Petroleum deregulation and the social mitigating measures

Tue, 8 Aug 2006 Source: Hayford, Kwesi Atta-Krufi

Petroleum deregulation and the social mitigating measures in Ghana - A stitch in time by the government…

The recent petroleum price increases, the abolishment of the 15% ad-valorem tax and the subsequent reduction in the prices has generated a debate in Ghana as to the role or otherwise of the government of Ghana when it comes to fixing of petroleum prices. What is without doubt in Ghana is the fact that as a non-oil producing country Ghana cannot afford to sell petroleum products below the soaring world price. What has raised the debate is the fact that government was able to create a situation for the price to come down by about 2000 cedis on average. This has sparked a credit taking campaign by the CJA, the NDC and a section of the NPP to the effect that they managed to put pressure on the government to reduce the prices. It has even prompted some members of the government to also come out with statements that the government is a “listening government”. the question I want to pose here is who is responsible for the price reduction. Is it the government’s action in suo motu or pressure from any group?

The aim of this paper is to explain the rationale behind the abolishment of the 15% valorem tax, further explain the petroleum deregulation policy by the NPP government and the measures that the government has put in place to assist in the social cost of adjustment. The paper will also trace oil price tracking from as far back as 2000 and a statement then by the former President Rawlings on the need to face realities

First of all in the 2006 main budget the government announced revenue rationalization and enhancement measures and this was in the form of a comprehensive programme to rationalise the excise tax regime in the country. What has actually taken place to effect some reduction in the petroleum product prices is the implementation of this rationalization enhancement measure where the government has abolished the imposition of a 15% excise duty on prices called the ad-valorem tax created by NDC 1998. In 1998 crude oil price per barrel was $10. The NDC government budgeted $25 per barrel and introduced the 15% levy to cream off the windfall. This tax, which was similar to VAT increased with petroleum price increases this making the indicative ex-pump price even higher. The sense in abolishing this tax was that in addition to it, there was another Excise Duty Specific which together with the former was pushing the tax to 25%. The abolishment of the ad-valorem tax means therefore that we now have only one excise duty, thus reducing the indicative ex-pump price by about 2000 cedis. Thus the credit taking actions by any group, be it political or pseudo-political is in fact unfounded. The government had a clear intention form the budget to abolish this tax and this is what is has rightly done.

The need to deregulate the petroleum sector was announced by Ex-President Rawlings in 2000. In a report by the Daily Graphic dated June 26, 2000, President Rawlings was quoted in an address at a durbar of ACDR activists in Kumasi as saying “government cannot subsidize fuel if it is to carry out development programmes”. He warned that unless the nation faces the reality and adjusts the prices of petroleum products it could face grim periods [source Daily Graphic 26/6/00 p.1] In the March 4, 2005 edition of Daily Telegraph, the acting secretary general of OPEC, Adnan Shihab-Eldin warned that the price could rise up to $80 per barrel in the next two years. Again in the June 6, 2006 edition of Daily Graphic, a Saudi minister warned that the price could rise three-fold if Iran was attacked. Price then was $70 per barrel. All these reports were adequate warnings to the government to act before it was too late.

In the main budget of 2005, the government rightly announced its intention of deregulating the petroleum sector to free budgetary resources, allow it to cut down on borrowing and increase allocation to vital resources. The government as a result put together the National Petroleum Agency (NPA) to regulate the private sector who now assume the role of petroleum service providers. As the government freed itself from the petroleum sector, the resources which were hitherto used to subsidize the petroleum products were channelled into priority sectors including health, education, agriculture and rural development. The government used the existing pricing formula that existed from February 2005 to re-align prices and as a starting point for the NPA to regulate.

The government was always mindful of the hardships which were likely to arise as a result of the full implementation of the deregulating policy when the full extent of the price increases hits the pumps. As a result certain measures were put in place to support poor households who were likely to be hit most by these hardships. The government therefore put in place a Social Impact Mitigating Levy to raise tax revenue from the prices to fund the Metro Mass Transport, Capitation Grants in schools, the School Feeding Programme, Public sector housing, tax relief and scholarships for cocoa farmers’ wards. With the abolishment of the 15% ad-valorem tax, there is a call from a section of the NDC for the Social Impact Mitigating Levy to be abolished as well. This seems to me to be unnecessary politicization of an issue on which Ghana’s infrastructural development hinges. As a nation can we afford to withdraw a source of funding for mass transportation, school feeding or capitation grant which as materialised the FCUBE in Ghana?

We may at this juncture look at other levies on petroleum product prices and consider whether it may be prudent to abolish them in order to help adjust the prices further down. First we need to look at the Debt Recovery Fund Levy. This levy raises revenue to service our national debts, something we cannot afford to neglect. The next is the Road Fund Levy. This levy raises revenue for road constructions and repairs and can we as a nation stifle the source for such vital infrastructural development? The next is the Exploration Levy which goes to assist the GNPC in its efforts to explore for oil, an exercise, if successful, will help us end all this deregulation and all its impacts. Indeed this close look indicates that the only margin for adjustment was the ad-valorem excise duty of 15%.

Between May 3 and July 20, 2006 the ex-refinery price of premium rose from 4467.42 cedis per litre to 5181.95 cedis a rise of about 20%. Even with the deregulation policy, the ex-refinery prices are being determined on monthly basis while oil prices increase almost on daily basis. In UK, USA and elsewhere, price is monitored and adjusted on daily basis thus where a daily adjustment requires reduction, it is rightly so done. However when it requires increment, it is so rightly done. The impact is little because the increases per day are minimal compared to monthly adjustments. In Ghana and with monthly adjustment, the impact tends to be greater thus invariably accusing hands are pointed to the government who has no say in the adjustment. It is the writer’s view that the adjustment should be on daily or consignment basis so that the impact is minimal and affordable

It amazes me sometimes when one looks at the graph on the economic trends compared with the petroleum price. Whereas the latter is ascending, the former as represented in interest rates and inflation are descending. It defies logic except that the cautious handling of the fiscal aspects of the economy is the reason for these trends.

It is my conclusion that the recent decision by the government to abolish the ad-valorem tax was a bold one bit even bolder is the decision to deregulate the petroleum sector, a stitch in time which is likely to save nine. The NPA should take a further step in monitoring prices on shorter terms as the monthly monitoring means the impact is often too high. Of course as a nation we have come a long way from annual monitoring to monthly one. We are still on a journey.

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Columnist: Hayford, Kwesi Atta-Krufi