The March 2020 Banking Sector Report has shown that the cedi’s strength against major trading currencies such as the dollar in the first two months of this year has made it unattractive for depositors to hold foreign currency accounts.
The figures reveal that out of GH¢83.1billion in total deposits, only GH¢23.2billion was in foreign currency as of February 2020. Though representing a 23 percent year-on-year growth, it is slower growth compared to the 43 percent growth recorded in December 2019.
Again, deposits of non-residents have shrunk by 30.7 percent compared to a mere 4.3 percent contraction in December 2019. This can be rightly attributed to the cedi’s performance at the beginning of the year, as it appreciated by 4.5 percent as of the end of February 2020 – a feat that has not been achieved for a long time.
Banking consultant Dr. Richmond Atuahene says this development can be credited to the Bank of Ghana’s forex auctions held every two weeks to ensure constant supply of dollars on the market, as it has resulted in the reduction of speculation – a major cause of depreciation for the local currency.
“The cedi appreciated against the dollar at the beginning of the year and people were no longer seeing holding dollar accounts as profitable, so they had to switch to holding money in local currency. It shows they have confidence in our local currency, and I think one of the things that has resulted in this is the auctions by the Bank of Ghana.
“People feel secure that when they want foreign currency they can get it at any time; so why would they rush to keep dollars in the bank when the interest on it is very small compared to interest on fixed deposits? They would rather convert their foreign reserves into fixed deposits as it will yield them more interest compared to keeping it in a dollar account,” he said in an interview with the B&FT.
Coronavirus to erode the gains
The cedi’s strength was tipped to remain for a greater part of the year, as the US$3billion Eurobond cash would have added to the regular supply of the dollar. But, unfortunately, that hope can no longer materialise as the coronavirus pandemic has washed away almost all gains made by the cedi at beginning of the year.
In fact, the cedi has seen a depreciation of 4.93 percent from the beginning of March – the very month the country recorded its first case – to Friday, April 29, 2020 owing to reduction in exports and capital flights, which has lately resulted in high demand for the US dollar.
This will reverse the trend of what was experienced last year, when the Banking Sector Report for September 2019 revealed that depositors were developing a strong appetite for converting their domestic deposits to foreign currency when the cedi was depreciating.
That report showed that the domestic currency component of deposits recorded a slower growth of 9.1 percent in August 2019, whereas foreign currency deposits grew by 21.2 percent.
The February 2020 foreign deposit growth rate of 23 percent is the lowest recorded since August last year.