Economy Still At Risk

Ghana's cedi has plumbed to an all-time low against the dollar in recent weeks due to strong corporate demand for dollars, as offshore investors sell their investments in bonds and other instruments. Suleiman Mustapha looks at the situation

Bank of Ghana (BoG) has warned of a high risk to the economy if the rate of imports and the mass withdrawal of funds from offshore investors from the domestic bond market are not controlled.

The BoG’s caution comes as withdrawal of funds by offshore investors from the domestic bond market and demand for the dollar by both local and foreign investors to cover import bills soar to record levels.

The Governor of the BoG, Mr Kwesi Amissah-Arthur has consequently appealed to offshore investors to allow their investments in the domestic bond market to mature before they redeem them.

The warning is coming at a time the economy is recording strong gains and improved macroeconomic indicators, especially in taming inflation to a single digit, lower interest rates and consistent drops in policy rates.

The massive withdrawal of funds by foreign investors in the Ghanaian market is likely to send wrong signals to the outside world as it will also cause the cedi to depreciate at a much faster pace. The cedi has depreciated at a much faster pace of 5.9 per cent compared to 1.9 per cent in January 2011, on account of strong demand for foreign exchange and some speculative activities.

Mr Amissah-Arthur who is also the Chairman of the Monetary Policy Committee (MPC) has on the sidelines of an MPC news conference in Accra presented a gloomy picture of the country’s shift to an import dependent economy.

The worry is that the central bank has over the past two weeks more than doubled its intervention onto the market with nearly US$450 million dollars. This is relatively high compared to a weekly average of US$50 million. This has caused the country’s Gross International Reserve to dip from US$5.4 billion in 2011 to US$4.6 billion as at January 2012.

The woe of the cedi is due to the fact that more pressure was placed on the exchange rate when foreign investors sought early redemption of their investments on the domestic bond market. This is because "we experienced premature redemptions by some foreign investors", the Governor said.

“The situation was further aggravated in January 2012 by speculative activities of dealers and traders”, he added. This was as a result of the surging demand for the dollar by both local and foreign investors, and businesses to cover import bills.

“The rapid growth in imports in 2011 and the unusual surge in demand for foreign exchange during the last quarter of the year created a misalignment in Bank of Ghana’s foreign exchange cash flow”, he said.

To turn the tide, the BoG adjusted its policy rate to 13.5 per cent from the 12.5 per cent, which is the first increase in three years, due to the euro zone debt crisis and currency volatility. This decision surprised some analysts who had expected tame inflation to prompt the central bank to keep rates on hold until later in the year.

International investment banking firm, Morgan Stanley Research had in a release after the news conference stated that the increase in the policy rate should also help support the local currency, which has seen accelerated depreciation since mid-2011, despite the country’s oil find.

This is a positive development, in our opinion, as the decision does not only give credence to the Central Bank’s reputation as one of the most credible inflation targeters on the continent, after South Africa, but also goes a long way to support our view that the Bank of Ghana will choose to tread the unpopular path, with the view to delivering long-term disinflation benefits for the economy as a whole, if it felt that this was the right thing to do.

Not only that, the decision should also help support the local currency, which has seen accelerated depreciation since mid-2011, despite the country’s oil find.

Investors, who, like ourselves, were concerned about currency weakness ahead of the December 2012 elections -particularly as a result of anticipated fiscal slippage - can now take some comfort in the fact that the monetary authorities will act to ensure price stability.

“Investors, who, like ourselves, were concerned about currency weakness ahead of the December 2012 elections -particularly as a result of anticipated fiscal slippage - can now take some comfort in the fact that the monetary authorities will act to ensure price stability".

We now expect two more rate hikes of 50bps each, taking terminal rates to 14.5 per cent by the end of the year. This should help cap the potential upside in dollar/cedi. For now, we maintain our view that dollar/Cedi will close the year at GH¢1.85.

Concerns of Business
The Executive Chairman of Finatrade Group of Companies, Nabil Moukarzel, is asking the Bank of Ghana to institute more pre-emptive measures to halt the perennial free fall of the cedi.

Nabil Moukarzel says this is crucial as the fluctuation sends wrong signals to investors and does not encourage convenient trading especially for importers.

He called for immediate steps to address what he described as an alarming situation for businesses, explaining that the devaluation towards the end of 2011 has continued in January of 2012.

In just a little to a year now, total merchandise imports grew by 46.2 per cent in 2011 to US$15.9 billion. Total non-oil imports alone had shot up to US$12.7 billion. By end-use, capital imports were US$2.7 billion, intermediate imports amounted to US$6.1 billion, consumption goods, US$3.0 billion and others constituted US$900 million. GB

Source: [email protected]/D-Graphic