Ghana's currency, the cedi, has seen exchange rate swings in the first half of the year. In spite of the approach of the elections, which is normally the time for economic declines, the local currency has gained some weight. Samuel Doe Ablordeppey & Suleiman Mustapha report.
The Managing Director of Stanbic Bank Ghana Limited, Mr Alhassan Andani, like many chiefs of the financial services industry, is happy that measures introduced by the Bank of Ghana (BoG) to halt the free fall of the cedi is holding grounds.
“The measures have been absolutely thorough and everybody is happy the way this currency has been arrested,” Mr Andani told the GRAPHIC BUSINESS in an exclusive interview on some the factors that were helping the cedi to regain strength against the dollar and major international currencies.
The cedi went on a nose dive at the beginning of the year, shedding about 30 per cent by the middle of the year. However, the Bank of Ghana introduced a number of measures including the enforcement of rules on pricing in dollars, not withdrawing more than US$10,000 over the counter and not travelling with dollar cash along.
Banks were also asked to keep certain levels of reserves corresponding with its foreign exchange accounts, a practice that discouraged people from either opening or keeping foreign currency accounts.
The Bank of Ghana also went on to issue medium to long term bonds of two, three and five years, which were all oversubscribed, mainly by foreign buyers. That meant that more dollars were transferred offshore to Ghana’s foreign reserve accounts to cover more imports of goods and services, thereby keeping the value of the cedi intact, as the supply of the dollar improved.
The cedi which started the year at about GH˘1.58 to the dollar, went up to GH˘1.66 by the close of January 2012. The cedi had crossed GH˘1.7 to the dollar by the end of the first quarter and doubled up to reach GH˘1.89 by the end of June 2012.
Over the first half of this year, the cedi lost about 20 percent of its value against the US dollar in the foreign exchange markets.
But now it has stabilised somewhat between July and August, reaching a peak of GH˘1.9565 to the US dollar in late-August, and thereafter gradually gained in value /recovered to the current GH?1.8938 by mid-October.
Barring any adverse developments, CEPA projects an end-year rate of GH˘1.85 per the US dollar.
For the year as a whole, this would mean a cumulative loss in the value of the cedi by about 13 per cent. In 2008, a trader paid one Ghana Cedi for one U.S. dollar, but at the beginning of April 2012, the same trader travelling to Dubai paid GH˘1.74 for one U.S. dollar.
This means that year-on-year decline in the value of cedi against the US dollar was 74 per cent over a three-year period.
Treasury bills, which shows the extent to which the government was borrowing from the domestic market, also started the year at around 10.7 per cent for the 91-Day bill, 11.25 per cent for the 182-day bill and 12.40 per cent for the two-year note, the rates went up to 12.61 per cent for the 91-day, 12.86 per cent for the 182-day and 13.60 per cent for the two-year note, as the three-year bond issued at the end of February settled a 14.99 per cent.
By the third quarter, the 91-day treasury bill and the two-year note shot up to 23 per cent each, with the182-day settling at 22.92 per cent, which helped the cedi to keep only a crawling depreciation to settle at GH˘1.92 to the dollar.
However, the measures have yielded positive outcomes as the cedi’s depreciation has been reversed somewhat to the present average of GH˘1.85 to the dollar in the month of October. This gives credence to analysts view that the cedi might end the year at GH˘1.9.
Mr Andani is among industry chiefs, who is bullish about the future of the currency, saying “supply of the cedi increased and the confidence has come back this has helped in halting the slide of the cedi against the dollar.”
He, however, warned that the country needs to jealously guard its currency like it was the case in all advanced countries.
“It is not in any Ghanaian’s interest to see the local currency depreciate because we are import based economy. So we all need to behave responsibly and ensure that we protect the value of our local currency. This should be a collective responsibility,” the managing director of Stanbic Bank stressed.
He added his voice to other bankers’ call that people did not need to carry bulk foreign currency on them when travelling for trading because “the banks have the most efficient ways to transfer money to the business entities offshore,” adding “there is absolutely no need for people to carry large sums of dollars on them”
Going forward, the banking guru said the country had to transform its economy to be export-oriented and increase the supply of foreign currency at all times.
That, he believes, would create value for the local currency and make it attractive for people to put their investments there, hence making it totally unrewarding for people to deposit large dollar sums at the bank and get no returns on them.
“When the cedi to the dollar is fairly stable, it makes sense to go for the yield. So people must make their money work for them. We also need more financial literacy and real economic personal activity to generate the supply,” Mr Andani said.
Mr Andani also dreads the situation where Ghana allowed itself to become the source of supply of foreign currency to neighbouring countries; a scenario of everybody just walking into the country for the dollar, which he said was not “sustainable.”
The Minister of Finance and Economic Planning, Dr Kwabena Duffuor, has said that the government would intensify measures to stem the currency's over 30 per cent loss against the dollar since January.
“We’ve begun implementing the latest measures and I have hope that the situation will change soon. By the middle of this month, we’ll see the cedi stabilise against the dollar,”
The acting Governor of the Bank of Ghana (BoG), Dr Kofi Wampah, attributes the fresh gains of the cedi to the implementation of recent policy measures that have resulted in a “slowdown of the monthly depreciation from 5.9 per cent in May, to 3.4 per cent in June, 0.6 per cent in July and further to 0.3 per cent in August 2012.”
In trade weighted terms, the real effective exchange rate depreciated by 4.2 per cent in July 2012 against 1.6 per cent appreciation in the corresponding period of 2011.
The new measures included “the re-introduction of BoG Bills, revision in the application of the statutory reserve requirement of banks and the provision of cedi cover for vostro balances”.
The Executive Director of the Centre for Policy Analysis, Dr Joe Abbey, also attributed the weakening of the cedi in the first half of the year to the political business cycle a characteristic of democracies around the world which is also observed in the Fourth Republic of Ghana.
“It largely manifests itself in election years, resulting in loss of macroeconomic stability continued loss in the value of the cedi and rising inflation”, Dr Abbey said.
A World Bank study findings that election year budget deficits have been, on average, 1.5 percentage points of GDP higher than the budget deficit of the preceding year supports Dr Abbey’s view.
In anticipation of this, investor concerns were expressed from the middle of 2011 as to whether Ghana would perform worse than average in 2012.
A point to note is that during the global economic crises of 2008/2009, the cedi depreciated by 25 per cent against the dollar. Between 2010 and 2011, the cedi again depreciated 18.5 per cent against the US dollar. GB
Source: Daily Guide
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