The foreign exchange market and the Dutch auction system in Ghana

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.