Bank of Ghana's Tight Monetary Policy Drove 2025 Cedi Recovery, Says U.S. Economist

Forget the external factors and political explanations—a top U.S.-based economist says the cedi's remarkable comeback in 2025 had one primary driver, and it was right under our noses the whole time.

Dr. Dennis Nsafoah, a monetary economist teaching at Niagara University in New York, has delivered a clear verdict on what powered the Ghanaian cedi's impressive appreciation last year: the Bank of Ghana's monetary policy was the star of the show. According to his analysis, the currency's dramatic strengthening from approximately GH¢15.80 per dollar in early 2025 to around GH¢10.80 by May 2025 wasn't a coincidence or luck—it was the direct result of deliberate and disciplined central bank action.

For a nation that has watched its currency struggle for years, Dr. Nsafoah's analysis offers both an explanation for last year's success and a roadmap for maintaining stability going forward.

Dr. Nsafoah, who serves as an Assistant Professor of Economics at Niagara University and sits on the Research Committee at Tesah Capital, pointed to a crucial correlation that many observers might have missed. The cedi's sharp appreciation happened at precisely the same time that the growth rate of reserves held at the Bank of Ghana collapsed.

Put simply, as the central bank withdrew cedi liquidity from the financial system, pressure on the foreign exchange market decreased, allowing the currency to strengthen. Less local currency chasing foreign exchange meant less pressure pushing the cedi downward.

"As cedi liquidity was withdrawn from the system, pressure on the foreign exchange market eased, and the currency strengthened," Dr. Nsafoah explained, describing how the contraction of available cedis in circulation reduced private sector demand for foreign exchange.

This reduced demand reinforced the fight against inflation (disinflation) and drove the shift from depreciation to appreciation that Ghanaians witnessed throughout 2025.

For those wondering about the economic principles at work, Dr. Nsafoah grounded his analysis in two fundamental concepts: Purchasing Power Parity (PPP) and the Quantity Theory of Money.

According to PPP, exchange rates in the long run reflect the relative purchasing power of currencies, influenced by inflation differentials between countries. The Quantity Theory of Money, meanwhile, suggests that the money supply directly affects price levels and, by extension, currency values.

"In the long run, exchange rates are governed by Purchasing Power Parity and the Quantity Theory of Money, where relative money supplies and inflation differentials determine currency values. Given Ghana's history of volatile inflation, the long-run framework is particularly instructive," the economist noted.

His analysis suggests that as inflation in Ghana fell relative to inflation in the United States, PPP predicted the cedi should appreciate. Under the Quantity Theory of Money, achieving this disinflation required reducing the growth of money in circulation.

"This is exactly what occurred in 2025," Dr. Nsafoah confirmed.

The economist was unambiguous about where credit belongs for the 2025 stabilization. While acknowledging that many factors can influence inflation and exchange rates, he insisted that monetary policy remains the decisive force.

"The Bank of Ghana's actions—tightening liquidity, anchoring expectations, and allowing monetary conditions to bite—were central to Ghana's macroeconomic stabilisation," Dr. Nsafoah emphasized.

This assessment gives considerable credit to the central bank's leadership for making tough decisions that may not have been popular in the short term but delivered results. Tightening liquidity means making money less available, which can slow economic activity but also helps control inflation and stabilize the currency.

The approach required discipline and a willingness to maintain restrictive policies even when facing pressure to ease conditions.

Perhaps most valuable in Dr. Nsafoah's analysis is his identification of what to watch for future stability—or instability. He offered a clear signal that policymakers, investors, and ordinary Ghanaians should monitor.

The key variable isn't external shocks, global commodity prices, or speculative market narratives. Instead, it's something fully under the Bank of Ghana's control: the growth rate of bank reserves held at the central bank.

"The experience of 2025 shows that exchange rate stability coincided with the contraction or modest growth of bank reserves at the central bank," Dr. Nsafoah observed.

His message is straightforward: as long as these reserves are shrinking or growing only moderately, pressure on the foreign exchange market remains contained. The cedi stays relatively stable.

But Dr. Nsafoah also issued a warning about what could trigger a return to the bad old days of sharp cedi depreciation. If the growth rate of bank reserves were to reverse course—returning to the 50 percent to triple-digit annual growth rates observed in earlier years—trouble would likely follow quickly.

"This would signal a renewed surge in cedi liquidity. History suggests that such an expansion would quickly translate into excess demand for foreign currency and a renewed phase of sharp cedi depreciation," he cautioned.

In other words, if the Bank of Ghana loosens the taps too much and allows reserves to grow rapidly again, the lessons of 2025 could be quickly forgotten, and the currency could return to the downward spiral that has plagued it in previous years.

Dr. Nsafoah's analysis delivers a powerful message for Ghana's economic management: maintaining cedi stability is possible, but it requires sustained monetary discipline from the Bank of Ghana. The central bank demonstrated in 2025 that it knows how to stabilize the currency when it commits to a tight monetary policy.

The challenge now is maintaining that discipline going forward, resisting pressures to expand money supply too quickly, and keeping bank reserves under control. For ordinary Ghanaians watching their purchasing power, businesses planning investments, and policymakers making decisions, the economist's analysis provides a clear framework for understanding what drives currency stability—and what could undermine it.

The cedi's fate, it seems, lies primarily in the hands of the Bank of Ghana. The question is whether the central bank will maintain the discipline that produced 2025's success story.