Business News of 2014-02-04

BoG to reform exchange rules to halt cedi's decline

The Bank of Ghana is expected to reintroduce some short-term bills and aggressively reform the reserve requirements of commercial banks in a bid to stem the decline of the local cedi against the major foreign currencies.

The bank may also push for a 100 per cent cedi requirement cover for Vostro (cash held in an account on someone else’s behalf) balances held at banks.

At the next sitting of the Monetary Policy Committee (MPC), the Bank of Governor Dr Kofi Wampah is expected to announce further details of a string of measures aimed at controlling the decline of the cedi.

The central bank is also likely to reduce limits on net open positions of banks in an effort to support the currency, which has fallen more than three per cent this month against the dollar, according to a source at the bank.

The short-term bills are also expected to be in the tenors of: 30-days, 60-days and 270-days. This is intended to support the monetary operations of the Bank of Ghana and provide additional avenues for cedi investments.

The moves are part of more stringent measures to fend off mounting inflation and stabilise the troubled local currency, the cedi that is expected to be announced later this week.

Cedi decline

The cedi has since the beginning of the year depreciated by more than three per cent against other currencies as demand for the dollar by local firms importing goods to drive the growing economy heavily outstripped supply, thus worsening the country's inflation outlook.

To restore stability and transparency in the foreign exchange market, the Bank of Ghana may also require commercial banks to maintain the mandatory nine per cent reserve requirement on domestic and foreign deposit liabilities in Ghana cedis only.

This means that commercial banks will no longer hold the reserves in different currencies.

A source at the Bank of Ghana revealed that the measures are intended to improve the attractiveness of cedi assets and increase the supply of foreign exchange to the market.

The measures by the central bank, some analysts claim, could still be thwarted by “speculative activity of currency traders in the inter-bank foreign exchange market who would continue to exert pressure on exchange rates, resulting in continuous depreciation of the Ghana cedi.

New regulations

The central bank had already issued new regulations to improve liquidity on the interbank currency market to shore up the local currency, the Governor of the Bank of Ghana, Dr Wampah said.

The regulations require all commercial banks in the country to quote a two-way pricing of currency exchange and limit the spread on corporate transactions to a maximum of 200 percentage points.

"I believe this new set of measures and others to follow soon are transformational and will help revamp our interbank market and stabilise the local currency,” he said.

The BoG Governor and his team are expected to go to Parliament to reinforce the regulatory control of the currency under the current circumstances.

"We intend to ensure strict compliance," he said, adding that the central bank would soon announce further restrictions on foreign accounts.

Although January has barely ended, the cedi has already depreciated by more than three per cent, after a 17 per cent slump against the dollar at the end of 2013.

It was trading at GH¢2.45 or GHc2.50 to the dollar last Tuesday and analysts expect it to remain under pressure next week, while market participants assess the impact of the new regulations.

Governor upbeat

But Dr Wampah was upbeat that the measures already taken and those which would be rolled out next would stem the tide.

“This decline is seasonal due to firms buying dollars to pay for goods bought during Christmas and it will soon subside,” he said.

Analysts say the directive will result in a review of the measures introduced to check the cedi's free fall, since other measures already introduced are yet to produce the desired result.

The new Ghana cedi was introduced on July 3, 2007 after four zeros were knocked off, making it the highest-valued currency unit issued by any sovereign country in Africa in 2007.

At that time, US$1 was sold at GH¢0.91. In December 2008, US$1 was sold at GH¢1.10.

In June 2009, US$1 was sold at GH¢1.40; in December 2010 it sold at GH¢1.47 and in December 2011 it sold at GH¢1.64

At the beginning of 2013, US$1 was exchanged at GH¢1.88 and ended the year at GH¢2.16, a 15 per cent decline, according to statistics by the Ghana Stock Exchange (GSE).

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