Ghana’s government is developing a new policy to purchase oil products using gold rather than US dollars, Vice-President Mahamudu Bawumia announced on Facebook.
The measure is intended to address diminishing foreign currency reserves as well as the demand for dollars by oil importers, which is causing the local cedi to weaken and living costs to rise.
Ghana’s Gross International Reserves were estimated to be around $6.6 billion by the end of September 2022, or less than three months’ worth of imports. According to the government, this is a decrease from roughly $9.7 billion at the end of the previous year.
The new strategy, if implemented as planned in the first quarter of 2023, “will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency,” according to Bawumia.
He also added, “The barter of gold for oil represents a major structural change.”
He said that using gold would prevent the exchange rate from having a direct impact on fuel or utility pricing because domestic vendors would no longer require foreign exchange to import oil items.
The proposed policy is certainly out of the ordinary. While governments occasionally trade oil for other goods or commodities, such transactions usually involve an oil-producing nation receiving non-oil goods rather than the other way around.
Ghana produces crude oil, but it has had to rely on imports for processed oil products since its lone refinery closed in 2017 due to an accident.
Bawumia’s remark came as Finance Minister Ken Ofori-Atta announced plans to decrease spending and increase revenue in order to address the country’s mounting debt issue.
In a budget presentation to parliament, Ofori-Atta warned that Ghana was in high danger of debt distress and that the depreciation of the cedi (Ghanaian currency) was gravely harming Ghana’s ability to manage its public debt.
“The current debt sustainability analysis conducted reveals that Ghana is now considered to be in high risk of debt distress,” said Ofori-Atta.
As the cocoa, gold, and oil-producing country face its worst economic crisis in a generation, the government is discussing a bailout package with the International Monetary Fund.
He added, “The government and the IMF have agreed on programme objectives, a preliminary fiscal adjustment path, debt strategy and financing required for the programme.”
To address the spiraling debt problem, Ghana will block public and civil servant employment and extend an embargo on government car purchases and non-essential travel, according to the finance minister.
However, Ofori-Atta did not propose any changes to expenditure on flagship programs and instead described a range of broader infrastructure and social investments.
He claimed that the cedi’s devaluation was “seriously impacting” Ghana’s ability to handle its national debt, which had risen to $48.9 billion this year.
Ofori-Atta outlined a number of measures that will allow the government to reduce spending while increasing revenue, including a 2.5 percentage point increase in VAT to 15%, a halt on new tax breaks for foreign companies, as well as a review of tax breaks for the free zone, mining, oil, and gas industries.
Despite the anticipated increase in revenue, Ofori-Atta stated that the fiscal budget will rise to 7.7% of GDP from 6.6% for the coming year.
The government will also prohibit the use of V8 and V6 engine vehicles, as well as impose a 50% cut in fuel allocations and a restriction on non-essential travel.
Ghana, among other reforms, would set a debt ceiling on non-concessional borrowing and will focus on using monetary policy to reduce inflation, which has above 40%, according to the minister.