The curse of oil

Parliament passed the bill the same day, under a certificate of urgency, but the opposition in parliament walked out before its passage. The law authorises the Ghana Revenue Authority to collect the tax which would be paid into the Consolidated Fund.

On the face of it, one could argue government has opted for this option in its quest to ramp up tax revenue to help close the ever-widening gap between its spending and receipts.

Another, and more plausible way to look at this development is government’s attempt to take more from oil, albeit from a psychologically misguided position.

Ghana has over the past half-decade been producing and exporting crude oil, revenues from which have become an important contributor – just about a third – to total GDP with cocoa and gold being the other major contributors. However, with the plunge in commodity prices on the international market in recent weeks, especially for crude oil, which has plummeted to a three-year low hovering around US$80, the country has been feeling the pinch.

Ghana, therefore, feels it must squeeze more from oil. Government’s thinking about the importance of oil revenues to the national economy is reflected in Terkper’s presentation where he started the Budget Statement by presenting the 2014 Annual Reports on the petroleum funds.

Increasingly, Ghana is finding itself being hurt by the oil slide since the middle of the year, and like other nations from Venezuela to Iran that depend heavily on energy for revenues, getting a little poorer as crude prices continue to plummet as they brace for imminent budget hit.

Terkper’s approach is misguided because it is not likely to be sustainable over the short term and, much less, the medium term. The nagging question is; after the slapping of the 17.5 per cent VAT, which naturally will take a bigger toll on low income consumers because of its regressive nature (never mind that government spokespersons say it will only reflect in a three percentage increase in prices at the pumps) will prices at the pump further go up should world market prices start climbing northward?

Should that happen, it would be difficult to imagine an already edgy middle class that has developed an appetite for street demonstrations taking that without escalating their agitations.

But government’s dilemma is even more complicated. Should world market crude prices tumble further, would government find creative ways to tax petroleum products the more?

The price plunge comes as a slowing global economy cuts into the demand for oil. At the same time, expanded production—including rising output from North America—has left the world awash in oil.

Further downslide in prices could eventually crimp some production from higher-cost producers, including Ghana, whose oil basins are increasingly in deeper waters with relatively higher production costs. New investments into exploration (critically needed by Ghana if its industry should grow) will definitely stall.

Presently, countries that have been spending cash generated by $100-a-barrel oil face the much tighter budgets. A recent IMF report said the hardest hit would include small oil exporters such as Oman, which faced a budget gap of 1.8 per cent of gross domestic product in 2016 and Bahrain could see its budget deficit shot up to 5.7 per cent by next year.

By comparison, Ghana, an insignificant oil producer is already in a precarious situation. Currently, the fiscal deficit of GDP stands at 10.8 per cent. The 2014 target for fiscal deficit of GDP is 8.5 per cent.

Government says its medium term objective is to reduce fiscal deficit to three per cent of GDP by increasing revenue through taxes and intends to complete its implementation of the policy on VAT.

Analysts say the impact of budget gaps among big producers such as Saudi Arabia and Russia, though, will be softened somewhat by large reserves built up during boom years. But a protracted era of cheap oil will force them to undertake serious belt-tightening. Ghana, a fledgling producer, does not enjoy that luxury.

But worse for the country, other top analysts are predicting crude could fall to US$60 and that crude oil has been massively overvalued, and US$60 per barrel oil looks imminent.

On the domestic front, industry observers hold that government’s approach to managing the sector could hurt the economy severely, pointing out that little effort is being made to improve the country’s opportunity to refine its own crude into finished products and that the 45,000bopd Tema Oil Refinery (TOR) has been left to rot.

They contend that all the revenue from oil earmarked for infrastructure development in the sector, is being channelled to only GNPC, which in recent times, is pursuing a US$700 million loan for infrastructure development, including the gas infrastructure which will eventually see the Ghana National Gas Company (GNGC) eventually subsumed to the GNPC, to enable the latter have much weight in pursuing exploratory activities.

Obviously, with these recent developments, there seems to be a clear disconnect between the expectations of Ghanaians and that of the government on ways to manage the country’s oil and the sector as a whole. The people feel, oil is putting them under severer bondage than they had bargained for.