Optimal Reserve Ratio (Gold Reserve / Foreign Reserve)-Targeting (30%) [+/-3%], in tandem with Inflation-Targeting
The present Government’s Cedi stability policies are recycled from 2000 – 2008 (Pre – Global Financial Crisis), and inappropriate for today’s global monetary environment (Quantitative Easing dilutes Ghana’s Cash Reserves), and some negative nominal interest rates by major Central Banks (Japan), and the ECB is at zero interest rate, limit the pool of investable assets.
The current Government is calling for a Cedi / Foreign Reserve (primarily Cash Reserve) equilibrium. The $2.25 Billion “Foreign” Cedi Bond, moved Ghana’s ORR from 7.7%, to below 5%. At this level, it is not robust, and is susceptible to volatility. Already, the Cedi has moved from 3.90 to 4.20 / $1.00, as the liquidity from the foreign cash injection dissipates.
If Ghana experiences any shocks now — like the budgeted 30% increase in Revenues don’t materialize, and we’re still paying for the 110 Ministers et al, the Cedi will face material headwinds. Also, for the unprecedented Single Financier Risk with 95% of the bond held by 1 foreign private investor — a bond that was well received and lots of interested investors.
Ghana should aim to achieve Cedi Resilience (essential for Clean Industrialized Growth) — Lower Inflation, Interest Rates and Unemployment Rate; Exchange Rate Stability and Convertibility by:
- using the ECB Optimal Reserve Ratio (“ORR”) (we should take an average of the past 3 years)
(+/- 3%) as a de facto peg ORR (This follows the role of “permanent capital” in optimal capital structure theory, and usually practice. Further, gold is similar to debt (short-term) in its risk / return profile. Most importantly, gold is a traditional hedge against inflation, therefore Ghana’s ORR needs to be higher than the ECB’s to dampen Inflation further from the current 12.8% to below the current target — (8%) [+/-2%]. The additional 300 basis points spread to the ECB average, is due to the Inflation differential between Ghana and the ECB — 1.73%. The ECB aims at Inflation rates of below, but close to, 2% over the medium term. For Ghana, this will lead to significantly Lower Inflation and Interest Rates; a material increase in both private sector and public sector investments; double-digit GDP growth rates; and
- An optimal Gold Reserve storage architecture proposal could be 76% is stored in Ghana – similar to “permanent capital;” with the remainder 24% split among WAEMU (CFA), United States, United Kingdom, China, Switzerland and Mauritius, for Safety, Liquidity and Convertibility purposes.
WAEMU (CFA) — [5%]. 50% of the Foreign Reserves of WAEMU (CFA) are deposited with the French Treasury (indirectly the ECB), in return for the guarantee of the CFA Convertibility. The Cedi’s Convertibility will be materially enhanced by this storage arrangement, as well as the Safety of the Gold Reserve. Further, through March, year on year Inflation in the CFA zone was 0.8%.
[16%] of Ghana’s gold will be split proportionally between the foreign currency markets in New York, London, HK, Zurich, where gold is traded — enhancing the Cedi’s Liquidity.
Mauritius — [3%] is considered because: (i) with the recent signing of a double taxation treaty with Ghana, greater investment flows are expected through Mauritius; (ii) traditionally, Mauritius has played a role as the offshore financial center for Africa; and (iii) security and logistical advantages — boosting Ghana’s Trade capabilities.
Effectively, we have created the same Monetary Policy conditions (Lower Inflation and Interest Rates; Currency Stability, Resilience and Convertibility) that have generated enhanced macroeconomic stability in WAEMU (CFA) — (Narrower Fiscal Deficits and Current Account Balances), in tandem with optimizing Ghana’s competitiveness through utilizing a best practice storage architecture.
By implementing an ORR-Targeting framework in tandem with Inflation-Targeting, the Cedi’s Resilience, and Exchange Rate Stability and Convertibility will be optimized.
Coupled with a Clean Industrialized Growth fiscal policy, Ghana can achieve and sustain GDP growth rates of 10%+.
Countries/Central Banks that have successfully implemented or are implementing this ORRTargeting strategy include:
- ECB + Eurozone Central Banks (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia, Spain, Bulgaria, Croatia, Denmark, Poland and Romania).
- WAEMU (Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal & Togo); and
- Turkey, Sri Lanka and Lebanon; (iv) China and Russia.
Sources: Bank of Ghana, Government of Ghana, ECB, WAEMU, World Bank, IMF, World Gold Council/
The writer is a financial strategist with 25 years of global finance experience, has worked with Ark Partners, IFC/World Bank and Norwest Bank. A previous article from the writer can be found in the Tuesday, April 18, 2017 edition of this publication: