BoG interventions help cedi recover , but market watchers are concerned
The Bank of Ghana’s (BoG) intervention in the foreign exchange (FX) market has helped the cedi record gains against its major trading partners after weeks of sustained depreciation.
The local currency appreciated 0.8 percent week-on-week (w/w) against the US dollar, 2.12 percent w/w against the British pound and 1.96 percent w/w against the euro, closing the week at a mid-rate of GH¢16.79 per dollar.
This follows significant liquidity injections by the central bank to address demand pressures in the FX market. “The Central Bank sold US$209.10m during the daily auctions while also auctioning US$20m to the Bulk Oil Distributing companies,” Databank highlighted in a note to investors.
The BoG also implemented new measures to extend daily FX support to the interbank market.
“The Bank of Ghana announced plans to extend its daily FX support to the interbank FX market, with the condition that bidding banks end the previous session with a net short or maximum net long position of US$0.5million,” the statement added.
These interventions aim to improve liquidity, meet market demand and reduce speculative activity, creating a more stable environment for the cedi.
These moves by the monetary authority are expected to help support cedi-stability this week.
Despite the short-term success of these measures, concerns about the FX reserves’ sustainability remain.
As of July, reserves were valued at US$7.5billion; equivalent to 3.4 months of import cover. Analysts have warned that continued aggressive interventions could deplete these reserves, leaving the central bank vulnerable to future economic pressures.
“Risk-off sentiments persist as concerns rise on sustainability of FX reserves in the near-term, especially given the BoG’s continued FX support,” Databank cautioned.
These concerns are compounded by the upcoming general elections in December, a period that historically sees heightened fiscal pressure and currency volatility.
Market watchers have argued that the BoG will need a lot more reserves to stabilise the cedi after the elections, especially when external debt servicing resumes.
While some say the moves have been initiated to improve the cedi’s look ahead of the elections, others believe the current BoG administration might be seeking to boost its end-of-term cedi value.
The BoG’s current strategy has temporarily calmed market pressures, but longer-term challenges loom.
Market participants remain cautiously optimistic about the cedi’s recent gains but recognise the risks of overreliance on reserves. Stakeholders will be closely monitoring developments in the FX market to determine whether the current stability can be sustained or whether additional measures will be required to protect Ghana’s economic position.