With the recent shift in the strategy of the country’s gold business, a new question is emerging about whether the Ghana cedi’s renewed strength has something to do with the change in how GoldBod finances its gold purchases
This is a new concern emerging from comments by data and policy analyst Alfred Appiah, who believes the new operating model being tested by the Ghana Gold Board (GoldBod) may be playing a role in improving foreign exchange liquidity in the banking system.
Under the model, commercial banks that need dollars provide cedis to GoldBod. GoldBod then uses its gold transactions to generate the foreign exchange, which is subsequently returned to the participating banks.
To put the model simply, commercial banks provide the cedis, GoldBod generates the dollars, and the dollars flow back into the banking system.
If sustained, that could potentially create an additional source of foreign exchange liquidity for banks without requiring the Bank of Ghana to be the direct financier.
And that is where the bigger question begins about whether GoldBod could be changing the country’s FX equation.
Alfred Appiah argues that the model may help explain some of the recent improvement in the cedi’s performance, particularly as the Bank of Ghana’s own dollar auctions have reportedly been significantly undersubscribed.
This development is significantly important since, for years, the Bank of Ghana has been a major supplier of foreign exchange to the market. If commercial banks can increasingly obtain dollars through a GoldBod-led mechanism, could that reduce pressure on the central bank to supply the market?
And if it does, could the resulting improvement in dollar liquidity be contributing to the cedi’s renewed strength? There is, however, a lot that remains to be established.
GoldBod itself says the model can operate without Bank of Ghana financing, potentially removing the central bank from a financing chain that has previously attracted scrutiny over the costs and losses associated with the domestic gold purchasing programme.
That raises another question: could GoldBod’s new financing architecture represent a more sustainable way of converting Ghana’s gold resources into foreign exchange?
Moreover, the loss question still remains. The attraction of the model ultimately depends on its efficiency.
Gold prices remain elevated, providing a potentially favourable environment for GoldBod to generate foreign exchange from gold transactions. But high gold prices alone do not guarantee an efficient operation. The crucial question is how much it costs the state to generate every dollar.
If GoldBod can continue improving the inefficiencies associated with the programme while generating foreign exchange at a lower cost, the argument for the model becomes considerably stronger.
But if generating those dollars continues to produce significant losses, then the apparent benefit to the cedi could come at a cost to the taxpayer.
That makes the renewed strength of the cedi an intriguing economic puzzle. Is the cedi strengthening because of broader improvements in Ghana’s reserves, fiscal and monetary conditions and market confidence?
Or is GoldBod’s emerging financing model quietly adding another source of dollar liquidity to the market?
Perhaps it is some combination of both. For now, the evidence does not provide a definitive answer. But the question is becoming increasingly difficult to ignore.
If GoldBod can bring dollars into the banking system using commercial-bank financing rather than Bank of Ghana financing, could that new model be one of the reasons the cedi is finding renewed strength?
The next test will be whether the model can continue delivering those dollars efficiently, sustainably and without simply transferring the cost from the central bank to the state.
