IFS advocates comprehensive hedging plan for Ghana’s oil
The Institute of Fiscal Studies (IFS) has urged government to consider a comprehensive hedging programme that would cover imports and exports of Ghana’s petroleum resources as well as interest rates on public debt.
The hedging will provide insurance for the country against oil price and exchange rate volatilities.
Speaking at a press conference organised by the Institute on plans announced by government to hedge Ghana’s oil imports, Professor Newman Kusi, the Executive Director of IFS, said the Institute welcomed government’s plans, especially as it had been advocating for a hedging programme since 2015.
“Without an oil hedging programme the country stands to lose foreign exchange earnings from exports when oil price drops on the world market.
Likewise when oil price increases, the country suffers through increases in its oil import bill. Both scenarios are undesirable and can be mitigated by an effective hedging programme to ensure stability in fiscal management,” he said.
Prof. Kusi said Ghana had been without a hedging programme since it suspended a previous one in 2013, although its partners in the Jubilee field – KOSMOS, Anadarko and Tullow – had insulated themselves from the effects of price volatilities through active hedging; a move which was not very prudent.
“… While Ghana’s crude oil sold for an average price of $46.13 per barrel on the world market in 2016, KOSMOS and Tullow raked in $73.60 and $61.70 per barrel respectively,” he said.
Prof. Kusi said government must not sit back unconcerned but take active interest in hedging against any risk that may lead to declines in the country’s oil production and export revenues.
Ghana’s previous experience with hedging showed that with a well-designed hedging programme, it was possible to protect the country against volatilities in commodity prices through the “call and put” options where government would hedge the price of its imports and exports at a strike price.
In cases of price hikes, the insurance company will then pay government the difference between the strike price and the world market price.
Prof. Kusi said hedging imports would help to ensure stability in prices on the domestic front as well since government would not have to pass on the increases in price to consumers.
The same would apply to a hedging programme for interest rates on public debt.
On how much it would cost the country to undertake such a hedging programme, the IFS noted that it did not have the figures as government would have to negotiate those terms with organisations that would provide the cover.
“It will depend on the negotiations and the movement; what is happening to the price and production levels that will determine the cost,” he said.
Source: GNA