Following closely on the heels of an accelerated macro-economic recovery, powered primarily by favourable global commodity market dynamics – high gold and cocoa prices and a relatively low petroleum products import bill – Ghana’s astonishing turnaround is now being threatened by a reversal in those global market dynamics.
But while the country’s government and its central bank are standing up to the threat of renewed domestic inflation emanating from the ongoing petroleum supply chain disruptions in the Persian Gulf, the threat of a surge in global inflation from the latest Middle Eastern troubles are presenting another economic problem for Ghana that is much harder to deal with.
Simply put, the country’s economic stability, heavily reliant on its gold exports, faces renewed challenges as global gold prices weaken. This potential downturn is largely driven by a complex interplay of rising international treasury yields, aggressive monetary policy tightening by central banks in developed economies, persistent global inflation, and the lingering geopolitical tensions and economic disruptions stemming from West Asia and the Persian Gulf.
These global dynamics are directly impacting Ghana’s public foreign exchange (FX) revenues and its efforts to accumulate gross international reserves, posing a critical test for the nation’s financial resilience.
Global gold prices are experiencing weakening trends, influenced by rising international treasury yields and monetary policy tightening in developed economies. The global economic landscape is currently characterized by rising inflation, due to higher petrol prices, particularly in developed economies, prompting their central banks to aggressively tighten monetary policy through interest rate hikes.
This action aims to cool down economies and bring inflation under control. A direct consequence of rising interest rates is an increase in treasury yields, making fixed-income assets more attractive to investors compared to non-yielding assets like gold. For instance United States government 10 year treasury bonds now offer yields of about 4.55 percent up from 4.19 percent at the start of the year.
Globally, the inverse relationship between gold prices and treasury yields has been evident. As central banks, particularly the US Federal Reserve, raise policy rates, government bond yields increase, offering investors a safer, higher-return alternative to gold. This shift in investor preference typically exerts downward pressure on gold prices.
Gold, having reached an all-time high price of US$5,602 per ounce in January this year, has fallen sharply since then. Currently it is trading at aroundUS$4,361 per ounce.
A clear and present danger
Ghana’s public FX revenues are substantially generated from gold exports. As global gold prices weaken, the value of Ghana’s gold exports diminishes, leading to a reduction in the foreign currency earned by the state. This directly impacts the government’s ability to fund essential imports, service external debt, and maintain macroeconomic stability. The Bank of Ghana has noted that the ongoing exchange rate pressures reflect a weakening of the current account surplus, partly due to higher import demand, which is aggravated when export revenues like those from gold decline
Gold’s pricing weakness also threatens government’s ambitious Ghana Accelerated National Reserves Accumulation Policy (GANRAP) which aims to achieve the equivalent of 15 months of import cover by 2028, relying heavily on accumulating gold reserves to generate foreign exchange, rather than relying on costly external borrowing. .
Gross international reserves are crucial for a nation’s ability to absorb external shocks and maintain confidence in its currency. While Ghana has recently seen its gross international reserves rise to US$13.8 billion, equivalent to 5.7 months of import cover, a sustained weakening in gold prices makes further accumulation challenging. Lower FX earnings from gold exports mean less foreign currency available for the central bank to purchase and add to its reserves.
This situation could lead to increased currency volatility and make it harder for the Bank of Ghana to intervene in the FX market to stabilize the local currency, the Cedi. It is instructive the cedi has already depreciated by nearly 10 percent since the beginning of March this year. As at early March the cedi traded at about GH¢10.66 to a dollar, but currently it trades at over GH¢11.80 to a dollar.
Prospects over the near term
The near-term outlook suggests continued volatility. While Ghana’s progress in reducing inflation has been noted, external pressures, such as surging global oil prices due to Middle East tensions, threaten to re-ignite inflationary trends. This could force the Bank of Ghana to maintain a firm monetary policy stance, which, while taming inflation, could also impact economic growth.
Economists generally agree that if developed economies continue their tightening cycles and geopolitical tensions persist, gold prices are unlikely to see a significant rebound in the immediate future, which would continue to strain Ghana’s FX revenues and reserve accumulation efforts.
There are no quick fixes
There is no simple way out of the current dilemma that Ghana has in its own hands since the global market’s pricing of gold lies completely outside its purview. This means the country can only take the prudent, already identified steps to lower its dependence on gold for its foreign exchange revenues, its fiscal sustainability and its build-up of international reserves.
Therefore Ghana needs to intensify its efforts to diversify its export base reducing over-reliance on gold by promoting other export sectors to stabilize FX revenues; continue efforts to manage public debt and reduce interest payment burdens, which consume a significant portion of government revenue; focus on enhancing value-added exports beyond raw commodities to improve trade balances; and implement strategies to protect and grow international reserves amidst global market fluctuations.
Alongside all these well-known steps, it now falls on the Bank of Ghana in collaboration with government itself to closely track international treasury yields, monetary policies of developed economies, and geopolitical developments to anticipate impacts on commodity prices and capital flows.
By: Toma Imirhe / businesspostonline
