Government of Ghana intends to barter sustainably mined Gold for imported Oil Products

On the back of the growing economic challenges, spiraling inflation, depreciation in the value of the cedi against the US dollar, and dwindling foreign exchange reserves, the government of Ghana has hinted a policy strategy to barter gold for imported oil products. This was revealed through a facebook post by the Vice President Dr. Mahamudu Bawumia on Thursday 24th November 2022, a day the Minister of Finance presented the 2023 budget statement to Parliament.

According to Dr. Bawumia, the objective of this policy is to address the dwindling foreign exchange reserves occasioned by the high demand of dollars by oil importers contributing to the depreciation of the cedi and high cost of living in the country. As disclosed by the Minister of Finance in the 2023 budget statement, the country’s Gross International Reserves at the end of September 2022 stood at US$6.6 billion equivalent to 2.9 months of imports cover from a stock position of US$9.7 billion (equivalent to 4.3 months imports cover) at the end of December 2021.

The new policy is expected to be implemented by the first quarter of 2023 and as noted by the Vice President 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. This is because the exchange rate (spot or forward) will no longer directly enter the formula for the determination of fuel or utility prices since all the domestic sellers of fuel will no longer need foreign exchange to import oil products”.

Despite being a producer of crude oil, Ghana relies heavily on imported refined oil products by Bulk Oil Distributing Companies (BDCs) to meet local demand. The BDCs depend significantly on the supply of US dollars from the Bank of Ghana (BoG). In recent times the Chamber of Bulk Oil Distributors have decried the dwindling quantum of dollars they receive from the BoG despite the implementation of the foreign exchange forward auction program to resolve the issue of lack of US dollars for the BDCs.

This new gold for oil policy if successfully implemented would replace the use of US dollars to import oil products by the BDCs.

Source of Gold?

The government is expected to rely on the BoG’s domestic gold purchase programme to source its gold for this intervention. As announced by the Minister of Finance in the presentation of the 2023 budget statement, the government plans to “expand the gold purchase programme by BoG to support FX Reserve accumulation, promote London Bullion Market Association (LBMA) certified gold refinery in Ghana and promote local currency stability”.

In 2021, the BoG introduced the domestic gold purchase programme, an intervention that provides the BoG the opportunity to buy locally produced gold from selected domestic gold aggregators and mining companies paying with the local currency at the prevailing market price.

The objective of the programme is to increase the country’s foreign exchange reserves, enhance the stability of the local currency, create a favourable environment for foreign direct investments and to enable the BoG use its gold holdings to raise cheaper sources of financing to provide short-term foreign exchange liquidity.

At the 105th regular meeting of the Monetary Policy Committee press conference earlier this year, the Governor of the BoG hinted that about 600 kilogrammes of gold have been purchased so far aiming to increase the country’s gold reserves of 8.7 tonnes to 17.4 tonnes by 2026.

Globally, there is an upsurge in the demand of gold by central banks as a safe asset and effective inflation hedge. According to the World Gold Council data, about almost 400 tonnes of gold were purchased by central banks at the end of the third quarter this year, leading to total gold purchases of 673 tonnes so far in 2022.