Low crude prices to create 53% vacuum in oil revenues

Government is likely to miss its revenue target from oil by some 53 percent due to lower than projected prices on the global market, the Africa Centre for Energy Policy (ACEP) has warned.

Government in the 2020 budget projected to receive US$1.567billion from oil revenues, anchored on a price prediction of US$62.6 per barrel. However, oil prices – according to ACEP, have dropped drastically so far; and are likely to sell on an average of US$40 per barrel, which means that US$743 million – about 53 percent – of the expected amount will not be met.

“Based on the average price prediction of US$40 per barrel, the receivables from oil could drop to US$743million; a shortfall of about 53 percent. This has severe implications for the budget, particularly physical infrastructure and debt servicing,” the think-tank said in a release titled: ‘Implications of low oil price on Africa’s oil producing economies’.

More starkly, it warned that government’s planned expenditure on critical sectors like infrastructure and other developmental and social intervention programmes could be heavily affected – as close to 80 percent of domestic revenue for the capital budget is to be sourced from the Annual Budget Funding Amount (ABFA), which is heavily dependent on oil revenues.

“ACEP estimates show that maximum allocation to the ABFA for the year in line with the Petroleum Revenue Management Act (PRMA) will significantly drop, from US$761million to about US$273million; representing a shortfall of about 64 percent.

“This shortfall of US$488million cannot be smoothened by the Ghana Stabilisation Fund (GSF) established by the PRMA,” indicated the statement signed by ACEP’s Executive Director, Benjamin Boakye.

At a standing balance of US$300million, it said the maximum withdrawal from the GSF compliant with the PRMA is about US$243million.

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Though this provides support and reduces the price shock on the ABFA component of the budget, the energy policy think-tank added that the GSF’s inadequacy to offset the entire deficit exposes failure of the US$300million capped balance to provide enough support for the budget in periods of a quantum drop in oil price as is being experienced currently.

“This is the second time the inadequacy of GSF has been exposed by oil price shocks since commercial oil production started in Ghana a decade ago,” the statement said.

Meanwhile, the projected transfer into GSF in 2020 is US$228million; and given that the GSF is capped at US$300million, the US$228million would have been excess over the cap and available for debt service and/or contingency, in compliance with the PRMA.

However, according to ACEP, over the years, the excess over the cap has been used largely for debt service – which indicates that the US$228 million, which is about 5.7 percent of the programmed expenditure for interest payment in 2020, will not be available for debt service. This, it added, creates additional pressure on government to look for other revenue sources to offset the gap in debt service allocation.

Implications

Per the analysis, it means that President Nana Akufo-Addo’s pledge to undertake massive infrastructure projects in 2020 – an election year that government has christened ‘the year of roads’ – could be impacted negatively from a political perspective.

Without the expected oil inflows, and given that this is an election year, government could be left with no option but to borrow from external sources in order to fullfil the promises it made to Ghanaians. But this might not bode well for a government that has preached fiscal stability.

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ACEP’S Recommendations

To assuage the situation, ACEP recommends Ghana and other African countries affected by the drop in oil prices should ensure transmission of the lower oil price to support industry and consumers of petroleum products. It also called on governments to come up with new budgets that account for the extraordinary drop in oil prices.

In future, it says, governments must implement significant countercyclical mechanisms: “An option will be for governments to have stabilisation funds with adequate buffers that are capable of smoothening significant shortfalls in the budget. Also, hedging portions of oil outputs will minimise the impacts of oil price volatility on national budgets.

“In Africa, effects of the COVID-19 outbreak could be harsh for emerging SMEs and industries that are struggling to compete in the global space. Increased unemployment as a result of layoffs on the back the pandemic is likely to occur. In a low oil price era, the temptation for many countries could be to increase taxes on downstream consumption to offset the revenue losses upstream. This will be injurious to many businesses in Africa, particularly in the face of inadequate incentives and stimuluses compared to the developed countries. A full transmission of the lower price of oil is therefore required for businesses and consumers in general to boost economic activity. This minimises production and service delivery costs to reduce the burden on consumers,” the statement concluded.

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