Oil, a natural resource which is supposed to be a blessing has became a curse in several countries and has painted a bleak picture of Africa.
In order not to make Ghana a victim of oil curse, laws have been enacted to make it a blessing in Ghana.
The essence of such laws is to safeguard the oil revenue from the wrong hands and ensure that the unborn generation also benefit from the oil revenue in future.
The Petroleum Revenue Management Act states that petroleum revenue shall be deposited in the petroleum holding fund for subsequent transfers. It states further that Disbursement from the petroleum holding funds shall be made to a national oil company for the purpose of equity financing cost, including advances and carried and participating interest of the republic to the consolidated fund in support of the national budget. This is known as The Annual Budget Funding Amount to the Ghana Petroleum funds, which includes the stabilization fund and the heritage fund.
Interestingly, the Public Interest and Accountability Committee (PIAC) semi annual report shows the following picture:
DISTRIBUTION OF 2016 HALF YEAR PETROLEUM REVENUE
Table 1
ITEM H1 2016 Amount (US$)
Transfer to GNPC 22,769,033.02
o/w Equity Financing Cost 12,046,356.39
o/w Net Carried and Participating Interest 10,722,767.46
GOG Net Receipts for Distribution to ABFA and GPFs 64,379,455.15
o/w ABFA 45,065,618.60
o/w Ghana Petroleum Funds (GPFs) 19,313,836.55
o/w Ghana Stabilization Fund 13,519,685.58
o/w Ghana Heritage Fund 5,794,150.17
TOTAL DISBURSEMENT 87,148,488.17
Source: Public Interest and Accountability Committee Semi Annual Report (January to June 2016)
According to PIAC’s Semi Annual report FOR 201 6 , the petroleum holding fund yielded a combined return on investment of 5.26% (3.08 million) during the first half of the year 2016 with the Ghana Stabilization Fund (GSF) and the Ghana Heritage Fund ( GHF )yielding US$0.438 million (0.33%) and US$2.64 million (4.93%) respectively.
There has been heated argument as to whether such funds should be invested home or abroad.
Investment management process begins with setting your investment objectives: the question we have to ask is what are the objectives of setting up the Heritage fund?
The obvious answer is to provide an endowment to support and secure the development of our future generation when petroleum revenues are depleted.
In this regard, then it is essential that this fund is invested in a long term instrument because the future is in the long term.
The second step in the investment management process is to set up an investment policy, which is simply an asset allocation decision. In some jurisdiction, funds are allocated among major classes of shares, bonds, real estate and money market instruments. In the case of Ghana we find it surprising that the money is invested in one instrument and not diversified?
Table 2
GHANA STABILIZATION FUND ACCOUNT
ITEM AMOUNT (US$)
Opening Book Value (1 January 2016) 177,396,126.85
Receipt during the period 13,519,685.58
Income from investment 438,509.29
Bank charges (2,595.16)
Withdrawal -
Closing book value (30 June 2016) 191,351,726.56
Source: Public Interest and Accountability Committee semi annual report
Table 3
GHANA HERITAGE FUND ACCOUNT
Opening Book Value (1 January 2016) 259,383,472.45
Receipt during the period 5,794,150.97
Income from investment 2,642,823.97
Bank charges (8,833.73)
Closing book value (30 June 2016) 267,811,613.66
Source : Public Interest and Accountability Committee semi annual report semi annual report
According to PIAC’s Report, GPF earned a combined return on investment of 5.26% (3.08 million) between January and June 2016 with GSF contributing US$0.438 million (0.33%) and GHF earning US 2.64 million (4.93%)
MERITS FOR INVESTING THE GPF HOME
Investing the GPS home either on long term securities on the Accra bourse or money market instrument leads to more liquidity and trust in Ghana’s money market instrument and capital market instrument. This will intend boost the confidence level and project the capital market.
Secondly, it is obvious that investing the GPF locally will lead to availability of foreign currency in the country. It is a known fact that when demand for foreign currencies is high and supply of foreign currencies is low the price of such foreign currency rises. It rises because there is a shortage of that foreign currency. So making the GPS available in the country will reduce the rate of depreciation of the cedi against the dollar.
On the other hand, based on figures from the 2017 budget, Ghana’s Fifth Eurobond had a face value of US$750 million with a yield of 9.25 %. The bond was back-end amortizing maturity with a weighted average tenor of 5 years. The principal is to be paid in three installments of US$250 million in September 2020, September 2021 and September 2022.
Boosting local capital market will have led government to borrow about US$490 million from the International Capital Market and this would have earned the heritage fund 9.25% instead of 4.93% saving a variance of 4.32%. The other argument is why should we accept 0.33% and 4.93% where we can get 9.25%?
Thirdly, investing locally truly makes Ghana an independent nation. Independence connotes doing things for yourself and for others younger than you. Independence envisages showing capability to succeed no matter the cost. After 60 years of independence, we have to be capable of investing our own funds and even investing funds of our contemporaries. By that we can make Ghana the hub of financial and capital market in Ghana. Asking another sovereign country to invest our funds is a sign of failure and slavery because it’s obvious the person is paying you less and lending to another party to earn higher returns.
Lastly, opponents who support investing GPFs abroad argues that once the money is invested locally, the investment may go bad. That is not entirely true. On the contrary investing the funds abroad carry risk, no matter how small the risk is, it is still a risk. Once the is risk, the probability that Ghana can lose the entire fund is there. It is better to lose money home than to lose it abroad.
DEMERITS OF INVESTING THE GPF HOME
Firstly, our politicians cannot be trusted with investment of such funds locally. It could lead to situation where ‘politicians could engage in create loot and share’ but at the moment they are no strict laws that regulates and punish politicians and Ghanaians from ransacking government funds. When funds are invested outside it serves as disincentives for such crook politicians from pilfering with our funds meant for the future.
Secondly, the GPF from table 1 is allocated about 22% of PHF. That presupposes that 77.8% is available for government to spend through transfer to GNPC and ABFA. The argument is if government even unable to account for the 77.8%, then why is he interested in the 22%.
The Good book says, to whom much is given, much is expected, if government is unable to account for 77.8% why is he interested in the little left?
Thirdly, Ghana is now part of the international community and hence has adopted the strategy of investing GPF abroad in line with International best practices. Oil production has become curse to some countries in the sub region and the world and has become a blessing to some countries on the other side of the coin.
Lastly, opponents have argued that investing the GPF locally will lead to erosion of funds because inflation and exchange rate depreciation might erode all the gains. For instance, the Ghana cedi recorded cumulative depreciation of 9.6 percent and 5.3 percent against the US dollar and the euro, respectively but in 2015, the Ghana cedi depreciated against the dollar, euro and the pound by 16.1 percent, 5.1 percent and 12.6 percent.
ASSESSING THE OPPORTUNITY COST OF INVESTING GHANA PETROLEUM FUNDS ABROAD
Analysis of the opportunity cost of investing (stabilization fund) an amount of USD 13,519,685.58 on the Ghanaian Financial Market specifically in a risk free instrument as against investing in other sectors at a rate of 0.33%.
From table 2, the stabilization fund yielded a return on investment of 0.33% (438,509.29) but investing same amount in risk free instrument would have yielded real rate of return of 5.84% as at the end of June 2016 as shown by table 4.
Other interesting facts about investing such huge fund in local risk free instrument are as follows:
• Difference between the 2 markets earnings of GH297,986.02
• Difference between the 2 markets as a percentage of earnings from foreign market of 340.25%
• Difference between the 2 markets as a percentage of value converted as at June 2016 OF 77.29%
Table 4
Source: field research
An Analysis of investing the Heritage Fund of USD 5,794,150.97 below on the foreign Financial Market at annual rate of 4.93% as against investment on the Ghanaian Financial Market specifically risk free instrument.
.From table 3, the Heritage fund yielded a return on investment of 4.933% (2,642,823.97) but investing same amount in risk free instrument would have yielded real rate of return of 5.84% as at the end of June 2016 as shown by table 5
Other interesting fact about investing such huge fund in local risk free instrument is as follows:
• Difference between the 2 markets earnings of GH611,205.17
• Difference between the 2 markets as a percentage of earnings from foreign market of 94.21%
• Difference between the 2 markets as a percentage of value converted as at June 2016 of 1728.41%
Table 5
Source: field research
SOWING THE SEEDS FOR GROWTH AND JOBS
The theme for the 2017 budget was ‘sowing the seed for growth and jobs’ I am not too old but I have not seen an instance where seeds were sowed abroad and generated fruits or developed home.
Conclusion
Several experts have argued about where to save funds meant for future generation but i will plead with people who will either counter my argument or otherwise to back such arguement with figures to make people really understand what is happening.
BY: YAW OHEMENG KYEI
COLUMNIST, GHANA BUSINESS AND FINANCE MAGAZINE
yawohemengk@yahoo.com/0242717524
