BoG shores up currency as Cedi shows early signs of weakening

Business News of Tuesday, 27 January 2015

Source: Graphic Online

Brand New Cedi Notes

Barely a month into the year, the Ghana cedi has started showing early signs of losing its value to major currencies, particularly the United States dollar, a scare that is forcing the Bank of Ghana to almost double its weekly dollar float into the market.

Since January 1 to date, the local currency has lost 0.64 per cent weight against the US dollar.

A source at the central bank told the GRAPHIC BUSINESS that the bank had “significantly increased” its dollars to the market to contain shortage that may arise out of composite demand for the currency in this time of the year.

The cedi, which traded at GH¢3.1 to US$1 at the end of December 2014, is now trading at GH¢3.22 to US$1, fuelled by surging corporate demand for the dollar and the lack of major offshore inflows.

As of December last year, a US$100 traded for GH¢320. By Friday, January 23, the US$100 was being bought for GH¢340 and sold for GH¢330 at most forex bureaux visited by the GRAPHIC BUSINESS in Accra.

Some economic analysts, including the Head of Research at Standard Chartered Africa, Ms Razia Khan, have said the Ghana cedi could depreciate to about GH¢4.20 by the end of the year.

So far, the cedi has depreciated by 0.63 per cent since the beginning of the year and analysts fear rising corporate demand for the dollar will exert more pressure on the local currency.

The cedi in the first nine months of 2014 slumped almost around 37 per cent but a Eurobond issue, cocoa loan inflows and talks with the International Monetary Fund on a financial assistance programme helped it recoup some losses.

The slowdown of the cedi’s depreciation in the last quarter of 2014 has triggered debate about whether this is just a flash in the pan after the turbulence of the first nine months of the year.

Analysts say the US$1 billion Eurobond and US$1.7 billion COCOBOD trade finance facility for the 2014/15 cocoa purchases, coupled with the slowdown of imports in August–September, largely explained the temporary halt in the declining value of the cedi.

A source at the Bank of Ghana said happenings on the foreign exchange market was cyclical because businesses at this time would need dollars to finance their imports for the first quarter of the year.

Officials of the central bank said they were pumping more dollars into the system in order to meet the high dollar demand from businesses and individuals.

This is part of the short-term measures the Bank of Ghana is adopting to prevent continuous drop in the cedi’s value going forward.

In the medium-to-long-term, however, the redemption of these facilities could put a downward pressure on the cedi against other foreign currencies if these facilities are not prudently invested in economic sectors that would yield better returns in the future.

Dr William Baah Boateng of the International Institute for Advanced Studies (IIAS) blames the current slide in the value of the cedi to the high fiscal deficit arising from unproductive spending.

According to him, the recent exchange rate concern is directly traced to the high fiscal deficit, which peaked at about 12 per cent of GDP in 2012

“The ‘dollarisation’ of local transactions including government’s own policy of indexing import duties to the dollar also tends to put pressure on demand for dollars by economic agents to avoid potential losses for holding domestic currency to pay import duties at the port,” he said.

But an economic analyst at investment firm, Databank Brokerage, Mr Courage Kingsley Martey, expects the cedi to remain stable after shedding some weight against the dollar.

“I think the cedi will find its level and remain stable in the coming weeks mainly because the Bank of Ghana (BoG) is likely to support the supply side on the interbank market,” he said.

He wants the maturity period for some government bills extended to between six to nine months.

Another economist, Dr John Gatsi, agrees and for him, the cedi was just assuming a normal behaviour, which was not strange.

“It is not strange that we are seeing this level of depreciation and the drop is not significant to warrant any panic,” he said.

Dr Gatsi, who is also a lecturer in Finance at the University Of Cape Coast, said the Bank of Ghana (BoG) was limited in its ability to always intervene in the market to halt the levels of depreciation.

According to him, BoG cannot intervene to correct the market if the currency depreciation is caused by the huge fiscal deficit or as a result of debt repayment or repatriation of profits.

Analysts expect the cedi to marginally lag behind the US dollar in the coming week as plummeting crude oil prices translate into foreign exchange shortfalls that will adversely impact on Ghana’s 2015 budget and gross reserves position.

But Dr Gatsi is upbeat that the pressure on the cedi would be short-lived as investors look forward to the start of the anticipated IMF programme in the first quarter of 2015 that will provide stable macroeconomic front for investment decisions.

For instance as of last month, one needed GH¢3.1 to get a dollar from the Forex Bureau, but it is now GH¢3.4 to a dollar.

For now, the cedi’s performance will largely depend on the start of the anticipated IMF programme that is expected to provide the technical and balance of payment support.

An IMF programme would therefore provide the needed support and sustain investor confidence in the Ghana Cedi.

There is also the US$153 million assistance for the construction of some senior high schools, which are offshore inflows that is expected to boost the country’s reserves.

The fear, however, is that the sustained recovery of the US economy (supporting the US dollar) could hasten the timing of a hike in US interest rates, which could divert capital flow to the US and heighten depreciation pressures on sub-Saharan Africa currencies.