Any hope for cedi?

Financial analysts expect the review of the foreign exchange restrictions announced last Friday by the Bank of Ghana (BoG) to provide immediate relief to importers and exporters.

The new measures are most likely to take effect from today.

Since the rules came into effect in February, importers and exporters have suffered from a combination of restricted access to their foreign currency holdings and bank financing in those currencies, and effective higher transaction costs brought about by the tightening of regulatory controls over their international trade transactions such as increased documentation requirements.

Importantly, the loosening of the restrictions should serve to boost confidence in Ghana’s foreign exchange market and thus reduce panic-driven speculative behaviour.

However, even the Bank of Ghana’s chieftains themselves admit that neither the restrictions nor the latest adjustments can by themselves halt the cedi’s ongoing sharp depreciation.

But they point out that the measures have slowed the monthly depreciation of the cedi from 7.8% in January to 2.7% in May.

The BoG’s review amounts to a compromise between two conflicting forces. One is the operational difficulties it has caused importers and exporters, which has raised calls for the scrapping of the restrictions imposed by February’s regulations.

The other is their significant impact in slowing the rate of depreciation of the cedi, which led to calls from some quarters for the retention of the restrictions.

Dr Benjamin Amoah, the central bank’s Head of Financial Stability, warns that the central bank’s adjustments of the rules and regulations that govern the foreign exchange market are no substitute for improving the fundamentals that drive demand and supply, which are the main determinants of exchange rates.

He, therefore, has called for government to cut its fiscal deficit, for enterprises and households to cut their demand for imports and, over the longer term for a restructuring of the economy through import substitution and increased value-added exports.

The Bank of Ghana declines to make public its forecast for the cedi’s exchange rate by the end of 2014, with Dr Amoah claiming it would be counter- productive since it would unduly influence the decisions of foreign exchange users and traders.

However, he said that the bank’s forecast takes into consideration expected higher inflows during the second half of the year than during the first half, largely because of the proceeds expected from COCOBOD’s syndicated loan financing for local cocoa purchases.

This year, COCOBOD is looking to raise about US$1.6 billion for this purpose, up from just US$1.2 billion last year, due to higher production levels this year.

Consequent to the review, the 60-day mandatory repatriation of export proceeds has been reversed and exporters now have as long as the sales agreement with their foreign buyers stipulates to repatriate what they are paid.

For instance, if the sales agreement stipulates payment within 120 days, then the exporter has that long to repatriate the proceeds. Conversely, if the agreement stipulates payment within, say, seven days, then the exporter only has that long to repatriate the funds.

Similarly, the five-day mandatory conversion of export receipts into cedis has also been scrapped. Henceforth, exporters are allowed to retain up to 60% of their foreign earnings in foreign currencies, which must be lodged in their Foreign Exchange Accounts (FEAs), although the rest must be converted into cedis within 15 days of receipt.

Exporters of goods and services can now receive payments locally in foreign currencies. This includes hotels, educational institutions and the likes. Such receipts must be paid into their FEAs.

Over-the-counter cash withdrawals from FEAs and Foreign Currency Accounts can now be made up to a limit of US$1,000 per travel or transaction.

The threshold for transfers abroad without accompanying documentation has been increased from US$25,000 to US$50,000. However, importers can only take advantage of this once; where documentation in respect of a transfer is outstanding, any subsequent payment can only be made if it is accompanied by the relevant documentation, no matter the value of the transaction.

Ghana’s banks can now resume giving their customers foreign currency loans for international trade-related transactions. Indeed all undrawn balances on foreign currency loans already granted can now be drawn down by the borrowers in the original currency in which the currency was granted.

One thing that has not changed though is the provision that the pricing, advertising, invoicing, receiving of and payment for goods and services must be done in cedis, unless express authorisation to the contrary is obtained from the BoG.

However, the central bank says it will continue to consider giving such authorisation to firms in the energy and mining sectors and support services on a case-by case basis.

Curiously, the BoG says it will encourage the use of debit cards by importers to pay for their purchases, and to this end it will henceforth increase the limit on payments by such cards from US$10,000 to US$50,000, as long as relevant documentation is provided for each transaction.

The central bank’s stance on this has attracted curiosity because less than a fortnight ago the fees paid by card holders on the use of their cards became subject to 17.5% Value Added Tax, a move which will discourage, rather than encourage, the use of such cards.

Meanwhile, the Bank of Ghana has come up with several recommendations for government to implement in order to plug foreign exchange leakages and improve supply of foreign exchange.

One is a recommendation that government reviews its existing agreements with mining, oil and gas companies and direct them to open and operate foreign currency retention accounts with either banks in Ghana or the Bank of Ghana itself.

The central bank says it can guarantee the availability of the foreign exchange held in such accounts for their owners within 24 hours of being requested for.

Another recommendation is that the management and technical service fees paid to multinationals under LI.1547 (1992) be streamlined to stem abuse. To implement this, the Bank of Ghana wants to engage government regulatory and facilitatory institutions such as the Ghana Investment Promotion Centre, Ghana Free Zones Board, Minerals Commission and the Ministry of Energy and Mines on the requisite modalities.

The central bank also says it will engage the Ghana Chamber of Commerce to use the Certificate of Origin issued by the Chamber to monitor repatriation of export proceeds.

It is also initiating steps to network banks and forex bureau to capture all foreign exchange flows and eliminate abuses such as documenting the same transaction through two different financial institutions to get approval for twice the foreign exchange actually needed for the transaction.