Will Oil Revenues Wane Foreign Aid To Ghana?

By Stephen Yeboah

3/16/2010 8:03:31 PM -

Importantly, Ghana’s potential oil wealth continues to gain momentum with the significant discovery by AO Lukoil, Russia’s second-biggest oil producer, and closely held Vanco Energy Company. Ghana is set to become one of Africa’s newest oil exporters in late 2010 when production begins at the Jubilee field, which has potential resources of as many as 1.8 billion barrels, according to Tullow Oil Plc, its operator.

These are still issues that need critical considerations in the quest of Ghana becoming a vibrant oil-producing economy. Oil discovery does not necessarily translate into economic growth and poverty reduction. It has been proven that oil tends to exacerbate miseries in oil-producing economies.

The controversy surrounding whether or not aid is effective in developing countries especially Ghana remains unresolved. The argument is divided between Dambisa Moyo’s bloc and other school of thoughts that believe that making aid available all time would have impact on growth. The sixty-four thousand dollar question is that has aid achieved its intended purpose so far especially in the African region? This I will live to individual judgments.

It is stated by Dambisa Moyo that the West has spent $1 trillion on aid to Africa over the past four decades "But no nation has ever attained economic development by aid". It is extremely important to know that the economy of Ghana has been shaped to fully depend on foreign aid. Without aid, believe it or not, Ghana cannot finance her spendings in priority sectors of the economy. With the impending potential oil wealth, would donor support for and influence over Ghana witness a new phase? And if donor assistance should decline, what would be the state of the economy that is completely hinged on foreign aid?

The idea behind this article is to examine the state of economy of Ghana without or with reduced official development assistance (ODA) and what should be done to prepare for unforeseen structural changes in the economy. Can the country cope with this condition if foreign should reduce or cease? This is very crucial to the country in her bid to achieving a middle income status sometime in the future. Ghanaians hope foreign aid continues to flow unabated.

The Undeniable Truth
It would, indeed, be interesting to witness how the economy of Ghana would be in a situation where there is no or less donor aid. It remains uncertain whether donors will withdraw or cut support from Ghana as oil revenues to the government increase over the coming years. Nonetheless, there is a good reason to believe that as oil revenue rise, official development assistance will decline.

The situation where an economy, as part of major structural changes witnesses a decline in the dependency on foreign aid is nothing new in the African region. There are also cases where an economy still depends on external financing despite oil windfalls. It is recorded that during the first year of oil production and sales, Chad’s budget rested on aid, subsidies, grants and loans. In 2004, one year into sales of oil, grants and loans accounted for approximately 56 percent of Chad’s total revenues, forming a more significant portion of the budget than oil money (Chad’s Oil: Miracle or Mirage? by, Ian Gary and Nikki Reisch). Chad encountered a problem with the IMF in 2004 after the start of oil production and exportation. In early 2004, IMF failed to complete a review of Chad’s performance before the previous Poverty Reduction and Growth Facility (PRGF) programme expired on January 6, 2004. This delayed the disbursement of IMF funds and consequently other donors withheld planned budget support.

The question that deserves to be asked is that is it Chad’s oil windfalls that necessitated this action by the IMF or the government of Chad assured of a potential revenue did not want to be influenced and controlled? Or are there more unknown factors? In that same year, disbursements from the World Bank were suspended due to additional arrears on debt service. It stands to reason therefore that potential increase in oil revenues has the propensity to reduce foreign aid or cause complexities in loan disbursements by donor agencies.

In a similar perspective, oil revenues make it possible for an economy to be less reliant on foreign aids as compared to non-oil rich states. This is because the actual oil revenues are much larger than the official development assistance. A case can be cited of Equatorial Guinea where foreign support almost ceased until recently. It is stated that the World Bank and the IMF have had only limited involvement in Equatorial Guinea until recently since the beginning of the oil boom. A health improvement programme was the last and major programme funded by the World Bank’s International Development Association (IDA) which was closed in 1999 and since then there have been no significant new Bank lending programme for the country. Though other factors including political might have account for this, it is believe that the oil boom have had a fair share in this situation.

Apart from the fact that oil wealth would cause official development assistance to reduce, the single most sensitive issue is the likely upheaval in bilateral and multilateral relations. Oil revenues are capable of reducing aids and development assistance from international donors and agencies like the World Bank and International Monetary Fund (IMF). This tends to also affect the state of relations that already exist between a country and the concerned donor organizations and agencies. An atmosphere of self-sufficiency is created when a country sees itself as capable of financing expenditures in a fiscal year. It happens especially when the country gradually distance itself from the laid down policies and directions of the donor organizations. Such bleak relationships are always to the detriment of the future state of the economy.

What can Ghana learn from these experiences that could happen to any oil-producing country?

What should Ghana do?
Ghana should not expect to receive huge external financing as it is today when oil revenue begins growing. Though, the country can depend on aid during the first and second years of oil production and sales, the structure completely changes in subsequent years. It, therefore, behoves on the country to start developing alternative ways of financing spendings in priority sectors of the economy.

Again, with her known outstanding commitment to bilateral and multilateral relationships and international conventions, is Ghana also likely to experience upheavals in her relationships with other countries and organizations? As much as possible, the country ought to consider these little but significant issues now.

Nonetheless, it would be an economic breakthrough when the budget of Ghana is prepared without or with less foreign assistance in a form of aid, grants and loans.

In no uncertain terms, Ghana ought to set up a sovereign oil wealth fund. A stabilization fund, for example, would tend to provide cushion for budget from turbulences caused by oil price volatilities and from reduced or no foreign support. Not only is setting up the oil fund crucial, but forming a statutory independent body to administer and monitor spendings from this fund should remain an utmost priority. The country could also set up savings fund that would set aside portions of oil and gas revenues for the future or current development needs. These are the conditions including strong regulatory and legal frameworks that should precede “who gets what”.

If the government is inquiring as to how it uses the oil money, the practical advice is that the impending petrodollars should be invested heavily in priority sectors of the economy including education, health, energy, transportation, improved telecommunication and technological research. Thus, turning the economy into an industrialization hub with improved infrastructure level. We are not hoping for reduction in foreign assistance but if that should occur, it will be a great test to the economy of Ghana. To the oil-producing countries that depends so much on foreign aid, aid cuts may be deemed a “resource curse” since a major source of spending has been blocked. But ideally, it is not. It is rather an opportunity to seek for development in a stable economy.

In terms of relations, the country should not get carried away by oil revenues that would not stand the test of time. Ghana should remain committed to international codes and conventions and move a step forward to implementing what is significant to global development.

Conclusion
Whether or not there would be decrease in foreign assistance to the economy of Ghana by virtue of the fact that the country has been empowered by oil revenues is worthy of consideration. It is important that the country makes best use of its oil wealth to counter the effects of unknown and sudden change in structural economic funding. Nonetheless, less reliance on foreign aids enables proper budgeting of projects and programmes in the priority sectors of the economy as the source of revenue is certain. This helps in preventing unnecessary budget deficits that causes retardation of a country’s economy.

The burning question is that would Ghana’s share of revenues from the Jubilee field have the capacity to wean it from the support and influence of donor funds and assistance respectively? Does Ghana know her share? Considering the secrecy in contract dealings in the “model” of transparency being sought for, Ghana’s share of revenues remains very uncertain and confusing even to the economists.

Maintaining and strengthening foreign relations still remains pertinent if Ghana is to see any significant development. But the question of whether or not oil revenues would reduce donor support and influence should resonate in policy and political discourse of the country. Ghana ought to be proactive in her undertakings.

The author, Stephen Yeboah is at the Department of Planning, KNUST and the National Co-ordinator for Osagyefo Network for Rural Development [email: [email protected]]

Disclaimer: "The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of Modern Ghana. The contents of this article are of sole responsibility of the author(s). Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article." © Stephen Yeboah.