SIKAKROM with GIDEON DONKOR: When nominals collide: Fiscal stress and exchange rate sustainability

I have seen the future, and it does not work. When presenting the 2026 budget, it was revealed that the government had a revenue shortfall of GH¢7.7 billion during the first nine months of 2025. Officials anticipated that robust fourth-quarter results would narrow this gap to GH¢3 billion by year’s end, working toward an updated target of GH¢223.5 billion. At that time, we doubted their ability to achieve this figure, predicting overall revenues would be closer to GH¢215 billion.

Although the final numbers have not been released, central bank data shows that as of November, total revenue reached GH¢187.9 billion, leaving a GH¢13.5 billion deficit. Currently, our projection is that the final outcome will fall between GH¢210 and GH¢213 billion. This notable gap between projections and actual revenue carries important implications for both fiscal policy and the national currency.

Government revenue growth from year to year does not follow a random walk. Once adjustments are made for any changes in tax policies during a given year, the portion of government revenues earned in local currency typically grows at a rate equal to the combined effect (exponential sum) of the real GDP growth rate and the average inflation rate for that year. The foreign currency portion follows the same path except for changes in the exchange rate.

To demonstrate this, let us estimate what last year’s revenues might have looked like if we had known that the economy would see 6% GDP growth, an average inflation rate of 14.58%, and a currency appreciation of 12.64%. Starting with the previous year’s revenue of GH¢186 billion, we first adjust for tax policy changes—such as eliminating the e-levy and implementing a new petroleum tax. Since 55% of government revenue is generated domestically in cedis, we apply this percentage to the adjusted figure and incorporate both inflation and GDP growth through an exponential multiplier.

This calculation yields a projected GH¢124.24 billion. For the portion indexed to the dollar (the remaining 45% of last year’s revenue), we grow it by a sum of imported inflation (estimated at 3%), real GDP growth, and currency appreciation, arriving at GH¢78.29 billion. Adding these two results would have given us gives us an estimate of GH¢202.54 billion. When compared to the previously mentioned upper-bound projection of GH¢213 billion, this amount falls short by GH¢11.5 billion. This supports Hon. Oppong Nkrumah’s assertion that the government has mistakenly included GH¢11 billion of 2024 revenue in their 2025 projections.

To estimate this year’s revenue, we begin with the 2025 projection and adjust for recent tax policy changes to determine the appropriate base. The process starts with the estimated GH¢202.54 billion; accounting for tax adjustments—including a GH¢6 billion reduction from the removal of the COVID levy, VAT modifications, and prior e-levy collections, offset by an additional GH¢2 billion from a full year of the new petroleum tax—results in a revised 2025 revenue figure of GH¢198.6 billion.

This adjusted amount serves as the foundation for the current year’s projections. Assuming an average inflation rate of 5%, a USD/GHS exchange rate of GH¢11.5, and real GDP growth of 5.5%, the compounded calculation yields an estimated revenue of GH¢209.8 billion for the present year. This estimate is approximately GH¢58 billion below the target of GH¢268.1 billion.

In a year where the government plans to boost spending by 44%, current revenue measures are on track to increase income by only 5 to 10%. Achieving the government’s targeted revenue growth rate of over 35% would require an implied inflation rate of 29% and an exchange rate of GH¢17 per dollar for the rest of the year. If your monetary and fiscal policies are not aligned, you are almost guaranteed a crisis. Without supportive monetary policy, spending would need to be cut back, with infrastructure investments likely facing the steepest reductions. Such significant budget gaps ultimately undermine government creditworthiness, negatively affecting both the currency and debt markets.

The swift appreciation of the currency is clearly having a notable and expected effect on both the country’s economic output and government finances. The recent challenges facing the agriculture sector highlight this issue. This situation is also decreasing government income, which is especially concerning because the country has substantial debt and must refinance GH¢110 billion and $4.9 billion within the next two years. Most people interpret currency appreciation as a sign of effective economic management.

Even dissenting opposition members admit that a strong currency is generally positive, though they argue it is “artificial” and therefore unsustainable. They believe that high gold prices are currently allowing the central bank to maintain the currency at an exchange rate of GH¢10–12, but they worry that gold prices may eventually decline. If this occurs, the government might no longer be able to support the cedi in the foreign exchange market. Essentially, aside from the market intervention, there is consensus view that a strong currency is beneficial. However, I disagree. In my view, a country should not permit a sharp real exchange rate appreciation, even if its trade balance improves—unless this is a result of long-term productivity gains. Regardless of gold prices and the size of the forex reserves, I anticipate that the currency will face pressure.

My viewpoint aligns with second-generation crisis models, such as those by Obstfeld (1994), which identify three main conditions under which the government may discontinue intervention in the foreign exchange market, even amid high gold prices. First, there needs to be a clear incentive for the government to maintain its currency’s value. Second, there must also be reasons compelling the government to abandon intervention in the exchange rate, creating a tension between these opposing motives. Finally, the self-reinforcing nature of a crisis arises when defending an exchange rate band becomes more costly as expectations grow that the government might let it go.

The primary motivation for wanting a strong currency is that it makes imports cheaper and helps control inflation. More importantly, the strong cedi symbolizes the economic strength of the current administration—if it collapses, so does their credibility. On the other hand, a government will consider letting its currency depreciate if it has a real incentive to do so. The guiding principle here is “it takes two nominals to make a real.” A genuine incentive to alter the exchange rate exists when something significant—large debts and salaries—is rigidly set in domestic currency.

Furthermore, the possibility of reduced cocoa prices is generally viewed unfavorably.  As growth in nominal revenues slows (even if real revenue is rising), the government is forced to weigh servicing its debt against paying salaries. While the government may reduce capital spending and funding for various programs, it is reluctant to default on obligations like debt or wages. Lastly, why does public skepticism about the stability of a managed exchange rate make defending it even harder?

When confidence wanes, debt holders demand higher interest rates, anticipating depreciation, which pushes debt costs to unmanageable levels unless devaluation occurs. Similarly, unions, expecting a weaker currency and higher inflation, may negotiate higher wages, further straining the budget. By considering these three basic factors—a reason not to depreciate, a reason to depreciate, and how the expectation of depreciation changes the cost-benefit balance for maintaining the current exchange rate—we can construct a broad explanation for currency crises in line with Krugman’s canonical model.

Over time, the tradeoff between keeping the current currency value and abandoning it worsens, especially given pressures from rising deficits. Eventually, the country will be forced to devalue its currency and adopt a more flexible monetary policy to stay solvent and refinance its maturing debts. As debt holders recognize this situation, they will demand higher rates, prompting the central bank to intervene aggressively in the debt market to keep the budget stable.

This intervention leads to excessive money printing, fueling inflation and further raising interest rates. Higher inflation erodes the currency’s purchasing power, motivating speculators to exit before devaluation—accelerating government woes and triggering devaluation even sooner. Experienced investors who expect this situation may withdraw their funds ahead of time, which could lead to a run on reserves that brings the exchange rate system to an early end—even if gold flows remain strong.

If we are to guess when the currency peg could be dropped, it is probable that the government will maintain it at least until the mid-year budget review. However, in the third quarter, as fiscal pressures increase and the outlook for cocoa farmgate prices worsens, there may be reasons to loosen monetary policy, allowing the money supply to grow and the currency to depreciate slightly to relieve economic stress. In response, debtholders might sell off bonds, and unions could demand wage increases over 20 percent ahead of the next budget announcement.

Usually, once investors anticipate that a currency peg will soon be abandoned, speculative attacks happen quickly, since arbitrage opportunities reward those who act first and prompt others to follow quickly. After such an attack, the exchange rate typically shifts to the “shadow price” aligned with the country’s fiscal situation. As mentioned earlier, this rate stands at GH¢17: $1 today but will keep rising the longer the current peg is sustained. Ultimately, these crises stem from conflicting government policies that prevent the exchange rate system from being sustainable long-term. As Ghanaians often say, these are just theories and I trust those responsible for managing the economy to make the right decisions. This simply represents an alternative perspective. But what do I know?

Gideon Donkor, an avid reader, dog lover, foodie, closet sports genius but a non-financial expert

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