About six months ago, I expressed an opinion (https://shorten.ly/8UYm2i) on Goldbod. I suggested that the Goldbod will make losses. I believe that was obvious to any economist. This week, the IMF reported that Ghana has suffered losses from the operations of Goldbod. Although the IMF report has confirmed my warning, should we take this to mean the Goldbod is bad? There is no straightforward answer but this is what I have to say:
There is a good economic and legal reason for Goldbod’s mandate. Their operations have the potential to reduce illicit financial flows and ensure that more of our gold revenues stay in the domestic economy. This is the most important reason why the Goldbod should be maintained.
Our politicians must learn that they do not need to have personal opinions on every issue. It is proper for them to learn to leave certain issues to those who understand them. Too much political commentary on technical economic policies can disorient implementers. Goldbod should not attract as much media attention as it has. What they are doing is too serious to be subject to so much uninformed discussion.
How do we explain the losses:
As I warned 6 months ago, Goldbod cannot expect to pay “world market [retail/headline] prices” for gold and make a profit. They can only make a profit if they buy at a discount. That was the first logic for why the losses were obvious. Their main constraint was the fact that if they bought at a discount, there would be room for smugglers to undercut their supply. The current approach removes much of the financial incentive for smuggling and other illicit gold-related activities.
They bought gold in cedis and sold it in dollars. Thus, they increase the domestic supply of dollars. This will cause losses by the following mechanism:
Say, at the time of buying gold, the cedi/dollar rate was GHS15/$1. When you sell the gold, you earn dollars. This increase in the supply of dollars will cause the cedi to strengthen. So the cedi/dollar rate becomes, say, GHS12/$1. This means that the same dollar amount will now be worth less in cedi terms. In other words, you spent GHS15 to buy the gold, sold it for $1, but now your $1 is worth GHS12. This is in addition to point 3 above.
From a policy perspective, this can be good [in the context of my previous writings on the exchange rate]. How?
In my opinion, the benefits of a stronger cedi far outweigh the losses that have been reported.
These losses are costs we have to pay for the Goldbod policy. In that case, instead of spinning this as a political issue and suggesting that the losses are bad. The government must be bold to classify and get the public to see these as reasonable costs for a good policy.
Change the perception that Goldbod is a profit-making vehicle because it cannot make a profit sustainably under the current model. Transparency is important. It is also not necessary for Goldbod to make profit.
The Bank of Ghana should not be paying the cost for the policy. It cannot afford it sustainably. The ministry for finance should pay.
It is a holiday, I should not be thinking about economics today. We would get back to this topic some other time.
Merry Christmas.
Dr Aboyadana is a financial and development economist with a Ph.D. in Economics from the University of Strathclyde. He has an MPhil in Finance and a BA in Economics from the University of Ghana. He is a lecturer in Economics at York St John University. He is affiliated with the University of Glasgow and the University of the West of Scotland. His website is www.aboyadana.com
Gabriel Aboyadana, financial and development economist with a Ph.D. in Economics from the University of Strathclyde