Ghana may be experiencing record growth rates but analysts are urging caution over oil revenue management and lack of infrastructure. By Jon Offei-Ansah


While Europe and the US are battling with crippling debts and fighting to avoid another recession, Ghana’s economy grew by an estimated 13.6 per cent in 2011, making it one of the world’s fastest-growing economies. Some African finance ministers, particularly those from Nigeria and South Africa, believe that Europe’s economic plight might slow Africa’s recovery. However, the data on Ghana indicate positive trends.

Many economic analysts say following the boost to 2011 growth from first oil, Ghana’s economy should maintain a strong momentum. The government is targeting 7.6 per cent non-oil growth in 2012 and expects overall GDP growth of 9.4 per cent but some analysts project a lower growth rate. “Given our own expectations of broadly supportive commodity prices, we forecast growth of 8.5 per cent,” Razia Khan, head of African economic research at London’s Standard Chartered Bank, said in an outlook of Ghana’s economy in December.

According to Khan, technical difficulties with oil production will prevent Ghana from achieving the expected production levels of 120,000 barrels per day (bpd) from its Jubilee Fields by end-2011.

Nonetheless, actual production levels of 80bpd are not materially different from budget forecasts, with Ghana still exporting all of its crude production in order to establish a benchmark. She added that the lack of infrastructure to make use of the gas produced is also a constraining factor.

“The hope was that Ghana could use this gas for electricity production, thus boosting manufacturing. The infrastructure is now unlikely to be in place until mid-2013 at the earliest, dampening oil production forecasts,” she said. However, plans for the financing of gas infrastructure are in place, with about $850 million of a $3 billion loan from the China Development Bank earmarked for this purpose.

There has been a long debate about how prudently the country will manage its oil revenues. While some analysts say that it is too early to draw conclusions about the management of the oil revenues, they are confident that Ghana will not go the way of other African producers. “We think the signs so far are relatively encouraging,” said analysts at London-based risk consultancy, Business Monitor International (BMI). “Certainly, the lengthy consultation that took place in the run-up to oil production indicates that the authorities are at pains to get things right,” the analysts said in a recent outlook on Ghana. The Ghanaian government held discussions overseas with countries such as Norway, which are known for managing oil revenues well, and domestically through nationwide consultations across the country, noted BMI.

And they are quite bullish. “The latest fiscal data show earnings specifically from the oil industry, indicating a good level of transparency,” they said. According to the numbers from the finance ministry, the government received about $57 million in royalties and $148 million in dividends, interest and profits from the oil sector in July 2011.

Giving credence to these figures, the BMI said, “the total amount is approximately what we would have expected given the prevailing oil prices, production levels, and the guidelines for how oil revenues are disbursed into the current budget, that is, how the annual budget funding amount is determined.”

In the other major sector of the economy, the high farm gate price paid to cocoa farmers will also provide a substantial boost to disposable income this year, especially given relatively stable inflation. But with falling world cocoa prices, some analysts question the sustainability of the prices being offered to the farmers.

“Although Ghana sells its cocoa forward, softer international prices since the peak of the Ivorian political crisis raise doubts about the sustainability of prices currently offered to Ghanaian farmers,” said Razia Khan. She added, “Furthermore, gradual foreign exchange depreciation may be required to compensate for high prices paid to farmers in Ghanaian cedi terms.” Also, with the government paying down more of its arrears, the banking sector’s non-performing loans are likely to improve. This should translate into a healthier credit growth in 2012.

It is believed that while Ghana is unlikely to experience sudden outflows of investment, the pace of new inflows is likely to slow this year. According to Khan, “With aggressive tightening in other frontier markets boosting the relative attractiveness of yields elsewhere, Ghana may be disadvantaged.”

This is already evidenced by declining foreign investor participation in domestic bond auctions. A key challenge in 2012, says Khan, “will be for Ghana to further deepen its debt market by broadening the domestic institutional investor base, extending yield curve maturities and providing more reassurance to foreign investors on fiscal and foreign exchange policy”.

On the fiscal front, the 2012 budget envisages a large increase in foreign financing of the budget - about $1 billion - keeping net domestic financing limited to 2.4 per cent of GDP (GH¢1.67 billion). This is about 30 percent lower than had been projected in 2011. An additional $1.2 billion will be drawn down from the China Development Bank loan. The IMF and some analysts have highlighted concerns over the level of foreign borrowing,
especially the sizeable loans from China, including the $3 billion from the China Development Bank.

Although they consider the public external debt stock – $7.1 billion - to be manageable, they are alarmed by its rapid growth, fearing it could impose servicing costs on the budget.

The public sector wage bill is expected to account for an even greater share of non-oil GDP given the ‘single-spine’ salary reforms and increases in basic pay in 2011. Analysts also warn on the need for prudence in the run-up to presidential and parliamentary elections this December. “Although an increased resource envelope, including foreign financing on concessional terms, has allowed for higher pre-election spending without pressuring the deficit, public spending will still need to be carefully monitored,” Razia Khan warned. She noted that Ghana’s history of pronounced election-related cyclicality is “likely to leave investors cautious ahead of [the elections] 2012. Its new oil-producer status risks exacerbating the tendency to overspend”.

While the country has an established history of peaceful democratic transition, with changes in government following both 2000 and 2008 elections, observers will watch closely for any signs that the country’s newfound oil wealth might destabilise things.

Dr. Kwabena Duffour, minister of finance and economic planning, Ghana

“Ghana’s advantages lie in having discovered oil with an already mature and established democratic system of governance,” said Khan, who believes that civil society will want to ensure that even with oil in the equation, this does not change.

Meanwhile, the economy is growing swiftly, and this is not just due to the new oil sector. The agricultural sector is also expanding rapidly, thanks to the phenomenal cocoa crop in the first half of 2011, as well as various government-led initiatives. Other sectors are also enjoying fast expansion. The Bank of Ghana composite index of economic activity paints a similar picture of swift economic growth.

“While this is good news on the face of it, the authorities will need to monitor the situation carefully in order to guard against overheating,” said analysts at BMI.