Economic concerns affect consumer prices for electricity in Ghana

 

According to the Association of Ghana Industries’ first quarter 2016 Business Barometer, 71% of businesses cited high utility prices as their primary constraint to growth. Energy-intensive consumers, like those in the industrial sector, were hit hardest by tariff changes. In the first half of 2016 crude oil prices remained relatively stable; however, the price experienced by consumers fluctuated significantly. Petrol, diesel, and liquefied petroleum gas (LPG) increased roughly 12.41%, 12.31% and 16.6%, respectively, between January and May of 2016. According to a May 2016 report from the Accra-based Business & Financial Times, the price of a gallon of petrol in January was around GHS14.10 ($3.64) and increased to GHS15.85 ($4.09) in May 2016. There are a number of factors that influence price changes, including inflation and a variety of government policies.

Inflation & Exchange Rates

Despite new discoveries and increased production, Ghana continues to be a net importer of energy, making the cost of the commodity vulnerable to foreign exchange shocks. Frequent changes in the value of the cedi have had an inflationary effect on the price of imported oil. The value of the cedi has fluctuated over the past decade, but never as significantly as in 2014 following the government’s failed foreign exchange policy. The cedi fell from GHS2.35:$1in January 2014 to GHS3.98:1 in November 2016. In February 2016 inflation was at 18.5%, and one month later it reached a six-year high of 19.2%. These changes have a direct impact on the price of fuel in Ghana.

The Bank of Ghana is actively attempting to counter this problem by curbing inflation and stabilising the currency through a series of targeted fiscal reforms, while the government has entered into a $918m deal with the IMF to reduce the budget deficit and contribute to stabilisation of the cedi. In August 2016 the central bank estimated that inflation would ease to approximately 8% by September 2017.

Government Intervention

Energy prices in Ghana are also affected by drastic changes in policy that can add significant costs to business operations. Following the dramatic decrease in oil prices in 2014, many Ghanaians expected to see a drop in prices at the pump as well. However, according to a July 2015 IMF paper, retail fuel prices only decreased by half as much as global oil prices, suggesting that as the cost of purchasing oil has fallen, fuel taxes in many countries have actually increased.

In December 2015 the government passed the Energy Sector Levy Law in an effort to raise revenue and reduce government debt, primarily in the road and power sectors. Levies outlined in this bill took effect in January 2016 and added a power generation and infrastructure support levy of GHS0.28 ($0.07) on petrol, diesel and LPG, and a price stabilisation and recovery levy of GHS0.12 ($0.03) for petrol, and GHS0.10 ($0.02) for diesel and LPG. The law also increased a number of existing taxes. According to the Africa Centre for Energy Policy (ACEP), the Ministry of Finance and Economic Planning has stated that this legislation would raise the price of petrol by 5%, diesel by 2.9% and LPG by 1.74%.

However, the ACEP also found that the levies increased prices for a litre of petrol, diesel and LPG by 33%, 40% and 22%, respectively. These new taxes are expected to secure GHS3.2bn ($825.6m) in government revenue per year.

The government is developing a number of other initiatives to diversify the country’s energy portfolio, including the expansion of renewable investments (see Energy analysis). Projects like this will hopefully reduce Ghana’s reliance on imported sources of fuel. If this does not happen, Ghana will have to wait until the cedi stabilises and the budget deficit is reduced to a level that no longer necessitates higher tax levies, or accept that the cost of fuel is not likely to

 

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The Report: Ghana 2017

Energy & Utilities chapter from The Report: Ghana 2017