There are indications that the cedi may stabilise by the end of this month following the decision of some banks to discourage their clients from holding their funds in dollars.

The measure is expected free-up the foreign exchange that is locked up in reserves, consequently increasing the supply of foreign exchange onto the market.

The increase in supply will satisfy some of the excess demand in the market and help ease depreciation pressures on the cedi.

In Ghana, about 80 percent of the US dollars in circulation are in the vaults of about six banks -- and normally those banks do not charge interest on the US dollar deposits.

Typically, a single client could keep as much as over US$150million in its accounts, which means that there is huge foreign exchange being held by the banks in their reserves.

For prudential purposes, the BOG requires that 9 percent of bank deposits, both local currency and foreign currency, be held as reserves at the central bank. Previously, reserve balances were held in their corresponding currencies -- i.e. required reserves on cedi deposits were held in cedis and those on foreign currency deposits were held in foreign currency.

In its press release of April 27, 2012, however, the BOG announced that all banks will now be required to maintain the mandatory 9 percent reserve requirement on domestic and foreign deposit liabilities in Ghana cedis only.

This requirement to hold all reserves in local currency is aimed at freeing-up foreign exchange locked in reserves, thereby increasing the supply of foreign exchange onto the market.

The increase in supply will satisfy some of the excess demand in the market, and depreciation pressures on the cedi will ease.

And true to its word, the Central Bank has begun charging fees on the reserve balances which are in foreign currency;  and as a result, some of the banks have incurred charges of between GH¢800,000 and GH¢1.3million for last month alone.

Sensing further losses, the banks are reacting by planning to advise their clients either to be prepared to pay interest on the foreign currency deposits or move them elsewhere. While some have already sent letters to their clients informing them of their decision, others are in the process of doing so.

After two years of relative stability, the cedi is facing intensified depreciation pressures and increased volatility. The pressures, which began in June 2011, became elevated in the last quarter of 2011 and further intensified in the first quarter of this year, especially in January and February.

Structural excess demand pressures in the foreign exchange market normally intensify in the last quarter of each year due to seasonal import demand for the holidays.

However, the intensification in the first quarter of 2012 was not normal and as a result the depreciation of the cedi in January 2012 was at a much faster rate of 5.9 percent compared to only 1.9 percent in January 2011.

The unusually strong demand for foreign exchange seen in the first quarter of 2012 can be attributed to the political business cycle and some of the consequences that have flowed out of that. In the recent period, the factors that have been at play in the foreign exchange market are the following:

The acceleration in GDP growth -- from 4.0 percent in 2009 to 14.4 percent in 2011 -- has resulted in an increase in economic activity and a higher demand for imports.

Estimates by the Centre for Policy Analysis show that an increase in GDP by one percent generates a rise in imports by as much as 1.14 percent.

Thus, the expansion in the economy has resulted in greater demand for foreign exchange, creating additional pressure on the cedi to depreciate.

The rising volume of trade with China has changed the demand patterns for foreign exchange. This is because imports from China are predominantly paid for in cash rather than with Letters of Credit, which spread out payments over a period of time.

As a result, there has been an increased reliance on cash holdings of foreign exchange, which has accentuated the seasonal pressures -- particularly for the year-end holidays.

Much of the demand for foreign exchange in cash occurs in the forex bureau market. As such, the change in the pattern of trade towards more cash-based transactions, particularly with China, would have a greater impact on forex bureau rates.

This could explain the relatively sharper depreciation seen in the forex bureau market and the resulting wider spreads between the forex bureau and interbank markets.

Speculative activity by foreign exchange traders trying to profit from the depreciation of the cedi has put additional pressure on the currency. Other market participants who are also trying to hedge against further depreciation have also contributed toward exacerbating the situation.