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BoG to ‘arrest’ cedi’s depreciation with US$775 million injection

As part of measures to ensure the economy has a stable local currency for the year, and especially in the first quarter when demand for forex is high, the Bank of Ghana plans to inject a whopping US$775million through its FX forward auction programme to achieve this objective.

Out of this amount, US$50million will be pumped into the economy bi-weekly till the end of the first quarter. Then from the second quarter, it will be slashed by half till end of the year. What this essentially means is that US$300million will be injected into the economy in the first quarter alone to shore-up the cedi.

The data show this strategy has started bearing good fruit, as since the beginning of the year to Friday, Jan 15, 2021, depreciation of the cedi against the dollar has been infinitesimal – recording just 0.001 percent – using the central bank’s mid-rate as the basis for computation.

Usually – with the exception of last year when the coronavirus pandemic halted international trade, which resulted in an appreciation of the currency – the cedi sees a sharp depreciation in the first quarter each year, mainly due to high demand for forex from importers to settle their bills.

Analyst with Data Bank Research, Courage Martey – sharing his thoughts in an interview with the B&FT on how the cedi will perform against its major trading currencies this year, said the FX forward auction by the central bank is timely and appropriate and will go a long way to cushion the local currency as pressure from traders is bound to happen; especially when the economy seeks to embark on a recovery programme.

“The Bank of Ghana has issued the FX forward calendar for this year, and what we notice is that for the first quarter of this year they are seeking push US$50million dollars every two weeks for the first quarter of this year; and this is two times the size they intend to allot after the first quarter.

“So, we see a signal of firm commitment to support the cedi during the first quarter, which is normally a difficult period for the cedi every year. And this has given us reason to be confident that in addition to the foreign inflows, the FX forward auction by the central bank will support the cedi’s stability in the first quarter,” he said.

On his general outlook for the cedi, Mr. Martey said despite lingering potential shocks, Data Bank Research projects the currency to be fairly stable – given signals from foreign investors and the US$5billion Eurobond government plans to borrow from the international market.

“We anticipate a generally stable first quarter for the cedi. That is not without the potential shocks that could happen. We are not overruling the argument that a steady recovery in economic activity is going to increase forex-demand for international trade. We also cannot overlook the fact we have just emerged from an election and the potential liquidity overhang from the election is pending; so these dynamics could indicate some shocks to the currency, especially as businesses try to restock.

“But then, we are also looking at other factors which could mitigate those risks. For instance, from the portfolio side, we are seeing increased foreign portfolio appetite for our local currency and securities, and that is pushing some forex into the system. In the meantime, if this is sustained it will help short-term supply of forex for the first quarter of the year. This is happening because the second wave of COVID-19 is keeping interest rates lower longer than expected in Europe and America, and so the search for higher yields is bringing investors back to our market.

“We also cannot forget government’s Eurobond, which is expected to come in the first quarter this year. This will strengthen the central bank’s coffers. So, overall, we believe that the cedi will experience relative stability for the first quarter,” he said.

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