Bank of Ghana not injecting $800m to support cedi – Isaac Adongo

Financial analyst and Member of Parliament for Bolgatanga Central, Mr Isaac Adongo, says it is not true that the Bank of Ghana is injecting $800 million into the economy to help stabilise the ongoing depreciation of the cedi against its major foreign counterparts.

In an expansive article on the recent depreciation, the MP said it was “misconception” for people to think that the central bank was going to inject the said amount into the economy.

“Before I proceed, let me clear some misconception that BoG’s utterances on the claimed expected $800 million addition to the NIR created in the minds of some people,” he said in the article titled ‘The $800m Deceit and Bank of Ghana’s Non-Compliance With Its Own Law. “BoG is not going to support the cedi with those reserves, provided even that it gets them and has the right to use them,” he added.

His piece followed a March 5 publication by the Daily Graphic which quoted a Bank of Ghana official as saying that the bank was targeting to add $800 million to the country’s net international reserves by the end of March.

The story said the addition of the $800 million was to increase the NIR to around $4 billion to help give comfort to investors and in the process stabilise the cedi depreciation.

Since then, some analysts have criticised the planned action as unsustainable.

In his piece, however, Mr Adongo explained that the central bank was not going to inject the said amount into the economy.

“It is only hoping that their addition to the NIR will help take it afloat the dangerous levels it is now and therefore provide some comfort to the market, the absence of which is currently aiding the depreciation process,” he said.

His article also examined areas he said were sources of the $800 million that the Bank of Ghana expected to add to the NIR.

He accused the BoG of deliberately failing to disclose “the exact sources of these so-called ‘pipeline’ funds that it hopes will yield an additional $800 million to the national reserves and therefore provide comfort to the international community.

“Fortunately, my checks reveal three major sources and after knowing about them, one will surely understand why the central bank decided to be mute on the sources of the $800 million additional reserves.

Below are the sources that Mr Adongo said the examined areas he said were sources of the $800 million that BoG expects to add to the NIR will come from.

1. The first source of the purported $800 million addition to our reserves is a $300 million swap arrangement that the central bank, faced with the precariously low levels of our reserve position at the moment, is forced to undertake to help boost gross international reserves, not NIR. At this point, let me hasten to state that it is soothing that BoG is acting in ways that vindicate my previous position about the low levels of the NIR and the need to find sustainable ways to shore them up to avoid a run on the country. While the intent is encouraging, the resort to swaps, which is a short term borrowing arrangement, is not the best option and will do little to address the primary problem. In actual fact, proceeds of swaps are encumbered funds. As such, and worsened by the short term nature of those arrangements, they will only increase forex liquidity and impact gross reserves but cannot be counted as part of NIR. Rather, swaps become a cost to the central bank as it will have to pay interest on them. Also, the $300 million must necessarily be available to be returned to the lender on maturity thereby worsening the liquidity and reserve situation and putting pressure on the cedi once again. This returns us to my early advice to the central bank to stop keeping an artificially low policy rate, which is scaring investors away from the bond market – one source of less costly forex. By doing that and now resorting to swaps to shore up the reserves, the central back and the country for that matter is thinking it is avoiding high costs from the fiscal side only to now be paying for it from the monetary side through the interest rates on the swaps it will be paying. Swaps will only provide short term liquidity if BoG decides to use it to intervene in the market. In the current circumstances, BoG appears to want to use it to shore up gross international reserves to give comfort to investors and the market but investors are more worried about the deteriorating NIR cover for short term net private capital flows. This has to be addressed by reversing the alarming portfolio reversals by foreign investors through appropriate interest rate hikes at the fiscal side. For how long can the Central Bank be borrowing to provide liquidity?

2. The second source is a $200 million that is expected to come from an advance payment for cocoa beans that the Ghana Cocoa Board (COCOBOD) will be supplying to domestic cocoa processors. COCOBOD requires the money to finance its operations ahead of the harvest season from which the beans will be gotten and supplied to the relevant institutions. My understanding is that a significant portion of this expected $200 million will be used to procure jute sacks, fertilizers, other chemicals and accessories for spraying cocoa farms. All these are expected to be imported with the dollar proceeds, meaning that the expected $200 million will not have any serious effect on building the NIR contrary to what the central bank will want to us to believe.

3. The third and final source of the purported $800 million inflows into the NIR is a $300 million loan that the Ghana Cocoa Board (COCOBOD) intends to take from foreign lenders to refinance a maturing debt that it has not been able to generate the necessary resources to repay. I am aware that the board is at verge of concluding the necessary paperwork with the relevant institutions for the funds to flow in hence BoG’s excitement. However, unless the original debt of $300 million is owed to a local entity, which will allow the central bank the opportunity to take the dollars and give the cedi equivalent to COCOBOD to pay off its indebtedness, this transaction, like those above will have no impact on the country’s NIR, talk less of arresting the current depreciation. This is because should the original debt of $300 million be owed to a foreign entity, the same amount being sourced from other lenders, in its exact shape and form, will be used to service the debt, leaving nothing for BoG to add to NIR. From the above, it is clear that although the country, through COCOBOD and BoG will borrow $800 million by the end of March, virtually nothing will be available to shore up NIR as the bank claimed. It is, therefore, erroneous, deceitful and disingenuous for the Central Bank to seek to mislead the market and the general public into believing that some $800 million will be added to NIR by the end of the first quarter.