Governor of the Bank of Ghana (BoG), Dr. Ernest Addison, has reiterated the bank's commitment to maintaining a managed floating exchange rate regime with minimal interventions. He emphasized that this framework is considered the most ideal for the domestic economy's growth and stability needs at its current stage of development.

Under a managed floating exchange rate regime, a country's currency is allowed to fluctuate in the foreign exchange (FX) market, with occasional interventions by the central bank to stabilize its value. In contrast, a fixed exchange rate regime (monetary unification) sets the currency's value at a specific rate and requires continuous central bank intervention to maintain it.

Conversely, a free-floating exchange rate regime (complete monetary autonomy) allows the currency's value to be determined solely by market forces without any government or central bank interventions.

“The Bank remains committed to maintaining a flexible exchange rate regime with minimal interventions, and has taken innovative measures such as the ‘gold for reserves’ and ‘gold for oil’ programmes to accrete the country’s external reserves,” he said in a keynote address at the opening ceremony of a Regional Course on Exchange Rate Regimes and Policies organised by the West African Institute for Financial and Economic Management (WAIFEM) in Accra.

Dr. Addison stated that the FX rate serves as a crucial monetary policy tool for managing the economy, particularly during periods of domestic and external shocks.

He continued, "The Bank continues to support the foreign exchange market, particularly during market stress, to ensure its smooth functioning," praising the relative success of the country's exchange rate policy since it moved away from a fixed system.

Describing the evolution of the local exchange rate framework, the head of the central bank highlighted that Ghana has maintained a liberal foreign exchange system without restrictions on payments for imported goods and services since enacting the Foreign Exchange Act, 2006 (Act 723).

A significant change occurred in July 2016 when the Bank of Ghana (BoG) decided that exporters were no longer required to surrender their export earnings to the central bank. Instead, they were mandated to sell the surrender portion of their export receipts directly to commercial banks, which in turn increased forex liquidity. These banks are now obligated to report all foreign exchange transactions to the apex bank.

Furthermore, to improve price discovery and the depth of the foreign exchange market while reducing uncertainty, the BoG introduced the multiple-price forward foreign exchange auction. This initiative has been successful in easing pressure on the spot market and minimizing front-loading of forex purchases by economic agents.

However, some critics have expressed concerns about the extent of foreign exchange interventions made by the BoG, given a combination of factors such as the pandemic, conflict between Russia and Ukraine, supply chain bottlenecks, global central bank rate hikes, and investor-flight to safety.

In a discussion paper titled 'Rethinking Inflation Management in Ghana in the Wake of Covid-19 and Russia-Ukraine War,' Dr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA), commended the BoG's approach while also raising certain considerations.

“The BoG should continue conducting measured market interventions to counter extreme exchange rate volatilities,” he said.

“While Ghana operates a flexible exchange rate regime, flexibility is limited by active BoG interventions to stem inordinate depreciations. The BoG’s inclination to stem exchange rate depreciation renders the exchange rate a de facto secondary target of monetary policy, which is thereby somewhat undermined,” the economist added.

Dr. Kwakye however called for urgency in addressing lingering structural challenges as the perennial depreciation of the exchange rate – caused by the ongoing imbalance between foreign exchange supply and demand – influences domestic prices through imports. Consequently, the BoG – relying on its limited reserves and occasional borrowing – can only intervene from time to time to curb rapid depreciations.

“The Banks’ interventions will remain palliatives, but cannot stabilise the exchange rate on a durable basis. Only transformative policies that substantially increase our foreign exchange earnings and reduce our demand for foreign exchange will ensure lasting stability of the exchange rate and stem its impact on inflation,” said the former Monetary Policy Committee member

In 2022, the cedi depreciated by 30 percent against the US dollar compared to 4.1 percent in 2021, data from the central bank released earlier this year showed. By January 26, 2023 it had cumulatively depreciated by 19.1 percent, 21.4 percent and 20.7 percent against the US dollar, pound and euro respectively.

At the end of December 2022, gross international reserves were US$6.2billion (2.7 months of import cover), down from US$9.7billion (4.4 months of import cover) in December 2021. The net international reserve position declined from US$6.1billion to US$2.4billion during the comparative period.