‘Resume oil hedging now’

Business News of Friday, 20 February 2015

Source: Daily Guide

Emmanuel Armah Kofi Buah Min

Government has been asked to quickly resume its oil price hedging programme, which was discontinued in 2013 to protect the country’s oil revenues and foster price stability.

The Institute of Fiscal Studies (IFS), which gave the advice, said managers of the country’s economy also need to undertake the required adjustments to ensure that the fiscal consolidation objectives were not undermined.

“For nearly seven months now since crude oil prices began to tumble on the international market, no concrete step has been taken by government to mitigate the associated risks.

“The economy might therefore not be able to withstand the impact of the looming external shock, which could exacerbate macro-economic instability and further slow down economic growth.”

The Institute also noted that the cedi could be negatively affected by the decline in oil prices with evidential weak forex inflows and lower corporate tax receipts.

“This may have the potential to significantly affect the country’s balance of payments and foreign reserves. The effects on individuals and businesses may also be devastating.”

On August 19, 2014, the Deputy Minister of Energy in-charge of Petroleum, disclosed that Government would from September 2014 introduce quarterly hedging once Cabinet had approved a memorandum to that effect.

“This appears strange in view of the fact that a National Petroleum Risk Management Committee had been set up by Cabinet and approved by parliament some four years ago. In any case, nothing happened until mid-January 2015 when the Minister of Finance also announced that the government was to resume hedging of the country’s crude oil imports and exports.

“What is puzzling to many Ghanaians is why the government is dragging its feet in such an important matter and is holding back from resuming the hedging programme, which was deemed to be very successful between 2010 and 2012.”

In 2013 when oil hedging was discontinued by government, oil was selling at about $100 per barrel and rose to $115 in July 2014.

However, by the second week of January, the price had dropped dramatically to below $50 per barrel.

Meanwhile, a benchmark oil price of $99.38 per barrel had been factored in the 2015 national budget.

It is clear that the estimated oil revenue this year cannot be realised.

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