International Finance And Monetary Policy Analysis And Outlook: Top 5 Factors Behind The Recent Cedi Appreciation Against The Us Dollar

This article simply seeks to explore the nature and reasons, behind the current Ghana Cedi appreciation against the US Dollar and its potential impacts on the Ghanaian economy and its citizens.

Second Tranche of the IMF Balance of Payment Support: The Ghana government recently passed the first review of the US $918 IMF Program based on perceived positive benchmark performance of the programs key metrics on fiscal and monetary consolidation. As a result, the second tranche of the cash inflows from the IMF to the Government of Ghana is scheduled to be released in august as planned. The $115 million due in August is vital to shore up a currency that has fallen to record lows and also to convince international investors.

Ghana received $114.8 million in a Balance of Payments support in the first tranche of the program. It is important to note that, the initial cash injection from the IMF was lower than the second and hence, sends positive signals to global markets and investors worldwide that the Government of Ghana is finally beginning to get its Fiscal, Monetary and Social policies in order.

COCOBOD Syndicated Loan: Parliament Wednesday approved a loan agreement between the Ghana Cocoa Board (COCOBOD) and a consortium of international and local banks for an amount of $1.8 billion for the purchase of cocoa beans for the 2015/ 2016 crop season. The banks are Barclays Bank Plc, Commerzbank, Aktiengesellschaft, Deutsche Bank AG, Natixis, Standard Bank Group of South Africa and Sumitomo-Mitsui Banking Corporation. Standard Chartered Bank is the arranger of the facility and the government of Ghana the guarantor. The loan will enable the company to purchase a projected 900,000 metric tonnes of cocoa for the season.

The significance of a monetary injection of almost $2Billion cannot be underplayed.

Upcoming $1 Billion Eurobond Issue: The Board of World Bank Group approved some 400 million dollars as guarantee for Ghana’s one billion dollar Eurobond set to be issued in the coming weeks. The funds will act as guarantee in case Ghana face challenges in paying the Eurobond on time. It will also ensure that the country gets a good interest rate(s) on the Eurobond issue as the World Bank Group will use its AAA ratings to back the one billion dollar bond.

This will in the long-term also reduce the cost associated with the bond that will be issued. It is also expected to help Ghana access long-term refinancing resources at more attractive rates than what will be available to Ghana on a stand-alone basis. Furthermore it will also help extend the maturity of Ghana’s debt and lower the interest cost of domestic debts repayments. 1 Billion Eurobond will to a large extent ensure the stability of the local currency.

In it’s recent press release, the WorldBank stated that “As Ghana transits from concessional financing towards market-based financing, the cost of public funds will increase, and so would the cost of public capital, to ensure that future obligations can be met. It is the World Bank’s hope that the Policy-Based Guarantee will minimize costs and risks.”

$150Million World Bank Macro-Economic Stability Support: The World Bank Group’s Board of Executive Directors has approved an additional 150 million dollar budget support for Ghana. According to their press release “The credit from the International Development Association, IDA, supports the First Macro-economic Stability for Competitiveness and Growth Development Policy Financing.”

It is the first of three development policy financing operations aimed at helping the Government of Ghana stabilize its economy and shore up fiscal control by implementing financial policies and processes that are transparent and predictable.

Foreign Investors Will be Allowed to Buy Two-Year Domestic Bonds: Central bank announced policy measures to boost forex inflows, including allowing foreign investors to buy its two-year domestic bonds. “The big takeaway is the BoG’s (Bank of Ghana) willingness to allow foreign participation in Ghana’s 2-yr note…the hope is that this will improve forex inflows,” said Standard Chartered Bank economist Razia Khan. Currency analyst Joseph Amponsah projected that the cedi could wipe off all its losses this year by close of next week on the “positive” signals from the central bank.”

Conclusion(s) and takeaways…
My conclusions regarding all of the fiscal and monetary tactics and strategies that the government of Ghana is employing to address the myriad of economic issues facing the nation can be broken up into two main categories and they as follows:

Socio-Economic

1. Consumers: Consumers should expect to see real incomes improve in the short to medium term.
2. Businesses: I expect to see many businesses adopt a “wait and see” approach to this recovery. Once they become fully convinced of a sustained improvement of the health of the Cedi, they should begin to lower prices for goods and services, and most importantly begin to spend again in the form of hiring and investments. I expect this type of activity type of activity to become perceptible between the end of the third quarter and the end of the fourth quarter.
3. Monetary policy: Holding the monetary policy rate unchanged and strengthening liquidity management should continue to help support the cedi. But it is even more important to note that, maintaining exchange rate stability is fundamentally based on lower government spending. And so as long as the government continues to show discipline in this regard, then the Cedi should continue to appreciate.
4. Sustained increased liquidity inflows: The Head of the Central Bank Wampah, said in a recent interview, that the country is expected to receive at least $4 billion by December in loans and donor support, in addition to export receipts. While some analysts suggest this number could be as high as $6Billion.
5. Unpaid public sector wages: As its liquidity position improves, we should expect to see the government moving to pay a lot of the salaries owed many public sector employees including Medical Doctors.

Political

1. Policy consistency: The current administrations sending a signal to the markets that they are intent on pursuing prudent and sound policies in order to achieve a total economic consolidation of its constrained economy and that is a good sign.
2. Credibility: addressing these issues helps improve the reputation of the current administration in the eyes of the global marketplace.