June 13, 2012 / Damina Advisors
 

Crude non-market based mechanisms by the central bank to halt dollarization of economy will trigger a banking crisis and weaken financial intermediation.
 

Ghana’s central bank, the Bank of Ghana (BOG) in a June 8 statement refuted strong domestic media speculations that the bank was devising plans to close all private non-Cedi forex accounts held by individuals and companies in the country in order to halt the ongoing dollarization of the country. The statement did not rule out the possibility that such a crude action, which had apparently been discussed within the bank, could be adopted in the future.
 

The central bank press statement simply stated that contrary to media speculation, such a drastic action had not yet been taken – without out rightly foreclosing the possibility that such crude methods may be taken in the future when the current set of market based policy tools do not work.
 

The Ghanaian cedi has fallen by almost 15% against the US dollar since the beginning of 2012 and major sectors of the local economy have effectively become dollarized. Rents and prices for private luxury homes, apartments, cars and professional services such as private school fees are being priced in US dollars. Almost all major local Ghanaian businesses, even small business owners and upper middle class families own US dollar deposit accounts. Major business transactions are often quoted in US dollars rather than in Cedis.
 

In April, the Bank of Ghana announced a number of market-based measures to stem the Cedi slide and reverse the ongoing dollarization. The Bank increased interest rates, ordered a reduction of the net-open-positions of local banks, introduced new 30, 60 and 270-day government bonds to mop liquidity, forbid local banks from holding 9% reserves against non-Cedi deposits in forex and a 100% local Cedi cover for all bank vostro accounts. These markets measures may have temporarily halted the sliding Cedi, but they are not likely to reverse the trend of the depreciating Cedi. Now the bank is considering more measures.
 

There are several reasons causing the Cedi to slide. Externally, as the Eurozone looks set to undergo a major depreciation/ devaluation amidst a new recession, the US dollar has once again become the safe haven of choice for all global savers and investors – including Ghana’s middle classes. However, internally on the domestic front, the likely major reason for the Cedi’s fall is the major capital market disappointment that over one year into commercial production of oil, Ghana is still 42% behind its set daily production target rate of 120,000 barrels of oil per day.
 

In late 2006, when the Cedi was redenominated the Ghanaian capital markets anticipated an oil-fuelled booming economy and launched the Cedi at less than 1:1 USD. After the markets caught on to the fact that the much anticipated foreign exchange from oil revenues was not at the level anticipated by the market; today, the Cedi is trading at almost 2: 1 USD. (Tullow Oil, the operator of Ghana’s Jubilee oil fields has recently confirmed that due to technical issues at the site it is only producing 70, 000 bpd as opposed to 120,000 bpd, 42% below its own earlier 2012 target).
 

This shortfall has removed about $500mn to $700mn of potential forex support from the Cedi. That said, the non-market based and crude tactic of seizing local forex accounts will be a major economic disaster for Ghana if it happens.
 

Even now, in anticipation of such a move (the denials of the central bank notwithstanding) a number of negative effects are already occurring. Panicked businessmen and women are quietly drawing down on their forex accounts and moving them back to accounts in North America and Europe or keeping their forex in cash at home. Middle class savers are taking their monies out of the banks and putting them under their proverbial pillows and mattresses. This process if accelerated will lead to large asset-liability balance sheet mismatches for many of Ghana’s banks. Banks will have to call back loans, cut credit lines and reduce private sector credit to bring their balance sheets in line with the withdrawn forex deposits.
 

Furthermore, a massive withdrawal of forex from the banks by individuals and businesses in anticipation of a possible central bank seizure of accounts will also weaken the monetary policy transmission mechanism and make it harder to control inflation. Finally, due to the large number of ordinary household items, including food, which are imported into Ghana, any credible hint of a potential seizure of private forex accounts will also mean that businesses seeking to place orders for goods from abroad, may either order ahead of schedule and encounter storage problems or hold back from ordering until market signals are clear.
 

These changes are likely to see prices of domestic imported goods in Ghana rise even before the onset of the year-end shopping season. With importers fearing a loss of profits due to future currency translation losses, many will start increasing their retail prices in anticipation of a further fall in the value of the Cedi.

For further deeper insights into the second and third derivative effects of the Ghanaian central bank de-dollarization policies, please contact:
Nicole Elise Kearse Esq.
Deputy Managing Director, Head of Transactional & Cross Border Risks
nicole@daminaadvisors.com
Tel: +44 7415 131102.