The Bank of Ghana (BoG) has taken steps to stabilize the forex markets, with Governor Dr. Ernest Addison providing assurance that the central bank has accumulated “sufficient reserves to address the challenges” that have impacted the cedi in recent weeks.
During the launch of the new commercial paper market, Dr. Addison acknowledged that the cedi has encountered “some challenges” following a period of relative stability.
However, he emphasized that the BoG is closely monitoring the situation and possesses the capability to intervene effectively.
“The exchange rate has been generally stable until recent weeks when some headwinds have been observed in segments of the market. But this is receiving much attention as the bank has built up enough reserves to tackle the pressures on the market,” Dr. Addison stated in a speech read on his behalf.
The reassurances arrive as the cedi has faced significant challenges in 2024 due to escalating corporate dollar demand and a strengthening U.S. currency. Since January, the local currency has depreciated by approximately 14 percent against the dollar.
Financial analysts caution that the prospects for foreign exchange inflows are uncertain, which could exacerbate the strain on the weakened cedi in the upcoming months.
“The near-term outlook for FX supply is decidedly negative due to a panel of fundamental factors,” Constant Capital stated in a market review, citing elevated inflation, low cocoa output, and constrained portfolio inflows.
According to GCB Capital, although gross international reserves saw a slight increase to US$6.2 billion in March, equating to 2.8 months of import cover, usable reserves have declined substantially to just US$4 billion. This amount is only sufficient for 1.8 months of imports when encumbered assets are taken into account.
“These levels offer limited protection against balance of payment shocks, indicating that the BoG will likely continue redirecting hard currency away from the interbank market to bolster reserves in the medium term,” the firm stated.
Databank’s weekly updates indicate that the BoG has already infused an estimated US$270 million into the forex market this year through spot and forward interventions, following US$713 million in support during 2023.
However, analysts suggest that significantly more firepower may be necessary, particularly with credit to the private sector described by the governor himself as “weak” due to lenders exercising caution.
In an effort to stimulate bank lending, the BoG recently introduced a “dynamic cash reserve ratio” policy linking required reserves to banks’ loan portfolios – a move aimed at incentivizing effective financial intermediation.
Under the new policy framework, banks with Loan to Deposit Ratios above 55 percent must maintain a 15 percent CRR, those between 40-55 percent face a 20 percent CRR, and banks below 40 percent are subject to a 25 percent CRR.
Currently, attention remains focused on the BoG’s forex reserves and its readiness to utilize them in response to the cedi’s depreciation.