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To Spend Or Not To Spend, Ghana's Oil Savings Dilemma

A local economic policy think tank, argue that the Ghana Petroleum Funds have too high opportunity costs as their returns are next to nothing.

24/02/2017 04:53 SAST | Updated 24/02/2017 04:53 SAST
Minasse Wondimu Hailu/ Anadolu Agency/ Getty Images
President of Ghana Nana Akufo-Addo delivers a speech during closing ceremony of 28th African Union Summit in Addis Ababa, Ethiopia.

The decision by President of Ghana Nana Akufo-Addo to finance its flagship free Senior High School policy with petroleum revenues has stirred controversy about the usefulness of the Ghana Heritage Fund (GHF), originally meant for future generations when the oil resources run out.

Proponents of the amendment of the country's Petroleum Revenue Management Act (Act 815), such as the Institute for Fiscal Studies (IFS), a local economic policy think tank, argue that the Ghana Petroleum Funds, which include the Stabilisation Fund and the Heritage Fund, have too high opportunity costs as their returns are next to nothing.

According to the Bank of Ghana, which manages the Petroleum Funds, since 2012, the highest net rate of return the two funds have attracted was 1.1 percent in 2014, while on the average, since 2012, the funds have attracted a combined interest of a paltry 0.68 percent. The bank's latest report on the Petroleum Funds shows that as at December 30, 2016, the Ghana Heritage Fund had a closing book value of US$277 million, with a negative 2.99 percent return.

The Ghana Stabilisation Fund, on the other hand, had a closing book value of US$207 million, attracting 0.24 percent interest for the second quarter of last year. Since their inception in 2012, the funds have been able to accumulate US$18.9 million in returns.

Whilst government has funds locked in the two funds, it has had to contend with exorbitant interest rates on its external borrowing. For instance, government borrowed US$1 billion in 2015 at an interest rate of 10.75 percent, while its US$500 million in the two funds attracted a rate of return of 0.7 percent. Perhaps it is such paltry returns that have influenced government to consider tapping into the heritage fund to help finance the free SHS policy. But the free SHS policy itself is an expensive undertaking and does not appear to be a sustainable source to provide for the smooth takeoff of the policy even in its first year alone.

Ghana's Senior Minister, Yaw Osafo Maafo, who disclosed government's intention of utilising the fund for the free SHS policy hinted that the policy would cost government in excess of GH¢3 billion per annum (appr.US$700 million), assuming the 1.6 million Ghanaians within the SHS age bracket are to be enrolled within the first year of the policy – though that looks a distant possibility due to infrastructure constraints among others.

In the midst of countless developmental challenges, it would be better to invest in infrastructure and the social sector as future generations stand to benefit from the investments the country makes today.

Assuming government is to succeed in amending the PRMA (Act 893) to allow for the oil proceeds to be used to finance the SHS education, the total balance as at last year in the two funds – US$484 million (appr.GH¢2billion) – will still leave a huge funding gap in the policy that needs to rely on a much more sustainable funding stream.

But a petroleum economist Dr. Theo Acheampong, argues that the proposal by the Akufo-Addo-led government is a complete nonstarter. "The Heritage Fund must not be touched. You have over 70 percent of oil revenues being allocated to the Annual Budget Funding Amount (ABFA) and another 21 percent going into the Stabilisation Fund. Find a way to use the ABFA to support the free SHS policy instead of the Heritage Fund, which only receives 9 percent of petroleum revenues.

The Heritage Fund is meant to provide for permanent income; it had a closing book value of US$277 million as at 30 Dec 2016. By contrast, we have allocated over US$1.43 billion to the ABFA, US$0.60 billion to the stabilisation fund and another US$0.93 billion to GNPC between 2011 and 2015," he said.

But the argument on the Heritage Fund is centered on what constitutes its judicious use for the benefit of future generations. Indeed, the Akufo-Addo led government has argued that the use of the Heritage Fund could fit perfectly into the goal of the desire of the fund to invest into future generations. Director General of the National Development Planning Commission, Dr. Nii Moi Thompson, has said before that he is not a "fan" of the Heritage Fund, which, in the main, is to "provide a heritage for future generations of citizens from savings derived from excess revenue."

Speaking at a Civil Society Forum on Oil and Gas, in June 2010, the renowned economist argued that in the midst of countless developmental challenges, it would be better to invest in infrastructure and the social sector, adding that future generations stand to benefit from the investments the country makes today. Those who argue for the fund to be retained also take a cue from Norway, a country whose savings from oil and gas have become the talk of town globally.

The Economist reported in September, 2016, that Norway's Sovereign-Wealth Fund, which is used to invest abroad the proceeds of the country's oil and gas sales, had reached US$882 billion, more than double national GDP, twenty years after its establishment. The opposition NDC has lashed out at the new government for attempting to use Ghana's own fund to roll out the free SHS policy. Deputy Minority Leader at Ghana's parliament, James Avedzi, said the attempt undermines the very purpose for which the fund was set up. The new government, however, appears unbending, and is bent on proceeding with its plans although it says it is still open to utilising other means to finance the expensive venture.