The foreign exchange market and the Dutch auction system in Ghana
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Date
2020-04-27
Authors
Dordunoo, Cletus K.
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
The foreign exchange market in Ghana prior to the economic reform
process was characterised by three major features, namely, an excessively
overvalued official exchange rate; a thriving black foreign exchange market;
and an allocation of official foreign exchange based on import licensing
arrangement issued by an Import Programming and Monitoring Committee. In
order to rationalize the official exchange rate, absorb the parallel sub-market
into the legal market, allow the forces of demand and supply to determine the
rate and allocation of foreign exchange, and to achieve a convergence of the
official and parallel rates, the Government adopted a series of exchange reform
measures. Initially, the cedi was devalued in stages, followed by the use of
purchasing power parity rule in determining exchange rate on quarterly basis
for about three years. Later a weekly auction based on the Dutch auction
system was introduced with two windows and later merged into one window.
The import licensing arrangement was abolished. The Dutch auction system
was utilized for about 6 years (on retail basis for 4 years and wholesale for 2
years). Also, foreign exchange bureaux were established to legalize the parallel
market operations. Despite the foreign exchange support from several
multilateral and bilateral agencies, as well as the extensive institutional reform,
and a stable macroeconomic environment, the convergence of the auction and
the bureaux rates took over 5 years to achieve.