Hedging crude oil imports will bring stability to the economy- IFS

The Institute for Fiscal Studies (IFS) has welcomed moves by the Nana Addo Dankwa Akufo-Addo government, to hedge its oil imports under a new risk management strategy to keep fiscal consolidation on track as global crude prices recover.

According to the civil society group, moves to hedge the country’s oil import is a step in the right direction, given that hedging provides an insurance to mitigate the adverse impact of oil price volatility.

In press statement copied to thebftonline.com, IFS stated that, “Currently, Ghana produces nearly 200,000 barrels of oil per day. Ghana’s share has risen to nearly 20% of this total output, which it sells on the international market. Ghana is however a net oil importer, except last year when oil exports exceeded imports.

Without an oil hedging program the country stands to lose foreign exchange earnings from exports when oil price drops on the world market.

Likewise, when oil price increases, the country suffers through increases in its oil import bill. Both scenarios are undesirable and can be mitigated by an effective hedging program to ensure stability in fiscal management.”

The call by the IFS to government to go ahead to hedge the country’s oil imports comes after the Finance Ministry gave the indication to the media that, the Akufo-Addo government had made plans to hedge as brunt crude oil hit $71 per barrel two weeks ago and has eased to $66.91 per barrel as of Tuesday February 6, 2017.

Ghana has largely been a net crude importer, except 2017 that oil exports exceeded imports by around $990 million, according to data from the Bank of Ghana.

The IFS further point out that, Ghana’s previous experience with hedging points to one key lesson: with a well-designed hedging program, it is possible to protect the country against volatilities in commodity prices through the “call” and “put” options.

Hedging is an insurance instrument used to buy protection against risks and not a gamble for futuristic gain as hedging is not entirely new to Ghana’s fiscal management.

In March 2010, after Ghana, had built its capacity in commodity risk management in collaboration with Goldman Sachs, its implemented a Commodity Risk Management Policy to help protect the economy from the volatilities in commodity prices.

After the policy was put in place, a National Risk Management Committee was established and charged with the responsibility of hedging Ghana’s oil imports and exports through “call” and “put” options, respectively.

Initially, the government hedged at a strike price of US$82.50 per barrel on monthly imports of 1,000,000 barrels and in July 2011, this was increased to 2,000,000 barrels of imports per month at an average strike price of US$115.00 per barrel which proved immensely successful, and by end-2011, the scope of the hedging program had been expanded to provide a 100% cover for Ghana’s oil imports.

Since 2015 the IFS has strongly advocated the need for Ghana to re-introduce the petroleum hedging program to cover both imports and exports to save the country from losing millions of foreign exchange earnings and also provide stability to the national budget.

The IFS therefore commend the government for its plans in this direction. We urge government to consider a comprehensive hedging program that covers both oil imports and exports and as well as interest rates on public debt.

It is important to note that, though future price recovery is partially good news for Ghana’s oil exports, the current government fears it could also derail price stability and spike fuel-related expenditures.