Implementing de-dollarization strategy by BoG

By Andrews AYIKU (Dr)

Dollarization is the use of the US dollar in addition to or instead of the local currency (Ghana Cedi).

This has long been entrenched in the economy and a lot of businesses, even those which are SMEs, dollar nominate their goods and services due to past volatility in respect of the cedi and the need to hedge against currency risk and protect profit margin.

But by dollarizing a national currency, a country may render its currency, and potentially its monetary policy, weaker, and complicate the management of its economy.

Given these risks, the Bank of Ghana has reinforced its drive to course the economy to be more Ghana cedi centric through a de-dollarization strategy.

In this article we look at the heart of this strategy, its upside and downside, and the how SMEs, policymakers and stakeholders can and should plan to prosper in this new paradigm.

Benefits of the De-dollarization Strategy for SMEs

Enhanced Monetary Stability and Predictability

The visible reduction in dollarization props up the cedi thereby enabling the BoG to implement sound monetary policy aimed at addressing inflation and price stability. This means less volatility and a more predictable cost environment to help SMEs plan financially and minimize any foreign exchange risks against dollar fluctuations.

Less Expensive Transfers and Easier Record Keeping

The fact that you can do business for the most part in the local currency means that SMEs do not need to waste money on expensive currency conversion. This minimizes bookkeeping and financial reporting burden, particularly for small firms that do not have complex accounting systems, thus reducing costs of compliance and increasing efficiency.

Increased Access to Local Finance

Managed transition from dollarization will better incentivizes cedi based financial products thus has potential to broaden the market of loans, savings and insurance products available for the SME sector. This ability to localize finance can free credit that has been shackled to the dollar for so long, allowing for the creation and growth of businesses.

Challenge Signaling & Collective Response

Ghana retains more in forex as reduced dependence on foreign currency bolsters fiscal space, allowing investment in local infra and provision of social services. A better economy sets the backdrop for SMEs to sustainably operate and expand.

Demerits of the De-dollarization Strategy for SMEs

Exposure to Currency Volatility

As the economy transitions, many SMEs are used to dollar pricing, and they may experience increased exposure to cedi depreciation risks. This unpredictability may increase input prices, squeeze profit margins, and dissuade investment until the cedi is whole.

Adjustment Costs and Operational Challenges

It takes time and resources to change pricing models, retrain staff, and realign contracts to the cedi. Some SMEs, especially those whose business involves higher levels of import or export activity, which is exposure to the exchange rate, may find it more difficult to manage under these changes.

Risk of Reduced Competitiveness

This de-dollarization can, in a short-term sense, stall human capital or imperil trading arrangements from business-to-business, which is vital sign to honor for multinational SMEs. That may limit growth and market access while in transition.

Potential for Regulatory Enforcement Tensions

If viewed as punitive or overly heavy-handed which consultation can help reduce the strict policing would likely alienate business owners. An inadequate provision of support and information to host the strategy may make the uptake of the strategy by SMEs ineffective and consequently, citizens and policy goals undermined by the resistance to the strategy.

My Advice?

Comprehensive Sensitization and Capacity Building

De-dollarization needs to be widely, uniformly communicated with SMEs on the why and the value. Equipping citizens with education on currency risk management, financial literacy, and the use of digital payment technology like the e-Cedi will smoothen the switch and boost confidence.

Phased and Flexible Enforcement

Gradual implementation of legal tender laws makes it easier for businesses to adjust in an orderly manner. Some goodwill and togetherness will come from early adopter bonuses and permissive transition zones.

Strengthening Cedi and the Financial Ecosystem

Cedi stability will be supported by continued monetary restraint, and the support of fiscal reforms. We must make sure the extremely essential reliable digital payments infrastructure is available on the ground, and enhance affordable credit access and availability, particularly for SMEs so businesses can perform better in a cedi economy.

Multi-stakeholder Collaboration

To realize this vision in individual informal sectors, almost all actors mentioned such as BoG, government agencies, and businessman including big giants in industry sections and associations of small to medium-sized enterprises (SME) need to work in coordination because it is not only one but entire layer of structural actors needs to be participate by working on draft policies such as de-dollarization plans, targets and mechanisms.

Conclusion

The de-dollarization strategy put forth by the Bank of Ghana exudes a transformative movement in shuffling Ghana’s economy to be able to stand on its own feet to create a well-rounded, inclusive space for SMEs. Although it is quite challenging, particularly in the transitional phases, long-term viability of stable currency, cost reduction, and financial sovereignty are extremely strong incentives.

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

[email protected]

IG: andy_ayiku

@AndrewsAyiku

F: Andyayiku

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