Explanation of Key Concepts in Money and Liquidity in a Modern Economy

Part a: Explanation of the Statement on Medium of Exchange 

In a modern economy like Ghana’s, money functions primarily as a medium of exchange, facilitating transactions without needing intrinsic utility (value-in-use). Instead, its acceptability relies on collective belief in its purchasing power (value-in-exchange). This shift from commodity money to fiat money enhances efficiency, as seen in post-colonial Ghana where the cedi replaced barter systems.

Value-in-use refers to inherent usefulness, e.g., gold’s industrial applications. Value-in-exchange is the ability to trade for goods/services based on market acceptance.

Examples:

• Fiat Currency (Ghanaian Cedi): No intrinsic value beyond paper/plastic but accepted due to BoG backing under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930). During the 2022-2024 DDEP, cedis retained exchange value despite inflation, unlike hyperinflation cases where trust erodes.
• Digital Money (Mobile Money like MTN MoMo): Under the Payment Systems and Services Act, 2019 (Act 987), it has no physical use but enables exchanges, boosting financial inclusion post-2017 banking cleanup.
• Historical Contrast: Cowrie shells in pre-colonial Ghana had ornamental value-in-use but were cumbersome; modern fiat avoids this, aligning with BoG’s monetary policy for stability.

This principle supports economic growth by reducing transaction costs, though risks like inflation (e.g., Ghana’s 2023 peaks) can undermine exchange value if not managed via BoG directives.

Part b: Discussion of Opportunity Cost of Liquidity 

The opportunity cost of liquidity is the foregone return from holding liquid assets instead of higher-yielding ones. In Ghana’s banking sector, this is critical amid liquidity risks highlighted by the 2017-2019 cleanup, where banks like UT Bank collapsed due to mismatches. BoG’s Liquidity Risk Management Guidelines require balancing liquidity for resilience.

Reference to Cash:

• Cash (notes/coins) offers ultimate liquidity—instant use without conversion risk—but zero interest. Opportunity cost is the interest sacrificed, e.g., holding GHS 10,000 cash instead of a 91-day Treasury Bill at 25% yield (2025 rates post-DDEP recovery) forgoes ~GHS 625 quarterly.
• Practical Impact: In Ghana, high cash holdings (e.g., informal sector) increase costs during inflation; BoG promotes digital alternatives to reduce this, aligning with Basel III-adapted standards.
• Example: During 2022 panic withdrawals, cash hoarding spiked opportunity costs as rates rose, prompting banks like GCB to offer incentives for deposits.

Reference to Interest-Bearing Financial Assets:

• These (e.g., savings accounts, bonds) provide some liquidity with yields but lower than illiquid investments. Opportunity cost arises from tiered liquidity: a fixed deposit at 15% is less liquid than a current account at 0-5%, sacrificing accessibility for return.
• Spectrum: Highly liquid like demand deposits (low yield, low cost) vs. long-term bonds (high yield, high cost if sold early). In Ghana, post-cleanup recapitalization (BoG Notice BG/GOV/SEC/2023/05) encouraged tiered products, e.g., Stanbic Bank’s tiered savings yield 10-12%, but early withdrawal penalties reflect liquidity cost.
• Risk Context: Cyber threats under 2020 Directive increase costs for digital assets; international comparison—Barclays’ UK model shows diversified portfolios minimize costs.
• Enhancement: Banks use ALM (Asset-Liability Management) to optimize, ensuring profitability while complying with CRD for capital adequacy.

Overall, managing this cost fosters ethical banking, profitability, and stability in Ghana’s recovering economy.