- BoG Must Diversify Reserves and Avoid Excessive Monetary Tightening — ISSER
Ghana’s reliance on gold accumulation to rebuild international reserves could expose the economy to fresh financial risks if bullion prices weaken, while the high cost of monetary operations used to reduce inflation may prove unsustainable, the Institute of Statistical, Social and Economic Research has warned.
ISSER Director Professor Robert Darko Osei said the Bank of Ghana’s domestic gold acquisition programme had contributed significantly to restoring Ghana’s external buffers and strengthening confidence in the cedi after the country’s economic crisis.
He cautioned, however, that increasing the share of gold within the reserve portfolio could make the central bank’s external position more sensitive to movements in international commodity markets.
“The use of gold for reserves poses some risk given the drop in gold prices on the international market,” Professor Osei said at the Post-Revenue Mid-Year Budget Review Forum in Accra.
The warning shifts attention from the headline size of Ghana’s reserves to their composition and resilience.
A fall in international gold prices can reduce the market value of bullion held by the central bank, even where the physical quantity of gold remains unchanged. Depending on the scale of the exposure, that decline could weaken reserve valuation, affect the Bank of Ghana’s balance sheet and reduce the strength of the buffer available to absorb external shocks.
The domestic gold acquisition programme was introduced to allow the central bank to purchase locally produced gold, reduce dependence on foreign-exchange purchases and improve reserve adequacy.
The policy has also been linked to efforts to support exchange-rate stability and retain a greater share of Ghana’s mineral value within the formal economy.
ISSER’s concern is not that gold should be removed from the reserve portfolio, but that excessive concentration in one asset creates vulnerability to price movements beyond Ghana’s control.
Central banks generally hold a combination of gold, foreign currencies and highly liquid securities to balance safety, liquidity and return. A diversified portfolio reduces the risk that a sharp decline in one asset materially weakens the overall reserve position.
Professor Osei also questioned the financial sustainability of the policies used to achieve Ghana’s sharp decline in inflation.
He said fiscal consolidation and the central bank’s monetary sterilisation operations had helped contain price pressures but had imposed substantial costs on the Bank of Ghana.
“The fiscal consolidation and monetary sterilisation have helped to contain inflation, but this has come to Bank of Ghana at a very high cost,” he said.
Sterilisation involves withdrawing excess liquidity from the financial system, often through the issuance of Bank of Ghana bills or other interest-bearing instruments.
While the process can reduce money-supply growth and support the inflation objective, the central bank must pay interest to institutions holding those instruments. Prolonged and large-scale sterilisation can therefore generate significant expenses and weaken the Bank’s financial position.
“This approach is certainly not the long-term solution to inflation considering its implications on the Central Bank’s finances,” Professor Osei said.
His comments highlight an increasingly difficult policy trade-off.
Ghana’s inflation rate has declined substantially, restoring household purchasing power and improving investor confidence. However, maintaining an exceptionally tight monetary stance after inflation has fallen could suppress credit growth, investment and employment.
Professor Osei cautioned against pushing inflation significantly below the Bank of Ghana’s medium-term target of 8.00% with a tolerance band of plus or minus 2.00 percentage points.
That framework implies an acceptable range of 6.00% to 10.00%. Inflation persistently below the lower boundary could indicate unnecessarily restrictive monetary conditions, particularly where economic growth and private-sector credit remain fragile.
ISSER therefore urged policymakers to focus on maintaining inflation within the target range rather than pursuing the lowest possible rate irrespective of the economic cost.
The institute also identified rising global crude oil prices as an emerging threat to the disinflation process.
Higher international oil prices increase Ghana’s petroleum import bill and can feed quickly into domestic fuel prices, transport fares, electricity costs and the prices of goods distributed across the country.
“The recent increase in oil prices has implications for inflation expectations and prices,” Professor Osei said.
The combination of weaker gold prices and higher oil prices could create a difficult external environment. Ghana could face a reduction in the value of an important reserve asset at the same time as its foreign-exchange requirement for energy imports increases.
The next phase of Ghana’s recovery will therefore require a more balanced policy framework.
The Bank of Ghana must preserve sufficient reserves and maintain price stability, but it must also manage concentration risk, contain the cost of liquidity operations and avoid monetary conditions that unnecessarily weaken productive economic activity.
Ghana’s immediate stabilisation gains are increasingly visible. The more difficult task is ensuring that the mechanisms used to achieve them do not become new sources of vulnerability.
