Will backing the cedi with gold work?

By Joshua Worlasi AMLANU & Ebenezer Chike Adjei NJOKU

The cedi could once again be backed by gold if the initiative announced by Vice President Dr. Mahamudu Bawumia at the launch of the Royal Ghana Gold Refinery on August 8, 2024 comes to fruition, but economic experts have their doubts about its viability.

This measure, he said, is designed to stabilise the cedi – which has faced significant volatility over the years, with its sharp depreciation in the past 24 months being a major concern.

The Vice President argued that the move reflects government’s intention to leverage the country’s substantial gold reserves, which are expected to increase in value due to gold’s position as a hedge during periods of uncertainty, as well as benefits of the new refinery.

“We are going to move quickly to back the cedi with gold,” Dr. Bawumia announced at the refinery’s launch.

However, the transition from fiat money to a gold standard would require an  increase in gold reserves. There was significant build-up in international reserves during the first six months of the year.

Gross International Reserves (GIR) increased by US$947million to    US$6.87billion at end-June 2024, equivalent to 3.1 months of import cover. The higher build-up in Gross International Reserves was aided by a strong performance of the domestic gold purchase programme.

Backing the cedi with gold is not without challenges. Banking consultant Dr. Richmond Atuahene, in an essay titled ‘The Politics of Ghana’s Gold Standard: ‘Is it a Myth or Reality?’, highlighted the need for a stable macroeconomic environment to support such a move.

Dr. Atuahene pointed out that for Ghana to successfully implement a gold standard, the country’s economic fundamentals – including inflation, exchange rates and fiscal deficits – must be significantly strengthened.

“To think of a gold standard, Ghana must address persistent depreciation of the cedi and high inflation which have plagued the economy over the past two decades,” Dr. Atuahene noted.

He also emphasised the need for government and the Bank of Ghana (BoG) to promote robust macroeconomic growth by diversifying the economy, particularly by reducing reliance on gold and cocoa exports and increasing non-traditional exports.

Dr. Atuahene’s analysis also stressed the importance of renegotiating with mining companies to increase the surrendered value of gold export proceeds from the current 13.5 percent to 25 percent.

This increase in gold reserves would be crucial before considering the transition from fiat money to a gold standard. He warned that the Bank of Ghana needs to maintain flexibility in its monetary policy to manage inflation effectively.

“The gold standard’s success in Ghana hinges on government’s commitment to a stable and viable economy,” Dr. Atuahene argued. “Without addressing the weaknesses in macroeconomic stability, adopting a gold standard could limit monetary policy flexibility and exacerbate economic instability.”

Similar sentiments have been shared by the Dean-University of Cape Coast (UCC) School of Business, Professor John Gatsi – who has cautioned that while inauguration of the Royal Ghana Gold Refinery is a positive step for the country, it alone will not solve the issue of cedi-instability.

Despite acknowledging the importance of value addition to natural resources, Prof. Gatsi stressed the need to increase gold reserves to effectively stabilise the currency significantly.

Furthermore, he expressed concerns about the refinery’s ownership structure with a majority stake held by Indian partners, which could lead to significant profit repatriation.

The economist stated that a stable currency is the result of a robust economic foundation, including factors like accountability, transparency and productivity. Simply increasing gold reserves or building a refinery, he said, is not enough. Consequently, the central bank must also address broader demand for foreign currency to effectively manage the cedi’s value.

The Royal Ghana Gold Refinery’s launch marks a significant step toward government’s ambition of positioning Ghana as Africa’s gold hub. The refinery has the capacity to refine 132 tonnes of gold annually, more than Ghana’s total gold exports. Dr. Bawumia stressed the importance of obtaining the London Bullion Market Association (LBMA) Good Delivery Bar Certification, which would enhance the refinery’s international credibility and support government’s vision of refining all gold in Ghana before export.

To further support the gold-backed cedi initiative, Dr. Bawumia announced plans to reduce the withholding tax on gold exports from 1.5 percent to 1 percent in the next government, should he assume the presidency.

This, he believes, will encourage higher production volumes and contribute to the gold-for-oil and gold-for-reserves programmes aimed at stabilising the currency.

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