Energy sector costs to drive public debt if not addressed – IMF tells government

Rising energy sector costs if not properly and decisively addressed, would add to and ultimately drive the country’s already unsustainable debt stock.

This is according to the IMF’s May 2021 Article IV Consultation paper on Ghana’s economy.

“Despite progress in rationalizing power generation, the financial viability of the energy sector affects people’s daily life and will remain a drag on productivity and a driver of public debt if not addressed decisively. Improving efficiency and collections remains a priority to achieve substantial savings,” stated the IMF.

Ghana’s energy sector is saddled with ‘Take or Pay’ clauses in Power Purchase Agreements (PPA) between government and Independent Power Producers (IPPs).

Aside electricity transmission and distribution losses and ECG’s inability to mobilize payments from its customers, these ‘Take or Pay’ clauses are costing government some $500 million every year.

Presently, government, on the back of the ‘Take or Pay’ clauses owes IPPs some $750 million after paying half of its $1.5 billion owed IPPs in February this year.

According to energy think tank, Institute for Energy Policies and Research (INSTEPR), if no action is taken, indebtedness within the power sector could reach
$12.5 billion by 2023 which will be about 18.7% of current GDP.

Meanwhile the IMF has commended government on some fiscal consolidation measures outlined in the 2021 budget.

According to the IMF, the fiscal consolidation measures to be implemented by government this year is ‘a step in the right direction but a difficult one in a pandemic.”

Some of the fiscal consolidation measures outlined in the budget include the introduction of the 1% Covid-19 Health Recovery Levy and the Ghs 0.20 pesewas and Ghs 0.18 per litre of petrol/diesel and Kilogramme of Liquified Petroleum Gas (LPG) under the Energy Sector Recovery Levy respectively.

As well as the imposition of the Ghs 0.10 pesewas Sanitation and Pollution Levy also under the Energy Sector Recovery Levy and also the 5 percent Financial Sector Levy on the gross profit of banks.

The IMF in its Article IV Consultation paper, commending government on fiscal consolidation measures outlined in the 2021 budget, called for a further deepening of fiscal consolidation measures going forward.

“Fiscal consolidation should be deepened and anchored around debt and debt service reduction to create space for social, health, and development spending,” said the IMF.