Ghana is one of Africa's big economic success stories. But the discovery of oil has confronted it with some tricky problems.
The phrase
"African oil" doesn't conjure up much in the way of positive connotations. The
exploitation of the continent's oil reserves has led to Libyan petro-authoritarianism,
the rampant kleptocracy of Equatorial Guinea, and the militarization of Chad
(whose defense expenditures increased by 633 percent between 2000 and 2009). African
oil has frequently ruined the countries that produce it, as the Financial Times has noted: "From the civil war
battlefields of southern Sudan to the slums of Angola and the swamps of the
Niger Delta, the discovery of crude has done little to improve local lives.
Often, it has destroyed them."
This
brings us to Ghana, a vibrant democracy that prides itself on having one of the
best-developed governance structures in sub-Saharan Africa. Ghana entered its
oil-producing phase with a strong civil society and government institutions
firmly in place. Since the restoration of democracy in 1993, Ghana has
developed a strong two-party system, strictly adhered to its two-term limit on
the presidency, held five regularly scheduled free and fair elections, and
peacefully transferred power between parties. A highly participatory democracy,
Ghana boasts a strong and independent media, the rights to freedom of speech
and association, civilian control of the military, and a strong rule of law.
Mindful of
past disasters related to sudden oil affluence,
Ghana's late President John Atta Mills urged early on that "those who are in leadership positions... ensure that [oil] becomes a blessing, not a curse."
Ghana's late President John
Atta Mills urged early on that "those
who are in leadership positions... ensure that [oil] becomes a blessing, not a
curse." (In the photo above, an optimistic Mills visits an
oil-processing vessel in 2010.) In classic democratic fashion, Ghana's
government responded to
widespread requests from the private sector, public bodies, and the
international community by putting policies into place to channel the
country's
oil and gas earnings into sustainable and equitable development while
assuring
transparency in revenue collection and use. In 2011, the country's
parliament
passed the landmark Petroleum Revenue Management Act (PRMA), enshrining
transparency of financial flows among companies and the government and
establishing a Public Interest and
Accountability Committee to oversee implementation of the law.
Oil contracts are public,
and the Ministry of Finance discloses payments received, barrels of oil
production, and details of the country's new petroleum discoveries.
The PRMA
succeeded in the sense that it averted the rampant personal corruption and
keptocracy seen in other African oil states. The new revenues were not,
however, channeled into sustainable development as the law intended. Instead,
politicians increased patronage spending in an attempt to meet the rapid rise
in public expectations fueled by the discovery of oil.
Such expectations
were extremely high when Ghana began exporting oil in December 2010. Export
earnings in the first quarter of 2011 were two-thirds higher than in the same
period of 2010, and real gross domestic product (GDP) for 2011 was forecast to
increase between 12 percent and 13 percent. Such expansion would have made
Ghana's economy one of the five fastest growing in the world. More importantly,
it was hoped that becoming an oil producer would quickly raise the standard of
living for large segments of the population.
Reality quickly
fell short of predictions. Ghana's oil endowment is modest: At current prices,
it is roughly equivalent to about $75 per capita -- a fact poorly understood by
the man-in-the-street. Thus, despite the added oil revenues, the government has
had an increasingly difficult time managing public demands.
Consequently,
a fall 2012 survey conducted by the
prestigious Afrobarometer found that 63 percent
of Ghanaians polled perceived the country's economic conditions to be
"very bad" or "bad," despite several years of rapid,
oil-driven economic growth. This figure showed a sharp deterioration from the
previous Afrobarometer survey in 2008, when only 45
percent characterized economic conditions in such dismal terms.
The
situation has continued to worsen, as evidenced by recent headlines in Ghanaian
newspapers: "IMF mission warns of
challenging times for the economy" (February 27, 2014), "What is the solution to
Ghana's economic crisis: Prayer, proper planning, or both? (March 17, 2014), and "Ghana's economy in
crisis: $20 billion squandered by government" (March 25, 2014). So has Ghana finally
succumbed to the oil curse despite its promising
start?
There is
no question that oil is at the center of Ghana's economic problems, although at
least some of the country's difficulties initially stemmed from the 2008 global
economic crisis and the resulting fall in commodity prices. Growth rates are still respectable
by most standards at 5.5 percent, but remain considerably below expectations.
The value of the country's currency, the cedi, has dropped considerably
compared to 2009. Inflation is above 10 percent and rising, and the government's
fiscal deficits as a percentage of GDP are in the double digits, despite the
continued inflow of oil revenues.
Ghana has
always had a tendency to run large budget deficits -- especially in election
years. With buoyant oil revenues on the horizon, the government committed a
serious mistake: It failed to enact a fiscal rule restricting public
expenditures in high revenue years. Such a rule can enable resource-rich countries
to maintain remarkable budgetary stability in the face of volatile revenue
streams, as Chile has demonstrated.
Instead, Ghana's
tendency to overspend was reinforced by two pieces of favorable economic news
that minimized initial concerns about the corrosive effects of oil. In 2010, the
country's national income accounts underwent revision, or rebasing. Initial estimates by the International
Monetary Fund suggested that Ghana's revised GDP might be up to 25 percent
higher than was previously thought. The new and much larger GDP figure
dramatically lowered Ghana's perceived debt burden (official debt as a percentage
of GDP). Next, between January 2009 and July 2012, the Mills government
quickly and remarkably brought the budget deficit down from 24 percent to 10
percent of GDP (pre-rebase figures), and inflation down from 20 percent to
10.68 percent.
Unfortunately,
still further reductions in spending were imperative, but public expectations
of an oil bonanza spiraled out of control and eroded the political will to
enact them. Furthermore, because voters would interpret any fall in living
standards as mismanagement of the oil revenues, the government felt compelled
to maintain and even expand expenditures, the bulk of which (94 percent) were
recurrent, patronage-type expenditures -- wages, salaries and other
non-investment items -- rather than more productive, long-term capital and
infrastructure investments.
In fact, revenues
from the country's new petroleum industry were disappointing, with the majority
of the early income going simply to cover the sector's costs. In both 2011 and
2012, Ghana's oil receipts fell well below budget expectations. In the second
half of 2013, oil revenue received by the government suffered a further decline,
from $391.9 million in the first two quarters to $176.3 million in the second
two quarters.
Then, with
the U.S. Federal Reserve keeping interest rates at extremely low levels,
investors began pouring money into better yielding emerging market assets. As a
democracy with excellent governance, Ghana found it easy to tap international
capital markets at bargain rates by borrowing against anticipated future oil
revenues -- an attractive alternative to fiscal restraint. The fortuitous flood
of funds provided the perfect enabling mechanism for increased governmental
borrowing.
Ghana's
first 10-year Eurobond, issued in 2007 at the height
of excitement over its oil potential, was four times oversubscribed. By 2012, collateralizing
future oil revenues involved negotiating a $3 billion loan with the China Development Bank. This
loan placed Ghana in the unfavorable position of having to sell its share of
crude oil exclusively to the Chinese. All told, in 2012, Ghana attracted
foreign direct investment of about 8 percent of GDP, an amount considerably below expectations. Investor concern over
the country's deteriorating fiscal position, together with election
uncertainties, were largely responsible for the investment fall-off.
In August
2013, Ghana floated a bond of $1 billion
with a 10-year maturity potential at a yield of 8 percent. The yield was higher,
and the excess bids were lower, than those in other African countries that
issued Eurobonds earlier in the year, perhaps partly reflecting the
deteriorating financial conditions. By April 2013, Ghana's initial (2007)
Eurobond was yielding as little as 4.5 percent.
Clearly, taking
on added debt to sustain expenditures has hit diminishing returns. The
government's inability to tame widening fiscal deficits has led to
deterioration in Ghana's debt ratios. The country's debt now represents just over half its GDP,
up from 32 percent in 2008. An expanding current account gap has had a severe
impact on the cedi, which has weakened more than 9 percent against the dollar so
far this year, following a 24 percent slide in 2013. In a sign of waning market
confidence, yields on Ghana's sovereign debt are higher than for any other
African country with an actively traded international bond, at around 9 percent
for its 2023 Eurobond and over 20 percent for domestic debt.
On October
17, 2013, Fitch downgraded Ghana's credit rating from B+ to B,
warning that "policy credibility has been significantly weakened" due to the
size of the budget deficit and the rising costs of servicing domestic
government debt. Meanwhile, sharp rises in the price of fuel, water, and power
have led unions to threaten strikes. Despite the
government's best intentions, an oil-fueled vicious circle of unmet
expectations, increased debt funded government expenditures, expanded current
account deficits, falling cedi, rising inflation, deteriorating living
standards, and further unmet expectations has set in.
On the one
hand, Ghana's experience to date provides a cautionary lesson for the new East
African oil producers (Uganda, Kenya, Tanzania, and Mozambique):
Even well-governed democracies that go to great lengths to avoid the oil curse can stumble if the government fails to manage public expectations and practice budgetary restraint.
Even well-governed
democracies that go to great lengths to avoid the oil curse can stumble if the government
fails to manage public expectations and practice budgetary restraint. On the
other hand, Ghana's situation differs from the classic oil curse phenomenon, in
which a surge in oil-financed public expenditures leads to a strengthening
currency (i.e., Dutch Disease), contraction of the
non-oil export sector, and the rampant corruption and erosion of democratic
institutions. Ghana has not suffered the irreversible damage usually brought on
by the oil curse. There has been neither massive deindustrialization nor the
cancerous spread of personal corruption. The country's democracy is intact, public
involvement and scrutiny are on the rise, and Ghana has at least a reasonable chance
of regaining its luster in the next several years, with IMF guidance and assistance on
proper stabilization and fiscal consolidation.
The role
of stepped-up borrowing in the current crisis has to a sharp rise in public
participation, with citizens groups pushing for fiscal responsibility legislation that would limit
borrowing against future oil and gas revenues. If passed, such legislation could
prevent future excessive borrowing that constrains the country's finances and
jeopardizes the steady expansion of its economy. The increased public scrutiny,
combined with the ability of the press and public to track oil revenue
allocations, should also make it more difficult for the government to divert
funds away from infrastructure and other productive capital investments to
non-investment budgetary items in the future.
In the longer run, it
is still possible that Ghana could become a model for the effective utilization
of new-found petroleum generated wealth. Increasing involvement of organized
civil society and the media have created the foundation for accountability and
best practice procedures in the management of the country's oil
resources. In fact, government efforts to
improve transparency in the growing oil and gas sector, together with the
country's progress in institutional development and apparent determination to correct
and learn from its mistakes, might eventually turn it into a role model for other
oil and gas producing countries throughout the developing world.
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