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Home Business News Banking and Finance

BoG secures US$1 billion to meet forex demand shocks

BoG secures US$1 billion to meet forex demand shocks

May 22, 2020
in Banking and Finance, Business News
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BoG secures US$1 billion to meet forex demand shocks

WASHINGTON, DC - MAY 20: Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing on May 20, 2013 in Washington, DC. The one hundred dollar bills will be released this fall and has new security features, such as a duplicating portrait of Benjamin Franklin and microprinting added to make the bill more difficult to counterfeit. Mark Wilson/Getty Images/AFP

In a bid to stand ready for any possible excessive demand for the US dollar in the near future, the Bank of Ghana has engaged the U.S. Federal Reserve for a US$ 1 billion repurchase agreement (REPO) facility for Foreign and International Monetary Authorities.

This move by the Bank of Ghana has been praised as prudent by many market analysts, since it effectively preempts any possible shocks that may come from a sharp increase in demand for the US dollar in the short-term as businesses reopen and try to make up for lost time through increased business volumes, at a time when forex inflows from the major sources have declined drastically.

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The FIMA repo facility allows foreign central banks to temporarily raise dollars by selling U.S. Treasuries to the Federal Reserve’s System Open Market Account and agreeing to buy them back at the maturity of the repurchase agreement.

The arrangement was announced by the Governor of the bank of Ghana, Dr. Ernest Addison, following the monetary policy committee’s meeting last week.

The facility, which is expected to be available for at least six months, provides an important foreign exchange buffer to boost dollar liquidity amid the COVID-19 global pandemic, and will thus further enhance the BoG’s dollar liquidity.

A senior Economist with Databank, Mr. Courage Kingsley Martey  explained that, “Under the REPO arrangement, the Bank of Ghana would give it’s holding of US Treasury securities to the US FED in exchange for equivalent amount of US Dollars cash worth US$1 billion with the promise to repurchase (or buy back) the US Securities after 6-months or extend it, subject to market conditions.”

“Essentially, the Bank of Ghana has been able to convert a part of its assets into US dollar cash to help support FX stability but without completely losing ownership of the assets because they can reclaim it after the agreed period once the US$1 billion it has taken is returned,” Mr. Martey explained.

Further checks by Goldstreet Business have shown that the transaction would be conducted at an interest rate of 25 basis points over the rate on IOER (Interest on Excess Reserves), which generally exceeds private repo rates when the U.S. Treasury market is functioning well, so the facility would primarily be used only in unusual circumstances such as those prevailing at present.

“…it’s a good move by the Bank of Ghana to reassure the market that it’s really committed to ensuring a stable Cedi through this difficult period. The signaling effect is already having a positive impact on the Cedi against major trading currencies with the local unit recording moderate gains since the MPC revealed this information,” Mr. Martey said.

The Bank f Ghana has noted that the government’s decision to access the Eurobond market earlier in the year, and the Rapid Credit Facility (RCF) financing from the IMF has resulted in a build-up in reserves of US$1.5 billion (2.2 percent of GDP).  Ghana’s gross international reserves increased from a level of US$8.4 billion at the end of December 2019 to US$10.3 billion at the end of April 2020, sufficient to provide 4.8 months of imports cover.

This strong reserve position has helped to ensure stability in the foreign exchange market even as external financing conditions tighten and emerging and frontier economies see capital inflow reversals as a result of the heightened global uncertainty.

“…but this additional US$1 billion is going to further strength the BOG’s capacity to continue its spot and forward market interventions, both of which have been really helpful in anchoring the Cedi’s stability,” Mr. Martey said.

source: Goldstreet business

Source: Goldstreet business
Via: nownews Ghana
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