Introduce an exchange rate policy to reduce pressure on the Cedi – AfDB tells Bank of Ghana

The Bank of Ghana (BoG) has been urged to introduce an exchange rate policy to reduce pressure on the Cedi exchange rate.

The African Development Bank (AfDB) report titled ‘Driving Ghana’s Transformation: The reform of the global financial architecture’ asked the central bank to allow the Cedi to freely adjust as much as possible based on changes in other macroeconomic fundamentals.

The report argues that attempting to resist movements based on fundamentals could undermine growth.

This suggestion forms part of the short-term measures that should be introduced as part of dealing with the challenges in the economy, according to the report.

The report explained that Ghana’s macroeconomic context is expected to gradually stabilize, with favorable growth prospects, decreasing inflation rates, more stable exchange rates and better controlled budget deficits leading to a decline in the debt ratio.

But the country must continue to consolidate the macroeconomic framework by combining shortterm and long-term economic policy measures, as well as implementing structural reforms to enhance the structural transformation, it said.

In the short term, it suggested “Continue the fight against inflation with a restrictive monetary policy and measures to stimulate supply. The Bank of Ghana should maintain its tightening monetary policy stance.

“It should also maintain its monetary policy rate high enough to bring inflation back to its target zone and anchor inflation expectations. The Government should remove factors preventing domestic supply from responding to rising prices and boost labor productivity through investments in infrastructure and human capital.

“Introduce an exchange rate policy to reduce pressure on the Cedi exchange rate. The Bank of Ghana should allow the Cedi to freely adjust as much as possible based on changes in other macroeconomic fundamentals, because attempting to resist movements based on fundamentals could undermine growth.”

Regarding the debt situation which stood at GH¢742 billion, representing US$50.9 billion as of June 2024, the report suggested to the managers of the economy to “Reduce the debt burden to bring the debt ratio to a sustainable level.”

“Ghana must continue its fiscal consolidation efforts by mobilizing more domestic resources (broaden the tax base by introducing new taxes such as the property tax and exploring tax loopholes, and improve the efficiency of tax administration) and rationalizing non-productive expenditures and completing the external debt restructuring process while improving statistics and strengthening debt management capabilities” it added.

On the medium to long-term policies, the AfDB report called for improvement in the business environment to attract more private investment (domestic and foreign).

“Ghana should undertake/accelerate structural reforms aimed at simplifying business regulation (SEZ policy, low on PPP) and removing major private initiative constraints such as corruption, the tax system, the price of land and electricity, and credit access.

“Mobilize more domestic resources to finance structural transformation. Ghana should pursue reforms aimed at improving economic governance by effectively combating corruption, illicit financial flows and tax evasion and improving the efficiency of tax administration. To this end, Ghana could, for example, integrate the Organization for Economic Co-operation and Development, OECD’s inclusive framework for Domestic tax Base Erosion and Profit Shifting (BEPS) and strengthen the digitalization of tax administration as well as control capacities (reducing informal sector size).

“Improve resource allocation to accelerate structural transformation for inclusive and sustainable growth. Ghana should continue strengthen budgetary allocation in favor of sectors driving structural transformation, such as education and energy, where needs are greater, by investing more in human capital development, quality infrastructure and Research and Development (R&D).”

The post Introduce an exchange rate policy to reduce pressure on the Cedi – AfDB tells Bank of Ghana first appeared on 3News.

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