Banks can’t absorb US$1.8bn cocoa loan inflow
Banks have admitted their inability to take the entire US$1.8 cocoa loan at once, an admission that supports moves by the central bank to delay direct transfers of the loan into the banking sector until the sector develops enough capacity and depth to take up that injection of foreign exchange.
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The capacity involves the deepening of the FX market and a marked improvement in the capital levels of the banks to ensure that they accumulate enough cedis to exchange for the US$1.8 billion.
Until that is done, the banks explained that allowing the pre-export finance facility to be disbursed directly into the banking sector, as the International Monetary Fund (IMF) had recommended, could lead to a breach of their individual net open position (NOP) limits.
The NOP is a measure of the amount of FX a bank is allowed by the Bank of Ghana (BoG) to hold at a given time.
The President of the Ghana Association of Bankers (GAB), Mr Alhassan Andani, told the GRAPHIC BUSINESS on September 22 that receiving such heavy inflow all at once could also lead to the hoarding of FX by banks that would not find immediate use for the funds.
He was responding to a recent announcement by the central bank that it had developed a rule-base framework, which it will be using to auction this year’s cocoa loan to competing banks.
"For the purposes of managing the flow, banks can't, as it were, absorb that US$1.8 billion all at once because of two things: the capital and the NOP.
“The third is that banks do not really need all that stock today to manage the flow over the period," Mr Andani, who is also the Manging Director of Stanbic Bank Ghana Limited, told the paper on the sidelines of the GAB annual general meeting and luncheon in Accra.
“In fact, it does not make sense to put that chunk of US$1.8 billion in the market because the market today, in terms of demand, does not need that,” he added.
From that perspective, Mr Andani said the BoG was right in deciding that it would continue to hold in its vault the proceeds of the cocoa syndicated loan and subsequently auction them in bits to competing banks, using a rule-based framework that it had developed recently.
Transparency
The Governor of BoG, Dr Abdul-Nashiru Issahaku, said on September 19 that the central bank had decided not to allow the US$1.8 billion cocoa loan be transferred from the offshore accounts of the lending banks directly into the local banking sector.
The decision was due to the inability of the 29 banks to absorb that magnitude of funds at a go, Dr Issahaku said.
In place of the direct transfer, the governor said the bank developed the rule-based framework that would guide the auctioning of the funds to banks that would qualify.
"The framework is transparent and fair and will take cognisance of the need to release dollars as and when the market needs them, the governor told journalists after the Monetary Policy Committee (MPC) meeting on September 19.
The approach is, however, in contrast with an earlier understanding reached by the country and the IMF on the annual cocoa loan, which the Ghana Cocoa Board syndicates from a consortium of banks to help finance cocoa production and purchases.
In that agreement, which is part of reforms under the three-year Extended Credit Facility (ECF) programme that the fund is using to help stabilise Ghana's economy, it was agreed that instead of BoG keeping the forex after they had been transferred from the lending banks, they should always be transferred directly into the banking sector to help deflate the intermittent pressures that the cedi faced.
Impact on cedi
Although the move would be beneficiary to the economy and the cedi in general, Dr Issahaku and Mr Andani converge on the fact that the FX market and the banks in particular were not entirely prepared for implementation.
In its current state, the US$1.8 billion cocoa loan, which the Ghana Cocoa Board (COCOBOD) signed on September 21, constitutes about 30 per cent to 40 per cent of the annual FX supply in the country.
Thus, allowing the loan to be transferred once into the banking sector would mean that banks look for extra cedis beyond their capital to be able to exchange for the excess, Mr Andani said.
“If today, the disbursement was made and you asked banks to take all of it, one, it just did not make sense to do that because we couldn't hold it beyond our NOP.”
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“Also, you have to pay cedis in other to get the US$1.8 billion and that means that it would've sucked up a lot of cedis and that is totally unnecessary," he explained.
He, however, welcomed recent revisions to the Foreign Exchange Act, which requires that export proceeds are repatriated directly into the banking sector.
The move, he said, led to the marked stability in the exchange rate between January and September, this year.
The cedi has depreciated by 3.8 per cent against the US dollar since January, compared to 21 per cent rate of depreciation recorded in the same period last year.
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The president of the GAB maintained that “the compulsory surrender to the market is good but as I said, you also have to be sure that the market does not get overloaded to the extent that we breach our NOP and get into speculative modes.”
According to him, if that happened, banks will just buy the dollars and hold and wait for for the cedi to go down before they sell it.
"That is not good enough for the intervention,” he stressed.