The Bank of Ghana's decision to purchase dollars from mining and oil companies, inadvertently reducing forex availability within the inter-bank market is one of the reasons behind the falling value of the cedi, Global leader in financial services and US firm, JP Morgan has said.
It said in a bid to accumulate FX reserves, the Bank of Ghana recently announced plans to purchase dollars from gold and oil mining companies.
These mining companies, it said, were previously allowed to convert FX earnings into local currency via commercial banks.
The report said while the new FX purchase policy was only a few months old, it had shifted FX away from the secondary market, thus resulting in increased FX pressure.
“In the meantime, the central bank has not increased the size of its fortnightly FX forward auctions, where it continues to sell US$25m, despite receiving demand amounting to US$100m per auction. To reduce volatility, we believe the BoG may need to use proceeds from mining sector FX purchases to increase interventions, or alternatively, reverse the FX purchase policy,” it said.
According to the report, since the policy was implemented, the central bank reports that it had purchased around US$84mn as of end-September and expects to have purchased US$500mn by year-end.
“FX reserves have been drained at a breathtaking pace. Gross international reserves have declined to US$6.6bn as of end-September, from US$9.7bn at the start of the year. However, net reserves have declined at a faster pace, reaching US$2.7bn in September, from US$6.1bn in January,” it said.
At that pace, it said gross reserves would have declined to US$5.6bn by the end of this year (US$1.6bn for net reserves), although disbursement of the US$1.1bn COCOBOD syndicated loan should provide a boost to FX reserves.
“Furthermore, the Bank of Ghana's decision to purchase most dollars from mining companies may have dampened confidence further and could result in a further acceleration of dollariSation and outflows by residents,” it said.
It also warned that the probable debt restructuring of Ghana's debt would further weaken the Ghana cedi, even if an increase in Foreign Exchange Forward Auction ceases or reversal of the FX purchase policy results in short-term respite for the cedi.
It also said the loss of confidence domestically had resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited.
“The cedi has now weakened by around 60 per cent against the US dollar this year, as uncertainties about the need for, and extent of, debt restructuring increased.”