“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 depreciaiton. 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 said in thinking of solutions to this dilemma, he wondered why we don’t accumulate reserves in terms of gold when gold is a foreign exchange reserve in its own right, especially considering we produce gold right here in Ghana.
According to him, since gold is a foreign exchange commodity, the moment we dig it up, we have forex in hand, which is exponentially better than earning foreign exchange via other commodities like cocoa and oil which needs to be sold before earning dollars.
In light of that, the government thought to use gold on its own to purchase oil rather than exporting other products, earning gold and then using that gold to purchase refined oil products, especially considering the country’s forex reserves are dwindling.
According to Reuters, Ghana’s Gross International Reserves stood at around $6.6 billion at the end of September 2022, equating to less than three months of imports cover. That is down from around $9.7 billion at the end of last year.
Ahead of announcing this policy, government directed the Bank of Ghana to start a gold purchase program that would systematically build up the country’s reserves.
Bawumia said the Central Bank has been piling up gold since last year and now, the country is ready to implement this new policy to fight the problem of persistent 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,”
Bawumia said the move would ideally save the country $3bn since there would be no need for oil importers, particularly the BDC, to continually storm the Bank of Ghana for dollars to import, immediately lowering demand for the dollar and hence cushioning the cedi against the U.S dollar.
Bawumia also addressed foreign media angst that Ghana’s policy is a move against the U.S. dollar. According to him, Ghana has no problem with the U.S. dollar and in fact, wants to accumulate more dollar reserves. However, there is a specific problem with cedi depreciation and in their estimation, this would be the best way to fix it.
Ghana ‘gold for oil’ policy kicks off in 2023.