Written by Oscar Soberg
Nestled along the West Coast of Africa, Ghana has long been a beacon of stability and democracy within the African continent. Since gaining its independence from colonial rule in 1957, the first in the region to do so (Dontoh, 2022b), Ghana has developed a peaceful and vibrant democracy in conjunction with a strong service and export-based economy (OEC, n.d.). Initially exporting mostly gold and cocoa, the country began exporting crude oil in 2010 and immediately saw a boost to its GDP (Dontoh, 2022b). Unfortunately, the nation’s economy has taken a turn for the worse in recent years. The Cedi, Ghana’s currency, dropped 57% in 2022 (Dontoh, 2022a) and the government has been warned the economy is on the brink of collapse (Inveen and Akorlie, 2022). But how did Ghana end up in this position? And what radical move is the government taking to try and save the economy from its downward spiral?
With the steady growth in oil-based revenue, the Ghanaian government embarked on a path of heavy government expenditure, often financed by debt (Dontoh, 2022b). The expectation was that future oil exports would be lucrative enough to repay the heavy debt incurred by the many new projects and programs. Evidently it was not.
Ghana’s debt began spiraling out of control and investors began fleeing. People began to fear the debt was unsustainable, in which case the government would likely end up defaulting on its loans and investors would not get the returns they either hoped for, or were promised. The pandemic didn’t help the issue, as the global economy’s grinding halt hurt Ghana’s ability to service its debt by lowering government revenue. By September of 2022 the government’s debt increased to 75.9 percent of the nation’s GDP (Dontoh, 2022b). To make matters worse, the economy has not performed as well as government officials had hoped, and the exodus of foreign capital has sent shockwaves through the domestic market.
After the nation’s only oil refinery was closed in 2017 following an explosion, Ghana has had to import refined petroleum products despite being a crude oil exporter (Tan, 2022). This means domestic companies have to buy foreign oil in order to power the country–a predicament that is exacerbated by the Cedi’s depreciation. With the government’s debt crisis weakening the national currency, the cost of imported oil has been increasing dramatically. These higher prices are then passed on to the consumer, which has put Ghanaian citizens in a tight financial situation. Fuel, water, electricity, and even food have become more expensive in Ghana, leaving people wondering how much longer they can afford their daily necessities (Bawumia, 2022).
The government of Ghana typically has reserves of United States dollars to be used in emergencies such as this. However, those reserves are running dangerously low. As of the end of September 2022, Ghana’s Gross International Reserves held enough dollars to cover three months of imports–barely enough to make it to the end of the year (Inveen and Akorlie, 2022). Without any more international reserves, the government will have to print even more Cedi in order to buy the much needed oil, which will cause the Cedi to further depreciate.
So how can Ghana stave off the deadly combination of an oil and debt crisis long enough to get the economy back on track? Beginning in 2023, the government will be enacting a radical new policy that they hope will prolong their foreign currency reserves, lower the cost of oil imports, and allow the government enough time to service its debt with the help of the International Monetary Fund (IMF) (Dontoh, 2022b). The policy is simple: buy oil with gold, not money. Gold, which the country has plenty of due to it being a main export, is more stable than the rapidly-depreciating Cedi, and would not affect the exchange rate. Essentially bartering oil for gold has never been tried before, but the Ghanaian government is confident it will work. The Cedi would still be incredibly weak, but the hope is that by using gold instead of domestic currency to buy huge amounts of oil the government will be preventing the foreign exchange market from being flooded with Cedi. However, the government still needs to build an attractive environment for foreign investment to pull itself out of the hole it has dug.
According to Ghana’s Vice-President Mahamudu Bawumia, the new policy will “significantly reduce the persistent depreciation of our currency,” thereby helping ease the skyrocketing cost of living in Ghana (Bawumia, 2022). The economic logic behind such policy, again according to Dr. Bawumia, is that the exchange rate “will no longer directly enter the formula for the determination of fuel or utility prices” since the products are not being bought with the dollar or Cedi (Bawumia, 2022).
To source the gold needed for this project, Ghana has ordered the large gold mining companies to sell 20 percent of their refined metal to the central bank (Dontoh, 2022a). It is a remarkably bold economic decision, and one that is quite unprecedented, but Ghana is banking on the hope that bartering for much-needed oil will protect its currency from further deflation, and stabilize the cost of living for its citizens. It is important to note, though, that this policy does not address the root problem of the Cedi’s depreciation, or the depletion of the country’s foreign reserves. Ghana will still need to find a way out of its debt crisis, which will likely take the form of a negotiated package with the IMF.
For now, it seems like this economic reform is exactly what Ghana needs to prevent a true disaster from occurring. An interesting example of how non-traditional economics may be able to provide short-term relief, Ghana’s bartering of gold for oil offers a unique solution, and lays the framework for other similarly-afflicted countries.
Works Cited
Dontoh, Ekow. “Ghana Gold Miners Ordered to Sell 20% of Refined Bullion to Central Bank.” Bloomberg.com, Bloomberg, 25 Nov. 2022, https://www.bloomberg.com/news/articles/2022-11-25/gold-miners-ordered-to-sell-20-of-refined-bullion-to-ghana.
Dontoh, Ekow. “Why Ghana Went From Hero to Zero for Investors.” The Washington Post, WP Company, 27 Nov. 2022, https://www.washingtonpost.com/business/energy/why-ghana-went-from-hero-to-zero-for-investors/2022/11/25/7a76048e-6cb2-11ed-8619-0b92f0565592_story.html.
Bawumia, Mahamudu. The Use of Gold To Buy Imported Oil Products. Facebook, 24 November 2022, 6:20 CST, https://www.facebook.com/MBawumia/posts/677321473754954. Accessed 27 November 2022.
“Ghana.” OEC, https://oec.world/en/profile/country/gha#:~:text=Exports%20The%20top%20exports%20of,%2C%20and%20Netherlands%20(%24697M).
Inveen, Cooper, and Christian Akorlie. “Ghana Plans to Buy Oil with Gold Instead of U.S. Dollars.” Reuters, Thomson Reuters, 24 Nov. 2022, https://www.reuters.com/markets/commodities/ghana-working-plan-buy-oil-with-gold-rather-than-usd-vp-2022-11-24/.
Tan, Huileng. “Debt-Ridden Ghana Plans to Buy Oil with Gold Instead of Dollars, as Foreign Currency Reserves Dwindle to an Alarming Low.” Markets Insider, Business Insider, 25 Nov. 2022, https://markets.businessinsider.com/news/commodities/ghana-plans-buy-oil-with-gold-us-dollars-debt-africa-2022-11.
Pan, Jingming. Hangzhou, 2021. https://unsplash.com/photos/iYsrkq5qq0Q