The Institute for Fiscal Studies (IFS) is pleased to note recent reports in the media about plans by government to hedge the country’s oil imports. The IFS welcomes this development as a step in the right direction, given that hedging provides an insurance to mitigate the adverse impact of oil price volatility. Currently, Ghana produces nearly 200,000 barrels of oil per day. Ghana’s share has risen to nearly 20% of this total output, which it sells on the international market. Ghana is however a net oil importer, except last year when oil exports exceeded imports. Without an oil hedging program the country stands to lose foreign exchange earnings from exports when oil price drops on the world market. Likewise when oil price increases, the country suffers through increases in its oil import bill. Both scenarios are undesirable and can be mitigated by an effective hedging program to ensure stability in fiscal management. Hedging is not entirely new to Ghana’s fiscal management. Hedging is an insurance instrument used to buy protection against risks and not a gamble for futuristic gain. 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, the government implemented a Commodity Risk Management Policy to help protect the economy from the 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, the 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$115.00 per barrel. The program proved immensely successful, and by end-2011, the scope of the hedging program had been expanded to provide a 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 to enable it support fiscal stability, the scope of the hedging program was expanded to include revenues from oil exports through the “put” option. Up to the end of 2011 fiscal year, 100% of the anticipated receipts from crude oil exports were also fully hedged. The government was also in the process of implementing interest rate hedging program which was to begin in 2012 to help stabilize interest costs arising from the external credit it had secured, including the China Development Bank US$3.0 billion loan. As of today, Ghana has no hedging program in place. The country’s hedging program 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 – have insulated themselves from oil price volatilities through active hedging. So, 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 program, 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 program to cover both imports and exports to save the country from losing millions of foreign exchange earnings and also provide stability to the national budget. The IFS therefore commends the government for its plans in this direction. We urge government to consider a comprehensive hedging program that covers both oil imports and exports and as well as interest rates on public debt.
