Transcript Ghana and the Oil Curse

NS4301
Summer Term 2015
Ghana and the Oil Curse
Overview
• Robert Looney, “Can Ghana’s Democracy Save it from
the Oil Curse? Foreign Policy May 1, 2014
• Ghana a new oil producer that has learned from other
countries the dangers associated with oil
• Country is a vibrant democracy with strong civil society,
institutions and governance.
• Strong independent media and strong rule of law
• Before oil production started Government began
• putting policies into place to channel country’s oil and gas
earnings into sustainable and equitable development
• Developing a process of transparency in revenue collection and
use
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Ghana’s Problems With Oil I
• In 2011 country’s parliament approved the landmark
Petroleum Management Act (PRMA)
• Ensures transparency of financial flows among companies and
the government and
• Established a Public Interest and Accountability Committee to
oversee implementation of the law
• The PRMA succeeded in that it averted rampant
corruption seen in other African oil states
• Problem: new revenues were not channeled into
sustainable development as intended.
• Instead politicians increased patronage spending
• Felt necessary to meet rapid rise in public expectations fueled by
discovery of oil
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Ghana’s Problems With Oil II
• Expectations very high in 2010 when country began
exporting oil
• Export earnings in first quarter of 2011 were two-thirds higher
than same period of 2010
• Real GDP for 2011 was forecast to increase between 12 and
13%
• Hope was that oil would quickly raise standard of living
for large segments of the population
• Unfortunately reality quickly fell short of prediction
• Ghana’s oil endowment is modest – depending on price only
$50-75 per capita
• Government has had an increasingly difficult time managing
public demands
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Ghana’s Problems With Oil III
• By the fall of 2012 63% of population felt country’s
economic conditions “bad” or “very bad”
• In 2008 only 45% thought economic conditions poor
• No question oil at center of Ghana’s economic problem
• Growth rate around 5.5% but still much below expedtions
• Exchange rate, the cedi has fallen sharply
• Inflation in double figures
• Government’s fiscal deficits as a %GDP also in double figures
• Country has always had large fiscal deficits – especially
in election years
• Rebasing showed the economy 25% larger and thus less
of a debt burden
• Made it easier to rationalize increased borrowing and
debt
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Ghana’s Problems With Oil IV
• Oil revenues in 2011 and 2012 were disappointing and
government should have cut expenditures
• However fear of voters interpreting any fall in lining
standards as mismanagement of oil revenues
• Government felt compelled to expand expenditures
• 94% of these were patronage expenditures rather than
productive long term capital and infrastructure
• During this time US Federal Reserve kept interest rates
low
• Investors sent money to emerging economies to get
higher yields
• Government started borrowing against anticipated oil
revenues – attractive alternative to fiscal restraint
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Ghana’s Problems With Oil V
• Ghana’s first 10 year Eurobond issues in 2007 at height
of oil expectations -- was four times oversubscribed
• By 2012 country had to negotiate a $3 billion loan from
china – had to sell a share of future oil exclusively to the
Chinese
• Investor concern resulted in a large drop off in FDI
• Country’s debt now about 50% GDP up form 32% in 2008
• Yields on Ghana’s sovereign debt higher than any other
African country with an actively traded international bond
• October 17 Fitch downgraded Ghana’s credit from B+ to
B waring that
• “policy credibility had been seriously weakened.”
• Growing signs of strikes brought on by rising prices of
fuel, water and power
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Ghana’s Problems With Oil VI
• Despite government’s best intentions a vicious circle of
• Unmet expectations, Increased debt funded government
expenditure,
• Expanded current account deficits,
• Falling cedi,
• Rising inflation,
• Deteriorating living standards, and
• Further unmet expectations
• Ghana’s experience – cautionary lesson for the new East
African oil and gas producers – Uganda Kenya, Tanzania
and Mozambique
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Ghana’s Problems With Oil VII
• Even well governed democracies that go to great length
or avoid oil curse can run into trouble if they fail to
manage
• Expectations, and
• Practice budget restraint
• On other hand Ghana’s situation differs from the classic
oil curse phenomenon in which a surge in oil financed
expenditure leads to a
• Strengthening of the currency – Dutch Disease
• Contraction of the non oil export sector and
• The rampant corruption and erosion of democratic institutions
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Assessment I
• Ghana has not suffered the irreversible damage usually
brought on by the oil curse
• No massive deindustrialization
• Nor spread of corruption
• Country’s democracy in tack
• Public involvement and scrutiny on the rise
• Country has a reasonable change of getting on track with
IMF assistance on proper stabilization and fiscal
consolidation
• Country’s stepped up borrowing in current crisis has led
to a sharp increase in public participation
• Citizens groups pushing for fiscal responsibility
legislation
• Would limit borrowing against future oil and gas
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revenues
Assessment II
• New budgetary rules should prevent future excessive
borrowing that
• Constrains the country’s finances and
• Jeopardizes the steady expansion of the economy
• Increased pubic scrutiny combined with the ability of the
press and public to track oil revenue allocations
• Should make it more difficult for government to divert
funds away from
• Infrastructure and
• Other productive capital investments
• To non-investment budgetary items
• In longer run -- possible Ghana could become a model for
the effective utilization of new found wealth
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