The Bank of Ghana (Bog) has announced details on its plan to start forward sales purchases of forex.
The central bank publicised that the forward rate auction will be limited to 7-day, 15-day, 30-day, 45-day, 60-day and 75-day tenors. A forward contract allows banks to lock in a currency exchange rate for settlement on a later date.
According to the guidelines from the BoG, the forward sales are hinged on the country’s improved liquidity and is expected to deepen its forex market.
US$50 million offer
The guidelines from the BoG state that the maximum bid shall not exceed 10% of US$50million (GHc 273 million), which is the amount on offer. In addition, any single bank’s cumulative volume of bids cannot surpass 20% of the announced target amount. Each Authorized Foreign Exchange Dealer banks can only put in up to 3 bids.
Furthermore, the allowable spread between trade and settlement for the banks’ clients shall be 25 pips/0.0025 cedis.
While Ghana has been one of the three fastest-growing economies in the continent, it’s currently facing monetary policy challenges.
Pulse Ghana highlights that the forward sales auction is a measure to keep the depreciation of the cedi at bay. The cedi has recently reached its worst half-year performance since 2015 last June. FXCM has a list of all the major forex currency pairs, with the US dollar accounting for the most traded exchanges. The cedi-US dollar pair closed at GHc 5.32 to US$1 last month which is a 9.34% year-to-date decline. As forex markets profit from the movement of value, buying dollars against the cedi has paid off for long-term investors.
The planned forward sales auction is expected to discourage currency speculators who are holding positions in a bid to sell higher later in the year.
Strong economy, unstable currency
The country’s GDP per capita is now the largest in West Africa. World Bank reports that Ghana’s economy grew by 6.3% last year and expected to post a 7.6% GDP growth this year. According to the Bank, the “strong growth in mining, petroleum, agriculture and sustained expansion in forestry and logging” are primarily driving this expansion.
In the past couple of years, Ghana has done multiple reforms in the finance sector. It revoked the licences of seven insolvent banks and bolstered capital requirements. Earlier this year, the Bank of Ghana introduced tighter protocols on forex trading to improve transparency.
However, the cedi has been devaluating rapidly over the past couple of years. The BoG reduced its base lending rate by 100 basis points in January. This was followed by the cedi losing 17% of its value over the next three months as investors fled from the fixed income market.
This volatility was abated by the new Eurobond issue in March. Bloomberg state that the $3 billion Eurobond offering (GHc 16.4 billion) has attracted bids that were over three times its value. This seventh, three-tranche Eurobond will be used both for budgetary financing and liability management operations.
The forex forward auction is expected to double down on the volatility of its liquid forex market. Experts also anticipate the widening trade surplus from cocoa exports to contribute to further stabilising the currency.