Introduction to Currency Appreciation
The Head of Research at the central bank, Dr. Philip Abradu-Otoo, has spoken out against criticism from the business community regarding the cedi’s recent appreciation against major trading currencies. This criticism has sparked a discussion about the management of currency movements and the balance between economic stability and the interests of various stakeholders.
The Impact of a Stronger Cedi
A stronger cedi is often seen as beneficial for the wider economy, as it helps to lower import costs and stabilize inflation. However, some exporters and businesses argue that it erodes their competitiveness in international markets and cuts into their profit margins. This conflict of interests highlights the complexity of managing currency movements.
Central Bank’s Response
Dr. Abradu-Otoo revealed that the central bank was surprised by the criticism when the currency started appreciating. The central bank must carefully manage currency movements to balance economic stability with the sometimes conflicting interests of stakeholders. The IMF Deputy Managing Director, Bo Li, has urged the central bank to "reduce its footprint in the foreign exchange market" and "allow for greater exchange rate flexibility."
World Bank’s Warning
The World Bank has also warned the Bank of Ghana (BoG) to avoid excessive foreign exchange (FX) interventions, stating that such actions could disrupt market balance and weaken economic resilience. In its latest Ghana Economic Update report, the World Bank emphasized the need for the central bank to allow market forces to have greater influence over exchange rate movements.
Recent Developments
In response to these concerns, the BoG directed commercial banks to immediately suspend payments of foreign currency cash for large corporate clients unless they have matching foreign currency deposits at the Bank of Ghana. This directive aims to restore high-priority forex stability and build financial discipline in the corporate and banking sectors. The Bank of Ghana is also working with stakeholders to re-emphasize the cedi’s legal tender status and discourage foreign currency invoicing for local goods and services.
Conclusion
The management of currency movements is a complex issue that requires careful consideration of various stakeholders’ interests. The central bank’s efforts to balance economic stability with the interests of exporters, businesses, and the wider economy are crucial for the country’s economic growth. By allowing market forces to influence exchange rate movements and avoiding excessive FX interventions, the central bank can help promote a stable and resilient economy. As the Bank of Ghana continues to work with stakeholders to promote the cedi’s legal tender status, it is essential to monitor the impact of these efforts on the economy and make adjustments as necessary to ensure a stable and prosperous future.
