[ 2012-03-04 ]

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 - Daily Graphic

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