Founder of mPedigree, Mr Bright Simons has expressed doubt that investors will stop shifting Cedi into dollars despite the increase in the policy rate by the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) because the incentive to do so is unavailable.
In his view, this can only happen unless the investors themselves are willing to do that, not necessarily the increase in the policy rate.
Speaking on the Business Focus programme with Paa Kwesi Asare on TV3 Monday August 22, the Vice President of Imani Africa stated that there is a disconnect between increasing policy rate on one hand and incentivizing investors on the other hand.
“What we do know, talking to people in the industry is that a lot of the investors in the retail side are coming in and seeking to redeem their money. Some of them are not rolling over as they used to roll over.
“Now you increase the policy rate, unless these operators in the market are sufficiently willing to take a cue and increase rate significantly, I don’t see how investors will stop shifting their money from local currencies into Dollars or Dollar-denominated products. So my sense is that we already have the historical challenge of the policy rate not feeding well into commercial rate on the market,” he said.
He added “That is something that we have all known for quite a while. Then the second issue is the fact that typically, a lot of the products that are on the market have never seen positive return.
“So when you raise the policy rate, how do you incentivize investors to increase their use of other alternative assets that will therefore have mopping up excess liquidity if there is any such excess liquidity. So the linkages are not very clear.”
As part of measures to deal with the challenges facing the economy especially the fall of the Cedi, the MPC increased the policy rate to 22 per cent from the initial 19 per cent.
Speaking at the MPC’s emergency meeting in Accra on Wednesday, August 17, the Governor of the BoG Dr Ernest Addison said recent developments in the foreign exchange market showed elevated demand pressures, reflecting among others, continued heightening of uncertainties in the global economy, rising inflation in many advanced economies and the resultant coordinated tightening of monetary policy stance by major central banks.
This, he added, has further tightened global financing conditions with significant implications for Emerging Markets and Developing Economies (EMDEs), especially for those with weak fundamentals.
The US Dollar has strengthened against all major currencies. From the beginning of the year to date, the pound sterling has weakened against the US dollar by 12.4 percent while the Euro has also weakened by 11.8 percent. Countries similar to Ghana (Ghana’s peers) are all experiencing sharp depreciation to date.
The Ghana Cedi, he noted, has depreciated by 25.5 percent year-to-date, reflecting the Ghanaspecific situation, including the challenging financing of the budget from both domestic and external sources, downgrading of sovereign credit rating, nonresidents disinvestment in local currency bonds, and loss of reserve buffers.
“The execution of the budget for the year has remained challenging. Revenue has not kept pace with projections and created financing challenges. In the absence of access to the international capital market and given the constrained domestic financing, central bank overdraft has helped to close the financing gap as reflected in the mid-year budget review. The Bank of Ghana is working with the Ministry of Finance to agree on a cap on the overdraft.
“Whilst addressing the immediate financing problems, the ongoing policy discussions with the IMF are expected to address the underlying
macroeconomic challenges, restore fiscal and debt sustainability and provide a sustainable balance of payments cushion.
“Under the circumstances, and considering the risks to the inflation outlook, the Committee decided on a 300 basis points increase in the Monetary Policy Rate to 22 percent.”
