NS4301 Summer Term 2015 Ghana and the Oil Curse

1. NS4301Summer Term 2015Ghana and the Oil Curse

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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