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Economist's corner Monetary Policy Nemeses; an Economic Anecdote of the Ghana Cedi

The Ghana Cedi lost more than 20% of its value measure on a year to day basis in the first quarter of 2015. During this period, monetary policy appeared “clueless” in its appreciation of the problem and subsequent prognosis of solutions to avert this trend

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Dr. Henry  Wampah, Governor of Bank of Ghana play

Dr. Henry  Wampah, Governor of Bank of Ghana

Monetary policy as an economic management tool could loosely be used to represent the set of initiatives and directives used in the management of broad/macro money related issues within an economy.

The vast interpretation of the objectives contained in such directives of economic management makes it quite challenging for any authority to have an absolute grip on all monetary policy variables for credible policy formulation.

At best key elements crucial to the policy formulation regime are selected, based on the objective of the policy authority, and simulated to produce some broadly desired economic results. Therefore, a safe assumption can be made that, any monetary policy intervention is as good as its ability to meet its intended objective, and that of its regulator, and ultimately its positive externality on a general economic context.

What then becomes of a set of monetary policy initiatives when they fail this fundamental tests of economic consistency with their predetermined objectives, and economic complementarity with the general economy? Will they have failed? Or just a simple case of a POLICY NEMESES!

In an article ‘formulating economic policy in times of crises’, I argued that, the ability of the managers of the Ghanaian economy to turn this economic trough around will depend primarily on fiscal policies, but with a great deal of support from monetary policy.

Indeed this position is consistent with the objective for the establishment of the monetary policy authority in Ghana – to ensure price stability (low inflation – inflation target), subject to economic growth and employment creation.  Granted, the tools for achieving this simple but complex objective vary depending on the state of the economy and the pursued objective.

With inflation registering a 17.9% for the month of July, policy rate increased to 24% - with consequential negative returns on growth, unemployment estimated to hit 271,000 for graduates alone, and the “karaoke of the Ghana cedi”, one needs little efforts to establish the somewhat grotesque failure of the regime for monetary policy formulation.

The case of the Cedi is of particular interest, and this is explored below.

The Ghana Cedi lost more than 20% of its value measure on a year to day basis in the first quarter of 2015. During this period, monetary policy appeared “clueless” in its appreciation of the problem and subsequent prognosis of solutions to avert this trend. Increasingly, the authority [BoG] looked to play on the sentiments of the market players focusing primarily on the demand and supply forces, to avert the situation. In its [BoG] diagnosis, it assumed there was a mere liquidity (supply) constraint, and so an increase in supply of foreign currency will immediately dilute the demand pressure, thwarting the cedi depreciation phenomenon.



In such an altruistic position, the authority discounts three (3) causal factors at play in the currency market;

  1. The extreme ‘power’ wielded by speculators in the market, and their sensitivity to information
  2. The forex market has to be perceived in a medium to long term perspective as short term solutions expose the policy inconsistency and inefficiency
  3. The structural issues of the general economy

The lowest point of the depreciation was recorded in 2014, with a cumulative y-o-y depreciation in excess of 40% percent (using BoG rates – market rates might show a much lower point).

A short term perspective was adopted by the regulator, which informed it and the government’s decision of issuing a sovereign bond in the dollar. This was further augmented by the receipt of the cocoa syndicated loan also in the ‘green buck’. Momentarily, the Ghana Cedi stabilized only for the inefficiencies to be exposed two months forward.

This short term view has been adopted by the authority in yet another episode of the ‘Karaoke Cedi’. This time, a complete disregard for the intelligibility of the currency market and its players (speculators inclusive), will create more dire consequences, and further expose the inefficiency in the policy formulation process, or what some analysts believe is the subjugation of monetary policy to the dictates of fiscal policy.


In its short term diagnosis this year, the BoG announced some seminal injection of US$20million per day as against a previous US$14million per week. This it hoped will unlock the “hoarded” supply of foreign currency by speculators. The failure here is the non-recognition of the reasons for speculative behavior, which is based short term profit seeking but also on the structure of the economy and its ability to support business activities in the short term.

For instance, a speculator who cannot guarantee the value and availability of the dollar (US$) in 6 months when a transaction is due, will prefer to “suck” the foreign currency out of the market today. The short term diagnosis by the BoG as above will make him [speculator] unlock his pile momentarily to minimize possible losses; even though the speculator is fully aware that the new price created by the regulator is more or less a shadow / artificial price.

This was evinced over the month of July 2015, when the currency (GHS) appreciated briefly. The danger though is that, on the trigger of a price reversal as the speculators and market players adjust swiftly to new and available information (such as a further limited supply of US$ from BoG, or learn of the psychological game played by the BoG), the depreciation is rapid, and a lot more efforts will be required for stabilization.

To put the above in perspective, the exchange rate prior to the “short termist” solutions from the BoG in July, the exchange rate of the dollar was in the region of GHS 4.18. In less than two weeks, the price of the dollar decreased to about GHS 3.19, with some analysts predicting further declines.

This was an artificial price, and just as the market got “wiser”, and could see the fluke in this price, a reversal was triggered. The speed of adjustment to “predecline” prices has been very rapid and much faster than the initial period of decline in the value of the Cedi (recovering the three weeks loss in value, in just about one week).

Estimates show a quick return to about GHS 4.5 to GHS 4.8 to US$ 1 by close of year (just 5 months away). Such estimates are supported by the weakened external outlook of the economy, decline in output, possible high volume of import in the third quarter as a lot of import from businesses and individuals have been deferred, high levels of inflation, an increase in interest rate (policy rate) with an attending increase in government debt (additional GHS 25billion, with some analysts predicting the total public debt stock to hit the GHS 100billion mark by close of year).

Did the monetary policy authority miss these indicators in its diagnosis? Did it underestimate the power of the speculators? Did it downplay the essence of the foundations of the economy? Did it focus narrowly on the short term? Are some “big guns” swaying the direction of Ghana’s monetary policy?

Policies are judged not by intentions but by their consequences or results. The monetary policy authority may have had the best of intentions but the results clearly point in a different direction, and until the causal factors are addressed with tact, things will remain the same!

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