Ghana’s foreign-exchange market is about to be spurred to life: by cocoa beans.
Currency transactions by Ghanaian banks are set to double as the government starts to auction foreign exchange raised by the country’s cocoa-exporting body, allowing companies to bid for dollars rather than buy them from the black market or exchange bureaus. The first $1.8 billion, a loan raised by the Ghana Cocoa Board, is hitting the market this month.
A dearth of foreign currency in West Africa’s second-largest economy has weakened the cedi by 49 percent against the dollar in the three years through 2015, stimulating a black market and driving the inflation rate to a seven-year high in March. The move to release revenue from gold sales and the region’s second-largest cocoa exports is a sign that the central bank is comfortable that measures to stabilize the currency since September last year are taking hold.
“Many people would prefer the banking system to do their business, but they don’t, either because they prefer rates offered by other markets or the banking system lacks dollar supply,” Anthony Kofi Asare, head of treasury at GCB Bank Ltd. in Accra, said in an interview. “The auctions will make more dollars available to banks. The rate determined at the auction will become a reference point for everybody in setting rates.”
The auctions could boost daily trading in the interbank market to about $65 million from $30 million, Asare said. The increase in transactions will support the cedi, helping stem its 5.2 percent decline to the dollar this year and prevent it from the weakening beyond 4 to the greenback, he said. The currency gained 0.6 percent to 3.9950 per dollar by 5 a.m. in Accra.
“One of the reasons why the black market has existed and it keeps thriving is they’ve managed to capitalize on the inefficiencies in the forex market,” Edem Harrison, research analyst at Frontline Capital Advisors Ltd. in Accra, said by phone. “With this structured approach there’s going to be more fair pricing. To a larger extent, it’s going to reduce the volume that we find going to the black market.”
Cedi ‘Anchor’
Until now, the central bank deposited foreign exchange raised by cocoa and gold exporters into the foreign reserves. Auctioning the proceeds of the cocoa board’s dollar loan will help develop the market and ultimately allow the agency to sell directly to banks once local institutions can absorb amounts as large as $1.8 billion, central bank Governor Abdul Nashiru Issahaku said Sept. 19.
Auction results may prove decisive in setting the cedi-dollar rate, said Razia Khan, head of Africa research at Standard Chartered Bank Plc.
“We may see a narrowing of bid-ask spreads given that the auction could act as an anchor for setting expectations around a certain FX rate,” Khan said by phone from London. “When it comes to dollar-cedi price setting elsewhere, this may converge around the anchor represented by the auction rate.”
The gap between the official and black-market exchange rates remains large. A dollar cost 4.20 cedis on the streets of Accra, as of Tuesday, compared with the official rate of 3.97.
The cedi has depreciated against the dollar year since 1995, when Bloomberg began compiling data. Ghana entered a $933 million program with the International Monetary Fund in September last year to help curb its budget deficit and combat weakness in the currency.
Confidence in the cedi has been supported by an improving budget deficit and prospects of inflows from the cocoa exporters loan and the $750 million Ghana raised in a September Eurobond sale. Foreign-exchange auctions will help strengthen the cedi, Daniel Kyei-Mensah, a currency trader at Universal Merchant Bank Ltd. in Accra, said by phone.
“Market forces will be more at work,” Kyei-Mensah said. “It won’t be in your interest as a bank just to hold on to dollar funds, especially when you’re going to be making provisions on it. So they’d have to come on the market and sell.”
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