COVID-19—Strengthening the petroleum revenue fiscal buffers

The world is in contingency mode and the nations announcing credible Corona measures, and not waiting for largesse, are those with superior fiscal space to run larger deficits, borrow or rely on fiscal buffers. Our interest is fiscal buffers and what the framers of our Petroleum or PRMA funds, led by the late Prof. J.E.A. Mills (HE), envisaged as better use of Ghana’s new natural resource find. The goal of fiscal balance or stability in addressing competing needs: consumption, savings, investment, debt, and buffers—is a clear departure from past uses of resources from gold and other minerals.

Sadly, we have not applied the PRMA rules consistently to achieve this goal, despite more flows from three (3) oil fields from 2017 to date, compared to one (1) field from 2011 to 2016. Part II reviews the performance and whether we learnt lessons from Ebola and the 2014-16 crude oil price slump to the handle current Corona fiscal storm better, especially the repeat of precipitous fall in crude oil prices—and, likely, other commodities.

 

Contingency Fund—stopping the flows

From 2014 to 2015, with one oil field and high crude prices, H.E. John Mahama’s administration accumulated about Gh¢89.3 million in the Contingency Fund—as required by Article 177 of the 1992 Constitution—after “capping” the Stabilisation Fund. Parliament, which has power over the Contingency Fund, approved the use of Ghc50 million as relief to support the victims of the Kwame Nkrumah Circle fire and flood disaster.

The fall in crude prices did not abate, the fiscal deterioration continued, and the nation fell on the Stabilization Fund, not the Contingency Fund, to support the budget. The Contingency Fund gets only 10 percent of excess revenues after “capping” the Stabilization Fund. Even with three (3) oil fields since 2017 to date and continued “capping”, the State did not replenish the Contingency Fund. The balance is still at zero (0) since 2016 when a continuation of the 10 percent allocation would have yielded multiples of the earlier Ghc50 million in the Fund.

At an average exchange rate of Gh¢3.8=US$1, the Gh¢50 million was about US$13.16 million—or 13.2 percent of the US$100 million Presidential pledge that an “IMF-exited” and Beyond Aid state expects to receive from the IMF and other donors. Probably, we could have had our own US$100 million for the Corona Relief. We note that the Mahama administration accumulated the Ghc90 million in the Contingency Fund at a difficult time too, when crude prices fell from over US$100 per barrel (pbl) in 2013/14 to sub-US$40s in 2015/16.

 

Stabilisation Fund—to the rescue now but with flawed accounting

The Stabilization Fund is the pillar of Ghana’s fiscal buffers and it is gratifying to hear the Minister inform Parliament and the public that the wholly owned Ghana Fund will be the first recourse for Corona budget support. It will be the second time that Ghana will rely on this Fund in crisis—the first was in 2015 when crude oil prices fell.

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While under the IMF ECF Program from 2014, the Mahama government withdraw about Gh¢250 million to support the Budget, resulting in less austerity or trimming of budget expenditures. At end-2019, the Fund had nearly Gh¢750 million as balance, compared to a meagre Gh¢72.9 million at the end of 2016.

The nation has made progress against all odds, recalling the heated debate in 2017 to sweep all the Stabilisation and Heritage Funds with low returns for consumption or recurrent expenditure!! We succeeded though in using the ABFA and Sinking Fund for that purpose. Hopefully, this second withdrawal justifies the need for the creative accounting that makes it difficult to account properly for the oil revenues flowing into the Stabilization Fund.

 

Annual Budget Funding Amount (ABFA)—consumption was priority

At various times in 2017 and 2018, the government set aside the mandate to use 70 percent of post-GNPC allocation to the ABFA for infrastructure. The breach of rules occurred even as the government added education to the priority sectorsand could split the expenditure in line with the prescribed 30 percent (recurrent) and 70 percent (capital) prescription.

Hence, despite touting education as top priority from 2017, the current government has fallen short of the Mills-Mahama counterparts in building education infrastructure, notably Basic and SHS schools. The amount spent indiscriminately, without targeting, from the oil funds on “soft capital” (euphemism for consumption), ignores the willingness or duty of capable citizens to foot part of the bill for social intervention in a progressive and cost-effective manner.

 

Heritage Fund—a quest to consume the share for our children

The vigilance of citizens has stopped the attempt to use a mere 9 percent of post-GNPC flows into the Heritage Fund to augment the appetite for consumption. Ghana needs to continue with this stance, as we approach the 15-year mark for reviewing the Heritage Fund. The best option is to channel any savings from the investments, not the principal amount,into more investment vehicles like the Ghana Infrastructure Investment Fund (GIIF).

Sinking Fund—adding and not redeeming any sovereign bonds

The Sinking Fund, also a 1992 Constitution (Article 182) requirement, was set up in 2015 to repay the principal amount of public debt with “interest-only” obligations. These include treasury bills, short-term notes, and sovereign bonds. The catalyst was the impending redemption of the 2007 Sovereign Bond in 2017. Having come to the end of HIPC and lacking borrowing or refinancing space, we were back at “risk of debt distress”, with bleak choices.

The initiative resulted in using oil funds of US$550 million to repay most of the US$750 million Bond. The refinancing of US$200 million balance from the 2015 Bond was to allow time to redeem the balance from the Sinking Fund—as with a large amount of Treasury Bills and short-term Notes that were being merely “rolled over” and increasing the public debt. The NDC redeemed US$336 million of the JAK Bond before leaving office and had Gh¢760.9 million (i.e., more than US$200 million) in the Sinking Fund at end-2016.

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Indeed, though never acknowledged, on October 4, 2017, it was the NPP that used the US$200 million (part of US$550 million) of the Sinking Fund to finally redeem Ghana’s first 2007 Bond. However, despite more flows from three (3) fields, it stopped the Bond redemption program from 2017 and has not implemented the NDC plan to use about US$300 million each year (from the Sinking Fund and self-financed projects) to repay the bonds.

No redemptions have occurred despite having Gh¢947 million and Gh¢748 million in the Sinking Fund at end-2018 and 2019, respectively. Instead, the NPP added four (4) bonds to those left by the NDC and then refinanced them over 15-to-40 years, without a principal redemption plan, for future generations to pay. Therefore, most depletion of the Sinking Fund since 2017 has gone to reduce a deficit from mainly recurrent or consumption expenditures.

 

Ghana Infrastructure Investment Fund (GIIF)—unfunded since 2017

GIIF was set up in 2015 to channel flows from 15 percent of ABFA and increase in VAT rate by 2.5 percent to 17.5 percent. The GIIF Secretariat was to use the funds to leverage or borrow from the capital markets for major “self-financing” projects that will repay the loans from incomes generated by the projects—not taxpayers. The Mahama administration also used US$250 million of the 2014 Sovereign Bond as seed capital for GIIF, which the Secretariat was to repay from returns on investments.

Consequently, GIIF became a member of the Consortium for the Terminal 3 Project at the Kotoka Airport and is beneficiary of the land for the Airport City II Project. Under the build-operate-transfer (BOT) plan, GIIF was to take over the entire project after 15 years. In the 2017 Budget, the government redirected the VAT flows into the Consolidated Fund and kept the flows to GIIF in the ABFA—which funds went mostly into consumption.

Conclusion

Ghana has embarked on the unsustainable phase of an ambitious social intervention program—at the expense of equally important debt reduction and development. With funds from “capping” statutory and other funds as well as use of petroleum funds to support these programs is now insufficient, so the nation has started spending Gh¢2.2 billion of the 2020 Sovereign Bond to fund recurrent or consumption expenditure programs.

If not reversed, Ghana will stand accused of using its oil (as with mineral) revenues for popular but fiscally unsustainable spending programs. The accusers will definitely include some who are cynically or hypocritically giving us the loudest applause today, the use of petroleum funds for a balanced fiscal program is feasible, as shown under the Mills-Mahama governments, which also came under intense pressure to “sweep” the Stabilisation and Sinking Funds to reduce budget deficits arising from mostly recurrent expenditure. We can do better. 

The writer is the former Minister for Finance

 

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