The oil boost is timely for Ghana

With production expected to start later this year, Ghana's oil fields are expected to provide a much needed boon to an economy that has shown signs of a slowdown in recent times. Ghana's economic growth slowed to 4.7% last year, its lowest rate since 2002, after reaching a high of 7.3% in 2008. This development was compounded by the fact that the country's economy had averaged a 6% growth rate over the previous five years.

This decline has happened despite Ghana's relative insulation from the global economic crisis. The country's banks were not exposed to the toxic assets that wreaked havoc in Western markets. Furthermore, Ghana's chief exports, gold and cocoa, did not suffer in the midst of the global recession as continuing demand for these commodities propped up their prices. Indeed, Ghana's gold industry is on the brink of a significant development that is expected to maximise its value to the economy. CC Global Investment, an Accra-based company, is in the process of constructing a $15m refinery, scheduled to be operational by the end of this year, which is expected to produce 300 kilogrammes of refined gold on a daily basis.

Instead, Ghana's recent slowdown can be attributed to certain key factors. Remittances from its sizeable diaspora fell by approximately one-fifth while foreign direct investment declined to a four-year low. The country's construction sector also slumped owing to the uncertainty brought about by the global economic crisis.

Fiscal squeeze

The government's fiscal position has largely deteriorated in spite, rather than because, of global economic conditions. The presidential election of December 2008 prompted a sizeable expansion of expenditure as the New Patriotic Party (NPP) sought to retain its grip on the presidency. This resulted in the country's fiscal deficit ballooning from 9.2% of gross domestic product (GDP) in 2007 to 17.8% of GDP in 2008. An estimated 38% increase in the public sector wage bill was seen as the main driver of the fiscal deficit's slide. As a result, Fitch Ratings downgraded Ghana's sovereign rating from 'stable' to 'negative' in early 2009.

The NPP's efforts to appeal to the electorate ultimately failed as the opposition National Democratic Congress (NDC) won the 2008 election, albeit by the slender margin of 40,000 votes. The NDC administration, led by president John Atta Mills, promised to rein in government spending to reduce the country's fiscal deficit. This process of fiscal consolidation has had the desired effect, as the fiscal deficit was estimated to have fallen to approximately 10.9% of GDP in 2009, according to the International Monetary Fund (IMF).

It is the fiscal deficit that revenues from the oil industry are expected to address. Ghana's offshore Jubilee field, operated by Kosmos Energy and Tullow Oil, is estimated to contain approximately 600 million barrels of recoverable oil reserves with an upside potential of 1.8 billion barrels. Production is expected to hit to a peak of about 120,000 barrels per day and is likely to be sustained for several years. The implications of such a development cannot be understated, according to David Cowan, Africa economist for Citigroup's global markets division. He says: "Oil will be a huge driver for [Ghana's] economy. We should witness the country's economy growing by approximately 15% to 20% next year. The industry will have huge revenue implications for the government. In times of high oil prices, the government's revenue could increase by as much as 25%. The numbers are very significant."

Whereas Ghana's fiscal deficit is expected to fall to as low as 3.5% of GDP by 2013, the implications of oil on the country's other notable deficit, its current account, are not expected to be particularly significant. The country's current account deficit reached 18.7% of GDP in 2008, according to IMF estimates.

Moreover, in spite of the pending commencement of oil production, the current account deficit is expected to remain relatively high over the course of 2010 and 2011, with estimates of 14% and 11%, respectively. This high deficit level is largely attributable to the development of the Jubilee field, which involves approximately $5bn of investment, including imports of capital goods.

Managing wealth

The Ghanaian government is aware of the need to manage its new-found wealth. With economic growth expected to jump above the 16% mark in 2011 on the back of oil production, according to Citi Investment Research and Analysis, it is seen as imperative that the government uses its increased revenue to maintain economic growth over the longer term. One part of this problem is not allowing the country's currency to be overvalued.

"Getting the country's exchange rate policy right is the hardest challenge facing the Bank of Ghana and that's where it has to concentrate its efforts," says Mr Cowan. "If Ghana overvalues its exchange rate, it effectively undermines the long-term competitiveness of the gold and cocoa sectors. The cocoa sector is going to remain the major employer for rural Ghanaians for a long time, so a suitable exchange rate policy is very much needed. It is a difficult process for the Bank of Ghana to manage but I hope it gets it right. It is fundamentally down to implementation, which is the challenge for most African countries."

Ghana's currency dilemma is highlighted by the experiences of other oil-producing African countries. Nigeria and Angola, two of Africa's most notable oil producers, have struggled to prevent their respective exchange rates from being overvalued. However, membership of a monetary union, namely the West African Economic and Monetary Union, has aided Equatorial Guinea and Chad, whose currency is the West African Franc, which is pegged to the euro. Ghana's cedi will continue to be the country's currency for the foreseeable future as the West African Monetary Zone, of which Ghana is a member, has yet to materialise.

Ghana also faces the problem of tackling inflation, which has a history of worsening in other oil-producing states throughout sub-Saharan Africa. Ghana's inflationary record is already known to be worrying; the country's inflation rate in the 2005/09 period was 14.2%, whereas the average for sub-Saharan Africa was 9.1%. According to Citigroup research, Ghana's medium- to long-term outlook for inflation is not promising. There is particular concern about the potential lagging of the agriculture sector as oil comes on-stream, a development that has already been experienced in Angola and Nigeria. Citigroup cites this as "part of the resource curse coupled with the liquidity problems caused by the revenue from the oil sector".

As well as addressing the problems that the advent of oil could bring, there is much the government could already do to strengthen its finances.

"There are still issues that need to be addressed when it comes to the government's finances," says Mr Cowan. "These include reform of petrol and utility subsidies, which currently consume reasonably significant slices of the government's budget. Most people in Ghana are aware of the fiscal problems inherited by the new government, so there is considerable goodwill that things have to be tackled. The fiscal and current deficits do hang over the country even though oil makes Ghana's economic prospects look good."

Tax system overhaul

Tax reform could also be instituted in the form of overhauling tax administration and improving the efficiency of the system. According to a report compiled by the African Development Bank and the Organisation for Economic Co-operation and Development titled African Economic Outlook 2010, Ghana's tax base remains low owing to a thriving informal sector. However, the report does highlight the fact that Ghana has made progress on this front over the past decade; tax revenue as a percentage of GDP increased from less than 17% to about 23% from 2000 to 2009.

Nevertheless, the outlook for 2010 remains positive. Ghana's economy is expected to grow by close to 6%, inflation is expected to fall and fiscal consolidation is expected to gather pace. Mr Cowan says: "2010 is unlikely to be much different from 2009. Both years, in a way, continue the process of recovery from a fiscal blow-out in the run-up to the presidential election of December 2008. Ghana is gradually reconsolidating at a time when it has experienced a relatively positive terms-of-trade shock."

The advent of oil production later this year will boost the economy but the question remains as to how effectively the country will be able to manage its increased revenue.

Macroeconomic framework for Ghana