Dr. Ernest Addison, the Governor of the Bank of Ghana, has predicted a stable cedi going forward in 2021 as measures have been put in place to strengthen the Ghanaian currency.
The Ghana cedi weakened slightly edging down to 5.76 against the United States dollar to close the year 2020, about 3.9 percent below its level at the beginning of the same year where it was trading at GH¢5.54.
“We were looking at building reserves to the tune of $300 million,” Dr. Addison opined while speaking on the prospects of the cedi this year, adding that, his outfit remains resolute in keeping the currency stable throughout the year on the back of reserve accumulation.
“The question is whether the $300 million is sufficient to enable us to guarantee a stable exchange rate in 2021. Obviously, it will help, but it will not be the only solution. As you know, the government has indicated its intention of going back to the capital market in 2021, so all of that will help us to keep the cedi stable,” he added.
Dr. Addison further asserted that, even though usually at the start of the year, there is quite an increase in demand for foreign exchange in the first three months, “we are hoping that the reserves that we have built can help us mitigate that seasonal demand.”
This situation of a hike in demand for foreign currency within the last quarter of a year through to the first quarter of a new year is usually attributed mainly to a spike in commercial activities during the festive season as well as profit and dividends repatriation by foreign investors in the first quarter of a new year.
Analysts have also affirmed that governments borrowing on the capital markets and the conduct of the bi-weekly forward forex auction by the Central Bank are boosters to the prospects of a potential stable Ghanaian currency.
For instance, the government’s ability to secure a US$3 billion dollar Eurobond facility last year before the full impact of the COVID-19 pandemic helped to fairly stabilize the cedi.
An Economist with Databank, Mr. Courage Martey has urged the Bank of Ghana to continue with its forward forex auctions because they “help participants on the exchange market to lock in exchange rates without going to rush for the physical cash and that has helped to reduce speculative and panic transactions on the spot market and so continuing these forward auctions will deepen forex trade on the market and that should help reduce panic on the spot market,” translating into a likely stable cedi this year.
In simple terms, a foreign exchange forward transaction is an agreement to purchase one currency against selling another currency at a fixed price for delivery on an agree date in the future hedging against the fluctuations of the currency market which poses a threat to the Ghana cedi.
“What we also noticed from this year is that typically the Bank of Ghana will allot twenty-five million dollars at each biweekly forward auction but in the first quarter of this year they actually allotted twenty million dollars per auction every two weeks, so it shows that the Central bank is preparing to support the cedi with all policy tools available,” Mr. Martey revealed.
