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As Ghana’s economy goes into crisis – there is need for policy options

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cocoa-treeGhana’s current economic crisis is not accidental. Many analysts forewarned that an increasing public sector wage bill and election-triggered spending in 2012 would put the budget out of balance and that is exactly what has happened.

The economy as it stands now must be stabilized, and a number of policy options ought to be considered.

This crisis is in spite of the fact that the country was among the world’s top six fastest growing economies in 2011.

Ghana’s GDP growth slowed from 14.4% in 2011 to 7.1% in 2012 and according to the Africa Economic Outlook, the economic growth peak in 2011 was due to the start-up of oil production in the last quarter of 2010.
The report estimated that Ghana’s GDP grew at 7.1% in 2012 largely driven by oil revenues, the services sector and the strong export performance of cocoa and gold.

The Ministry of Finance projected a GDP growth of 8% for the year 2013.

Meanwhile, according to the IMF the government has accumulated net arrears of 2.8 percent of GDP, about half of that owed to state-owned enterprises, mainly linked to the under-pricing of fuel and utilities. A shortfall in revenue and grants added to the deficit. The IMF attributes the main cause for the large fiscal deterioration to higher spending.

The IMF further stated that recurrent spending rose by 4¼ percentage points of GDP between 2011 and 2012, reflecting higher interest cost, energy subsidies and, in particular, a much larger wage bill, which grew by 47 percent in nominal terms. An 18 percent pay hike explains part of this increase, and new hiring appears to have offset the smaller-than-expected savings from the recent payroll audit, but many of the factors that could explain the increase have not yet been quantified. In addition, deferred wage payments from the single spine salary reform amounted to two and half percent of GDP, twice the level included in the mid-year revised budget.

Structural change of the Ghanaian economy

Oil sector

The Centre for Policy Analysis (CEPA) observed in its 2013 Outlook that the discovery and production of oil marks a structural change in Ghana’s economy. Anticipated oil revenues as well as increasing world prices of Ghana’s main exports gold and cocoa were expected to prop the increasing wage bill and government spending.

Obviously, the dependence on primary commodity exports makes Ghana more susceptible to terms-of-trade shocks. At the onset of oil production in Ghana, there was great enthusiasm about the prospects of the sector to the economy of Ghana. It was expected that the sector will generate enough revenues for government spending as well as create jobs for Ghanaians.

In spite of the oil sector’s boost to industrial growth, it has had negative impacts on agriculture and manufacturing in Ghana. CEPA states that the impact of oil discovery was evidenced in the continued steady appreciation of the real effective exchange rate which has resulted in steady erosion of international price competitiveness of the tradable subsectors of the non-oil sector. CEPA therefore, believes that these developments mark the onset of the dreaded Dutch Disease.

The performance of the oil sector has been mixed. The CEPA observed in its 2013 Outlook that oil production volatility from the Jubilee oilfield has affected projected revenues. It noted that due to technical difficulties experienced in 2011, production from the Jubilee oilfield is yet to reach its maximum of 120,000 barrels per day. Hence, overall GDP growth declined to 8.5 percent in 2012 due to relatively lower contribution from oil in 2011.

According to the Standard Chartered Research, crude oil is now Ghana’s second main export, increasing moderately in the past two years from $2.7 billion in 2011 to $3 billion in 2012. Oil, gold, and cocoa account for 85 percent of Ghana’s total exports of goods, and the value of gold and cocoa exports alone has risen by more than 90 percent since 2009

“In 2011 and 2012, oil production averaged 90,000 barrels per day, missing production targets due to technical factors stemming from the absence of gas infrastructure (the prohibition on flaring means that gas must be re-injected into the Jubilee field for the time being, leaving Ghana vulnerable to output volatility),” it said, adding that “the discovery of new sites, adjacent to the Jubilee field development, which targets 500 million barrels in estimated oil reserves, should enable the country to increase production to about 250,000 barrels per day of oil equivalent by 2021. Current production is estimated to be around 110,000 barrels per day.”

Non-oil sector
Agricultural

Despite an increase in cocoa production levels in 2011, the overall agricultural sector grew 0.7% and in 2012, the sector saw no growth. This is an unpleasant development since the sector has been on decline for some time. Moreover, the sector still remains a large employer of the rural population and it is critical to both Ghana’s food security and mitigating rural urban migration.

Industrial sector

Ghana’s industrial sector is also not doing well either. The emerging oil sector has been the main contribution to the sector and its growth is not broad based nor reflective of the dire need for a manufacturing sector which is in decline. According to CEPA, oil production more than made up for potential output losses in the tradable subsectors of manufacturing.

Services sector

The services sector is the sector that seems to be doing well largely also due to the oil sector – such as accommodation, recreation, entertainment, household services and so on in support of the oil sector.

Job creation

Most Ghanaians were optimistic when the oil find was announced in June 2007. They believed they would find jobs and make lots of money. Suddenly, oil and gas training institutions sprang up across the country, promising to train Ghanaian citizens to take up positions in the oil sector. But three years on, that does not seem to happen.

Sources in the oil industry are lamenting the fact that most Ghanaians trained in the sector can’t find top jobs in oil and gas, which still goes to expatriates. Ghanaian citizens are mostly stuck with menial and low paying jobs within the industry.

The IMF projects that Ghana needs to “create 6-7 million quality jobs over the next 20 years.” Since the oil sector cannot create enough quality jobs, what sectors can absorb the teeming youth who are ready for the job market annually?

Without a doubt, Ghana’s oil find and production has changed the structure of the economy and that has enormous implications for other sectors.

Government must be creative

Looking at the current structure of the economy, it is imperative for the Ghana government to be more creative and look for other policy options that can spruce up the economy – re-engineer the manufacturing sector and create more jobs.

Government over-reliance on the oil sector could be counter-productive and unhealthy for the overall economic development.

It is necessary to invest in the agriculture sector and make it healthier than it is now, and as the largest employing sector in the economy, it has the potential to stir growth.

Government’s creativity must also stretch to plug the holes in the system that allows for wastage of national funds.

By Emmanuel K. Dogbevi & Dode Seidu

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