A recent study shows that the cedi’s fall in value is mainly due to weak economic conditions in Ghana, not because of external events like the COVID-19 pandemic or the Russia-Ukraine war.The research, led by Professor Alex Annan Abakah of Bentley University, challenges the government’s claim that global events are to blame for the country’s economic struggles.

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At a policy discussion organized by the PFM Tax Africa Network, titled ‘Is the COVID-19 and Russia-Ukraine War to Blame for Ghana’s Current Economic Challenges?’, Professor Abakah shared findings that suggest the cedi’s decline is mainly caused by problems within Ghana’s economy itself.The value of the Ghanaian cedi dropped by 28% in the first nine months of 2024, compared to the same period last year, when it had fallen by 9.78%.

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This ongoing decline is mainly because businesses are demanding more dollars and because of changes in how investors feel about the market, following decisions made by the U.S. Federal Reserve.The Federal Reserve only lowered interest rates by one point instead of the two that were expected, which kept the dollar strong and made investments in U.S. dollars more attractive.

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The study found that only 11% of the cedi's decline was caused by the COVID-19 pandemic, and the Russia-Ukraine war had no major effect on the currency.The research also shows that the currencies of Russia and Ukraine actually became stronger compared to the cedi during this time. In comparison, weak economic conditions in Ghana had a much bigger impact on the cedi, nearly four times greater than the pandemic’s effect.

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Professor Abakah also pointed out that while Kenya's currency, the shilling, dropped by 21.17% after COVID, the Ghanaian cedi lost a staggering 104.69%.“External shocks like COVID-19 undoubtedly affect all economies,” he explained. “However, the extent and duration of such impacts depend on the strength of a country’s economic fundamentals.

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Countries with weak fundamentals experience larger impacts over a longer period before recovery.”Insights on Ghana’s economic weaknessesThe study pointed to Ghana’s high interest-to-revenue ratio as a key indicator of its economic challenges. In 2022, this ratio stood at 47.27 percent, surpassing pre-HIPC (Heavily Indebted Poor Countries) levels.

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This meant nearly half of every cedi generated in revenue was spent servicing debt interest – leaving little room for investment in infrastructure, human capital or other productive areas.The findings also revealed that during the Russia-Ukraine war period, the Ghanaian cedi depreciated by 128.26 percent, compared to the Kenyan shilling’s 25.66 percent decline.

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“The data show that Ghana’s economic struggles cannot be squarely blamed on the war or pandemic. Instead, it underscores the urgent need to address internal weaknesses,” Prof. Abakah said.The research highlighted a need for government to legislate fiscal discipline by implementing a debt ceiling and aligning expenditure with revenue to prevent fiscal overruns.

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It also emphasised prioritising investment in infrastructure and human capital development over consumption to drive future revenue and job creation. Additionally, the study called for leveraging natural resources to support industrialisation, modernising agriculture to ensure food security & long-term growth and adding value to local produce to reduce reliance on imports.

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To improve currency stability, the study advocated strict enforcement of foreign exchange regulations, discouraging dollarisation and controlling repatriation of foreign company profits.Prof. Abakah stressed the importance of good governance, including anti-corruption measures and effective budget monitoring systems as well as fostering a stable and transparent economic environment to build resilience against external shocks.

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“These measures can reduce the economy’s reliance on external borrowing, enhance local production and create a more resilient economic framework,” Prof. Abakah noted.Prof. Abakah emphasised that while external factors like a stronger dollar exert pressure, the impact on Ghana is exacerbated by domestic economic weaknesses.“When fundamentals are weak, the effects of global shocks are amplified.

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Strengthening these fundamentals is the only sustainable path to currency stability and economic resilience,” he said.

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