Multiple exchange rates: IMF tasks BoG to sanitise forex market

In a move to scrap multiple exchange rates, the Bank of Ghana (BoG) is to provide forex liquidity at prevailing market exchange rates and implement measures to further support unifying the exchange rates.

This means the situation where BoG at times provides foreign exchange support at rates other than those prevailing in the market, leading to the emergence of multiple exchange rates will no longer happen.

BoG to limit gross forex interventions

The central bank will therefore limit gross forex interventions to only smoothing exchange rate fluctuations associated with disorderly market conditions.

These are contained in the full document spelling out the details of the three-year $3 billion bailout programme with Ghana.

Impact of multiple exchange rates

Exchange rate misalignment results in resource misallocation and could hamper overall economic growth.

Persistent undervaluation leads to high levels of inflation which in turn creates macroeconomic instability while overvaluation leads to trade imbalances with consequential balance of payment problems

With gross reserves falling rapidly, the BoG has started limiting foreign exchange interventions since mid-2022.

Rebuilding foreign exchange buffers

The agreement noted that more efforts to rebuild foreign exchange buffers will be critical to achieve the programme’s medium-term objective of an international reserve coverage ratio of at least three months of imports.

Any unexpected forex inflows should be saved as the performance will be monitored through a Net international Reserve (NIR) target performance criterion.

Achieving these goals will be underpinned by efforts to ensure a unified and flexible exchange rate and to create the conditions for foreign exchange market deepening.

According to the agreement, BoG committed not to introduce measures that give rise to Multiple Currency Practices (MCPs).

IMF staff and BoG officials agree that limiting central bank forex interventions and allowing for greater exchange rate flexibility will enhance monetary policy effectiveness and help rebuild reserve buffers.

To support price discovery and efficient allocation, the BoG will employ auctions as the primary channel for any foreign exchange intervention.

The agreement said any bilateral trades will be conducted at the market rate.

The BoG will gradually phase out the special foreign exchange auctions for fuel distributors introduced in March 2022 and enhance the design of the regular foreign exchange auctions with the support of Fund technical assistance.

According to the agreement, these measures will help bolster foreign exchange liquidity in the banking sector and encourage price discovery and foreign exchange market deepening.

Ghanaians’ easy access to foreign currency at the various forex bureaus is what has significantly contributed to the dollarisation of the economy and the subsequent slide of the cedi.

Some individuals have criticised the Central Bank for the publication of foreign exchange rates which does not reflect the current retail market rates.

BoG h defended the daily publication of foreign exchange rates, which puts the rates lower than what is sold in the retail or forex market.

According to the Central Bank, the rates are weighted average of transaction rates collected and collated from the commercial banks offered to customers.

The Central Bank explained that the rates from the Central Bank are weighted average of transaction rates of the banks which the banks publish as indicative rates.

Dual exchange rates can be the consequence of various official exchange rates for different imports in an effort to subsidize key imports; they can be associated with fixed (or tightly managed) exchange rate regimes where the official exchange rate deviates from the market exchange rates (an exchange rate premium exists); or both.

A premium is the outcome of market restrictions that drive the non-official supply and demand for foreign currency.

And it is a symptom of the inconsistency of fiscal and monetary policies and, in particular, the lack of credibility of de jure exchange rate policy given the level of foreign reserves.

Dual exchange rates provoke distortions by manipulating relative prices in the economy and open opportunities for rent-seeking behavior for those who have access to preferential rates.

Eliminating dual exchange rates thereby would lead to a more efficient application of market-driven relative prices to allocate resources in the economy.

There are two approaches toward unifying an exchange rate gap: big bang and gradual devaluations.

The first approach is to do a large one-off devaluation. The second approach is to devalue gradually and credibly