This is as a result of the fall in crude oil prices on the international market.
The fall in crude oil prices from about US$110 in March last year to US$54 as of March 19 means that the country’s crude oil import bill has been trimmed by about 60 per cent while its export revenues will drop by almost the same margin.
The result is a mixture of expenditure cuts on the crude import bill and a painful reduction in revenue forecasts from exports from an initial estimate of GH¢4.2 billion to GH¢1.5 billion. The revision of the revenue targets were announced by the Finance Minister, Mr Seth Terkper, in a fiscal statement to Parliament on March 13, 2015.
Impact on cedi performance
A reduction in oil export revenues means that the country’s foreign exchange inflows will drop and that poses serious threats to the already dwindling gross international reserves (GIRs) and the stability of the cedi.
The threat to the cedi’s stability is further worsened by the government’s resolve to virtually dry up the Ghana Stabilisation Fund (GSF), a key source of GIRs (which is funded by oil revenues), to support the budget. The fund, which serves as a shock absorber to falling oil revenues, had accumulated some US$590 million as of December 2014, and the decision to draw GH¢487.2 million on a quarterly basis to finance the revenue shortfall means that nothing will be left to prop up the GIRs, which was reported at US$4.9 billion (equivalent to 2.9 months of imports) in January, this year.
Consequently, this weakens the country’s reserve position and the result could translate into a decline in the value of the cedi, an Economist and Lecturer at the University of Cape Coast, Dr John Gatsi, said in an interview.
Dr Gatsi’s fears for the cedi sits well with the conclusions of a policy brief by policy think-tank, the Institute for Policy Studies, which stated that the fall in oil prices and its impact on revenues exposed the country’s reserves and balance of payments to significant risks.
“The recent stability of the cedi may fall victim to the falling oil prices, with evidential weak forex inflows and lower corporate tax receipts. This may have the potential to significantly affect the country‘s balance of payments and foreign reserves,” the institute said.
Cumulatively, therefore, the price drop threatens key macroeconomic indicators such as the gross domestic product (GDP), inflation and the gaping fiscal deficit which has been revised to GH¢10 billion (7.5 per cent of GDP) from an initial target of GH¢8.8 billion (6.5 per cent of GDP).
That puts the finance minister in a tight corner, Dr Gatsi said, and pointed to the implications on debt sustainability.
With the current power supply deficit already threatening growth in the economy, Dr Gatsi said the drop in oil prices meant that the woes of businesses in the upstream petroleum sector had been compounded and that could translate into slow growth in the petroleum sub-sector of the industry and consequently GDP.
A drop in GDP growth, together with a spike in expenditure, would mean that the ratio of the country’s debt stock to GDP, which was 67.1 per cent in December 2014, would move up, thereby complicating the worries of Mr Terkper and the country in general.
NPA’s good fortune
But as Mr Terkper scratches his head over an issue that threatens budget targets, the National Petroleum Authority (NPA), which regulates the downstream petroleum sector, is indifferent to the development, given the savings it makes from the fall in oil prices.
Although the government is tight-lipped on how much it is making from crude oil imports, the NPA recently used part of those savings to settle a US$412 debt owed bulk oil distribution companies (BDCs), thereby confirming that although a global price slump has wider implications on the economy, it provides an avenue for the country to trim its oil import bill.
Oil imports cost the country some US$2.7 billion as of September last year, down from US$2.6 billion within the same period in 2013, according to the 2015 budget.
Although the erratic power supply has impacted positively on the demand for fuel to power generator sets, Dr Gatsi said the growth in oil import bill could moderate on the back of the 60 per cent drop in oil prices.
“This should provide some space for the government to accumulate some savings to be able to pay off debts and balance its books,” he said.