The Global Perspective
The world is still counting the massive cost that COVID-19 has unleashed on its soil. The level of anxiety and uncertainty prevailing globally has characterized the pandemic as a key milestone in human history.
In 2019 both the World Bank and the International Monetary Fund (IMF) gave a positive forecast for a marginal expansion in the world economy. IMF predicted that the global growth forecast will increase from 2.9% in 2019 to 3.3% in 2020.
Little did they know that a health monster was lurking in the corner to pull a shrink in the predictions. In its January 2020 Global Economic Prospect, the World Bank forecasted that the world will see a growth rate of 2.5% in 2020.
OECD in the same fashion lowered its estimation of the 2020 global GDP growth to 2.4%, indicating a prediction of contraction in general output. In its African Economic Outlook for 2020, African Development Bank puts Africa’s 2020 growth rate at 3.4%.
In the light of the COVID-19 I guess this outlook will be revised downwards to reflect the emerging risks.
Impact on Energy
Whilst we analyse and count the cost of COVID-19, we must not lose sight of the adverse impact on the key driver of world economy: ENERGY. Within a quarter the price of oil fell from $62.00 per barrel at the end of December 2019 to $25.00 per barrel in March 2020.
The steep fall was driven largely by a twin-effect namely the glut in oil production due the disagreements between Russia and Saudi Arabia, the supposed class prefect of OPEC+ and a reduction in global demand due the COVID-19 pandemic which is threatening the economic foundations of major world Economies like China and USA.
The fall in the price of oil has resulted in the weakening of revenues and output mainly in economies that depend heavily on oil and gas exports for the growth of their economies.
With the fall in the oil prices, African countries including Nigeria, Ghana, Libya, Angola, Algeria, and Equatorial Guinea, will obviously have to prop themselves up to face an onslaught of difficult fiscal conditions that can linger into the medium term.
Ghana is no exception to the wave of COVID-19’s economic de-stabilization. Ghana is one of the newest oil-producing countries in Africa.
Even though relatively small the volumes of oil being produced mainly in the Tano-Cape Three-Point Basin in the Western Region of Ghana is making a significant impact on the development agenda of the nation.
For example between 2011 and 2018 Ghana bagged a little above $7.5billion, according to Public Interest and Accountability Committee (PIAC) a body established by law to monitor petroleum revenues in Ghana. This revenue is significant in relation to Ghana’s level of GDP.
With the emergence of COVID-19 the revenue generated from the petroleum sector for 2020 is expected to assume a tailspin. This is mainly due to fall in the world price of oil.
Ghana’s 2020 projected petroleum revenue is pegged at $1.2milion. Underlying this projection is the assumption that the dollar price of oil will be $58.66/b.
The reality as presented to us by the weakening global demand curtesy COVID-19 and the price war between Russia and Saudi Arabia, is that as at 5th April 2020 the WTI and Brent crude sold at $28.34/b and 34.11/b respectively.
The obvious effect is that if the price remains below $58.66/b, which analysts expect, Ghana will suffer a shortfall in petroleum revenue and this will have a negative ripple effect on the Government’s ability to execute the needed agricultural, infrastructural, educational and health projects it intends to carry out this year.
The attendant negative effect on the GDP for 2020 including significant job losses cannot be escaped unless bold and out-of-the-box policies are urgently executed.
It is heartwarming that the Government of Ghana, through the Ministry of Finance decided to embark on a number of measures to reduce the impact on the nation.
On 30th March 2020 the minister of Finance made some proposals before Parliament of Ghana to address the effect of COVID-19 on Ghana’s economy and some of the measures outlined bothers, of course, on energy.
Specifically, the minister indicated that the total fiscal impact is projected to be $9.5million which is 2.5% of the revised budget.
The minister requested approval to use $219m from the Ghana Stabilization Fund (GSF) towards Ccovid-19 projects, reduce the statutory cap on GSF of $300million to $100million to allow the Government to access extra Ghs1,250million more funds from the petroleum revenue to support Corona Virus Alleviation Program (CAP), reduce portion of the Net Carried and Participation interest due GNPC from 30% to 15% and a daring suggestion to amend the Petroleum Revenue Management Act (PRMA) to enable Government to withdraw money from the protected $591million Ghana Heritage Fund.
Position of the law and recommendations
Ghana’s petroleum sector is highly regulated. We have laws that regulate the upstream, midstream and downstream subsectors. One key law that is relevant and which has already undergone amendment is the Petroleum Revenue Management Act (Act 815).
The law stipulates that Ghana shall have Petroleum Holding Fund which hosts all petroleum revenues. From this fund disbursements can be to GNPC, Annual Budget Funding Amount, Ghana Petroleum Funds and Exceptional Purpose Transfers. Ghana Petroleum Funds are made up of Ghana Heritage Fund and Ghana Stabilization Fund.
According to the PRMA (ACT 815) Section 9(2) ‘The object of the Ghana Stabilization Fund is to cushion the impact on or sustain public expenditure capacity during periods of unanticipated petroleum revenue shortfalls’.
Section 10 of the Act 815 states that “the object the Ghana Heritage Fund is to (a) provide an endowment to support development for future generations when petroleum reserves have been depleted; and (b) receive excess petroleum revenue”.
Considering the analysis above, it is clear that that since petroleum revenues are projected to reduce the use of the proceeds this year should be highly maximized. Oil and Gas are finite resources and hence the use of the proceeds must have adequate sustainability measures in place.
I think the use of funds from petroleum funds especially the Ghana Stabilization Fund to support CAP is in order considering the fact that COVID-19 needs to be contained quickly to curtail further economic destruction.
It is suggested that part of the fund should be used to assist educational institutions in Ghana (both private and public) that are providing Energy Programes through the traditional means, to deliver seamless technologically driven studies to students so that the future manpower needs of Energy Experts are not compromised.
In this case the use of the funds will address current needs and also future aspirations of the nation. As regards the proposal to amend the PRMA to enable funds to be withdrawn from the Heritage funds, it is suggested that the position of the law on the Ghana Heritage Funds should be maintained as it is. We have a future after COVID-19.
We will reach a peak in our oil and gas production cycle and that is where the true value of the GHF will be felt. The history of exploitation of natural resources in Ghana is dented with disheartening scenes of degradation without far-reaching benefits and this is what the law wants to prevent in future.
The spirit of the writers of Act 815 should be maintained and guarded and I think there is no need to amend this part of the law now.
I think that Government should use part of the funds to support local companies that engage in mainly manufacturing activities for both domestic consumption and export.
This is so because these companies employ a teaming number of Ghanaians and at the same time serve as a source of foreign currency. Cushioning them during this time is crucial to the resilience of our economy.
Government must also support the Agricultural sector by ensuring that farming areas are properly targeted and farmers are adequately educated on ways of preventing COVID-19. Efforts should be made by Government to establish health facilities in food basket zones in Ghana.
Adequate funds should be directed towards safeguarding the Agricultural value chain to prevent food inflation which can create further hardship in the economy.
Finally, it is recommended that all funds that are being pulled to support CAP to ensure the effect of COVID-19 is alleviated are efficiently spent and accounted for. PIAC must not lose sight of this even in this emergency situation.