– Emerging support for optimal reserve ratio (gold reserve / foreign reserve)
By Kofi ARKAAH
In 2017, I called for the Bank of Ghana (“BoG”) to grow its Gold Reserve as a percentage of its Foreign Reserve from 7.7%, to 30% (+/- 3%) at that time, in tandem with its inflation target of 8% (+/- 2%), for currency stability and act as a pillar to sustained macroeconomic growth. At 7.7%, the Bank of Ghana’s Optimal Reserve Ratio (“ORR”) was weak and unfit for the 21st century – where shocks tend to converge and increase in frequency. Accordingly, the Bank of Ghana’s ORR needed to calibrate to a modern global financial system, to dampen inflation to meet its current 8% (+/- 2%) target.
Today, Ghana’s ORR is a robust 38.5%, within the current ORR zone (see below). In July 2021, the BoG commenced a Gold Repurchase Program to double its gold holdings in five years – from 8.7MT to 17.4MT. By July 2023, the BoG had reached this target, and has since purchased an additional 17.3MT. Due to the successful implementation of this transformational macroeconomic monetary policy, the BoG’s monetary gold measures 34.7MT, a fourfold increase.
Ex post, Ghana would have withstood the shocks it experienced between 2017 – 2022 and would not have needed to return to the IMF in December 2022. Indeed, the Vice President of Ghana agrees with me – “What is clear to me is that if we had started implementing these policies say 20 years ago, Ghana would be in a very different situation today.”
Ghana’s economy (2017 – 2023)
Between 2017 and 2022, Ghana suffered several shocks, including – a debt default driven by reckless borrowing beyond globally acceptable leverage ratios, unsustainable fiscal and/or current account deficits (the Government attributes the recent macroeconomic challenges faced primarily to COVID-19, and the Russia/Ukraine war), and systemic unchecked corruption. As a result, Ghana defaulted on its debt for the first time in its history, and by November 2022, the Ghana Cedi / US dollar exchange rate sharply deteriorated to 13.01/1.00, from 4.18/1.00 in April 2017. The Government was unable to access the international capital markets and resorted to Bank of Ghana printing more than GHC60 billion to fund the deficits. The next month, the Government returned to the IMF for the 17th time for support and signed a 3-year, $3 billion Extended Credit Facility (“ECF”) loan. Since then, the Government has followed fiscal policies broadly in line with the IMF ECF loan.
Current gold market developments
Gold prices have consistently risen since the 2008 global fiscal crisis — primarily driven by global (including emerging markets) central bank purchases. In 2022, “central banks bought 1,079 tons of bullion — the most since records began in 1950.” Today, global central bank purchasing continues unabated and has been joined by Chinese retail investors as they diversify their investment portfolios away from their declining property and stock markets, and the US dollar.”
Green shoots of promise
On February 9, 2023, the Vice President of Ghana acknowledged that the single most successful macroeconomic / monetary policy intervention implemented has been the Bank of Ghana’s gold repurchase program:
- “… helped rescue the economy from catastrophe in the recent crisis was the Bank of Ghana’s domestic gold purchase program.”
- “The Bank of Ghana has purchased 26 tons of gold (US$1.73 billion) since inception of the domestic gold purchase program under its gold for reserves policy” – unlocking $1.73 billion to stabilize the exchange rate, lower inflation and build foreign exchange reserves.” This was over 50% of the loan obtained from the IMF. Additional green shoots of this transformation are being immediately evidenced through:
Inflation: Has declined from 43.1% in July 2023, to 23.2% on February 9, 2024.
Depreciation of the Cedi: Has slowed materially – “Excluding the sharp depreciation of 20.6% in January, the Ghana Cedi cumulatively depreciated by 7.2% against the US dollar between February and December 2023.”
The political economy of maintaining prudent fiscal policies and prosecuting corruption simultaneously is likely to prove challenging. Particularly, in election years — like Ghana’s this year. Notwithstanding the rigor of the IMF program in maintaining a practical fiscal policy, the promising early results show what any Government can achieve if ORR discipline is retained.
Maintaining the optimal reserve ratio: potential implications for Ghana & Africa economies
The ORR acts as a foundational pillar to macroeconomic stability — a resilient Ghana Cedi, better able to withstand converging shocks, and easier convertibility with WAEMU (CFA). This is one of the most crucial steps to the establishment of a single African currency, accelerating intermediation, catalyzing the dividends of The African Continental Free Trade Agreement (“AfCFTA”), and further harmonizing the global financial architecture.
Economic Effects
- A “Demonstration Effect” policy strengthening Ghana/Africa central banking reserve policies for the 21st century to achieve high GDP growth, with currency resilience and macroeconomic stability.
- Lower inflation and interest rates – an investment and job creating environment.
- A source of savings and hedge against the volatility of high GDP growth.
Combined with prudent fiscal policies (pro private-sector, climate beneficial, industrialization), strengthened social policies, and the firm prosecution of corruption — in a decade, Ghana’s economy will be better able to withstand the shocks. In fact, Ghana should reach middle-income with a material decrease in inequality.
Sources:
- A “best practice” gold reserve proposal for Ghana – The Business & Financial Times (thebftonline.com)
- Ghana Cedi: from volatility to resilience & convertibility: – The Business & Financial Times (thebftonline.com)
- Launch-of-BOG-Gold-Purchase-Programme-Governors-Remarks.pdf
- How Ghana’s economy became a cautionary tale for Africa (ft.com)
- MPC-Press-Release-July-2023-240723.pdf (bog.gov.gh)
- Ghana’s Next Chapter Selfless Leadership and Bold Solutions for the Future” by Dr. Mahamadu Bawumia, Vice President and NPP Presidential Candidate, Republic of Ghana, University of Professional Studies (UPSA), 7th February 2024
- Gold Spot Prices & Market History | World Gold Council
- The new gold boom: how long can it last? (ft.com)
- Chinese investors buy gold as property and stock markets fall (ft.com)
- MPC-Press-Release-January-2024.pdf (bog.gov.gh)
The writer is a Financial strategist with 30 years of global finance experience. Previously worked with IFC/World Bank, Norwest Bank, Ark Partners, VOLVO, and Beraku, LLC. He is the author of two previous articles published by this newspaper:
