A balanced tax cut approach to petroleum price surges in Ghana

Introduction

Following the outbreak of the war in Iran, involving American allies, Ghana experienced a sharp increase in petroleum product prices. Between the first pricing window of February and that of April, the floor price of diesel rose from GH₵10.47 per litre to GH₵17.10 per litre, a 63% increase.

Over the same period, petrol increased by approximately 36%, from GH₵9.80 to GH₵13.30 per litre. Liquefied Petroleum Gas (LPG) also saw an 18% rise, from GH₵9.05 to GH₵10.71 per kilogram.

These price hikes have triggered widespread agitation, particularly from Commercial Transport Operators (CTOs), who are demanding government approval to increase transport fares. Beyond transport, rising fuel prices pose a significant threat to macroeconomic stability, especially by fuelling inflation.

Government’s Response and the Need for Clarity

In response, the government introduced tax cuts within the petroleum price build-up to cushion consumers. However, the magnitude and structure of these tax cuts have been communicated ambiguously and lack product-specific clarity. A one-size-fits-all tax reduction risks undermining fiscal stability without effectively addressing the price disparities across products.

A Balanced Tax Regime and Product-Specific Cuts

The Center for Environmental Management and Sustainable Energy advocates for a balanced or neutral tax regime, which varies by product type and market price. This approach is more progressive and efficient and minimises market distortions.

Specifically, tax cuts on diesel should differ from those on petrol and liquefied petroleum gas (LPG), reflecting their respective price levels and consumption patterns.

Proposed Tax Cuts by Product

Based on current price variations and the need to preserve fiscal stability, we recommend the following targeted tax cuts:

Based on current price variations and the need to preserve fiscal stability, we recommend the following targeted tax cuts:

Tax/Levy Component (GHC)	Petrol (GH₵)	Tax Cut on Petrol (GH₵)	Diesel (GH₵)	Tax Cut on Diesel (GH₵)
Energy            Sector Shortfall & Debt Repayment Levy	1.95	0.18	1.93	0.48
Road Fund Levy	0.48	0.10	0.48	0.20
Energy Fund Levy	0.01	—	0.01	—
Special      Petroleum Tax	0.46	—	0.46	—
UPPF	0.90	—	0.90	0.20
Fuel             Marking Margin	0.09	—	0.09	—
Primary Distribution Margin	0.26	0.10	0.26	—
BOST Margin	0.12	0.12	0.12	0.12
Total Tax Cut		0.50		1.00

Fiscal Impact of Proposed Cuts

Based on the 2025 consumption data:

1. A GH₵ 0.50 per litre cut on petrol would result in a monthly revenue loss of GHC 142 million.
2. A GH₵ 1.00 per litre cut on diesel would lead to a monthly loss of GHC 253 million.
3. Additionally, we propose a temporary one-month relaxation of the Cylinder Recirculation Margin (CRM), currently set at USD 80 per metric ton. This would further reduce revenue by approximately GH₵27 million.
4. In total, implementing this balanced tax cut approach would cost government revenues about GH₵422 million monthly.

Offsetting the Revenue Gap

To address this shortfall without compromising fiscal discipline, we suggest the following:

1. Transferring windfall gains from the upstream petroleum sector to offset revenue loss. Ghana is expected to make GH₵ 264 million in a month based on a crude oil price of

$100/b and one million barrels lifting.

• Utilizing surplus revenues from the Unified Petroleum Price Fund (UPPF), which often accumulates excess income, to help balance the fiscal deficit arising from intervention. It is estimated that the UPPF generates a surplus of approximately GH₵320 million annually.
• The windfall from upstream and surplus income from the UPPF could close the revenue gap for a month.

Conclusion

Petroleum products differ significantly in terms of market prices and consumption impacts. Therefore, the government should apply product-specific tax cuts rather than uniform ones. This targeted approach will cushion consumers and protect the economy without jeopardising Ghana’s fiscal stability.

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DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.