The steady depletion of Ghana’s international reserves from US$5.6 billion in December 2013 to US$ 4.7 billion as of March 28, 2014 is heightening fears about the capacity of the government to meet its international debt repayment obligations.
But financial analyst and a chartered economist, Mr John Gatsi, in an interview with the Daily Graphic, sharply downplayed those fears, saying, “It is a normal phenomenon”.
According to Mr Gatsi, the government should be worried when the country’s international reserves hit below 1.8 months of import cover.
“Ghana has had a trajectory of averaging its international reserves to between 1.8 to 3.0 months of import cover,” he said.
He explained that when a country’s international reserves hit below average of 1.8 months of import, the government would have to sell off some of its foreign assets to shore up the liquidity situation in the foreign exchange market.
“It is a measure of what a country’s central bank effectively has available to make external payments and this is the measure that is of most concern to international investors,” he said.
The Bank of Ghana Governor, Dr Henry Kofi Wampah, at the recent Monetary Policy Committee (MPC)news conference in Accra, stated that “gross international reserves as at March 28, 2014 was estimated at US$4.7 billion, compared to US$5.6 billion at the end of 2013, able to finance imports for only 2.6 months”.
The depletion of the country’s reserves caused the visiting Economics Professor at the Central University College, Dr Mahamud Bawumia, to earlier raise concerns about the decline in the country’s foreign exchange reserves, casting doubts about the government’s ability to effectively intervene in the foreign exchange market.
Dr Bawumia was even more alarmed that the current net international reserve position was not sufficient to purchase five months of normal crude oil imports.
BoG on Fitch ratings
In a related development, the central bank has rejected the warning by the international ratings agency, Fitch, that Ghana could face a credit downgrade due to its rising debts and depreciating currency.
The ratings agency lowered the country’s outlook to “negative” from “stable”, citing a budget deficit of 10.8 per cent of national output and a 20 per cent depreciation of Ghana’s currency, the cedi, but said it would keep the country’s debt ratings at “B”.
“Ghana’s large budget deficit is adversely impacting economic stability, with the current account deficit and inflation firmly in double digits,” the ratings agency said in a statement.
But Dr Wampah disagrees with the rating agency’s assessment, saying the agency only considered the short-term impacts.
“They didn’t look as much to the forecast both in the medium, as well as the long term, in my view; I think they should have put some weight to long term. They were more focused on the short- term view and so I cannot agree with them,” he said.
Viewed as the most stable democracy in the region, Ghana has seen rapid economic growth in recent years, thanks to favourable exports of gold, cocoa and oil, which it began producing in 2010.
But falling gold prices, government overspending and difficulties in raising Ghana’s oil production beyond its current level of 100,000 barrels per day have prompted scepticism among investors and lenders.
The International Monetary Fund said last month that the economy in Ghana grew by only 5.5 per cent in 2013, a drop from nearly 8.0 per cent.
The bank has maintained its policy rate at 18.0 per cent following a 200 basis point adjustment in a bid to halt the slide of the cedi.
“The committee is of the view that the impacts from the recent monetary policies are still working through the system and so it has decided to maintain the policy rate at 18 per cent,” Dr Wampah said.
Finance Minister Seth Terkper announced no new policies to tackle the deficit in a speech to Parliament on April 1, and said measures already introduced, which included subsidy cuts and new foreign exchange rules, would, over time, consolidate the fiscal position.