Over US$700m FX injection to stabilise cedi during festivities

The Bank of Ghana’s (BoG) decision to implement a 15 percent unified Cash Reserve Ratio (CRR) on both local and foreign currency bank deposits is anticipated to inject over US$700million into the foreign exchange (FX) market.

Despite existing pressure on the cedi, upcoming inflows from the International Monetary Fund and cocoa loan syndication offer promise – thus enhancing market stability. The recent monetary policy decision, coupled with the CRR adjustment, is expected to foster a slight improvement in FX liquidity conditions within the interbank market.

These developments, according to market analysts, bode well for cedi stability through the festive season.

“We expect FX liquidity conditions to improve slightly on the interbank market following last week’s monetary policy decision, and the additional policy measure of increasing the CRR to 15 percent and unify the currency denomination criteria for holding reserves with the Bank of Ghana,” GCB Capital highlighted in its review.

Quantifying the policy shift’s impact, GCB Capital estimated that the new CRR directive – effective November 30, 2023 – should drain about GH¢11billion in cedi liquidity from the interbank market while releasing approximately US$750million. This move is expected to enhance liquidity conditions in the FX market, potentially curbing the pace of depreciation during the festive season.

Impending FX liquidity inflows from the anticipated US$800million annual cocoa loan syndication could stabilise the cedi against major trading currencies through December 2023. Furthermore, the second tranche disbursement of US$600million is expected to reinforce the local unit against volatility through Q1 2024.

Last week, the FX market experienced subdued liquidity due to limited interventions from the BoG, leading to the cedi’s decline against major currencies. The cedi depreciated by 1.22 percent w/w versus the US$, settling at a mid-rate of 12.28/$ in the retail market. Additionally, it faced weekly declines of 1.48 percent and 0.94 percent against the GBP and euro respectively.

Databank, in its FX market analysis, noted the central bank’s policy could potentially alleviate liquidity constraints in the coming weeks. “We expect the central bank’s move to unify currency denomination for cash reserve ratio (CRR) will slightly alleviate FX liquidity constraints in the coming weeks.”

Dr. Ernest Addison, Bank of Ghana Governor, has already highlighted the external support and tighter monetary policies contributing to a relatively stable cedi. Excluding the sharp depreciation last January, the cedi has depreciated by 6.6 percent against the US dollar between February and November 2023.

“The foreign exchange market’s relative stability has been supported by inflows from the IMF ECF first tranche, Ghana’s Domestic Gold Purchase programme, and repatriated export proceeds from mining companies and oil and gas producers,” Dr. Addison explained.

The BoG reported positive impacts on balance of payments due to reduced portfolio outflows and lower amortisation payments. The capital and financial accounts recorded a net outflow of US$1.5billion, lower than the US$1.6billion a year earlier. Notably, portfolio outflows reduced to US$195million from US$1.9billion in the previous year while government loan amortisation declined by 41.7 percent.

This favourable scenario resulted in a lower overall balance of payments deficit, reaching US$617million in the third quarter of 2023 from US$3.4billion in the same period of 2022. Gross international reserves – excluding pledged assets and petroleum funds – surged to US$2.5billion by October 2023, indicating a substantial increase from the December 2022 position of US$1.5billion.