A Professor of Finance and Dean of the University of Cape Coast (UCC) School of Business, John Gatsi, has expressed doubts about the potential of a local gold refinery to stabilize the cedi, given Ghana’s minority 20 percent stake in the enterprise.
His comments come in response to Vice President Dr. Mahamudu Bawumia’s recent assertion that the refinery would play a crucial role in boosting the cedi.
Speaking at the inauguration of the Royal Ghana Gold Refinery in Accra, Dr. Bawumia stated, “With the significant value addition to our gold as a result of this refinery, we are going to move quickly to back the cedi with gold.”
He further elaborated, “The ability to locally refine our gold will allow us to sell at the appropriate price, retain its economic value within our borders, and create numerous job opportunities for the youth. Additionally, refining all gold produced in Ghana will enhance our economic independence and resilience.”
Dr. Bawumia emphasized the importance of substantial gold reserves in achieving currency stability. “The more, the better. We have huge gold deposits in Ghana. If we truly control this factor, currency stability is not a complex issue. The Monetary Rule will be to fully back any increase in base money with at least an equivalent increase in foreign exchange reserves of gold,” he said.
However, Prof. Gatsi cautioned against oversimplifying the challenges of currency stability. “Refining gold in Ghana is certainly progress for the economy. It will create jobs, contribute to currency management, and increase earnings through exports. But it will not be the panacea for the current and future volatility of the cedi,” he noted.
He pointed out that existing initiatives, such as the gold purchase program and the gold-for-oil deal, have not succeeded in curbing the cedi’s volatility. “Currency stability cannot be reduced to the establishment of the first gold refinery in the country. It is more than that,” he stressed.
Prof. Gatsi also stressed a critical limitation of the refinery’s impact: the ownership structure. “The Bank of Ghana owns only 20%, while the Indian partners control 80%. This means that 80% of the profits may be repatriated to India, similar to other foreign direct investments in the country. The net effect does not favor currency stability,” he explained.
He acknowledged the importance of value addition to natural resources, drawing a parallel with the Atuabo gas processing plant, which he described as a progressive and strategic initiative for national development.
Despite the potential benefits of the refinery, Prof. Gatsi warned that gold itself has shown volatility over the years. “Gold futures experienced a downward trend in the 1980s and consistent volatility from 2010 to 2020,” he observed. “The Ghana cedi has similarly exhibited a volatile trend. To ensure a stable currency, we must address all contributing factors, especially those with significant impact.”
He further argued that the strength of a currency is not solely determined by gold reserves. “The dollar is the strongest currency not just because America holds the largest gold reserve, and Switzerland’s economy is great not merely because it has the largest gold refinery (Valcambi SA). The structure, accountability, transparency, productivity, inclusive growth, and opportunities are crucial,” Prof. Gatsi emphasized.
He called for a comprehensive approach to currency stability, including ensuring adequate foreign currency supply to meet diverse transaction demands.
