BoG pumps more dollars
The Bank of Ghana will next month begin a monthly surrender of US$150 million in export proceeds to commercial banks in a renewed bid to further strengthen the cedi.
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This is expected to increase the supply of foreign currency in the market and help ease the pressure on the local currency.
The Governor of the Bank of Ghana, Dr Abdul Nashir Issahaku, told the Graphic Business in an interview that the cocoa pre-export finance facility, expected in the fourth quarter, will also increase the supply of foreign exchange in the interbank forex market, which will further boost the central bank's foreign exchange reserves.
The governor said the robust interbank intervention would continue and that the expected dollar inflows from donors, a Eurobond and cocoa loan, will help to boost the central bank's foreign exchange reserves.
"We have raised our intervention significantly over the period. This is going to continue and we will do more as and when necessary to ease pressure on the cedi," Dr Issahaku said.
"We expect to have a very healthy reserve position in the coming weeks as this policy takes root,” he said.
“It will initially seek to establish a strong monitoring system to ensure export revenues are released into the market through commercial banks, and sold on a “need basis,” the governor said.
Cumulative depreciation
So far, Dr Issahaku’s almost four months in office as governor of the central bank has seen the cedi cumulatively depreciating only by 3.3 per cent against the US dollar in the year to June 2016 compared with 26.1 per cent over the same period of 2015.
This, he attributes, to the programme with the IMF, which has begun to impact on the macro economy.
“The fiscal consolidation and the tight monetary policy stance have both contributed immensely to anchor expectations and have led us to our current position,” he said.
“Specifically, the monetary policy rate (MPR) was cumulatively increased by 500 basis points in 2015 and at the same time, the fiscal deficit narrowed to 6.7 per cent in 2015, lower than the programme target of 7.3 per cent and down from 10.6 per cent in 2014. These policy adjustments have significantly reduced the exchange rate volatility in the economy,” he added.
There have been significant foreign exchange inflows in the last quarter of 2015; US$1.8 billion from the cocoa pre-export finance facility and the US$1.0 billion Eurobond proceeds.
Foreign inflows
The central bank has also seen some appreciable levels of inflows from the development partners and currency swaps, with the deposit money banks minimised in the first quarter volatility in the foreign exchange market.
But in a bid to further strengthen the local currency, the central bank is starting a four-stage process to liberalise the foreign-exchange market to make it easier for companies to access foreign currency.
The current practice is for the Bank of Ghana to build foreign reserves with these inflows and release them through lenders onto the market as it deems fit, to smooth out volatility. The system has been in place since 1992.
Directing the export earnings to commercial banks will help deepen Ghana’s foreign exchange market and reduce volatility in the exchange rate, the International Monetary Fund said in a January review of the country.
Analysts say the new approach would enable banks to meet most of the normal daily foreign-exchange demand from customers, while providing an impetus for lenders to enter into syndication deals for bigger transactions and to develop derivative instruments including forward contracts, something the market currently doesn’t allow.
Lending rate maintained
Last week, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) in a highly expected move maintained its key lending rate at 26 per cent for a fourth straight meeting, citing risks to inflation and balanced growth.
The Governor of the Bank of Ghana, who doubles as the Chairman of the MPC, said at a news conference in Accra last Monday that inflationary trends in the first half of the year had been largely influenced by increases in the prices of petroleum products and utility tariffs.
“The committee views the risks to inflation and growth as balanced,” Dr Issahaku said.
The MPC, he said, “sees the current monetary policy stance as appropriate since inflation levels remain above the medium-term target band.”
“Inflation stood at 18.4 per cent in June but was expected to peak in the third quarter of 2016 before beginning to fall,” Dr Issahaku said.
The policy rate, which is the rate at which the central bank lends to banks and is also used by the banks to calculate their base rates, is expected to keep the country’s interest rates further tightened.
The central bank raised the rate four times by a total of 500 basis points last year to prop up a plunging currency which fueled consumer-price growth.
“To a large extent, the pace of decline in inflation has been reinforced by the current tight monetary policy stance and stability in the local currency,” Dr Issahaku said.