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Govít Sleeps On Falling Oil Price
 
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25-Feb-2015  
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Seven months since crude OIL PRICES began to tumble on the international market, no concrete step has been taken by the government to mitigate the risks of the falling prices on the Ghanaian economy.

The Institute for Fiscal Studies (IFS), a leading Accra based  economic think tank, has revealed in its latest policy brief paper titled -’The Falling Crude OIL PRICES: Mitigating the Risk’.

 The institute stated: “As a result, the economy might not be able to withstand the impact of the looming external shock, which could lead to further macroeconomic instability”.

The IFS, which is headed by Prof Newman Kwadwo Kusi, a renowned economist, further warned that the recent stability of the cedi (Ghana currency) may fall victim to the falling OIL PRICES with evidential weak forex inflows and lower corporate tax receipts from oil.

This may have the potential to significantly affect the country’s balance of payments and foreign reserves. The effect of the falling OIL PRICES on individuals and businesses in the country may also be devastating, the institute further warned in its 10-page policy brief paper.

It insisted: “The resultant drop in private sector investment could slow down the rate of growth of the economy further with devastating consequences”.

Furthermore, Ghanaian consumers have been witnessed to the negative impact of rising petrol prices in periods of OIL PRICE surge.

It was not only the cost of filling the tank that was crippling, but also the knock-effect of spiraling food prices ended up creating havoc in household budgets.

 In Ghana, as the institute indicated both statistical and anecdotal evidence point to the fact higher OIL PRICES have serious negative impact on economic performance.

Whenever there is a rise in petroleum prices, all transport related businesses face the decision of whether to raise their charges to shift the increased costs onto consumers or not. Meanwhile, a benchmark OIL PRICE of $99.38 per barrel had been factored in the 2015 budget which was read in November 2014. “Now that the crude oil price has more than halved in the past seven months and predictions suggest a prolonged slump in prices, there is no doubt that, the inaction of the government has dangerously exposed the country. It is clear that the estimated oil revenue in 2015 cannot be realized.”

The institute observes that the current falling prices of crude oil on the world market will have serious negative implications for Ghana’s 2015 budget and the fragile economic recovery. 

The budget estimates total revenue from oil at $1.24billion (GHc4.2billion), equivalent to 3.1% of Gross Domestic Product (GDP) and representing a benchmark price of $99.38 per barrel and output of 37.2 million barrels, according to the government.

Between June 2014 and the second week of January 2015, however, the price of crude oil plunged by about 55% to below $50 per barrel as stockpiles mounted with no sign of a cut in production.

Demand for oil is also weak, with the outlook for the global economy remaining subdued. Oil analysts predict that the price could fall below $40 per barrel before it rebounds.

The fall of OIL PRICES has been steep, prompting companies and decision makers to wonder how suddenly unpredictable the market has become, forcing them to take measures to mitigate the numerous risks presented by the fall in price.

According to the IFS, at $100 per barrel reference price and based on the output of about 100,000 barrels per day, Ghana could earn over $700 million annually from oil exports not including corporate tax receipts, surface rentals and other charges. However, at a price level between $60 and $70 that figure plummets below $500 million on the same output basis, complicating the country’s efforts to come from the deep budget deficits.

The government will still miss the estimated oil revenue target for 2015 even if oil production is increased by more than 10% over the current levels of 105,000 barrels per day, the institute indicated. Admittedly, Ghana’s President John Dramani Mahama was reported to have told Ghanaians living in Germany that the country will lose $700 million in oil revenue this year due to the falling price of crude oil on the world market.

 

According to him, the latest developments have brought the expected revenue down to $500 million this year. Given the pre-October 2010 state of affairs therefore, IFS stated unequivocally that the country benefited greatly from the hedging programme.

Keep fuel cost within a predictable range protects the economy from unexpected changes in the price of fuel-changes that could otherwise adversely impact on the national budget in particular and on the overall economy in general.

With a structural plan and clear goals as set up by the government during 2010-2012 hedging against fuel price risk could have a significantly positive effect on the national economy, the institute noted.

If indeed this is the case, the IFS questioned what influenced the decision to discontinue the hedging of Ghana’s exposure to crude OIL PRICES in 2013? At the time the hedging programme was discontinued, oil was trading at around $100 per barrel and by July 2014 the price had jumped to $115 per barrel.

However, by the second week of January, 2015 the price of this same commodity had dropped to below $50 per barrel-the most dramatic drop since the 2008 crisis.

In view of the negative macroeconomic implications of the continuous fall in the crude OIL PRICES, IFS suggested to the government to undertake the required adjustments now to ensure that the fiscal consolidation objectives are not undermined.

It is also good that the government intends to submit a proposal to Parliament to review the Petroleum Revenue Management Act (PRMA) to allow it to incorporate a lower benchmark price should the downward price trend continue over the course of the fiscal.

This will allow the government to make the necessary adjustments in the projected oil revenues in the 2015 Budget and beyond, according to the economists at the leading economic think tank.

The institute noted: “Although the country has missed out in taking full advantage of the falling OIL PRICES, all is not lost yet.The government should move quickly to resume the hedging programme which helped to protect the economy against the vagaries of the oil price volatility in the past.

 “The suggestion to set up a Mitigation Fund to be used to hedge the pump price when OIL PRICES start to rise is also a good idea and should be implemented soon”.


 
 
 
Source: The Chronicle
 
 

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