In response to the sharp depreciation of the Ghana cedi in 2022, the government of Ghana introduced the Gold for Oil policy. According to officials, the policy will be in the form of barter, whereby the government of Ghana will directly exchange gold, a commodity Ghana produces in large quantities, for petroleum products from suppliers. Alternatively, the central bank will actively purchase gold locally, sell it and use the proceeds to buy oil for local distributors. The objectives of the policy include achieving lower ex-pump prices on the domestic petroleum market and stabilizing the local currency.
After more than 18 months of implementing the policy, there is no credible evidence to show that it has led to the strengthening of the cedi or a decrease in fuel prices. However, some people who still believe it is a good policy have argued that it has not been effective because it has been implemented on a small scale. In the last week, some commentators have called for the policy to be extended to cover 100% of oil imports. Many other authors and commentators have raised concerns about the policy's ability to achieve its objectives, but little has been said about one fundamental reason why it is unlikely to work: demand and supply.
A common phrase used in this conversation is "pressure on the cedi". The pressure on the cedi is largely based on the demand and supply.
Let us consider this scenario:
1. Ghana produces Gold but wants to buy oil.
2. Before the policy, Ghana sold its gold on the open market to acquire dollars, which it then used to buy oil.
3. If Ghana does batter(or something similar), will petroleum products be cheaper in Ghana?
This is not likely. Oil prices will not be cheaper in Ghana than on the international market unless the government provides a subsidy.
Here is why:
1. Oil producers will not exchange oil at a rate lower than they can get from the open market. That is, they will not exchange $110 worth of oil for $100 worth of gold.
2. Similarly, Ghana will not exchange $200 worth of gold for $150 worth of oil.
3. That means both parties will only enter this exchange if it favors them or if it is at least as good as selling on the open market.
4. The above is based on the assumption that all parties in the transaction are looking for the best possible deal for their oil and gold.
So unless we can establish that Ghana cannot sell its gold on the open market to obtain dollars, then the gold for oil policy will not produce a superior outcome than Ghana taking its gold to the market to sell for fiat money and then using that money to buy oil.
On the "pressure on the cedi";
The pressure on the cedi is not an absolute factor. It is a relative factor.
It is determined by:
1. The amount of dollars people in Ghana want to buy
2. The amount of dollars available in Ghana
If Ghana can sell its gold on the open market, it will receive dollars equivalent to the gold's value. Because the two are equal, the increase in demand for dollars(to buy oil) will be matched by the increase in the supply of dollars in Ghana (from the gold sales), and so there will be no pressure on the cedi.
What do you think?