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InterviewsJune 30 2011

Ghana's finance minister focuses on maintaining momentum

Ghana’s finance minister, Kwabena Duffuor, is focusing on maintaining the economy’s momentum of the past 18 months and attracting more foreign investment. He is also at the forefront of efforts to ensure the country’s recently discovered oil riches are not squandered.
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Ghana's finance minister focuses on maintaining momentumKwabena Duffuor. finance minister, Ghana

Q: How big an effect will oil, which Ghana began exporting in December, have on the country's economy?

A: We are going to have both oil and gas production. And we expect that these will transform the Ghanaian economy. At the moment, we are doing very well with cocoa and gold production. With the oil and gas, we’re going to have four big commodities.

The gas, in particular, must be developed to build up the power sector. At the moment, power is unreliable and expensive. It is, therefore, acting as a major constraint on businesses. So with reliable and cheap power, the cost of production for the business sector will go down. Productivity will improve. We will also develop a fertiliser industry [using by-products from the oil extraction], which is critical for agriculture.

So we expect a gradual transformation from the present state into a diversified, modern economy with the oil and gas coming on stream. Already, Ghana has middle-income status, albeit at the lower level. We want to make sure we attain a strong middle-income status.

Q: Is Ghana planning to build a major refinery that can act as a hub for oil from other countries in the region, including Gabon and Nigeria?

A: We already have a refinery [at Tema] and we are trying to upgrade it. But if we are going to be a major oil producer, a second refinery may be a good idea. However, this may not necessarily be owned by the government. The private sector will be encouraged to build it and a public-private partnership will also be expected. It could certainly act as a hub for refining oil from other nearby countries.

Q: Can Ghana avoid the mistakes made by producers such as Nigeria and Equatorial Guinea and ensure its oil wealth is distributed evenly?

A: We have learnt from those who are ahead of us, both good and bad. We have started managing the economy in such a way that we will not suffer the Dutch disease [where the oil industry crowds out other economic activity]. We are making sure the non-oil sector is managed in a more efficient way.

We have managed to improve cocoa production, for example. By next year we should be able to produce 1 million metric tonnes. If we modernise our agriculture, if we take steps to make sure the non-oil sector picks up – that it grows at a fast rate – we will not experience the oil curse.

Q: How will the recently signed Petroleum Revenue Management Act help in this regard?

A: Under the law, we will make sure that revenues from petroleum exports go into two main areas in addition to oil revenues that will directly support the budget. We will have a stabilisation fund and a heritage fund. The first will invariably be used to support the budget. If there are exogenous oil shocks, this fund will be able to absorb them and give us some stability in planning the management of the economy. What will go into the heritage fund will serve as an endowment for future generations. This is why the so-called ‘curse’ won’t apply to Ghana: we’ll have revenue for current consumption through the budget allocation and stabilisation fund, and revenue for future consumption through the heritage fund.

Q: What will the heritage fund invest in?

A: We’re setting up an investment advisory committee to advise the Ministry of Finance about this. Obviously, we will make sure it invests in high-yielding assets outside Ghana. It will act as a sovereign wealth fund.  The investment modalities for this fund as outlined in the Petroleum Revenue Management Act will be strictly adhered to.

Q: What oil price has Ghana factored into its current budget?

A: This year, we’ve made a provision for $100 per barrel. Since the price is above $100, that’s giving us some stability. Apart from this, we’ve hedged oil from both consumption and production sides. We’re the only country in Africa to have done that.

On the consumption side, our hedge assumes the price of oil will go up. We’re paying a monthly insurance premium on the strike price. If the oil price does go up, we’ll be restored when the call option is taken. On the production side, the view is that the price will go down. And if it does, we’re also hedged. These hedges, both very simple instruments, ensure our budget won’t be undermined by variations in market prices. We gain both ways.

Q: Are you worried about the fiscal deficit?

A: Under new methodology adopted in 2010 by the main statistics office, the budget deficit for the end of this year is forecast to be 5.5%. It has come down since last year. This is mostly because revenues have picked up, especially since January. We actually hope that by the end of the year it will be lower than 5.5%, particularly if we are able to control expenditure, as we are doing now. The goal is to cut the deficit to 3% by 2013-14.

Q: Are you worried about the effect of high global food prices on inflation?

A: Our economy is quite different. Yes, internationally food prices are so high that they’re hurting many countries. But we have a peculiar structure. Our food imports account for only 15% of the basket. So this is not something that can undermine our efforts to curb inflation that much.

Q: Many people say that Ghana needs to boost its agricultural production and that it cultivates too little of its arable land. What is the government doing to rectify this?

A: In the last budget, the focus was on a few areas. One of them was the modernisation of agriculture. We have been dependent on subsistence and rain-fed agriculture in the past. We’re moving away from that, making sure we develop commercial farming where we have a lot of small dams supporting the farmers. We’re also encouraging more use of fertilisers.

Look at rice production. In the 2010 budget, we restored the tariff on rice imports. This encouraged the production of rice locally and it has since gone up by more than 30%. The idea is to continue to support domestic production, so that imports of rice are reduced.

Generally, agriculture is being improved and modernised. And the focus isn’t just on cocoa, rather the whole sector.

Q: What are the production targets for cocoa?

A: We want to grow 1 million metric tonnes by next year. This year we managed almost 900,000, compared to 700,000 a few years ago. Some analysts are saying that growth has shot up because of the crisis in Côte d’Ivoire. That’s not true. If you look at the output region by region, you see significant growth in all of them. If the increase was because of the Ivorian situation, then growth would have been greatest on the Ivorian border [in the west of the country]. But that’s not the case. The area with the highest growth rate is Volta Region [on Ghana’s eastern border]. So it’s not true that we’ve gained from the Ivorian crisis. Our cocoa has a premium. The quality is better than Côte d’Ivoire’s.

The increase in output is due to modernisation, such as the use of fertilisers, and also price effects. Over the past two years, the price of cocoa has jumped considerably.

We are also benefiting from the high gold price of more than $1500 an ounce. So we have very strong exports.

Q: What is being done to improve Ghana’s infrastructure, which analysts say is sorely lacking in many parts of the country?

A: Infrastructure is constraining productivity. So we’re giving priority to its development. A recent World Bank study indicates that we need about $2.5bn annually for the next four or five years for infrastructure development. We want to take that seriously to help economic growth. The state of our roads, railways, and health facilities presents serious challenges. But we’re making a lot of effort.

A lot of the funds for this development will come from oil revenues. Over the next 10 years, we want to use a lot of those revenues to improve infrastructure.

Q: Will Ghana issue a second Eurobond?

A: The [$750m] bond from 2007 had a coupon of 8.5%. Because of the performance of the economy, it is now trading at 5.8%. We hope that it will trade up further. If so, we can think about another Eurobond. As of now, we haven’t decided. We’re looking at the yield on the outstanding bond.

Q: Ghana is rated B by Standard & Poor’s and B+ by Fitch. Do you expect it to be upgraded?

A: Yes. Our macro indicators are the best ever. We are borrowing locally at 10.4%. Two years ago it was 25%. Our foreign exchange reserves have gone up from $2bn to almost $5bn in the same period. Inflation has gone down to single digit figures. And the cedi has been stable since August 2009. So why wouldn’t our rating improve?

The agencies were talking to us about arrears. Those were a problem last year. But in the first quarter of this year, we paid almost 1.2bn cedis [$792m] in arrears. So arrears are no longer a problem.

Q: How will the oil – and last year’s upgrade from lower- to middle-income status – change Ghana’s relationship with foreign donors?

A: The donors said last year that Ghana should have a transitional period of about five to 10 years in which it will continue to enjoy concessionary financing facilities. Only after that will we be subject to non-concessionary financing. Donors still want to help us reach all the Millennium Development Goals. We have made five out of eight [of the goals]. Within that transitional period we should be able to meet the other three. There’s a cordial relationship with our donor partners as far as financial and technical assistance from them is concerned.

Q: What financial support will China, which has heavily boosted its presence in Africa in the past five years, provide Ghana over the coming decade?

A: To manage our sovereign debt well, we give preference to concessionary facilities. Whenever we can get them, we’ll consider first them. We deal with the Chinese as they provide huge facilities. If we can get them for our infrastructure projects, why shouldn’t we go for them if they’re cheap?

Q: Is Ghana actively courting foreign investment?

A: Yes. This is a time for investors to move into Ghana. The economy is doing very well. It is strong and resilient. And we’re continuing to diversify and modernise it. Ghana’s also a stable country, with the rule of law, transparency and good governance. It’s a peaceful country. In this environment, the economy can only grow faster.

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