New oil discoveries in Ghana make revenue management a priority for the government

Energy sector revenue management has been a legislative priority for the Ghanaian government since 2007, when commercial quantities of oil were discovered offshore. The government started with a revenue management act, called the Petroleum Revenue Management Act of 2011 (PRMA). The PRMA is likely to be amended, given the difficulties involved in budgeting for it. According to Minister of Finance and Economic Planning Seth Terkper, amendments to the plan for parliamentarians to consider would be forthcoming, likely in 2015.

The PRMA was designed to channel revenue from the energy sector into defined categories for spending and saving. It mandates that 70% of revenue go to government spending on an ongoing basis, via the Ghana National Petroleum Corporation or for general budgeting purposes, and allows for collateralisation of this type of revenue to aid in government borrowing. The rest is earmarked for use later, and split into two specific funds. The Stabilisation Fund gets 21% of total revenue and can be drawn upon when oil prices fall, to lower deficit spending – that has been done recently to compensate for crude’s price plunge since July 2014, for example. The Heritage Fund is the equivalent of Ghana’s sovereign wealth fund, meant for long-term investing and spending in future generations. It receives 9% of total revenue.

Expected Revenues

The law provides specifics on how the Ministry of Finance and Economic Planning (MOFEP) can calculate expected oil revenues. They are to be based on a seven-year moving average price. Given the current volatile market price for crude – which has swung from a peak of $132.72 in July 2008 for spot trading of Brent crude to $46.58 in August 2015 – the rule has resulted in an inaccurate budgeting assumption.

March 2015 saw the delivery of an amended budget, following proposals from MOFEP to adjust the formula in light of the current bear market for oil. Terkper announced the proposed amendment to the PRMA at the same time, which, he told Parliament, would allow for greater discretion in making budgeting assumptions.

New Funds

Another change made was to cap the Stabilisation Fund at $250m, as part of the 2014 budget approval process. Some of the money transferred out of it was used to establish two new accounts, according to MOFEP, namely a contingency fund and a debt servicing account.

At the end of 2014 the book value of the Stabilisation Fund was $286.64m, implying further drawdowns, according to the 2014 Reconciliation Report on the Petroleum Holding Fund submitted by the minister to parliament in March 2015. That figure was down from $319m at the end of 2013. The Ghana Heritage Fund almost doubled in 2014, rising to $248.9m from $128.1m at the end of 2013. Of that total, $4.3m came from investment income. Taken together, a total of $388.2m was transferred to the funds in 2014.

Future Risk

The changes have drawn mixed reviews. As part of its programme of fiscal support and structural reform, the IMF has agreed to work with Ghana on drafting the changes to provide greater budgeting flexibility. However, the Natural Resource Governance Institute (NGRI), a UK-based resources-focused watchdog, has warned that although the measure may help in budgeting, it could leave room for abuse by future governments when oil prices are high. “There is a risk that these rules will create a level of ambiguity and discretion that will also ultimately undermine the PRMA,” according to NGRI analysis. “Since 2011 the PRMA was much praised across the world, including by NRGI, for its role in creating a clear and consistent strategy for saving and spending of petroleum revenues. It is important that this be maintained.”