Ghana plans to buy oil with gold rather than dollar reserves

Ghana is developing a new strategy that would see it purchase oil products using gold rather than U.S. dollar reserves.

Disclosing this in Thursday, Vice President Mahamudu Bawumia, explained that the decision is intended to address Ghana’s declining foreign exchange reserves and the demand for dollars from oil importers, a situation that has drastically weakened the local cedi and driven up living expenses.

The Vice President said that since domestic vendors would no longer require foreign currency to import oil products, using gold would prevent the exchange rate from directly impacting the cost of fuel or utilities.

According to him, “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.

Recall that at the end of September 2022, Ghana’s gross international reserves were estimated to be around $6.6 billion, or less than three months’ worth of imports. According to the government, that is a decrease from the $9.7 billion it was at the end of the previous year.

Ghana produces crude oil, but since its sole refinery was forced to close due to an explosion in 2017, it has been dependent on imports for refined oil products.

During the presentation of the 2023 budget Ghana’s parliament was warned that the West African country faced a high risk of debt distress and that the depreciation of the cedi was negatively impacting Ghana’s capacity to manage its public debt.

The nation that produces cocoa, gold, and oil is experiencing its worst economic crisis in a generation, and the government is currently negotiating a relief package with the International Monetary Fund.