Returns on the Ghana Petroleum Funds have over the years been low based in comparison with international benchmark, a report by the Institute for Fiscal Studies (IFS) has confirmed.
These comparatively low returns have largely been due to the Petroleum Revenue Management Act’s narrow range of permitted investments.
In real terms, the average annual net interest returns were negative, whereas the annual total returns on the GPFs, which include both interest income and capital gains on investments, were low in comparison with the returns on key benchmark indices for financial investments in the US and European markets.
In nominal terms, average annual net interest returns of barely one percent were realized on the GPFs between 2011-17.
Comparing the returns with Ghana’s cost of dollar borrowings from the Eurobond market, which ranged between 7.88 percent and 10.75 percent, with an average of 9 percent over the period, shows a high opportunity cost compared against the low level of returns being realized on the GPFs.
In real terms, the net interest returns on both the GSF and GHF were invariably negative, with average annual real interest returns of -1.27 percent and -0.49 percent on the two funds respectively.
According to the 2018 annual report on petroleum funds, the net profit on the GPF since inception to the end of the third quarter 2018 was US$39.41 million, which is about 4.95 percent over the total allocation of US$796.67 million.
The total net profit on the GPFs for January to September 2018 was US$11.20 million.
From 2011-2017, a total amount of US$776.55 million was transferred into the GSF, while US$430.63 million was withdrawn, leaving US$345.92 million as the net amount transferred into the GSF for investment. For the GHF, it received a total amount of US$323.72 million for investment during the period.
The Institute points out that the prevalence of the low returns in the face of more lucrative alternative investments on the international markets raises efficiency concerns.
Indeed, permitting diversification of funds’ investment across different assets classes and markets would certainly attract higher yields.
Currently, the Investment Advisory Committee (IAC), set out in the Public Revenue Management Act to oversee the investment of the GPFs is not functional.
The law mandates the Committee to formulate the investment policy, determine the benchmark portfolio, risk and returns, and to offer broad investment advice on the GPF to the Minister of Finance.
Notwithstanding the power the Law gives to the IAC as an independent body, the IFS indicates that the law at the same time undercuts the Committee’s role and its room to maneuver, by specifying a narrow range of qualifying instruments which the GPF can be invested in.
This is deemed to have serious implications for the efficient management of the GPF’s.
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