The State of the Energy and Extractive Sectors of Ghana: Critical Reforms Required for Sustainable Economic Recovery
Summary of issues
- The challenges in the energy and extractives sector contribute significantly to the current economic challenges in Ghana. Consequently, efforts at economic recovery may not succeed without addressing the key challenges that plague the sectors.
- The recent increases in petroleum prices send a significant shock to various sectors of the economy because of the over reliance on petroleum prices for transportation and almost nonexistent alternatives. Therefore, the government is required within its fiscal constraints to critically examine further the taxes and margins to lessen the burden on consumers to encourage economic growth.
- The power sector under-recoveries undermine the economic development of the country. For example, in 2020 and 2021, the government’s settlement for the energy sector under-recoveries was over GHS 14 billion (GHS 6.8 billion in 2020, and cedi equivalent of $1.257 billion in 2021).
- The inability to control the under-recoveries undermines the objective of ESLA to address legacy debts. Currently, levies paid under ESLA barely settle coupon payments, transaction and administrative costs. Outstanding bonds to be settled at maturity amounts to about GHS 8.7 billion.
- The limited activity in the upstream oil and gas sector undermines the sector’s contribution to government revenue and general economic growth. The year-on-year decline in production signals the urgent need for policy and regulatory reforms to encourage investment in the sector.
- The National Oil Company’s acquisition of 7% in Jubilee and TEN fields is positive; however, the attempt to hide the stakes (about $300 million cashflows) in a tax haven and outside the Petroleum Revenue Management Act (PRMA) undermines the government’s effort to plug the budget deficit.
- Significant investments in the gas sector are required to convert flared gas to economic value. For example, between 2019 and 2021, about 47 bcf of gas was flared, equivalent to about $300 million in value.
- The uncontrolled focus on Liquified Natural Gas (LNG) imports risks investment attraction in the gas sector to convert flared gas into economic value and the government’s desire to use gas as a transition fuel. Again, price volatility in the LNG market could constrain the management of the power sector debt if tariffs are not frequently adjusted to account for price movements.
- In 2020, the energy sector State Owned Enterprises (SOEs) incurred a loss of about GHS 9.19 billion (accounting for the government’s grant of GHS 6.8 billion to ECG). Institutional inefficiencies (political appointments, bloated staff strength) and the lack of accountability by management and boards contribute significantly to the losses made by the state institutions.
- The new trend of state participation in the mining sector raises significant risks of investing tax revenue, given the horrendous history of state ownership and government participation. In 2020, the government’s exposure through the SOEs was about GHS 21 billion, representing about 30% of Ghana’s domestic revenue, 6% of nominal GDP, and 700% of capital investment in agriculture, education, health, roads, and gender. This situation questions the government’s decision to expand the number of SOEs.