Dr. Mahamudu Bawumia, vice president, has assured Ghanaians that the government’s recently proposed gold for oil policy, which is scheduled to go into effect in 2023, will go a long way towards halting the rampant depreciation of the cedi and, as a result, the rising costs of goods and services that have been associated with it and significantly raised Ghanaians’ cost of living.
In a nearly ten-minute speech at the 2022 Ghana Energy Awards on Sunday, November 27, Bawumia covered the finer points of the government innovation intended to stop the devaluation of the cedi.
He claims that if the government of Ghana follows through on its intention to buy refined oil products using gold reserves rather than dollars reserves, the cedi to dollar exchange rate would no longer be a factor in determining how much fuel is priced in Ghana.
According to the vice president, this would shield the local economy from the whims of the foreign exchange market and, as a result, result in lower fuel prices, which would then lower transportation costs, merchandise prices, and even energy tariffs.
“A major source of cedi depreciation has been the demand for foreign exchange to finance the import of oil products. In fact, our import of oil products is around $3bn annually. Persistent cedi depreciation increases the cost of living with higher prices for fuel, transportation, utilities, food and so on. Many governments, including ours, are facing very difficult economic crisis that requires solutions that must come out of the box. How do we stop the depreciation? How do we stop the persistent increases in the prices of fuel and utility? We have been thinking about this long and hard.
“When you think about it, the challenge that we face is a limited access to foreign exchange as our foreign exchange reserves have depleted but the demand has not fallen but been relatively steady…and so the demand exceeds the supply and then you have depreciation. So the thinking was that how do we get in more foreign exchange reserves for the country to be able to stem this gap between the demand and the supply,” Bawumia began his talk.
The Vice President noted that while he considered how to resolve this issue, he asked why we don’t build up gold reserves since the metal already functions as a foreign exchange reserve, especially given that gold is produced in Ghana.
He claimed that because gold is a foreign exchange commodity, when we find it, we already have foreign currency, which is far better than obtaining foreign currency from other commodities like cocoa and oil, which must be sold in order to obtain dollars.
In light of this, and especially in light of the nation’s FX reserves, the government decided to utilize gold on its own to purchase oil rather than exporting other goods, earning gold, and then using that money to acquire refined oil products.
At the end of September 2022, Ghana’s Gross International Reserves were estimated to be around $6.6 billion, or less than three months’ worth of imports, according to Reuters. This is a decrease from the approximately $9.7 billion at year’s end.
The government gave the Bank of Ghana the go-ahead to launch a gold purchase programme in order to steadily increase the nation’s reserves before disclosing this strategy.
According to Bawumia, the Central Bank has been stockpiling gold since last year, and the nation is now prepared to put this new strategy into practice to combat the issue of recurrent depreciation.
“…To address this fundamental challenge of the persistent depreciation and its impact on fuel, utility prices, food and so on, government has decided to implement a policy of using our gold to buy oil products. That is something new and it is the barter of sustainably mined gold for oil and is one of the most important policy changes in Ghana since independence.
If we implement it as we have envisioned, it will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency with its associated increases in fuel, electricity, water, transport and food prices.
“It is very simple. This is because the exchange rate…will no longer directly enter the formula for the determination of fuel or utility prices once we implement this because the purchases of fuel for transport and utility is going to be in cedis, its not going to be in dollars. Because you are buying that fuel with gold, that is where the exchange takes place. But once you sell that fuel, you sell it in cedis, and then the bank of Ghana uses that cedis to buy more gold and buy the oil, you sell and it goes around in that way. Essentially, you are taking the exchange rate out of the equation” Bawumia further explained.
“Today, our fuel prices are being priced at a forward exchange rate of Ghc 19 to the U.S dollar. So you can imagine when you price without the exchange rate in the formula, which is what is going to happen, you will see that the prices of fuel will come down. Similarly for PURC, if the exchange rate doesn’t enter the equation, which it shouldn’t because the transaction will be in cedis, similarly then electricity tariffs would also have to come down.
“One of the biggest drivers of fuel, electricity price increases and the cost of doing business is fundamentally the exchange rate….so if you are able to tap a handle on the exchange rate movement, you are able to lower the depreciation of the currency at the same time,”
According to Bawumia, the action would ideally save the nation $3 billion since oil importers, particularly the BDC, wouldn’t have to swarm the Bank of Ghana for dollars to import. This would immediately reduce demand for the currency and cushion the cedi versus the US dollar.
Bawumia also addressed concerns expressed by foreign media about Ghana’s stance on the US dollar. He claims that Ghana has no issues with the dollar and really wants to increase its holdings of the currency. However, they believe that this would be the ideal solution to address a specific issue with cedi devaluation.
The “gold for oil” policy in Ghana begins in 2023.
