BoG reiterates commitment to flexible FX regime

The Bank of Ghana (BoG) remains committed to maintaining a managed floating exchange rate regime with minimal interventions by the central bank, its Governor Dr. Ernest Addison has said – noting that it represents the most ideal framework for the domestic economy’s growth and stability needs at this stage of its development.

A managed floating exchange rate regime allows a country’s currency to fluctuate in the foreign exchange (FX) market, with periodic central bank interventions to stabilize its value. In contrast, a fixed exchange rate regime (monetary unification) sets the currency’s value at a specific rate and requires central bank intervention to maintain it.

On the other hand, a free-floating exchange rate regime (complete monetary autonomy) allows the currency’s value to be determined solely by market forces without any government or central bank interventions

“The Bank remains committed to maintaining a flexible exchange rate regime with minimal interventions, and has taken innovative measures such as the ‘gold for reserves’ and ‘gold for oil’ programmes to accrete the country’s external reserves,” he said in a keynote address at the opening ceremony of a Regional Course on Exchange Rate Regimes and Policies organised by the West African Institute for Financial and Economic Management (WAIFEM) in Accra.

Dr. Addison stated that the FX rate serves as a crucial monetary policy tool for managing the economy, particularly during periods of domestic and external shocks.

“The Bank continues to support the foreign exchange market, particularly during market stress, to ensure its smooth functioning,” he further stated while touting the nation’s exchange rate policy’s relative success since its transition from a fixed regime.

Chronicling the local exchange rate framework’s evolution, the central bank head noted that since enacting the Foreign Exchange Act, 2006 (Act 723), Ghana has maintained a liberal FX system without restrictions on payments for imported goods and services.

Additionally, in July 2016 the BoG made a significant change by no longer requiring exporters to surrender their export earnings to the central bank. Instead, they are now required to sell the surrender portion of their export receipts directly to commercial banks; thereby increasing forex liquidity. These banks are obligated to report all FX transactions to the apex bank.

To enhance price discovery and the FX exchange market’s depth while reducing uncertainty, he added, BoG introduced the multiple-price forward FX auction. This initiative, Dr. Addison said, has contributed to easing pressure on the spot market and minimizing front-loading of FX purchases by economic agents.

Some critics have expressed concern over the degree of FX interventions the BoG applied due to the emergence of a cocktail of factors including the pandemic, conflict between Russia and Ukraine, supply chain bottlenecks, rate hikes by central banks globally, and investor-flight to safety.

While commending the BoG for its approach, Director of Research at the Institute of Economic Affairs (IEA), Dr. John Kwakye, in a discussion paper titled ‘Rethinking Inflation Management in Ghana in the Wake of Covid-19 and Russia-Ukraine War’ he said:

“The BoG should continue conducting measured market interventions to counter extreme exchange rate volatilities,” he said.

“While Ghana operates a flexible exchange rate regime, flexibility is limited by active BoG interventions to stem inordinate depreciation. The BoG’s inclination to stem exchange rate depreciation renders the exchange rate a de facto secondary target of monetary policy, which is thereby somewhat undermined,” the economist added.

Dr. Kwakye however called for urgency in addressing lingering structural challenges as the perennial depreciation of the exchange rate – caused by the ongoing imbalance between foreign exchange supply and demand – influences domestic prices through imports. Consequently, the BoG – relying on its limited reserves and occasional borrowing – can only intervene from time to time to curb rapid depreciation.

“The Banks’ interventions will remain palliatives, but cannot stabilize the exchange rate on a durable basis. Only transformative policies that substantially increase our foreign exchange earnings and reduce our demand for foreign exchange will ensure lasting stability of the exchange rate and stem its impact on inflation,” said the former Monetary Policy Committee member

In 2022, the cedi depreciated by 30 percent against the US dollar compared to 4.1 percent in 2021, data from the central bank released earlier this year showed. By January 26, 2023 it had cumulatively depreciated by 19.1 percent, 21.4 percent and 20.7 percent against the US dollar, pound and euro respectively.

At the end of December 2022, gross international reserves were US$6.2billion (2.7 months of import cover), down from US$9.7billion (4.4 months of import cover) in December 2021. The net international reserve position declined from US$6.1billion to US$2.4billion during the comparative period.