Ghana is in a tough spot. Commodity prices are falling, President Mahama is facing stiff competition from the twice defeated Nana Addo in the upcoming November elections, and declining agric and manufacturing sectors.
The Ghana Cedi, the national currency has rapidly depreciated against Ghana’s major trading currencies such as United States Dollar, the British Pound Sterling, and the Euro to the extent that not only is it having a very negative effect on the economy, but it has also caused massive increase in the cost of living among Ghanaians– and the situation is worsening day-by-day.
The prices of various basic goods such as rice, poultry products, cooking oil, sugar, pharmaceutical products, cereals, milk, among others, have skyrocketed to the point that many salaried workers cannot afford.
The rising cost of the above-mentioned consumables has been blamed on the government’s inability to keep the local currency stable.
Simplistically, the erosion in the purchasing power of the Ghana Cedi relative to other currencies such as the US dollar, British Pound Sterling and Euro is referred to as depreciation.
For instance, as of the time of going to press, the Cedi traded at 3.98 against the US currency. Some currency analysts are predicting that the Cedi is likely to hit GHC4.00 against the US Dollar by the close of March, this month.
This, they explained that most goods imported for the Christmas and New Year Yuletides are almost ran out of stocks. So, they will have to import new goods this month. They start the process by buying more US Dollars from the commercial banks and the black markets to enable them import the various goods into the country.
Just last year, the Cedi depreciated 26 percent in value against the US Dollar, while on a year-to-date basis, it depreciated by 15.5 percent as of October 2015, compared with 31.2 percent in the corresponding period of 2014, according to the Bank of Ghana (BoG).
Further depreciation
Analysts including John Opoku are worried that the country is going to witness massive depreciation of the Cedi as a result of the tension-packed general elections, this year. Although the current government has assured that it would not overspend in the election year, it recent past left many Ghanaians especially political parties, civil society organisations, and the international community not to believe it.
For instance, Ghana recorded one of the worst budget deficits in 2012 which was attributed to the titanic general elections held in that year. The budget deficit of 12.1% of Gross Domestic Product (GDP) was nearly double the revised estimates in July 2012 of 6.7 of GDP and nearly triples the original estimate in November 2011 of 4.8% of GDP.
The deficit came close to that of 8.5% revised (14.7%) recorded in 2008 (election year) and seemed to repeat the election-year cycle of fiscal excesses. Currently, due to the strong performance of revenues, a fiscal deficit of 5.1 percent of GDP (cash basis), against a target of 5.7 percent was recorded during 2015 period. This compares to a deficit equivalent to 6.4 percent of GDP for the same period in 2014, an indication that Government’s fiscal consolidation efforts are taking hold.
Opoku tells African Eye Report that the election activities of the government such as spending more on projects, campaigns, billboards, radio and TV advertisements, among others would cause the Cedi to depreciate further thereby affecting the performance of the Ghanaian economy.
Although, the World Bank’s Global Economic Prospects (GEP) for January 2016, projected that Ghana’s growth is expected to rise from 3.4 percent in 2015 to 4.8 percent in 2016, similar to the pace in 2014, and to 5.3 percent in 2017 and 2018. However, the currency gymnastics, macro-economic imbalances, and others are likely to thwart the growth prospects.
Very very bad news
The days coming are likely to be harder than envisaged as the International Monetary Fund (IMF), has pontificated that crude oil prices may slump to as low as $20 per barrel in 2016.
The IMF which is currently assisting Ghana with US$918 million bailout highlighted that the price of crude oil could drop between US$5 and US$15 in 2016.
According to IMF, the dwindling oil prices would not have overtly negative effect on many oil producing countries including Ghana, Nigeria, and Iran whose GDPs are expected to rise by 2016-018.
Ghana which began commercial oil production in 2010 has benchmarked oil price at US$53.05 per barrel for 2016, in line with the forecasts by ICE/Bloomberg and the World Economic Outlook (WEO), and traditional sources of Brent crude pricing data.
As the 2016 budget noted the 2016 Benchmark Revenue (BR) output is estimated at 38.73 million barrels (106,115 bopd), up from the 2015 BR output of 37.24 million barrels (102,033 bopd).
Based on the government revised price (US$53.05), the total projected petroleum receipts for 2016 is US$502.10 million, down from the original 7-year moving average BR price projected revenue of US$969.57 million, giving a negative variance of US$467.47 million.
The petroleum receipts of US$502.10 million amount is expected to be contributed by Royalties (US$111.72 million), Carried and Participating Interest (US$293.03 million), Corporate Income Tax (US$27.87 million), Surface Rentals (US$1.05 million) and Gas Receipts (US$68.43 million).
Going by the crude oil prices fall, Ghana would again lose revenue to the more than one year of failing crude oil prices on the international market, consequently adding more pressure on the government to go borrowing in 2016 to finance development projects outlined in the 2016 budget.
The government would still miss the estimated oil revenue target for 2016 even if oil production is increased by more than 10% over the current levels of 102, 6000 barrels per day.
The tumbling prices of oil and other commodities would compel the Minister of Finance, Seth Terkper to back to Cabinet to review oil revenue targets for the second time in two years.
One of the main areas where the managers of the economy is going to suffer some major impact is the crude oil prices, just after they read the budget in November, last year and benchmarked oil price at US$53.05 per barrel, within three months the commodity is being sold below US$28 per barrel as the middle of January, 2016, which is the lowest in 12 years.
Silver lining!
For Dr. Mohammed Amin Adam, the Executive Director of Africa Centre of Energy Policy (ACEP), an Accra-based leading energy think-tank states that African producers including Ghana are the worse hit by the oil crush due largely in part to their less diversified economies, over-dependence on oil revenues, lower tax effort, fiscal indiscipline and corruption among others.
In spite of the lower benchmark prices of between US$50 to US$60 per barrel used by most of the countries in the 2016 budgets, they are now compelled to make difficult fiscal adjustments which are not only going to be unpopular with their people, but also affect their macroeconomic outlook, he adds.
The question that confronts these governments, according to Dr. Adam is simple – Does lower oil price provide a silver lining for introducing tough fiscal measures?
Nigeria, the leader of the pack in its 2016 budget outlined a number of measures to address some of the challenges that plaque the country amidst the oil crush. For example, the government expressed its plan to prioritize agriculture as a way to diversify the economy away from oil, widen the tax net, and remove fuel subsidies.
Ghana has already imposed new taxes and levies on petroleum products and electricity, and withdrew subsidies from petroleum. Other producers like Angola, Equatorial Guinea, and Gabon are still faced with policy dilemmas whilst their economies are suffocating from the oil squeeze. There is cause to believe that some of the fiscal measures are unpopular with the people. Ghanaian Labour Unions have already held a march to protest the new taxes and levies on petroleum, whilst making demands for increase in salaries.
The economic environment created by the oil crush is both a blessing and a curse. It is a blessing because; consumers of petroleum products now enjoy lower prices of petroleum products as demonstrated in Nigeria and Ghana where pass-through prices have favoured downward price adjustments, Dr. Adam notes.
Furthermore, the reduction in the petroleum import bill for these countries which although produce crude oil, import large quantities of petroleum products, has been significant, bringing desirable improvements on their terms of trade.
The governments also now have basis to remove subsidies from petroleum products. It is however a curse because savings from subsidies are unlikely to finance the deficits from lower oil prices.
Governments can also introduce or increase taxes on petroleum products reducing the benefits of price over-recoveries to consumers. Further, these countries are compelled to cut spending, which adversely affects social welfare.
It is therefore not surprising that oil-producing countries are taking tough fiscal measures to raise additional revenues to meet budget targets. For example, the Government of Ghana will raise incremental revenue of about US$800 million annually from new taxes and levies on petrol, diesel and LPG alone.
Foreign reserves underthreat
Furthermore, the Ghana Cedi 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, this year.
The resultant drop in private sector investment could slow down the rate of growth of the economy further with devastating consequences.
Similarly, major players in the upstream oil sector who are responsible for searching for potential underground or underwater crude oil and natural gas fields are also at risk as a result of the plummeting crude oil prices.
Usually, such exploration and production oil companies spend huge investments into the wells which they cannot recoup due to the oil price falls. During this time, most investors shy away from the upstream oil sector.
It is based on this fear that a renowned economist at the University of Ghana, Dr Eric Osei-Assibey doubts the coming onboard of the much-awaited Tweneboa, Enyenra and Ntomme (TEN) Project. According to him, the hysteria caused by the tumbling oil prices would discourage investors and financial institutions from lending funds to Tullow Ghana, a subsidiary of Tullow Plc to carry on the project,
However, Tullow Oil, the lead operator of the TEN Project is confident that despite the dip in the oil prices, the TEN oil blocks project would come on stream by the middle of this year.
The Chief Executive of Tullow Oil Plc, Aidan Heavey, stated in the company’s trading statement and operational update in January: “The TEN Project continues to make excellent progress, is over 80% complete, and remains within budget and on schedule for first oil between July and August 2016”.
“To date, all the key milestones of the project have been met, with the next important event being departure of the TEN FPSO from Singapore to Ghana. The vessel is expected to depart late January 2016 and arrive in Ghana early March, when the vessel will begin to be connected to the risers and subsea infrastructure”.
A gradual ramp-up in production toward plateau is anticipated during the second-half of 2016 as the facilities go through the final commissioning stage and wells are tied into the FPSO. Tullow estimates that TEN average working interest production in 2016 will be around 23,000 bopd gross (net: 11,000 bopd), it noted.
Anticipated job loses
Many young Ghanaians’ desire of getting juicy jobs in the country’s nascent oil and gas industry may hit a snag if the current oil prices fall do not stop. For instance, Tullow Ghana Limited laid off 70 Ghanaian workers last year as a result of the similar collapse in oil prices on the international market.
As the International Labour Organisation (ILO) noted in its World Employment and Social Outlook-Trends 2016 report the economic weakening has caused a further increase in global unemployment.
It states: “In 2015, the number of unemployed people reached 197.1 million – approaching 1 million more than in the previous year and over 27 million higher than pre-crisis levels. This increase in the number of jobseekers in 2015 occurred mainly in emerging and developing countries including Ghana.
“In Cameroon, for instance, underemployment is estimated to stand at 75.8 per cent of total employment; and in Ghana, with a low unemployment rate of 5.2 per cent, more than one-third of the population is underemployed, and the composite measure of underutilization is 47.0 percent”.
No cheap fuel
On the downstream side, although crude oil prices on the international market are falling and nationals in some countries are enjoying cheap petroleum products, the same cannot be said of Ghanaians because taxes alone constitute about 70% of the cost of fuel in Ghana.
Just at the beginning of the year, prices of petroleum products in the West African second largest economy have been increased by almost 30 percent occasioned by the passage of the Energy Sector Levy (ESL) by Parliament last month.
Consequently, pump prices have gone up which forced commercial transport owners to increase their fares thereby increasing the cost of living in the country.
It is not only the cost of filling the tank that is crippling, but also the knock-effect of spiraling food prices end up creating havoc in household budgets. In Ghana, both statistical and anecdotal evidences 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 US$53.05 per barrel had been factored in the 2016 budget which was read in November 2015.
Now that the crude oil price has fallen below the benchmark price for more than two months and predictions suggest a prolonged slump in prices, there is no doubt that, the Ghanaian economy has dangerously been exposed. It is clear that the estimated oil revenue in 2016 cannot be realised.
By Masahudu Ankiilu Kunateh, African Eye Report
