The Bank of Ghana (BoG) has mopped up GH˘1.2 billion in excess liquidity from the system in a bid to stem the exchange rate pressure and reduce the demand for dollars.
In a move to halt the growing trend of ‘dollarisation’ and stabilise the cedi, the central bank is also reviewing the currency composition of the reserve requirements of commercial banks.
The Governor of the BoG and Chairman of the Monetary Policy Committee (MPC), Mr Kwesi Amissah-Arthur, at a news conference in Accra Wednesday, announced a hike in the prime interest rate by 50 basis points to 15 per cent, the third rate hike this year, as part of efforts to fend off mounting inflation and stabilise the local currency.
Dollarisation is characterised by a tendency for businesses to sell their goods and services in foreign currencies, particularly dollars.
Service providers quote exchange rates that are significantly off-market. The fringe exchange rates trickle down into the market and become benchmark rates, unduly influencing market rates.
The situation has fuelled price increases in the country and led the BoG to tighten monetary policy, alter bank reserve requirements and reintroduce several bonds.
“The committee notes that the measures have begun to take effect. Increase in the policy rate has led to upward adjustments in rates of money market instruments and improve the attractiveness of cedi assets, compared to foreign currency assets,” Mr Amissah-Arthur said.
According to the governor, though the BoG was not considering abolishing the operation of foreign exchange accounts by citizens, it would move to restore the pre-eminence of the cedi in domestic transactions, which required strict adherence to the provisions of the Foreign Exchange Act 2006 (Act 723) and the accompanying regulations.
“It is our view that this will contribute to restoring confidence in the cedi,” he said, adding that “the bank will issue the necessary notices to this effect in due course”.
He was worried about the large dollar deposits in commercial bank accounts, which he said had significantly contributed to the exchange rate pressure.
The share of foreign currency deposits to total deposits in the banking system increased from 27.9 per cent in April 2010 to 28.2 per cent in April 2011 and 31.8 per cent in April this year.
This means that some commercial banks have more foreign currency deposits than domestic currency in their total deposit.
The BoG feared that those banks could be importing large volumes of foreign currency to service the needs of their clients.
During the first five months of this year, the cedi has depreciated cumulatively by 15.1 per cent against the US dollar, compared to 1.9 per cent depreciation in the same period of 2011.
In recent weeks, however, the pace of depreciation of the cedi has moderated as a result of the measures introduced to restore stability.
The real effective exchange rate depreciated by 6.8 per cent between January and April 2012, compared with a real appreciation of 5.9 per cent in the same period of 2011. But Mr Amissah-Arthur assured Ghanaians that the end of the cedi fall was in sight.
Source: Daily Graphic/Ghana
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