Ghana’s Currency Crossroads: The Story Behind Recent Exchange Rate Developments

Ghana: Ghana's economic fortunes have long been tied to the ebb and flow of its currency-the Cedi. Over the past decade, the Real Effective Exchange Rate (REER) has traced a path of relative stability, followed by sudden turbulence-a journey that now demands urgent policy attention. According to Ghana News Agency, between 2015 and 2019, Ghana's REER hovered near equilibrium, supporting export competitiveness and a healthy external balance. This period of stability fostered optimism among policymakers and exporters alike. Yet, as the world reeled from the Covid pandemic, Ghana's currency began to appreciate moderately, with the equilibrium rate remaining steady. The data, derived from an author's estimation based on the IMF's Behavioral Equilibrium Exchange Rate (BEER) model, suggests that the estimated equilibrium REER for Ghana tends to hover near 70-75 (2010=100) in recent years, indicating mild undervaluation in 2024 and sharp overvaluation in 2025. Fig. 1 visualizes the REER's journey, showing its close alignment with equilibrium until 2019, and the dramatic divergence projected from 2025 onwards. These projections are based on the assumption of unchanged policy. The sharp appreciation in 2025, where actual REER leaps to 85-88 against an equilibrium of 74, marks a turning point-one that signals overvaluation and raises alarms about Ghana's global competitiveness. The chart illustrates that the sharp depreciation from 2023 into 2024, which led to undervaluation of the currency, was not consistent with the fundamentals. The drivers of that depreciation were at variance with the fundamentals, which is expected during crisis periods. It would have been imprudent to use hard-earned FX reserves to combat such deviation from the long-term trend, despite the painful effects on the economy. Similarly, the sharp appreciation in 2025 is not consistent with the fundamentals, creating a misalignment that could have lasting effects if not urgently corrected. An overvalued currency can erode export competitiveness, makin g Ghanaian goods more expensive abroad and increasing reliance on imports as imported goods become cheaper, undermining the domestic economy. These consequences ripple through the economy, leading to widening current account deficits, pressure on foreign reserves, and inflationary surges. If left unchecked, these trends threaten to dampen industrial growth and job creation, undermining Ghana's long-term prospects. Fig. 2 illustrates the degree of REER misalignment over time. Positive values indicate overvaluation, while negative values indicate undervaluation. Up until the end of 2024, the degree of misalignment appears stationary (integrated of order zero-no unit roots). This means that movement in the real exchange rate is mean-reverting, staying close to its long-term trend. Deviating from trend or equilibrium within ±5% indicates alignment with fundamentals. Deviation within ±10% indicates 'broad alignment' with fundamentals. Anything above ±10% is a clear case of misalignment, requiring urgent policy in tervention. To address these challenges, a coordinated, multi-pronged approach is necessary. Flexible Exchange Rate Management should be employed by the Bank of Ghana to prevent excessive appreciation, using sterilized interventions to maintain monetary policy credibility. Reserve Accumulation should be pursued to build robust foreign reserve buffers to cushion the economy against potential external shocks and currency volatility. Export Diversification should be intensified over the medium to long term by promoting non-traditional exports and value-added sectors such as agro-processing and manufacturing to reduce dependence on primary commodities and strengthen competitiveness. Fiscal and Monetary Coordination should align fiscal policy with monetary objectives, deploying counter-cyclical measures during periods of misalignment. Structural Reforms involving investment in infrastructure, technology, and skills development will boost productivity and lower transaction costs. The Bank of Ghana's in-house REE R monitoring framework should influence exchange rate policy to prevent sharp and unsustainable appreciation of the currency. Ghana's experience serves as a cautionary tale for emerging markets and developing economies. Proactive, coordinated policy measures are essential to prevent sustained overvaluation and safeguard external competitiveness. By aligning monetary, fiscal, and structural policies, Ghana can maintain macroeconomic stability and support long-term growth, even as global headwinds gather.