An Economist and a Research Fellow of the Institute for Fiscal Studies (IFS), Mr Leslie Dwight Mensah, has questioned the rationale behind the country’s decision to invest its petroleum funds in foreign investment instruments that yield less than one per cent per annum while borrowing at rates higher than 10 per cent
In the current scheme of things, Mr Mensah said the country was virtually shortchanging itself, hence the need to review the decision to invest the Ghana Petroleum Funds (GPFs), a creation of the Petroleum Revenue Management Law (PRMA), in low-yielding investment instruments.
He was speaking to the GRAPHIC BUSINESS on the sidelines of the institute’s pre-budget forum on February 13.
The IFS, a fiscal policy think tank, used the event to highlight challenges facing the country’s financial position and how the current government could navigate its way around.
Using the US$1 billion Eurobond issued at 10.75 per cent in 2015 and the annual return of 0.74 per cent on GPFs in that year as an example, he said that “it means you are paying 10.75 cents to borrow a dollar when you are earning less than one cent on your own dollar.”
“So, we have to ask ourselves whether this is how we should be going. It is not as if we are running budget surpluses and that is why we have enough to save; we are saving because the law says we should save,” he said in reference to the requirements of the PRMA.
“It is important, therefore, to maximise the returns on the savings,” he added.
The PRMA, which was passed in 2011 but reviewed in 2015, requires that 30 per cent of the country’s of petroleum revenue be shared among and invested in the Ghana Stabilisation Fund (GSF) and the Ghana Heritage (GHF) for budget support and to build savings for posterity respective.
As of September 2015, the two funds had accumulated a total of US$502.2 million, with majority of them being invested in government securities abroad.
Although proceeds from the GSF have been used in the recent past to plug budgetary shortfalls, savings in the GHF have been left untouched until after 2026, when the law empowers Parliament to determine if the funds should be used.
Commenting on the investment strategy, Mr Mensah said while it was understandable to invest proceeds of the Ghana Stabilisation Fund (GSF) into short-dated instruments, which mostly yield low returns, investing the Ghana Heritage Fund (GHF) in similar instruments was unproductive, given the fund’s long-term nature.
“We can earn better, especially, on the Heritage Fund because it is long-term.”
“Once it is a long-term fund, you are less interested in liquidity or how easy you can convert your investment into cash compared to how you can maximise the returns,” he said.
Should the country succeed in maximising returns on investments on the two funds, the economist said it will help to reduce the opportunity cost of investing petroleum dollars.
He mentioned landed assets or properties as one good source of long-term investment instruments that the country could choose to invest proceeds of the Heritage Fund into to help maximise the returns.
This, he said will be similar to what oil producing giants such as the United Arab Emirates (UAE) have done with their oil proceeds.
In addition to reviewing the investment instruments, the Research Fellow at the IFS said there was the need for active management of the GPS to help ensure that the country took advantage of fine investment opportunities whenever they arise.
“Instead of, say, placing the money in foreign treasury bills and giving instructions to the financial institutions, who buy the bills on your behalf, to rollover whenever it matures, the fund manager should be active in the sense that, it should be someone who is searching for investments and looking for high yielding instruments.
“It should be someone who is reviewing the investments asking that this amount be put here and there with teh view to maxisimising returns,” he explained. —GB