Economists warn Ghana of risks, oil curse, Dutch disease as oil money flows

Some economists have warned that Ghana is likely to face some economic risks, including the phenomena known as ‘Dutch disease’ as the country earns money from its new found natural resource, oil and the country’s economy grows. The Ghana government has estimated a 13.6% growth for 2011.

According to a report by the VOA, the economists warn that there are many risks in this sudden growth, including the so-called “Dutch disease”. This can happen when exploiting natural resources leads to a stronger national currency and a subsequent decline in other economic sectors. The name was given after economic problems in the Netherlands followed that country’s discovery of a large natural gas field in the late 1950s.

The VOA cited Chris Jackson, a senior economist with the World Bank, repeating the warning at an event focused on Ghana’s future in Washington last Thursday November 10, 2011.

“We have got oil, (so) we have got the potential implications of Dutch disease with exchange rate appreciation and the damage that that can do the non-oil booming sectors,” Jackson was quoted to have said.

Jackson, the report said, gave the example of export-crop farmers, whose goods, such as pineapple or cocoa, would become more expensive and less competitive globally.

The report also cited Ian Gary, an oil expert with Oxfam America, sounding the warning that Ghana’s Jubilee oil field, which started commercial oil production on December 15, 2010, is underperforming and producing about 80,000 barrels a day, rather than the expected 120,000 barrels.

He also expressed concerns that new laws, which took years to craft, are being ignored, such as saving current oil profits to absorb future shocks in world oil prices, the report said.

He was quoted as saying, “Instead of putting the surplus into a savings account, the way that the revenue management act called for, those were put directly into the budget for spending this year. Another issue that has arisen is the $3 billion loan with China for infrastructure and that loan violates the provisions of the revenue management act.  The revenue management act allows oil to be used as collateral for loans up to 10 years but this would be a 15-year loan.”

The economists also worried about the so-called oil curse, whereby large oil revenues lead to an abandonment of other economic sectors, environmental degradation, conflict and large-scale corruption, the report said.

David Throup, with the Center for Strategic and International Studies, said Ghana’s current political structure may not be suitable to ensure a fair distribution of oil wealth.

“It is a highly centralized political system with an excessively strong presidency.  The president is the center of all patronage and I think the pervasiveness of patronage politics in Ghana does corrode political institutions,” Throup was quoted saying.

According to the report, the panelists stressed that next year’s presidential election, with control of a bigger economy at stake, could be, in their words, fierce.

They also warned that the oil boom has not led to much job creation so far, with estimates of more than 80 percent of young people in urban areas still working in the informal sector, it added.

However, Raziah Khan, an analyst with Standard Chartered had told the BBC in a broadcast monitored by in June 2011, that Ghana won’t experience the ‘oil curse’ because the country is doing so many things right.

She said the country took the right decision in hedging its oil at $107 per barrel. She explained that by hedging oil, Ghana has the option of selling its oil at $107 per barrel on the international market even if the prices fall below that.

Ms. Khan also commended Ghana for passing the ‘Oil Revenue Management Law’ which allows the country to establish a ‘Heritage Fund’ in which to make savings for future generations.

Ghana’s Parliament, Wednesday March 2, 2011 passed the Petroleum Revenue Management Bill. Clause 5 of the law would allow Ghana to collateralize the country’s oil revenue. In other words, it would allow the government to borrow against any future oil revenues. It would also set-up an independent regulatory body to regulate the oil industry in the country.

By Emmanuel K. Dogbevi

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