Injection Of Dollar Not Sustainable BOG

The Bank of Ghana (BoG) has admitted that its controversial pumping of dollars into the economy to arrest the continuous fall of the cedi against the US dollar and other major foreign currencies is unsustainable.

Governor of the Bank, Dr Henry Kofi Wampah says it will take more than injection of foreign exchange to stabilize the cedi.

“Yes you can say you will sell additional forex but that is not sustainable; you must have the fundamentals right. Monetary policy has to deal with part of it then fiscal policy in terms of consolidation,” Dr Wampah told journalists last week.

Dr Wampah stated further that the current tightening of monetary policy was one of the measures being taken to forestall the cedi’s fall.

The Governor was responding to concerns over fears that the value of the cedi could depreciate fast in the first quarter of 2016 as has been the phenomenon over the years.

Citing rising inflation, the bank announced an increase in its policy rate (the rate at which commercial banks borrow from the Central Bank) by 100 basis points to 26 per cent, the highest since December 2003.

It will be recalled that in a bid to arrest a volatile currency which had depreciated by 25 per cent within six months of 2015, the BoG in June this year announced it was injecting $20million on daily basis into the economy.

The measure was greeted with pessimism from economists and captains of industry who felt it could not be sustained. According to them, the central bank could not afford to pump $20 million daily into the money market.

Executive Director of the Institute for Fiscal Studies (IFS), Professor Kwadwo Kusi downplayed the impact of BoG’s move, saying “pumping $20 million a day is not the solution; what the Bank of Ghana has to do is to find out why the cedi is depreciating.”

According to him the Central Bank was refusing to tackle the real cause of the poor performance of the cedi against the major trading currencies.

Mr Kenneth Thompson, Chief Executive Officer of Dalex Financial Services also described the measure as unsustainable, stressing that the cedi will continue to fall if Ghana’s economy remained import dependent.

“Ghana has an alcoholic economy; we are addicted to foreign goods and services and because of that addiction, there is a huge demand for dollars so consequently the cedi will continue to fall,” he explained.

But the BoG vehemently insisted it had enough foreign exchange to restore the cedi and that the cedi would see a rebound.   Interestingly, the cedi for about three weeks regained strength, appreciating by 21 per cent but shortly afterwards resumed its turbulence and consequent depreciation (15 per cent) against the dollar and other major trading currencies.

This was rather suffocating for businesses as they dreaded the rising costs of their production and consequent collapse of their firms.

This situation led to some manufacturing firms questioning the BoG’s judgment in its handling of the exchange rate market.

“Why would the bank support the cedi to gain value in one month and then withdraw the support the next month? We have been compelled to increase prices of our products along with the depreciation,” said an official of multi-local food manufacturer, Promasidor Ghana Limited.

Convinced that other strategies are crucial in resolving the crisis faced by the cedi, Dr Wampah disclosed that the monetary policy committee had considered other measures “that would improve flows during the first quarter of the new year including looking at how to remove that seasonality in the flow because most of the flows come at the end of the year while the first quarter or the whole of the first half of the year, we have much less inflows.”

He said the bank will introduce other measures that will encourage expatriates to repatriate their earnings back into the Ghanaian economy and “ensure that all exporters repatriate their funds into the banking system.”

“I’m not talking about surrendering but repatriation of export earnings,” he added.