Eurobond proceeds, cocoa loan to rescue cedi?

Expectations are high in government circles that the US$1 billion earned from Ghana’s fourth Eurobond should help restore the strength of the cedi on the forex market.

Even though some experts have downplayed the effect of the forex on the embattled currency, there are those who are confident that the inflows will provide ready respite for the cedi.

Proceeds from the international bond, which have already hit the coffers of the Bank of Ghana (BoG), would shore up the central bank’s foreign exchange reserves thereby improving the supply of dollars on the market.

The BoG had earlier this month also received the first tranche of this year’s cocoa syndication loan of $800 million and is currently waiting for the final tranche worth $1 billion.

The Ghana Cocoa Board (COCOBOD) in September 2015, signed a syndicated $1.8 billion from international lenders for the 2015/16 cocoa purchases.

With these developments, some economists and financial analysts are very optimistic that the local currency would receive the needed support it requires to perform strongly on the forex market.

They also believe this would put the BoG in a much stronger position to meet market dollar demands.

According to economist and senior lecturer at the University of Cape Coast (UCC), Dr John Gatsi, the release of the syndicated loan and the coming in of the Eurobond sends positive signals into the market and brings more stability to the local currency.

“It is good news because when the money hits the account, the central bank then forwards cedi equivalent into the economy to engage in various activities, including COCOBOD activities. It is the exchange (dollar to cedi) that will be positive for the larger economy,” he said.

Dr Gatsi, however, said it would take many policy initiatives to arrive at a stable currency in the long-term.

He said even as government anticipates the recovery of commodity prices from their slump in due course, it (government) should still embark on all the efforts put in place to ensure that selected commodities that Ghana imports from are produced within the country soon.

“For example, government can in the medium term stabilise the currency by saving the $700 million it spends annually on the importation of various pharmaceutical products that pharmaceutical companies can produce here in Ghana,” he said.

The economist further appealed to government to concentrate on growing strategic sectors of the economy to provide the needed impetus to the currency.

According to another analyst who spoke on grounds of anonymity, the inflow from both sources is positive news, especially when the country was unable to raise the original $1.5 billion it was hoping to raise from the Eurobond.

“The $1 billion from the Eurobond, together with the $1.8 billion cocoa syndicated loan would boost the performance of the cedi which has experienced some amount of volatility against major trading currencies for a larger part of this year,” he said.

The cedi since the beginning of the year has performed badly against major trading currencies; however, it has rallied strongly in recent weeks on expectations of the syndicated loan which was heavily oversubscribed and the Eurobond.

However, with the yuletide just two months away, the efforts chalked by these two amounts coming in might be meaningless.

In the few weeks towards Christmas each year, the rate of imports escalates as importers run along to meet local demand for foreign goods – this increases the demand for the dollar on the forex market thereby making the cedi lose value against the greenback.

Commenting on how to remedy the situation, economist and lecturer at the Ghana Institute of Public Administration (GIMPA), Dr Raziel Obeng-Okon said: “The BoG needs to continue to build a strong buffer in foreign reserves and take measures to increase the liquidity in the foreign exchange market as a way to reduce excessive exchange rate volatility.”

He added that prudent fiscal management was necessary to lower the country’s debt for interest rates to fall, this he explained, “has the potential to stabilise the exchange rates.”

The cedi opened 2015 trading at GH¢3.20 to a dollar. It had remained relatively stable around that rate since September 2014 when the central bank stepped in to stem its fall against major trading currencies. The cedi had reached 2014’s all-year-high of GH¢3.80.

In 2015, however, the local currency has performed badly against the greenback and other major currencies peaking at an all-year-high of GH¢4.30 in end June making it the worst performing currency on the African continent. It has since 2014 been swapping positions with the Zambian kwacha for the unenviable position.