How the Bank of Ghana Determines The Daring Foreign Exchange Rates In Ghana: The1$£€ Equivalence.

Foreign exchange rate in Ghana has always been the talking point. With most people always complaining and asking about the dealings of the central bank regarding the handling of the cedi, it is undoubtedly right for one to know how the Bank of Ghana determines the daily foreign exchange rates.

The Bank of Ghana is the mother bank of all the banks in Ghana. It is the supreme bank for the country and the only one that transacts government businesses. Therefore, we say the Central Bank of Ghana is the banker to the government and one that caters to the indigenous sector of the economy.

Functions of the Bank of Ghana

• formulate and implement monetary policy aimed at achieving the objectives of the Bank;
• promote by monetary measure the stabilization of the value of the currency within and outside Ghana;
• institute measures that are likely to have a favorable effect on the balance of payments, the state of public finances, and the general development of the national economy;
• regulate, supervise, and direct the banking and credit system and ensure the smooth operation of the financial sector;
• promote, regulate, and supervise payment and settlement systems;
• issue and redeem the currency notes and coins;
• ensure effective maintenance and management of Ghana’s external financial services;
• license, regulate, promote, and supervise non-banking financial institutions;
• act as banker and financial adviser to the Government;
• promote and maintain relations with international banking and financial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and
• do all other things that are incidental or conducive to the efficient performance of its functions under this Act and any other enactment.

The Foreign Exchange Rates

It would be very unfair for one to think that the Bank of Ghana just gives daily foreign exchange rates or reference rates following no protocols regarding computations and other stakeholder engagements and considerations.

Foreign Exchange Auctions

The foreign exchange action is a monetary policy instrument through which the central bank sells or buys foreign currency on the interbank foreign exchange market. The main goal of the foreign exchange auction is to fill the international reserves, to eliminate the pressure on the exchange rate due to high temporary inflows of foreign capital, and or to balance the private and government gap.

The Central Bank of Ghana undertakes regular foreign exchange auctions, where authorized dealers (banks and other financial institutions) bid for foreign currencies. The exchange rate is determined by the highest bid.

Interbank foreign exchange market

In addition, the interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly or through electronic brokering platforms.

The Bank of Ghana also oversees the Interbank Foreign Exchange Market, where authorized dealers trade foreign currencies among themselves. The exchange rate is then determined by the demand-supply forces in the market.

Monetary Policy

The Monetary Policy Committee of the Bank of Ghana is responsible for formulating and implementing policy in the areas of money, banking, and credit to promote and preserve monetary stability.

The Bank of Ghana’s Monetary Policy decisions such as adjusting interest rates or implementing capital controls also influence the exchange rates.

The Determining Procedure

The reference rate, published every day on the Bank of Ghana website is computed from data submitted by all banks. Each working day, all the banks that have the license to transact foreign currencies submit data on all spot US$/GH¢ transactions concluded on the reporting day before 2.00 pm.

The data covers all spot transactions on the interbank markets as well as transactions with their clients that have nominal values of US$10,000 or more. The data submitted is used to compute the weighted average exchange rate. The weighted exchange rate is published on the Bank of Ghana website, as the closing rate for the day’s transactions.

The authorized banks then take the published rates from the Bank of Ghana and offer to their clients at rates around that which have been published by the central bank.

For instance, on Monday, 15 February 1993, before 2:00 pm, all the foreign exchange licensed banks send their daily foreign exchange reports to the central bank. This report indicates how much of every foreign currency was purchased and transacted on 15th February 1993 before 2:00 pm.

The Bank of Ghana then uses demand and supply analogy and other complex econometric computations (some of which are discussed above) to arrive at the reference rate for the next day which is 16th February 1993. Let’s say buying is “US$1is to GHȻ10.50” and selling is “US$1is to GHȻ11.50”.

These rates now become the reference rates for Tuesday, February 16. This means that the reference rates are the benchmark to guide all the authorized dealers in foreign exchange.

The licensed banks then use these reference rates to determine their rates for 16th February 1993. It is extremely advisable to notice that the banks buy from the central bank at such rates, so they also need to sell and make profits.

This means that the rates given by the banks to its customers or clients are somehow a bit higher than the reference rates from the Bank of Ghana.

The buying rate is the rate the bank will transact business with, in case you walk into the bank and present a foreign currency and request to change it to a local currency. The bank buys the foreign currency from the customer. In addition, if anyone receives a foreign currency and wants to change it to a local currency, the rate that will be used in such a transaction is the buying rate of the bank.

The selling rate on the other hand is the rate that will be given to anyone who walks into the bank with a local currency and requests to change it to a foreign currency. Also, it is the selling rate of the bank that will be used to transact business for anyone who will send an email or a note, or even walk into the bank to make a foreign payment using his or her local bank account.

These mechanisms help determine the daily exchange rate in Ghana, which in turn affects the value of the Ghanaian cedi (GhȻ) relative to other currencies.