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A black gold coast emerges

By Patrick Smith in Accra
Posted on Thursday, 9 December 2010 11:42

The excitement surrounding Ghana’s graduation into the ?oil-and gas-producers’ club is tempered by the challenges this creates for the development of a diversified economy.

With all the enthusiasm that a former investment banker can muster, Finance Minister Kwabena Duffuor told Ghana’s parliament in October that a new era in the country’s history is about to dawn. He then announced an upbeat budget statement for 2011, the first full year of commercial oil and gas production.

“The 2011 budget will introduce critical growth-oriented strategies,” said Duffuor. “These interventions will include both social programmes in the education and health sectors, and growth-enhancing programmes in the infrastructure and economic sectors.

“?Cautious banker that he is, Duffuor is not about to bet Ghana’s farm on an oil boom, but somehow he has to bow to the political imperative of convincing Ghanaians that brighter economic days are coming, if not imminently, at least before the 2012 elections. At the same time, Duffuor is no free-spender, as some of his ministerial colleagues are finding out.

Although he hails from an Nkrumahist party with a socialist tradition, Duffuor is more business-oriented than many of his predecessors. He told parliament that public investment in roads, energy, housing and the railways opened the way for commercial initiatives: “It is my expectation that business will take full advantage of this opportunity and devise innovative ways of creating sustainable jobs and increased incomes.”?

For Edward Effah, managing director of Fidelity Bank, that is a message that Ghana needs to hear more. “The issue is that government has to really understand business and how it can contribute to growth. When the government spells out a clear message about the aims of its economic policies then we can work more effectively with it,” says Effah.

Duffuor has spent much of the past 18 months trying to cut the government’s inherited fiscal and trade deficits. He is now sticking to the script that the government is establishing a platform for sustained growth and will keep a tight check on spending. That is the message he has given the IMF, whose mission chief, Peter Allum, has already voiced concerns about the risks of the government taking on too much debt in its rush for rapid development.

“The key thing is that the government is not about to announce a large surge in government spending,” Allum tells The Africa Report. Ghanaian and IMF officials had discussed the debt issue at length, says Allum, adding that the concerns were about rising indebtedness and the need to build a robust debt strategy ahead of the coming economic expansion.?

Although Ghana qualified for debt relief from the IMF and the World Bank in the mid-2000s, the government under President John Kufuor (2001-2009) started accruing foreign debt with a $750m Eurobond in 2007, which was followed by more commercial borrowing.

Government indebtedness has grown from 52% of GDP in 2007 to 67% of GDP in 2009, and a projected 70% of GDP in 2010. Its debt obligations are split more or less evenly between domestic and foreign creditors, with a slight weighting to companies and banks. As the government has rationed its spending carefully over the past 18 months, those domestic operators have borne some of the brunt, and state entities have built up substantial arrears to local concerns.

The government is likely to formalise much of this debt by floating domestic bonds or issuing promissory notes, beginning to pay the rest down. All this will reinject some money back into the system, as demanded by many working in the private sector.

Some of the more optimistic projections of more than 14% real GDP growth in the first year of oil production have been scaled down. Even the IMF’s modest forecast that Ghana’s economy will grow by 9.9% in 2011 and then maintain a higher momentum suggests several new development possibilities. Although Duffuor argues that oil production will radically change the country’s growth and investment calculus over the next decade, he and his fellow ministers are trying to contain popular expectations of an early national bonanza.

Using the government’s and the IMF’s figures, the higher growth levels next year will translate into a rise in average annual incomes per head from $355 in 2010 to $381 in 2011. Initially, working Ghanaians will see little difference in the economy, unless they are based in the emerging oil city of Takoradi in the Western Region or in the capital, Accra, where hundreds of local service companies are gearing up to work alongside the expanding oil-company operations.

As Joseph Abbey, a former finance minister who runs the Accra-based Centre for Policy Studies, says: “We expect the effects of oil and gas on our economy to be catalytic not transformative.” He adds that the oil reserves are, however, large enough to affect the future of the economy if used in a holistic development strategy. That means, according to Abbey, that there should be full transparency in the management of oil revenues and their allocation in the budget, along with the government’s ability to manage the revenues and allocate them to projects with high social returns.

The trade and industry minister, Hanna Tetteh, talks animatedly about transforming Ghana from a factor-driven economy to a competitive economy with an emphasis on developing new industrial sectors. She cautions that the mainstays of the export economy, gold and cocoa, will remain critically important: “It’s not about moving from the cocoa economy to an oil and gas economy, it’s about moving to a diversified economy.”

One of the reasons for current optimism about the economy, she explains, is that both the cocoa and the gold sectors are growing and are attracting record prices on world markets. Gold exports yielded $1.8bn in the first six months of 2010, $537m more than a year earlier. Similarly, cocoa exports were up to $1.3bn in the first half of 2010, a 22% increase over the previous year’s first-half result of $1.1bn.

Provided that the government’s balancing strategy stays on track, the prospects for diversification look good. Strong commodity prices and the addition of oil revenues could boost state revenues by as much as 50% over the next year, according to Standard Chartered’s Africa economist, Razia Khan.?

However, the picture will be complicated by the initial investments, she says. “While the current account deficit will widen initially as the start of oil production pushes up oil-sector imports, these imports will eventually help to boost foreign exchange earnings.”?

In the short term, oil’s greatest impact, Khan says, will be to reduce the economy’s vulnerability to the external price shocks of hikes in world fuel prices. Almost all of Ghana’s downturns in recent decades have been associated with increases in the cost of oil imports. With its own oil production, the government has the chance to break free from that cycle.

Like other economists, Khan acknowledges worries about the cost of Ghana’s public sector. The IMF’s Allum calculates that the government’s restructuring of public-sector pay into a ‘single spine’ system which aspires to reward equal work, in whatever government department or parastatal company, with equal pay will increase the state wage bill, costing as much as 2-3% of GDP.

Public spending on wages and salaries has long been higher than in many other African states but, according to Khan, “Ghana has plenty to show for it. It is closer than most African countries to reaching the Millennium Development Goals.” She points to the plans to develop an associated gas industry with links to the electricity grid, which will be able to support manufacturing operations and suggests that Ghana will get higher economic returns from its hydrocarbons than other economies in the region.

To make that work, the government should give more effective backing to small+- and medium-sized businesses, says former finance minister Abbey. He argues that the government’s tough policies on the deficit and money supply over the past 18 months has constricted the job-creating smaller companies.?

The banks could help the situation by more determined lending to smaller companies. They are not passing on the central bank’s cuts in interest rates to their smaller corporate customers, says Abbey.

Foreign investment is growing both at the macro and corporate level, says Abbey, but also in the domestic money and financial markets over the past year: “The domestic money market continued to reflect strong investor demand with the significant easing of inflationary expectations in the domestic economy.” After the Bank of Ghana floated a three-year, fixed-rate bond, foreign investors were holding 17.6% of the bonds by June, up from 9.6% at the end of 2009.

According to Fidelity’s Effah, foreign-investor interest in the real economy is matching those money -market flows: “The market view is very optimistic about Ghana. Most of our clients [local and foreign] are in expansion mode, both about selling here but also into the region.” Several of Effah’s customers are using Ghana as a base to sell wood and wood products in Nigeria, others have set up operations ranging from poultry farms to small chemical-manufacturing companies, which target regional export markets.

Over the next decade, the IMF’s Allum believes there will be important social as well as economic changes in Ghana: “It’s an economy where the private sector is finding its voice. Lots of young and very dynamic Ghanaian businesspeople are determined to use the economic opportunities that oil can provide.”?

Roger Nord, a senior adviser in the IMF’s Africa Department, argues that Ghana’s position as a “maturing democracy” would help it 2manage oil and gas development more effectively. The lengthy debates between civil society and government over the petroleum revenue bill and a new regulatory authority reflected a higher level of state accountability than in many states where oil has undermined economic management, he says.

Government officials and analysts say the real test for oil and gas policy will be in the real economy: will it boost jobs and drive self-sustaining growth? As Energy Minister Joe Oteng-Adjei told company officials at the Accra International Conference Centre in March 2010, there is no shortage of examples of oil producers in the region that have suffered great economic damage, so Ghana has no excuse if it does not learn from those precedents.

This article was first published in the Investing in Ghana supplement to The Africa Report’s December 2010-January 2011 edition.

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