Between ‘Dumsor’ and ‘Depreciation’

First Published on June 5, 2023

On June 30th, the Independent Power Producers of Ghana’s Energy Sector have laid down a demand for 30% of the 1.6 billion dollars owed them or they will shut down their plants.

The dilemma facing the government is not simply about having the money to pay or not, despite the importance of that fact. They basically have to decide whether to allow ‘Dumsor’ with its significant social, political and economic consequences; or to somehow pay 400 million dollars at a go and risk a catastrophic depreciation of the cedi.

This is the stuff that the study of Economics is made of. Economics is not difficult. However, it doesn’t lend itself to simple thinking; and therefore understanding CHOICES is crucial to successful economic planning.

Every good Economic Planner appreciates 3 basic things – Scarcity, Alternative Uses and Opportunity Cost. Fundamental to an economy is that its resources are scarce. Abundance therefore only exists in the realms of God Almighty and the Supernatural. Mere mortals must live by counting the pennies because there is never enough of them.

Secondly, for everything we can use our resources for; there is a competitive alternative. There are therefore no maxims or moral imperatives in economics. All money is fungible and you must therefore seriously consider alternatives all the time.

Thirdly, whenever you arrive at an economic decision or resource allocation plan; it will result in a loss of opportunity elsewhere. This is always a cost to every decision. If this cost is therefore too significant, that means you did not fully consider alternatives and your decision is a ‘bad’ one.

Now, follow me to evaluate government decision making process for their tango with the IPPs.

The scarce commodity in this instance is dollars. It is not just about having money to pay the IPPs. It is that even if they are paid in cedis they will inevitably change to dollars because they are foreign companies. We just got 600 million dollars from the IMF, of which we are already planning to increase cedi liquidity by giving the cedi equivalent of that amount from the Bank of Ghana to the government as budgetary support. We cannot therefore afford to give 400 million dollars or its equivalent in cedis to the IPPs at a go on the 30th of June.

What is the alternative to paying the IPPs? Keeping our dollar reserves high enough and the depreciation of the cedi low.

But the cost of choosing this alternative will be ‘Dumsor’; and actually the demand for 30 percent of their money by the IPPs sounds like a reasonable request. It is also in the interest of government to ensure that the IPPs are financially viable to maintain their plants and forestall hostile takeovers. Government essentially cannot risk an escalation. The opportunity cost is too high.

So what can government do?

Government should negotiate with the IPPs to keep the 400 million dollars in an account with the Bank of Ghana in the name of the IPPs. The IPPs should show good faith by only requesting withdrawals over a period of time on a severe need basis. They can also use the funds in the accounts to request for liquidity support with international banks to keep up their operations.

There must be deliberateness in government’s actions, decision making and negotiations in regard to this issue. It has the makings on an economic shock that could wipe out any macroeconomic gains made since the start of year. There must therefore be broad-based thinking, forbearance and economic prudence every step of the way.