Could gold purchases be fuelling liquidity growth?

By Joshua Worlasi AMLANU

Ahead of the 2025 budget presentation, concerns are mounting over the Bank of Ghana (BoG) Gold Purchase Programme’s (GPP) role in the country’s rising monetary growth.

The Institute for Fiscal Studies (IFS) is urging policymakers to assess whether the programme, initially designed to shore-up foreign reserves and stabilise the cedi, may be inadvertently contributing to excess liquidity.

Dr. Said Boakye – a senior research fellow at IFS – highlighted that while the GPP has significantly boosted Ghana’s gold reserves, its impact on overall liquidity levels cannot be overlooked.

He recommended that the new government critically examine the programme’s influence on money supply growth since 2022 and determine whether adjustments are needed to ensure macroeconomic stability.

“The Gold Purchase Programme was introduced with the intention of strengthening reserves and shielding the cedi from depreciation. However, its role in the sharp expansion of liquidity must be assessed carefully,” Dr. Boakye stated.

“If liquidity growth is found to be excessive and linked to the programme, then a policy decision must be made on whether to modify or discontinue it in its current form,” he added.

Rising liquidity and inflationary pressures

Monetary expansion has been a persistent challenge in recent years. Broad money supply (M2) growth, which stood at 12 percent in 2021, surged to 27.8 percent in 2022 and further accelerated to 37.2 percent in 2023 before slightly easing to 33.7 percent in 2024.

This expansion, coupled with a prolonged period of high inflation, has raised concerns about the sustainability of the country’s macroeconomic trajectory.

Despite an initial disinflationary trend in 2023, inflation has remained stubbornly high, registering 23.5 percent in January 2025. The persistence of inflation above 20 percent for nearly three years is unprecedented in Ghana’s modern economic history, according to IFS.

Before the recent crisis, inflation rates exceeding 20 percent were rare. From 2001 to 2021, Ghana experienced such levels only briefly in 2009 and 2014, both driven by external shocks and fiscal slippages.

“The fact that we have had inflation consistently above 20 percent for 34 consecutive months is deeply concerning. This is not a normal occurrence and signals underlying structural imbalances,” Dr. Boakye noted.

The key question remains whether the GPP is a necessary stabilising measure or a driver of the country’s liquidity expansion. While the BoG has defended the programme as a strategic move to bolster reserves, IFS insists that a rigorous evaluation is needed to determine its broader economic effects.

If the programme is found to be contributing significantly in monetary expansion, policymakers may need to reassess its scale or structure.

Dr. Boakye stressed that the ultimate goal should be striking a balance between strengthening reserves and maintaining macroeconomic stability.

Exchange rate pressures and fiscal instability

The cedi’s depreciation has also remained a source of instability, with the local currency losing 19.2 percent of its value against the US dollar in 2024.

While this marks an improvement from the sharper declines of 30 percent in 2022 and 27.8 percent in 2023, it still far exceeds the historical annual average depreciation rate of 9.4 percent recorded between 2001 and 2021.

The IFS argues that excessive fiscal deficits, driven by high debt service costs, remain at the heart of the country’s macroeconomic challenges. The country’s debt restructuring efforts have provided temporary relief, but concerns persist about long-term fiscal sustainability.

“If the high macroeconomic instability is not forcefully reined-in, the country’s already sluggish economic growth could continue to decline – worsening unemployment and reducing investment,” Dr. Boakye warned.

Policy recommendations

To restore stability, IFS is advocating a two-pronged approach: stronger fiscal consolidation and tighter monetary control. The think-tank emphasises that government must prioritise revenue growth beyond historical trends while avoiding excessive taxation of local businesses and low-income citizens.

Instead, Boakye believes that the extractive sector could provide a more sustainable revenue source.

“Ghana needs to rethink its approach to resource management. The current concession model benefits private and foreign entities disproportionately. A shift toward production-sharing agreements or greater state participation could significantly boost government revenues,” he said.

On the monetary front, IFS is calling on the BoG to broaden its toolkit for managing liquidity, rather than relying predominantly on interest rate adjustments.

The central bank’s policy rate hikes in recent years have aimed to curb inflation, but with limited success.

“The Bank of Ghana must use all available tools to control money supply growth, not just the policy rate. Excessive reliance on interest rates alone has proven insufficient in stabilising the economy,” Dr. Boakye asserted.

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