New FX rule eases pressure on banks and importers

Banks and importers have started reaping the benefits of the Bank of Ghana’s (BoG’s) new rule on foreign exchange surrender, as the Ghana Association of Bankers (GAB) and the bulk oil distributors (BDCs) report that access to foreign exchange (FX) and its availability in the country have improved tremendously than before.

While the banks report of increased FX liquidity in recent times, which has made it easier for them to meet demands, the BDCs, which require between US$2.5 billion to US$3 billion to fund their operations annually, said the measure had improved FOREX flow in the market.

The two bodies are, therefore, confident the successful implementation of the measure, which scrapped the compulsory surrender of between 20 per cent to 25 per cent of FX to the central bank, would help ease the pressure they went through trying to serve their customers.

With more FX now available to the banks, thanks to the rule, the Chief Executive of the GAB, Mr D. K. Mensah, said banks are no longer relying on BoG for FOREX cover to their trade finance deals.

Instead, they are using portions of the FX surrendered to them directly to meet such demands, Mr Mensah told the Graphic Business on July 11.

The new rule will also improve liquidity of FX and that will help reduce the prices at which importers like BDCs buy FX, the CEO of the Chamber of Bulk Oil Distributors (CBOD), Mr Senyo Hosi, said in a separate interview.

“It will improve liquidity and create room for FX derivatives to be introduced for our sector. There will be room for that market and that is something good for us,” Mr Hosi added.

Forex cover

The banks non-reliance on BoG to for import cover for their trade finance transactions represents a sharp contrast from the previous regime, where almost all trade finance deals that required foreign currencies to execute were always covered by the BoG. The frequent requests for import cover – a ratio of the total imports to the FX needed for the importation – from the central bank came at a cost to the banks, a hurdle that has also been removed by the scrapping of the compulsory surrender.

Mr Mensah said this meant that “the story of ‘I am waiting for the BoG to provide the import cover for me’ is no longer there.”

The result will be an improvement in business transaction time, which will reflect in the output of banks and their business partners.

“You see, all that is going to happen is that it is going to build up their offshore funds and that will put them (the banks) in a better position to finance all those who want to import,” the GAB CEO added.

Last year, imports totalled about US$3.5 billion, of which non-oil imports were US$3.05 billion.

Improving competition

Beyond improving liquidity for importers, the CEO of CBOD said the FX rule will help introduce competition into the FOREX market, where risk mitigation measures would be needed to shelve the companies from heavy losses.

Unlike the previous regime where FX losses were underwritten by the BoG, Mr Hosi said the decision to put the demands of BDCs on the market meant that individual companies would have to manage their own risks.

With that you are deposed to a lot more risks but that is what separates the boys from the men,” he said.

“Generally, it has put a lot more pressure on the market but with the flow of more FX into the market, it has mitigated any negative impact,” he added.

Forex leakages

Meanwhile, the GAB has allayed the concerns of policy think tank, the Institute for Policy Studies (IFS), that the FX rule could help raise increase capital flight through the banking sector.

The association’s CEO said BoG’s prudential requirement meant that the central bank was always in tune with the quantity of FOREX in the banking sector and that made it impossible for banks to sneak FX into foreign markets.

Mr Mensah was responding to concerns from the institute that the introduction of the rule could provide a fertile ground for capital flight.

As a result, the Head of Research at IFS, Dr John Kwakye, said in a separate interview that the BoG needed to introduce stringent liquidity management measures that will help plug the loopholes that may make it easier for banks to leak FX abroad.

“Because BoG was keeping it before, they were able to police any leakages through their system. Now that it is going out there, our fear is that if you do not police it well, the foreign-owned banks may adopt some kind of practices whereby they will siphon this FX that is now going to them,” he said.

“There is that possibility because and if it is more profitable, they will do it,” he explained.

Mr Mensah, however, said that was not possible, given the stringent rules surrounding FX reporting.

“They cannot take it out because the repatriation is normally done through the BoG and if you leak, the central bank will obviously know,” he explained.

This means that the story of ‘I am waiting for the BoG to provide the import cover for me’ is no longer there.

Source: Graphic Online