Instead of US dollars, Ghana plans to buy oil with gold

The Ghanaian government is developing a new policy to buy oil products using gold instead of US dollars.

The measure aims to address dwindling foreign exchange reserves as well as oil importers’ demand for dollars, which has weakened the local cedi and raised the cost of living.

Ghana’s Gross International Reserves were estimated at about US$6.6 billion by the end of September 2022, or less than three months of imports. That’s down from about $9.7 billion at the end of last year, according to the government.

If the new strategy is implemented as planned in the first quarter of 2023, “It will fundamentally change our balance of payments and significantly reduce the continued depreciation of our currency” According to Bawumia.

He also added “Bartering gold for oil is a big structural change.”

He said the use of gold would prevent the exchange rate from directly affecting the prices of fuel or utilities, as local sellers would no longer require foreign exchange to import petroleum products.

The proposed policy is certainly unusual. Although governments occasionally trade oil for other goods or commodities, such transactions usually involve the oil-producing country buying non-oil goods, rather than the other way around.

Ghana produces crude oil, but has had to rely on imports for refined petroleum products since its only refinery closed due to an accident in 2017.

Bawumia’s announcement came as Finance Minister Ken Ofori-Atta announced plans to cut spending and raise revenue to tackle the country’s mounting debt problem.

In his budget presentation to Parliament, Ofori-Atta warned that Ghana is at risk of high debt distress and that the depreciation of the cedi (Ghana’s currency) is seriously damaging Ghana’s ability to manage its public debt.

“The existing debt sustainability analysis shows that Ghana is now considered to be at high risk of debt distress” said Ofori-Atta.

The government is negotiating a bailout package with the International Monetary Fund as the cocoa, gold and oil producer faces its worst economic crisis in a generation.

He added that “The government and the IMF have agreed on the program objectives, the initial financial adjustment path, the debt strategy and the financing required for the program.”

According to the finance minister, in order to address the spiraling debt problem, Ghana will freeze the employment of government and civil servants and extend the embargo on the purchase of government vehicles and non-essential travel.

However, Ofori-Atta did not propose any changes to spending on flagship programs and instead outlined a series of broader infrastructure and social investments.

He argued that the devaluation of the cedi has “severely affected” Ghana’s ability to manage its national debt, which has soared to US$48.9 billion this year.

Ofori-Atta outlined a number of measures that will enable the government to cut costs while raising revenue, including a 2.5 percentage point increase in VAT to 15%, the suspension of new tax breaks for foreign companies, as well as a review of tax breaks. for free zone, mining, oil and gas industry.

Despite the expected increase in revenue, Ofori-Atta said the fiscal budget will increase from 6.6% to 7.7% of GDP for next year.

The government will also ban V8 and V6 engine vehicles, as well as introduce a 50% cut in fuel allowances and restrictions on non-essential travel.

Among other reforms, Ghana will set a debt ceiling on concessional borrowing and focus on using monetary policy to reduce inflation, which is above 40%, according to the minister.