The decline in crude oil/gas output and prices is a feature of global financial and non-financial crisis and the effect on global demand and commodity prices (for Ghana, gold, cocoa, and crude oil). Other common exogenous and domestic causes include destabilization through droughts, wars, and conflicts, leading falling budget revenues, foreign currency supply, and reserves. These result in high (import-induced) domestic prices; unemployment due to low output or productivity, economic growth, and development.
These are not unique to COVID-19 but the shock from lockdowns and border closures made it abrupt and severer than the global financial crisis from 2008. Before COVID-19, the financial crisis was the worst crisis since the 1930s Great Depression. Compared to the 1990s Rawlings era, the Kuffour administration had HIPC/MDRI flows to minimize the adverse effects of droughts and power crisis in the 2000s.
In contrast, Mills/Mahama went through the financial and oil price shocks from 2009; an Ebola scare; droughts/power crisis; damage to the WA Gas pipeline and disruption in Nigeria gas supply; and single-spine wage overruns. Hence, they enacted and took the PRMA rules seriously and started building budget buffers, stabilizers as well as savings and investment strategies.
The main benefit is drawing down US$250 million in 2020 (a quarter of IMF RCF US$1 billion loan facility) from the Stabilization Fund to manage the COVID crisis.
Since financial or non-financial crisis are inevitable, they need plans in good or “boom” times to manage bad or “bust” times better. The next article argues that Ghana did not follow the PRMA measures well with three (3) oil fields under the NPP, as it did with one (1) field under Mills/Mahama.
An allegation that the NPP keeps repeating is that the Mahama government handed over a weak economy at the end of 2016, a charge that deliberately ignores the opportunities from, but highlighting some challenges of, the Mahama era. The Opposition also falsified its performance, now being exposed, to portray a better performance.
- Sinking Fund and 1st Sovereign Bond
The current government became the main beneficiary of the Mahama government plan of using the new oil flows to the budget to pay down the looming liability on the Ghana’s first 10-year US$750 million Sovereign Bond issued in 2007 and which matured on October 4, 2017.
- Nature of Sovereign Bond(s): As with the Bonds that we continue to issue, Ghana is obliged to make semi-annual “interest-only” payments but (a) repay smaller amounts of the loan itself periodically; or (b) pay the whole (US$750m) when the Bond matures for payment in 2017. From 2007 to 2013, with barely 3 years to maturity, Ghana had not repaid the principal or loan until the Mahama administration decided to set up of the Sinking Fund—as permitted under Article 182 of the 1992 Constitution and Financial Administration Act (replaced by the Public Financial Management Act, 2016 (Act 921).
- Setting up the Sinking Fund: The Sinking Fund (and Contingency Fund) were set up as part of the Resolution of Parliament that approved the Economic Policy of Government in the 2015 Annual Budget. The source of funds is the excess of the PRMA Stabilization Fund after its “capping” to manage debt and setup the Contingency Fund (under Articles 175 and 177 of the 1992 Constitution).
- NDC refinanced and repayment: By the end of 2016, the NDC used the Sinking Fund proceeds and the “buy-back” method of redeeming Bonds from the secondary markets (i.e., Stock Exchange) to repay US$336 million of the US$750 million Bond. It also refinanced US$200m of the face value from the Sovereign Bond issued in 2015—which was used exclusively to refinance domestic and foreign debt.
- NPP used 2016 Sinking Fund to pay final US$200m: On maturity date on October 4, 2017, the NPP used US$200m of the balance left in the Sinking Fund to retire the 2007 Bond. Hence, NPP became a beneficiary to enhanced fiscal (expenditure and debt) space—not hinder it as it likes to portray.
- NDC’s Bond repayment Plan: Table 5 shows how the NDC planned to use the Jubilee Field proceeds flowing to the Stabilization Fund to set up a “principal” or “amortization” plan to retire the Bonds that Ghana continued to issue.
Table 5: NDC Bond repayment plan
- NPP stops repayment plan and changed to roll-overs: In a Statement to Parliament in August 2020, the Minister for Finance conceded that the Sinking Fund was not used to reduce debt 2017. Secondly, even with three (3) oil fields, MOF used only US$238 million to repay Public Debt—implying that the Sinking Fund may have been used to reduce the deficit or finance the budget.
- Sinking Fund and slowdown in rate of growth of Public Debt: As Figure … shows from the 2019 Budget and 2019 Public Debt Management Report, the NDC debt management policies started to reduce the rate at which Ghana was borrowing. This trend started to reverse from 2017, even without the addition of Energy sector arrears and Banking sector bailout costs.
Figure … Rate of Accumulation of Public Debt
- Non-commitment to Stabilization, Sinking Fund and Contingency Funds: In general and with some specificity, it is clear that the current government was not committed to the policies that started to abate our deficit and public debt as well as lend stability to the Budget. It is also necessary to note that the government did not replenish the Contingency Fund proceeds that that was used to complement the payments to Kwame Nkrumah Circle disaster in 2015.
- Stabilization Fund US$250 million COVID-relief: The NPP has become the largest single beneficiary of the Stabilization Fund to date, with the drawdown of approximately US$250m (compared to the NDC’s Ghc250m or US$65m)—most from funds accumulated by the NDC with one (1) oil field.
- PRMA priority was consumption: After the allocation to GNPC, the Annual Budget Funding Amount (ABFA) gets 70 percent, Stabilization Fund follows with 21 percent, and Heritage Fund 9 percent. Clearly, with three (3) oil fields, Ghana should have had more in the Stabilization Fund to meet the COVID-19 crisis.
- Stabilization Fund capping remained in force in 2017: The Minister for Finance was quoted recently as staying that there was no capping in 2017 and, therefore, no use of the Sinking Fund to repay debt. We differ on the point since the 2015 cap remained in force and the excess flows should have gone for debt management (i.e., Sinking Fund) and the Contingency Fund, as required by the PRMA.
- Conclusion—NPP’s consumption expenditure priority
To date, the NPP has been the major beneficiary of the Stabilization Fund and its offshoots, the Sinking Fund and Contingency Fund. as well as GIIF, also an offshoot of the ABFA. the NPP did not consider investment or debt management as priority in the use of the petroleum funds.
On the contrary, its pre-occupation between 2017 and 2018 was to draw down the Stabilization and Heritage Funds to (a) supplement the financing of the budget deficit; and (b) finance consumption expenditure—despite the largest proportion of ABFA going to fund recurrent education (FSHS) expenditure. As noted in Part III, among others, this preference for insatiable consumption and borrowing has brought the nation to a critical point, with the deficit likely to be about 15 percent and public debt about 75 percent by the end of 2020.
- ESLA: Banking and Energy Sector Solutions
- 1st Banking Sector Crisis
- 1st Settlement of Road Arrears
- ESLA Prize
- Non-replenishment of Contingency Fund
- EXIM Bank
- Foreign Exchange Reserves
- No PRMA or VAT allocation to GIIF
- End-2016 Deficit and Ghc5 billion set-off
- End-2016 arrears was overstated
- Alleged consolidation was under Mahama
- Debt was Ghc120 billion, not Ghc122 billion
- GDP Growth: misunderstanding nature of economic crisis
- Exaggeration of Fiscal Consolidation
- Positive forecasts for 2017 onwards
By Seth E. Terkper – Former Minister for Finance