Basic economics tells us that if the value of the currency of Country A is falling relative to that of Country B then it means domestic inflation is high in Country A compared to Country B.

In lay man's terms therefore if the Ghana Cedi is falling against the US Dollar then it is because domestic inflation is high in Ghana compared to the US.

This means Ghana must deal with domestic inflation to arrest the falling Cedi. It is not correct for the Bank of Ghana (BOG) to just blame the Ghanaian business community for trying to save the value of their wealth by dollarising.

The BOG should rather ask: "Why is everyone rushing for the Dollar?" The answer is simple: High domestic inflation. Ghanaians or Ghanaian businessmen do not hate the Cedi but they just want to make sure they can continue to remain in business. If Ghanaians keep their money in Cedis but the value of the Cedi keeps falling (whether official government inflation statistics capture rising inflation or not) then they will have to stop importing vital goods.

Ghanaians are rushing for the Dollar because of domestic inflation. The BOG forcing Ghanaians to just use Cedis or converting the savings in the Dollar accounts of Ghanaians into Cedi equivalent is not the solution since all the products the typical Ghanaian uses have to be imported and they need dollars to import the goods. Or is the Government and the BOG now going to enforce a strict "Buy Ghana only policy"? We doubt it and it is not prudent as a policy measure.

The question to ask then is "who caused the inflation that is responsible for the uncontrollable rush for dollars that is in turn causing the value of the Cedi to plummet?" Well we do know about cost push and demand pull inflation and we do recognize that inflation can be due to many factors. However the major cause of inflation in any country is seigniorage (the printing of money).

Milton Friedman, the famous Nobel-prize winning economist once quipped "Inflation is everywhere a monetary phenomenon." This means inflation in Ghana is due to increases in money supply which is controlled by BOG. It is the BOG’s job to control the money supply in the Ghana. When the money supply in the economic system is high domestic inflation is high and vice versa. Further when domestic inflation is high the value of the Cedi falls as people rush for dollars and vice versa.

It seems logical to argue then that the BOG is the one printing money and increasing the money supply leading to domestic inflation in Ghana perhaps under pressure from the executive. This is easy enough to believe given the very high recent government expenditure on items like the election and the wage bill and the excessive borrowing the Ghana government has been doing. Surely someone has to pay for such wanton expenditure?

It is not a logical stretch to surmise that new money was printed to finance this expenditure but we have no evidence to support such an assertion. In an ideal situation the BOG will have real independence from the government so they can refuse to print new money even if the government wants more money released into the system. At present there is a law that guarantees independence to the Central Bank Governor but because the president retains the power to fire him and because the central bank governor only has a 4 year term instead of a 14 year term like in the US the BOG governor remains directly under the control of Ghana's president.

This means the law guaranteeing the independence of the BOG governor is an ineffective one at best and cannot prevent government from demanding more money from the BOG for more expenditure whether ill-advised or not. The Bank of Ghana (BOG) clearly needs to tackle domestic inflation in spite of the non-alarming 13.5% posted by GSS. However the BOG has already failed with its policy of inflation targeting. The target was supposed to be single digit (6-8%) but inflation is now officially 13.5%. Even worse is the almost certain possibility that inflation is actually higher than it is reported by the Ghana Statistical Service (GSS).

This maybe because the GSS is measuring Consumer Price Index (CPI) and inflation using a questionable approach. In fact as if to pacify its critics about its vexatious handling of inflation measurement, the GSS announced in 2013 that it had increased the contents of the typical basket used for computing CPI by 41 items. Unfortunately this act seemed more like a mea culpa about the GSS’s challenges in measuring CPI and inflation. Note that the CPI is the price of the typical basket of goods the average consumer buys.

The inflation rate is calculated as the percentage change in the CPI. It seems that "Ghana's chickens have finally come home to roost" A combination of factors such as mismanagement of money supply and inflation by the BOG and wanton government expenditure and borrowing are killing the Cedi.

We are hoping that if you have read this piece to this point then you now have some idea as to what should be done to arrest the Cedi's demise. (i) Reign in domestic inflation now although unfortunately this may mean increasing interest rates. (ii) Stop the wanton government expenditure with no value for money (iii) Limit government borrowing (iv) Stop printing money to finance everything just because you can. This is indirect taxation and it is undermining grievously the value of the Cedi. (v) Finally put in place policies to stimulate domestic production and exports so that the supply of Dollars to Ghana will increase.