A common belief held among economic and financial pundits is, inflation has strong influence on the value of financial assets. Stated differently, a strong relationship could be established between inflation and the value of financial assets in the global financial market. However, inflation occurs when there is a general increase in price levels of goods and services over a given period of time. The increase in price levels may be attributed to varied underlying factors, including excessive money in the hands of the general public relative to the supply of goods and services within the economy. Conversely, inflation does not occur when an increase in price can be offset with a decrease in demand for goods and services.
The causes of inflation can be grouped into three. These include cost-push inflation, demand-pull inflation, and continuous or cyclical inflation. Cost-push inflation arises out of increased cost of production inputs such as wages and materials; and the desire for higher profit. These factors tend to affect the supply of goods in the market. Wage push inflation relates to situations in which workers’ agitation for increased wages and salaries results in higher remuneration. The percentage increase in the cost of human capital or labour is passed on to the final consumer in the form of higher prices.
In profit-push inflation, producers may be interested in recording higher profits even though cost of production inputs has not increased. To this end, they would review prices upwardly; a general increase in price by producers across a given geographical area may result in inflation. In the case of imported materials inflation, a fall in value of a country’s currency means more money would be required to import the same quantity of materials into the country to meet consumption needs of individual households and the entire population. All things being equal, the producer would pass on the increase in the cost of imported production materials to consumers in the form of higher prices of goods and services.
Sometimes, materials required for production may be obtained within the country. However, the proximity factor may be affected. That is, the geographic distance between the location of the production or manufacturing plant and raw materials may be long enough to invoke high transportation cost of carting the required raw materials to the production site. Moreover, prices of these materials may be increased by local suppliers to off-set an increase in their operating cost. Producers would eventually pass on the increased cost of local raw materials to consumers. This inflationary trend is called non-imported materials inflation.
Some measures have been recommended by economists to minimise the effects of cost-push inflation on countries across the globe. For instance, inflation that is triggered by cost-push factors can be mitigated through the introduction of policies on pricing, incomes and import controls; among other significant intervening monetary and fiscal policies.
Demand-Pull Inflation and Recommended Measures
Increase in incomes encourages individuals to purchase more goods and services. All else held constant, an excess aggregate demand over aggregate supply would result in an increase in price, leading to an inflation. Inflation that is caused by demand-pull factors can be controlled through demand management strategies or techniques, including the introduction of restrictive fiscal policy and monetary policy. Restrictive fiscal policy advocates for reduction in government expenditure and increase in taxation through increased tax rate, strengthening of existing tax collection systems; and widening of existing tax nets.
Under monetary policy, the government, through the central bank, introduces measures that would minimise expenditure and aggregate demand by individuals and companies. These measures include raising minimum interest rates on borrowings and limiting withdrawals from bank accounts, among other strategic monetary policy tools.
Continuous or Cyclical Inflation
This concept holds that inflation is endless; and that, a rise in cost of one component leads to a rise in the cost of another. To illustrate, an increase in wages of employees would lead to a rise in production cost. This cost difference would be passed on to consumers in the form of increased prices of goods and services. Workers, who are consumers, would again agitate for higher wages to offset the price increase. Producers would again, pass on the increase in production cost to consumers; and this trend may continue over a long period.
Monetarist View on Inflation
The question on the determination of inflation and whether fiscal or monetary policy may be used to counter inflation is often not answered by cost-push and demand-pull strategies. Rather, this question is often answered through the monetarist approach. The Monetarist Theory is premised on the theorem (equation) of Irving Fisher commonly called the equation of exchange. The equation is expressed as MV = PT. Where M = Stock of money; V = Velocity of money circulation; P = Average price level; and T = Number of transactions per period.
The basic event in the analysis of the equation of exchange is transaction. That is, transfer of goods and services in return for money. The equation suggests that M x V equals the total value of expenditure over a given time period. This is because M represents the stock of money and V explains the frequency (number of times) with which money turns over. P refers to the price or value of each transaction; T is the actual volume of transactions recorded during the period. This means M x V; and P x T are not different; they are the same: MV perfectly equals PT.
In the absence of assumptions, the equation of exchange presents limited information on causes of inflation. Fisher admits the numerous factors outlined in the model (equation of exchange) do not have the same causes. For instance, the price of a commodity is determined by several factors, not a single factor. Price is believed to be a passive element.
Views of the monetarists or quantity theorists are premised on two assumptions: V is constant over relatively long time periods. The reason for this assumption is velocity depends on the banks and the existing payment systems, which respond to change on a gradual basis. T would be at or close to full-employment level; and over time, would change gradually. The foregoing assumptions mean V and T are constant; and M x 1 = P x 1. That is, M = P.
Quantity theorists hold the belief that the main objective of money is to determine the general price level suitable for the conclusion of transactions. Individuals are rational beings seeking to maximise their utility; and money itself cannot maximise utility unless it is used as a medium of exchange. The usefulness of money therefore lies in its ability to help individuals obtain goods and services.
Monetarists affirm the (a) trend of velocity of money circulation (V) in the long run is stable, and predictable; (b) number of transactions (T) has value in the long run. This value is determined by forces in the economy; (c) economy is self-directed towards full employment; and (d) realisation of full employment in the short run may be affected by economic rigidities and disturbances. Monetarists hold that the permanent operation of an economy is challenged whenever she travels beyond her natural level of employment.
Economic rigidities cause an increase in money supply in the short run to result in employment and output rising above their natural long run values due to an increase in the level of aggregate demand. Nominal interest rates are likely to fall in periods of excess money supply because individuals may invest part of the excess money supply in financial assets; and increased demand over supply of financial assets would cause their price to rise; while the interests (yields) provided by sellers would fall.
The impact of increased money supply on the real levels of employment and output in the long term is very minimal or non-existent. However, it has an impact on price levels, leading to inflation. Monetarists do not support the use of monetary policy as a viable economic tool; they believe the effect of fiscal policy on the economy is limited. They propose the introduction of policies that would eliminate or minimise the short run economic rigidities. The elimination would accelerate the economy’s path to full employment, especially when the full employment journey has been marred by external shocks such as lower prices of gold and cocoa.
Contrary to the views held by Monetarists, Keynesians believe factors such as interest rate changes make the velocity of money circulation (V) volatile. That is, changes in interest rate make the velocity of money circulation unpredictable and variable. For instance, all things held constant, a fall in interest rates would discourage individuals from investing in financial assets; people would be interested in keeping larger money balances thereby affecting (negatively) the volume of money in circulation.
Money can be defined in several ways. As a result, Keynesians believe Monetarists are proposing an economic control by a variable which lacks one definition; and whose velocity is unpredictable. The proponents (Keynesians) believe the impact of money supply on inflation is not high as claimed by the Monetarists; while the influence of monetary policy on the economy is minimal. The role of monetary policy in the development process is supportive; it ensures interest rate stability, an essential requirement for productive and meaningful investment. Keynesianism emphasises on fiscal policies as critical to economic growth. However, an economic marriage of fiscal and monetary policies sometimes poses a challenge to economists.
Inflationary Periods and Value of Money
The value of money, in a modern economy, is expressed as a function of the commodities it can purchase. That is, the purchasing power of money relative to goods and services. Differences in the value of money are observed through price differences. Generally, economists categorise money into two groups: Nominal value of money and Real value of money.
Nominal value refers to the quantity of money that is available at any given time period. It is measured in monetary unit, based on face value. Real value explains the goods and services that the given quantity of money can purchase over a given period. It is measured in terms of consumers’ purchasing power and expressed in constant prices ruling in a given base year. This means nominal value is deflated by the price index to obtain real money value.
Price Index and Purchasing Power
Mathematically, the price index and purchasing power are computed as follows:
Price index of current year = [(Total price of basket of current year – Total price of basket of base year) ÷ Total price of basket of base year) x 100%].
Purchasing power of current year = (Total price of basket of base year ÷ Total price of basket of current year) x 100%].
Inflation and Economic Challenges
The purchasing power of money plummets during periods of inflation. The values of non-interest-bearing financial assets experience full depreciation-effect in inflationary periods. Inflation undermines the effectiveness of money as a store of value since more money is needed to purchase the same product. Money may cease to be a medium of exchange in periods characterised by hyperinflation as witnessed in the former Soviet Union, now Russia, between 1918 and 1922; and witnessed in other economies across the globe.
Further, the acceptable level of liquidity and choice of good protection against inflation become a challenge to investors. The purchasing power of financial assets decreases during inflation. Thus, continuous holding of funds in financial assets require adequate compensation during inflationary periods. Generally, assets with very low liquidity attract high interest rates.
Conversely, assets with very high liquidity attract low interest rates. An unexpected rise in inflation rate could reduce the protection enjoyed by investors in financial assets investments. Moreover, inflation increases the incidence of high default risk; and distortions in the redistribution of wealth and income. During inflationary periods, borrowers pay back loans in devalued currencies; while pensioners’ benefits are negatively affected.
It is often difficult to assess the effect of future inflation rates on long-term contracts. This encourages many people to enter into short-term contracts at the expense of long-term contracts. The former does not ensure efficient positive economic growth. Frequent price fluctuations during inflationary periods tend to have adverse financial effects on producers and sellers of goods. Provision of trade credit tends to be unattractive to sellers since debtors pay back at low old prices. In times of inflation, the cost (in terms of money, effort and time) of market survey and research into appropriate price tends to be high.
Beneficiaries of Inflation
Inflation results in lower payments, in terms of value, by borrowers to lenders. Governments repay loans with inflationary money. This enables them to repay government securities holders and lending financial institutions (banks) at maturity dates with relative ease. The inflation premium charged by banks on loans allows them to be protected against; and to benefit from inflation.
Lenders who provide mortgage loans benefit from inflation when the value of their homes exceeds the inflation rate significantly. These lenders record substantial benefits than persons with savings in building societies and other mortgage providers. A mild inflation can stimulate economic growth. In a period of increased money supply, individuals use the excess to purchase goods and services. This could result in excess demand over supply, leading to upward adjustment or increase in prices. The price increase may encourage producers to increase production and supply of goods and services. The increase in production contributes to economic development and growth.
Financial Assets and Liquidity
As part of its functions, money is described as a liquid store of value. This implies a financial asset can be converted into an easily spendable means of payment whenever the holder wants. Liquidity, therefore, places an emphasis on a person’s ability to transform wealth holding into cash without delay or loss of value. Money’s description as a liquid store of value means (a) money stores value of wealth for individuals and businesses; (b) people can possess money with high level of certainty that its value would be stable or maintained in the near and distant future, controlling for inflation; (c) money serves as a liquid asset. Cash is the most liquid form of all financial assets; and (d) it can be spent without strict conditions. A non-cash asset may also be liquid if it may be converted into cash within a short period; and without a significant loss or penalty, which may mean loss of capital, loss of face value; and loss or forfeiture of a substantial amount of interest.
Forms of Financial Assets
In Ghana and many other countries across the globe, individuals and businesses use different forms of financial assets. Examples include currency, current account, foreign currencies, cedi travellers’ cheques, building society term deposits, service card, Barclaycard, government treasury bills, bank acceptances, trade bills, certificates of deposit (CDs), call and time deposits, commercial paper (CP), loan stocks; and gilt-edged securities, among others. Each of these financial assets is discussed, briefly, to determine whether or not it is money; and to determine the extent to which it can be readily converted into cash.
Currency performs all the functions of money and meets the five relative advantages outlined by W. T. Newlyn, including the need for individuals and corporate bodies not to incur cost in holding money; money should not be marketed to facilitate its conversion into means of payment; it must not (normally) earn income; certainty surrounding the absolute value of money must be significant; and controlling for inflation, certainty surrounding the real value of money must be high. For obvious security reasons however, persons are reluctant to hold money in large quantities; they would prefer to deposit it at the bank or channel it into other investment vehicles.
Current account is also called sight deposit account, demand account or chequeable account. In other jurisdictions such as the United States, it is called a checking account. Use of a cheque facilitates transfer of funds from an individual’s account to the other. This eases payments for transactions and remittances, among others.
Foreign currencies are not considered as legal tender; they must be sold before being spent. Readily convertible currencies like the United States dollar are now included in the broad classification of money. Some government and private institutions make and accept payments; and save in dollars. This affirms its liquidity in Ghana; and in many other jurisdictions than the United States.
Cedi travellers’ cheques are issued in different denominations by GCB Bank (formerly Ghana Commercial Bank) for travellers within the country. They are not a legal tender, but widely accepted by individuals and businesses throughout the country. These cheques reduce the quantum of money that may be required for business and personal trips across the country. They are used in designated shops; and their spending is preceded by marketing. However, building society term deposits are not chequeable in Ghana. For a withdrawal to take place, the cheque must be issued by the building society; and encashed in a designated bank before spending.
Service card is available at allStandard Chartered Bank branches in the country. It guarantees cheques up to a certain amount on each transaction. There is a money line service which guarantees payment up to a higher amount. Both can be used in any branch of the banks, specified restaurants and fuel stations; and commercial houses. Unlike other jurisdictions, use of credit in Ghana was originally restricted and conditionally accepted for payments.
Barclaycard is issued by Absa Bank Ghana Limited (formerly Barclays Bank Ghana Limited). Functions of the Barclaycard are similar to those of the service card; in that, it guarantees payments at member shops and filling stations; and businesses. This card was originally restricted and conditionally accepted for payments.
Government treasury bills are financial instruments with high liquidity feature. There is an active secondary market for purchase and sale of existing bills. They are traded on the discount market. A holder can rediscount it pre-term without significant loss of capital or income. A treasury bill must be sold before being spent. For this reason, it is described as a money surrogate or quasi-money.
Bank acceptances are bills issued by firms. They are rediscounted on an existing secondary market. The bills are categorised into three: eligible bills, ineligible bills and trade bills. Eligible bills are acceptable or guaranteed by the central bank; ineligible bills are neither accepted nor approved by the central bank; and trade bills do not carry the acceptance of a bank. They are least secure and thus give the highest yield. Secondary market for trade bills is not active, except in the case of fine trade bills. That is, bills issued by blue chip or very reputable companies.
Call and time deposits of wholesale funds are accepted by clearing banks, acceptance houses, and building societies from individuals and businesses. The term of call deposits varies from overnight to seven (7) days. However, time deposits range between three (3) and twelve (12) months; or more. These carry interest, but there is no secondary market for moneys at call and short notices.
Certificates of deposit (CDs) are issued to depositors against large deposits; and are intended for specific periods. They attract fixed interest rates; they are negotiable; and have an existing active secondary market though they operate in the same way as call and time deposits. CDs are more liquid than time or call deposit.
Commercial paper (CP) is a short-term financial instrument comprising unsecured promissory notes with fixed maturity ranging from 7 days to 3 months; issued in bearer form and on discount basis. Commercial paper is a form of securitisation. That is, it assists firms to raise funds between themselves. Banks act as managers of the CP issue; advising the issuing firms, but do not act as intermediaries for them. This means banks raise funds for customers by hoarding and selling their customers’ securities without lending to them. There is a primary market for the issue of CP; and a secondary market for trading in them.
Other bills such as the mineral bills, cocoa bills; and the Bank of Ghana bills, among others, are operated like the treasury bills.
Gilt-edged securities are government stocks; and are of long-term duration. These securities carry a minimum of risk as regards regular payment of interest on due dates; and redemption of the stock on maturity. Gilts, as these securities are simply called, are classified as liquid only if they are nearing maturity. They are generally regarded as non-monetary assets because their maturity is long-dated; while others are undated.
Loan stocks are also called bonds or debentures. They are borrowings that increase the capital of issuing companies. They are generally issued by reputable firms. Holders of loan stocks are creditors of the issuing companies. Loan stocks rank ahead of all types of shares for payment and of interest on them. The interest due on loan stocks is fixed, usually a little lower than that on preference shares. They are redeemable at par. However, we could have irredeemable loan stocks. Therefore, like gilts, loan stocks are classified as liquid only when they are close to maturity. Irredeemable stock can be traded on the Stock Exchange.
Company shares are expected to be withdrawn and represent capital participation in a company. Companies are presumed to have perpetual existence. To this end, company shares are considered as perpetual debts. Like stocks, functions of the Stock Exchange allow for shares ownership to be shifted from one person to another. It is worth-emphasising shares are not convertible into cash in their own rights. Therefore, they are non-monetary assets.
Liquidity and Money in Modern Economy
In Ghana, some financial assets are identified as highly liquid. However, only the Ghanaian bank notes, coins and sight deposits are classified as cash. Thus, the basic tenet of money in a modern economy is a matter of degree. Therefore, liquidity is the degree of moneyness of financial assets.
Sometimes, the dividing line between money and quasi-money tends to be blurred because money performs four functions, not one. The functions can be met in different degrees by different financial assets, but they must be combined together with the relative advantages to impart to an object, the quality of generalised purchasing power.
Technical Definition of Money
Technical definition of money involves the use of monetary aggregates in the process. Monetary aggregates relate to official statistics used to classify the volume of money in the economy. Generally, financial assets may be classified under any of the following monetary aggregates: M0, M1, M2, M3; and so on.
M0 is defined as the wide monetary base, including currency in circulation, till money; and bankers’ operational deposits with the central bank. Till money is money kept by a bank on its premises to meet day-to-day cash requirements. Monetary measures vary from one country to the other. However, the following monetary aggregates are usually published by Ghana:
M1 as a monetary aggregate is described by the Bank of Ghana as the money supply or narrow money. It consists of currency with the public. That is, currency outside the banking system; and demand deposits. Definition of M1 includes time deposits in Kenya; and in many other economic jurisdictions.
M2 is termed by the Bank of Ghana as the total liquidity or broad money. It includes M1 plus quasi-money which comprises savings deposit, time deposits; and certificates of deposit with the deposit-money banks (DMBs).
M2+ is the broader definition of money; it comprises M2 plus foreign currency. Foreign currency is denoted by (+).
Generally, Ghana uses M1, M2 and M2+ to target its macro-economic objectives. The Ghanaian economy has witnessed significant surge in inflation in recent years (from 15.7% during February 2022 to 19.4% during March 2022). The rate of inflation recorded during March 2022 (19.4%) remained the highest since August 2009. Quite a significant amount of money in circulation in the Ghanaian economy is outside the banking system. However, the amount of money in circulation through mobile devices such as mobile money transactions has increased considerably in recent years. For instance, statistics released by PWC in its 2016 Banking Survey revealed during 2014, about 140 million volumes of mobile money transactions were recorded in Ghana. In monetary terms, these transactions translated into about GH¢17 billion during the period.
During 2015, the volumes of mobile money transactions were over 250 million with a corresponding monetary value of about GH¢36 billion. In percentage terms, we observed about 78.57% increase ((250 million – 140 million) ÷ 140 million) × 100% = 78.5714%) in transaction volumes between 2014 and 2015. Monetary transactions during the same period increased by about 111.77% ((GH¢36 billion – GH¢17 billion) ÷ GH¢17 billion) × 100% = 111.7647%).
The foregoing computations affirm growth (111.77%) in monetary value of mobile money transactions between 2014 and 2015 exceeded growth (78.57%) in volumes of mobile money transactions during the same period. Quite remarkably, data released by Imarc (2022) revealed the total value of mobile money transactions within the Ghanaian economy during 2021 was equivalent to US$92 billion.
Perhaps, the flexibility in registering mobile money accounts and processing mobile money payments remains major contributing factor to the high patronage of mobile money transactions within the country; and in many other economies where these digital financial services are available. Mobile money has contributed significantly to reduction in individuals’ tendency to keep money in their homes. Now, a significant amount of money outside the bank could be accounted for within the banking system through the activities of mobile money service providers; or e-money issuers.
Admittedly, mobile money transactions have come to stay; mainstream banks would have to brace the challenge and device strategic ways of effectively incorporating them into their operations. The quest for cashless economy requires strengthening of the mobile money system; while other efficient and effective alternatives are sought to complement and sustain the mobile money system.
The collaborative efforts of the Bank of Ghana (BoG) and National Communications Authority (NCA) in ensuring successful implementation of the electronic money (e-money) system in Ghana is commendable. The BoG is mandated to regulate the activities of mobile money operators called, E-Money Issuers, through various financial acts such as the Bank of Ghana Act of 2002, Act 612, Section 4, subsections 1(d) and (e); Payment Systems Act of 2003, Act 662; and Banking Act of 2004, Act 673, Section 51, subsection A(3). These Acts spell out the power vested in the Bank of Ghana to supervise and promote payments through electronic and other media; regulate funds transfer, clearing and settlement systems within its jurisdiction.
Some economies on the African continent have made meaningful strides in the development of their cashless systems through mobile money transactions. Notable among these are Kenya and Nigeria. The Kenyan government has encouraged massive investment in telecommunication infrastructure, training of agents; and creating awareness, among others. Further, the Nigerian government has adapted a protectionist approach to stem the tide of possible money laundering in mobile money transactions. The implementation models and strategies culminating in the success stories of Kenya and Nigeria in mobile money transactions in prior and recent periods are worthy of adaption and implementation in Ghana.
Non-Monetary Assets and Ghana’s Monetary Aggregates
Ghana boasts of about sixteen (16) financial assets. However, there are only three monetary aggregates (M1, M2, and M2+) serving as measures to effectively account for flow of money within the economy. Some monetary experts are of the firm belief the existing aggregates must be extended to account for quasi-money not included in the definition. Examples of non-monetary assets include shares, bonds and stocks; currency held in central bank vaults; treasury or government accounts; accounts held by central bank; dormant accounts; and unused credit facility. Non-monetary assets are not included in any of the monetary aggregates.
Currency held in central bank vaults is not part of money supply; it does not affect the expenditures of banks. Thus, it has no impact on the level of inflation. It becomes money only when it is transferred from the Issue Department (the vaults) to the banking system, including the Banking Department of the Bank of Ghana, for payments to the general public.
Treasury or government accounts such as cash in vaults do not affect the level of inflation in the country. It is therefore, essential for these accounts to be deleted from the total demand deposits figures. These accounts hold money withdrawn from circulation. Government expenditure does not hinge on its outstanding balance, but on policy, including Parliamentary or Cabinet approval. Sometimes, behaviour of the economy influences government’s expenditure decisions. Unlike commercial banks, the central bank operates for and on behalf of the government. Thus, the central bank’s accounts are government accounts. As a result, moneys held in these accounts must be ignored when determining total demand deposits.
The term, dormant accounts, is used to describe inactive accounts; these are accounts that have been left “unattended” by the depositor or depositors for a relatively long period of time. Normally, balances in dormant accounts are closed and transferred to suspense account in order not to affect money supply. For this reason, dormant account balances are not included in any of the monetary aggregates. Similarly, unused credit facilities are not considered as part of means of payment. Overdrafts result in the creation of an automatic credit line. Money supply increases only when consumers spend. Unused portion of the credit facilities must be excluded from the computation of money supply.
Reasons for Several Definitions of Money
The existence of several definitions for money stems from its use for different purposes. First, governments control the supply of money because it is widely held that growth of the stock market has an effect on employment, investment, inflation, output; and balance of payments. Nonetheless, a specific monetary measure is required to fulfill each objective. For instance, the government would require the narrow definition if the underlying intention is to curb inflation; while any of the broader definitions would be required if the objective is to estimate growth of national income.
Second, while Ghana’s economic system is developing at a faster rate, her financial system is developing at a steady rate. This results in minimal funds available to meet the expected amounts for economic activities. To address this problem, all kinds of surrogate moneys (or money substitutes) are used in the economy. The use of surrogate moneys by banks, companies and individuals may make it difficult for an expert to control a specific monetary aggregate in an attempt to establish statistical relationships within a monetary aggregate.
Third, authorities in charge of monetary policies are interested in employing a method, which can measure the purchasing power and demand of the private sector. However, the choice of “best” measure has become a challenge due to differences in opinion. It is argued no statistical measure can effectively summarise the stock of money; and provide unique and correct basis of controlling the complex relationships among the growth of money supply, prices and nominal incomes. Finally, the desire to spend and save underlies demand for money. Generally, an individual’s desire changes from time to time; and this reflects corresponding changes in the composition of the stock of money.
Periods of rising inflationary levels in an economy imply consistent surge in prices of goods and services; and corresponding decrease in the purchasing power of the economy’s currency. Ghana’s total foreign debt as at February 2021 was estimated at 24.8 billion; which was US$0.2 billion in excess of the total external debt (US$24.6 billion) recorded as at March 2021. Practically, governments stand to benefit considerably from internal repayment of outstanding debts during inflationary periods. However, a gloomy financial picture could be painted and recorded when governments have to settle foreign debt obligations during periods of inflation; as more local currency would be needed to settle the same outstanding foreign debt. To illustrate, suppose Ghana’s total foreign debt due for repayment during April 2023 is US$2.6 billion.
Further, assume the exchange rate at the beginning of April 2023 would be GH¢10.50 to US$1.00. If the exchange rate remains the same at the due date, Ghana’s total debt repayment in cedi terms would be GH¢27.3 billion (GH¢10.50 x US$2.6 billion = GH¢27.3 billion). However, should the exchange rate at the maturity date change to say, GH¢12.50 to US$1.00, the economy would require GH¢32.5 billion (GH¢12.50 x US$2.6 billion = GH¢32.5 billion) to settle the same outstanding debt of US$2.6 billion. The implication is inflation could compel the country to pay an additional GH¢5.2 billion (GH¢32.5 billion – GH¢27.3 billion) on the debt settlement.
To mitigate such financial pitfalls, it is imperative for managers of the economy to put the necessary strategic measures in place to ensure economic rigidity; which has the strong potential to culminate in strong fiscal discipline and desired economic outcomes, including accelerated development and growth. Given the high value of Ghana’s external debt, the nation’s stewards cannot afford to lose sight of the invaluable need for consistent implementation of practical inflationary control measures within the broader economy to stem the potential tide.
The above write-up featured in Thursday, February 23, 2023’s Edition of the Business and Financial Times (B&FT). www.thebftonline.com
Ebenezer M. Ashley (PhD.)