone. The relevant comparison is between the marginal security gained from each additional dollar held and the potential economic return from using that dollar to remove a binding constraint on production.
For Ghana, those constraints are substantial. Electricity transmission and distribution weaknesses raise costs for businesses, poor roads restrict trade and agricultural access to markets, while inadequate irrigation leaves food production heavily exposed to rainfall variability.
Investment in irrigation, for example, could increase agricultural productivity, improve food security and potentially reduce the foreign exchange spent importing food. Better feeder and commercial roads could reduce post-harvest losses and transport costs while improving the ability of producers to reach domestic and export markets.
That means the opportunity cost of exceptionally large reserves goes beyond foregone government expenditure. It includes output that might not be produced, jobs that might not be created and future foreign exchange earnings that productive infrastructure could otherwise generate.
There is, however, a powerful counterargument. Ghana has only recently emerged from debt distress, severe exchange-rate pressure and exclusion from international capital markets, and conventional reserve benchmarks may not fully capture the vulnerabilities of an economy with that recent history.
A much larger buffer could reduce perceptions of currency risk and provide the central bank with considerably more room to absorb external shocks without aggressive interest-rate increases or disruptive foreign-exchange shortages. Investors may also attach value to the credibility created by reserves that are clearly more than sufficient to meet near-term external obligations.
The policy question is therefore not whether Ghana should build reserves. It is where the additional benefit from reserve accumulation begins to become smaller than the economic return available from alternative uses of national resources.
Dr Nsafoah also draws attention to an underappreciated political-economy consideration. Reserves offer governments a visible measure of stability: billions of dollars can be announced, months of import cover can be compared and progress can be communicated in a single headline number.
The economic returns from irrigation networks, upgraded transmission systems or rural roads are harder to compress into a headline. They may take years to materialise and their benefits are often spread across businesses, households and regions rather than captured in one macroeconomic indicator.
Yet those are precisely the investments that can improve an economy’s ability to generate foreign exchange rather than simply store it. An irrigation system that raises agricultural exports or a reliable power network that supports industrial production can strengthen the external position from the productive side of the balance sheet.
Dr Nsafoah does not reject GANRAP itself. He argues that its underlying model accumulating reserves from domestically generated gold rather than predominantly through borrowed foreign currency represents an improvement on earlier periods when Eurobond proceeds helped strengthen reserves while simultaneously increasing external debt.
“Its underlying model building reserves from domestically generated gold rather than borrowed foreign currency is preferable to the Eurobond-funded reserve accumulation of the past,” he said.
That distinction is significant. Borrowed reserves can create the appearance of external strength while simultaneously increasing the liabilities that those reserves may eventually be needed to service.
Using domestically generated gold potentially creates a more durable model. But even reserves built without new external debt still carry an opportunity cost because the underlying national resources could theoretically be deployed differently.
The more credible policy approach may therefore lie between aggressive accumulation and premature fiscal expansion. Ghana could maintain a strong external buffer while establishing transparent thresholds for determining when additional reserve accumulation should be weighed against strategic capital expenditure.
Such a framework would require equally strong safeguards on the spending side. Redirecting resources from reserves would make economic sense only if the money financed projects with credible productivity, export or cost-reduction benefits rather than recurrent spending or politically attractive infrastructure with weak economic returns.
That condition is crucial because the argument for lower reserve accumulation is not an argument for looser fiscal policy. Substituting financial buffers for inefficient public spending would leave Ghana more vulnerable rather than less.
The debate ultimately reflects how Ghana defines the next phase of its recovery. The immediate post-crisis priority was stabilisation: restoring confidence, rebuilding reserves, restructuring debt, lowering inflation and repairing public finances.
But stability is ultimately an enabling condition rather than the final objective of economic policy. The larger challenge is converting it into higher productivity, stronger exports, employment and improvements in living standards.
Foreign exchange reserves help Ghana survive the next external shock. Reliable electricity, irrigation and transport infrastructure can make the economy stronger enough to generate more of the foreign exchange needed to withstand that shock.
The difficult question is how much insurance Ghana needs before the next dollar is better spent building the productive economy that makes such insurance less necessary. That may become one of the most consequential policy choices of the country’s post-crisis era.
