Dr. Mohammed Amin, Executive Director, Africa Center for Energy Policy (ACEP)
Dr. Mohammed Amin, Executive Director, Africa Center for Energy Policy (ACEP)

Africa Centre for Energy Policy has made its?observations?and commented on the Statement the Finance Minister, Seth Tekper presented to the house of Parliament on the?Effect of Oil Price Fall on Ghana?s Budget

Dr. Mohammed Amin, Executive Director, Africa Center for Energy Policy (ACEP)
Dr. Mohammed Amin, Executive Director, Africa Center for Energy Policy (ACEP)

According to ACEP it? does not support any amendment that allows the Minister the discretion to?revise the projection of petroleum revenues (Benchmark Revenue) when crude?oil prices fall and that there is no problem with the law on the pricing regime as well as?on the comprehensive buffer provided for smoothing expenditure, Rather the?problem is with the arbitrary and discretionary determination of a lower cap by?the Minister. Therefore the proposal to amend the PRMA and allow the Minister?the discretion to revise the benchmark revenue should not be granted by?Parliament.

Below is ACEP’s observations:

The Effect of Oil Price Fall on Ghana?s Budget – Reflections on the Statement
to Parliament by the Minister of Finance

1. Minister has no Mandate to review certified projection of petroleum revenues

The Minister of Finance presented a Statement to Parliament on the effects of the?oil price crush on the Ghanaian Economy. Projected petroleum revenues for?2015 were put at GH?4.2 billion based on crude oil price of $99.33 per barrel and?production volume of 102,033 barrels per day. However, in his statement, the
Minister revised revenue projections to GH?1.5 billion based on average crude?oil price of $50 per barrel. This according to the Minister implies that there?would be a shortfall of GH?2.7 billion on petroleum revenue projections.

What the Minister sought to do in our view was to make a case for a proposed?amendment he is sending to Parliament to allow him the discretion to revise the?benchmark revenue when crude oil prices fall relative to the estimated price for?the year. The Minister at the moment does not have the power to do that.
The Minister cannot revise petroleum revenues (or Benchmark Revenue)?projected from 1ST September and certified by an independent certifier when?market prices change. Rather, in the event of a fall in market price relative to the?moving average based price, the Minister can draw from the GSF to smoothen?spending.

2. Lower Cap on the Ghana Stabilization Fund (GSF)

In our view, the Minister revised the projections because the balance in the GSF?based on a maximum cap of $250 million set by the Minister in line with Section?23(3) and (4) of Petroleum Revenue Management Act will not be sufficient to?cushion against the price effect. This is self-inflicted as the Minister ignored all
odds and set a lower cap through a discretionary and arbitrary process; in order?to prematurely divert money for debt repayment as provided by the PRMA. As a?result of this lower cap, a total of $305.7 million being excess over the cap on the?GSF was used for debt service and contingency fund by end of September 2014.
This was done at the time the cap on GSF constituted 61% of the projected?Annual Budget Funding Amount (ABFA) of $409,072,778 for the year 2014. This?meant that in the event of a shortfall in price by 50%, there would be enough?buffer in the GSF to cushion the budget. The Minister did not however take into
consideration the fact that in the event of a higher estimated ABFA as in 2015,?the GSF would be exposed to too much liquidity risks. Thus, in 2015, the?projected ABFA was very high at $721,818,314.17, hence the cap on the GSF?reduced to 34.6% of the projected ABFA, a lower buffer against drastic fall in?crude prices. Why the Minister did not raise the cap to the same proportion of?the projected ABFA above 50% as was done in 2014 is curious. Thus, the?problem is not the drastic fall in crude oil price, but the rather the stagnant cap
on the GSF.

In our view the actual shortfall of revenues in the budget will be GH?1 billion being the variance from the Projected ABFA of GH?2.5 billion (And not GH?2.7 billion as we are told in the Minister?s statement). What we need to worry about is the shortfall that affects the budget and not on the entire shortfall on total projected petroleum revenues. If the Minister raised the cap as proposed above, there would have been $440,309,171.54 (or GH?1.5 billion), more than sufficient to neutralize the shortfall on the ABFA.

3. Ghana not oil dependent country

Oil dependent countries like Angola and Nigeria are hardest hit by the oil crush.?Angola?s estimated revenues have reduced from 56% of GDP to 33% of GDP,?whilst Nigeria?s reduced from 15% of GDP to 9% of GDP. In the case of Ghana;?the price crush reduced revenue estimates from 3.1% of GDP to 1.1% of GDP.
This shows that Ghana is not oil dependent. This is why the effect of a decline in?petroleum revenues on the overall expected revenues and grants for the 2015?fiscal year has been minimal – from GH?32.4 billion (24% of GDP) to GH?29.7?billion (22.3% of GDP).

But why Government is worried?
Due to the fact that the GSF does not have sufficient liquidity to cushion the budget, the capital budget is being reduced by GH?868.4 million whilst goods and services budget reduced by GH?344.0 million. The effect on the capital budget is higher because the bulk of the petroleum revenues in the ABFA were allocated to capital infrastructure in line with Section 21(4) of PRMA, which requires a minimum of 70% of the Annual Budget Funding Amount to be used for public investment expenditures.

4. Recommendations

We do not support any amendment that allows the Minister the discretion to?revise the projection of petroleum revenues (Benchmark Revenue) when crude?oil prices fall. There is no problem with the law on the pricing regime as well as?on the comprehensive buffer provided for smoothing expenditure. Rather the
problem is with the arbitrary and discretionary determination of a lower cap by?the Minister. Therefore the proposal to amend the PRMA and allow the Minister?the discretion to revise the benchmark revenue should not be granted by?Parliament.
However, we support the adoption of a moving cap on the GSF since it is the anchor for stabilization of the ABFA and the budget in the event of a drastic fall in crude oil prices. However, it is important to state that the law does not prohibit a review of the cap on the GSF.
We also support that the cap in monetary terms should at all times not be less than 50% of the projected ABFA for the succeeding year. This ensures that at all times; the liquidity of the fund is secure. This is why both Nigeria and South Sudan decided to build their Sovereign Wealth Funds for a transition period before using it to stabilize the budget.

Signed

Benjamin Boakye

Director of Operation

Source: spyGhana.com

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