Foreign exchange, generally known as Forex or FX, is the conversion of one country’s currency into that of another. In other words it is the rate at which we, as Ghanaians would convert Ghana cedis into US dollars, British Pounds and Euros. In some countries, the rate of exchange is fixed by the central bank or government and in others, it is allowed to fluctuate, that is, the rate is determined by forces of demand and supply. In Ghana, the latter is prominent.
Foreign exchange transactions cover everything from the conversion of currencies by a businessman at the forex bureau to million-dollar payments made by companies at the banks and billion-dollar payments by the governments for goods and services purchased overseas. The increase in global trade has led to a massive increase in the number of foreign exchange transactions. These forex transactions usually occur in the foreign exchange market. The global foreign exchange market is by far the largest financial market, with average daily volumes in the trillions of dollars. It is generally known and accepted that out of these volumes only about 15 percent is traded for goods or services, the remaining 85 percent is traded by individuals and institutional speculators.
Ghana has the formal and informal forex markets. These markets are operated by a number of players; the players in the formal forex market are the banks and other regulated bodies whilst the informal markets generally have the ‘black market’ and other unregulated players. Each of these players influence the daily volume of forex traded in Ghana. Most of these trades are between the Ghana cedi and the US dollar.
The US dollar has been generally accepted as the base currency. The base currency is the currency from which a forex rate is derived. In a currency pair, the base currency is listed first and given a value of 1 in order to determine the exchange rate of the other currency. So we usually would quote the cedi against the dollar as USD/GHc, meaning that we would exchange a number of cedis for one US dollar. By extension, the fate of the cedi in all forex transactions is based on the fate of the dollar.
The following participants buy and sell foreign exchange daily in the formal market:
- The Bank of Ghana
- The banks
- Forex Bureaus
- Forex Brokers
The Bank of Ghana and the banks usually play in the interbank market. All these players, in either the formal and informal markets, determine their price for forex trades regularly.
The interbank market rates are compiled daily by the central bank and it is officially used as the guide for forex transactions by banks, government agencies, the public and foreign traders. The interbank rates are generally determined by taking the average rate of the USD/GHc on the market and applying the US dollar cross rates to derive the other currencies. A cross rate is the exchange rate between two currencies that are not the official currencies of the country that the exchange was quoted in. For example, the US dollar cross rates are the exchange of the US dollar to other currencies such as the British pound.
Therefore, in the interbank, it is only the USD/GHc that is actually market driven or determined by forces of demand and supply in Ghana. The other forex rates are derived. However, it is important to note that, the US dollar cross rates are also determined by demand and supply of the dollar against the other currencies. This is explains why the fate of the cedi especially to other currencies is directly related to that of the dollar.
In the daily determination of rates, banks do not only consider the official interbank rates from Bank of Ghana. They consider the rates of competition and the other players. Banks quote two sets of forex rates; transfer rates and cash rates. The transfer rates are usually in line with the interbank rates whilst the cash rates are usually higher because of its determinants. The forex cash rates are quoted in competition with the forex bureaux whose business is usually cash. The bank cash rates are quoted to close any arbitrage opportunity that might arise between the rates of these players. An arbitrage is taking advantage of a price difference between two or more markets to make a profit.
The forex bureaux determine their rates purely based on the demand and supply of forex cash. Usually their USD/GHc quote is higher than the interbank and it is also a means of attracting clients while diverting inflows to the banks. The determination of the exchange of the cedi to other currencies is also purely determined by demand and supply for that particular currency. They would buy and sell to make a margin which determines their profit. They are regulated by Bank of Ghana and thus submit returns on their operations to the central bank on a regular basis.
There are a few Forex Brokers in Ghana and they are usually regulated by the Securities and Exchange Commission (SEC). Their primary role as forex brokers is to facilitate the participation of foreign investors and portfolio managers in the Ghana Stock Exchange (GSE). They thus ensure that these players can enter the GSE by acquiring cedis and exit the exchange by converting their principal and gains thereon back into forex.
On the other hand, in the informal market is the ‘black market’. The players in this market also operate on demand and supply of cash. Most of these players operate outside the banking sector. Their structure is very simple; there are the front men whose role is to seek business by the roadside and the ‘gurus’ who operate in the background as the banks. Their rates are usually higher that the of the forex bureaus. This market’s operations span beyond Ghana into the West African sub region and it is one of unique forex markets that operate 24 hours and a day and seven days a week.
A recent development in Ghana is the introduction of the Online Forex Trading Platforms. These are offered by some forex brokers and companies who have affiliations with other foreign counterparts with rights. The trading platforms offer individuals and in some cases groups or companies, the opportunity to play in the global forex market by buying and selling currency pairs; buying one currency and selling another with the view of making profit. This is purely operated as an investment tool for the interested party and there are mainly two ways of participation. One cannot decide to have the trading platform set up for personal trading or engage the forex broker to trade on one’s behalf.
Having provided the above information, it is imperative to clarify how these players in both the formal and informal markets influence the demand and supply of forex Ghana and the rate of exchange of the Ghana cedi to the major currencies. This will be communicated in our next issue.