Business in Ghana

We Understand the issues that make the News

On Fuel Hikes and Petro-Economics

Posted by Business in Ghana on January 6, 2011

By Sydney Casely-Hayford, Sydney@bizghana.com

The Tema Oil Refinery (TOR) debt is a shifting target.  Without it’s interest element, the current principal debt is estimated at Ghc1.5billion.  This figure includes balances due to Ghana Commercial Bank (GCB), Barclays Bank, Standard Chartered Bank and other TOR notes raised on the commercial markets.  According to the Finance Minister Dr. Kwabena Dufuor, the balance due to GCB alone as at December 31, 2010 is approximately Ghc640million.

Government parlayed the GCB debt down by Ghc445million in mid-2010 with a promise to pay the balance “soon”, a date yet to arrive.

On a 20% simple interest basis the interest charge alone on the current principal balance due to GCB is Ghc128million a year and this is an over-simplification of the real charge, just to illustrate the point of this article.  The TOR levy recovers approximately Ghc60million a year from the consumer, a figure, which comes nowhere near paying down the debt.  At this rate of recovery and simple interest rate, Government will never redeem its indebtedness to GCB from the recovery levy alone, forgetting other creditors.

The TOR debt ballooned to its present figure from socio-political sensitivities of one government to the next.  In their attempt to cushion Ghanaians from mismanagement of State Owned Enterprises (SOEs) both NDC and NPP governments have decidedly absorbed crude oil hikes in order not to create undue hardship and by so doing succeeded in creating an image of themselves as pro-poor sensitive interventionists.  Now the chickens have come home to roost.  Inevitably, Ghanaians are finally facing the reality of misguided Government policy.

SOEs are a repository for favored Government cronies and used as a basis to support political favors and programs on the quiet.  TOR is a prime example.  Illiquid and unprofitable, but a useful source of ready cash for political gain.  Ergo National Investment Bank (NIB).

Between May 2008 and July 2008, average crude oil prices topped $147 a barrel.  Prior to this date, the NPP Government absorbed the excess cost, building up the debt for future redemption.  By December 2008, average crude prices dropped to as low as $42 a barrel.  The crude price drop between May 2008 and December 2008 was 64% but the ex-pump price was adjusted by only 31% from 118.53 per liter down to 82.00 per liter.  The last change in pump prices was after the first round of voting on 12 December 2008.  The NPP Government held back passing the full reduction in crude prices to the public until it was politically convenient to do so.

Now, bearing in mind that the TOR debt was inherited from the previous NDC Government, we take a view that there was some debt, which prompted the NPP government to introduce the TOR recovery levy in 2002.  Unfortunately, this history is not easily available and it is difficult to determine how the recovery levy was specifically applied to the TOR debt.

With the recent price hikes, gas oil and gasoline have increased by 30% ex-pump and LPG is up 25%.  Petrol goes up from 1.1698 to 1.5207, diesel increases from 1.1805 to 1.5346 and LPG now costs 104.76 per kilogram, from 83.81 per kilogram.

However, Government still subsidises LPG to the tune of Ghc9million a month and continues to provide pro-poor intervention for kerosene and pre-mix fuel.

So, even as we raise prices to maintain close to full recovery, we are still doling out with the left hand, bleeding cash in order to impress the poor for their votes.

Government has, since October 1, hedged 50% of its crude requirements at $82.50 a barrel on a 6 month rolling basis.  Forget the jargon.  What this means is that Government has taken up an insurance policy against the high crude price increases.  When prices stay below $82.50 a barrel, Government saves itself some money.  Above this line, it costs us some dollars.  In addition to this, there is a premium of between 6% and 7% paid to implement the hedge.

Between April and May 2010 crude oil prices hovered slightly above $85 a barrel.  From June through end October it stayed within $65 and $85.  World crude prices have risen steadily starting November, hovering close to $95 a barrel.  The hardening price barrier is on the back of a worsening winter in the West, increased demand from Asia, particularly China and India and the recent floods in Australia.  Analysts are predicting $100 a barrel in the 1st quarter of 2011.  The fuel hike is practically forced on us.

What matters most is the cost / benefit proposition to this mix of socialism and capitalist model we are experimenting with.  By all means there is a need support the poor and alleviate strife in the rural and peri-urban areas but we must think outside the box and apply simple common sense to some simple problems.

How do you pay down a debt when the recovery levy allocated to that debt is inadequate to even satisfy the interest on the principal?

Why continue to give away freebies when we could improve the earning capacity of the poor with proper infrastructure and other business support programs that will enable them to pull themselves up with their own bootstraps.

It would make more sense if we channeled the subsidies on LPG, premix and kerosene into improved feeder road networks and enhance the distribution network to get cheaper food to urban markets and add some value at the farm gate.

The fuel hike has, within two days raised the cost of food in the central markets.  If the consumer can absorb this increase with no change in the Consumer Price Index (CPI) or the Producer Price Index (PPI) and if inflation holds at single digits, we have a really big problem.  Because this will mean that we either do not have a handle on the economic indicators or Government has found a way to record macro-indicators outside of the data gathering institutions.

If we continue to shy away from making the hard value for money decisions and instead play pro-poor petro-econmics for votes, we defer the burden to settle debt to future generations.

We will realize the impact of the fuel hike in three months.

 

Advertisements

16 Responses to “On Fuel Hikes and Petro-Economics”

  1. Sydney:

    Good morning. I read your article “On Fuel Hikes and Petro-Economics” posted on GhanaWeb.
    The article is very educative and informative. You are correct in your analyses about TOR debt, the recovery process, and the structural deficiencies/impacts of some of the pro-poor agenda policies.
    The lack of secondary and cumulative impact analyses of policies and programs – short and long term implications is a contributory factor for lack of focused and targeted development in Ghana.
    The National Development Planning Commission should be resourced and reconstituted for intergovernmental coordination; and to provide the necessary support for informed decisions; and technical proven analyses of policies and programs.
    Can a government which has not created wealth redistribute wealth?
    Should petroleum products be subsidized? And to what extent? What should be the subsidy policy; And how should the subsidy be structured and recovered that it does not bankrupt the economy?
    In Ghana, the answers to the questions may be in the realm of politics.
    Your article is educative for informed decision-making; and a must read for politicians.
    Happy New Year!

  2. Couple USA said

    WHEN WILL NPP AND NDC STOP POLITICS WILL FUEL. TO AVOID CONFUSION, TEMA OIL REFINERY MUST BE PRIVATISED. IT MAKE NO SENSE FOR GOVERNMENT TO RUN OIL REFINERY.

  3. Man-usa said

    The question is, is should TOR be in debt, has the government been really subsidizing TOR debt ?

  4. Obenfo said

    I posted questions for the government on a prior article I just read about the same 30% petrol increase. I questioned the implecations of the hedging that the Finance Minister announced last year, but your article has done a great job in addressing all the questions.

    The effect will be very uncomfortable now for Ghanaians, but I think the Mills administration is doing the right thing to save Ghana’s future.

  5. McAkatti said

    Mr. Hayford, I truly admire your objectivity and ingenuity. Please help the noise makers, those make politics out of everything with their pettiness to learn from you by writtin often. Educate us more and more especially the youth. Can you please send some of your writting to my inbox so I can get some knowledge from you. bakatti25@yahoo.com

  6. DOES RAWLINGS KNOW THAT FUEL PRICES WILL GO UP. WHEN THE PREVIOUS GOVT DID INCREASE PRICES, HE CALLED FOR WAHALA OR WALAHA DEMONSTRATIONS. WHAT IS HE GOING TO DO NOW?

  7. Asabee said

    THERE ARE STILL SOME DANIELS AROUND

  8. Wayo said

    You wrote, ” . . . . both NDC and NPP governments have decidedly absorbed crude oil hikes in order not to create undue hardship.”

    That is not true because oil prices are higher in Ghana than in several countries including the US. US does not subsidize oil prices.

  9. Felix said

    THE US ALSO DO NOT CHARGE TAXES ON THE REFINED PETROLEUM PRODUCTS TO GENERATE INCOME FOR GOVERNMENT. SINCE GOV’T IS COLLECTING TAX ON THE FINISHED PRODUCTS,THE PRICE INCLUDES THE TAX AND THEREFORE THE PRICE WILL BE HIGHER.HOWEVER, WHAT IS THE EXCHANGE RATE OF CEDI/DOLLAR, CURRENTLY @1.47.THIS MEANS THE PRICE PER LITRE IS 1.5207/1.4700 WHICH GIVES $1.03 PER LITRE.TAXES ARE NEARLY 40% OF THE EX PUMP PRICE SO THE REAL COST OF THE PRODUCT IS ABOUT $0.60 PER LITRE

  10. J A Yamoah said

    A detailed piece for politicians – very educative and informative for policy making. Are the politicians reading the article?

  11. yes as a country we must think outside the box and apply simple common sense to some simple problems. in this age of single spine government functionaries must be weaned off the freebies – as a first step. step two – establish vigourous continuing performance audit; and step three the media should shift from the ndc/npp ‘fight’ and pursue public education on how to cut down on expenses.

  12. Okunka said

    Great Article!
    This is clear evidence that journalists can research and acquire information from Public sources and use that to inform the Public.
    Some of the comments also have been fair , truthful and balanced and that is what we need without the usual stance derived from political affiliations.

    However, the are some half truths and some none truths in some of the comments.
    In particular on taxes and on prices in the US. Taxes in Ghana (that which accrues to Govt) is less than 15 percent (petrol)and in some cases zero (LPG, Kerosene, Premix, Marine Gasoil). All countries apply taxes on the pump prices of petroleum products. Taxes in the UK are over.50%, while the taxes in the USA are mostly applied by the State Govt and not the Federal Govt. California and Washington have some of the highest taxes in the US.

    On the matter that petrol is cheaper in the US and UK because there are no taxes, this is not necesseraly true. A litre in the UK sells for GBP 1.32 per litter – this is equivalent to over GHS13.75 per gallon as compared to GHS6.84 per litter in Ghana. In the US petrol sells for USD3.57 (pls note that a US gallon is less than an imperial gallon – 3.875 liters vrs 4.5 liters for an Imperial Gallon. So this is equivalent to USd4.15 or GHS6.01 per litre. The main reason why the prices in the US are lower that those in Ghana is due to economies of scale – distribution cost and manufacturing cost are less in the US than in Ghana.

  13. Ernest Addison said

    I just read your very good piece on fuel hikes and petro-economics. Well researched and easy to understand. I think you should add that in almost all the Frontier Emerging Markets, in Latin America and Africa, petrol prices have been deregulated! Even in Julius Nyerere’s Tanzania! I don’t know why Ghanaian politicians think this is the way to win an election even though they have been proved wrong each time. Neither the NDC nor NPP has won an election by interfering with the price mechanism.

  14. REINDOLF OTU ACQUAH said

    Hi Sidney, this is educative and a good piece of intellectual discourse, do we have some good managers of this country?Lets hope so.I believe in a national agenda with political parties using different methods in reaching that goal.

  15. You need to check this out…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: