Don’t stop ‘dollarisation’; It's counter productive
In a desperate quest to stabilise the falling cedi against the United States dollar, the Bank of Ghana (BoG) has encountered the displeasure of some analysts and business captains for prohibiting foreign currency transactions in the country.
Advertisement
The central bank in the week ending January 7 outlawed contracting foreign loans by companies for their operations and also banned commercial banks from guaranteeing foreign loans for businesses, among other stiffer measures to halt decline of the cedi.
That fall, which has rattled consumers and shaken business confidence, is the latest problem confronting the monetary policymakers of a country that is also struggling to control broader economic instability, as depicted in a high budget deficit of 10.2 per cent.
The Governor of the Bank of Ghana, Dr Kofi Wampah, is upbeat the directives, when strictly enforced, would “make the cedi currency more attractive and, therefore, instead of going to buy dollars, you will rather buy treasury bills and other Bank of Ghana/government papers, and so on."
But an Economic Consultant, Mr Kwamena Essilfie Adjaye, says the latest move by the BoG is counter-productive and was likely to spiral the black market foreign exchange trade.
“Outlawing or banning dollarisation is not the solution to halt the falling cedi. However, encouraging foreign exchange inflows would do the trick,” he said.
Mr Adjaye, who disagrees with the rules, said “Let’s not do anything that will constrain the supply of foreign exchange,” adding that “any measures to frustrate or constrain the inflow of foreign exchange accounts are likely to worsen the situation”.
According to him, Ghana has a long history of foreign exchange controls which never worked, adding that he did not expect those latest measures to halt the tumbling of the cedi.
On the other hand, the measures would make holders of foreign currency reluctant to trade it in the formal market, which might increase the black market trade.
The economist rather wants the central bank to actively encourage the inflow of foreign exchange by way of remittances and other capital inflows, including deposits into foreign exchange accounts.
“We should encourage non-resident Ghanaians to open foreign exchange accounts in our local banks,” he said.
Mr Adjaye suggested that the BoG float special foreign exchange bonds targeted at Ghanaians and non-resident Ghanaians who had foreign exchange.
The economist, who in 1996 was the lead consultant on foreign exchange rules in Ghana, called on the BoG to address the constraint on the supply side of foreign exchanges in the short term.
“Industrialisation, value addition and import reduction are the best measures to address the free fall of our currency. Let's think long term.”
A Financial Analyst, Dr Yaw Kwadwo Nkansah, agreed with Mr Adjaye that the measures could discourage high net-worth individuals with dollars from investing in the banking system and consequently reduce availability of loanable funds which, he says, is likely to trigger a rise in borrowing costs.
“Uncontrolled black market activities could thrive under such a regime because importers will not stop importing and those with dollars would prefer to trade them in the black market.”
“You are effectively freezing dollar accounts and expect to reduce amount of dollars in circulation by that? I don't believe that is an effective strategy for a heavily import-dependent economy like ours. The result could be more disastrous than we have now,” he cautioned.
According to Mr Nkansah, the "artificial" shortage of dollars that the measures will create could spike the price of convertible currency, especially the USD, leading to further plummeting of the cedi against the major trading currencies.
In addition, the increased cost of foreign currency could be priced into the cost of goods, which will further create cost-pushed inflation.
“The BoG may have a good intention but this could backfire. I wouldn't be surprised if under this new regime, the cedi slumps to GH¢4 to US$1 by the end of the year,” he noted.
Advertisement
The Minister of Finance, Mr Seth Terkper, however, sharply disagrees with such schools of thought, saying “the measures are necessary to ensure supply of foreign exchange” for those who really need them to transactions abroad or transfers and not to be used as a store of value within the economy.
Mr Terkper said just as outlined by the Bank of Ghana at its January 6 press conference, the Ghana cedi’s predicament was not isolated as it was brought on by what has become known as “the tappering effect” where improvements in the US economy was causing investors to withdraw investments in emerging markets and repartriating them to the US.
The finance minister said considering that commodity prices were also falling and imports were increasing, the measures representated an important step, as the government also makes efforts to reduce the budget deficit, increase exports and diversify the economy.
Interest rate/cedi trade off
But in a highly expectant move, the Bank of Ghana hiked its key policy rate by 200 basis points to 18 per cent, from 16 per cent, in a drive to curb a fall in the cedi currency and combat external pressures.
Advertisement
This is the first increase in the central bank’s main interest rate determinant policy since May 2013. The hike had been expected, although most analysts forecast a 100 basis point rise. Analysts said they welcomed the decision.
The latest move by the central bank is likely to trigger interest rates and the cost of borrowing, which at the moment is more than 30 per cent.
This First Deputy Governor of the Bank of Ghana, Mr Millison Narh, admits it is a tradeoff to save the cedi from falling further.
“Yes, you can say that this move will increase interest rates, but it is the better under this current circumspect in order to save the cedi,” he told the Graphic Business on the sidelines of a Monetary Policy Committee (MPC) news conference in Accra.
Advertisement
Head of Research at Standard Chartered Bank, Ms Razia Khan, has proposed a rise in the policy rate by 100 basis points (bps) to 17 per cent, from the 16 per cent.
Explaining her position, Ms Khan said “even if the assumption is that inflation is driven primarily by one-offs, utility and fuel subsidy adjustment – as the Bank of Ghana has suggested - and that these one-offs may well prove to be temporary, given the weakness of demand in Ghana - in our view, tightening now would still be the correct thing to do.”
The Bank of Ghana is also under further pressure to act because of inflation, which in December hit a three-year high of 13.5 per cent in a country which is viewed as one of Africa's brightest prospects because of its stable democracy and high GDP growth.
Ghana follows emerging markets such as India, Turkey and South Africa that increased borrowing costs in January to support their currencies after the U.S. Federal Reserve's decision to roll back its bond buying shook emerging markets.