19 January 2017

IFS wants government to hedge oil prices


The Institute of Fiscal Studies (IFS) says government should consider hedging oil exports against price volatilities. The IFS believes a decision to lock up the price of the nation’s share of crude oil outputs from the Jubilee Field and the TEN Project will ensure that revenue projections from petroleum are not unduly hampered by a global fall in prices of the commodity.

It will also help shield the budget against future revenue shortfalls occasioned by drop in prices of crude oil, the Executive Director of the institute, Prof. Newman Kusi, said in Accra.

Last year, the nation suffered from a drop in oil revenue due to the failure to hedge against world market price volatilities

“If we want to hedge, then the new government must take action on it immediately. The price is currently hovering around US$42 (per a barrel of oil) and the tendency for the price to rise above US$60 per barrel is not real. But if you look at the trend, it is coming up again,” he said at a news conference.

“We lost the opportunity to maximise the export revenue from hedging, but we can still hedge because we don’t know the direction of the price in future,” he explained.

Addressing the media after the institute’s press briefing to announce its economic policy priorities for the new government, Prof. Kusi said although the country failed to maximise its export revenue from hedging last year, it was not late for the new government to consider resuming it.

Commenting on concerns that the hedging programme would cost the country, Professor Kusi said the successful implementation by the Jubilee Partners gave credence to the fact that it would only provide a cushion to fall on whenever oil prices drop.

“Even our partners in the fields – Tullow and Kosmos – have hedged their oil prices to 2018. If our partners have hedged, why do we sit as a country and say it is costly for us? It just serves as insurance,” he said.

Explaining further, the executive director of the IFS said: “If you take a life insurance and you pay a premium, it doesn’t mean you are going to die tomorrow.”

“But you take it with the view that should the unexpected happen, there is something you can fall on,” he said.

Oil to drive growth

According to a World Bank prediction, economic growth in 2017 is expected to be largely influenced by the oil sector.

Although the IFS is not ready with its economic outlook for the year, the Institute says its forecasts will not differ from that of the World Bank, especially on the increased oil production, with the coming on stream of the Sankofa-Gye-Nyame and the Tweneboa Enyera Ntomme (TEN) fields. The Ten fields have already started producing, and the Sankofa field is expected to come later this year.

Tackling corruption

A Senior Research Fellow at the IFS, Dr John Kwakye, said corruption had become a major problem confronting the country, which has negative effects on the country’s politics, governance, the economy and society at large.

The institute is, therefore, proposing that the new government must demonstrate a strong commitment to deal decisively with all forms of corrupt practices, irrespective of the status of the offender.

“Establish an anti-corruption commission to be manned by eminent persons with proven integrity, who should be given unfettered independence and authority to deal with all acts of corruption,” he said.

He also urged government to ensure the early passage of the Right to Information Bill to promote open, transparent and accountable governance.


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