Counting the cost: Disrupting Ghana’s currency black market

The foreign currency black market has long been an economic challenge in many African countries, including Ghana. 

This shadow economy not only disrupts legitimate banking systems but also undermines the authority of central banks, leading to currency instability and speculative pressure on national currencies. 

Ghana, in particular, has seen a consistent struggle to regulate its foreign exchange market, leading to the persistence of underground trading and informal exchanges.

In response to these challenges, banks and financial institutions in Ghana, including the Bank of Ghana (BoG), could consider an innovative approach: the introduction of foreign currency sweeping special purpose call accounts. 

These specialised accounts could allow clients to transfer funds from local currency holdings into foreign currency accounts based on pre-set instructions, giving them the flexibility to engage in international transactions both domestically and abroad, while reducing the reliance on black markets.

This article explores the historical background of the black market for foreign exchange in Ghana and how this initiative could reshape currency trading in the country.

Etymology of foreign currency trading and black markets in Ghana

Foreign currency black markets in Ghana have roots that stretch back to the early days of the country’s independence. In the 1960s, the government imposed strict foreign exchange controls to stabilise the young economy. 

However, this created an unintended consequence: shortages of foreign currency for legitimate trade and personal use. 

This scarcity led to the development of a parallel underground market where foreign currencies, particularly U.S. dollars, could be bought and sold at rates better than those offered by official sources.

During the 1980s, under structural adjustment programmes imposed by the IMF and the World Bank, Ghana liberalised its foreign exchange regime. 

However, demand for foreign currency continued to outstrip supply and the black market persisted.

Over the following decades, black market traders established themselves as a critical part of the currency ecosystem, meeting the needs of individuals and businesses when official channels could not.

The continued existence of these markets has posed numerous challenges to economic stability. With unofficial exchange rates often diverging significantly from those set by the Bank of Ghana, they have contributed to speculative pressures on the cedi. 

Furthermore, black market transactions are often opaque, with minimal regulatory oversight, making it difficult for the central bank to manage capital flows and maintain currency stability.

The underground foreign exchange market in Ghana

The underground foreign exchange market in Ghana, known as the black market, plays a significant role in the country’s economy, largely due to its ability to meet the high demand for foreign currencies such as the U.S. dollar, British pound, Euro among others. 

This market often thrives due to several key factors that enable its operators to acquire foreign currency and build strong relationships with their clients, while banks struggle to keep pace.

Acquisition of foreign currency by black market operators

Black market operators source foreign currency through a variety of informal and often illicit means, some of which include:

1. Remittances: Ghana receives significant remittances from its diaspora, with annual figures often exceeding $4 billion. A portion of these funds is diverted to black market operators who offer better rates than banks and avoid official tracking.

2. Tourism and informal trade: The tourism sector in Ghana brings in foreign currency, especially in cities such as Accra and Kumasi. Black market operators often strike deals with businesses in the tourism sector, providing them with more competitive exchange rates.

3. Export proceeds diversion: Small-scale exporters, especially in gold, cocoa and other natural resources sometimes avoid formal banking channels to exchange their proceeds on the black market. This is due to the faster and more favourable rates they receive.

4. Connections with importers: Importers who need foreign currency for transactions often prefer black market operators because of their ability to supply large amounts at better rates than banks.

Why black-market operators outprice banks

1. Favourable exchange rates: Black market operators typically offer significantly more attractive exchange rates than formal institutions. As of 2023, while banks may offer around GH¢12.50 to $1, black market rates can range from GH¢13.50 to GH¢14.00 per dollar, depending on market demand. This differential can provide clients with considerable savings, especially for high-volume transactions.

2. Speed and efficiency: Banks in Ghana are often burdened with regulations that can delay transactions. Black market operators, however, provide quick and discreet services, without the need for cumbersome paperwork or compliance checks.

3. Negotiable rates and personalised service: Black market operators frequently build personal relationships with clients, offering negotiable rates based on the volume of currency exchanged and even delivering currencies directly to clients. This level of flexibility and trust is often missing in bank transactions.

4. Fewer restrictions: The Bank of Ghana and the formal financial sector are subject to strict foreign exchange regulations, which cap the amount of currency a person or business can purchase. The black market, however, operates outside of these restrictions, giving clients access to unlimited foreign exchange.

Why banks in Ghana struggle in the foreign currency market

1. Regulatory burdens: Banks in Ghana are heavily regulated by the Bank of Ghana, which imposes strict limits on foreign currency reserves, liquidity and trading rules. These regulations are meant to stabilise the cedi and manage inflation, but they also reduce the banks’ ability to meet the demand for foreign currency.

2. Lack of foreign currency supply: Despite official exchange rate controls, banks often face liquidity issues in sourcing foreign currency due to limited inflows. The country’s trade deficit (Ghana recorded a trade deficit of $1.44 billion in 2022) means that demand for dollars far exceeds the supply, pushing businesses and individuals to the black market.

3. High fees and documentation requirements: Banks are required to follow stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, which can be time-consuming. The process of verifying documents and tracking the origin of funds leads to delays, while black market operators can bypass these requirements.

4. Higher costs of operation: The banking sector incurs higher costs in maintaining infrastructure, staff and regulatory compliance. This cost structure is passed on to customers in the form of less competitive rates and higher fees. Black market operators, with their lean and informal operations, can offer better rates and lower transaction fees.

5. Unstable local currency: The Ghanaian cedi is highly volatile, often leading to depreciation. In 2023, the cedi lost approximately 20 per cent of its value in the first half of the year alone. Many individuals and businesses seeking to hedge against depreciation prefer the black market, where they can quickly exchange cedis for stable foreign currencies.

Growing confidence in black market operations

1. Reputation for consistency: Despite operating in an informal space, many black-market dealers build long-term relationships with their clients based on reliability and better deals over time. Some operators establish a strong network of repeat customers, ranging from traders to tourists to local businesses.

2. Ease of access: Black market operators are often located in high-traffic areas and can be contacted via phone or online messaging, making it easy for clients to transact anytime, anywhere. This level of convenience is hard for traditional banks to match.

3. Reduced paperwork and anonymity: Many clients are attracted to the black market because of the relative anonymity it offers. Unlike banks, which require detailed documentation for foreign exchange transactions, black market operators seldom request identification, making it easier for individuals who want to avoid formal scrutiny.

The black market for foreign exchange in Ghana has thrived due to its flexibility, ability to offer more competitive exchange rates and quick services, which appeal to a range of clients from businesses to individuals. 

The formal banking sector struggles due to regulatory constraints, liquidity shortages, and operational inefficiencies. These dynamics have cemented the underground market’s role as a key player in Ghana’s foreign currency transactions. 

While the Bank of Ghana and local banks try to stabilise the cedi and manage inflation, the black market continues to attract clients seeking better deals, faster service, and less bureaucracy.

Case for foreign currency sweeping call accounts

To address these challenges, Ghanaian banks could introduce sweeping foreign currency call accounts, offering a legal and regulated pathway for individuals and businesses to manage their foreign exchange needs. 

These accounts would allow customers to “sweep” their local currency holdings into foreign currency accounts automatically, based on predetermined triggers such as exchange rate movements or customer instructions. 

Unlike traditional foreign currency accounts, these would be more flexible and linked to the client’s primary accounts, providing easier access for both domestic and international transactions.

Benefits and challenges for customers

For customers, the primary benefit is flexibility. These accounts would allow individuals and businesses to convert their cedi holdings into foreign currency when the exchange rate is favourable, avoiding the need to engage with the black market. 

For example, a business that imports goods from Europe could maintain a euro balance in a sweeping call account, avoiding the last-minute rush to acquire foreign currency when payments are due.

Additionally, customers would benefit from increased security. Engaging with regulated banks rather than black market traders mitigates the risks associated with counterfeit currencies, fraud, and other illicit practices. 

Customers would also have the advantage of greater transparency, knowing that their transactions comply with international standards.

The primary challenge for customers would be the fees associated with these accounts. Banks may charge for currency conversion, account maintenance, or transfer fees, which could make these accounts less attractive compared to black market traders offering more competitive rates. 

Another concern might be liquidity: if the banking system cannot meet the high demand for foreign currency, customers could face delays in accessing their funds.

Benefits and challenges for banks and financial institutions

For banks, these accounts provide an opportunity to reclaim market share from the black market. As customers shift their foreign exchange activities from informal traders to formal institutions, banks will see an increase in deposits, foreign exchange transactions and overall customer engagement. 

This could strengthen banks’ balance sheets, improve their foreign currency reserves, and enhance their reputation.

In addition, offering sweeping call accounts could open the door for banks to provide more advanced financial products such as hedging instruments, foreign exchange contracts, and other treasury services that would be attractive to businesses engaged in international trade.

The challenge for banks lies in developing the technological infrastructure to support sweeping accounts. These accounts would require real-time monitoring of exchange rates, the ability to convert currencies instantaneously and automated systems to trigger currency sweeps based on customer preferences. 

This may require significant investment in both software development and cybersecurity measures.

Moreover, banks would need to comply with stringent anti-money laundering (AML) and know-your-customer (KYC) regulations to ensure that these accounts are not used for illicit activities such as money laundering or tax evasion.

Implications for regulator

For the Bank of Ghana, sweeping call accounts represent a powerful tool to bring foreign exchange transactions under regulatory oversight. 

By formalising more of the foreign exchange market, the BoG would have greater control over capital flows, helping to stabilise the cedi and reduce inflationary pressures. 

Furthermore, increased transparency in foreign currency transactions would enhance Ghana’s standing in the global financial system, potentially improving the country’s credit rating and making it easier to attract foreign investment.

The Bank of Ghana would need to establish a robust regulatory framework to govern these accounts. This would involve setting limits on foreign currency holdings, ensuring compliance with international financial standards, and monitoring transactions for signs of money laundering or capital flight. 

Additionally, the central bank would need to ensure that there is sufficient foreign currency liquidity within the banking system to meet customer demands.

Impact on Ghanaian economy

At the macroeconomic level, the introduction of foreign currency sweeping call accounts could help stabilise the Ghanaian cedi by reducing the influence of the black market on exchange rates. 

As more foreign currency transactions are conducted through formal channels, the Bank of Ghana would have greater control over the money supply, reducing speculative pressure on the cedi.

In addition, this initiative could enhance the competitiveness of Ghanaian businesses by reducing the transaction costs associated with foreign exchange. 

With easier access to foreign currencies, businesses could engage more effectively in international trade, boosting exports and supporting economic growth.

One potential downside is that if too much foreign currency is swept into these accounts, it could reduce the liquidity of the cedi in the domestic market, putting downward pressure on the currency. 

Additionally, the shift away from black market exchanges could disrupt informal sectors of the economy that rely on these transactions.

Impact on international trade and currency ecosystems

The introduction of sweeping call accounts could make Ghana a leader in currency management innovation, particularly among emerging markets. 

If successful, this system could serve as a model for other countries struggling with black market currency trading, boosting Ghana’s reputation in the international financial community.

For international trade, this initiative would provide greater confidence to foreign businesses and investors, knowing that Ghanaian companies have access to transparent and regulated foreign exchange channels.

The global financial ecosystem is highly interconnected, and Ghana’s sweeping call account system would need to integrate with international banking standards and systems. 

Ensuring seamless transfers between Ghanaian banks and their international counterparts will require significant coordination, as well as investment in technological infrastructure.

Operational feasibility and technological development

The operationalisation of sweeping foreign currency call accounts hinges on banks’ ability to develop advanced financial technologies. 

Real-time exchange rate monitoring, seamless integration with mobile banking platforms, and automated currency conversion processes would be essential. 

Banks must also invest in cybersecurity infrastructure to protect these accounts from fraud and hacking, especially given the potential for high-volume foreign exchange transactions.

Incorporating blockchain technology for transparency and secure transactions could be explored. Additionally, mobile applications could play a key role in allowing customers to manage their sweeping accounts remotely, further reducing reliance on black market traders.

Conclusion

While there are challenges, the introduction of sweeping foreign currency special purpose call accounts offers a promising path forward for Ghana to address the longstanding issue of black-market currency trading. 

By providing a legal, flexible and technologically advanced system for managing foreign currencies, Ghanaian banks and the Bank of Ghana could help stabilise the cedi, reduce inflation and enhance the country’s integration into the global financial system. 

With the right investments in technology and regulation, this initiative could position Ghana as a leader in currency innovation, setting an example for other emerging markets to follow.

The writer is the Vice President of Regent University College of Science and Technology.
sammylaatey@yahoo.com