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Ghana risks serious fiscal pressure if international gold prices fall sharply, as the country lacks a dedicated stabilisation mechanism to cushion government revenue from fluctuations in mineral prices, the Natural Resource Governance Institute (NRGI) has warned.
The Country Director of NRGI, Patrick Stephenson, said unlike the petroleum sector, which has a revenue management framework with stabilisation and heritage funds, Ghana had not established a similar arrangement for its mineral revenues.
He warned that a significant decline in gold prices could undermine government revenue projections, disrupt planned public expenditure and force the country to borrow to finance budget shortfalls.
If the prices collapse today, we don't have any buffers. What that means is that if the revenues we're looking for are not realised, you have serious pressures on our hands. If you ask me what will happen if the prices collapse, we're in serious trouble,” he said.
Stephenson made the remarks in an interview on the sidelines of a civil society dialogue on Ghana's mining resources organised by NRGI in partnership with the Ghana Chamber of Mines in Accra.
The dialogue, held under the theme, “Ghana's Mining Fiscal and Revenue Governance Architecture: Is Ghana Maximising Value from its Mineral Wealth?”, examined how the country could improve revenue management and secure greater economic benefits from its mineral resources.
Stephenson said Ghana's Petroleum Revenue Management Law provided a useful model for managing commodity price volatility, with provisions for allocating petroleum revenues to the annual budget funding, stabilisation and heritage funds.
He said the arrangement allowed the country to save some revenues when commodity prices were high and draw on the stabilisation fund when prices declined.
However, he regretted that the country had not replicated the framework in the minerals sector, despite the importance of gold to government revenue and the wider economy.
He noted that the recent surge in international gold prices had supported Ghana's fiscal position and helped cushion the economy against some external shocks.
But he cautioned that relying on favourable market conditions without building adequate financial buffers could expose the country to significant economic difficulties when prices declined.
He said NRGI was considering proposals for a mineral revenue management framework similar to the petroleum revenue management system and would engage the Ministry of Finance, civil society organisations and other relevant stakeholders on how such an arrangement could work.
Value addition must translate into local economic benefits
On the need for Ghana to derive greater value from its mineral resources, Stephenson said the country must look beyond value addition and pay greater attention to value retention.
He explained that while value addition involved processing minerals into higher-value products, value retention focused on how much of the economic value generated remained within the country.
Using the bauxite-to-aluminium production chain as an example, he said processing bauxite into alumina and subsequently aluminium increased the value of the mineral.
However, he said Ghana also needed to determine how much of the additional value was retained locally through domestic businesses, employment, skills development and the production of goods and services required by mining companies.
Value addition and value retention are completely different. Value addition asks how much more value you have created, while value retention asks how much of that value you actually keep in the country,” he said.
Stephenson cited evidence suggesting that between 60 and 70 per cent of the value generated in Ghana's gold value chain went outside the country because mining operations relied heavily on imported inputs.
He added that the situation required deliberate industrial policies to encourage local production of mining inputs and strengthen Ghanaian businesses to participate more effectively in the mining supply chain.
How do you balance policymaking such that two-thirds of the dollar that is generated in revenue in the gold value chain actually sits in the country?” he asked.
He said opportunities existed for Ghanaian companies to manufacture and supply goods currently imported by mining firms, adding that developing the necessary skills and industrial capacity would help retain more economic value locally.
He also pointed to the potential of linking different mineral value chains, explaining that developing a domestic lithium battery industry, for instance, would require a broader industrial strategy that considered other minerals, including manganese.
Stephenson stressed that value retention should be pursued without necessarily placing additional tax burdens on the mining sector.
Small-scale miners must contribute more to national revenue
On the fiscal contribution of artisanal and small-scale mining (ASM), Stephenson called for a review of policies to ensure that the sector contributed more adequately to government revenue.
He said local ownership of mining companies should not be confused with small-scale mining, explaining that domestic investors could own and operate large-scale mining companies.
He noted that the more important question was whether the substantial volume of gold produced by small-scale miners translated into corresponding tax revenues for the state.
According to him, evidence suggested that the fiscal contributions of small-scale mining were relatively low compared with those of established large-scale mining companies.
He said the amended Minerals and Mining legislation had introduced a two per cent royalty rate for small-scale miners under the new sliding-scale royalty regime, but questioned whether the rate was sufficient.
If they're producing 53 per cent of the volume of the minerals we have in the gold value chain, then there has to be a calibration of policy on fiscal such that they contribute a bit more,” he said.
He, however, cautioned against imposing excessive taxes that could push small-scale operators out of the formal regulatory system and potentially encourage illegal mining activities.
He argued that government needed to strike a balance between increasing revenue mobilisation and maintaining a fiscal regime that encouraged compliance and formal participation in the sector.
He urged policymakers to examine the opportunities within the mining value chain to improve domestic revenue mobilisation and retain a greater proportion of the wealth generated from Ghana's mineral resources.
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