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 2

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 3

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 4

Ghana’s Problems With Oil III By the fall of % 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 5

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 6

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 7

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 8

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 9

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 revenues 10

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 11