Ghana should reconsider its goal of accumulating foreign exchange reserves equivalent to 15 months of imports. Instead, the nation should direct some of these resources towards critical infrastructure projects. This is according to US-based economist Dennis Nsafoah, an Assistant Professor of Economics at Niagara University.
Dr. Nsafoah's intervention reopens a significant debate about balancing financial security with investment-led growth. He acknowledges that rebuilding Ghana’s external buffers is crucial after the recent economic crisis. However, he questions whether pushing reserves significantly beyond conventional adequacy levels is the most productive use of scarce national resources, given Ghana's substantial infrastructure deficits.
This argument centers on the Ghana Accelerated National Reserve Accumulation Policy (GANRAP). Under GANRAP, authorities aim to build a much stronger stock of foreign exchange assets. Dr. Nsafoah, a member of the Research Committee of Tesah Capital, challenges the 15-month import-cover target in his paper, “Why Is Ghana Cutting Capital Expenditure to Pursue Reserves Far Above the IMF’s Adequacy Benchmark?” He asks if this target strikes the right balance between protection against shocks and the country’s development needs.
“The correct lesson is that Ghana should maintain an an adequate buffer while pursuing credible fiscal policy, exchange-rate flexibility and a productive economy capable of continuously generating foreign exchange,” Dr. Nsafoah stated. This perspective confronts policymakers with a complicated trade-off in Ghana’s post-crisis recovery. The 2022 economic crisis demonstrated the dangers of weak reserves, declining investor confidence, and restricted capital market access.
Foreign exchange reserves are valuable because they provide insurance against such moments. They help the Bank of Ghana meet external obligations and support confidence in the Ghana cedi. Reserves also provide a cushion when commodity earnings, capital inflows, or access to international financing suddenly decline. However, this economic insurance comes at a cost.
Every additional dollar held in liquid reserve assets is a dollar that cannot finance electricity transmission, irrigation schemes, or transport links. These investments are capable of increasing Ghana’s productive capacity. This opportunity cost is central to Dr. Nsafoah’s argument. If roughly six months of import cover, plus an additional prudential margin, offers adequate protection, policymakers must assess the economic benefit of moving towards 15 months.
The answer cannot be determined by reserve size alone. The relevant comparison is between the marginal security gained from each additional dollar held and the potential economic return. This return comes from using that dollar to remove a binding constraint on production. Ghana faces substantial constraints, including weaknesses in electricity transmission and distribution, which raise business costs. Poor roads restrict trade and agricultural access to markets. Inadequate irrigation leaves food production heavily exposed to rainfall variability.
Investing in irrigation, for example, could increase agricultural productivity and improve food security. This could also reduce the foreign exchange spent importing food. Better feeder and commercial roads could reduce post-harvest losses and transport costs. They would also improve producers' ability to reach domestic and export markets. The opportunity cost of exceptionally large reserves extends beyond foregone government expenditure. It includes output that might not be produced, jobs that might not be created, and future foreign exchange earnings that productive infrastructure could otherwise generate.
A powerful counterargument exists, however. Ghana has recently emerged from debt distress, severe exchange-rate pressure, and exclusion from international capital markets. Conventional reserve benchmarks may not fully capture the vulnerabilities of an economy with this recent history. A much larger buffer could reduce perceptions of currency risk. It could also provide the central bank with more room to absorb external shocks without aggressive interest rate increases or disruptive foreign exchange shortages. Investors may also value the credibility created by reserves that are clearly more than sufficient to meet near-term external obligations. The policy question is therefore complex.