Fuel Price Hikes: IMF policies begin to bite

The growing economic hardship is set to worsen as government sets out to implement the full-blown International Monetary Fund (IMF) three-year bailout programme by increasing petroleum prices and interest rates in one week.

A 100 basis point interest rate rise by the Bank of Ghana on Wednesday to 22% and the 9% increase in the prices of petroleum products are to demonstrate to the IMF that government is committed to fully implementing the three-year programme.

Businesses which are wailing about the high cost of doing business have just been hit by an increase in the cost of capital, in addition to buying diesel, also at a new price, to power their gen-sets in this era of rolling power cuts.

Government has received the first tranche of the $114 million out of the $500 million to be disbursed this year and has to show commitment to implement the programme so that the IMF can release further funding in the third quarter.

April inflation is at 16.8%, but under the IMF programme, inflation is to be reduced to 12% by end-2015.

The cedi has fallen more than 17% this year on top of a 31% drop last year.

Central Bank governor Dr Henry Kofi Wampah is hopeful the 100 basis point interest rate hike would help slow the decline of the cedi, which the IMF projects to hit GH?3.4 but is almost GH?4 towards stability and boost the credibility of the Central Bank.

For him, the decision was taken in part to bolster reserves and minimise the impact from an expected U.S. rate hike later in the year.

Economic growth in Ghana, once a favourite of investors in Africa, has been slowed by fiscal crisis that forced the government to seek IMF support and undermined its reputation abroad for financial management.

But it is the energy crisis that has crippled businesses at home and angered ordinary Ghanaians. Currently, the electricity company provides power for 12 hours out of a 36-hour cycle.

Under the IMF programme, subsidies for utilities and petroleum products are to be fully eliminated through strict implementation of tariff and price adjustment mechanisms (quarterly and bi-weekly adjustments for utility tariffs and petroleum products prices respectively).

Therefore, the 9% increase in the prices of petroleum products falls in line with this conditionality in the bailout.

It means a gallon of petrol is going for GH¢15 from yesterday. When crude oil was $115 per barrel, that was the price of petrol. But a barrel of crude is now around $60.

In addition, an adjustment of the Energy Fund Levy on Petroleum Products from Gp0.05 to Gp1.0, part of which would be used to establish the Renewable Energy Fund, is expected to result in increases in the prices of petroleum products.

Also, subsidies on petroleum products, totalling GH¢50 million, are expected to be scrapped as part of the bailout plan.

The scrapping of these subsidies is likely to inch up petroleum prices further for 2015, irrespective of changes in the price of petroleum prices on the international market.

Petrol will be selling at GH¢3.33 per litre, up from the current price of GH¢3.5.

Diesel will also be selling at GH¢3.24 up from the old price of GH¢2.97 per litre.

A kilogramme of LPG is expected to be sold at GH¢2.88 from the old price of GH¢2.64.

MGO Local is also expected to go up from GH¢2.71 to GH¢2.96. Unified petroleum and kerosene for mining firms are expected to go up by 4%.

However, premix fuel and RFO will not see any price adjustments. The last time prices went up was around November 2014. However, on January 1, 2015, the National Petroleum Authority actually reduced prices by 10%, forcing commercial drivers to reduce transport fares by 5%.

It is, however, not clear whether this increment will result in an adjustment in transport fares.

In November last year, government imposed Special Petroleum Tax of 17.5%.