Business News of Tuesday, 31 December 2019
Source: www.citibusinessnews.com
2019-12-31
Governor of the Bank of Ghana, Dr. Ernest Addison
The cedi’s perennial struggles against the US dollar does not seem to go away as this year’s performance is rated as the worst in the three-year-old Akufo-Addo administration.
According to data from the Bank of Ghana, the cedi depreciated by about 10.6 percent against the greenback compared to the 8.21 percent depreciation achieved last year.
Even the 2018 performance was worst off when compared to 2017 where the cedi showed a rare determination to shed 3.27 percent of its value against the US dollar.
This year’s performance was set off by the Bank of Ghana’s decision to reduce its monetary policy rate by 100 basis points to 16 percent in January.
That rate action caught foreign investors in our domestic market unaware, and being unhappy about the decision which ultimately meant a reduction in interest rates, they proceeded to sell off their investment.
As investors moved out, it meant more dollars were needed, and that shortage drove up the price of the dollar leading to a rapid depreciation of the local currency.
At its peak, the cedi depreciated by about 5 percent in a matter of weeks, and the mere fact that the entire previous year it had depreciated by about 8 percent made it even scarier.
The inflows from the US$3billion Eurobond provided the Bank of Ghana with forex that was used to cure the shortage. Also, the bank announced a number of measures that were tailored to regulate forex trade which was dominated by undocumented transactions.
Apart from the forex market conduct rules, the central bank also on October 1 this year, commenced forward sales purchases of forex.
The central bank in a notice on guidelines issued to forex dealers said the initiative which comes on the back of improved liquidity on the market would deepen the foreign Exchange Market.
Foreign exchange dealers until then made forex purchase through spot sales, that is, a purchase made on a day and settlements done in two days.
The Bank of Ghana earlier this week announced that it will auction US$715 million in Forward Foreign Exchange Auctions for the year 2020.
Per the schedule released by the Bank of Ghana, the central bank would have the highest auction of 80 million dollars each in January, February and March 2020.
But with Ghana set to go to the polls next year, there are fears that the cedi’s depreciation, notwithstanding the BoG’s measures, may top the 10.6 percent depreciation recorded in 2019.
The fact that since 2017 there seems to be a deteriorating year-on-year performance of the cedi, also makes for a grim forecast for the local currency.
Commenting on the performance of the central bank’s forex measures, the IMF said: “these auctions may help mitigate exchange rate volatility, although they create a net open position for the central bank that must be carefully managed.”
The Economist Intelligence Unit, however forecasts that not only will government miss its fiscal deficit target owing to increased spending ahead of elections in that year, but it also forecasts that the cedi will depreciate to an average of GH¢5.66:US$1
