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Depreciation of cedi sometimes boosts profitability of the BoG – Governor

Thu, 25 Jun 2020 Source: Laud Business

The depreciation of the cedi is one of the factors that boots the profitability of the Bank of Ghana (BoG), Governor, Dr Ernest Addison, has said.

He said this when answering a question from Member of Parliament for Ningo Prampram, Samuel Nartey George during the Public Accounts Committee (PAC) hearing on Wednesday, June 24.

The opposition lawmaker asked Dr Addison whether forex depreciation or the cedi depreciation plays any role in boosting the profits or the profitability of the central bank.

In answering the question, Dr Addison said there are several factors that boost the profitability of the BoG or otherwise.

He however indicated that the central bank is not focused on making profits rather it is focused on stability of the price and exchange rate.

“Well, it depends. Some times on the net foreign assets position of the central bank if your net foreign asset position is positive, you have more assets in foreign exchange than liabilities. Obviously, if the cedi depreciates, as a net foreign assets holder or foreign exchange, you’re in a better position.

“On the other hand, if you look at it on the net liability situation then if the cedi depreciates you have a bigger problem. So it depends on the structure of the account at a point in time.

“Let me say that the objective of policy at the central bank is about stability, price and exchange rate stability. The central bank does not look at profitability as a criteria. So we focus on the mandate of the Bank of Ghana and that is what takes priority in all the analyses and the decisions that the bank takes.

“I think the profitability of the central bank depends on many factor. If you recollect in 2018 the central bank made a very large loss . This was due to impairment of liquidity supports that the central bank had given to the commercial banks that became insolvent . That is what dominated the financial outcome for 2018 .

“In 2019 we did not have a lot of those type of impairments and that is the reason why the central bank was able to generate a few more profits in that year than the year before so it is not the entirely true that it is only driven by the performance of the cedi”

When Sam George sought clarification as to whether the explanation provided indicate that the cedi depreciation may be one factor but not the only factor, he answered “Exactly.”

Meanwhile Dr Ernest Addison, revealed to the PAC there has been a stability in the exchange rate in Ghana.

This he said should be an incentive for businesses to continue pricing in cedis and not dollars. The BoG has banned pricing in dollars in Ghana as a measure of strengthening the cedi.

He warned the general and businesses especially to desist from pricing in dollars saying the central bank will start investigating complaints against some businesses engaged in the practice thereby flouting the BoG’s rule.

Dr Addison reminded the general PAC hearing on Wednesday June 23 that it is illegal for businesses to price in dollars.

Answering a questions posed by Member of Parliament for Ningo Pramparma , Samuel Nartey Geogre regarding the measures the central bank has taken to tackle persons trading in dollars in Ghana, an action that goes against the BG’s regulation, Dr Addison said : “As you are aware the central bank has come out very clearly on trying to declare dollarization illegal and we have gone round trying to stop people from pricing and invoicing in US dollars .

“ But what you described is the situation in which the school is indexing its charges to the exchange rate . They can decide to index their charges to the consumer price index , that is another way of measuring what the change in cost of living is.

“And we found out that people are more interested indexing to the dollar rather than indexing to the CPI.

“ I think that if you look at the stability that we are seeing in the exchange rate , may be they better be indexing on the CPI , which if you look at where the inflation rate is today at 10.6%, that is much higher than indexation to the dollar.

“That I think it reduces the incentives for dollarization. When you have a stabled currency that is not depreciating very fast , you don’t have widespread dollarization because the incentive is not there.”

He added : “We already said that we do not encourage invoicing in foreign currency . We have already said that we do not support dollarization , But pricing generally in the economy is on the basis of an assessment of conditions and typically the consumer pricing index which is the rate of inflation is what would normally be used as the benchmark .

“Even for wage adjustments when the labour goes to negotiate with their employers they look at the change in the cost of living and use the inflation rate as an adjustment factor . So all that I am saying is that , now that we have a relatively stable currency the incentive to index in the US dollar is not there , but yes it is illegal to be pricing in dollars. It is illegal to invoice in USD , it is illegal to index in USD.”

Source: Laud Business

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