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Business News of Wednesday, 12 August 2020

Source: thebftonline.com

Depositors take refuge in foreign currency as cedi loses value

Bank customers have started running to foreign currency deposits as a safe haven after the cedi consistently lost value against its major trading currencies, especially the US dollar in the second quarter of 2020, the Statistical Bulletin report has shown.

From the May-2020 Statistical Bulletin, the data show that in April and May foreign currency deposits increased to GH¢22.6 billion and GH¢23.3 billion respectively. Meanwhile, within the same period, the cedi has depreciated by 1.21 percent and 1.55 percent respectively in those months.

However, when compared to the first quarter of the year, foreign currency deposits decreased in February and March to GH¢21.9billion and GH¢21.8billion respectively – the very months the cedi recorded its biggest gain against the US dollar by appreciating at 4.8 percent and 1.66 percent respectively.

The logical conclusion here is that there is a relationship between the cedi’s performance and foreign currency deposits as seen in the data. In the first quarter of the year when the cedi was stronger against its foreign trading partners, specifically the US dollar, depositors felt confident and safe in keeping their monies in local currency as the value was maintained.

But as the cedi began depreciating in the second quarter, depositors no longer felt it attractive and wise to keep their monies in the local currency; so they started increasing their foreign currency deposits just to keep the value of their monies for the future.

Retired banker and now a banking consultant, Stephen Asare, shared a similar view on the subject in an interview with the B&FT. He said the low interest rates on deposits and depreciation of the cedi are accountable for the growth in foreign currency deposits.

“Interest rates on domestic deposits are going down, so depositors don’t find it attractive to hold money in local currency. They rather prefer to change it into foreign currency, as that will hold the value up, instead of putting it in local currency deposits.

“And again, when there is depreciation of the cedi, importers and other international trade actors would like to change their monies to foreign currency to hedge themselves from the risk of losing the value when is time to buy goods from outside,” he said.

The cedi’s loss of grip on the US dollar, as the data show, began in April after the country recorded its first case of coronavirus in mid-March, indicating that among other factors the depreciation was largely stirred by the pandemic-induced capital flight from the country – which put enormous pressure on the cedi.

Governor of the Bank of Ghana, Dr. Ernest Addison, underscored this during an interaction with the Public Account Committee of Parliament at the end of May when he said: “The cedi reflects many factors. It reflects our domestic economy. It reflects developments in the global economy, and If you look at what has happened worldwide, we have seen capital leave jurisdictions such as ours into the advanced economies. Now, when that happens it has an impact on the availability of dollars in Ghana, and that can trigger depreciation of the currency”.

Currently (August 11, 2020), the cedi has depreciated 2.55 percent against the dollar as investors still have misgivings about developing economies’ ability to withstand shocks of the pandemic. But analysts and market watchers are projecting the cedi to gain strength, given the inflow of the US$1billion from IMF and forex measures introduced by the Bank of Ghana.

“The recent approval of US$1billion by the IMF for Ghana’s COVID-19 responses should also provide forex inflows to shore-up the country’s foreign currency reserves. This will significantly enhance the Bank of Ghana’s capacity to support the cedi against extreme shocks. We expect these developments to mitigate pressure on the Ghana cedi in quarter-two of 2020,” the Data Bank Research (May 2020) commented.

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