Why IMF demands full disclosure on gold for oil

One of the conditions the country will have to fulfill in exchange for its new and direly needed $3 billion Extended Credit Facility programme being provided by the International Monetary Fund is a review of the government’s ongoing gold for oil initiative.

The review forms part of ongoing updated safeguards assessment being carried out to provide additional support for the review of the Bank of Ghana Act.

The Fund is concerned that the initiative lacks fiscal transparency and its benefits are not worth the lack of financial transparency that accompanies it.

Certainly, this is a concern critics have raise locally but the government also points to the gains of the programme since the commencement of the initiative in January.

Petrol prices at the pump have fallen considerably, and instructively the start of their fall coincided with the commencement of the initiative.

Indeed, the architect of the initiative, Vice President Dr Mahamudu Bawumia, said the strategy had the potential to save Ghana some $4.6 billion annually, this being the amount that would otherwise have been spent on the petroleum product imports that are instead being paid for with gold.

Actually this is incorrect.

The gold being used to pay for oil imports would have generated at least nearly as much if it had been sold on the international gold market, and in foreign exchange too.

Reserve buffers

However, this takes little away from the actual benefits that the country is enjoying through the implementation of the programme.

By using gold to pay for petroleum product imports, the pressure on Ghana’s sharply depleted gross foreign reserves (which have fallen from over $7 billion to less than $5 billion over the past one year) has been reduced substantially.

This is because the gold producers are paid cedis for the purchases of their precious metal by the Bank of Ghana, rather than in dollars; if those gold producers have sold it themselves not all of the forex proceeds would have been made available for use by Ghana.

Furthermore, by exchanging gold for petroleum product imports through arrangements made by the government, through its central bank acting as agent, a considerable portion of the commissions and fees paid to private intermediaries that facilitate the conventional purchase of petrol imports is being saved.

However, this is where the controversies start.

Because the actual process for how gold, purchased by the Ghanaian state with cedis, is used to exchange for oil produced by corporate entities abroad, has not been made clear.  

Questions have been asked by industry analysts, public policy commentators and political opponents of the government as to the transparency and integrity of the entire process.

These are the questions now being repeated by the IMF which is in a much stronger position to demand answers than local critics, since it can hold its offer of the remnant of the direly needed $3 billion in medium term budgetary and balance of payments support as leverage.

More controversies

The Government for its part has tended to emphasise the results of the initiative rather than the process being applied but this too has ignited controversy.

While the government points to the falling price of pump prices for petroleum products as evidence of the positive impact of the gold for oil policy, industry analysts insist that the price falls are primarily the outcome of falling oil prices on the global market and to a ­lesser extent the improved performance of the cedi against the US dollar since the turn of the year.

Because the government has not come clean on the actual prices of exchange at which the two commodities are being swapped, and the commissions being paid to the agents that facilitate the transactions, it is difficult, near impossible, to do an accurate quantitative assessment of the real impact of the initiative on local pump prices and the state’s fiscal and foreign reserve positions.

So far the general populace has been happy with the falling petrol prices even though they have not translated into lower commercial transport costs because commercial transporters have refused to lower their costs, citing general high inflation as their reason.

However, at the technical analysis level – at which the IMF operates – questions persist.

The question on the lips of many is, to what extent the programme at its current level impact on nationwide petroleum prices.

Within two months of the commencement of the programme fuel prices have fallen by between three and 10 per cent at the pumps.

Petroleum products which were selling for around GH¢15 in January had fallen to about GH¢13 by mid-March on average.

The mathematics

Critics, however, point out that over that same period the world oil price also fell from around $87 per barrel to $74.47 per barrel, an even bigger fall of some 12 per cent.

Proponents of the policy on the other hand argue that the cedi depreciation over the period would have seen significantly higher prices if not for the gold for oil policy.

Without the full information as demanded by the IMF it is not possible to do an accurate assessment of the new policy’s impact.

Related to this is the issue of fair competition.

Petroleum products imported through the programme are significantly cheaper than those imported through conventional means but fall short of aggregate demand, who decides on which bulk oil distribution companies and oil marketing companies get the cheaper products and which consumer markets ultimately get to benefit?  

Even the issue of price benefits which are at the core of the debate remain unresolved.

Some analysts insist that proof that it is the fall in global market prices rather than the gold for oil initiative is evidenced by the fact that the first round of purchases, which government claimed had significantly lowered gasoline prices at the pump, were in actual fact  for the purchase and importation of diesel. 

Mining companies

The IMF will get considerable support from other stakeholder groups too.

The gold mining companies are groaning that added to the earlier agreement reached between them and the BoG under which 20 per cent of their production is sold to the central bank for cedis in order to beef up Ghana’s depleted international reserves, their obligations under the gold for oil initiative is leaving them with little forex for their own urgent needs.

The Fund also frets that this could become a disincentive for investment to expansion of production which amounts to forex costs from which only 60 per cent of sales revenues would be available in forex to recoup that investment.

The Bulk Oil Distribution Companies are also complaining that the gold for oil policy is taking the product purchase process, pricing and timing, both inclusive, out of their hands, without adding any benefits in terms of either sales volumes or revenues made.

The benefits, if any, all go to the final consumer.

But it is the final consumer whose interests the government is supposed to protect as priority and so it is positioned to argue the case for continued gold for oil to the IMF at least as long as Ghana’s forex availability situation remains fragile.