Strong import demand and dollar flight as companies repatriate dividends to offshore shareholders have caused the cedi to retreat sharply since the end of March, losing more than 3 percent to the dollar since start of year, on top of 17.5 percent depreciation in 2012.
But BoG Governor Henry Kofi Wampah said this week that this trend is consistent with the past, as demand for foreign exchange tends to be high and supply to be low around this time of the year.
“Demand is high around this time of the year due to the settlement of import bills after the festivities, as well as demand from the corporate sector to meet dividend transfers. On the other hand, however, supply is also low as most of our forex receipts come during the second-half of the year,” he said.
“The BoG will increase supply of foreign exchange -- as we are currently comfortable with the level of our reserves -- and on the demand side, the bank will continue with its tight monetary policy stance,” he added.
Robust economic growth, which notched 7.9 percent last year, continues to drive import spending as the country’s manufacturing sector remains too weak to supply the needs of an increasingly upmarket consumer class.
Ghana’s imports jumped by 12.1 percent to US$17.7billion in 2012 -- accounting for 47 percent of GDP. Export growth, on the other hand, was 5.7 percent with total earnings of US$13.5billion, causing the trade deficit to widen by 35 percent to US$4.2billion. These recurring trade gaps affect foreign exchange demand and the strength of the cedi.
The effect of a weak cedi is more expensive imports, which drives inflation, and higher cost of inputs for businesses that import raw materials. Companies ranked exchange rate losses fourth among their top-ten challenges, according to the Association of Ghana Industries (AGI)’s first-quarter business barometer report.
“From the beginning of the year, the cedi was quite stable; but an increase in dollar demand at the end of March as firms repatriated dividends to their parent companies caused it to weaken sharply – though it has still performed better than the last two years,” Yaw Adu-Koranteng, research analyst at NDK Asset Management in Accra, told the B&FT.
Around this time last year, the cedi had lost 13 percent to the dollar; and two years ago the slump was 3.7 percent, he said. Policies by the Bank of Ghana (BoG) to strengthen the currency in the second-half of 2012 were successful initially, but it appears the pressures have returned, he added.
The policies -- which included easing foreign exchange supply by demanding banks to hold their mandatory reserves for foreign currency deposits in the local currency only, and an increase in interest rates to draw investors to cedi-denominated assets -- will not be relaxed, Dr. Wampah said.
The price of gold, Ghana’s biggest export commodity, has lost 12.1 percent so far this year, and there are worries this could cause a decline in the terms of trade -- that is, the price of exports relative to imports -- which is likely to put pressure on the cedi.
Dr. Wampah said this worsening of the terms of trade will be compensated for by the jump in oil production from the Jubilee Field. The field is expected to average a daily production rate of 83,000 barrels in 2013, up from 72,000 barrels last year.
Sovereign bond discussions
The Governor said there are “initial” discussions on the possibility of issuing a sovereign bond this year, adding however that no firm decision has been taken on its size and purpose.
Last year, the Ministry of Finance gave indication that it will sell a second Eurobond to redeem the one maturing in 2017.
Analysts are however not convinced that the timing is right as Ghana’s fiscal finances have worsened, with expenditure pressures blowing up the budget deficit to 12 percent of GDP in 2012. In February, Fitch Ratings cut its outlook on Ghana’s B+ sovereign rating from stable to negative, citing the fiscal deterioration.
The Ministry of Finance has said it will narrow the deficit to 9 percent of GDP this year.
Source: Business and Financial Times
