Dr John Kwakye, Director of Research, IEA
The Institute of Economic Affairs (IEA) has advised the Bank of Ghana (BoG) to consider implementing a currency board in place of the existing central bank system.
According to the IEA, this proposal, if adopted, would ensure that the Ghanaian Cedi is maintained as legal tender, meaning that the currency board would ensure that Cedis in circulation are fully backed by foreign exchange (Forex).
On Monday, May 20, the IEA released a statement proposing measures the government could implement to stabilize the devaluing Cedi. Principal among the proposed measures is that the currency board should not lend to the government or banks, effectively replacing the central bank system with a currency board.
"An alternative to full dollarization is to adopt a currency board system in place of the central bank system. In that case, the Cedi would be maintained as legal tender. However, the currency board would ensure that Cedis in circulation are fully backed by foreign exchange. The Cedi would also be pegged to the dollar at a fixed rate. Further, the currency board would not lend to the government or banks.
"With these conditions in place, Cedi depreciation and inflation would be minimized. However, the currency board has limitations, including the potential loss of independent monetary policy and the loss of the lender-of-last-resort function."
The IEA stated that stabilizing the Cedi is a complex task, requiring concerted actions to achieve this challenging goal.
"Some of the measures may reinforce others while some may preclude others. We are proposing them for consideration by our economic managers and to prompt debate on what is obviously one of the most important national challenges.
"We do not believe that stabilizing the Cedi is rocket science. We only need to take concerted actions to achieve that ever-elusive goal. Not acting while the Cedi continues to bleed is not an option!"
EAN/MA
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