A recent decision by an Accra High Court could have misunderstood the use of the Ex-refinery price differential In the calculation of fuel pump prices and this may force Government to raise retail pump prices if the National Petroleum Authority (NPA) loses its appeal and Government is mandated to carry out the court order.
Simply explained, the court ruled that the ex-refinery differential used in the calculation of the fuel prices is a form of tax and must therefore have Parliamentary approval before implementation. The detail of the case is captured in a series of articles in most Ghana media.
If you delve a little deeper into the calculation of retail pump prices made available by the NPA and in the public domain, you notice that the ex-refinery differential is used to reduce the final pump price rather than increase it. In effect, it is a subsidy not a tax.
Using the three most subsidized products; Kerosene is subsidized 70.59 pesewas per liter, LPG 59.98 and Premix 62.12. In essence the ex-differential subsidy keeps pump prices level and consistent. Without the subsidies, consumers have to pay far more for the product.
Government's decision to provide these subsidies is a political one rather than financial.
Should Government continue to subsidise the “poor” persons fuel is another discussion. Supporting Kerosene, LPG and Premix as well as all the other fuel products is a safety net strategy and Government has hitherto provided up to $45 miilion a month to support its fuel poverty alleviation program.
IMF extended Credit Arrangements to Ghana insist that these subsidies must be gradually eliminated in order that we can sustain debt payments and keep the macro economy on track. The annual cost to the Government of these subsidies alone is $540million, a figure that is clearly not sustainable even with the oil revenues.
There are also major concerns about election year over-spend and most rating agencies, S&P, Moody's etc. have issued cautious statements about expenditure overruns in 2012. And there is cause for concern because Government budget delivery is very dependent on the $3billion facility from the China Development Bank (CDB).
Approved by Parliament, Government is yet to sign on the CDB Head agreement and time is running out for any major project to be completed in 2012.
The other worrisome issue is that the Jubilee Fields are underperforming, due mainly to our non-flaring policy, which is protected by re-injecting gas back to the wells. The wells are generating only 85,000 barrels a day rather than 120,000. At this point the 2012 budget is already looking vulnerable seeing as it was based on the high-end production of 120,000 barrels.
Operating partners are concerned that re-injecting the gas will impact future output and raise future costs. There are also fundamental concerns regarding Government policy on use of Gas which at the moment is going to waste because of a lack of clear direction.
Government options are limited.
If Government continues to subsidise petroleum prices, they lock horns with the IMF and the drawdown of the $3billion Chinese facility is protracted till end of June 2012 when the IMF arrangements expire. By that time, election fever is on us and time has run out.
If Government abrogates the IMF arrangement they ruin a hard won reputation as a reforming country and international financial support to Ghana will take a huge step back. Our ratings will fall and our ability to sustain debt payments will be questioned. The publicity will not go down well.
If Government acts on the High Court ruling on ex-refinery prices, it will, in my estimation have to raise fuel pump prices. In an election year, and having raised fuel prices by 30% previously in this term, the political fallout could be catastrophic.
But, to ensure that it can access the $3billion CDB facility, Government must remove the subsidies and satisfy IMF requirements. The IMF is keen to see Ghana succeed, but is guided by two things. One, the fact that it is an election year and the natural tendency, despite what is promised publicly is to spend to rake in votes, and two, this Government has not met all promises to the Fund. The subsidy debate has been raging since June this year.
Either way, at the core of the debate is how to secure the CDB facility. All major infrastructure projects hinge on the $3billion loan.
So we must ignore all the promises from the Finance Minister and the President about protecting hard won gains in macro stability and holding down expenditures.
Government must remove the subsidies and consequently raise fuel prices to save the CDB loan, which it needs to guarantee votes.
But time has run out. Major project works need planning time before execution. With just 12 months left to elections, there is limited opportunity to impress voters. Even after they compromise with the IMF and the CDB loan comes into play, Government has to counter the backlash from Ghanaians. The 1% vote game-changer from 2008 is a serious concern and the opposition NPP has learnt some hard lessons not to be repeated.
Government must eliminate the subsidies, stay in the good books of the IMF, not only to ensure that it can access the CDB loan, but also because it cannot afford to sustain the subsidies, or fatally, it must comply with the court ruling, erroneous as that may be.
In my estimation, pump prices will have to go up by at least 15% across board. The only option available is to defer the price increase till after Christmas.