The Bank of Ghana (BOG) has said that a strong build up in reserves has helped to cushion the cedi against shocks. It said that helped the local currency to register marked moderation in the pace of depreciation this year.
The Monetary Policy Committee (MPC) of the central bank said in a statement last monday that in spite of negative investor sentiments that had triggered some currency pressures in the past two months, the adequate reserve levels provided some buffers and supported a much slower depreciation pace compared with pre-pandemic levels.
The bank added that it was confident that the pace of depreciation would continue to be slower as the country’s external payment position remained strong.
The statement was to communicate the MPC’s decision on the policy rate after concluding its regular meeting.
The bank increased the rate by 100 basis points to 14.5 per cent, citing the need to respond to significant inflationary risks and the pressure on the currency.
Reserve position
The bank said at the end of october, gross international reserves stood at us$10.8 billion, equivalent to 4.9 months of import cover, compared with us$8.6 billion, representing four months of import cover at the end of december 2020.
“The strong reserve position provided some buffers for the local currency despite pressures in the third quarter due to strong foreign exchange demand from the corporate sector, importers and offshore investors. Cumulatively, while the cedi depreciated by 2.6 and 1.1 per cent against the us dollar and british pound respectively in the year-to-november 17, 2021, the cedi appreciated by 5.6 per cent against the euro”.
“In the same period of 2020, the ghana cedi recorded depreciations of 3.1, 3.3 , and 8.3 per cent against the us dollar, the British pound and the euro, respectively,” it said.
Sources
The gross reserves have been funded largely by eurobond sales, the cocoa syndicated loan and special donor and institutional supports to the country to contain covid-19 and its effects.
Thus, the plan to sweep about three quarters of the country’s allocation from the International Monetary Fund’s (IMF) increased capitalisation to finance next year’s budget could impact the buffer levels.
The finance minister, mr ken ofori-atta, said in the budget presentation that of the us$1 billion that was allocated to the country as its share of the imf’s increased Special Drawing Rights (SDR) in August this year, the equivalent of GH¢4.5 billion would be used to plug the gap.
Although the move is part of efforts to lift pressure on borrowing, especially from foreign sources and rein in the debt and deficit levels, it will reduce the reserves by about US$750 million.
Sovereign spreads
Already, bog noted in the november mpc statement that the country’s sovereign bond spreads widened markedly over the past two months as investor sentiments shifted based on fiscal and debt sustainability concerns.
That, it said prompted some sell-offs by investors with spillovers on the domestic foreign exchange market.
“This triggered some currency pressures in the past two months as demand for the us dollar increased. However, the adequate reserve levels provided some buffers and supported a much slower depreciation pace compared with pre-pandemic levels”.
“In the outlook, the committee is of the view that the strong reserve buffer level should provide some assurance to the market and help abate investor concerns, as the country’s external payment position remains strong,” it added.
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