Ghana’s Cedis, by virtue of misfortune, became the worst performing currency in the world – compounding the country’s troubled economy as inflation accelerated as much as 37.8% as at October.
As part of efforts to tame the inflation that has seen the cost of living skyrocket in the West African country, Ghana’s central bank has continued to raise its benchmark interest rate. Last month, the monetary policy committee lifted the cost of borrowing by 250 basis points to 24.5%, as cedis weakened 41% against the dollar in 2022.
Despite attempts by the authorities to curtail the impact of rising inflation, Ghana’s economy has been spiraling downward, forcing businesses to shut down as the cost of fuel and other goods and services soar.
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In October, Ghanaian traders locked their shops in a three-day protest aimed at bringing the plights of businesses to the notice of the government. Joseph Obeng, the leader of the Ghana Union of Traders Association, the country’s largest lobbying group for retailers, said that soaring inflation, which has pushed exchange rates up, has “deeply eroded” the capital of business owners by over 50% this year.
“As I speak to you now, we are not able to service our loans contracted by local banks and external suppliers. We are now at our weak end and can no longer endure any further suffering,” Obeng said.
Against this backdrop, the government on Thursday announced that Ghana is developing a new strategy that would see it buy oil products using gold rather than U.S. dollar reserves. This move was announced on Facebook by Vice President Mahamudu Bawumia. He said the plan is to protect Ghana’s foreign exchange reserve that has been on massive decline due to intense pressure from dollar demand by oil importers.
The weight of the demand, which falls heavily on Ghana cedis as oil cost rise globally, has been responsible for the currency’s decline – driving the cost of living up.
Bawumia said the gold-oil barter regime would take pressure off cedis by preventing exchange rate from impacting the cost of goods and services.
“The demand for foreign exchange by oil importers in the face of dwindling foreign exchange reserves results in the depreciation of the cedi and increases in the cost of living with higher prices for fuel, transportation, utilities, etc.
“To address this challenge, the Government is negotiating a new policy regime where our gold (rather than our US dollar reserves) will be used to buy oil products. The swap of sustainably mined gold for oil is one of the most important economic policy changes in Ghana since its independence.
“If we implement it as 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. 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,” he explained.
Ghana has about 8.74 metric tons in gold reserves, a quantity that is considered large enough for the gold-oil barter regime.
The government has ordered all large-scale mining companies to sell 20% of their entire stock of refined gold at their refineries to the Bank of Ghana from Jan. 1, 2023.
“The Bank of Ghana and the Precious Minerals Marketing Company (PMMC) will coordinate with the large-scale mining companies to ensure compliance with this directive,” Bawumia said.
“The gold to be purchased by the Bank of Ghana and the PMMC will be in cedis at spot price with no discounts,” he added.