Dollar auctioning could hurt cedi – Economist

An economist, Dr. Lord Mensah, has said the auctioning by the central bank of part of the US$1.8 billion cocoa syndicated loan proceed could impact negatively on the local currency.

His argument stems from the fact that commercial banks are likely to bid for the dollar above the current interbank rate of GH¢3.98, which could potentially push upwards the price of the dollar.

The Bank of Ghana, yesterday, begun the first three auctions of the cocoa syndicated loan to commercial banks in the country as part of measures to help stabilise the cedi.

Dr. Lord Mensah, who is a Senior Lecturer at the University of Ghana Business School, argues, however, that: “For me, the process of releasing the cocoa syndicated loan through auctioning is not right, because we are looking at a situation where the various banks will go into an auction pool trying to determine the price of the cedi to the dollar…

This is because releasing the dollar into the market by the banks won’t cause the price to come down. So, if the banks, during the auction process, bid at a higher price, then definitely the dollar price will also go up on the market.”

The central bank, which auctioned US$20 million yesterday, quoted an opening bid of GH¢3.98 and is expected to conduct the auctioning twice till the end of the year, to sell some additional US$60 million.

The next auctioning of another US$20 million dollars will be on December 14, 2016.

Even though some banks have said the amount being auctioned is not enough, as demand for dollars at the moment by importers and exporters far exceeds the 20 million being auctioned, the central bank has already released a time table which indicates that only US$ 60 million will be auctioned for the rest of the year.

Dr. Lord Mensah insists that the central bank should rather have allowed the banks to make requests on how much dollars they need while they use part of their cedi capital held with the central bank to offset the dollars they take.

“I think the central bank should have allowed the banks to make their request and then use their cedi minimum capital with them to offset it while they are given time to replace. Bidding is just not the right way as that will rather cause depreciation of the cedi.”

The rules guiding the auction states that only authorised Foreign Exchange Dealing Banks will be allowed to partake. The auction process is also expected to be limited to purchase or sale of the US Dollar (USD) against equivalent value of the Cedi (GHS).

The quotation of rates for bids placed in the auction shall indicate the equivalent value in the national currency (Ghana Cedi/ GHS), expressed against one unit of the USD quoted up to 4 decimal places.

Each bank is permitted to submit a maximum of three bids in the auction, quoting their desired amount and at their freely determined exchange rate as per quotation convention.

The minimum bid size is 500,000 dollars and also in multiples of 250,000 dollars and expressed in numbers while the maximum bid size of a single bid shall not exceed ten percent of the announced auction target.

Meanwhile, the cumulative volume of all bids from any single bank shall not exceed twenty percent (20%) of the announced target for the auction.