The monetary system of Ghana has been an integral part of Ghana's economic development. Since the country's independence, authorities have treated the monetary system with utmost priority to ensure its stability. This paper, therefore, seeks to discuss Ghana's monetary system since its independence. The paper discusses the various versions of the Ghanaian currency (the Cedi) issued, as well as the reasons behind their issuance. The paper also discusses some key monetary policies pursued by the Ghanaian Central Bank, as well as the trend of inflation since Ghana's independence.
1. INTRODUCTION
The monetary system of Ghana has been an integral part of Ghana’s economic development. Since the country’s independence, authorities have treated the monetary system with utmost priority to ensure its stability. This paper, therefore, seeks to discuss Ghana’s monetary system since its independence. The paper discusses the various versions of the Ghanaian currency (the Cedi) issued as well as the reasons behind their issuance. The paper also discusses some key monetary policies pursued by the Ghanaian Central Bank as well as the trend of inflation since Ghana’s independence.
This paper is structured as follows: section 1 is the introduction; Section 2 looks at a brief history of the Bank of Ghana (BoG); Section 3 looks at the evolution of currency in Ghana after independence; Section 4 discusses inflation and monetary policy; and section 5 summarizes and concludes the paper.
2. BRIEF HISTORY OF THE BANK OF GHANA (BoG).
The Bank of Ghana (BoG) is Ghana’s central bank and it is the highest monetary institution in the country. It has the mandate of managing Ghana’s monetary system and monetary policy. The bank finds its beginning in the then Bank of Gold Coast. The bank officially came into existence on 4th March 1957 with the passing of the Bank of Ghana Ordinance (No. 34) of 1957. The principal mandates of the Bank as stated by the Ordinance of 1957 include among others, the issuance and redemption of banknotes and coins as well as ensuring monetary stability in Ghana. After several legislative reforms, the Bank is currently operating under the Bank of Ghana Act, of 2002.1
3. EVOLUTION OF CURRENCY IN GHANA.
According to the Bank of Ghana, the official currency in Ghana before independence in 1957 was the West African pound, shillings, and pence which was issued by the West African Currency Board (WACB). This was subsequently replaced by the Ghana pound, shillings, and pence in July 1958. The Ghana pound, shillings, and pence were the first currency to be issued by the Bank of Ghana.
In 1965, Ghana officially left the colonial monetary system of the British and introduced the first series of the Cedi (¢) and Pesewas currency (which is currently in use today) to replace the Ghana pound, shillings, and pence (Bank of Ghana, 2021).2 According to Dzokoto and Mensah (2010b), the first series of the Cedi (the first Cedi) was replaced by the New Cedi (the second Cedi) in 1967. This move was partly political as the military regime that overthrew the CPP government led by Dr. Kwame Nkrumah sought to remove the image of Dr. Nkrumah from currency notes and coins.
The new Cedi or the second Cedi, as affectionately called, was in existence from its inception in 1967 to 2007 when it was replaced by the current Ghana Cedi (Gh¢). In the 40 years of the second Cedi’s existence, it faced numerous challenges and declined in value along with the failing Ghanaian economy in those days. Due to periods of high inflation, poor economic performance, and poor economic management, the Cedi was devalued on several occasions (Aryeetey et al., 2017). In the 1980s for example, the Cedi was devalued severally due in part to the implementation of the International Monetary Fund (IMF) Structural Adjustment Programs (Dzokoto and Mensah, 2010b).
To keep up with the rising levels of inflation, the Bank of Ghana began issuing higher denominations of the Cedi. As of 2007, the highest denominations of the Cedi were the 10,000 and 20,000 Cedi notes. To address this situation and ease the mode of conducting business and cash transactions, the government and the Bank of Ghana moved to redenominate the Cedi and issue the Ghana Cedi (Gh¢) in 2007. With the redenomination of the Cedi, Gh¢ 1 and Gh¢ 2 were worth 10,000 and 20,000 old Cedis respectively. The redenomination of the Cedi presented hope to many Ghanaians as the burden and dangers of carrying a bulk of cash to conduct business transactions were erased (Dzokoto and Mensah, 2010b). However, since the redenomination of the Cedi, its value has fallen from an equivalence of Gh¢ 1 to 1 US dollar in 2007 (Dzokoto and Mensah 2010b) to an equivalence of Gh¢ 5.73 to 1 US dollar as of 10th May 2020 (Bank of Ghana, 2021). Also, the highest denominations of the Ghana Cedi as of 2nd December 2021 were the Gh¢ 100 and 200 notes compared to the Gh¢50 note when the Ghana Cedi series was issued in 2007.
4. INFLATION AND MONETARY POLICY IN GHANA.
Inflation levels in Ghana have historically been high. According to Aryeetey et al. (2017), inflation levels in the period between 1960 and 1983 reached levels as high as 122.8%. This has however been declining as confirmed by Figure 1 below, depicting Ghana’s annual percentage change in inflation since 1980. Gyimah-Boadi and Jefferies (2000) suggest that the decline is due to effective measures adopted by monetary authorities. As of April 2021, Ghana’s inflation rate was 8.5% (Ghana Statistical Service, 2021) indicating that Ghana’s efforts in combating the high inflation levels of the 1960s and 1980s have paid off.
In terms of monetary policy, Ghana has pursued various diverse monetary policies in the period before and after its independence. The strategies used include exchange rate targeting; monetary aggregate targeting; and inflation targeting (Aryeetey et al., 2017).
Figure 1: Ghana’s annual percentage change in inflation since 1980.
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Ghana recently adopted the inflation-targeting approach to monetary policy. According to Aryeetey et al. (2017), inflation targeting was adopted by the passing of the Bank of Ghana Act 612 (2002) but it was not operational until 2007. Before this, the monetary aggregate targeting was used from 1982 to 2006. Abango et al. (2019) indicate that under this regime, inflation averaged 29.22% which further declined to an average of 13.26% when the switch was made to inflation targeting (see Table 1). Kyereboah-Coleman (2012) indicates that with inflation targeting, there has been a significant reduction in the levels of inflation in the period preceding 2012. Kyereboah-Coleman (2012) also adds that Ghana’s adoption of inflation targeting as its monetary policy has resulted in macroeconomic stability in Ghana and increased the credibility of the central bank.
Table 1: Inflation Rate, Base Money Growth, and Policy Rate
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5. SUMMARY AND CONCLUSION
In summary, the Bank of Ghana has the mandate of executing Ghana’s monetary policy and ensuring the stability of the country’s monetary system. Historically, the Ghanaian economy has battled with inflation which in part has affected the strength of the Cedi and threatened economic stability. Inflation targeting has so far been the Bank’s best response to reducing inflation and ensuring monetary stability.
To conclude, though Ghana’s monetary system is not as robust as that of the Western world, it has improved given the early challenges it faced after leaving the British colonial monetary system to adopt its monetary system when it became an independent nation in 1957.
REFFERENCES
Abango, M.A., Issifu, A. & Yusif, H. (2019). Monetary Aggregates Targeting, Inflation Targeting and Inflation Stabilization in Ghana. African Development Review, Vol 31, pp 448-461. https://doi.org/10.1111/1467- 8268.12399
Abradu-Otoo, P., Amoah, B., & Bawumia, M. (2003). An Investigation of the Transmission Mechanisms of Monetary Policy in Ghana: a Structural Error Correction Analysis. Bank of Ghana. WP/BOG-2003/02.
Afful-Mensah, G., & Quartey, P., (2014). Financial and monetary policies in Ghana: A review of recent trends. Review of Development Finance, 4 (2), 115–125. https://doi.org/10.1016/j.rdf.2014.07.001
Alagidede, P., & Tweneboah, G. (2018). Currency Substitution And Stability Of Money Demand In Ghana. The Journal of Developing Areas, 52 (2), 41–53. https://doi.org/10.1353/jda.2018.0021
Aryeetey, E., & Kanbur, S.M.R. (Eds.). (2017). The economy of Ghana sixty years after independence (1 ed). Oxford University Press. https://oxford.universitypressscholarship.com/view/10.1093/acprof:oso/9780198753438.001.0001/acprof-9780198753438
Bank of Ghana (2021). Evolution of the Cedi. https://www.bog.gov.gh/bank-notes-coins/evolution-of-currency-in-ghana/
Bank of Ghana (2021). History about the bank. https://www.bog.gov.gh/about-the-bank/
Ghana Statistical Service (2021), CPI Inflation, April 2021. https://www.statsghana.gov.gh/headlines.php?slidelocks=MjYzOTE0MjAzNy42NQ==/headlines/139qs5rs89
Dzokoto, V.A.A., Mensah, E.C., & Young, J. (2010a). A tale of two Cedis: Making sense of a new currency in Ghana. Journal of Economic Psychology, 31 (4), 520–526. https://doi.org/10.1016/j.joep.2010.03.014
Dzokoto, V.A.A. & Mensah, E.C., (2010b). Making Sense Of A New Currency: An Exploration Of Ghanaian Adaptation To The New Ghana Cedi. Journal of Appiled Business and Economics.
Gyimah-Boadi, E., & Jefferies, R. (2000). The Political Economy of Reform, in Economic Reforms in Ghana: The Miracle & The Mirage, ed. Ernest Aryeetey, Jane Harrigan, and Machiko Nissanke. Oxford: Africa World Press, pp. 32–50
International Monetary Fund, World Economic Outlook Database, https://www.imf.org/en/Publications/WEO/weo-database/2021/April/weo-report?c=652,&s=PCPIPCH,&sy=1980&ey=2020&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1 Retrieved on 14th May, 2021.
Kyereboah-Coleman, A. (2012). Inflation targeting and inflation management in Ghana, Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(1), pages 25-40.
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1 Source: https://www.bog.gov.gh/about-the-bank/, 2021
Frequently asked questions
What is the purpose of this paper about Ghana's monetary system?
This paper discusses Ghana’s monetary system since its independence, including the various versions of the Ghanaian currency (the Cedi) issued and the reasons behind their issuance. It also discusses key monetary policies pursued by the Ghanaian Central Bank and the trend of inflation since Ghana’s independence.
What is the Bank of Ghana (BoG)?
The Bank of Ghana (BoG) is Ghana’s central bank and the highest monetary institution in the country. It manages Ghana’s monetary system and monetary policy. It was officially established on March 4, 1957, with the mandate of issuing and redeeming banknotes and coins, as well as ensuring monetary stability.
What was the currency in Ghana before independence?
Before independence in 1957, the official currency in Ghana was the West African pound, shillings, and pence, issued by the West African Currency Board (WACB). This was replaced by the Ghana pound, shillings, and pence in July 1958.
What is the history of the Cedi?
In 1965, Ghana introduced the first series of the Cedi (¢) and Pesewas currency to replace the Ghana pound, shillings, and pence. In 1967, the first series of the Cedi was replaced by the New Cedi. In 2007, the New Cedi was replaced by the current Ghana Cedi (Gh¢) through redenomination to address high inflation and ease transactions.
What challenges did the Cedi face before redenomination?
The Cedi faced numerous challenges, including declining value due to high inflation, poor economic performance, and poor economic management. It was devalued on several occasions, particularly in the 1980s due to the implementation of IMF Structural Adjustment Programs.
What was the purpose of the redenomination of the Cedi in 2007?
The redenomination of the Cedi in 2007 aimed to address the rising levels of inflation, ease business transactions, and reduce the burden of carrying large amounts of cash. Gh¢ 1 and Gh¢ 2 were worth 10,000 and 20,000 old Cedis respectively.
How has the value of the Ghana Cedi changed since redenomination?
Since the redenomination, the value of the Cedi has fallen. In 2007, it was equivalent to Gh¢ 1 to 1 US dollar, but as of May 10, 2020, it was Gh¢ 5.73 to 1 US dollar.
What has been the trend of inflation in Ghana?
Inflation levels in Ghana have historically been high, reaching as high as 122.8% between 1960 and 1983. However, it has been declining since then due to effective measures adopted by monetary authorities. As of April 2021, Ghana’s inflation rate was 8.5%.
What monetary policies has Ghana pursued?
Ghana has pursued various monetary policies, including exchange rate targeting, monetary aggregate targeting, and inflation targeting.
When did Ghana adopt inflation targeting?
Inflation targeting was adopted by the passing of the Bank of Ghana Act 612 (2002) but it was not operational until 2007. Before this, monetary aggregate targeting was used from 1982 to 2006.
What have been the results of inflation targeting in Ghana?
Inflation targeting has resulted in a significant reduction in inflation levels and has contributed to macroeconomic stability in Ghana and increased the credibility of the central bank.
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- James Oppong-Gyebi (Autor:in), 2021, A Brief History of Ghana's Monetary System, München, GRIN Verlag, https://www.grin.com/document/1348990
