Ghana has been advised to reconsider its 15-month foreign exchange reserve target. This target is currently depriving the nation of domestic capital investments. These investments are crucial for stimulating economic growth.
Dr. Dennis Nsafoah, a US-based Assistant Professor of Economics at Niagara University, made this recommendation. He suggests a reserve objective closer to the International Monetary Fund’s (IMF) estimated adequacy level of six months. Adding a prudential margin to this would still provide Ghana with substantial protection against external shocks. It would also free significant resources for productive domestic investment.
This advice comes as Ghana navigates its economic recovery and development agenda. The country has historically faced challenges with external vulnerabilities and the need for robust foreign exchange buffers. However, the current strategy of accumulating reserves far beyond international benchmarks raises questions about opportunity costs. These costs include foregone investments in critical sectors like energy and transport infrastructure.
Dr. Nsafoah presented his views in a paper titled “Why Is Ghana Cutting Capital Expenditure to Pursue Reserves Far Above the IMF’s Adequacy Benchmark?” He argued that the lesson from having too few reserves is not to accumulate the largest possible stock. Instead, Ghana should maintain an adequate buffer while pursuing credible fiscal policy and exchange-rate flexibility. A productive economy capable of continuously generating foreign exchange is also vital.
He also noted the political attraction of high reserves. They provide a visible indicator of economic strength. A government can easily announce that reserves have reached US$20 billion or 10 months of imports. Quantifying the long-run productivity gains from irrigation, electricity infrastructure, or agricultural roads is much harder. However, what is easily measured does not always produce the highest economic return.
Dr. Nsafoah, also a member of the Research Committee of Tesah Capital, believes Ghana does not need to choose between stability and development. He supports the Ghana Accelerated National Reserve Accumulation Policy (GANRAP). Its underlying model, building reserves from domestically generated gold rather than borrowed foreign currency, is preferable to past Eurobond-funded reserve accumulation. However, he stressed that the 15-month target itself should be reconsidered.
The implications of this advice are significant for Ghana’s economic policy. A shift in reserve strategy could unlock substantial funds for domestic capital projects. This could accelerate development in key areas like electricity infrastructure and roads. Decision-makers will need to weigh the benefits of higher reserves against the potential for increased domestic investment and economic growth. Markets will closely watch any policy adjustments regarding reserve targets and capital expenditure. This could influence investor confidence and the cedi’s stability.
Ghana's current foreign exchange reserves stood at GHS 68.4 billion (equivalent to $6.1 billion) at the end of 2023, covering 2.7 months of import cover. The proposed 15-month target would require a substantial increase, potentially tying up billions of dollars. Reallocating even a portion of these funds could significantly boost infrastructure development. For instance, the government's 2024 budget allocated GHS 1.5 billion for road infrastructure, a figure that could be augmented by a revised reserve strategy. The debate highlights the ongoing tension between macroeconomic stability and the urgent need for developmental spending in Ghana.