Ghana’s Gold-for-Oil Policy Raises Eyebrows, Experts Slam Announcement
The Government of Ghana’s latest announcement to buy oil with gold rather than US Dollars amidst forex scarcity and high inflation in the country has raised eyebrows and criticism from industry experts and observers.
The Ghanaian Vice President, Mahamudu Bawumia announced through Facebook that the government was working towards a new policy to buy oil products with gold rather than scarce US dollar reserves.
Ghana’s dwindling foreign reserves were weakening the cedi and driving up living costs as exports failed to keep up with imports. The country recently announced the proposal of a 30% principal and interest payments loss to its Eurobond investors in a move to curtail its spending.
This was necessary for it to qualify for a debt sustainability program by the International Monetary Fund (IMF), and it was just part of a couple of reforms the government put together to form the basis of negotiations with IMF. A statement on its website read, “The program seeks to establish a macro-fiscal path that ensures debt sustainability and macroeconomic stability, underpinned by key structural reforms and social protection.” Ghana aims to secure a $3bn relief package from the IMF over three years.
Generally across the world, US dollars have been scarce due to contractionary monetary policies by its central bank, The Federal Reserve, and record export surpluses, leading to the reserve currency rising strongly against other currencies this year like the euro, pound, naira, and the yen.
The Ghanain cedi is reportedly the worst performing against the dollar so far as it has dropped more than 80% this year alone. Bawumia also ordered all large-scale mining companies in the country to sell-off 20% of their entire stock of refined gold to the Bank of Ghana as from Jan 1 2023.
The move has faced backlash from industry observers and expert show say it has no economic justification and could backfire. An oil and gas finance expert on his Twitter stated, “Gold does not grow on the ground. It requires hundreds of millions of ‘DOLLARS’ in investment to bring it out of the ground, process it and transport it for sale in ‘DOLLARS’.”
Another commentator said, “Also through time I spent working with Ghanaians to combat illegal rosewood logging, I learned Ghana lost an estimated $2bn in 2016 alone from illegal old mining. So unless there’s immediate enforcement squashing the illicit trade, this plan seems shaky.”
A precious metals investor, Erik Haglund said on Quora while describing the costs to mining gold, “There are a few measurements gold miners use when presenting their numbers and books. Cash cost, all in cash cost, and all in sustainable cost (AISC) are the most common.
Arguably AISC is the most commonly used factor when comparing miners to one another. The AISC, i.e. the cost to produce an ounce of gold varies depending on mine type, location, infrastructure, external commodity costs like oil, etc. In early 2021, most large scale gold mining operations report AISC of around 1100–1300 $/oz.” According to BullionVault, gold currently trades at $1,767.87 per ounce.
The international trade of gold follows the laws of demand and supply, a rise in its supply drops its sale price in the markets, just like oil. Ghana’s decision to force firms to selloff to the Central bank at spot price could result in price crash as holders scramble to sell their gold according to analysts.
