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Renowned economist and Director of Research at the Institute of Economic Affairs (IEA), Dr. John Kwabena Kwakye, has explained that his suggestion of dollarisation in response to the depreciation of the cedi was born out of desperation and can only be a short-term measure.
A former member of the Bank of Ghana’s Monetary Policy Committee said in a social media post that official dollarisation should be implemented given the current rate at which the cedi is depreciating.
But in clarifying the statement, Dr Kwakki stressed that the move cannot be a long-term one.
“To be honest, I think I am proposing this out of some desperation. People are asking for short-term measures. What do we do now? It’s like putting out a fire. So, I am not proposing this as a long-term solution,” he told Starr News’ Edem Kojo.
“What I would say is that given where the exchange rate is going, it doesn’t seem like our authorities have a solution to the problem. So, the action I think would be probably is that we adopt the dollar,” he further clarified.
In explaining how dollarisation could be pursued, Dr Kwakye suggested three options that the government could explore.
“There are probably three ways to do this. The first is what we call unilateral dollarisation. That way, we don’t even have to agree with the United States. We would sit down and say we want to adopt the dollar as our currency. So we look at how much the Reserve Bank of Ghana has, some of it is gold, some of it is foreign reserves, and so on. So we can let them keep some of it and the rest we convert it into dollars and say to Ghanaians, trade your cedis for dollars,” he explained.
However, he reiterated that the move was only a stopgap measure pending resolution of the underlying structural issues.
“This will last for a few years, maybe two years or so. It will not replace the underlying structural weaknesses; we should continue to take steps to address those. But for now, it’s like we are stabilizing the system,” he stressed.
According to him, the second approach is to adopt the US dollar across the board.
“The second way is to approach the United States and say we want to adopt your currency. Again, they will say, well, what reserves do you have in exchange? So, you also exchange your reserves and then accept their currency,” he said.
Dr Kwakki believes that a more sustainable approach is to retain the cedi as the official currency while providing full foreign exchange backing for the cedi through the introduction of a currency board.
“The third way is to maintain our currency. But we ask the central bank to make sure they have enough foreign exchange to back it. So we call it a currency board. A currency board means you have your own currency but every cedi is fully backed by foreign exchange. So, in this case, the cedi will not depreciate,” he explained.
Dr Kwakye added that strict conditions were needed for its successful implementation, however.
“It comes with very strict terms that the currency board does not lend to the government. Because lending to the government would also create excess liquidity which would further depreciate the currency. So, it brings some kind of restriction,” he concluded.
The cedi has depreciated by about 14% against the dollar since the beginning of the year and is selling for 15 Ghanaian cedi to the dollar in some retail outlets.
source: starrfm.com.gh
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