Ghana's economy has faced severe macroeconomic instability, driven by a ballooning public debt burden and escalating inflation. In 2022, consumer price inflation surged to a record high of 54.1%, driven by the soaring costs of imported fuel, utilities, and food. The Bank of Ghana attempted to curb this by raising its policy rate, but inflation remained stubbornly in the double digits, severely eroding real household incomes.
The government's fiscal position weakened significantly, with public debt-to-GDP rising above 90%, leading major credit rating agencies to downgrade Ghana’s sovereign debt to 'junk' status. This triggered a massive exit of foreign portfolio investors who sold off government bonds, converting their local currency holdings to safer foreign assets.
Furthermore, Ghana's economy remains heavily reliant on primary commodity exports—specifically gold, cocoa, and crude oil. While international prices for these commodities fluctuated, structural issues in the domestic cocoa sector, including disease outbreaks and smuggling, led to a 20% decline in cocoa production volume. Consequently, export revenues fell short of projections.
Meanwhile, youth unemployment has escalated, with the World Bank estimating that over 30% of young adults are underemployed or out of formal work. To address the fiscal deficit, the government introduced a controversial Electronic Transfer Levy (E-levy) and slashed public spending on infrastructure, which further dampened economic growth. Amidst these compounding pressures, the Ghanaian currency, the Cedi, lost more than 55% of its value against the US dollar in 2022.
Using information from the case study, explain possible reasons why the Ghanaian currency, the Cedi, has fallen in value by more than 55% in 2022.
