Ghana urged to increase foreign exchange cover for currency to safeguard economy
The Institute of Economic Affairs (IEA), a public policy think-tank in Ghana, has recommended a significant increase in the amount of foreign exchange cover for currency issued by the Bank of Ghana, with a view to safeguarding the country’s economy. According to the IEA, the current level of currency cover is insufficient, and the value of the currency is prone to fluctuations.
At present, the Bank of Ghana Act 2002, Act 612, allows for up to 60 percent of currency in circulation to be covered by cedi-denominated Treasury instruments, with the remaining 40 percent covered by foreign exchange. However, the IEA argues that a currency that is fully covered by foreign exchange is considered more stable and less prone to fluctuations in value. This means that the monetary authority that issued the currency has enough foreign currency reserves to back up every unit of the domestic currency in circulation.
Speaking during a recent instalment of the IEA Constitutional Review Series, which focused on ‘Institutionalising Fiscal Discipline and Macroeconomic Stability For Sustained Growth In Ghana: The Constitutional Pathway’, Dr. John Kwakye, the IEA’s Director of Research, pointed to the comparative stability witnessed among peers where the currency is 100 percent covered by foreign exchange.
Dr. Kwakye clarified that the IEA is not calling for a sudden or strict rise in currency cover, but rather a staggered increase. “We are not saying that we should move from 40 percent to 90 percent overnight, but we should be looking to raise the level,” he added.
The IEA’s recommendation comes amid ongoing concerns about the stability of the Ghanaian currency and the country’s broader economic health. In recent months, the central bank has come under scrutiny for its financing of the budget deficit, which stood at over GH¢44.5 billion – around 64 percent of the previous year’s revenue, versus the GH¢3.5 billion that would have been in line with the law.
While the central bank has defended its actions, saying that it could not allow the economy to collapse at a time when fiscal authorities were struggling with revenue generation and capital market access, analysts have argued that a currency that is fully covered by foreign exchange is considered to be more stable and less prone to fluctuations in value. Moreover, it can help to instil confidence in the currency and economy as a whole, which can be particularly important for emerging market economies or countries with less established financial systems.
To prevent similar occurrences in the future, the IEA has proposed strict enforcement of the Bank of Ghana’s lending ceiling, with a target of 3 percent in the medium-term, in line with the convergence criteria for the Economic Community of West African States (ECOWAS) and the West African Monetary Zone (WAMZ). Ghana is a member of both organizations. Additionally, the IEA has recommended a 60 percent Debt to Gross Domestic Product threshold.
The IEA has also called for the establishment of an independent Fiscal Council or Parliamentary Budget Office to help parliament carry out its fiscal oversight mandate. According to Dr. Kwakye, the proposed council would be similar to those found in many other countries, such as the Congressional Budget Office in the US and the Office of Budget Responsibility in the UK.
“Our recommendation prompted the formation of the Fiscal Policy Advisory Council by President Akufo-Addo in 2018. However, the FPAC did not meet our requirements to the extent that it was an advisory body attached to, and under the influence of, the president and working in secrecy – contrary to our call for an independent body attached to parliament and working transparently, which is the international standard,” he stated.
