The Bank of Ghana (BoG) plans to inject US$775 million into the economy through its FX forward auction programme.
The move is one of a raft of measures to ensure the economy has a stable local currency for the year, and especially in the first quarter, when the demand for forex is usually high.
Out of this amount, $50 million will be pumped into the economy biweekly until the end of the first quarter. From the start of the second quarter onwards, it will be slashed by half until the end of the year.
What this means essentially is that $300 million will be injected into the Ghanaian economy in the first quarter alone to shore up the cedi.
According to data from the BoG, this strategy has begun to bear good fruit, as, judging by the performance from the beginning of the year up until Friday 15 January 2021, the depreciation of the cedi against the dollar has been infinitesimal – recording just 0.001% – using the central bank’s mid-rate as the basis for computation.
Boosting confidence
Usually – with the exception of last year, when the coronavirus outbreak halted international trade, resulting in an appreciation of the currency – the cedi experiences a sharp fall in value in the first quarter each year, mainly due to a high demand for forex from importers to settle bills.
Courage Martey, an analyst with Databank Research, shared his thoughts in an interview with today’s Business and Financial Times (B&FT) on how the cedi will perform against major trading currencies this year.
He 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 occur, especially when the economy seeks to embark on a recovery programme.
“The Bank of Ghana has issued the FX forward calendar for this year,” Martey said, “and what we notice is that for the first quarter of this year they are seeking push US$50 million every two weeks for the first quarter of this year. 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. 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.
Aftershocks?
On his general outlook for the cedi, Martey said despite lingering potential shocks, Databank Research projects that the currency will be fairly stable – given the signals from foreign investors and the US$5 billion Eurobond that the government plans to issue on 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,” he said, “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.”
Martey added: “In the meantime, if this is sustained it will help short-term supply of forex for 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 the 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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