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Cedi gains on forex inflows

March 17, 2017, 3:04 p.m.

-Traded at GHc4.56to the dollar by mid-morning yesterday

By Elvis DARKO, Accra

THE gains the Cedi made this week is expected to continue next week as forex inflows improve amid lower import demands on the currency.

After touching record lows of GHc4.7 to the dollar early this month, the cedi gained strength this week rallying to GHc4.56 by mid-morning yesterday.

The Cedi is linked to the dollar as Ghana transacts international business   mainly in dollars.

As an import-dependent country that needs dollars mostly to finance imports, a decline in dollar supply would only worsen the plight of the Cedi.

Currency analysts told The Finder that the auction of $30.25 million by the Bank of Ghana (BoG) last week aided the recovery this week.

They added that another factor is foreign investors also brought in dollars and changed them into cedis to buy part of the GHc1.01billion three-year domestic bond issued at a yield of 21.5%.

Joseph Nketia of HFC Bank

Joseph Nketia of HFC Bank explained that the Cedi could recover its losses further against the dollar in the face of improved forex liquidity and a somewhat dwindling demand.

He sees gains made this week as the beginning of the stabilisation, adding that the Cedi could between GHc4.55 and GHc4.6 to the dollar.

According to him, most heavy importers who needed dollars to settle maturing bills for goods imported during Christmas have done so and, therefore, the pressure has waned.

He added those who have sold their stocks have also restocked their shops by now and do not need dollars immediately.

Nketia further stated that persons and businesses with future commitments in dollars hoarded dollars to evade the depreciation saying with the gains made by the Cedi, such people and various businesses have started selling the dollars ensuring availability.

Sulemana Mohammed of Financial Portal

Sulemana Mohammed of Financial Portal, however, thinks the gains made this week could be short lived.

According to him, the auction and bond proceeds could support the Cedi for the next two weeks after which the local currency risks depreciating again.

He based his forecast on the fact that Ghana lacks enough foreign exchange reserves to support the Cedi.

In addition, he said some companies that restock on quarterly basis would also need dollars and that would put further pressure on the local currency.

He explained that the Cedi could only be stabilised if BoG is able to intervene in the market with more than the $20million it auctions every two weeks.

The Cedi has been under pressure after the new government announced it had uncovered contract arrears of $1.6 billion and a budget deficit close to double digits, compared to the 2016 target of 5.25 percent of Gross Domestic Product (GDP).

Uncertainty over how the new government will address the country's weaker-than-expected fiscal deficit for 2016 has also put the local currency on the ropes.

Risk-averse investors are edgy, leading to a surge in offshore dollar demand amid a seasonal liquidity crunch as local businesses settle their first quarter import bills.

Repatriation of profits

When the fiscal year ends for most businesses, usually in December, some major companies, mostly foreign-owned ones, repatriate profits and dividends back to their home country and they do so in dollars. 

Surrender and repatriation of export receipts

 In May 2016, the Bank of Ghana in a directive issued announced that it has amended the requirements of the surrender and repatriation of export receipts. 

This means that exporters, who previously were mandated to surrender a portion of their export revenue to the Bank of Ghana, are now at liberty to sell that portion they would have surrendered to the BoG to commercial banks.

In the central bank’s wisdom, this was intended to deepen transparency and grow the exchange rate market. 

But what the Bank failed to realise is that, commercial banks have a mind of their own and act in the sole interest of themselves.

BoG starved of hard-currencies

Some analysts and market watchers are of the view that what this amended surrender policy has done is that, it has starved the BoG of hard-currencies (dollars especially) with which it would have used to intervene in the market when necessary. 

Therefore, BoG has been crippled and cannot easily enter the forex market and help to influence the rate as it used to do.

According to these analysts, one would have wished that the commercial banks would play the role the Central Bank was playing by meeting the dollar demand of traders. 

They explained that most of these banks keep the dollars surrendered to them by exporters in order to meet the demand of their big or high net worth clients like those in the oil, mining, telecom, and commerce sectors.

That means, ‘small’ importers are now finding it difficult to have access to the hard currencies and are now chasing after the few dollars in the system resulting in the depreciation.

Again, the small reserves that the BoG has to influence the foreign exchange market, is being done on an auctioning basis, which means that the higher bidder for the dollars that the central bank wants to supply to the market wins. 

This means, which ever bank that fixes a higher rate for a dollar would get the supplies, and as expected, many banks would want the dollars and as a result would bid higher than the actual market rate in order to get the supply and that would be the going exchange rate.