…if it won’t bear FX losses

Bulk Oil Distribution Companies (BDCs) have said if government decides to opt out of bearing forex losses incurred by oil importers through its pricing policy, then it may as well stop intervening in pricing.

This follows a warning by Finance Minister Seth Terkper, in his March 12 statement to parliament on the implications of falling crude oil prices to the economy, that government will no longer entertain claims for forex losses.

The minister indicated that “companies which have existing contracts denominated in foreign currency and who incur foreign exchange losses are reminded to claim such losses as allowable expenses under the income tax laws…Consequently, no claims for forex losses will be entertained”.

Reacting to the statement in an interview with the B&FT, Senyo Hossi, lobbyist for the BDCs, said industry, including the banks, wil have to start taking initial steps to decide whether it can continue to sell under a pricing model that an NPA or whoever advises.

“That is a decision we will have to take, because it is possible for the NPA to keep saying it will determine the price. So if the NPA assumes the FX rate in your price should say be 3.5 and you know that the market is 3.6, 3.7 -- and you think you cannot commercially absorb that 0.1 or 0.2 loss -- you do not sell,” he said.

The forex under-recoveries, he said, are a function of government’s pricing decisions, and that it cannot opt out of bearing the losses without taking a second look at its role.

“You cannot say you will not take FX under-recoveries and still want to determine the exchange rate in the price. The reason government has to bear that responsibility is because it has taken it upon itself, through the NPA, to determine what FX rate it should apply in the pricing. And the FX under-recoveries are incurred largely because there is a mismatch between what is applied and what government provides the industry through the Bank of Ghana: and if the Bank of Ghana is not going to supply, then government may not also have the capacity, in some sense, to also determine what exchange rate goes into the pricing,” he said.

“You can fix me a price because you know how you are going to supply it. But if you do not know how you are going to supply me your dollar, then you cannot necessarily fix me a dollar price. If I have to supply my own dollar then I would have to myself fix my dollar price -- and that makes it liberalised at the pump.”

The BDCs hold the position that the FX losses they incur are not actual accounting exchange deferential losses but rather an under-recovery of the contract sum that they are engaged through the National Petroleum Authority’s pricing model to supply the industry.

“Considering the fact that this under-recovery is a function of government’s pricing policy decision, and to which it is responsible for its consequent fiscal implications, opting not to take the consequence of the responsibility will also suggest the need for government to review its role as in being responsible for pricing,” Senyo Hossi said.

In the last two years, he said, there have been heavy under-recoveries due to the exchange rate being applied by government, and the forex exchange supply arrangement that exists with government.

“From 2011 to 2013, following the audit by Ernst and Young, the preliminary audit position of about US$395million in FX under-recovery is outstanding. This is liquidity loss being financed by banks at the cost of the BDCs, and it is the liability of government under the current rate structure -- funding of the industry has been along those lines.

“For 2014, a review of that process is ongoing and, roughly, we estimate about US$300million for 2014 alone. That leaves you with a major sum of about US$695million that has been incurred in the last few years. This liability cannot be borne by the BDCs; it is not a liability that can be borne by the banks either. So if government wants to take decisions which yield this level of liability and it does not want to take the responsibility for it, then there is a need for government to review what responses it wishes to make; whether it really wants to keep determining pricing or the FX rate which is applied in pricing.”