IFS commends government’s hedging plans

Fiscal policy think-tank, the Institute for Fiscal Studies (IFS), has commended plans by government to hedge the country’s oil imports as part of moves to ensure some form of price stability.

Speaking at a press conference in Accra, Prof. Newman Kusi, Executive Director of the institute, said the development is a step in the right direction, given that hedging provides an insurance to mitigate the adverse impacts of oil price volatility.

“Without an oil hedging programme, the country stands to lose foreign exchange earnings from exports when oil prices drop on the world market.

“Likewise, when oil prices increase, 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,” Prof. Kusi added.

The Executive Director of policy think-tank however maintained that hedging is an insurance instrument used to buy protection against risks, and not a gamble for futuristic gain.

History of hedging

In March 2010, after the country had built capacity in commodity risk management – in collaboration with one of the world’s reputable banks, Goldman Sachs – government implemented a Commodity Risk Management Policy to help protect the economy from volatilities in commodity prices.

In line with the policy, a National Risk Management Committee was established and charged with the responsibility of hedging Ghana’s oil imports and exports through ‘call’ and ‘put’ options, respectively.

Initially, government hedged at a strike price of US$82.50 per barrel on monthly imports of 1,000,000 barrels. In July 2011, this was increased to 2,000,000 barrels of imports per month at an average strike price of US$115 per barrel. The programme proved immensely successful, and by end-2011 the hedging programme’s scope had been expanded to provide 100% cover for Ghana’s oil imports.

The commencement of oil production from the Jubilee Field created a new price risk exposure for the country. To protect the oil revenue and enable it support fiscal stability, the hedging programme’s scope was expanded to include revenues from oil exports through the ‘put’ option. Up to end of the 2011 fiscal year, 100% of the anticipated receipts from crude oil exports were also fully hedged.

Government also started the process of implementing an interest rate hedging programme that was to begin in 2012 and help stabilise interest costs arising from the external credit it had secured – including the China Development Bank US$3billion loan.

However, the country’s hedging programme was abandoned in 2013 – exposing its foreign exchange resources to the vagaries of an unpredictable and often harsh international commodities market.

Meanwhile, Ghana’s Jubilee Partners – Kosmos, Anadarko and Tullow Oil – had insulated themselves from oil price volatilities through active hedging. While Ghana’s crude oil sold for an average price of US$46.13 per barrel on the world market in 2016, Kosmos and Tullow raked in US$73.60 and US$61.70 per barrel, respectively.

“Ghana’s previous experience with hedging points to one key lesson: with a well-designed hedging programme, it is possible to protect the country against volatilities in commodity prices through the ‘call’ and ‘put’ options.

“Since 2015, the IFS has strongly advocated the need for Ghana to re-introduce the petroleum hedging programme to cover both imports and exports and save the country from losing millions in foreign exchange earnings, and also provide stability to the national budget.

“The IFS, therefore, commends government for its plans in this direction. We urge government to consider a comprehensive hedging programme that covers both oil imports and exports, as well as interest rates on public debt,” Prof. Kusi added.