BANK OF GHANA (BOG) MEASURES TO SAVE CEDI DEPRECIATION ILL-INTENTIONED, DESPERATE AND MEANT TO VICTIMISE FX DEALERS
In a desperate attempt to stem the free fall of the cedi against major currencies in recent times, the Bank of Ghana (BoG) on February 25 announced some measures to streamline trading of dollars and other major foreign currencies in the country.
According to the Central bank, the objectives of the new measures are;
1. To more clearly regulate the conduct of interbank foreign exchange (FX) business in the Ghanaian financial market.
2. To establish standards of practice expected of market participants to help ensure an efficient and effective FX market.
3. To help develop and deepen the foreign exchange market in Ghana.
It is instructive to note that these “command and control” measures come at a time when the cedi is the worst performing currency among a basket of more than 140 currencies worldwide. It is, therefore, understandable that BoG, which virtually is an extension of the Ministry of Finance will attempt to employ such “command and control” measures, which are shortsighted in form and flawed in totality, seeking to address a problem that is clearly a loss of faith in the economic policies and management credentials of the Akufo-Addo and Bawumia-led administration. Fortunately, we have presented in clear terms simple, pragmatic and results-oriented solutions below, which, when followed, will help reverse the situation and save traders, importers and the business community of the pinch that the policy distortion, steeply receding confidence in the economy and BoG’s regulatory tyranny is taking them through.
In general, while one can broadly agree with measures to deepen Ghana’s interbank market, it is clear that the recent measures are meant to victimise and vilify forex traders and shift the central bank and indeed the government’s irresponsibility and ineptitude to players in the FX market. The timing of the announcement of the new rules is also inappropriate and signify a desperate attempt by an institution and a government drowning in its own ineptitude to hold onto straw.
Conservatively, the BoG’s approach and the measures thereof are counter-productive, will dampen confidence and spike the panic in the system and altogether create friction that will further worsen the plight of the cedi against its foreign counterparts. Of grave concern is the tendency of the hurriedly developed and announced measures to facilitate the activities of the ‘Black Market’ and distort the FX market further. We also find it strange that the BoG is now impugning unethical practice by forex dealers who are seasoned and senior staff of treasury departments of banks in Ghana and have been in that business under the very own eyes of the same BoG for years. Is the BoG all of a sudden saying that these market participants do not conduct their activities ethically, transparently and professionally and hence causing the sharp depreciation of the cedi? Are we saying they do not act in an honest and fair manner when dealing with clients and other participants?
The measures give the unfortunate impression that dealers have been doing something fishy in their trading rooms and that has contributed to the historic fall in the value of the cedi. But these are staff of banks that are well governed, to quote the Governor of the Bank of Ghana on his recent armchair assessment and its findings. We also see the measures as an attempt to micro-manage and control dealers in line with the regulatory tyranny that we have variously raised concerns about. Please note that this tyranny, which started last year ensured that banks were afraid to quote realistic market rates for the cedi, calling into question the BoG’s long held rule of operating a liberal FX market.
If the idea is to improve regulation and the conduct of interbank FX business in the Ghanaian financial market, then best practices show that implementing such reforms when the market itself is experiencing unprecedented volatility is unwise and could be counter-productive. What is even more disturbing is the fact that these measures announced by BoG are nothing new but virtually a copycat and an unethical revision of previously announced and suggested measures. It is instructive to note those portions of these measures were suggested by the ACI Financial Markets Association (Ghana) since 2015. Also, parts of these measures, particularly those bothering on trading band, have already been implemented and have proved to be ineffective.
As stated earlier, one consequence of these measures will be a booming black-market activity in the coming days and months, and the market premium will certainly exceed the 10 percent threshold to signal the policy distortion. Therefore, we want to plead with the Governor to resist the temptation to make the gross mistake of sending soldiers after the black-market operators, operators who will be aiming to profit from a jaundice measure by the central bank itself. Such “command and control” measures never work and will not work.
While the BoG is shoving its measures on the FX market, the government is also heard telling hotels to stop charging room rates in dollars. Interestingly, these were the very measures that the ‘Eminent Economist,’ Dr Bawumia opposed in 2015 when he was desperately seeking a way into the Flag Staff House. But when the cedi is changing value hourly, do you expect hotels to be changing their room prices every hour? And if a customer presents a dollar bill to them, you say they shouldn't take it?
Rather than extending the regulatory tyranny, government should improve supply of forex, cut down on useless imports and coordinate monetary and fiscal policy better. The BoG should be more proactive and spot-on with its interventions in the market to help smoothen out blips but while doing that it should be conscious of the country’s weakening net international reserves position so as not to deepen the vulnerability of the central bank in the long term. The government should also tighten the deliberately loosened screws that allow ‘dirty money’ to enjoy passage into and within the economy, resulting in the European Commission giving Ghana that disdainful tag of a country with lax anti-money laundering and counter-terrorists financing regimes. These are as simple as counting a,b and c, but if the government is unable to implement these measures, we are available to show them if only they ask.
In conclusion, let us sound a word of caution that an even more dangerous development is the so-called Ghana Cedi Reference rate, purportedly to guide exchange rate determination. This is a reckless policy decision because our net international reserves in relation to net short term external liabilities (e.g. net short-term capital inflows) is not looking good at all. In other words, we will not be able to avert a financial crisis if there is a sudden portfolio flow reversal on a massive scale. Remember that we are already seeing signs of this phenomenon as evident in the January 2018 developments as published by Bloomberg News. How then would a government adopt such a fatal policy measure that is closer to an exchange rate soft peg? Don’t we remember what caused the East Asian Financial Crisis? A soft peg in the context of declining net international reserves (amid large stock of short-term external liabilities) and capital mobility is a dangerous cocktail indeed.
Let me end by asking ‘Is the weakness of the fundamentals of Ghana’s economy being exposed by the cedi?
James Klutse Avedzi-MP
Deputy Minority Leader
27th February 2019
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