Understanding the change price and Bank of Ghana’s position – Life Pulse Daily

Introduction

When headlines report that the Bank of Ghana (BoG) “supplies dollars” to influence the exchange rate, many readers picture a central bank flooding the market with U.S. dollars to stabilize the Ghanaian cedi. This image is both common and misleading. In reality, the Bank of Ghana does not create U.S. dollars; it creates cedis. The true driver of exchange-rate movements in Ghana is not the supply of foreign currency but the control of domestic liquidity. This article explains the actual mechanism behind the cedi’s value, using recent data from 2025 to illustrate how tightening cedi liquidity, not dollar injections, led to the cedi’s significant appreciation. By the end, you will understand why the phrase “BoG supplies dollars” obscures the real story and how this knowledge can improve analysis and policy discussions.

Key Points

Background

How Exchange Rates Work in Ghana

In a floating exchange-rate system like Ghana’s, the value of the cedi is determined by supply and demand in the foreign-exchange market. Commercial banks, businesses, and individuals demand foreign currency—mainly U.S. dollars—for imports, debt payments, and investments. The supply comes from export earnings, foreign investment, and the central bank’s reserves.

The Role of the Bank of Ghana

The Bank of Ghana is the country’s monetary authority. It holds foreign-exchange reserves and can intervene in the market by selling or buying U.S. dollars. However, its ability to create dollars is zero. Its power lies in managing the domestic money supply. When it sells dollars, it receives cedis in return. Those cedis are withdrawn from the banking system, reducing the amount of money available for spending and for demanding foreign exchange.

Common Misconception: “Supplying Dollars”

The phrase “BoG supplies dollars” suggests that the central bank increases the total amount of U.S. dollars in the economy. This is incorrect. The BoG merely reallocates existing reserves. The real effect is a reduction in cedi liquidity, which eases pressure on the exchange rate by lowering demand for dollars.

Analysis

The Liquidity Mechanism Explained

The exchange rate is a price: how many cedis it takes to buy one U.S. dollar. Prices move when supply or demand changes. In Ghana, the supply of dollars is relatively fixed in the short term, determined by exports and capital flows. What the BoG can control is the demand side, by influencing how many cedis are available to purchase those dollars.

When the BoG conducts an FX auction and sells dollars to commercial banks, it credits those banks with foreign currency and debits their cedi accounts. The net result is a decrease in the amount of cedis in the system. With less cedi liquidity, banks and their customers have less capacity to bid for dollars. Demand for dollars falls, and the exchange rate improves (the cedi appreciates).

2025 Data: Evidence of the Liquidity Effect

In 2025, the Bank of Ghana implemented a tight monetary stance. Key monetary aggregates show a dramatic slowdown:

• Reserve money growth, which was over 60% year-on-year in March, turned negative by September.
• Broad money supply (M2+) growth fell from above 30% early in the year to single digits by October.

During the same period, the cedi appreciated significantly. The exchange rate moved from about 14.1 cedis per dollar in April to a range of 10.5–11.4 between August and October. This represents an appreciation of roughly 30% to 40%. The timing is not coincidental. As cedi liquidity contracted, demand for dollars weakened, allowing the cedi to strengthen.

Why the Misconception Persists

The focus on dollar supply persists because it is visible. When the BoG holds an auction, reporters see dollars being sold. The immediate narrative is that more dollars are entering the market. The less visible but more important part is the withdrawal of cedis. This accounting identity—selling dollars equals withdrawing cedis—is often overlooked in public discourse.

Implications for Policy and Analysis

Understanding that exchange-rate stability is driven by domestic liquidity has several implications:

• Monetary policy should prioritize controlling money supply growth to support the cedi.
• Foreign-exchange interventions are effective only when paired with liquidity management.
• Long-term exchange-rate stability requires fiscal discipline to avoid excessive domestic money creation.

Practical Advice

For Investors and Businesses

If you are involved in foreign-exchange transactions in Ghana, focus on domestic monetary trends, not just on the level of foreign reserves. Watch indicators like reserve money growth and broad money supply. When these are tightening, expect less pressure on the cedi. When they expand rapidly, anticipate potential depreciation pressure.

For Policymakers and Analysts

Shift the narrative from “dollar supply” to “liquidity management.” Use precise language when discussing interventions. Instead of saying the BoG “supplies dollars,” say it “withdraws cedis” or “reduces liquidity.” This leads to more accurate analysis and better policy decisions.

For the General Public

When you hear reports about the BoG selling dollars, remember that the real action is in the cedis being taken out of circulation. The cedi’s strength comes from scarcity of domestic money, not abundance of foreign currency.

FAQ

Conclusion

The phrase “BoG supplies dollars” is a convenient shorthand, but it misrepresents how the exchange rate actually works in Ghana. The Bank of Ghana does not strengthen the cedi by increasing the supply of U.S. dollars. It strengthens the cedi by reducing the supply of cedis. The appreciation observed in 2025 was a direct result of tight liquidity, not abundant dollar reserves. Recognizing this mechanism leads to clearer analysis, more effective policy, and better-informed public discussion. The next time you read about foreign-exchange intervention, look beyond the dollars and focus on the cedis being withdrawn. That is where the real story lies.