How Ghana’s high exchange rate contributes to economic challenges

Ghana's economy, like many others in Africa, is heavily reliant on imports, particularly gasoline, machinery, and industrial raw materials.  

The country also has a sizable amount of foreign debt that must be serviced in foreign currencies. Over the last decade, the Ghanaian cedi has suffered significant devaluation versus international currencies, particularly the US dollar. 

Several reasons, including trade imbalances, capital flight, and global commodity price volatility, have contributed to the country's depreciation, reducing its foreign exchange reserves. 

As of 2024, the exchange rate crisis had only worsened, with the cedi depreciating further. 

The high exchange rate has boosted expenses for businesses and consumers alike, putting extra pressure on an economy that is already struggling.  

This context sets the stage for understanding the numerous ways in which Ghana's high exchange rate contributes to its economic issues.

Rising business costs 

The high exchange rate raises the expense of conducting business in Ghana. Companies that rely on imported raw materials or machinery are obliged to pay more since the cedi is weaker. This is especially visible in industries such as manufacturing, where production costs have grown dramatically. 

For example, a local furniture business that imports wood and machinery from abroad would suffer huge cost increases, forcing it to raise prices or absorb the costs, both of which are harmful. 

Raising prices might result in customer loss, whereas absorbing costs would lower profitability, potentially leading to layoffs or even business closures. 

Worsening Public Debt Situation

Ghana's national debt is predominantly denominated in foreign currencies, particularly the US dollar. As the cedi weakens, the cost of servicing this debt rises, putting extra strain on the government's budget. 

In 2024, Ghana's government found itself paying a higher portion of its budget on debt payment, leaving less money available for crucial infrastructure, education, and healthcare projects. 

This has resulted in cuts to public spending, stifling economic growth and progress. 

The high exchange rate exacerbates an already perilous financial situation, making it more difficult for the government to manage its budget and meet the population's demands.

Effects on foreign investment

A volatile and high currency rate might hinder foreign investment, which is critical to Ghana's economic development. Investors are frequently reluctant of putting money into an economy when the local currency is quickly depreciating, as this increases the chance that their assets may lose value. 

Ghana has suffered a fall in foreign direct investment (FDI) in recent years, which can be attributed to concerns over the cedi's stability. 

Potential investors in the real estate or industrial sectors, for example, may prefer to invest in more stable economies, resulting in a loss of capital inflows that could have boosted economic activity and job creation.

Social and political implications

The economic issues posed by the high exchange rate have serious social and political ramifications. 

As the cost of living rises and businesses struggle, public anger increases. This can raise pressure on the administration, as evidenced by recent rallies and demonstrations about economic conditions. 

The administration may also find difficulties adopting policies targeted at economic stabilization, as unpopular measures like austerity can exacerbate discontent.

For example, fuel subsidy cuts or tax increases, which are frequently required to balance budgets in the face of high debt servicing costs, can cause widespread unhappiness and instability.

Challenges for small and medium-sized enterprises (SMEs)

Small and medium-sized businesses are more exposed to exchange rate swings. Many Ghanaian SMEs rely on imported commodities, either for resale or as production inputs. 

The high exchange rate raises business costs, which they may struggle to pass on to customers due to market competition and price sensitivity. 

As the cedi depreciates, a tiny electronics retailer that imports products from China may find its profit margins squeezed. 

If these enterprises are unable to manage the rising costs, they may be compelled to shrink or even close, resulting in job losses and decreased economic activity.

Conclusion

The high exchange rate in Ghana is more than just a financial statistic; it is a significant contributor to the economic challenges facing the country. 

From rising inflation and the increased cost of doing business to worsening public debt and declining foreign investment, the impacts are far-reaching and deeply felt across society. 

The practical examples outlined in this article illustrate how the depreciation of the cedi exacerbates existing problems and creates new ones, highlighting the urgent need for effective economic policies to stabilize the currency and mitigate its negative effects. 

Dr Andrews Ayiku, Lecturer/SME Industry Coach, Coordinator (MBA Impact Entrepreneurship and Innovation), University of Professional Studies Accra

ayiku.andrews@upsamail.edu.gh
IG: andy_ayiku
@AndrewsAyiku
F: Andyayiku