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Extractive IndustriesThe Management of Resources as a Driver of Sustainable Development$

Tony Addison and Alan Roe

Print publication date: 2018

Print ISBN-13: 9780198817369

Published to Oxford Scholarship Online: November 2018

DOI: 10.1093/oso/9780198817369.001.0001

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Oil Discovery and Macroeconomic Management

Oil Discovery and Macroeconomic Management

The Recent Ghanaian Experience

(p.220) 11 Oil Discovery and Macroeconomic Management
Extractive Industries

Mahamudu Bawumia

Håvard Halland

Oxford University Press

Abstract and Keywords

This chapter analyses the evolution of fiscal and monetary variables in Ghana, from the discovery of oil in 2007 through to 2014. It documents the deterioration of fiscal and monetary discipline over this period, which resulted in a rebound of debt, a deterioration of the external balance, and a decrease in public investment. The chapter goes on to analyse the potential causes of this deterioration, including the political economy context, and the fiscal and monetary institutional framework. The suggested causes include the politics of Ghana’s dominant two-party system. Finally, the chapter discusses what Ghana could have done differently to avoid the various damaging effects associated with the oil discovery. It does not aim to provide specific fiscal policy recommendations for Ghana, but rather to give an empirical account of Ghana’s experience that may be useful for other countries that discover oil.

Keywords:   Ghana, oil, public investment, political economy, fiscal policy

11.1 Introduction

Much of the extensive literature on the ‘resource curse’ phenomenon suggests a negative correlation between national resource endowments and economic growth (Sachs and Warner 1995, 2001), and literature subsequent to Sachs and Warner has concentrated on identifying various mechanisms, including real exchange rate appreciation, through which natural resource wealth impacts on growth.

Ghana’s situation since 2007 provides a unique opportunity to consider the resource curse hypothesis: it also provides limited support for some versions of this hypothesis, but ultimately tells a simpler story of insufficient fiscal and monetary discipline. Crucially—and contrary to, for example, Botswana—Ghana was not able to manage expectations sufficiently after oil was discovered: consistent with van der Ploeg’s (2011) ‘anticipation of better times’ hypothesis. It is also consistent with Atkinson and Hamilton (2003), who conclude that the combination of natural resource rents and high government consumption provides an explanation for the curse, and with Collier and Hoeffler (2009), who argue that the combination of rents from the extractive industries and open democratic systems is associated with slower growth unless there are enough checks and balances. Ghana’s large increase in sovereign debt after the discovery of oil reflects the concerns of Mansoorian (1991), who suggests that an abundance of natural resources may encourage countries to assume unsustainable levels of debt.

(p.221) Tightly fought elections in 2008 and 2012, in the context of expected or newly available oil revenues, generated a situation where electoral promises trumped the need to manage expectations, generating spending pressures that ultimately could not be contained. Institutional weakness, often proxied by aggregated indexes of institutional quality, took on very precise forms in Ghana. These specific forms are discussed in detail later.

Ghana’s case also corresponds well with arguments from the political economy of macroeconomics, surveyed by Persson and Tabellini (2000). A fundamental insight from this literature is that the implicit discount rate used by politicians may exceed the rate of interest by the probability of the politicians being removed from office. Hence if a political faction expects to be expelled from office in the near future, it will extract oil or minerals much faster than is socially optimal and will also borrow against future oil revenues (van der Ploeg 2011).

Bleaney and Halland (2016) do not find evidence that natural resource wealth in general promotes fiscal indiscipline. However, their econometric model, based on the most disaggregated fiscal data currently available, does not explain the performance of some outliers such as Ghana and Mongolia. The Ghana case example therefore extends what can be learned about the resource curse based on the prevailing econometric analysis.

Section 11.2 of this chapter elaborates some of the key developments in the period leading up to the discovery of oil, in 2006. Section 11.3 provides the context of the policy choices faced by the government in the subsequent period, after oil had been discovered and the legal framework was put in place to manage oil revenues. Sections 11.4 and 11.5 examine the deterioration of public finances and the large accumulation of debt following the discovery of oil. Section 11.6 analyses the decline in capital expenditure following Ghana’s oil discovery. Section 11.7 examines Ghana’s declining economic growth following the oil discovery, while Section 11.8 examines the possible increase in corruption post-oil discovery. Section 11.9 places the developments in Ghana in the context of the political system and in particular the specific context of narrowly won elections. Section 11.10 asks the question ‘What could Ghana have done differently?’ Section 11.11 concludes.

11.2 Ghana before Oil

From the year 2000 until around 2012, Ghana was one of the stars of the ‘Africa rising’ story, the toast of the international development community, and a benchmark for other African countries in the areas of democracy and development. In particular: (i) it had enjoyed stellar GDP growth between (p.222) 2001 and 2008; (ii) it had received substantial HIPC debt relief to the tune of $4.2 billion after reaching the HIPC completion point in 2004; (iii) it had benefitted from the experiences of countries such as Nigeria, and had put together a strong framework to avoid the oil curse: especially the Petroleum Revenue Management Act (PRMA) 2011 (Act 815, Republic of Ghana 2011) which sets the key parameters for the accounting and collecting of petroleum revenues; and (iv) it had a good record of democratic governance, with a free press, rule of law, and reasonably strong institutions.

One would therefore have expected Ghana to be on the list of sub-Saharan African countries able to avoid the natural resource curse. However, even before oil production began in 2011, and increasingly thereafter, Ghana found itself embroiled in all the problems of the curse. In August 2014 it requested a bailout from the IMF.

In a recent earlier paper (Bawumia and Halland 2017) we summarized in some detail the disastrous record of macro management in Ghana in the pre-liberalization period from 1960 through 1983, and the recovery through 1999. This recovery was followed by a period of excessive fiscal expansion, high inflation, and currency depreciation in the run-up to the presidential and parliamentary elections in 2000. The immediate focus of the new government of President John Agyekum Kufuor, elected in peaceful democratic elections that year, was to restore macroeconomic stability. This would consolidate many of the reforms initiated in 1993 by the Economic Recovery Program (ERP). The term of the Kufuor government also coincided, from 2001 to 2006, with adherence to an IMF programme that was required to obtain HIPC debt relief. In a sense, Ghana during this period was operating under a quasi-fiscal rule: a major shift in macroeconomic policy, from one of monetary accommodation, to one of fiscal stringency and monetary discipline.

A major pillar of this macroeconomic stabilization process was old-fashioned fiscal consolidation, involving a medium-term fiscal framework; the stabilization of domestic public debt; robust revenue mobilization; and prudent spending. For example, the 2003 fiscal programme set a target of zero net domestic financing of the public-sector borrowing requirement for 2003.

The government’s fiscal policy strategy from 2001 also focused on debt reduction. Under the Multilateral Debt Relief Initiative (MDRI), Ghana’s debt relief was estimated at US$4.2 billion in nominal terms. After the enhanced HIPC initiative was implemented in 2004 and Ghana qualified for the MDRI, Ghana’s external debt decreased significantly, from 156.3 per cent of GDP in 2000 to only 17.2 per cent of GDP by 2006 (Table 11.1). Thanks to the HIPC relief, Ghana’s external debt declined from US$6.02 billion in 2000 to US$2.17 billion by 2006. Furthermore, the proportion of exports used to service Ghana’s debts declined from 28.1 per cent in 2000 to only 4.5 per cent by 2006 (Table 11.1).

Table 11.1. Ghana, selected economic indicators, 2000–8










Annual percentage change unless otherwise stated

Real GDP




















Broad money










Reserve money










Ex-rate depreciation










91-day T-bill










BOG prime rate










Gross reserves (US$m)










Months of imports










Overall balance (US$m)










Crude oil (US$ per barrel)










NPLs %










External debt (US$m)










Debt services/exports










As percentage of GDP

Budget deficit










External debt









Debt services










External debt services (US$m)










Current account balance










Note: BOG = Bank of Ghana; NPLs =non-performing loans; T-bill = treasury bill.

Source: data from Bank of Ghana.

(p.223) (p.224) Monetary policy at this time was underpinned by the adoption of an inflation-targeting framework, with the central bank taking advantage of the statutory independence that parliament had enshrined in the Bank of Ghana Act (BOG 2002).

This new fiscal and monetary policy framework caused a decline in inflation and inflationary expectations and strengthened Ghana’s external payments position. Headline inflation declined from 40.5 per cent in 2000 to 12.7 per cent by 2007 (Table 11.1), and between 2001 and 2007 the overall balance of payments was in surplus (except for a deficit of US$10.5 million recorded in 2004. Gross international reserves increased from US$233 million (less than one month of import cover) in 2000 to US$2.84 billion (approximately three months of import cover) by 2007.

Additionally, after an initial sharp depreciation of the cedi against the US dollar in 2000, relative exchange rate stability was restored in 2001, when the depreciation was just 3.7 per cent. This was followed by 13.2 per cent and 17.3 per cent nominal depreciation in 2002 and 2003 respectively, 2.2 per cent in 2004, 0.9 per cent in 2005, 1.1 per cent in 2006, and 4.8 per cent in 2007 (anchored by declining inflation expectations). Between 2004 and 2007 the cedi depreciated by an average of 2.25 per cent annually against the dollar (Table 11.1). This contrasted with the cedi’s historical instability and its 50 per cent depreciation in 2000.

11.3 Discovery of Oil

In June and August 2007, the United Kingdom-based firm Tullow Oil, and its US partners Kosmos Energy and Anadarko Petroleum, announced two significant oil discoveries off Ghana’s coast. Some initial reports conveyed the impression that Ghana’s reserves were comparable in size to those of Nigeria and Angola (Modern Ghana 2007b). With oil production projected to begin in 2010, the Ghanaian government was optimistic. In particular, there was a sense among government officials and the population that Ghana would be freed from the clutches of donors and international financial institutions, to pursue a more independent and growth-based development agenda. With an election on the horizon for 2008, the incumbent New Patriotic Party (NPP) government was eager to maximize the political benefit of the oil discovery, and in the process arguably did not manage expectations sufficiently.

However, impacted soon afterwards by increased domestic government spending and the global oil and food crisis, Ghana’s economic environment took a turn for the worse as early as 2007–8. The government then faced the choice of fiscal contraction, full cost recovery for utilities, postponement of some already committed expenditures, or continued fiscal expansion. (p.225) Government factions argued that as the world was heading towards a recession, Ghana needed to adopt counter-cyclical policies, and therefore aggregate demand needed to be increased in the interim. It was argued that public finances could then be balanced later when the crisis was over, and when the oil was expected to start flowing in 2010.

For a government facing an imminent election in 2008, this was a persuasive argument. There was a sense that some reduction in the price trends and the forthcoming oil revenues would soon abate Ghana’s economic difficulties (Bawumia 2010). The natural resource discovery gave a false sense of greater fiscal space than was the case.

The expansionary fiscal policy of 2007–8 had predictable consequences, and the economy quickly suffered a setback: inflation increased from 10.9 per cent at the end of 2006 to 18.1 per cent at the end of 2008, and the exchange rate depreciated by 20.1 per cent in 2008 compared with only 1.1 per cent in 2006. The budget deficit increased from 4.8 per cent of GDP in 2006 to 6.5 per cent of GDP by 2008. Gross international reserves declined from US$2.27 billion (three months of import cover) in 2006 to US$2.04 billion (1.8 months of import cover) in 2008 (Table 11.1). Thus the beginnings of the natural resource curse were evident in Ghana long before the first drop of oil was produced.

Nevertheless, the government of Ghana expressed determination to make sure that Ghana’s oil resources would be managed well so as to avoid the dreaded curse (Amoako-Tuffour and Ghanney 2013). The government convened stakeholders to learn what pitfalls to avoid and which best practices to follow from the diverse experiences of countries such as Nigeria and Norway. To underpin good governance in the oil sector, and based on these discussions, public consultations, and international best practices, Ghana passed both the PRMA and the Petroleum Commission Act in 2011.

11.4 Deterioration of Public Finances

Notwithstanding these efforts, Ghana’s public finances began to deteriorate quickly following the oil discovery in 2007. As Figure 11.1 indicates, public finances were generally sound from 2001 to 2007. For example, in 2005 there was a deficit of only 2 per cent of GDP. But this subsequently increased to 6.5 per cent of GDP in 2008, as the government increased expenditure in that election year in anticipation of oil revenues. Following the onset of oil production in 2010, the fiscal deficit narrowed, but only temporarily, to 4 per cent of GDP in 2011.

Oil Discovery and Macroeconomic ManagementThe Recent Ghanaian Experience

Figure 11.1. Fiscal deficit as percentage of GDP, 2000–14

Source: authors’ illustration based on data from Ministry of Finance and Economic Planning, Ghana.

The 2008 elections brought a change of government, from the NPP to the National Democratic Congress (NDC). Notwithstanding this change, increased pre-election spending also occurred ahead of the 2012 elections. (p.226) Ghana signed on to a further IMF programme in 2009 for the period 2009–12.1 The programme restored macroeconomic stability, with inflation, the fiscal deficit, the exchange rate, and real GDP growth generally moving in the direction of stability. However, the IMF programme ended in mid-2012, and notwithstanding the progress that had been made, and with an election approaching, the authorities decided not to renew it.

As the 2012 presidential and parliamentary elections drew closer, the incumbent NDC government dramatically increased expenditures relative to 2011–14 revenues. While government tax revenue averaged approximately 18.9 per cent of GDP between 2011 and 2014, government expenditures increased from 20.1 per cent of GDP in 2011 to no less than 34.5 per cent in 2012—before declining to 28.2 per cent at the end of 2014 (IMF 2014). In the 2012 election year, Ghana’s budget deficit reached GH₵8.7 billion, and amounted to some 11.6 per cent of GDP. This was the highest-recorded budget deficit in Ghana’s history.

To make matters worse, the bulk of the increase in government expenditure between 2011 and 2014 (94 per cent) was on recurrent expenditure (mainly wages and interest payments). At the end of 2008 the government wage (p.227) bill represented some 46 per cent of total tax revenue but it had increased to 72.3 per cent of tax revenue by December 2012 (Government of Ghana 2013). This fiscal stance resulted in double-digit fiscal deficits of 11.6 per cent and 10.9 per cent of GDP in 2012 and 2013 respectively, and a provisional 9.5 per cent of GDP in 2014 (Figure 11.1). This was the first time in independent Ghana’s history that the country had double-digit fiscal deficits two years in a row. It resulted in the government being cash-strapped and unable to meet some of its obligations on statutory payments (for example, for health, education, and local government) as well as some non-statutory payments.

11.5 Rising Levels of Public Debt

The debt relief that Ghana obtained under the HIPC initiative had reduced the country’s debt burden significantly. However, with the onset of oil production, the public debt stock rose dramatically to GH₵76.1 billion (67.1 per cent of GDP) by the end of 2014, versus 30 per cent in 2008 (Figure 11.2).

Oil Discovery and Macroeconomic ManagementThe Recent Ghanaian Experience

Figure 11.2. Total debt as percentage of GDP, 2000–14

Source: authors’ illustration based on data from Ministry of Finance and Economic Planning, Ghana.

At the same time government borrowing became much more expensive, as illustrated by the successive increases in the risk-free treasury bill rate; see Bawumia and Halland (2017: Figure 3). Such large-scale borrowing—made possible by the large expected oil revenues—and the ensuing high returns offered to investors by investing in risk-free treasury bills, had the effect of (p.228) crowding out the private sector, which was increasingly unable to borrow. The interest burden of this increased and high public debt stock was also considerable, growing from 2.8 per cent of GDP in 2008 to 7.1 per cent in 2015; see Bawumia and Halland (2017: Figure 4).

This high interest burden, combined with a rising wage bill, left Ghana’s government with very little money for other critical areas. To put this in perspective, the government of Ghana’s 2015 budget allocations (excluding internally generated funds and donor contributions) to the eight most important spending ministries including education, health, and transport ministries amounted to about GH₵952 million, whereas interest payments on Ghana’s public debt stock in the same year were GH₵9.5 billion—that is, ten times the combined allocations to these critical ministries.

This situation was reminiscent of Ghana’s situation before the HIPC debt relief, when the debt burden had reduced the critical fiscal space that could have enhanced capital and social expenditure. At 67 per cent of GDP, by 2015 Ghana’s debt stock had crossed the critical 60 per cent level: a particular concern to developing countries with limited access to capital flows. In fact, Ghana’s debt by then was right back on the unsustainable track that had led to its HIPC relief.

How could Ghana have so misjudged its capacity to borrow so soon after obtaining HIPC relief just a few years earlier? Apart from the oil discovery heightening expectations about ability to pay, it should also be noted that Ghana’s GDP was rebased in 2010, thereby statistically increasing Ghana’s GDP by 60 per cent from 2007. This made the debt-to-GDP ratios look satisfactory on the surface. What policy makers may have overlooked was the fact that the GDP was rebased without an attendant increase in foreign exchange liquidity. In this situation, taking comfort from an apparently low debt-to-GDP ratio was potentially very misleading.

11.6 Declining Capital Expenditure

According to Hartwick’s rule (Hamilton and Hartwick 2005), resource-rich countries, in order to maintain wealth and build strong foundations for economic growth, should offset the depletion of their natural resources by commensurate levels of investment in produced capital—primarily infrastructure and human capital. But in the case of Ghana, notwithstanding the new oil revenues and the massive increase in the debt stock, capital expenditure as a percentage of GDP has actually been in decline since 2007. From an average of 12 per cent of GDP between 2004 and 2008, capital expenditure declined to 4.8 per cent by 2014; see Bawumia and Halland (2017: Figure 5). This meant that before the oil discovery Ghana was spending a much higher proportion of (p.229) its income on capital investment than it has been since the oil discovery. This decline in infrastructure investment runs counter to what was anticipated and what good practice recommends.

In accordance with Section 21(5) of the 2011 PRMA, four priority expenditures were approved by parliament in the annual budget funding amount (ABFA): (i) expenditure and amortization of loans for oil and gas infrastructure, (ii) roads and other infrastructure, (iii) agricultural modernization, and (iv) capacity-building (including oil and gas). Table 11.2 shows the allocations to these areas for the 2012 budget year.

Table 11.2. Annual budget allocations to four priority areas, 2012

Priority areas

GH₵ millions

Expenditure and amortization of loans for oil and gas infrastructure


Roads and other infrastructure


Agricultural modernization






Source: Government of Ghana Budget 2013.

Even though on paper the oil revenue allocation is skewed towards infrastructure, the overall decline in capital spending means that the total allocation to infrastructure is likely to have declined. In the earlier paper (Bawumia and Halland 2017) we document several other related aspects of the macroeconomic deterioration that followed the discovery of oil. These include: (i) a loose monetary policy associated with excessive Bank of Ghana financing of the government (2017: Figure 6); a sharp increase in the rate of inflation through the 2008 elections and beyond (2017: Figure 7); a severe deterioration in the country’s external payments position and its international reserve holdings (2017: Figures 8 and 9); and a progressive depreciation of the cedi currency against the US dollar (2017: Figure 10).

11.7 Declining Real GDP Growth

While the discovery of oil initially boosted economic growth, real GDP growth in Ghana has declined significantly since 2011. Data from the Ghana Statistical Service (Government of Ghana 2011) show that real GDP growth increased from 8.4 per cent (without oil) in 2008 to 15 per cent in 2011 (when it ranked among the highest in the world). Since 2011, however, real GDP growth (including oil) has slowed down—to 7.9 per cent in 2012, and then to around 4.2 per cent in 2014 (Figure 11.3). The 2015 budget projected further declining growth—to 3.5 per cent, at a revised oil price (p.230) of US$52.8 per barrel.2 Non-oil GDP growth has similarly declined from 9.4 per cent in 2011. The actual growth rate in 2015, at just under 4 per cent, was only marginally higher than in the year 2000, and less than half the rate achieved in 2008 without oil.

Oil Discovery and Macroeconomic ManagementThe Recent Ghanaian Experience

Figure 11.3. Real GDP growth, 2000–15, %

Source: authors’ illustration based on data from Ghana Statistical Service.

The decline in real GDP growth can be attributed to a number of factors including: (i) the increase in current expenditure at the expense of capital expenditure; (ii) the greater fragility of both the private sector (partly due to a reliance on public contracts that could not be honoured given the need for adjustment post-elections) and the financial sector (given the accumulation of arrears and related non-performing loans); (iii) an increasing debt burden that has reduced critical fiscal space; and (iv) reduced macroeconomic policy credibility affecting investment decisions.

11.8 Corruption, Post-discovery

We now turn to consider some aspects of Ghana’s political economy that arguably contributed to the macroeconomic malaise. An important strand of the relevant literature attributes the natural resource curse to the political and social factors at play in a given country (Rosser 2006; Schrank 2004; Snyder and Bhavnani 2005; van der Ploeg 2011). Such factors include, in particular, (p.231) corruption and rent-seeking (Acemoglu et al. 2004; Isham et al. 2002; Leite and Weidmann 1999; Sala-i-Martin and Subramanian 2003).

The basic argument is that natural resources create ‘rents’, and political elites compete for their control. Natural resource wealth provides incentives for administrations to stay in power at any cost—by bribing voters, supporting patronage-based and unproductive investments, encouraging a shift from productive entrepreneurial activity to unproductive rent-seeking, weakening institutions, and resisting efforts to further accountability, transparency, and modernization. Corruption imposes a fiscal burden on the economy through the waste of resources that could otherwise have been more productively spent or saved.

In the case of Ghana, there are some indications that corruption may have been on the rise since the discovery of oil. The Afrobarometer Survey conducted in 2014 by the Ghana Centre for Democratic Development (CDD 2014) found that public perceptions of corruption had significantly increased, and there was a similar perception of an increase in corruption in the run-up to the 2008 elections under the NPP government (CDD 2008). According to the 2014 survey, three quarters (75 per cent) of respondents said corruption had increased over the previous year.

11.9 Ghana’s Political System in the Context of Oil

Ghana practises what has been described as a hybrid system of governance. The president is chosen directly by the people (unlike in the parliamentary system), and is head of government and head of state with full executive powers. But unlike the system operating in the United States, for example, the Fourth Republican Constitution, under which Ghana operates, makes it mandatory for the president to select a majority of ministers from parliament.

This means that power is significantly skewed towards the executive branch of the government. The executive branch also plays a large part in judicial duties. Not only is the executive responsible for framing and presenting all bills sent to parliament, but the president wields the power to appoint justices to the High Court and Appeals Court (acting on the advice of the Judicial Council) as well as Supreme Court, and to appoint the chief justice (in consultation with the Council of State and with prior approval of parliament). In practice, therefore, Ghana’s political system is a presidential one (Banful 2011).

Ghana is a multiparty democracy, but of the twenty-three political parties registered in 2014, very few are active across the nation. The strongest, most vibrant parties are the NDC, the NPP, the Convention People’s Party, the People’s National Convention, and the Progressive People’s Party. However, (p.232) the relative dominance of the NDC and NPP in various general elections since 1992 has turned Ghana’s democracy into a virtual two-party system. All general elections since that year have been closely contested between the two parties. Only a small margin (in terms of percentages and sometimes actual numbers) separates the two. The NDC won the presidential elections and a majority of parliamentary seats in the 1992, 1996, 2008, and 2012 general elections, while the NPP won the presidential elections and a majority of parliamentary seats in the 2000 and 2004 general elections.

In the 2000 presidential elections, after both candidates failed to secure the required votes in the first round, the elections went to a run-off. NPP candidate John Agyekum Kufuor secured 56.9 per cent of the votes. In the 2004 presidential elections, he secured 52.5 per cent of the votes to defeat John Atta Mills of the NDC, who received 44.6 per cent of the votes. The 2008 election saw Mills defeat Nana Akufo-Addo of the NPP by the narrowest of margins—41,000 votes (of about 12 million registered voters and nine million actual votes)—in another run-off poll. This was the closest election in Ghana’s history, and the first to follow the discovery of oil. It speaks to the functioning of Ghana’s democracy that the incumbent government was defeated by the opposition, even if by the narrowest of margins. The 2012 election was also fiercely fought: the NDC’s John Dramani Mahama received 50.7 per cent of the votes, while NPP candidate Nana Akufo-Addo received 47.7 per cent.

Such close margins indicate that for a four-year political term, the pressure on any government to deliver is high. A loss of the support of even a small number of voters can turn the next election. When oil was discovered in 2007, the incumbent NPP government raised public expectations to a high pitch (Modern Ghana 2007a). President John Agyekum Kufuor declared, ‘It is a great time to be Ghanaian’ (Abissath 2008). As discussed above, the main economic indicators deteriorated sharply ahead of both the 2008 and 2012 elections: the first time while the NPP was in government, the second time while the NDC was the incumbent party. Consistent with the political business cycle literature, incumbent governments in Ghana have generally expanded fiscal policy in election years. In a joint review of public expenditure, Republic of Ghana et al. (2011) found that in election years (1992, 1996, 2000, 2004, and 2008) the fiscal deficit (on a cash basis) as a percentage of GDP was 1.5 per cent higher than the year before. The 2012 fiscal outcome following the oil discovery therefore cannot be wholly attributed to the discovery, even though the discovery may have amplified the political business cycle.

Much of the literature on the political economy of resource booms predicts that the first government to enjoy resource rents will do all it can to remain in power. In the case of Ghana, this drive may be further facilitated by a skew in political power towards the executive branch. Ghana’s experience may therefore support some researchers’ hypothesis that presidential systems are more (p.233) prone to this sort of tendency than parliamentary systems (Andersen and Aslaksen 2008; Persson and Tabellini 2003).

11.10 What Could Ghana Have Done Differently?

The objective of this chapter is not to provide policy recommendations for Ghana, but rather to make available an empirical account of Ghana’s experience to guide other recent or upcoming oil and mineral producers. In that context, it is useful to briefly discuss what Ghana might have done differently.

11.10.1 Anchoring Fiscal Discipline

While the discovery of oil provided Ghana with the fiscal space to increase its borrowing, there was a clear and present danger amid a lack of actual value. In the case of Ghana, plans for how the loans were to be spent—and the transparency of their terms—were arguably insufficient. In sum, institutional mechanisms were insufficient to check unsustainable fiscal expansion. Could fiscal rules of the type employed in Chile and discussed by Solimano and Guajardo (2017) help in such a context?

11.10.2 Fiscal Rules and Budget Institutions

Fiscal rules commit governments, usually but not always by legislation, to numerical targets—most often budgetary aggregates pertaining to debts, deficits, expenditures, and revenues. The aim is to tie the hands of the fiscal authorities in a bid to achieve greater fiscal discipline. Research on the effectiveness of fiscal rules does not indicate that fiscal discipline follows in a straight line. Ossowski and Halland (2016) note that fiscal rules seem to work best in countries with:

  • a prior commitment to fiscal discipline

  • strong institutions

  • political commitment and consensus

  • policy credibility

  • strong public financial management capacity

  • fiscal transparency

  • robust monitoring.

It is therefore possible that a country lacking fiscal rules but possessing a commitment to fiscal discipline and good institutions will outperform a country with well-designed fiscal rules but with less commitment to fiscal discipline, less political consensus, and weaker institutions.

(p.234) Chile provides a good example of the success of fiscal rules amid dependence on resource revenues (Frankel 2011). There, the structural budget balance is targeted to allow some cyclical flexibility. The medium-term equilibrium price of copper and the output gap are decided on by two non-partisan expert panels. The Chilean mechanisms are discussed in greater detail in Solimano and Guajardo (2017).

What is clear from the literature is that political economy considerations are critical to the success—or otherwise—of fiscal rules in resource-rich countries. For many low-income countries, infrastructure needs are high, as is the demand for public-sector wages. Governments facing elections may attempt to respond to these two demands by embarking on infrastructure projects without conducting value-for-money audits, and by increasing public-sector wages (Gelb 1986; Medas and Zakharova 2009). Similarly, it is very difficult for politicians in low-income countries that have just discovered a resource to make an argument to increase savings and pursue some sort of inter-temporal optimization, as argued in a recent paper by van der Ploeg and Venables (2017). This is especially the case when elections are hard fought and close in margin.

The application of fiscal rules in Ghana is new territory: the history of the country’s fiscal management is one of fiscal indiscipline interspersed with short periods of fiscal discipline. In Ghana even a fiscal rule enshrined in law might lose out to the promise of electoral victory. Judging from successive administrations’ very poor observance of the 2002 Bank of Ghana Act and the 2011 PRMA, fiscal rules by themselves are not sufficient to guarantee fiscal discipline.3 What is needed is a commitment to, and a consensus on, fiscal discipline across the political divide, policy credibility, and a building up of strong public financial management capacity. With these requirements in place, a fiscal responsibility law might work.

11.10.3 Anchoring Monetary Discipline

In Ghana, fiscal dominance following oil discovery and production was also accommodated by the central bank. Central bank financing of the fiscal deficit increased fourfold between 2007 and 2008 (in the run-up to the 2008 elections), and subsequently increased sixfold between 2008 and 2014. In the context of an inflation-targeting framework, such an increase in liquidity was bound to compromise the central bank’s ability to maintain price and exchange rate stability.

(p.235) 11.10.4 Bank of Ghana Act and Central Bank Independence

The case for central bank independence is based largely on the argument that central banks need to be protected from political interference to deliver on the goal of price stability (Alesina and Summers 1993; Bade and Parkin 1982; Parkin 1987). Yet some research (including in developing countries) indicates mixed economic performance even where central banks are independent (Berger et al. 2001; Eijffinger and de Haan 1996; Klomp and de Haan 2007).

In the case of Ghana, the 2002 Bank of Ghana Act was a landmark piece of legislation that established the independence of the Bank of Ghana. The Act states that the Bank shall support the general economic policy of government and promote economic growth and effective operation of banking and credit systems in the country, ‘independent of instructions from the Government or any other authority’ (BOG 2002, emphasis added). This provision makes the Bank of Ghana, on paper at least, one of the most independent central banks in the world (Ayensu 2007).

This historic Act gives operational independence to the Bank of Ghana and specifies, inter alia, that: ‘Government borrowing from the central bank in any year will be limited to 10 per cent of its current year’s revenue.’

To achieve its primary objective of maintaining price stability, the Bank of Ghana in 2002 formally adopted an inflation-targeting monetary policy framework. In this context, the central bank should be able to choose instruments independent of political pressure and have minimal responsibility for financing government deficits. Fiscal reforms to maintain a broad revenue base, and thus reduce the need for seigniorage revenue,4 then become crucial (Tuladhar 2005).

So why is it that central bank financing has grown so dramatically since the oil discovery, and why has the 2002 Bank of Ghana Act not been able to restrain this increase in central bank financing? The answer most likely lies in the inability of the central bank to withstand pressure from the government. There are no sanctions for breaches of the Act. Also, under the Act, the Bank of Ghana does not report to parliament. Furthermore, the ceiling on lending to the government is based on the government’s estimate of revenue collection in the current year, which provides an incentive for an upward bias in revenue estimates. Instead, such legislation might have set a ceiling on the bank’s lending to the government that is based on the government’s actual revenue collection in the previous year.

The experience of Ghana shows that while monetary policy matters, fiscal policy matters even more. Ghana’s monetary policy framework could not (p.236) withstand sustained pressure from the fiscal authorities in 2000, 2008, and 2012—all election years. It is clear that governments must commit to fiscal discipline beyond the electoral cycle. In the context of Ghana’s most recent (April 2015) IMF programme, the central bank will be required to reduce its financing to the government to 5 per cent in 2015 and zero in the 2016 election year (IMF 2015). The conditions necessary for fiscal rules to be effective are probably the same as those necessary for central bank independence: policy credibility, fiscal discipline, political commitment, and political consensus, among others.

11.10.5 Transparency

To enhance transparency in the management of natural resources, Ghana joined the EITI in 2003 and became compliant with EITI in 2011. Ghana also set up the Public Interest Accountability Committee (PIAC) in 2011 under Section 51 of the 2011 PRMA, to conduct independent assessment and monitor the utilization of oil revenues to ensure accountability by government.

How much have PIAC and EITI contributed to enhancing transparency in the management of Ghana’s oil resources? The Institute of Economic Affairs Ghana, a leading public policy think tank, has developed the Petroleum Transparency and Accountability Index Project to monitor transparency and accountability in the oil sector. Since 2011, their index has focused on four key areas: revenue transparency, expenditure transparency, contract transparency, and the Ghana Petroleum Funds. The 2015 report found that steady progress had been made with regard to the transparency of revenue expenditure and the Ghana Petroleum Funds. Contract transparency showed the least improvement, lacking public disclosure of contracts and the associated process (IEA 2015). An earlier paper (Bawumia and Halland 2017) discusses in more detail how the example of the Atuabo gas project—the largest project yet undertaken in the sector—illustrates the remaining weaknesses of the approval and transparency processes in Ghana.

Furthermore, contracts for prospecting or exploration rights in Ghana’s oil and gas sector are issued through an administrative process, rather than through competitive tendering. Ghana also does not have any mandatory contract disclosure provisions, and therefore details of oil contracts that do not come before parliament can only be disclosed by a ministerial directive.

Notwithstanding Ghana’s compliance with EITI, civil society organizations have called for increased disclosure of information on beneficial ownership in mineral and oil contracts (which is voluntary under EITI). Furthermore, there have been claims that the oversight responsibility of PIAC may have been curtailed, with the record over the last two years indicating that PIAC has had (p.237) difficulties in carrying out its mandated activities, partly because of underfunding. According to Adam (2014), in 2014 PIAC received only 14 per cent of its proposed budget.

11.10.6 Strengthening the Law on the Management of Oil Revenues

Ghana’s PRMA includes the following provisions: a limit of 70 per cent utilization of expected revenues in any financial year; payment of excess revenues into the Petroleum Holding Fund; a transfer of at least 70 per cent of the excess revenue into the Petroleum Stabilization Fund; and the balance to be paid into the Heritage Fund (an endowment fund to support development for future generations when petroleum reserves have been depleted). However, and significantly, the oil revenues due to the budget can be used as collateral for loans for the first ten years of oil production.

But in the face of dwindling foreign exchange reserves, the Petroleum Stabilization Fund was drawn down well before oil prices fell and before there was any actual shortfall in petroleum revenues. As the funds transferred to the Stabilization Fund increased in 2012 and 2013, the government set a cap on the amount to be transferred into the Stabilization Fund. The cap was set at US$250 million at a time in 2013 when the balance on the account stood at US$426 million. This provided fiscal space to spend the excess amount of US$176 million. Civil society organizations have argued that the withdrawal of funds from the Stabilization Fund was illegal, since this was not made public and was first brought to the attention of the public by a whistle-blower (ACEP 2014).

The lesson from Ghana’s experience thus far is that while stabilization and savings funds can help smooth spending, they can certainly not prevent slippages. In the case of Ghana’s PRMA, this is compounded by the fact that the collateralization of future oil revenues was allowed for the first ten years, thereby undermining the initial objective to limit excessive spending permitted by oil discoveries.

11.10.7 Forecasting Government Oil Revenues

The literature contains persuasive evidence that official forecasts of revenues during resource booms tend to be overly optimistic (Forni and Momigliano 2004; Frankel 2011; Jonung and Larch 2006). This is arguably the case in Ghana.

According to Adam (2014), Ghana’s 2011 PRMA as designed gives an incentive to governments to project higher revenues than are likely realizable, because 70 per cent of the projected benchmark oil revenue is allocated to the budget. In 2011, for example, the government projected that it would (p.238) receive GH₵1.2 billion from oil. The total amount actually earned, however, came down to GH₵667 million: a shortfall of GH₵583 million. The benchmark revenue for 2012 was over GH₵1 billion,5 but the amount actually received came down to GH₵562.4 million. In 2011, forecasted oil revenues from corporate taxes of GH₵600 million (GH₵384.1 million for 2012) were arguably unlikely to materialize (Adam 2014). This is because the Jubilee partners6 are entitled to capital cost recovery under the 1987 Petroleum Income Tax Law (PNDC Law 188). The over-projection was arguably motivated by the provisions of the 2011 PRMA, by which the proportion of the oil revenues that accrues to the budget (ABFA) is based on projected benchmark oil revenues.

In the 2015 government budget presented to parliament in November 2014, oil revenues were estimated at GH₵4.2 billion (3.1 per cent of GDP) based on an oil price of US$99.3 per barrel, although global oil prices at the time were actually close to US$50 per barrel. It was argued that the use of the US$99.3 price was dictated by the PRMA legislation (specifying a seven-year moving average price) even though this over-optimistic forecast implied a revenue shortfall of GH₵2.7 billion (2 per cent of GDP). Prudence would have dictated that, despite the law, no budgeted expenditures be made in relation to unrealizable revenues.

The government later, at the prompting of the IMF (in the context of negotiations for an IMF bailout), presented a revised oil revenue estimate of GH₵1.5 billion (1.1 per cent of GDP) using the price of US$52.8 per barrel, even though the original budget was approved by parliament in January 2015.7

To enhance safeguards against fiscal indiscipline, adequate legislation and methodologies for revenue forecasting are imperative. Frankel (2011) has recommended, following Chile’s example, that resource-rich countries consider establishing independent non-partisan expert panels to forecast resource revenues for the budget and the extent to which prices (of oil, in the case of Ghana) deviate from their long-run averages.

11.11 Conclusions

The discovery of oil in Ghana in 2007 raised public expectations quickly and substantially. For many, oil appeared to be the long-awaited solution to (p.239) Ghana’s developmental challenges. This hope was reflected in the 2008 and 2012 election campaigns, which saw political parties promise much in the areas of education, infrastructure, and health, among others. Fiscal discipline was given only low priority, as parties focused on winning the elections.

As a consequence, the public finances deteriorated, debt returned to unsustainable levels, current account deficits ballooned, foreign exchange reserves dwindled, the exchange rate depreciated rapidly, interest rates rose, inflation rose, and real GDP growth declined. These are the hallmarks of a resource curse. Ghana’s experience suggests that symptoms of the resource curse that have dimmed its prospects since the discovery of oil could have been avoided in the presence of:

  • a broad-based political commitment to fiscal and monetary discipline

  • strong institutions, including the ability to uphold relevant fiscal and monetary legislation

  • strong public financial management capacity

  • transparency in the management of oil resources

  • alignment of expenditure with realizable revenues in the context of independent oil revenue forecasts.

The case of Ghana may not fit smoothly into the classic resource curse narrative because several of the usual transmission channels—such as an appreciation of the real exchange rate and the volatility of commodity prices, or armed conflict—are missing. Nevertheless, as discussed in the introduction to this chapter, the Ghanaian story in part reflects the insights provided by the literature on the political economy of development, and more specifically the political economy of the resource curse. The immediate cause of the lack of fiscal and monetary discipline in Ghana can be found in policy decisions.

Importantly, Ghana’s story allows us to move beyond vague notions of ‘institutional quality’, measured by aggregate indexes, when considering the resource curse and how to address it. The Ghanaian experience confirms that there are specific institutional checks and balances that must be upheld if a country is to avoid the resource curse. From a fiscal and monetary perspective, these include early management of expectations, a broad-based political commitment to fiscal discipline as opposed to a reliance on fiscal rules, full and real (as opposed to nominal) independence of the central bank, as well as the establishment of means to isolate from political pressures any sovereign wealth fund and the government entity responsible for oil revenue projections. Ultimately, these factors are likely to be critical in determining whether the discovery of natural resources will adversely affect economic growth or not. In the case of Ghana, they were key factors in the regrettable shift from boom to gloom just four years after the discovery of oil.

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(1) This was a Poverty Reduction and Growth Facility arrangement that built on Ghana’s second Poverty Reduction Strategy. The main goal of the programme was to eliminate Ghana’s large fiscal imbalances by 2011 and put in place strengthened institutions for public financial management (IMF 2009).

(2) The initial budget projection was based on a price of US$99.3 per barrel.

(3) A detailed account of how Ghana’s PRMA has been breached one way or another can be found in NRGI (2015).

(4) Seigniorage is the difference between the face value of money (i.e. coins or notes) and its production cost.

(5) Based on a projected oil price of US$90 per barrel.

(6) Tullow, Kosmos, Anadarko, and Sabre, which are currently producing Ghana’s oil from the Jubilee Field (offshore).

(7) Statement to parliament on ‘Implications of the fall in crude oil prices on the budget’ submitted by the Minister of Finance and Economic Planning, 12 March 2015.