The Bank of Ghana (BoG) has announced new measures to arrest the free fall of the national currency, starting 1 May, 2012.The BoG says despite raising the policy rate by 100 basis points to 14.5 per cent on 13 April, 2012, the Cedi continues to show weakness against the major international trading currencies, especially the US dollar.
The policy rate measure, it said was intended to improve the attractiveness of cedi assets and increase the supply of foreign exchange to the market but close monitoring showed it produced a less-than-satisfactory result, hence, the additional measures.
An official of BoG said in basic terms, there are a lot of business transactions taking place in US dollars. Companies are pricing their goods and services in dollars, and so the dwindling trust in the local currency is causing a lot of instability. There is far too much Cedi on the market chasing the few dollars.
In order to reinforce the monetary policy stance and restore stability and transparency in the foreign exchange market, the central bank has decided to reintroduce the BoG 30 days, 60 days and 270 days T-Bills. This is intended to support the monetary operations of Bank of Ghana and provide additional avenues for cedi investments.
There is also a revision in the application of the statutory reserve requirement of banks. Here, all banks will now be required to maintain the mandatory 9 per cent reserve requirement on domestic and foreign deposit liabilities in Ghana Cedis only. Consequently, banks will no longer hold the reserves in different currencies.
And then there is the provision of cedi cover for vostro balances. In which case, all banks are required to provide 100 per cent cedi cover for their vostro balances, to be maintained at Bank of Ghana.
This is in line with the provision in the Operational Guidelines Pursuant to the Foreign Exchange Act, 2006 (Act 723) that precludes foreign investor participation in the short end of the money market. This is also consistent with the 27th March 2012 directive of Bank of Ghana to all banks.
Ghana has demonstrated a trend of instability with the local currency every election year, and among others; large increases in public expenditure during these times and the speculations that come with the political tensions have been identified as prime factors.
“Political instability and economic instability are twins …If we keep making elections so expensive, then the cedi will cry. It’s a summary of what we are doing to ourselves”, Dr Joe Abbey Executive Secretary of the Centre for Policy Analysis (CEPA), cautioned when he earlier touched on the matter. “If we make political and social tensions, the economy will not do well”.
The government however, said it will guard against profligate expenditure.
Arch O.Ansah
