Unsettled Currents of Restoration: Governing Natural Resources in a pandemic context in Ghana

Learning from history?
In Christopher D. Wraight’s 2011 book on trade and aid he summarised vividly the ethics of international charity that got the British people considering carefully its aid delivery mechanism in the 2000s. Silent Spring by Rachel Carson appealed to an American audience that shook the foundation of U.S. policy on use of pesticides in the early 60s and inspired the creation of the Environmental Protection Agency. Though not published, Covid-19 virus is more or less a ‘book’ whose unforgiving impact the world has so easily felt its whack. Shuttered economies; broken dreams and new questions of globalisation that many have asked but not had answers are visibly troubling. Around the world from Asia to Europe; Africa to the Americas, these effects are all remnants of the pandemic which by far have been the most talked about and reported on in the media. But beyond the veil of socio-economic disruptions are many other unheard realities which I attempt to piece together from Ghana.
Why we went back to the IMF: Public Financial Management indiscipline or Covid-19?
‘…never again will we go back to the IMF…’ was a pithy message from the President of Ghana a few months ago when Ghana’s last tranche of the Extended Credit Facility was disbursed, and Article IV review completed. One would have thought this was an epitaph on loans from the IMF which had been grounded deeply in our economic history and I daresay has become ‘our friend’! But before many could digest this message came a new request for one of the biggest the IMF has transacted with Ghana: $1 billion! Covid-19 was to blame for this and many would say it is true. But it is important to ask questions of why the appetite to reach out to the IMF every now and then?
It is economically rational to lend money or even give freely when one has more but in defiance of this logic, many African countries tow a different path – the ‘arm-chair’ path of attracting foreign direct investments. If it is not the IMF supporting a recovery from fiscal downturn, it is an effort of such countries, to grant excessive and unnecessary tax concessions which are tantamount to issuing a blank cheque to development partners resulting mostly in crippled economies. Whichever way this is looked at, the shared and related aim is often to restore investor confidence and to stimulate foreign direct investment. Many studies concur on the correlation between reduction in statutory tax and foreign direct investment. However, such concessions when not backed by rigorous domestic resource mobilisation become problematic. A typical case is Ghana for which reason we have had to visit the IMF for at least 16 times for help. Government of Ghana has decried the rise in tax concessions, granted by itself, from 0.9% of GDP in 2010 and to a whopping 2.6% of GDP seven years later. At the same time, its rate of collection is abysmal. Assessed in relation to GDP of its peers in Africa, Ghana collects relatively low tax – about 13% of GDP below the average of its peers.

*Data unavailable for Africa average before 2008.
Author’s construct using data from OECD, 2019
It is fair to say that with little home-based revenue sources; the economy thus rides on a turbulent tide and would easily succumb to any little shocks. The obvious reality would thus be to turn to loans from lenders to finance critical development needs and the IMF comes in handy. While covid-19 shows a rather different situation for many countries because of the scale of the impact, many countries felt its whack more and it would make sense to reference the overall unsound fiscal discipline and limited domestic resources as one of the key reasons for this scale of impact aside the slowdown of industrial activity, slump of oil prices and many others. This impact in turn influenced the amount of funds applied for and approved by the IMF as can be seen below.

Why our best bet: natural resources could not help the economy withstand the pandemic
A year after Ghana’s first commercial export of petroleum in 2010, if anything was not certain it was at least clear that the newly-enacted petroleum revenue management law (coming into force in 2011) had measures to protect the economy from global shifts in oil prices. The law, admired as one of the best on the African continent, provided for a stabilisation fund into which a portion of oil revenues are put to guard against future revenue shortfalls in case oil prices were lower than projected. Proving its usefulness, in the 1st quarter of 2020 when covid-19 struck, the government approved a withdrawal of at least $200 million from the fund as the world battled a record dip in oil prices way below $12 per barrel. Now given the scale of impact of the pandemic on the economy – about 2.5% of GDP – more money was required, and the only option was to look to the contingency fund, a constitutional provision! But there was a problem! While the petroleum revenue management law was expected to be a cash cow of this fund, government barely implemented this provision thus raising the question: do we have to let the needs of today make us lose focus of the future? Thus, the state had an empty piggy bank which effectively was reduced to an insurance without premium. Since 2011 there is evidence of only two-year allocations to the contingency fund, in 2014 and in 2015 as can be seen from the table below. According to ACEP, an energy think tank and Oxfam partner, a budgetary allocation of GHS50 million (approx. $9m) and GHS177 million (approx. $30m) were made to the contingency fund in 2019 and 2020 but there is currently no evidence of actual disbursements. Certainly, this trend is worrying and if price control measures and fiscal contingency options are a force to go by in the management of natural resource rents, now is the time to ask questions.

Author’s construct (2020) using Ghana Ministry of Finance data.
After having mined solid minerals for centuries, the mining sector is even more exposed to the dangers of price fluctuations. Unlike with the petroleum sector, regardless of the challenges, the mining sector is at the mercy of externalities hinged on price of for example gold which is one of Ghana’s biggest foreign exchange earners as biggest producer in Africa. Many arguments have been made for replicating Ghana’s petroleum revenue management laws in the mining sector for a variety of reasons. While others advocate for the benefits that such a law would have including enhanced fiscal controls for price fluctuations; there is drift of perspective positing transparency and accountability through citizen oversight. Through whichever lens this is looked at, the urgency for this law is even more needful with current pandemic given its impact on petroleum revenues. This call is also a reminder to the government of Ghana to respond to its campaign promise nearly four years ago, to deliver on this law. What is also important to note is that three main mining companies responsible for a combined minimum of 70% of mining tax revenues in Ghana, Newmont Ghana Limited, AngloGold Ashanti and Goldfields all hold licences that allow them pay royalties based on gold prices rather than the mandatory 5% flat rate sanctioned by law. With lower prices such as has happened in the petroleum sector, it follows logically then that less royalty would be received by the government should a pandemic trigger such developments. For petroleum sector with price controls, though not robust, the price slump was pervasive enough and responsible for losses amounting no less than a billion dollars. The big question here is, with non-existent price controls, what would have been the fate of the mining sector?
Momentum shift: Pressing the reset button and future outlook
A trillion Euros (€3 trillion) package announced in May 2020 is what the European economic bloc, the EU, recently agreed as a relief for its member states as Covid-19 continues to test the limits of economies around the world. Across the Atlantic to the United States a record $2 trillion was approved by lawmakers for same reasons. For Ghana bailouts may be necessary but that is just immediate and short-term especially with about 2.5% of GDP impacted negatively by the pandemic. For this reason, a gaze over the long-term is critical to address the systemic issues.
Fiscal smoothing and insurance protect against future uncertainties and for the extractives industry price hedging is one of the best bets in a sector where prices of the commodity swing almost every now and then. The past few months witnessed a global price slump in crude oil to an all-time negative low. For countries like Mexico however, this shock did not affect them because their price control insurance worked quite reasonably for them. In a Bloomberg report, the country is set to cash in about $6.2 billion in its price insurance of at $49 per barrel at a time prices were way around single digits. Quite a strategic insurance programme has paid off and can be adopted by many other countries. Ghana’s attempt at hedging particularly in the petroleum downstream, until is abrogation in 2013, was carried through a strategic risk management policy. It may not have performed the way industry players expected but there is room for reform. Reactivating this and thoroughly assessing a price insurance programme in the oil sector and expanding this to the minerals sector at government level could guarantee an insulation from the global market swings and externalities. For mining, the entry point could be a mineral revenue management law similar to its petroleum revenue management with some contingencies designed to
By now it is no news that no country that is successful today did so without galvanising tax revenues. While Ghana is at this, there is need to streamline all its tax revenues particularly from the extractives sector by scaling back its grant of tax reliefs which now cost the economy about 2.6% of GDP. Further Ghana needs to fast-track the passage of its exemptions bill which will give legal backing to controls of tax exemptions. It is also critical that audits of cost are given serious attention. In an Oxfam report undertaken in 2018, cost audits were revealed as crucial in the revenue generation chain in Ghana, Kenya and Peru however there was need, in the case of Ghana, to carry out timely assessments of cost and subsequent collection of revenues due the government.
Ghana should pay attention to the findings of the Ghana Extractive Industries Transparency Initiative & annual Auditor General’s reports and speedily retrieve all funds owed the state through misappropriations by public officers; quasi-government institutions etc; non-payment of dividends due to the state by mining and oil companies etc. A catalogue of these are glaring in the statutory audits conducted by the supreme audit institutions and other oversight bodies whose findings have hardly been given state prosecutorial attention.
In its seventh and eighth reviews in April 2019 under the Extended Credit Facility programme in Ghana, the IMF highlighted a fiscal risk in the energy sector particularly for loss-making enterprises in the value chain. It is imperative that urgent measures are taken to rationalize efficiency and switch power sources from Heavy Fuel Oils to domestic gas in the operations of these power plants. The proposal based on evidence gathered by ACEP, is for a renegotiation of agreements to halt LNG imports and to cream off cash from this to support a programme that would minimize state debt on crude and LNG imports using gas next door.
Conclusion
No country can end pandemics, and this is a well-known fact. What countries can do however is to build and maintain an economy that will not only withstand the shocks long enough to bounce back alive, but to transform based on fiscal prudence and management of the backbone of its economic basket. For natural resource dependent countries, the daily discipline in management of this backbone is even more important given its susceptibility to global price pressure. This remains unresolved but is a golden key to unlocking the real potential of natural resources.