The Bank of Ghana has issued a report that shows foreign currency deposits grew briskly in the first five months of the year, at a time the cedi experienced a sharp decline in value against the major trading currencies.

The Bank of Ghana in its latest financial and economic data report released last week indicates that foreign currency deposits -- which were US$2.73billion in January this year -- witnessed a 59.7 percent growth in May.
Within the same period, however, the cedi lost about 20 percent of its value against the US dollar in particular, a situation that has raised concerns about abnormality of the depreciation that occurred from beginning of the year.

According to the Bank of Ghana, the considerable growth in foreign currency deposits over the period reflects the cedi’s sharp depreciation.

Historically, there has been significant growth in foreign currency deposits during periods in which the cedi has struggled against the major trading currencies.

In January last year, when the cedi depreciated by 7.3 percent -- its biggest loss in a single month for the year -- foreign currency deposits grew by 31 percent. In the same year -- during September, when cedi-depreciation for the year reached its peak -- foreign currency deposits increased by 61.9 percent.

However, some economists and financial analysts have raised questions about the growth in foreign currency deposits data since the deposits and value of the cedi have a close relationship and tend to trend together.

“The data beats economic theory and logic, because we would have expected that significant growth in foreign currency deposits would have improved FX liquidity on the market. Every week, the demand for FX on banks is about US$300 million and the depreciation we experienced was because demand outstripped supply and the speculators also took advantage. It is therefore difficult to explain why improvement in the foreign currency deposits will be met with depreciation of the cedi,” a Treasury analyst at one of the major banks told the B&FT.

The sharp depreciation of the cedi this year forced the central bank to take corrective action to save the cedi from total collapse, and its announcement to ramp-up supply by pumping US$20million a day into the economy -- together with the IMF’s positive review of of the extended credit facility programme implementation -- has shored-up the currency’s value, which has since the beginning of July made major gains against major trading currencies.

The cedi has recovered, and has since the beginning of the year lost only about 2.8 percent against the US dollar especially.

The MD of SG Ghana, Gilbert Hie, told B&FT that the cedi’s abnormal depreciation amidst a rise in foreign currency deposits could have been caused by speculators.

“The stability has been re-established, and right now it’s close to the rate we were having at the end of the year; so probably there is something that has not been followed up closely, or the market reacted in a wrong way.

“But now it is good that the central bank has been able to stabilise the situation because probably it was an artificial thing, but I believe the depreciation was abnormal though now the situation is better.

“It is possible. I don’t have this kind of information but I think it is possible speculators pushed the depreciation further,” he said.

B&FT understands that depreciation of the cedi was exacerbated by premature redemption of bonds by foreign investors which exerted depreciation pressure on the cedi, as well as the slump in prices of oil, gold and cocoa -- three commodities that always guarantee significant inflow of foreign exchange for the country.

More so, some of the banks are believed to have used their excess reserves to purchase and hoard foreign exchange, which contributed to depreciation of the cedi. Additionally, because of the high cost of open market operations, the BoG has been unable to effectively mop-up excess liquidity from the system, which has led to lower yields on cedi assets and resulted in the excess being channeled into the foreign exchange market…causing further depreciation of the cedi.