Speculators inundate banks with dollars; As govt, BoG work to consolidate cedi gains
The Minister of Finance, Mr Seth Terkper, has stated that the recovery of the cedi against the dollar will be sustained, as offshore inflows arrive to boost foreign exchange supplies.
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The recovery of the cedi against the US dollar in particular is expected to dampen speculation and boost more confidence in the economy.
Speaking to the Daily Graphic in an interview last Saturday, the Finance Minister was upbeat that the local currency would head for the biggest gain against major trading currencies in the coming months.
Report from the market say, some foreign exchange speculators have projected that at this rate, the cedi could climb in value to as much as GHC 2.782 to one US dollar by the end of this month (July) as the Bank of Ghana increases more dollar supply in the system.
Heads of treasuries of some commercial banks who spoke to the Daily Graphic on condition of anonymity say, their banks have been inundated by some foreign currency dealers who want to exchange their dollars for the cedi at the current rate, fearing further losses as they hoard the dollars.
The cedi has shed more than 22 per cent in value against the dollar this year and was trading at GH¢4.4051 to the dollar on June 22 when it peaked.
But checks on the BoG website showed that the dollar was being sold for GH¢3.4596 on the interbank market and being bought for GH¢3.4630 as of the close of week Friday, July 10, 2015.
But most forex bureaux visited by the Daily Graphic in Accra Central last Thursday, July 9 were selling the dollar between GH¢3.4708 and GH¢3.520
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Highest gains
Friday’s gain of 4.27 per cent was the highest since early February, as increased dollar sales by the BoG and donor inflows consolidated a bounce after months of decline.
Last June, the BoG increased its dollar sales on the interbank market to $20 million a day, up from $14 million a week, and is set to sustain that in the months ahead.
The market reacted swiftly to the report, which dampened speculation and reduced the pressure on the cedi.
But Mr Terkper said he was hopeful that increased dollar inflows from the almost a billion dollar Eurobond sale, a $1.8 billion cocoa syndication loan, and the resumption of almost $400 million aid from development partners would help sustain the gains by the Ghana cedi.
The gradual switch to gas in the production of electricity should also reduce pressure on the foreign exchange market and allow the central bank to rebuild its external reserves to a higher level than programmed by the end of year.
Offshore inflows
Already, the IMF has indicated that its US$918 million fiscal stability programme with Ghana is on track, and that the government has met almost all the performance criteria.
The IMF is, therefore, set to release the next tranche of $114 million.
This is expected to boost the central bank's foreign exchange reserves and help shore up the cedi.
Analysts also attribute the massive recovery of the cedi to improved sentiments in the economy after the IMF issued an optimistic statement about the progress of ongoing fiscal consolidation.
The gains by the cedi are, therefore, seen as possible evidence of the impact of Ghana's aid programme with the fund, which started in April and is aimed at stabilising its economy and jump-starting growth.
Recent gains by the cedi have surprised many analysts who had forecast the local currency to close the year between GH¢3.9 and GH¢4.3 per dollar.
Databank forecast
A senior economic analyst at Databank, Mr Courage Kingsley Martey, said with the latest improvement on the supply side of the foreign exchange market, the local currency might end the year trading at GH¢3.9 to the dollar.
“We think that the BoG’s latest policy move is only aimed at correcting the speculative drivers of the cedi’s depreciation and anchoring exchange rate expectations until the COCOBOD and Eurobond inflows arrive in the latter part of the second half of 2015”, he said.
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Mr Martey said he wanted the BoG to strengthen its monetary policy framework by restraining its financing to the government.
That, he said, tended to fuel aggregate demand over and above the economy’s current capacity to produce, leading to increased demand for imports and fueling the cedi’s depreciation.
“Fiscal policy must also be recalibrated to support capital expenditure and economic growth in order to generate sufficient foreign exchange inflows from exports and improve the country’s balance of payment position and rebuild gross reserves to avert significant depreciation pressures,” he said.
Rising concerns
The senior economic analyst feared that despite assurances by the government and the effort of the central bank to contain the decline of the cedi, the currency could still face further depreciation pressures, particularly in the first quarter of 2016, if the persistent electricity supply challenges which drove import bill for crude oil as a substitute for Grid-powered electricity were not resolved.
Weak balance of payments and gross reserves position, especially during the first half of the year, also posed major risks to the cedi’s stability as the weak inflow during the period was insufficient to absorb the demand for foreign exchange, he said.
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For now, the cedi is reversing its decline and is expected to record major gains against the dollar as the BoG is set to roll out more measures, with some fiscal reforms from the government, to sustain the recovery of the once ailing currency.
The IMF has stated that the country is on track to report a budget gap of seven per cent of gross domestic product this year, lower than the previous estimate of 7.5 per cent.