Rigid FX rules impede cedi’s performance - says IFS but Chamber of Mines disagrees
Policy think tank, the Institute for Fiscal Studies (IFS), has called for a renegotiation of the foreign exchange (FX) retention agreements between the country and mining companies to help reverse the existing regime where mines are allowed to retain about 70 per cent of their earnings abroad.
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The negotiations should focus on getting the companies to repatriate more of their mineral proceeds into the domestic economy, the institute said, citing its implications on the perennial depreciation of the cedi and the increasing incidence of FX retention abroad.
With forex retention being one of the causes of the cyclical cedi depreciation, a Senior Research Fellow at the IFS, Dr John Kwakye, told the GRAPHIC BUSINESS in Accra that giving mines the flexibility to retain around 70 per cent of their earnings, as is currently the case, would mean that the country continues to experience forex volatilities, with its attendant consequences on other fiscals.
Meanwhile, the Chief Executive Officer of the Chamber of Mines, Mr Suleimana Koney, has explained that despite the regulation that allows players to retain 70 per cent of their earnings abroad, majority of it was actually repatriated to help finance domestic operations.
He explained that contrary to the IFS's findings, about 85 per cent of mineral revenue was repatriated into the country last year, with records at the Bank of Ghana (BoG) indicating that mineral revenue (resulting from the repatriations) accounted for 31 per cent of the bank's forex reserves for that year.
Impact on cedi depreciation
Until this year, when the cedi is enjoying some historic stability, currency depreciation has been one of the the top three challenges facing businesses. This followed the steep decline in the value of the local currency between 2013 and 2015.
In 2014 for instance, the cedi lost about 30 per cent of its value to the US Dollar after shedding some 22 per cent of its value to the American currency a year earlier.
Because of the import-dependent nature of the economy, a depreciation of the cedi mostly leads to increases in prices of goods and services, which also translates into inflationary pressures and dampened consumer and business sentiments.
While admitting that the 70 per cent proceeds retention currently enjoyed by the mines was instituted to help attract investments into the extractive sector, Dr Kwakye said the IFS believed that the time had come for Ghana to take a second look at the arrangement or risk continuing to be at the receiving end.
"When you look at our balance of payments, it will capture all the export proceeds as accruing to Ghana but the point is, what actually comes to BoG is just a fraction of that. So, the total that is published looks good and if someone sees it, he/she will say Ghana is doing very well because we are exporting so much."
"However, what adds to our reserves is just 30 per cent or less," he said, pointing to recent statistics on the country's balance of payments.
"But when you go to cocoa, the requirement is that when Ghana Cocoa Board (COCOBOD) exports, they should surrender 98 per cent to BoG and keep just two per cent, may be, for operational obligations. This is where we see the challenge and we think a renegotiation on how much is kept or repatriated (by mining companies) is necessary," he said.
Mr Koney of the Mines Chamber, however, said such calls for renegotiation were not too relevant given the records on the ground.
"The last time I checked, an average of 26 per cent came through the BoG and the rest was done through the commercial banks, amounting to 85 per cent," he said, explaining that the general belief that majority of mineral revenue was retained abroad was based on the confusion between ownership and retention.
"Ownership is different from retention. If you own a company, it does not mean that all the profit they make comes to you the owner; it does not work like that."
"If we repatriate this much (over 70%), then how do the companies run their operations? These things are not true and we have been saying them yet we get these sentiments," he said, explaining that majority of the earnings were used to run the operations of the company.
"Last year, more than 40 per cent of our revenue went into the procurement of consumers locally such as electricity, cyanide and food," he added.
Repatriation verses retention
As of December, last year, earnings from gold totaled US$3.2 billion, about US$400 million shy of the US$2.8 billion raked in from cocoa exports within the same period. Going by the IFS's analysis means that only US$960 million of the period's proceeds from gold would have been sold to the Bank of Ghana to help shore up gross international reserves while over US$2.2 billion was retained by the mining firms.
In the case of cocoa, however, over US$2.7 billion, representing the 98 per cent, of last year's total proceeds was surrendered to the Bank of Ghana in exchange for cedis, leaving less than US$100 million as foreign exchange in the hands of Cocobod.
With the GCM analyses, however, over US$2.7 billion of last year's earnings from gold was repatriated into the country, leaving almost US$500 million abroad.
Doubt over possibility of reviews
Dr Kwakye of the IFS said what existed in the mining sector applied to the upstream petroleum sector, where revenue accrued to the state is less than 20 per cent.
"That is why we think that to turn the situation around, there is the need to revisit the agreements on foreign exchange retention by mining companies to correct any anomalies," he said, admitting that the possibility of new negotiations in the petroleum sector was minimal due to the infant nature of the agreements.
"I do not know if it is possible to go back and renegotiate - that is something we are not sure of - but we suggest that the authorities should re-look at those things and possibly change the dynamics," Dr Kwakye said.
"If the mining companies increase the revenue that they repatriate to Ghana, it will increase the foreign exchange liquidity in the market and help cushion the cedi. That way, all these pressures on the cedi will be reduced," he added.
Currently, the operations of each of the mining companies is governed by separate agreements that define the amount a company can pay in taxes and royalties, among other statutory contributions.
Apart from Gold Fields, which secured its stability agreement earlier this year, majority of the mining companies are operating with age-old agreements, some of which are ring-fenced by indemnity clauses that bar the country from renegotiating them until a specified period of time.