Ghana: The Opportunities and Dangers of Oil

Ghana is about to enter the ranks of Africa’s oil producers, joining long established producers like Nigeria, Angola, and Gabon, and more recent entrants like Equatorial Guinea and São Tomé and Príncipe. The quantities involved are comparatively modest. Current estimates suggest that the Jubilee Field by next year will produce 120,000 barrels per day (bpd), and further discoveries may double that production, compared to Angola’s export of two million bpd and Nigeria’s current level of 1.9 million (down by 25 percent over the last two years). Ghana’s production, nevertheless, could soon compare with current levels in Gabon and Congo-Brazzaville, which range from 225,000 to 250,000 barrels. The Jubilee Field was estimated in October 2009 to contain reserves of 490 million barrels of high-quality oil. Production is expected to expand very rapidly, reaching 120,000 bpd in 2011 and sustaining that level until 2016, when output will gradually decline over the following two decades unless new deposits are discovered. Recent explorations have suggested that nearby sites may well contain up to 1,500 million barrels, three times the size of the original estimates.

The impact of oil on the economy and society, of course, depends on the quantities produced and the price. If international prices remain stable at roughly $75 per barrel, revenue predictions suggest that oil will rapidly provide between $1 billion and $1.5 billion per annum to the Ghana Treasury, or roughly 25-30 percent of total government revenue, which amounted to $3.7 billion in 2008, or between six and nine percent of GDP (currently $16.1 billion). Commercial exploitation will be viable while the international price of oil remains above $30 per barrel. The current fiscal regime includes a five percent royalty for oil revenue, a ten percent tax on petroleum revenue net of royalty and operational expenses, a share of the oil rent increasing with the rent amounts, and a 35 percent income tax. The flow of revenue to the exchequer will fluctuate dramatically depending on variations in the world oil market. If the world price were to fall to $50 per barrel, government revenue would decline to $0.4 billion per annum, but if prices rose to $100 per barrel, Ghana’s oil would generate $1.6 billion on average over the next 18 years. Similarly, fluctuations in the cost of production will have significant effects on the revenue accruing to the government. Government revenue would fall 14 percent if production costs were 25 percent higher than anticipated.

A serious debate is already well underway both within Ghana and outside about how best to take advantage of the windfall. Should the 30 percent increase in government revenue be spent on essential infrastructural projects or deposited, as in Norway and Alaska, in an investment fund which would produce development finance far after the oil reserves are exhausted? The new revenue provides a real opportunity for the country to escape the trap of under-development and become a middle income country with a well-diversified economy. There are also very real economic and political dangers that stem from the influx of such a dramatic increase in government revenue that need to be carefully managed. Ghana is not likely to become another Nigeria, where the expansion of oil virtually destroyed the agricultural export sector—which now contributes only two percent of foreign exchange earnings—and led to inflation, the growth of “state rents”, and the further expansion of the culture of corruption with its ties to political clientage. Ghana has only one-fiftieth of Nigeria’s proven reserves; oil will not become anywhere near as important either in its share of exports or government revenue, but it will have a significant impact on both the economy and Ghana’s politics.

Let us first examine its economic impact. Oil will become a significant foreign currency earner and may push the value of the cedi upwards, undermining the competitiveness of Ghana’s cocoa exports which are currently at record levels, and adding to inflationary pressures in the domestic economy, which in December 2009 were already running at nearly 16 percent. The appreciation of the cedi would also have serious effects on non-traditional agricultural exports, like pineapples, mangoes, and bananas, which operate on very tight margins and face established competitors in Central America. A development fund would curtail these effects and over the long-term provide revenue for on-going development. In Botswana, the development fund established with the government’s diamond mining earnings provides today the third largest component of total government revenue. The Norwegian Government and others [i] have encouraged Ghanaians to consider this option. Political pressures within Ghana, however, make it most unlikely that such an approach will be adopted, although a small proportion of the revenue will almost certainly be invested in such a fund. The voices of prudence in civil society will be overwhelmed by the country’s populist politicians and its culture of clientage. Ghana urgently needs to improve its infrastructure: it needs new sewers and water pipes and ring-roads in Accra, a revamped electricity grid, improved generating facilities at Akosombo, improved rail-links from Accra to Kumasi and Tamale and on to Burkina Faso, and a renewed and extended network of secondary and tertiary feeder roads through the rural hinterland. Others will argue for improving educational and health facilities. Such development spending would generate employment in construction and ancillary services, and hopefully promote sustained economic activity and growth. In a society where 60-70 percent of the population depends on smallholder agriculture for their livelihoods and 90 percent of the population in urban areas depends on the informal sector, such job-generating spending could be beneficial. But the money must be spent wisely and over a number of years if it is not to exacerbate inflation and exceed Ghana’s capacity to absorb the spending.

Scholars at the Kiel Institute for the World Economyhave tested four econometric models in order to identify the most beneficial use for Ghana’s oil revenue. [ii] A “spend all” strategy would have the most immediate effect on the economy, promoting short-term growth. It would, however, inevitably lead to the appreciation of the cedi and to adverse effects on agricultural exports and the incomes of rural households. A “save all and spend interest only” strategy, as in Norway and Alaska, would generate little immediate growth although development revenue would continue to accrue long after the oil fields are exhausted. Such a strategy, as advocated by the Todd Moss and Lauren Young of the Center for Global Development, [iii] would do little to satisfy Ghana’s immediate infrastructural needs or to provide employment.

Using the oil revenue to support the budget and to stabilize the debt ratio would also produce little growth and would provoke Dutch disease with its adverse consequences for agricultural exports. Instead, the Kiel Institute studysuggests that sustainable high growth and economic stability can best be secured by shifting between infrastructural spending and investment saving at different phases of the economic and petroleum extraction cycles. This will require sophisticated macroeconomic management and economic modeling by the Ministry of Finance and the Bank of Ghana. It will test the competence of Ghana’s civil servants and the prudence of the political elite. This is a high risk strategy but also the one with the highest return and it is the one most likely to be adopted. Ghanaian civil society and reform-minded officials should seek to ensure that prudent economic management is not overwhelmed by the demands of patronage politics and the electoral cycle.

Domestic civil society over the past two years has already mobilized to promote safeguards. The government has recently passed a Freedom of Information Act which guarantees that all contract negotiations, agreements and payments will be fully revealed. A Petroleum Revenue Management Bill, which meets civil society’s calls for transparency and safeguards against corruption, will soon be approved. These are positive signs. But the oil revenue is only now starting to flow and the country is less than mid-way through the current presidential and parliamentary term. Much will change when the oil money reaches the exchequer and as the next elections draws near.

The National Democratic Congress (NDC) government of President Atta-Mills is already coming under increasing pressure from the opposition New Patriotic Party (NPP), and from within its own ranks from the populist faction led by former President Rawlings and his wife, Nana Konadu Agyeman Rawlings. The NPP points to the NDC’s lackluster economic performance. The Rawlings faction is upset with its failure to deliver sufficient patronage and jobs to the right quarter.

The 2012 election is even more important than previous ones and is likely to be fiercely competitive. The influx of oil revenue means that the victor is likely to dominate Ghana politically, not simply for the next four years but well into the 2020s. Even by Africa’s standards, Ghana’s presidency is an extremely powerful institution, dominating the legislature, making more than 4,000 direct appointments (including the chief executives of the 110 district authorities and 30 percent of the members of such authorities), and directing political patronage, jobs, and contracts throughout the still largely state-dominated formal sector of the economy. President Atta-Mills is certain to come under intense pressure to (mis)use oil revenue to maximize his political appeal. The demand for patronage (i.e. contracts and jobs) under the guise of infrastructural investment for future growth is likely to overwhelm the political resolve of both Atta-Mills and the technocrats that surround him in Osu Castle, the president’s office, to ensure prudent management of the oil revenue. His critics within the ruling NDC and his political opponents in the NPP, given their past records, seem even less likely to withstand the challenge.

The oil is a tremendous windfall for Ghana. Spent wisely on essential growth-generating infrastructural projects, it could catapult the nation into the ranks of middle income states, diversifying the economy away from its dependence on cocoa and gold mining, and into an era of sustained development. This endogenous growth will be facilitated and reinforced by changes in the age cycle, which will see a much higher proportion of the population in the economically productive age cohort for the next 40 years. Ghana’s challenge—and the challenge of its international partners—is to see that this happens and that the politics of clientage and the lure of corruption—contracts for “big men” and jobs for “youth-wingers” —do not derail Ghana’s future.

David Throup is an adjunct professor at George Washington University and the Johns Hopkins School of Advanced International Studies in Washington, DC. He is a senior associate of the CSIS Africa Program.