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BoG Scraps ‘Huhudious’ Forex Measures…And Vindicates Bawumia Again!   
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Dr Kofi Wampah, Governor Bank of Ghana
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The Bank of Ghana (BoG) has finally bowed to good counsel and reversed its controversial and widely criticised foreign exchange rules which many blame for compounding the woes of the Ghana Cedi, culminating in the currency’s unwanted reputation as the worst currency in the world this year.

The Bank of Ghana in a statement issued on Friday stated that “following consultations with stakeholders and the general public as well as an analysis of the available data ” it had reversed almost all the forex directives issued in February.

The Bank of Ghana in February of this year introduced several restrictions on foreign exchange transactions which they claimed were meant to halt the Cedi’s steadily decline in the early part of the year. These restrictions among others prevented over the counter withdrawals of Dollars and placed a threshold of $10,000 as the highest amount a traveller could withdraw after showing proper documentation. It stopped cheque and cheque book issuances in foreign currency and also stopped transfers between foreign currency dominated accounts and also stopped foreign exchange sales by authorized dealers to credit customers.

To make matters worse, BoG ordered all exporters “to collect and repatriate in full the proceeds of their exports to their local banks within 60 days of shipment ” and ordered banks that receive export proceeds to convert them into Cedis within five days “based on the average interbank Foreign Exchange Rate prevailing on the day of conversion with a spread not exceeding 200 pips ”.

Those measures were criticized by various experts who warned that the measures, rather than controlling the decline of the cedi could worsen the situation further and also affect the confidence in the local currency and the banking industry.
Dr. Mahamudu Bawumia, former Deputy Governor of the Bank of Ghana, perhaps summed up the sentiments of all such experts perfectly in his lecture titled “Restoring the value of the cedi ” in March.

For Dr. Bawumia, the measures were based on the wrong prognosis of the situation which was that Dollarization was the cause of the Cedi depreciation stating, “…the fact is that dollarization only rears its head when the economic fundamentals are weak and people lose confidence in the ability of the cedi to maintain its value. Dollarization is and has been a consequence of weak economic fundamentals and not the cause of poor economic performance. Persistent depreciation of a currency would result in dollarization. The lesson here is that, trying to solve the problem of Cedi depreciation by focusing on de-dollarization is attacking the effects of a problem and not its causes; it is ultimately an exercise in futility ”.

Dr. Bawumia further explained how the measures were going to be harmful to the economy and the banking industry particularly.

Forcing exporters to now surrender their earnings within 5 days means that they would likely have to buy foreign exchange at higher price to import raw materials at a later date. It is a tax on exporters that will have the effect of discouraging the repatriation of export earnings. …….. Forcible conversion into cedis and restrictions on dollar withdrawals amount to a breach of contract which would undermine confidence in the banking system. It would discourage people from bringing in their foreign exchange holdings into the banking system and drive foreign exchange transactions into the black market ”.

He warned that “If these two new directives are meant to stop the depreciation of the cedi, then they are bound to fail because dollarization, as I stated earlier, is not the cause of depreciation but rather a vote of no confidence in the local currency. Unfortunately these directives are retrogressive steps that have destroyed so much of the hard work on the foreign exchange market going back 30 years .”

Finally, Dr. Bawumia urged the Bank of Ghana to immediately reverse the measures and even signaled that history showed that the measure will be short-lived as it was based on the wrong view that dollarization was the cause of the cedi’s woes.

Mr. Chairman, to restore confidence in the banking system and a degree of certainty in the foreign exchange regime, the Bank of Ghana should immediately reverse the new directives relating to the forced conversion into cedis of repatriated export earnings and forced conversion into cedis of withdrawals from FCA and FEA accounts. There is no problem with repatriation of export proceeds but there must not be forced conversion of those proceeds into cedis ,” he stressed.

During the years 2002-2007 and 2010-2011, he stated, the cedi was relatively stable even though exporters were allowed to retain their repatriated earnings in dollars and foreign account holders were allowed to withdraw their savings in dollars.

This was therefore not responsible for the depreciation of the cedi. However, the new directives are based on what in my humble opinion is the rather wrong view that dollarization is responsible for depreciation of the cedi. International experience shows that regulations such as those issued by the Bank of Ghana tend to be short-lived in effect as market participants find ways to circumvent them. Zambia just last week abolished similar foreign exchange controls because they found out that the controls were counterproductive . “

Despite these views however, the Bank of Ghana remained adamant and decided to keep the measures even though there was proof that the measures had done nothing to reverse the decline of the cedi.

For many, the measures of the Bank of Ghana worsened the plight of the cedi and point to the fact that the Cedi was trading at 2.41 to a dollar after falling by some 7% between January and February when the measures were introduced but slumped to its worst value in years after the measures and has now fallen by almost 40%, trading between 3.75 and 3.80 on the market.
Source: Gordon Asare-Bediako/New Crusading Guide/Ghana

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