Cedi’s hopes hang on BoG

 

The Bank of Ghana (BoG) must do more to shore-up the cedi, say market players -- who predict that the local currency will remain under pressure as importers continue to seek scarce dollars to pay for goods procured on credit during the holidays as well as buy fresh stocks for the New Year.

Last week the BoG, which has been cautious about using its international reserves too quickly to ease the shortage of dollars, said it had injected US$20million to meet demand in selected sectors. But the amount was seen as paltry, with banks saying the central bank must intervene more vigorously lest the cedi, which fell by 3.1 percent against the dollar in January, gives up further ground to not just the greenback, but also the euro, pound and CFA.

At the start of the year, the exchange rate was 2.335 cedis to the dollar, but it slipped to 2.45 cedis by the end of January, according to data from Bloomberg. By mid-morning on Monday, the currency was at 2.4650 to the dollar.

“Basically, what we have seen from the beginning of this year is that the currency has come under pressure mainly from strong demand on both the corporate and retail side,” said Inusah Musah, Head, Global Markets, at Stanbic Bank in Accra. “We are also experiencing a supply issue because the mining sector, which is one of the key forex providers in the country, is going through some price challenges. And once you have more demand than supply, naturally, you expect the push.”

He added that “from where we sit in the market, [the central bank] needs to do more in terms of supply to ease off the pressure”. Though the BoG has supplied dollars to aid the import of oil, non-oil demand -- which is also strong -- has not been met sufficiently,” he said.

Another banker who keeps his eye on the currency market -- but asked not to be named because he is not authorised to speak -- said the remainder of the first quarter is a critical period for the market, with more depreciation pressure on the cedi expected from multinationals that will be buying dollars to repatriate dividends to shareholders.

“I don’t see the demand [for dollars] easing in the coming months. So the solution is to increase the supply, because this is purely a demand and supply issue,” he said.

The BoG seems in a quandary, however: its reserves, which stood at US$5.6billion in November, are enough for only 2.9 months of imports compared to its target of 3 months -- and not all of it is liquid, which limits the extent of its intervention.

Consumers feel the pain

While bankers urge on their regulator, ordinary consumers -- in whose pockets the pain of depreciation is felt -- are also counting on the central bank to support the cedi to prevent further cost-of-living rises.

In the past year the currency has lost 21 percent of its value against the dollar, pushing up the price of almost everything: fuel at the pumps, cooking gas, frozen chicken, clothing, furniture, footwear and the wigs that women use for their hair.

Two years ago, when the cedi weakened by 18 percent, the government shielded consumers from much of the impact by subsidising petrol, electricity and water -- a decision that contributed to a record budget deficit worth 12 percent of GDP.

This year, however, subsidies have been cancelled, leaving consumers to bear the brunt of the currency’s misfortune. From 8.8 percent in December 2012, inflation picked up to 13.5 percent last month, and the persistently weak cedi threatens to force it higher.

Petroleum products have become especially expensive given their double exposure to the vagaries of the international price of crude oil and the local currency’s exchange rate. Petrol and diesel prices are up 41 percent and 45 percent respectively from a year ago, while liquefied petroleum gas (LPG) and kerosene have jumped by 112 percent and 169 percent in the same period.

Fundamental problem

At the root of the currency debacle is the country’s sizeable import demand, with much of the boost to incomes from the brisk economic growth rates of the past decade fuelling the craving for tastier goods from abroad.

The International Monetary Fund (IMF) estimates that Ghana’s trade deficit widened to 13.1 percent of GDP last year, while the current account deficit -- a broader measure that adds net foreign transfers due to dividends, remittances and other forms of income -- rose to 12.9 percent of GDP from 12.2 percent in 2012.

Stanbic Bank’s Musah said excess dollar demand is the “immediate driver” of the cedi’s depreciation, but the more fundamental reason for its sustained weakness is that “structurally, we tend to have more imports than exports”.

This view is widely shared and, according to most critical observers, the permanent way to fix the cedi’s vulnerabilities is to bolster and diversify exports as well as curb import demand by boosting the quantity and quality of home-based production.

Meantime, the fire-fighting is on

In the short-term, however, the central bank -- nervous about the danger that depreciation poses to already stubborn inflation -- has been mulling additional measures to defend the currency. One central banker hinted last week that the monetary authorities may limit the number of forex accounts that non-traders can maintain with a bank, an idea apparently intended to curtail the hoarding of dollars.

Already, in a bid to promote transparent pricing of foreign exchange and bring the market into greater exchange-rate harmony, the regulator has instructed banks to quote both their “buy” and “sell” positions when dealing with counterparties, and to limit the spread between the rates to 25 basis points in inter-bank transactions and 200 basis points in transactions with customers.

One senior currency trader at a major regional bank said the central bank’s new directive will narrow banks’ margins, and that traders may find a way to circumvent the restrictions.

The BoG could also raise interest rates on Thursday, after it brought forward its February monetary-policy meeting by two weeks to consider early action to save the declining situation.

An interest-rate hike (the rate is currently at 16 percent) will increase the returns on cedi assets, but could further slow already lacklustre growth that registered 4.1 percent in the first nine months of 2013, compared to 8.7 percent in the same period of 2012.

By Leslie Dwight MENSAH & Bernard Yaw ASHIADEY

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