A US-based Monetary Economist, Dr. Dennis Nsafoah, has attributed the cedi appreciation in 2025 solely to the Bank of Ghana’s monetary policy.
According to him, the sharp appreciation of the cedi, from about GH¢15.80 per dollar in early 2025 to around GH¢10.80 by May 2025, coincided precisely with a collapse in the growth rate of reserves held at the Bank of Ghana. In other words, as cedi liquidity was withdrawn from the system, pressure on the foreign exchange market eased and the currency strengthened.
He stated that the contraction of the cedi liquidity reduced private demand for foreign exchange, reinforcing disinflation and driving the observed shift cedi depreciation to appreciation.
“In the long run, exchange rates are governed by Purchasing Power Parity (PPP) and the Quantity Theory of Money, where relative money supplies and inflation differentials determine currency values. Given Ghana’s history of volatile inflation, the long-run framework is particularly instructive”, Dr. Nsafoah who is an Assistant Professor of Economics at Niagara University, New York, pointed out.
He further stated that if inflation in Ghana falls relative to inflation in the United States according to PPP, the cedi should appreciate. Under the Quantity Theory of Money, this disinflation is achieved by reducing the growth of money in circulation. “This is exactly what occurred in 2025”.
The Experience of 2025 Delivers a Powerful Message
Continuing, Dr. Nsafoah, who is a Member of the Research Committee, Tesah Capital, said many factors influence inflation and exchange rates, but monetary policy remains the decisive force. “The Bank of Ghana’s actions — tightening liquidity, anchoring expectations, and allowing monetary conditions to bite — were central to Ghana’s macroeconomic stabilisation”.
Finally, he stressed that if one is looking for an early warning signal of whether — and when — the exchange rate may return to episodes of sharp and disorderly depreciation, the key variable to monitor is not external shocks or speculative narratives, but a policy variable fully under the control of the Bank of Ghana.
He concluded that the experience of 2025 shows that exchange rate stability coincided with the contraction or modest growth of bank reserves at the central bank.
Therefore, as long as reserves held with the Bank of Ghana are shrinking or growing only moderately, pressure on the foreign exchange market remains contained.
“However, if the growth rate of these reserves were to reverse course —returning to the 50 percent to triple-digit annual growth rates observed in earlier years — this would signal a renewed surge in cedi liquidity. History suggests that such an expansion would quickly translate into excess demand for foreign currency and a renewed phase of sharp cedi depreciation”, he added.
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