In a nutshell, one can say that the Ghanaian economy has continued to witness significant growth, despite both international and domestic headwinds. In the last decade or so, Ghana’s average GDP growth has been one of the highest in sub-Saharan Africa. In 2011 the economy grew at the fastest rate in the world, bolstered by the newly added oil sector. This was accomplished while maintaining a stable macroeconomic environment and single-digit inflation. We cannot let these advantages be undermined by short-term volatile considerations and inadequate measures.
In recent months, we have had substantial volatility in the exchange markets and the cedi has depreciated by about 17% since the beginning of 2012. Many factors have contributed to this depreciation.
First of all, we have seen excess demand pressures for dollars over the past few months as a result of high import bills. The number of requests has risen almost four-fold, putting a lot of pressure on exchange rates and thereby causing severe deterioration in the trade account. Second, there have also been a number of instances in which some external parties have partnered with local banks and participated in the short-term securities market. The pass through to the bond market in terms of these portfolio reversals added some demand pressures as well. Third, speculative trading activities as a result of the widening spread between buying and selling rates has occurred. Fourth, low yield on domestic assets has resulted in portfolio shifts from the money market to the foreign exchange market. Finally, there is also a problem of increasing dollarisation of the economy, which has contributed to the increased demand for dollars. As such demand pressures mount, the response of banks has been to import huge volumes of foreign currency to service the needs of their clients, which fuels dollarisation. We have opened our doors to suggestions for the implementation of measures that will limit this phenomenon.
The effort to restore the dominance of the cedi in domestic transactions requires strict adherence to the provisions of the foreign exchange regulatory framework. It is our view that this will contribute to restoring confidence in the cedi. However, the situation has simmered for too long and the solution must likely be implemented over the long term.
Further to this, the way commercial banks have transmitted the policy measures against dollarisation could have been better. For instance, we have seen increased deposit holdings of large balances in non-remunerated dollar accounts. This is because, although depositors were not earning returns on those specific deposits, as the cedi depreciated, the value of deposits would be maintained while hedging against inflation. To reverse this trend, the central bank hiked interest rates to instigate portfolio adjustments in favour of cedi-denominated assets. At the prevailing yield rates on instruments in the money market and inflation levels, these kinds of assets are likely to yield much higher returns than foreign currency-denominated ones in the long run.
To limit dollarisation, the central bank is also no longer authorising commercial banks to import dollars independently to feed the high demand. Hitherto, people were going to the bank and withdrawing high levels of foreign currency over the counter, disregarding the limits placed on such transactions in the foreign exchange guidelines. This ease of access was feeding the dollarisation process and encouraging more transactions that could be done in the cedi to take place in dollars. We decided therefore to remind all banks to abide by the guidelines that underpin foreign exchange transactions. Our long-term objective is to further discourage the importation of dollars and to reinforce the advantages of cedi-denominated assets.
Despite the initial market uncertainties created by these policy measures, they have largely helped to stem the tide of rapid depreciation that was seen in the first half 2012. The central bank will therefore continue to build stronger coordination with the commercial banks to ensure that monetary policies are correctly transmitted onto the way banks operate in the country.
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