Cedi Depreciation: Bright Simons Presents Strong Arguments Against Government’s Gold-for-Oil Barter Proposal

• Bright Simons says the plan by the government to buy refined petroleum products with gold presents serious risks
• The respected fellow of think tank IMANI Africa has said the plan is destined to fail because other countries that tried it failed
• The vice president of the think tank says it will make sense for the government to buy dollars with the gold it claims to have and then use that to buy the petrol

Bright Simons has presented strong arguments to counter a plan announced by vice president Dr Mahamudu Bawumia that government intends to purchase refined petroleum products with gold.

The vice president explained that the move will end the pressure on the local currency and stop depreciation.

The decision has already raised concerns among experts in finance and in the petroleum sector.

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But in a comprehensive article, Simons, vice president of think tank IMANI Africa has said the move presents risks and opens the floodgates of murky deals and possible corruption.

"Oil and gold prices do not move in tandem. Gold and dollars are however increasingly more correlated than used to be the case. So much so that gold is increasingly a poor hedge against the dollar. The intriguing joint effect of both facts is the result that Ghana’s plan may in fact be quite risky," he wrote in a article posted on his blog.

The article, titled "Ghana’s Golden Gambit on Oil" also noted that the proposal is also fraught with serious challenges.

"First, the large-scale [gold] miners today have major overseas payment obligations that lead them to repatriate roughly 20% of their forex earnings to Ghana. The rest is apparently needed for legitimate forex-denominated business expenses. Forcing them, outside these 'retention agreements', to sell 20% of their output in local currency could mean a corresponding and equivalent gap in their forex needs. If so, then, as many analysts have already suggested, they will seek to convert the Cedis received to US dollars. The first goal of relieving US dollar pressures in the forex markets would thus have been defeated," he observed.

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Also, the government has said it is confident that by overcoming forex challenges, it is likely that the fuel it buys with gold will be cheaper, but Bright Simons disagrees.

He added there is no guarantee that the fuel the government will buy with the gold would be cheaper than what it can buy on the international market.

"For the fuel bought with gold to be cheaper, two assumptions must hold: a) the local Cedi to gold exchange rate must be lower than the Cedi to dollar exchange rate and b) the Gold to oil price ratio (or “exchange rate”) must be lower than the dollar to oil price ratio. Both factors will depend on skilled negotiation, but in a voluntary contracting situation, such as this one, one wonders whether such a double arbitrage will be possible to achieve.

"Surely, all gold producers in the world that are net importers of oil would love to exploit these arbitrages. China is both the world’s largest gold producer and oil importer. Yet, despite repeated promises to scale up its gold-backed Yuan-priced oil futures and settlement products, it never seems to find the heart," Simons stated.

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Bawumia Announces Plan By Government To Use Gold To Buy Imported Petroleum Products

Meanwhile, YEN.com.gh has reported that Ghana plans to buy imported petroleum products like diesel and petrol with gold to decrease the demand for forex that causes the cedi to depreciate.

The move has been criticised as untenable by some experts in the petroleum and finance sectors.

For instance, COPEC-GH has said the best way to reduce pressure on Ghana's forex reserves is to bring TOR back online.

Source: YEN.com.gh