By Joshua Worlasi AMLANU (ACSI)
Three years into the Domestic Gold Purchase Programme (DGPP), the Bank of Ghana has made notable progress in strengthening its gold reserves, which have now reached 65.4 tonnes, valued at approximately US$5.07 billion. Of this, a significant 23 tonnes were acquired in just the first half of 2024.
Launched in June 2021, the DGPP is a strategic initiative aimed at enhancing Ghana’s foreign exchange reserves and stabilizing the national currency in the face of fluctuating global economic conditions.
The DGPP’s impact on Ghana’s international reserves has been substantial. According to the Bank of Ghana, Gross International Reserves (GIR) increased by US$947 million to US$6.87 billion by the end of June 2024, providing 3.1 months of import cover.
Similarly, Net International Reserves rose by US$1.31 billion to US$4.50 billion. The domestic gold purchase programme has been a key factor in this reserve build-up, underscoring its role in supporting the country’s foreign exchange stability.
Looking back, by the end of 2023, Ghana’s gross international reserves stood at US$3.7 billion, surpassing the IMF’s initial estimate of US$2.4 billion. The accumulation of gold reserves was a major contributor to this increase, adding US$1.5 billion to the total reserves. This growth has provided Ghana with a more substantial buffer against external economic shocks and enhanced its capacity to meet international payment obligations.
However, despite the DGPP’s contributions, the Ghanaian cedi faced continuous and significant depreciation pressures in the first half of 2024, particularly in May. The BoG’s currency stabilization efforts have been a combination of tight monetary policy, the introduction of a dynamic Cash Reserve Ratio (CRR) to manage liquidity, and revised regulations on advance payments for imports.
This has been buttressed by somewhat improved market sentiment following the third tranche of the IMF Extended Credit Facility and agreements with external creditors. Nonetheless, the cedi has crossed the GH¢16 mark to US$1 on the retail market.
While the DGPP has undeniably strengthened Ghana’s reserve position, the International Monetary Fund (IMF) has highlighted a critical caveat: the contributions from the DGPP do not immediately impact the balance of payments unless the gold is sold or swapped on international markets. This insight points to a nuanced understanding of the programme’s benefits—they are indirect and hinge on the Bank of Ghana’s strategic decisions regarding the timing and method of utilizing these gold reserves.
The broader question that arises is the effectiveness of the DGPP in terms of the local currency and within the global context, where central banks worldwide are increasingly turning to gold as a hedge against economic uncertainty and geopolitical risks.
The Global Rush for Gold
Globally, central banks have been actively increasing their gold holdings. In the first half of 2024, central banks purchased a record 483 tonnes of gold. This surge in demand is primarily driven by concerns over inflation, geopolitical tensions, and a strategic shift to diversify away from traditional reserve assets like the U.S. dollar.
Turkey and India have been at the forefront of this trend, with Turkey acquiring 45 tonnes and India 37 tonnes in the first six months of 2024. These countries, similar to Ghana, view gold as a safe-haven asset that provides a hedge against global uncertainties.
Gold as a share of official foreign reserves had reversed its earlier decline more than ten years ago, around the time of the 2008–09 Global Financial Crisis (GFC), shifting from a period when more countries were selling gold pre-GFC to a period of increased purchasing post-GFC.
Fully half of the largest year-over-year increases in central bank holdings of gold reserves since the turn of the century were associated with the risk of sanctions, as observed by Serkan Arslanalp et al. (2022). Using an indicator of financial sanctions imposed by the United States, United Kingdom, European Union, and Japan—traditionally the principal reserve-issuing economies—sanctions have had a positive impact on the share of reserves held in gold.
Aggregate evidence suggests that some reserve managers respond to relative costs and returns; an increase in the gold share is observed when the expected return on gold is high while that on financial assets, such as U.S. Treasury securities, is low.
Most view gold as a hedge against economic and geopolitical risks: gold shares in both advanced and emerging markets increase with a measure of economic uncertainty, and in advanced economies, these shares also rise with a measure of geopolitical risk.
More central banks plan to add to their gold reserves within the next year, and more of them expect others to do so as well, due to ongoing macroeconomic and political uncertainty despite high prices for the precious metal, the World Gold Council (WGC) noted in its 2024 annual survey.
Demand for gold from central banks has been elevated over the last two years as some countries diversify their foreign currency reserves. Their demand contributed to the gold price rally in March-May, with the spot price hitting a record high of US$2,449.89 per ounce on May 20.
Moreover, studies have shown that reserve managers in emerging markets increase the share of reserves held in gold in response to sanctions risk. Many of the largest year-on-year increases in individual central banks’ gold holdings occur when those central banks are, or have reason to believe they may be, subject to financial sanctions.
Ghana’s approach to increasing its gold reserves through the DGPP aligns with this global trend. By purchasing gold from domestic producers in local currency, the Bank of Ghana aims to reduce reliance on foreign currencies and build a more resilient financial system. However, while countries like Turkey and India have a more diversified approach to reserve management, Ghana’s heavy reliance on gold presents both opportunities and risks.
The Role of Basel III in Enhancing Gold’s Status
The importance of gold in global financial markets has been elevated by the Basel III regulations, which classify gold as a Tier 1 asset. This designation makes gold a high-quality, liquid asset that banks can hold to meet capital requirements, thereby increasing demand for physical gold. For Ghana, this presents a strategic opportunity.
The DGPP’s focus on accumulating gold aligns with the global regulatory environment that favors gold as a stable, risk-free asset.
However, Basel III requirements also impose stringent capital and liquidity standards on banks, meaning Ghana must manage its gold reserves prudently to meet these international norms.
This involves not only increasing the quantity of gold held but also ensuring that the gold meets the quality standards required to be considered a Tier 1 asset. The Bank of Ghana’s efforts to refine and store gold to meet international standards are steps in the right direction, but continuous oversight and regulation are essential to maintain these standards.
While the DGPP has yielded positive results, it faces several challenges. A key issue is the low retention of foreign exchange from exports. Currently, only 17% of export earnings are retained in the domestic economy, far below the levels seen in countries like Nigeria and Botswana, which retain over 50%. For Ghana to fully leverage its gold resources, it needs to increase this retention rate, particularly for foreign exchange generated from gold exports.
Moreover, Ghana’s reliance on gold as a primary reserve asset exposes it to fluctuations in global gold prices. In 2024, gold prices surged by nearly 20%, driven by increased demand from central banks and geopolitical uncertainties.
While this price increase has benefited Ghana in the short term, the country remains vulnerable to potential price declines. The Bank of Ghana must therefore adopt a dynamic and flexible approach to reserve management, balancing gold with other reserve assets to mitigate risks.
Opportunities for Growth and Stability
The DGPP presents significant opportunities for Ghana, particularly in terms of stabilizing the cedi and enhancing the country’s foreign reserves. By continuing to build its gold reserves, Ghana can reduce its reliance on the U.S. dollar and other foreign currencies, providing greater financial security in times of global economic instability.
Additionally, the program could serve as a model for other resource-rich countries looking to strengthen their economic resilience through strategic reserve management.
However, the success of the DGPP will depend on several factors, including the ability to maintain a steady supply of high-quality gold from domestic producers, the effective management of reserves, and the implementation of policies that promote transparency and accountability in the gold supply chain.
Ghana must also continue to engage with international partners and stakeholders to ensure that its reserve management strategies align with global best practices.
Conclusion
While the Domestic Gold Purchase Programme (DGPP) has undeniably bolstered Ghana’s foreign exchange reserves, the future of the programme will hinge on its ability to adapt to evolving global and local economic conditions. To maximize the benefits of its gold reserves, the Bank of Ghana must maintain a balanced approach to reserve management—diversifying its holdings and mitigating risks associated with price volatility.
Moving forward, enhancing transparency in the gold supply chain, increasing foreign exchange retention from exports, and aligning reserve management strategies with international best practices will be crucial. Ghana’s ability to navigate these challenges will not only determine the future success of the DGPP but also the stability and growth of its broader economy. Amid an ever evolving global financial landscape, Ghana’s gold strategy will be a critical element in providing a buffer against external shocks.
References:
- Arslanalp, S., Eichengreen, B. J., & Simpson-Bell, C. (2024). Gold as International Reserves: A Barbarous Relic No More? IMF eLibrary. Retrieved from https://www.elibrary.imf.org
- Bank of Ghana. (2024). 119th Monetary Policy Committee Press Briefing. Accra, Ghana: Bank of Ghana. Retrieved from https://www.bog.gov.gh
- Bank of Ghana. (2024). Governor of the Bank of Ghana Speech at the Launch of the Royal Gold Ghana Limited. Accra, Ghana: Bank of Ghana. Retrieved from https://www.bog.gov.gh
- International Monetary Fund. (2024). Ghana: Second Review Under the Extended Credit Facility, Request for Modification of Performance Criteria and Financing Assurances Review—Press Release; Staff Report; And Statement by the Executive Director for Ghana. Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org
- World Gold Council. (2024). Gold Demand Trends Q2 2024. London, UK: World Gold Council. Retrieved from https://www.gold.org
- “More central banks to increase gold reserves within 12 months”, http://www.mining.com
[email protected] / [email protected]
