Over the past decade, the real effective exchange rate (REER) has traced a path of relative stability, followed by sudden turbulence—a trajectory that now demands urgent policy attention.
The calm before the storm
Between 2015 and 2019, Ghana’s REER hovered near equilibrium, supporting export competitiveness and a healthy external balance.
This period of stability fostered optimism among policymakers and exporters alike. Yet, as the world reeled from the Covid-19 pandemic, Ghana’s currency began to appreciate moderately, while the equilibrium rate remained steady.
Source of Data: Author’s estimates based on the IMF’s Behavioural Equilibrium Exchange Rate (BEER) model. Key determinants: GDP growth, interest rate differentials, and commodity prices.
The estimated equilibrium REER for Ghana tends to hover near 70–75 (2010=100) in recent years, suggesting mild undervaluation in 2024 and sharp overvaluation in 2025.
Historical and Projected REER vs. Equilibrium REER, 2015–2030
Fig. 1 visualises the REER’s journey, showing its close alignment with equilibrium until 2019, and the dramatic divergence projected from 2025 onwards. The projections from 2025 are based on the assumption of an unchanged policy mix.
That is, the policy mix in 2025 remains unchanged into the future.
The sharp appreciation in 2025, where actual REER leaps to 85–88 against an equilibrium of 74, marks a turning point—one that signals overvaluation and raises alarms about Ghana’s global competitiveness.
The chart shows that the sharp depreciation from 2023 to 2024, which led to undervaluation of the currency, was not consistent with the fundamentals.
The drivers of that depreciation were at variance with the fundamentals—that is what should be expected in crisis periods. And it would have been wrong to use hard-earned FX reserves to fight such deviation from the long-term trend, despite the painful effects on the economy.
Similarly, the sharp appreciation in 2025 is not consistent with the fundamentals.
And this time, it is creating a wide misalignment that could have lasting effects if not urgently corrected.
The Risks of Overvaluation
Why does this matter? An overvalued currency can erode export competitiveness, making Ghanaian goods more expensive abroad and increasing reliance on imports as imported goods become cheaper —undermining the domestic economy.
The effects ripple through the economy: widening current account deficits, pressure on foreign reserves, and triggering inflationary surges.
If left unchecked, these trends threaten to dampen industrial growth and job creation, jeopardising Ghana’s long-term transformation and diversification objectives.
Source of Data: Author’s derivation from the estimated model for the equilibrium real exchange rate.
REER Misalignment (MisA), 2015–2030
Fig. 2 illustrates the degree of REER misalignment over time. Positive values indicate overvaluation, while negative values indicate undervaluation. For the period up to the end of 2024, the degree of misalignment of the series appears stationary (integrated of order zero—no unit roots).
What this indicates in simple terms is that movement in the real exchange rate is mean-reverting (moving close to its long-term trend).
In standard terms, the real exchange rate in Ghana during that period was aligned with its fundamentals.
Deviations from the trend or equilibrium within ±5 % indicate alignment with fundamentals, while deviations within ±10 % suggest “broad alignment. Any deviation exceeding ±10 % constitutes clear misalignment, requiring urgent policy intervention.
Beyond 2024, the process is not stationary (sharp divergence from the long-term trend) and would require policy intervention to bring it back closer to the long-term trend.
As indicated earlier, projected misalignment beyond 2025 is based on the assumption of unchanged policies—maintaining existing policies in 2025.
Policy at the Crossroads
How should Ghana respond? The answer lies in a coordinated, multi-pronged approach:
Flexible Exchange Rate Management: The Bank of Ghana must intervene judiciously to prevent excessive appreciation, using sterilised interventions to preserve monetary policy credibility.
The current sharp deviation of the real exchange rate from its long-term trend —which is not aligned with fundamentals—could undermine monetary policy credibility and gains made so far. • Reserve Accumulation: Building robust foreign reserve buffers (now that the “rains are not pouring”) will help cushion the economy against potential external shocks and currency volatility.
• Export Diversification: Over the medium to long term, diversification policies should be intensified, now that Ghana is in the “calm period,” by promoting non-traditional exports and value-added sectors—such as agro-processing and manufacturing—to reduce dependence on primary commodities and strengthen competitiveness. Since long-term objectives are shaped by a sequence of short-term dynamics, policies intended for the medium to long term should begin immediately. ‘Think big, start small, but start now.’
• Fiscal and Monetary Coordination: Fiscal policy must align with monetary objectives, with counter-cyclical measures deployed during periods of misalignment.
• Structural Reforms: Investment in infrastructure, technology, and skills development will boost productivity and reduce transaction costs. Total factor productivity in Ghana has been declining consistently; a trend that has intensified over the last two years. This must be reversed if Ghana wants to build a resilient economy that can withstand shocks.
• Monitoring and Forecasting: The Bank of Ghana, it is believed, already has an in-house REER monitoring framework. This framework should inform exchange rate policy. What remains unclear is how it has influenced the sharp and unsustainable appreciation of the currency, and whether the consequences outlined above will be considered in future exchange rate policy.
Looking Ahead
Ghana’s experience offers a cautionary lesson for emerging markets and developing economies (EMDEs). Proactive, coordinated policy measures are essential to prevent sustained overvaluation and safeguard external competitiveness.
By aligning monetary, fiscal, and structural policies, Ghana can maintain macroeconomic stability and support long-term growth—even as global headwinds intensify.
The writer is lead researcher, Wait A Moment Ghana – Research
and Advocacy Platform
Email: [email protected]
