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Cuts in policy rate driving investors away— Isaac Adongo

By: Emmanuel Bruce
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FINANCIAL analyst and Member of Parliament of Bolgatanga Central, Mr Isaac Adongo, has blamed the current woes of the cedi on the shortage in dollar supply caused by the exit of foreign investors from government bonds and securities.

He said the consistent cuts in the policy rate by the Bank of Ghana was driving investors away from the country’s bonds and securities, leading to low net international reserves.

In response to a GRAPHIC BUSINESS email on February 14, 2019 he said the foreign investors were taking their money out of the country due to unattractive interest rates and demands by importers.

He said the government was also recording huge uncovered auctions and that was having a toll on the cedi.
He indicated that the government failed to raise its targeted GH¢4.15 billion on treasury bills and bonds, as it was able to raise only GH¢1.3 billion, leaving a shortfall of GH¢2.8 billion.

“The foreign investors who buy these bonds normally bring in dollars to their banks and exchange them into cedis to buy the bonds, thereby leaving more dollars in the banks to increase liquidity or supply of dollars to ease the pressure on the cedi,” he stated.

“Unfortunately, the continuous politically motivated cuts in the policy-rate by the Bank of Ghana is driving these investors and critical source of liquidity or supply of dollars away leading to acute supply shortage of dollars,” he added.

He said those uncertainties were likely to get worse after April “when the country exits the International Monetary Fund (IMF) programme if the BoG does not stop the politicising monetary policy and focus on aligning it to reverse the alarming capital flight. In January, the Bank of Ghana (BoG) reduced its policy rate by 100 basis points from 17 per cent to 16 per cent.

Policy distortion
The Member of Parliament also noted that there was a distortion between the policy rate cuts and the various government instruments.

He said the recent interest rates movements on government’s risk-free debt instruments suggested that both the government and the BoG had no trust in the economic data that had influenced policy rate cuts.

“While the BoG is cutting interest rates to signal a downward trajectory of interest rates, the same BoG and the government are raising interest rates on benchmark risk-free instruments,” he stated.

Interest rate on government’s 91 day T’ Bills increased from 13.3 per cent in 2017 to 14.6 per cent in 2018, while the interest on the 182 day T’ Bills rose from 13.8 per cent to 15 per cent in 2018. Interest on the seven-year bond also rose from 16.3 per cent to 21 per cent, with the 10-year bond increasing from 16.7 per cent to 21.2 per cent.
The interest on the 15 year bond rose from 17.2 per cent to 21.4 per cent.

Increasing consumption imports
Mr Adongo also blamed the depreciation of the cedi on the increasing consumption imports.

“It is worrying that Ghana's non oil imports are now shifting towards increasing consumption imports and declining capital and intermediate goods imports. Imports of capital goods to expand manufacturing and productive capacity to support local production and job creation declined from US$2.2 billion in 2016 to US$ 2 billion in 2017 and further to US$1.9 billion in 2018,” he explained.

“Similarly, imports of intermediate goods for production, contrary to the promise to eliminate import duty on intermediate goods to increase it imports, has declined from US$5.8 billion in 2016 to US$5.2billion in 2017 and further down to US$5.1 billion in 2018,” he added.

Strangely, imports of consumption goods have been increasing from $2.1 billion tin 2026 to $2.4 billion in 2017 and $2.6 billion in 2018.

He said the government was gradually reversing all the gains of local manufacturing and creating an import of consumption goods economy. 

“This puts more pressure on the cedi as importers are demanding dollars,” he noted.

Low levels of net international reserves
Mr Adongo also pointed out that the country’s low level of net international reserves, which currently stand at US$3.2 billion, was increasing external vulnerabilities.

He said that was also creating uncertainties for the country to deal with increasing demands.