Monetary policy was major cause of 2025 cedi appreciation – US-based Monetary Economist – Life Pulse Daily

Introduction

In 2025, Ghana witnessed a remarkable turnaround in its foreign exchange market. The Ghanaian cedi, which had been under severe pressure, appreciated sharply from approximately GH¢15.80 per US dollar at the beginning of the year to around GH¢10.80 per dollar by May 2025. This represents an appreciation of roughly 31% in just a few months, a significant shift for any emerging market currency.

This dramatic move was not a random occurrence or solely the result of external factors. According to Dr. Dennis Nsafoah, a US-based monetary economist and Assistant Professor of Economics at Niagara University, New York, the primary driver behind this appreciation was the Bank of Ghana’s monetary policy.

This article delves into Dr. Nsafoah’s analysis, explaining the mechanisms through which monetary policy influenced the cedi’s value, the theoretical frameworks that support this view, and the implications for Ghana’s future exchange rate stability.

Key Points

Background

Ghana’s Exchange Rate History

Ghana has a history of exchange rate volatility. The cedi has experienced periods of both significant appreciation and severe depreciation. In the years leading up to 2025, the cedi had been under considerable pressure, depreciating significantly against the US dollar. This depreciation was driven by a combination of factors, including:

• High inflation rates
• Large fiscal deficits
• External shocks (e.g., commodity price fluctuations)
• Capital outflows
• Loss of confidence in the currency

The 2025 Turnaround

The shift in 2025 was dramatic. The cedi not only stopped depreciating but began to appreciate sharply. This turnaround occurred despite ongoing global economic uncertainties and challenges. Understanding the cause of this appreciation is crucial for policymakers, investors, and the general public.

Analysis

The Role of Monetary Policy

Dr. Nsafoah argues that the Bank of Ghana’s monetary policy was the decisive force behind the cedi’s appreciation. Specifically, he points to the contraction of cedi liquidity as the key mechanism.

What is Cedi Liquidity?

Cedi liquidity refers to the amount of cedis available in the banking system. This is largely determined by the level of reserves that banks hold at the Bank of Ghana. When the Bank of Ghana increases these reserves, it is effectively injecting liquidity into the system. When it reduces them, it is withdrawing liquidity.

How Liquidity Affects the Exchange Rate

When there is an abundance of cedis in the system (high liquidity), individuals and businesses have more cedis to spend. This can lead to increased demand for foreign currency (to buy imports, make investments abroad, etc.), which puts downward pressure on the cedi’s value (depreciation). Conversely, when liquidity is tight (low reserves), there is less cedi available for spending, which reduces demand for foreign currency and can lead to cedi appreciation.

Purchasing Power Parity (PPP)

Dr. Nsafoah emphasizes that in the long run, exchange rates are governed by Purchasing Power Parity (PPP). PPP is an economic theory that suggests that in the absence of transportation costs and trade barriers, identical goods should have the same price in different countries when expressed in the same currency.

How PPP Applies to Ghana

According to PPP, if inflation in Ghana falls relative to inflation in the United States, the cedi should appreciate. This is because lower inflation in Ghana means that Ghanaian goods become relatively cheaper compared to US goods, increasing demand for the cedi.

In 2025, Ghana experienced disinflation (a decrease in the rate of inflation). This disinflation, relative to US inflation, created conditions favorable for cedi appreciation, as predicted by PPP.

The Quantity Theory of Money

The Quantity Theory of Money is another fundamental economic principle that Dr. Nsafoah cites. This theory posits a direct relationship between the money supply and the price level in an economy. In its simplest form, it is often expressed as MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output.

Application to Exchange Rates

Under the Quantity Theory of Money, disinflation (a decrease in P) is achieved by reducing the growth of money in circulation (M). By tightening liquidity and reducing the growth of reserves, the Bank of Ghana was effectively reducing the money supply growth, which helped to bring down inflation. This disinflation, in turn, supported cedi appreciation.

The Timing of the Appreciation

Dr. Nsafoah notes that the sharp appreciation of the cedi in 2025 coincided precisely with a collapse in the growth rate of reserves held at the Bank of Ghana. This timing is not coincidental; it underscores the direct link between monetary policy and exchange rate movements.

The contraction of cedi liquidity reduced private demand for foreign exchange, which reinforced the disinflationary process and drove the observed shift from cedi depreciation to appreciation.

Practical Advice

For Policymakers

Monitor Reserve Growth: The growth rate of reserves held at the Bank of Ghana is a critical indicator of future exchange rate stability. Policymakers should closely monitor this variable and be prepared to adjust monetary policy accordingly.

Maintain Credibility: The success of monetary policy in stabilizing the exchange rate depends on the central bank’s credibility. Clear communication and consistent actions are essential to anchor expectations.

Coordinate with Fiscal Policy: While monetary policy is powerful, it works best when coordinated with sound fiscal policy. Reducing fiscal deficits can help to reduce pressure on the exchange rate.

For Investors

Watch Monetary Indicators: Investors should pay close attention to monetary policy announcements and reserve data from the Bank of Ghana. These indicators can provide early warning signals of potential exchange rate movements.

Consider Long-Term Trends: While short-term fluctuations are inevitable, the long-term trend in the cedi’s value is likely to be influenced by the relative inflation rates between Ghana and its trading partners.

Diversify Risk: Given the potential for volatility, investors should consider hedging strategies to manage currency risk.

For the General Public

Understand the Link: It’s important for the public to understand that the value of the cedi is influenced by monetary policy. Support for sound monetary policy can contribute to exchange rate stability.

Plan Accordingly: Businesses and individuals engaged in foreign trade should be aware of the factors that influence the exchange rate and plan accordingly.

FAQ

Conclusion

The 2025 appreciation of the Ghanaian cedi was a significant event in the country’s economic history. While multiple factors can influence exchange rates, Dr. Dennis Nsafoah’s analysis highlights the central role of monetary policy. By contracting cedi liquidity and anchoring inflation expectations, the Bank of Ghana was able to stabilize the exchange rate and even achieve appreciation.

The theoretical frameworks of Purchasing Power Parity and the Quantity Theory of Money provide a robust explanation for these movements. They underscore the long-run relationship between money supply, inflation, and exchange rates.

Looking forward, the growth rate of reserves held at the Bank of Ghana will remain a critical indicator of exchange rate stability. Policymakers, investors, and the public should pay close attention to this variable. While external shocks and other factors will always play a role, sound monetary policy remains the most powerful tool for maintaining a stable and credible currency.

The experience of 2025 delivers a powerful message: exchange rate stability is achievable through disciplined monetary policy. It also serves as a warning: a return to rapid reserve growth could signal a resurgence of cedi depreciation. The lessons of 2025 should guide future policy decisions to ensure lasting macroeconomic stability for Ghana.