20.03.2023 Feature Article

Gold-for-Oil Policy

Gold-for-Oil Policy
20.03.2023 LISTEN

The government’s Gold-for-Oil (G4O) policy has some vague characteristics that need thorough analysis before concluding on the purported success of the policy. The policy is not predicated on quantitative evaluation and predictions. The effectiveness of the policy can only be ascertained through quantitative estimations. The quantity of gold to be exchanged for an amount of oil worth about US$350 million or US$400 million should have been known before the programme commenced. Knowledge of such a key component of the policy would allow analysts and policymakers to appraise the strategy appropriately.

The Vice President recently confidently claimed that the current trade policy for oil could save about $4.8 billion (in reserves) a year if the strategy is successfully executed. But the effectiveness of the policy cannot be evaluated without paying attention to the following key areas:

The Gold-for-Oil policy is principally hinged on the purchase and resale of gold to pay for oil supply or direct barter of gold for oil (which is rare to have in a modern world economy). A press release by the NPA indicates that "payment for oil supply is to be done in two channels: by way of barter trade where gold is exchanged for oil or via a broker channel where the gold is converted into cash and paid to the supplier." Currently, the country is utilizing the second channel, where the gold is sold and the proceeds are used to pay for the supply of oil.

It is expected by the authorities that there will be a reduction in ex-pump prices in Ghana and that "the consequent reduction in foreign exchange pressures and premiums charged by international oil traders as well as gains from the value chain will lead to the expected lower ex-pump prices in the country" (emphasis mine). There is no doubt about the policy potential of the programme in reducing the excessive demand for dollars to import oil into the country. Yet the other aspect of the programme leading to savings is severely challenged.

The state must make a margin on an ounce of gold purchased and sold before there can be savings. The NPA’s press release equally outlined that "the prime objective of the programme is to use additional foreign exchange resources from the Bank of Ghana’s Domestic Gold Purchase (DGP) programme to provide foreign currency for the importation of petroleum products for the country, which currently stands at about US$350 million or US$400 million per month." Simply put, the margin to be gained from the trading of the gold will be the additional foreign exchange resources to be used for the payment of the supply of oil. Before a definite conclusion on savings can be made, the government must evaluate whether it is actually making excess foreign exchange resources to pay for the supply of the oil and the commission of the broker. That is, is the country making reasonable margins on the purchase and sale of gold to pay for the supply of oil and the commission of the broker?

There will not be any savings from the policy if the state does not make excess dollars between its purchase and sale of gold. For instance, if the WTI crude oil is priced at US$66.34 or the Brent crude oil is priced at US$72.53, and supposing Ghana buys crude oil (in fact, the country buys refined petroleum products), it must make a margin over US$66.34 or US$72.53 on its sale of gold before it could save US$4.8 billion annually. The reason is that substituting about US$350 million or US$400 million per month with gold when there is a lack of knowledge about the actual gains from trading gold does not constitute a savings of that amount of dollars. In fact, it does mean that the demand for dollars of about US$350 million per month will reduce or cease to exist. The US$350 million or US$400 million is the money needed per month to pay for the supply of oil by oil importing companies; using a different means to pay for the same quantity of oil does not lead to a savings of that amount, as the gold is bought with real cash.

The Central Bank of Ghana uses financial resources to purchase the gold for the policy. It would appear clearly that the projected savings of about US$4.8 billion per year could be real only if the state uses its gold without purchasing it from any company. Without proper quantitative estimations, it will be difficult to predict the success of the programme and the likely savings the country will make. There is no quantitative evidence to back the claim of the Vice President when he asserted that "the savings in foreign exchange when we do this will be an annual savings of $4.8 billion every year, and that means the oil importing companies will not be going to the Bank of Ghana looking for US$4.8 billion to buy oil."

Other oil-importing companies that do not benefit from the programme mobilize foreign exchange resources from the market to import oil into the country. The amount of foreign exchange resources such companies mobilize forms part of Ghana's US$350 million or US$400 million oil import bill. In earnest, the country will not save all the US$4.8 billion annual demand for dollars or other foreign exchange resources. According to reports, the programme does not meet the country's monthly oil consumption requirements. It is plausible to guesstimate that the programme does not cover the entire oil consumption requirements of Ghana, and so the amount of foreign exchange resources needed per month to import the quantity of oil required in the country is not met or provided by the same programme.

The said amount (US$4.8 billion) is the total demand for foreign currency by the oil importing companies, and a substitute for the said amount with gold simply indicates the demand for such an amount will either reduce or not exist at all. The Central Bank does not provide the entire amount to the oil importing companies; otherwise, there would be no exchange rate fluctuations or the country would face minimal exchange rate challenges. The Bank of Ghana needs to either provide this amount to the oil importing companies from its reserves or arrange with other companies to have dollars and other foreign exchange resources to meet the demand for foreign exchange. The purchase of gold involves the use of cash by the Central Bank. Oil importing companies used to and still do mobilize foreign exchange resources from the market to supplement those provided by the Central Bank.

Consequently, it can be inferred that the Central Bank of Ghana could only make a savings of some foreign exchange resources in its reserve as the demand for such resources will fall. Ghana may not be saving US$4.8 billion annually if the programme is evaluated in its entirety.

A policy evaluation of the quantity of gold needed to be exchanged for the amount of oil required per month in Ghana and the rate at which the gold is bought, plus the margin to be made on the sale of the gold, will help determine the amount of foreign exchange resources to be saved.

Emmanuel Kwabena Wucharey
Economics Tutor, Advocate, and Religion Enthusiast