SUGGESTIONS AND RECOMMENDATIONS PRESENTATION BY CENTRE FOR POLICY ANALYSIS
MAKING OIL A BLESSING AND NOT A CURSE FOR GHANA
The international experience of resource-rich
good macroeconomic management – particularly
good economic governance – through the
are necessary to make oil a blessing rather than
Additionally, Ghana must boost the international
price competitiveness of the relevant tradable
subsectors in agriculture and manufacturing by
bringing down the cost of doing business; through
investments in human capital — education, skills,
knowledge and health of the workforce; and by
reducing the deficiencies in physical infrastructure.
Protection of the non-oil tradable sector by way of
subsidies and/or import tariffs perpetuates
uncompetitiveness of the sector and must be avoided.
A healthy, growing and integrated economy would
always have demand for imports – technology and
raw materials – for productive use. As such, the
efficiency gains from trade would always be much
higher than the savings on foreign exchange that can
Excessive spending often characterizes the
economic mismanagement that tends to take root in the wake of a natural resource find. This is both because the natural resource generates additional income that adds to government revenue and because government develops an increased appetite for debt that can be secured with the natural resource.
Greater fiscal discipline, therefore, is what is
needed if the effects of the Dutch Disease are to be mitigated and oil is to become a blessing for Ghana.
This calls for the efficient collection and
the overall fiscal deficit is reduced;
the primary balance is at least zero – ensuring that
government does not borrow to service its debt; and
value for money is derived from public expenditures –
by investing in projects that generate a growth rate higher than the interest on government debt.
The need for fiscal discipline is particularly
important now that Ghana has attained middle-income status and is being gradually weaned off donor support.
Although not sufficient, the debt-to-GDP ratio is
the means by which foreign investors assess the credit worthiness, and hence the likelihood of default, of borrowing countries.
Thus, by reducing the size of the deficit
government can reduce the perception of risk that investors have about Ghana; thereby lowering the cost of credit and improving our access to credit.
Fiscal discipline is also important for enhancing the
effectiveness of monetary policy in macroeconomic
Fiscal indiscipline, by way of excessive government
spending of oil revenues would increase the amount of
reserves in the system, thus, requiring the Bank of
Ghana (BoG) to mop-up the excess or risk higher
The increased foreign exchange inflows from the
export of oil could also pose liquidity challenges for
the BoG if it decides to use the foreign exchange to
build its gross international reserves (GIR) – the BoG
would supply cedis in exchange for the foreign
exchange thereby increasing the amount of currency
If left unsterilized, the excess liquidity in the system
– resulting from either the increase in government
spending or the decision by the BoG to build its
international reserves – would raise fears of rising
inflation and, hence, necessitate a rise in the MPR.
This, consequently, would cause a rise in market
FISCAL DISCIPLINE Per the Petroleum Revenue Management Law a
Heritage Fund has been established into which 30
percent of the annual oil revenues would be put and
invested outside Ghana. This is to cater for the
Where there is fiscal discipline and the insistence on
value for money in investment, however, the windfall
revenues from oil can be invested domestically in
growth-enhancing projects that would yield greater
benefits for future generations to come.
With the large infrastructural deficit in Ghana, the
large savings-investment gap we face, and the high
cost of credit, investing our oil revenue at home could
yield higher future benefits than the alternative
Heritage Fund. In other words a prosperous, high
growth economy could be bequeathed rather than the
yield from investments of the Heritage Fund.
Three key institutions have been identified as
important for ensuring that our oil find proves a blessing and not a curse. These are
institutions for macroeconomic stabilization;
institutions for social insurance; and
institutions for conflict management
INSTITUTIONS FOR MACROECONOMIC STABILITY
Private sector led market-oriented economies are
not necessarily self-stabilizing. Shortfalls in
aggregate demand can result in unemployment;
and inherent instability of financial markets can
be transmitted to the real sector. Fiscal and
monetary institutions, therefore, are needed to
Where these institutions follow pro-cyclical
rather than counter-cyclical policies, however,
they could add to macroeconomic instability.
These considerations have spurred the trend
toward central bank independence, and have also
helped open the debate on designing more robust
Social arrangements for equalizing the
distribution of resources in traditional societies
lose much of their social insurance functions.
As markets spread, the risks that have to be
insured against become much less manageable in
the traditional manner. Indeed one of the most
remarkable features of the evolution of advanced
market economies during the twentieth century
has been the huge expansion of publicly provided
social insurance program – social security,
unemployment compensation, public works,
Social insurance legitimizes a market economy by
rendering it compatible with social stability and social cohesion.
At the same time it must be noted that the existing
welfare states engender substantial economic and social costs – mounting fiscal outlays an entitlement culture/mentally and long-term unemployment which become increasingly burdensome. Partly because some developing countries have been encouraged by the IMF, the World Bank and their development partners to adopt the market-oriented model without paying sufficient attention to creating institutions of social insurance. The upshot has been however economic insecurity and a backlash against the
In the search for an answer we will have to
develop our own vision and institutional innovations that would bridge the tension between market force – the market takes no prisoners who must be fed, clothed and homed – and the legitimate yearning for economic security. The often neglected fact is indeed that the institutions needed by a country cannot be independent of its culture and history.
Societies differ in their cleavages.
In the oil era, the pertinent example here is
Nigeria, “characterized” by deep cleavages along ethnic, religious, and income lines.
These divisions, when not adequately bridged,
can hamper social cooperation and prevent the undertaking of mutually beneficial projects.
Social conflict is harmful. It diverts resources
from economically productive activities and also discourages such activities by the uncertainty it generates.
Models of social conflict shed light on questions
Why the government might delay stabilizations when
Why in spite of the discovery of oil our economic
performance in the oil era could be worse than in the preceding non-oil era,
Why external shocks – commodity terms of trade or
harvest failure – could lead to protracted economic crises that are out of proportion to the divert costs of the shocks themselves.
All these situations can be thought of as due to
the inability by groups in society to co-ordinate on outcomes that would be of mutual benefit.
They bring home the critical need to build and
strengthen institutions that would make such distortions co-ordination failure less likely.
In the specific context of the oil era, these
institutions are required to ensure that the discovery and production of oil would be a blessing and not a curse. This is what the international experience suggests for countries at our level of development.
Oil can be a blessing for Ghana. But this requires
good economic management and governance.
Ghana must remain committed to building strong and
sound institutions of economic management and
In addition Ghana must persevere with reaching and
maintaining a stable macroeconomic environment
particularly, in respect of fiscal and debt
When this is done, we can look forward with
confidence to the oil and gas find being a blessing for
Ghana; and Ghanaians can have legitimate hope that
the oil wealth will be translated into growth, jobs, and
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