Renowned finance scholar, Professor Alex Annan Abakah, from Bentley University, has challenged widespread claims that the Russia-Ukraine war and the COVID-19 pandemic are the main contributors to the decline of the Ghanaian cedi.
At a policy dialogue in Accra, organized by the Public Financial Management Tax Africa Network, Professor Abakah shed light on the cedi’s decline, attributing it mainly to deep-seated structural weaknesses within Ghana’s economy, rather than external factors.
According to Prof. Abakah, his research reveals that the COVID-19 pandemic and the war in Ukraine had a minimal impact on the cedi’s depreciation, with the pandemic contributing a mere 11%.
“Impact of Russia-Ukraine war on cedi depreciation is insignificant; Covid contributed only 11% to the cedi’s depreciation,” he stated, contradicting the widely-held notion about these external factors.
The study further highlighted that that Ghana’s currency displayed relative stability during the Covid-19 pandemic, characterized by a moderate depreciation rate, in contrast to the sharp decline that occurred post-pandemic.
Professor Abakah noted that this change in the cedi’s value prompts crucial inquiries into the underlying internal factors.
“Ghana’s weak economic fundamentals are the primary drivers of the cedi’s depreciation,” he asserted.
The research findings contradicted widespread claims that the Russia-Ukraine conflict significantly impacted the cedi’s depreciation, as the Russian ruble and Ukrainian actually strengthened against the cedi during this time.
“Even the currencies of Russia and Ukraine appreciated against the cedi during the war so there is no point blaming the two warring countries for the cedi’s depreciation,” Prof Abakah noted.
The research findings also highlighted that the Ghanaian currency’s depreciation rate significantly outpaced other African currencies, with Ghana experiencing a staggering decline five times greater than Kenya’s shilling.
The study further disclosed that post-COVID, the cedi’s value depreciated by 104.69%, whereas Kenya’s shilling only depreciated by 21.17%.
According to Professor Abakah, external shocks like the COVID-19 pandemic can have far-reaching impacts on economies worldwide, but the severity of these impacts depends on the strength of a country’s economic fundamentals. Unfortunately, Ghana’s economic framework has proven inadequate, leaving the country vulnerable to prolonged economic challenges.
Professor Abakah emphasized that Ghana’s fiscal imbalance is a major contributor to the country’s economic struggles. He cited that in 2022, the interest-to-revenue ratio was 47.27%, which is higher than the pre-HIPC levels. This means that almost half of the country’s revenue is being used to pay interest, leaving limited resources for essential investments in infrastructure and human capital.
To curb the cedi’s decline, Professor Abakah proposed a comprehensive approach that focuses on restoring fiscal discipline. He recommended introducing debt ceilings to prevent excessive borrowing and ensuring that government spending is aligned with revenue. This approach aims to promote sustainable economic growth and stability.
“There is the need for legislating fiscal discipline by introducing a debt ceiling and ensuring that government spending aligns with revenue,” he stated.
Professor Abakah stressed the importance of long-term investments in infrastructure and human capital development, as these are vital for generating future revenue and creating employment opportunities. He also advocated for Ghana to harness its abundant natural resources to drive industrialization and recommended implementing stronger foreign exchange regulations to stabilize the cedi. This would include controlling the repatriation of profits and dividends by foreign companies, which would help reduce the pressure on the local currency.
Professor John Asafo Agyei, a senior fellow at the Africa Centre for Economic Transformation, also emphasized the need for structural reforms. He noted that Ghana’s economy has remained vulnerable to external pressures due to its heavy reliance on imports since gaining independence.
To address these challenges, Ghana could consider implementing policies that promote domestic production and reduce reliance on imports. This could include investing in key sectors such as agriculture and manufacturing, as well as implementing trade policies that support local businesses. By taking these steps, Ghana can work towards building a more resilient and self-sufficient economy. “We are still relying on imports and it’s made the economy very vulnerable. We are depending on others, and whenever there is a downturn, we suffer for it,” he added.
