COVID-19: ACEP Predicts Drop in Oil Revenue

A huge drop in the government of Ghana’s projected revenue for 2020 has been predicted by the Africa Centre for Energy Policy (ACEP)

The prediction is due to the sudden oil price war between Russia and Saudi Arabia which has caused a global drop in oil prices of about 30% and the outbreak of the novel coronavirus.

A press statement signed by the Executive Director of ACEP, Mr. Benjamin Boakye, indicates that the government had projected to receive $1.567 billion from oil revenues, anchored on a price estimate of $62.61 per barrel.

However, the price on the international market, which was $66.25 per barrel at the start of the New Year, has fallen abruptly to $26 per barrel as of Saturday, March 21, 2020. This fall in oil price is linked with The outbreak of COVID-19 which is a key contributing factor that troubles the oil industry as a result of the shut down of some cities and countries and hence affecting the global economic growth including a reduction in demand for oil, therefore, creating excess oil supply.

Given the current global economic condition due to the effects of COVID-19, and Russia's mission to sustain oil price below the marginal cost of shale production, oil price recovery is expected to be in the region of $45 per barrel by the end of 2020. Therefore, the likely average oil price is estimated to be about $40 per barrel for the year.

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What are the implications for Ghana?

In the case of Ghana, based on the average price prediction of $40 per barrel, the receivables from oil could drop to $743 million, a shortfall of about 53%.

This has severe implications for this year’s budget, particularly on physical infrastructure and debt servicing. In the 2020 budget, Ghana’s infrastructure development programme is heavily dependent on oil revenues; about 80% of the government’s domestic revenue for its capital budget was to be sourced from the Annual Budget Funding Amount (ABFA).

ACEP’s estimate shows that maximum allocation to the ABFA for the year in line with the Petroleum Revenue Management Act (PRMA) will significantly drop from $761 million to about $273 million representing a shortfall of about 64%. The Ghana Stabilisation Fund (GSF) established by the PRMA cannot diminish the impact of this shortfall of about $488 million as there will be an outstanding balance of about $300 million. This is because the maximum withdrawal from the GSF compliance with the PRMA will be about $243 million. Though this provides support and reduces the price shock on the ABFA component of the budget, the inadequacy of the GSF to balance the entire deficit exposes the failure of the capped balance of about $300 million to provide enough support to the budget in periods of a dramatic drop in oil price as being experienced currently.

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Recommended actions provided by ACEP

  1. In Africa, the effect of the COVID-19 outbreak could be harsh for emerging SMEs and industries that are struggling to compete in the global space. Increased unemployment as a result of layoffs on the back of the pandemic is possible to occur. In a low oil price era, the temptation for many countries to increase taxes on downstream consumption to balance the revenue losses upstream will be high. But when this happens, it will be injurious to many businesses in Africa, particularly in the face of inadequate incentives and stimulus compared to the developed countries. Full transmission of the lower price of oil is therefore required for businesses and consumers in general to boost economic activity. This minimizes production and service delivery costs to reduce the burden on consumers.
  2. A new budget that accounts for the extraordinary drop in oil prices is required for oil-producing countries in Africa. Algeria has already recognised this fact and is preparing a supplementary budget that will help manage the effects of low oil prices. This also recognises that a mid-term budget will be too late for many countries to accommodate the full effect of oil price drop and the impacts of COVID-19 outbreak on the national budget.
  3. In the future, governments must implement significant countercyclical mechanisms. An option will be for governments to have stabilisation funds with an adequate buffer that is capable of smoothening significant shortfalls in the budget. Also, hedging portions of oil outputs will minimise the impacts of oil price volatility on national budgets.