He added that the move would also help to stabilise the local currency in the long run.Mr Adoteye made these observations in an interview with the Daily Graphic last Friday.
“In the long run, it will stabilise our cedi because it provides certainty, so people will not depend on the spot market all the time to put pressure on the banks and the central bank.
“With the FX forwards, you are guaranteed and have that certainty that your cash will be delivered when you need it. People take the speculative decisions because they are not assured of tomorrow but now we are assured of the FX and this will bring some confidence in the market in terms of availability of FX,” he explained.
Introduction of forex auctioning
The BoG recently announced a foreign exchange forward rate auction limited to seven days, 15 days, 30 days, 45 days, 60 days, and 75 days tenors.
The auction allows banks to, on behalf of clients, lock into exchange rates now for delivery of forex later.The amount on offer for the maiden auction was US$50 million, with another US$ 50 million to be auctioned in November.
In December, the BoG is expected to auction US$25 million
The maiden foreign exchange forward auction in October was oversubscribed by the commercial banks which placed bids worth well above US$ 51.3 million.
However, the central bank only accepted price bids for transactions of seven days and 15 day tenors which cumulatively amounted to US$16.75 million.
Per the guidelines for the auction, each bank is permitted to submit a maximum of three bids per tenor in the auction, quoting their desired amount and at their freely determined exchange rate as per quotation convention.
The minimum bid size is US$500,000 and in multiples of US$250,000, and expressed in numbers.
Mr Adoteye said that would enable clients to plan effectively knowing that “I have cedis today but I know I can get dollars in seven or 15 days or in one month time.”
He said that was very critical to the development of the economy, adding that “this supports the depth of the market and further deepens it. It’s all about risk management so it’s about someone putting a hedge to make sure that he or she is assured of the needed forex for his transactions.”
“It guarantees your cash flow and gives you that piece of mind that within the next few days I can get my FX and you can plan with it. This gives you some degree of certainty that you are going to get the money within the expected time,” he stated.
How it works
Shedding more light on how the forex forward auctioning works, he said the cumulative volume of bids from any single bank should not exceed 20 per cent of the announced target for the auction.
He said successful banks would also be required to provide the cedis on trade dates when buying a forward contract.
He also noted that all bids must be backed by actual customer demand and documentation shall be submitted to the central bank.
“This is not a speculative product as its being offered today, because before you go in, you have to support your request for the FX with an underlining document.
“You should provide the documents which say that in 75 days, I have a need for this amount,” he said.
He said the price of the forwards was mainly influenced by the interest rates differentials.
Need to do more
Mr Adoteye also called for a continuous review of the process and assessment of performance.
“I think at this time of the development of our market we need to do more. Overtime, I believe the central bank will assess the performance of the market, and they will either review the frequency of the auction or possibly increase the size.
“This is one step and this one step will open avenues for other products to come onto the market,” he said.
“We need to increase the size of the auction and also improve the frequency but let’s give ourselves up to the end of year and see the performance of it and we can improve it next year,” he added.