The Ghanaian cedi, already struggling with severe depreciation, faces additional pressures as the U.S. dollar strengthens amid Donald Trump’s early lead in the U.S. Presidential race.

News of Trump’s prospective return to the Presidency has driven up the dollar, leading traders to place their bets on policies that could further increase dollar strength. With the Bloomberg Dollar Spot Index rallying over 1%, the shift has had ripple effects worldwide. Major currencies, including the euro, yen, and Swiss franc, have all weakened, and the Ghanaian cedi is expected to experience an even greater impact.

This situation has set the stage for potential economic shifts in Ghana, where the cedi has already depreciated significantly throughout 2024. According to the Bank of Ghana, the local currency depreciated by about 24.3% against the dollar from January through September, and the trend continued into October with a 3.95% decline.

With Trump’s protectionist and tax-cut policies likely to bolster the dollar even further, the cedi could face additional depreciation, which would strain Ghana’s economy, disrupt inflation control, and raise import costs.

Strengthening Dollar Poses Risk to the Cedi

As the U.S. dollar rises, it creates challenges for other currencies, especially those in emerging markets like Ghana. When the dollar appreciates, goods priced in U.S. dollars become more expensive for foreign buyers. For Ghana, this translates to higher costs for imported goods, which are mostly priced in dollars. Given the country’s dependence on imported items, this could mean a steep rise in consumer prices, contributing to inflationary pressures.

Historically, the cedi’s depreciation is exacerbated by dollar gains, which have a disproportionately large impact on the Ghanaian currency. Statistically, a 1% rise in the dollar has been known to lead to a 1.5% to 3% drop in the cedi’s value. This ratio underlines the vulnerability of Ghana’s currency to fluctuations in the dollar, making it especially susceptible to the kind of shifts currently occurring.

A further depreciation of the cedi could have substantial consequences for Ghana’s inflation rate, which the country has worked to keep under control in recent months. In September, the Ghana Statistical Service (GSS) reported a national inflation rate of 21.5%.

This represented a slight improvement in the country’s inflationary trend, and the Bank of Ghana responded by reducing the policy rate by 2%, bringing it down to 27%. However, a potential decline in the cedi due to a surging dollar could reverse these inflationary gains.

Higher inflation could force the Bank of Ghana to implement a more restrictive monetary policy. This would likely involve raising interest rates, which could dampen economic growth by increasing borrowing costs for businesses and consumers.

Rising prices for imported goods, such as fuel and food, would increase the cost of living for Ghanaians, leading to a reduction in purchasing power. Thus, the economic consequences of a weakening cedi could be far-reaching, affecting not just inflation but also household spending, business investment, and overall economic growth.

Pressure on Ghana’s Monetary Policy

With a Trump Presidency strengthening dollar, Ghana’s central bank may need to shift its monetary policy to safeguard the cedi. Fitch Solutions has already suggested that a Trump presidency could necessitate more restrictive policies than anticipated, as the Bank of Ghana seeks to stabilize the currency amid external pressures. The central bank could opt for measures such as raising interest rates or intervening directly in the forex market to supply more dollars, albeit at a potentially high cost.

However, such interventions come with trade-offs. Increased interest rates could reduce inflationary pressure but would also raise the cost of borrowing. This might stifle business expansion and consumer spending, impacting economic recovery efforts.

Forex market interventions, while offering a temporary solution to stabilize the cedi, could strain Ghana’s foreign reserves. Thus, the central bank faces a difficult balancing act between managing inflation, stabilizing the currency, and fostering growth.

Global Market Reactions to Trump’s Lead

The global market response to Trump’s lead in swing states highlights the widespread expectation of a return to his past policies, which emphasized protectionism, low taxes, and high tariffs. These policies are seen as likely to drive demand for the dollar further, as investors seek stability in the U.S. currency amid anticipated trade disruptions and inflationary pressures in the U.S. This could lead to significant shifts in global trade, with countries like Ghana feeling the ripple effects.

If Trump’s election results in dollar-strengthening policies, the cedi would likely see additional declines, heightening the challenges faced by Ghana’s import-dependent economy. Currency volatility in the face of a strong dollar is often more pronounced for emerging markets, and traders are likely to view the Ghanaian cedi as particularly vulnerable in light of Trump’s election prospects.

In the near term, Ghana may need to explore strategies to mitigate the impact of a stronger dollar on its economy. Measures such as increasing local production to reduce import reliance could be effective in the long run.

Ghana could also work on enhancing export competitiveness, which would help generate foreign exchange to bolster the cedi. Expanding the agricultural and industrial sectors, improving infrastructure, and investing in skills training for the workforce are steps that could strengthen the economy’s resilience against currency shocks.

In addition, the Bank of Ghana may consider adopting currency stabilization measures by diversifying its reserves away from the U.S. dollar. Countries such as China and Japan, which hold significant dollar reserves, may offer insights into currency diversification and economic stabilization strategies that Ghana could emulate.

Another potential measure is to encourage foreign investment in Ghanaian bonds and other financial instruments, thereby boosting dollar inflows and alleviating some pressure on the currency. This would, however, require confidence in Ghana’s economic policies and fiscal discipline, as well as stability in key sectors of the economy.