Ghana’s Golden Promise: Backing the Cedi with Gold

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In a bold economic move, Dr. Mahamudu Bawumia, the Vice President and flagbearer of the New Patriotic Party, has pledged to use Ghana’s gold reserves to back the Ghanaian Cedi with gold if elected as the nation’s next president.

This ambitious plan, initially conceived by the Central Bank, took its first steps in June 2021 with the launch of the Domestic Gold Purchase Program, aiming to enhance gold reserves and strengthen the Cedi.

But what does it mean for a country to back its currency with gold, and why is it significant for an economy like Ghana’s?

The Concept of Gold-Backed Currency

Backing a currency with gold involves tying the value of the national currency to a specific amount of gold. This method provides a tangible asset that underpins the currency, offering stability and a hedge against inflation. Historically, gold-backed currencies have been seen as more reliable, as they limit excessive money printing and maintain long-term value.

The Zimbabwean Example

A recent example of the potential benefits of a gold-backed currency is Zimbabwe. In April of this year, Zimbabwe introduced a new gold-backed currency, the Zimbabwe Gold (ZIG), which led to a dramatic improvement in its exchange rate, reducing it from 40,000 to 15,000 Zimbabwean Dollars per US Dollar. This move helped curb excessive money printing, boosted investor confidence, and significantly reduced inflation. The success of the ZIG illustrates the potential advantages of adopting a gold standard, particularly for countries facing economic challenges.

Ghana’s Current Gold Reserves and Requirements

As it stands, Ghana has 44.56 billion Cedis worth of cash in circulation, with a corresponding gold holding of 16,197 kilograms valued at 14.03 billion Cedis. To effectively back the currency with gold, an additional 35,238 kilograms of gold, worth 30.53 billion Cedis, would be required. This substantial increase in gold reserves is necessary to meet the demands of a gold-backed currency system.

The Potential Impact on Ghana’s Economy

Implementing a gold-backed currency in Ghana could offer several benefits:

Curbing Excessive Money Printing: Linking the Cedi to gold would prevent the Central Bank from printing money indiscriminately, helping to maintain the currency’s value and reduce inflation.

Boosting Investor Confidence: A gold-backed currency would likely enhance investor confidence, attracting foreign investment and promoting economic stability.

Reducing Inflation: With a gold standard, the Cedi’s value would be more stable, leading to lower inflation rates and increased purchasing power for Ghanaian citizens.

Conclusion

The proposal to back the Ghanaian Cedi with gold represents a potentially transformative economic policy for Ghana. By enhancing the country’s gold reserves and stabilizing the currency, Ghana could address critical economic challenges such as inflation and investor confidence.

However, the feasibility and implementation of this promise remain to be seen. Whether this pledge is mere political rhetoric or a game-changer for the Ghanaian economy, only time will tell.

By Wisdom Sarfo