Improve Domestic Budget Financing To Stabilise Cedi

Dr Ernest Addison

Dr Ernest Addison, Governor of the Bank of Ghana (BoG), has called for improvement in Ghana’s debt management strategies and engineering policies to shift the financing of the budget from non-residents to domestic financing.

The Governor, who was addressing a Stanbic Ghana-sponsored forum on exchange rate stability recently in Accra, said the local currency would stabilise in a sustainable manner if this strategy is implemented.

He said the “successful implementation of this strategy will help moderate the country’s external vulnerabilities arising from shifts in investor sentiments” adding that “currently, our bond market is significantly exposed with non-resident holdings of domestic bonds above 25 percent in the domestic debt market.”

Explaining the recent depreciation of the local currency against major foreign currencies, Dr Addison said the start of 2019 was characterized by intense cedi volatility reflecting the seasonal foreign exchange demand and pressures fuelled mainly by importers and corporates.

He said investor sentiments weakened on concerns about the economic outlook, as Ghana was on the verge of exiting the IMF programme.

“This triggered some outflows, putting pressure on the cedi. We also witnessed significant repatriation of coupons by non-resident investors, which contrasted past trends of re-investment of coupon proceeds.  Third, as part of the objective to build up lost reserves in 2018, the BoG decided to improve Net International Reserve levels to what pertained at the end of December 2018. This required that the BoG limit its presence in the market. Consequently, efforts to build up reserves in a period of strong foreign exchange demand exerted additional pressures on the local currency.”

Furthermore, he said: “As we all know, Ghana’s economy is import dependent, hence the existence of persistent foreign exchange demand pressures by importers. In addition to these huge demand pressures, the seasonal repatriation of profits and dividends foreign-owned companies reflects in significant outflow of resources out of the services and income accounts, exerting additional pressures on the local currency. As a matter of fact, these developments explain why the two consecutive years of trade surpluses have not fully translated into current account surpluses.”

He, therefore, called on government to address Ghana’s import dependence through the pursuit of structural reforms geared towards promoting local production and continue the improvement in the business environment, especially in the area of ease in doing business to attract investments into the country.

“These should include re-examining laws that serve to improve the business environment, pursuing business-friendly regulations, making it easy to move goods across the country, pursuing policies to facilitate trade among others; taking a relook at Ghana’s retention agreements and promoting local content, especially in the downstream oil sector and finally promoting non-traditional exports, including tourism.”

By Samuel Boadi