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Bank of Ghana draws investors to T-bills

The Bank of Ghana (BoG) is luring investors to government paper with higher yields that will raise the opportunity cost of holding dollars and stabilise the exchange rate.

At its auction last Friday, for bills to be issued this week, the bank hiked interest rates on short-term bills and notes to levels not seen in two years. The yield on the 91-day bill rose to 15.4%, the highest since March 2010, while the 182-day bill returned 15.9% per annum.

The yields on the one- and two-year notes were 15.5% and 16% respectively, up from 14.5% and 14.8% on April 23.

The Central Bank has said it intends to mop up excess cedis which have found their way into the foreign exchange market because of the previously low yields on cedi assets. The bank has blamed the increased buying of dollars with excess cedis for weakening of the local currency.

Last year’s 14.4% expansion in the economy gave a big boost to spending on imports which has continued into 2012, putting pressure on the exchange rate and the bank’s foreign currency reserves.

The cedi has depreciated by nearly 10% this year against the dollar, losing as much value as it gave up for the whole of 2011. In the forex bureau market, the cedi has slipped by more than 12% since the start of the year.

The weak cedi poses risks to inflation, macroeconomic stability and economic growth, Governor Kwesi Amissah-Arthur said on April 13 when the Central Bank raised its benchmark policy rate for the second time this year to 14.5%.

On the same day, the bank in a bid to improve foreign-exchange supply by banks to the market lowered the required single currency net open position (NOP) of banks -- the difference between their assets and liabilities in a single currency -- to 10% from 15%, and reduced the aggregate NOP to 20% from 30%.

But the cedi has traded at 0.6% lower among banks and depreciated further by 4% in the forex bureau market since the April 13 announcement, compelling the bank to introduce additional corrective measures.

Banks are now required to keep the mandatory 9% reserve requirement on domestic and foreign currency deposits in cedis only, according to new guidelines issued on April 27.

In addition, they are to provide 100% cedi cover for so-called vostro balances -- that is, local currency accounts held by foreigners -- to be maintained by the Bank of Ghana.

The Central Bank also re-introduced bills with 30-, 60-, and 270-day maturities to increase avenues for cedi investments.  

A price worth paying

Even though tight monetary policies could slow down the economy’s fast-paced expansion, the price is worth paying, Deputy Finance Minister Seth Terkper said.

“The price of inaction could also mean that growth will suffer. When you have challenges with your currency and you are losing reserves, you need to move in quickly to restore equilibrium. If you don’t and the Central Bank just continues using our collective reserves to defend the cedi, you may get to a point where you don’t have reserves and you cannot support your imports.”

The Central Bank’s reserves fell by US$800million to US$4.6billion in the first three months of the year as it sold dollars to support the cedi.

Mr. Terkper is confident the new measures will stabilise the exchange rate and return the situation to normal.
“The Central Bank is only trying to do a correction. And when it does sufficient correction, I think the economy will move gradually back to equilibrium.”

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