The State of Ghana’s Economic Crisis

Ghana’s inflation and exchange rate crisis is deepening and fears are mounting of a newer, more devastating, phase: a full run on the local currency, the Cedi (GHS), which has year-to-date lost more than 50% of its value on the retail end of the market.

The government’s problem diagnosis and corresponding policy responses so far can be summarized as follows:

  • For slow growth and inflation, blame external factors – COVID-19 and the Russia-Ukraine conflict in particular – for the entire problem, and admit no flaws in policy.
  • For exchange rate depreciation, blame speculators aided by criminal black market operators, and admit no flaws in policy.
  • Nonetheless, raise the policy (interest) rate in order to abate inflationary pressures,
  • Continue to predict near-term improvement based on an imminent IMF deal and the arrival of certain official foreign loans.
  • Catch and jail more tax evaders.

Some of these policies are understandable but taken as a whole they mostly miss the mark.

The True Driver of Inflation

Ghana’s Central Bank has said repeatedly that domestic inflation is currently “generalized” and is not driven primarily by imported inflation. Raising domestic interest rates, as it has done multiple times in recent months to cumulatively reach a 5-year high, to tackle primarily imported inflation would be preposterous.

The key driver of inflation in Ghana is self-evident in fiscal policy. In the first 9 months of this year, the government earned 51.5 billion GHS in income. Despite pledges to cut 30% of discretionary expenditures, it ended up spending nearly 90 billion GHS. This is despite escalating arrears (that is to say refusal to pay many overdue bills). Shut out of international markets, it has resorted to borrowing 41.2 billion GHS to plug the gap (fiscal deficit) and pay interest and principal due on debt.

Because investors have cooled towards government debt, a significant portion of the gap financing has been provided by the Central Bank in various forms. Using the net growth in outstanding stock of government securities on the fixed income market (GFIM) as a gauge of market financing of the government deficit, and taking out the funds plucked from the Petroleum Stabilisation Fund (virtually wiped out now), one can deduce “monetization” in the region of 25 billion GHS. When governments have their central banks create money out of thin air to spend, inflation is always and inevitably the end result.

Blaming the Russia-Ukraine conflict would only add up if Ghana were exceptionally exposed to that region. Fortunately, on many indicators such as trade and investment, Ghana is not even among the top 20 African countries with high levels of exposure. How then is inflation in Ghana the fastest rising in Africa behind only Sudan and Zimbabwe?

Readers will also recall recent decisions by the government to impose certain taxes, particularly the e-Levy, that analysts predicted will be pro-inflationary because of their generalized impact and corrosive effect on confidence.

In short, the government’s inability to rein in the fiscal deficit despite being shut out of the Eurobond market is the driver of Inflation.

Readers who find it difficult to accept this author’s downplaying to secondary status of the very real external contributors to the current difficulties like COVID-19, the US FED rate hikes and the Russia-Ukraine conflict etc. should take cue from the disclosures, reproduced below, made by the government to international investors during its bond issuance in early 2020 before COVID-19 was declared a pandemic.

During the first nine months of 2019, Ghana’s debt stock rose to US$39.2 billion as at 30 September 2019, of which approximately US$19.1 billion comprises domestic debt and approximately US$ 20.1 billion was external. In addition, to the extent the Government faces further challenges in the energy and financial sectors that have not been budgeted for, the Republic may need to raise additional debt to fund such unbudgeted amounts. Debt service (interest and principal repayments) as a percentage of total Government revenue reached 44 per cent. for the year ended 31 December 2018, compared to 47 per cent. in 2017, and the Government expects that debt servicing costs as a percentage of total revenues in 2019 will account for approximately 60 per cent. of total revenues, compared to a budgeted amount of 52.1 per cent.

Extract from the Government of Ghana Global Notes Prospectus (February, 2020)

The government, where it is bound to candour, openly admits that the current economic challenges have been building up well before the current global headwinds.

Speculation vs Hedging

It is very hard to have such high inflation without corresponding exchange rate depreciation because most rational economic actors in the country will seek to find ways to preserve the value of their assets.

Whilst there are multiple factors involved with complex interrelationships, as in the diagram below, the linkage becomes stronger when the effects are so pronounced.

Chart Source: Erdogan Kotil (2020)

Rational economic actors with low confidence in the economy, dealing with the fast erosion of the value of their assets due to inflation, and struggling to invest because of uncertainty in the policy direction, will seek to hedge through the cheapest and most reliable instrument. In shallow markets with limited supply of various derivatives, especially forwards and futures products, the dollar or other hard currencies are the most sensible options.

Such actions must be carefully distinguished from speculation. Speculation primarily involves the use of risk capital to make gains from future shifts in the exchange rate, known in the jargon as “Inter-temporal carry-overs”. Sometimes those speculating are following the herd or trying to find the right bandwagon. But profit is a major intention. In that sense, speculators can actually be stabilizing if they sense that the local currency will rise in the future and start to dump their inventories of foreign currencies forcing the rate to align with the long-run equilibrium rate. Many theorists even go as far as argue that speculation at variance with fundamentals is always loss-making and thus unsustainable.

The government’s focus on speculators is wrongheaded because the conditions exist for the vast majority of rational economic actors to want to hedge against the currency. To focus one’s energies in such circumstances on the smaller number of actors with the financial heft, risk appetite and risk capital to profit from the situation is distracting.

The Black Market & Market Manipulation

Of course, the government should seek to enforce the law against black market operators and use whatever moral suasion and policy tools are at its disposal to discourage destabilizing speculation. The issue is the degree of emphasis.

The black market – destabilizing speculation nexus in Ghana has been tackled entirely at the retail market end by the authorities. They have organized mass arrests of street-level dealers in recent weeks, for instance.

The problem is that this segment of the forex market is an overflow from the forex bureau market. Forex bureau trades are only 1.2 percent of the total forex transaction volume in Ghana, down from roughly 4% seven years ago. The commercial banks mobilise 72.5% of forex and handle 98%+ of mass market sales. As we have explained extensively elsewhere, the commercial banking sector is now too dominant in the forex trade for small upticks in government forex reserves from such limited inflows as the opaque Afreximbank facility and syndicated cocoa loans to make a significant impact. A two billion dollar injection cannot override sentiment in a near $40 billion system if things are going downhill.

The annual Eurobond injections, on the other hand, were critical because in addition to boosting confidence they were also leveraged for a wide range of liquidity swaps that provided buffers and cushions throughout the year buoying the more vital commercial bank-level trade. With those elements sadly out of the picture, the critical focus should be on taking actions, such as discussed later in this essay, that will sustain commercial banking forex sentiment.

Concern about traders from neighboring countries using Ghana as a hub for obtaining dollars is interesting but if such a trend is significant it must correspond to an increased demand for Naira and CFA in Ghana, which would mean that the fundamental driver of rates would be trade not speculation. Put another way, it would mean that Ghana has started importing such large quantities of goods from across the sub-region that forex operators here are willing to offer large volumes of dollars to secure Naira and CFA.

Given Ghana’s overall higher international trade surpluses, any such sub-regional trade dynamics must be marginal.

The Thrust of the Forex Market

That last point is very significant. On the trade front, Ghana is one of the best performing in the region from the perspective of net dollar/forex importation through the trade channel. Since discovering oil and from the onset of the gold boom, Ghana has been piling up trade surpluses. Yet, its overall current account has been under significant pressure. When that happens it means that the hard currency is being repatriated out of the country for reasons other than basic trade.

In Ghana’s case, the real “culprits” are actually not too difficult to find.

Over the last decade, the country has been aggressively liberalizing its capital markets. The government has tried to attract a lot of capital into the country by promising investors that it will be easy to repatriate their profits and principal back home whenever they want. A fair bargain, especially when times are good.

Amidst groundbreaking developments like launching, in 2017, Africa’s largest domestic bond priced in dollars and targeting mostly foreign investors, Ghana has been busy promoting direct equity investments into all sectors of its economy. Much of the growth touted by the government and visible signs of affluence in the capital come from these liberal flows of forex-denominated capital. Many corporate institutions in Ghana became very focused on raising both debt and equity overseas by riding on the broader narrative, pushed in no small part by the government, of fast growth, super high returns, and liberal capital rules.

And the government took a big chunk of the flows. Let’s even put aside the country’s Africa-topping Eurobond issuances (as a percentage of GDP) in the international capital markets. At one point, the country ranked fifth in the world for how high a proportion of its domestic government debt had been bought by foreigners.

On the whole, whether forex or cedi-based, the fixed income market that started life in 2015 with barely 5 billion GHS in trading volume and is now the fastest growing in Africa (total volume heading towards 300 billion GHS) is totally dominated by investors trying to lend at very high rates to the government.

Government-fueled capital inflows mirror considerable growth in overall Foreign Direct Investment (FDI) in Ghana.

Source: UNCTAD Data cited by Standard Bank (2022)

If the government’s own numbers are to be believed, FDI inflows have grown from $20 million in 1991 to $115 million in 2000 to $2.6 billion today. The total FDI stock is a staggering ~75% to ~80% of GDP compared to a continental average of about 25%. Even if we significantly discounts the government’s numbers, the ratio is still intimidating.

Pan-African trends in FDI stock accumlation. Source: UNCTAD (2021)

It is widely accepted that any country with an FDI-stock-to-GDP ratio above 40% is highly vulnerable to global shifts in sentiment about their economy. The equivalent numbers for Cote D’Ivoire, Nigeria, and Kenya, for instance, are 22%, 25%, and 18% respectively.

Because of the pivotal role played by the government in maintaining this entire apparatus of liberalized capital flows, its continued fiscal adventurism, and the damage it has caused to its credit-worthiness, has sent shockwaves throughout all parts of the economy exposed to global investors.

Foreign investors have dumped 10 billion GHS worth of government bonds and bills this year, but the problem is that they can’t find enough dollars to sell more of the 11% of total stock they still hold. Various other investors have been trying to exit other investors early and quite a number have suspended planned projects. The resultant impact on forex flows in Ghana is self-apparent.

To be absolutely clear, the commercial banking forex window, the dominant part of the forex market, is where all this plays out and not in the forex bureaus and street-level black markets.

So long as various major economic actors are making rational decisions about preserving the value of their investments, they will seek to exit Cedi assets with resulting pressure on the exchange rate. The way forward is for the government to truly and proactively restructure its entire spending in order to drastically reduce the fiscal deficit and stop further monetization. A wholesale end to the decrepit and highly corrupt procurement system that have spawned such woeful cases such as Kelni GVG and underhand SOE commercial dealings such as the GNPC-Genser contract is important to convince analysts about the sustainability of such measures.

Racking up arrears rather than removing obligations, as the government has been currently doing, simply prolongs the problem because sooner than later it would be forced to pay the power plants some of their mounting piles of unpaid invoices (one major producer was recently sent a cheque for $5 million as a sop to keep the lights on despite arrears of roughly $150 million); do right by the medicine and food suppliers of the now totally socialized health and education sectors; and face up to its unkept promises to road contractors else watch them pack up and leave like it happened with the botched National Cathedral project.

 The fiscal drag from the casino capitalism days continues to generate negative currents throughout the economy, heavily undermining confidence. If such is allowed to persist, even as inflation and other direct effects multiply, another phase of exchange rate depreciation might open up that will be even less responsive to policy measures.

But what about the IMF deal?

 The IMF Deal

This author and his collaborators have written extensively about the ongoing negotiations between Ghana and the Fund.

The crux of the matter is that when in 2021 the World Bank and the IMF said Ghana’s debt was sustainable but at high risk of distress their assessment was based on several caveats:

  • Not considering energy sector and cocoa sector liabilities, among others.
  • Assuming continued access to borrow from the Eurobond market.
  • Assuming steady cost of borrowing.
  • Trajectory of debt falling under the thresholds in the standard Debt Sustainability Analysis (DSA) framework.

All those caveats no longer hold. By the yardsticks openly used by the IMF, it is apparent that Ghana’s debt is unsustainable going forward under current fiscal policies.

There are therefore only two serious questions:

  • Can public debt be made sustainable without a debt restructuring?
  • Will debt restructuring be made a “prior action”, i.e. prerequisite, before the IMF offers Ghana a deal?

Under newer rules in place since 2016, a country with unsustainable debt seeking an IMF program is not automatically required to restructure their debt. But they must find substantial concessional finance if restructuring is to be avoided.

Chart source: IMF

Given Ghana’s large gross financing needs, recent announcements by the country’s Finance Minister of interest on the part of Germany and France to step in with concessional financing are not sufficient. Ghana is far past the stage where bilateral funding can be arranged quickly enough and in quantities capable of making a difference. This means that debt restructuring is inevitable in the course of an IMF program.

True, there are exceptional access policies that sometimes allow the IMF to continue lending to a country with unsustainable debt. But such facilities are far more likely to be used when the country has already started receiving funds from an IMF facility and continued lending is thus judged to be necessary to safeguard the IMF’s already committed resources.

The “Prior Action” Bogey

The only serious questions then are whether the Fund will make such restructuring a “prior action” and if they did whether the government has the political muscle to commence the process without a hitch before later signing an IMF deal, and then using the new flow of resources and enhanced credibility to address the ramifications of the restructuring program. All prior actions are required to be completed five days before the IMF Board is expected to meet to approve a program with a member state.

Analysts worry about prior actions generally because they would mean delaying the commencement of an IMF program. In the case of a debt restructuring Prior Action, this would mean for certain that the government’s arbitrary November budget timeline would be breached. Simply because even the fastest market-friendly debt restructuring processes, once the roadshow has commenced, take about 3 months to close (example: Uruguay’s 2003 exercise). Considering how much the government has banked its hopes on an IMF deal, such a delay would be considered catastrophic by its dealmakers. And yet, the signs are not too rosy.

Still, Ghana has considerable goodwill at the top of the IMF, especially at the political level. Unlike various countries around the world, its record in recent years has been excellent with the Fund. The country is current on all its IMF payment obligations. Every one of its failures to meet targets set in previous programs (2009 – 2012 and 2015 – 2019) were sanctioned by the IMF itself through the latter’s own waiver procedures. Usually, the Fund does not require prior actions of countries that do not have an adverse record. But there is another factor that can make prior actions necessary notwithstanding excellent relations: country ownership of the planned program.

Where it becomes evident that a country borrower is not itself fully braced to take responsibility for the requirements and consequences of its own reform agenda, on the basis of which it is seeking IMF support, the Fund will normally insist on prior actions as a means of demonstrating real ownership. After all, an IMF program is merely meant to give spine to a domestically developed and steered program. Some countries like Belize have in the past even undertaken their own debt restructuring program without embedding it in an IMF program.

Ghana Hires a Sovereign Debt Restructuring Specialist

It is in the above context that news of Ghana hiring Paris-based Global Sovereign Advisory founded by a former Rothschilds banker is somewhat ominous. I will explain.

In 2020, the IMF cancelled a Malawi program due to the authorities providing false data, a strong sign of lack of sincerity about the country following its own commitments. When Malawi’s new government tried to rebuild ties and secure a new IMF program, it was advised to get a serious sovereign debt consultant on board. So, the country hired the same Global Sovereign Advisory (GSA). GSA then advised Malawi to restructure its debt ahead of a program with the Fund but the country balked. Since then, negotiations with the IMF have slowed. One wonders therefore whether the involvement of certain private sovereign debt specialists only becomes necessary when it is clear that debt restructuring is inevitable.

It is important to bear in mind that Malawi’s debt service to revenue ratio (how much of the government’s money spent on paying off debt) was pegged at 24.9% in 2020 when the country’s debt was judged to be unsustainable and a debt restructuring prior action demanded. Its debt to GDP was also around 60%.

Ghana’s current debt service to revenue ratio is topping 60%. Its debt to GDP is between 85% and 110% (against the 55% threshold advised by the IMF) depending on which debts and arrears one chooses to add. Judged by a continental average of about 16% debt service to revenue ratio and 63% debt to GDP metric, one might be tempted to believe that the involvement of GSA is further evidence of the likelihood of debt restructuring being made a prior action.

Average Debt Service to Revenue Trends in Africa
Source: UNICEF 2021 based on World Bank – IMF data

The counter to that logic, as already hinted, is Ghana’s excellent record with the Fund and the belief that it has a higher debt carrying capacity than countries like Malawi. In those circumstances, the IMF could decide to let the debt restructuring process happen as part of the program rather than as a precondition for one. It will then use the “performance criteria” route to make debt restructuring a condition before the first disbursement of funds under the program.

But if it does not? If it insists on debt restructuring as a Prior Action as it did in the case of Jamaica and is doing in the case of Malawi? What about other difficult prior actions like privatising various debt-prone State-owned enterprises (SOEs), as it once did in Zambia’s case?

Ghana Should Not Set Up the IMF Program to Fail

Ghana’s excellent working relationship with the Bretton Woods institutions has survived many historical ups and downs. Occasionally the country has been judged to be less than candid about its affairs but when caught out, it quickly makes amends and apologises profusely.

It would be a monumental tragedy for the leadership were that track record to be broken as a result of this latest program.

The title of this essay points to the author’s worry, based on what has happened so far, about the government’s capacity to deftly handle the IMF program negotiation and design as part of its efforts to contain the current crisis speedily and with an eye on implementation success.

As clearly argued in an earlier essay, any domestic debt restructuring activity (domestic debt prioritization is essential because it provides 75% of the government’s short to medium-term liquidity relief) shall require tremendous amounts of public goodwill and the full collaboration of the political opposition.

To avoid potential litigation and other confusions (such as may result from any attempts to exempt certain categories of creditors such as households or obstruct certain trades without damaging the Repos markets), new laws are likely to be required to smoothly execute any domestic debt restructuring.

Some readers may not be aware that one of the effects of the securitization models used by the government to ramp up borrowing in recent years has been the nominal transfer of government debt to non-government special purpose vehicles with the debt collateralized (and in some cases overcollateralised) with future tax flows. An investor could conceivably garnish the accounts of the government in the event of any coercive restructuring. One of these special purpose vehicles, ESLA PLC, is even subject to English, rather than Ghanaian, law.

Source: ESLA PLC
Source: Daakye Trust PLC

Unpacking all of this complexity to pass the right legislative measures will require consensus in the effectively hung and fiercely polarized Ghanaian parliament.

To garner credibility with the markets, restructuring would also have to be deep enough else Ghana risks seeing a situation similar to Jamaica’s 2010 to 2013 episodes, where an additional restructuring was required to hit 30% (8.5% of GDP) relief after the first one failed to go far enough (achieving relief equivalent to only only 3.5% of GDP). On top of that, the IMF insisted that all bond holders must be covered (i.e. “100% participation”) before it would approve. Jamaica’s second restructuring case was in such trying circumstances only successful due to very skilled management and a bold decision to create a local creditor committee with unfettered access to all data shared with the IMF in the ensuing part two program.

The simple truth is that the short-term effects of any debt treatment that achieves 30% liquidity relief for the government and bring debt service to GDP ratio below 40% in Ghana would also have substantial effects on liquidity in the funds industry and may well rout the domestic fixed income market by curtailing participation for a while. A government shut from the international markets would now struggle to borrow locally too.

Exempting businesses and households from the debt treatment in order to conserve political capital means an even greater burden for banks and Funds. Because quite a number of the banks would require capitalization in such a situation, and yet direct resources from the IMF ($1 billion per year in the most optimistic scenario) would be far from enough to tackle the resultant effects.

The $3 billion that Ghana has requested will take its already high extra-quota access to a level that under IMF policies normally require “heightened scrutiny”.

Source: IMF

And yet, it remains a small fraction of the $15 billion needed over the same period to cushion against the effects of adjustment. The restructuring would create far more problems than it would solve if it does not contribute to a broader program to restore investor confidence across the board and unlock much greater additional resources.

Ghana must be guided by the famous saga of the botched debt restructuring program in Russia in 1998 that triggered a currency run after investors judged that the overall program will not result in debt sustainability. Actors that shape sentiment in such contexts, especially in the political opposition, need close cultivation and briefing at every point.

Even an Approved IMF Program Does Not Guarantee Success

After all, a detailed analysis of many IMF programs between 2011 and 2017 found that only 32% achieve success. Unsurprisingly, programs that involve some debt structuring or relief tended to be more successful though only 33% of such programs proceed to completion. Countries like Pakistan have today become bywords for serial IMF recidivism because each program becomes protracted.

Source: European Central Bank (2019)

Still, whatever its historic sins, scapegoating the IMF should no longer be used as an automatic get-out-of-jail card for fiscally bumbling African states.

The government of Ghana must take full responsibility for the path it is taking the country on. Which is why some analysts worry seriously about whether the current decision makers at the helm have what it takes to build the degree of public goodwill necessary for the hard choices facing the country. There is a secretiveness, a clannishness, an aloofness and a pervasive lack of accountability that alienates rather than mobilises. In good times these may well be the ingredients of success in the private capital markets. But in a context such as the one Ghana currently finds itself in, it is highly counterproductive. To date, the government has not even published the so-called “enhanced fiscal recovery program” based on which it is purporting to negotiate with the IMF. Very much the opposite of what the authorities did in countries seen to have had a relatively successful debt restructuring exercise like Uruguay and Jamaica.

Besides all the technical complexities described in this essay, the lack of political preparation for the serious development ahead of Ghana in containing the current economic crisis is, to the greatest extent, what keeps this author awake at night.

Readers of this site would be aware of a joint investigation by IMANI Center for Policy & Education (IMANI) and the Africa Center for Energy Policy (ACEP) into a sweetheart deal between GNPC, Ghana’s national oil company, and Genser, a US-based Ghanaian-owned company that recently announced that it has raised $425 million to expand its gas-to-power facilities in Ghana.

Image credit: Adobe

For those readers not abreast with the key facts, here is a quick recap.

Context of the Gas-to-Power Market in Ghana

Ghana has three main gas fields, all offshore, from which natural gas is pumped through an undersea pipeline to the shore. From the offshore receiving facilities, gas is distributed, in principle, according to the country’s Gas Masterplan.

The gas is produced by private oil and gas companies of the likes of Tullow, Eni, Vitol and Kosmos and aggregated by GNPC, in its capacity as Ghana’s main upstream state interest operator, for sale to other entities. Ghana Gas is the primary wholesale buyer of the gas and the main processor. Currently, it is also the largest distribution infrastructure operator, though that role has been designated for state-owned BOST. BOST is unable to effectively invest in the pipeline complex required for it to play this distribution utility role due to financial constraints.

Source: Shafic Suleman (2020)

At every level of the value chain, there are regulators that are supposed to make sure that a level playing field exists; and that strict compliance with law and policy, observance of standards and the political and economic interests of the country and its citizens are the hallmarks of the country’s budding gas industry.

Source: Oxford Energy Institute

Clearly, either all these regulators are asleep or they are complicit in the brazen ongoing heist of public resources evident in the GNPC – Genser sweetheart deal.

So, who is Genser?

Genser is one of 15 main thermal power producers in Ghana. A “thermal power” producer uses fossil fuels like gas and crude oil to generate electricity for sale to customers. Unlike most power producers who sell the power through the GRIDCO-managed national grid, Genser locates its power plants close to its customers and transmits directly as an “embedded generation operator”. It is one of two main companies doing this in Ghana, the other being Trojan.

So why are we saying it has entered into a “sweetheart deal” with GNPC? Well, the charge is vindicated by the mindboggling pricing it succeeded in securing from the national oil company.

In 2020, it signed a deal to buy natural gas from GNPC at a cost of $2.79 per MMBTU. “MMBTU” is just a fancy unit used to measure gas flow in the gas industry.

This was after it had committed in 2018 to buy gas at $6.5 from Ghana Gas if it succeeds in being classified as an “strategic industrial consumer” and if not then at $7.29. When Ghana Gas tried in February 2019 to get the Energy Commission, a key regulator, to designate Genser as a strategic consumer and thus to justify the lower price, Energy Commission refused.

A year after the Energy Commission rejection of any discount arrangement for Genser, GNPC stepped into the fray with the $2.79 (per MMBTU) price deal, obviously at a steep discount from the regulated price then of $6.50. But that was not sweet enough. So, in July 2021, GNPC upped the ante and offered Genser a deal whereby it will further reduce the gas price to $1.72 if Genser built more pipelines that GNPC might in the future use to transport gas (thereby bypassing the Ghana Gas network).

ACEP and IMANI were scandalised by these revelations because even large energy producers and wholesale buyers of gas in Ghana do not get such deals, despite fuel being the biggest contributor to the cost of power businesses and households face in Ghana.

The biggest power producer in Ghana, VRA, for instance, attributes 60% of its total costs to fuel when breaking down the electricity prices it is allowed by the PURC (the main pricing regulator) to charge. Its cost of gas is the regulated price of $6.08 (changed to $5.99 by the regulator in 2022).

Source: Energy Commission of Ghana (2022)

Under what circumstances then can a smaller power producer with far less impact on the economy, without any of the social constraints faced by VRA to service poor and rich alike, get gas at a price that is roughly 1/4th what the principal public utility is charged?

Even the main wholesaler of gas in Ghana, Ghana Gas, which on-sells/retails to the power industry, gets its gas at $5.4. Due to rampant under-recoveries in the power sector (implicit subsidies imposed by the government, which it nevertheless refuses to pay), it struggles to get paid by the utilities and therefore rack up debts to the upstream suppliers.

Source: GNPC Accounting Data

GNPC’s own calculations suggest that securing gas costs it $7.9 per MMBTU. It has therefore tried to persuade the pricing regulator, PURC, to increase gas prices above the $5.99 the latter has set for the downstream power sector.

How can a commodity that has been averaging $8 per unit in recent times, and which the seller claims costs it $7.9 to produce, be sold at $2.79 or, even worse, prospectively at $1.72?

Source: Finanzen GmBH (2022)

GNPC’s Bogus Explanations

Following the ACEP-IMANI exposures, GNPC and the Energy Ministry went on the offensive this week. At an ongoing parliamentary enquiry, GNPC did it best to obfuscate the issues, and suggested all manner of reasons why Genser deserves to pay between 60% and 75% lower than virtually every other gas buyer in the energy industry.

First, it cited the fact that Genser is on the “industrial development tariff”, which at $4.20 per unit is lower than the regulated price (“weighted average cost of gas” – WACOG) set by the regulator.

Next, it insisted that Genser is one of a few companies that pays its bills on time and does not rack up arrears and thus deserves some back-patting.

Finally, and most importantly, it rolled out the Rolls-Royce of all justifications: Genser uses its own pipelines to transport the gas it buys and so deserves a rebate on that account alone. Even more vitally, Genser has given GNPC the right to use gas pipelines it is still building in the future to transport gas for free and thus deserves further discounts in what amounts to a barter trade.

None of these arguments hold water; some are plain lies.

The Sham “Industrial Development Tariff (IDT)”

As already pointed out, the Energy Commission rejected similar arguments about the role of Genser in 2019.

There is nothing exceptionally “industrial” about what Genser is doing. It is not facilitating manufacturing or doing manufacturing on its own, unlike other IDT beneficiaries. The agreements it has with GNPC and Ghana Gas do not impose any requirement for it to use the gas for industrial applications or purposes.

It virtually all the power it generates with the discounted-price gas to mining companies, which are in the “primary extraction” sector.

Genser’s list of Customers (July 2021)

It is merely undercutting other power producers, who could easily meet the demand of the mines, by buying gas for cheap. Recall that for gas power producers, raw gas is roughly 60% of their total costs. There is absolutely no strategic, policy or developmental reason for Ghana to discount gas prices for a commercial power producer to undercut its rivals in selling power to rich gold mines.

Companies that are focused strictly on delivering power to Ghana’s industrial parks, export processing zones, and manufacturing corridors do not get these sweetheart deals.

The Hollow Pipeline Argument

It is not correct, as being canvassed by GNPC, government and Genser PR agents that only Genser has invested in private pipelines for receipt and onward transmission of gas. Companies like Aksa, Trojan and Early Power have all gone through the necessary regulatory screening to construct pipelines to convey gas to their plants.

Ghana Gas has the largest pipeline complex in the country. Roughly $1.6 billion of equity and public/ publicly-guaranteed debt have gone into this huge infrastructure base. All the offshore pipelines that bring the gas from the sea to land (the most expensive form of gas transmission) belong to Ghana Gas. Yet Ghana Gas is paying an average wholesale price of about $5.4 per unit for the gas it retails.

At any rate, as argued at length in the previous essay, the value of gas pipeline transmission is well established. Ghana Gas provides clear local benchmarks for how to value the contribution of pipeline infrastructure to cost buildup.

The PURC has set a regulated threshold price of $1.288 per MMBTU. And there are many global benchmarks (some of which were shared in the previous essay). If GNPC wishes to give Genser a rebate for transporting the gas it buys over the small proportion of distance covered by its own pipelines versus the much greater extent of public pipelines used in bringing the gas from under the sea, it can do so rationally and transparently. Such an approach will not generate a rebate of more than $0.5 per unit.

As for the planned use of Genser’s pipelines for free by GNPC, the proposition has been cited as a justification since early 2020. GNPC has not transporting any volume of gas through said pipelines. Some of the use cases for that arrangement, like the bauxite refinery at Nyinahin, are highly futuristic. It is plainly ridiculous to be granting massive discounts on the basis of hazy, unrealised, future barter arrangements.

More bizarrely, the agreement signed between GNPC and Genser does not bear out the “free” thesis. Genser intends to charge a “gas compression fee”:

Extract from July 2021 GNPC – Genser agreement

Does Genser pay on time?

The short answer is “no”.

As of the end of December 2021, it owed roughly 50% of its due obligations to GNGC, in the amount of $4.6 million.

GNGC Accounting Data (2021)

In the first half of 2022, as of June 30th, Genser owed GNPC more than $3.24 million. Whilst reconciliation is still outstanding for Q3 2022, that debt keeps rising and may hit $5 million.

Genser has a track record of owing suppliers. It recently had to pay damages to Vitol in a London court for failure to pay for LPG/NGL (mostly propane) deliveries made to it during the lean years of 2018 and 2019 when it had not yet secured its sweetheart deal with GNPC and was paying in excess of $7 per unit of gas to private suppliers.

Source: Vitol SA v Genser Energy Ghana Limited (July 2022)

Worst of all, it gets Worse

Imagine the horror of IMANI and ACEP analysts when they discovered that all the time GNPC and Genser PR agents were seeking to justify Genser’s $4.2/MMBTU IDT (“industrial development tariff”) and the various rebates as sensible commercial terms, the company was neither paying $4.2/MMBTU nor, as some of its spokespersons have said, $3.5.

Genser has not even been paying the contract price of $2.79 all the time.

According to reconciled GNGC accounting data, Genser has in fact been paying, wait for it, $1.14! Essentially, a giveaway price.

Comparing how much Genser pays with the rest of the industry, including those manufacturers that actually qualifies for the IDT rate as a result of their playing critical roles in resurrecting strategic dying industries like ceramics, throws into alarming relief the true scale of the mess.

Here is part of a pricing chart for January/February 2022:

GNGC Accounting Data

And for June/July 2022:

GNGC Accounting Data (2022)

Clearly, Genser is the golden-haired boy-wonder of the power consuming world. It is billed nearly 6 times LESS than the main public power utility and nearly 4 times LESS than companies that are actually using gas to drive Ghana’s industrialisation.

The Big Picture

Whilst we have talked about the risk of Ghana losing $1.5 billion if GNPC continues to sell gas to genser at the contract price (based on the contract gas volume of more than 328 million MMBTU), it is important to now clarify that Ghana has already lost considerable amounts of money.

Selling gas at $1.14, $1.72 or even $2.79 to Genser instead of the $7.9 it costs GNPC to acquire the gas or the $6.08 set by the regulator for the relevant period means losses of between $4.97 and $6.76 for every unit of gas sold. In 2021, Genser bought more than 7 million MMBTU of gas from GNPC implying a loss of between $34 million and $45 million already incurred, even after making provision for a fair transmission rebate for the use of Genser’s own pipeline. By the end of this year, $100 million in losses would have already accrued.

At a time when Ghana is seeking a $3 billion IMF bailout due to a debt crisis worsened by mounting energy sector liabilities of more than $2 billion a year in recent estimations, it is both unconscionable and mindboggling that GNPC can afford to lose nearly $100 million on a single contract in just two years or be willing to lose as much as $1.5 billion over the contract’s lifetime.

To underline the fishiness and level of impunity, consider that Genser started enjoying these discounts EVEN BEFORE GNGC signed the new agreement with the fresh discounts based on the futuristic pipeline barter trade. Here is a January 2021 trade ledger entry (the agreement was signed in July 2021).

GNGC Accounting Data

Clearly, the Parliament of Ghana which now claims to be investigating this matter has its full credibility on the line as Ghanaians await its findings.