Billions in power debt prompted brief foreign currency echange force – BoG Governor – Life Pulse Daily

Introduction

The interplay between national economic policies and global market dynamics can sometimes lead to unexpected interventions. This was recently highlighted when the Governor of the Bank of Ghana (BoG), Dr. Johnson Asiama Pandit, clarified the Bank’s role in stabilizing the foreign exchange (FX) market amid surging power sector debt and investor uncertainty. The Bank of Ghana’s strategic measures—though framed as temporary—offer critical insights into balancing fiscal pressures, currency stability, and investor confidence in emerging economies. This article dissects the crisis, the Bank’s response, and lessons for stakeholders navigating similar challenges.

Analysis: The Triggers Behind the Foreign Exchange Intervention

Dr. Pandit’s remarks at the IMF/World Bank Spring Meetings painted a picture of a dual crisis:

Power Sector Debt and Its Ripple Effects

Massive arrears owed to Independent Power Producers (IPPs) in the energy sector created urgent obligations. These unpaid bills, totaling billions of dollars, strained the Bank’s foreign currency liquidity as domestic entities scrambled to settle debts abroad. Unlike traditional venture capital interventions—where central banks inject funds to stabilize the market—the BoG’s approach focused on targeted liquidity support to address specific liabilities rather than blanket market manipulation.

Remittance Declines and Currency Preference

Remittances from Ghanaian expatriates, which historically inject over $6 billion annually into the cedi’s economy, dipped during this period. This loss of inflows coincided with a preference for foreign currency transactions among domestic investors, triggering outflows as holders liquidated bonds and assets. The Central Bank had to step in to prevent systemic liquidity crunches.

Market Volatility and Policy Misconceptions

The Bank faced criticism from analysts who misinterpreted its interventions as overt market manipulation. Dr. Pandit clarified that the BoG’s actions aimed to mitigate volatility, not fund the market. By prioritizing timely payments to IPPs and managing bondholder expectations, the Bank sought to “freeze” speculative pressures without flooding the market.

Summary: BoG’s Strategic Response to Dual Pressures

The Bank of Ghana’s intervention between July and August 2025 was a calibrated response to two interconnected challenges: settling power sector arrears and counteracting currency preference-driven outflows. Key actions included:

• Lump-sum foreign currency payments to IPPs to clear billions in debt.
• Guidance for foreign currency inflows through commercial banks to stabilize interbank liquidity.
• Strategic liquidity injections amounting to $150 million, which temporarily shored up market confidence.

Crucially, the Bank emphasized that its role was regulatory rather than fiscal, avoiding direct funding of the sector. Post-intervention, the interbank FX market began recovering, signaling restored investor trust.

Key Points: Decoding the Central Bank’s Strategy

1. Targeted Liquidity Support Over General Intervention

Contrary to allegations of indiscriminate market support, the BoG directed aid specifically toward power debt repayment. This focused approach minimized broader market distortions while addressing immediate obligations.

2. Impact of Remittance Shortfalls

The decline in remittances—which contribute billions in FX annually—exacerbated liquidity strains. The Central Bank had to compensate for this gap during its intervention phase.

3. Guidance for Commodity Exporters

Directing oil and mineral exporters (excluding gold) to use commercial banks for foreign currency transactions aimed to reduce black-market intermediation and enhance transparency.

4. Gradual Market Recovery

By October 2025, the interbank market’s rebound—with $90 million of a $150 million liquidity injection absorbed—demonstrated the intervention’s efficacy without prolonged dependency.

Practical Advice for Stakeholders

For Energy Sector Actors

• Accelerate FX settlement timelines to avoid triggering liquidity crises.
• Engage in forward contracts to hedge against currency fluctuations.

For Investors:

• Monitor BoG directives to align investment strategies with emerging FX rules.
• Diversify revenue streams to mitigate local currency risks.

For Policymakers:

• Strengthen remittance corridors to insulate against global FX shocks.
• Enhance cross-sectoral coordination to preempt debt accumulation.

Points of Caution: Navigating Risks and Missteps

Over-Intervening Could Fuel Dependence

Prolonged FX support risks creating moral hazard, where investors expect perpetual liquidity. The BoG’s phased exit ($60 million reserves added recently) exemplifies a move toward market self-reliance.

Transparency in Debt Management

Public disclosures on power sector arrears could deter speculative trading. While the BoG withheld specifics, proactive communication might preempt rumors.

Black Market Risks Persist

Even with improved liquidity, illicit forex networks may thrive without stricter enforcement mechanisms. The BoG’s reliance on commercial banks remains a work in progress.

Comparison: BoG’s Approach vs. Global Precedents

Contrasting the Bank of Ghana’s strategy with interventions elsewhere highlights:

IMF vs. Central Bank Roles

While the IMF typically imposes structural reforms during balance-of-payments crises, the BoG opted for self-led liquidity management, reflecting Ghana’s regulatory autonomy under existing policy frameworks.

Cedi vs. Nigeria’s FX Era

Ghana’s relative currency stability—unlike Nigeria’s prolonged naira collapse—shows the cost of timely policy adjustments. However, both nations grapple with balancing domestic liquidity against external pressures.

Legal Implications: Compliance and Regulatory Frameworks

The Bank’s intervention adhered to Ghana’s Foreign Exchange Act, which mandates that central banks act as lenders of last resort without directly financing fiscal deficits. However, scrutiny exists over whether lump-sum payments to IPPs should fall under monetary policy mandates or require legislative backing. Critics argue that clearer statutory authority could prevent overreach in similar scenarios.

Conclusion

The Bank of Ghana’s handling of its 2025 FX crisis underscores the delicate balance required to stabilize economies amid fiscal shocks. By addressing power debt while avoiding market distortions, Dr. Pandit’s team demonstrated that targeted interventions can restore confidence without undermining macroeconomic stability. For Ghana and similar economies, the lesson is clear: proactivity, transparency, and market-aware policies are essential.

FAQ: Common Questions About BoG’s FX Intervention

Why did the BoG intervene in the FX market?

To settle power sector debts and counter liquidity outflows caused by currency preference, ensuring sectors like energy could operate without FX hurdles.

Is the Central Bank still involved in market operations?

As of October 2025, the BoG’s support has diminished, signaling a shift to supervisory oversight. The interbank market’s resilience indicates reduced dependency.

How does this affect local businesses?

Improved liquidity should lower transaction costs and reduce reliance on foreign currency hoarding, benefiting SMEs reliant on imports.