Dynamics of Foreign Exchange Reserves Accumulation and Macroeconomic Stability: The Ghanaian Perspective

Publication type Article
Status Published
Affiliation: Rostov State University of Economics
Journal nameAsia and Africa Today
EditionIssue 10

This study examines the impact of Ghana’s foreign exchange reserves on improving the investment climate of the economy through stabilizing the macroeconomic environment. According to the Maastricht criteria, the stability of the macroeconomic environment is assessed by five variables: inflation, interest rate, exchange rate stability, the ratio of public debt to GDP and government budget deficit. The study adopted the VAR-Vector Auto Regression method to examine the relationship between foreign exchange reserves and selected variables that measures the macroeconomic stability. Annual data on these variables were taken from the Central Bank of Ghana and World Bank websites for the period from 2000 to 2016 inclusive. The result obtained from the analysis showed that the dynamics of foreign exchange reserves of Ghana has a significant statistical impact only on the exchange rate (GHS/USD) among all the macroeconomic variables. The paper concludes that the continued accumulation of foreign exchange reserves by the Central Bank of Ghana will steer the depreciation of the Ghanaian cedi, increase revenues and profits of the export sector and increase investment and economic growth based on higher exports. Ghana’s foreign exchange reserves, via the channel of preventing the appreciation of the Ghanaian cedi, will reduce the risk premium of foreign investments and, by inference, help to attract a higher share of foreign investments.

KeywordsGhana, foreign exchange reserves, Maastricht criteria, macroeconomic stability, investment climate, exchange rate, depreciation
Publication date19.10.2018
Number of characters13
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