Cedi Strength Reflects Tight Liquidity, Not Dollar Sales, Economist Says
The strength of Ghana’s cedi is being driven more by tighter domestic liquidity conditions than by the Bank of Ghana’s foreign exchange sales, according to Dennis Nsafoah, an Associate Professor of Economics at Niagara University in the United States of America.
Market commentary in Ghana frequently attributes movements in the exchange rate to the central bank “supplying dollars” to the foreign exchange market. Nsafoah argues that the phrase creates a misleading impression of how the exchange rate actually responds to policy actions.
“The Bank of Ghana does not create U.S. dollars. It creates cedis,” Nsafoah explains. When the central bank sells dollars from its reserves, it is not increasing the true supply of foreign currency in the economy. Instead, it transfers existing dollars to commercial banks and absorbs cedis in return.
Those cedis are effectively removed from circulation, reducing liquidity in the banking system. With fewer cedis available, businesses and financial institutions have less capacity to demand additional foreign currency, easing pressure on the dollar and supporting the local unit.
According to Nsafoah, this mechanism is often overlooked because public attention tends to focus on the visible act of dollar sales rather than on the contraction of cedi liquidity that accompanies them. “The decisive factor is not the supply of dollars, but the supply of cedis,” he notes.
Data from 2025 underscore the point. Growth in reserve money, a key measure of liquidity, slowed sharply during the year. After expanding at more than 60 percent in March, reserve money growth declined steadily and turned negative by September. Broad money growth, measured by M2+, followed a similar path, falling from above 30 percent earlier in the year to single-digit growth by October.
As liquidity conditions tightened, the cedi strengthened markedly. The exchange rate appreciated from about 14.1 cedis per dollar in April to a range of roughly 10.5 to 11.4 between August and October, representing gains of between 30 and 40 percent.
“The timing was not a coincidence,” Nsafoah says. “As cedi liquidity was squeezed, demand for dollars eased, and the exchange rate responded.”
The episode highlights a broader lesson for Ghana’s exchange-rate management. Currency stability, Nsafoah argues, depends far more on domestic monetary conditions than on how much foreign exchange the central bank can inject into the market at any given time.
When liquidity expands rapidly, pressure on the exchange rate tends to build. When liquidity is restrained, the cedi firms. This pattern, he says, has been consistent over time and explains much of Ghana’s exchange-rate volatility.
The continued use of the phrase “BoG supplies dollars” persists because it reflects what traders observe during foreign exchange auctions. But it misses the underlying policy action that matters most: the withdrawal of cedis from the financial system.
For policymakers, Nsafoah says the distinction is critical. Sustaining recent gains in the cedi will require disciplined liquidity management and consistency in monetary policy, rather than reliance on periodic foreign exchange interventions.
“The central bank strengthens the cedi by withdrawing cedis, not by creating dollars,” he concludes. “Understanding that distinction leads to clearer policy debates and better economic outcomes.”
