Energy sector crisis is a “ticking time bomb” –Ato Forson

Dr Cassiel Ato Forson, the Finance Minister, says Ghana’s energy sector is facing a critical financial crisis, described as a “ticking time bomb,” largely due to non-cost reflective tariffs and unsustainable energy subsidies.

He highlighted the sector’s dire financial state, noting that the projected cumulative financial shortfalls were expected to exceed nine billion dollars by 2026, even with government’s interventions.

Dr Ato Forson said this on the first leg of the two-day National Economic Dialogue ongoing at the Accra International Conference Centre.

“The energy sector in Ghana has become a ticking time bomb with more than two per cent of GDP every year. Every year, the profits of the energy sector will probably fall back on the legal side. For citizens, we require radical measures,” he said.

He pointed to the Electricity Company of Ghana (ECG) as a key area of concern, highlighting significant distribution and collection losses.

“Currently, only 62 per cent of total energy purchase by ECG is collected, leaving out probably 62 per cent. 65 per cent of that amount is used to pay for supplies through the cash waterfall mechanism,” Dr Forson said.

“Unfortunately, 35 per cent of ECG’s revenue is used to take care of ECG themselves, over times that they don’t actually work,” he added.

Dr Forson expressed concern over the non-reflective tariffs on the true cost of service provision.

“In most reflective tariffs, about 50 per cent of cost of service provision is not for us to expect. However, I still maintain that tariffs should not be used to reward ECG’s inefficiencies and other inefficiencies in the system,” he said.

He revealed that unpaid legacy arrears in the energy sector stood at $1.3 billion at the end of 2022, with annual cumulative sector shortfalls reaching $2.2 billion in 2024, despite substantial government transfers.

The Finance Minister attributed the sector’s woes to a combination of factors, including the lack of political will to implement cost-reflective tariffs, limited renewable energy capacity and inefficiencies within ECG.

He called for urgent and radical measures to address the crisis and prevent further financial strain on the economy.

“Having generational costs due to lack of politicians and limited renewable capacity in the energy mix is a problem. Having distribution and collection losses at ECG is also a problem,” he said.

Dr Forson stressed the need for a comprehensive approach to reform the energy sector, including addressing inefficiencies, promoting renewable energy and implementing sustainable tariff policies.

He warned that without immediate action, the sector’s financial challenges would continue to escalate, posing a significant risk to Ghana’s economic stability.

Dr. Cassiel Ato Forson also expressed serious concerns about the negative impact of tax exemptions on Ghana’s revenue mobilisation and the under-capitalisation of the extractive sector.

He highlighted the significant fiscal challenges facing the nation, stressing that tax exemptions on Value Added Tax (VAT), Personal Income Tax (PIT) and import duties are estimated to result in a “staggering” 3.9 percent loss of GDP.

He emphasised that those figures did not include corporate income tax exemptions, which further exacerbated the revenue shortfall.

“While these exemptions often offer temporary relief, they are incredibly costly and introduce significant complexity and distortions within our tax system,” he said.

Dr. Forson specifically pointed to the VAT exemption on the supply of dwellings and land, which accounts for 33 percent of the total VAT exemptions.

He criticised the previous administration for abandoning VAT on real estate in 2024, attributing the decision to electoral considerations and emphasised the urgent need to address this issue.

The minister also highlighted Ghana’s failure to adequately capitalise on its extractive sector, noting the significant gap between the sector’s natural resource rent, which is 14 percent of GDP and the actual fiscal revenue generated, which is only 1.5 percent of GDP.

“We are struggling to leverage our natural wealth, capture its rent, and channel it towards productive infrastructure and human capital development,” he said, asking”We must ask ourselves; can we not harness even a fraction of this 14 per cent to support our nation’s progress?”

Dr. Forson attributed the country’s poor revenue mobilisation to various factors, including a stagnant domestic revenue collection rate, numerous tax exemptions, a complex tax system and challenges in tax administration.

He noted that Ghana’s VAT collection performance was significantly behind that of its peers, emphasising the urgent need for reforms to streamline the VAT regime.

GNA

 

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