MONEY MATTERS: Giant of Africa - Beware!

The government of Ghana has announced the discovery of crude oil off the coast of her Western Region.

Development work is on-going and initial estimates are that the country will start producing between a hundred and one hundred and twenty thousand barrels of oil per day in 2011. These modest quantities could transform the economy of this country if well managed and signs are that it will.

In 2008, the output of the Ghanaian economy was US$ 16 billion about 8% of that of Nigeria. In fact, the economy of Ghana is smaller than that of Lagos State.

Currently, Ghana is a chronic net importer with imports (goods and services) exceeding exports by over US$ 5 billion in 2008. This is the principal reason why the currency of the country is weak relative to the major international currencies. It also makes the country build up debts denominated in foreign currencies.

In 2006, the country received some debt forgiveness under the programme for Highly Indebted Poor Countries and debt to GDP ratio fell from 63% to 23%. However, since the fundamentals in the external sector have not changed, the country has started building foreign debt again with debt to GDP ratio of 28% at the end of 2008. The country is also considering seeking an IMF balance of payments support loan in the region of US$1 billion to address her chronic balance of payments deficit.

On the fiscal side, non-oil tax revenue averages 22% of GDP and the country receives grants averaging another 5% of GDP but government still spends more than she earns. In 2008, budget deficit reached an all time high of 11.5% of GDP. Public sector borrowing requirement is high and this puts an upward pressure on interest rates as government, private sector businesses and households compete for loan able funds. For example, the government currently borrows three months’ money at 26% p.a.

What can make all this bad economic news turn into good? Politics, perception and oil! On the political side Ghana is viewed as the success story of sub-Saharan Africa. There are two principal political parties in the country - NDC and NPP. When the country returned to democracy in 1992, the country voted for John Jerry Rawlings of the NDC in the presidential elections and he was re-elected in 1996. John Agyekum Kufuor of the NPP won in 2000 and 2004 while Professor John Attah Mills of the NDC was elected President in the 2008 elections.

This means that during the last five presidential elections in Ghana, the incumbent party has lost thrice and on each occasion there has been a peaceful handover! The 2008 presidential election was particularly impressive because during the first run Nana Akufo-Addo of the incumbent NPP had the highest percentage of votes 49.1% but did not have the majority required. In the re-run, he lost to his arch-rival Professor Mills of NDC who won 50.2% of the votes and transition was peaceful! Such things are hard to come by in sub-Saharan Africa. No wonder President Obama chose the country as his first African port of call.

Apart from political stability, foreign visitors also perceive the country as safe and secure. It is not unusual to see back-packing Europeans on the streets of Accra. A large number of African Americans also trace their “roots” to Ghana even when their DNA results place them elsewhere. If we bring oil into the equation, the size of the economy should grow and the country could become a major business destination in sub-Saharan Africa.

Oil revenue, if well managed, could propel the country from an economically weak democracy to a country that is politically stable and economically sound. Even the modest quantities of oil will make the country a net exporter of crude oil. This means a reduction in the import bill (oil was US$ 2.3 billion or 22% of imports in 2008) and an increase in export revenues. Suddenly, the deficit on the current account could be eliminated and the country could build healthy foreign reserves and enjoy stable exchange rates.

Oil revenues should also boost government finances and could eliminate budget deficits or reduce them significantly; thus reducing public sector borrowing requirements and interest rates.

A more robust economy, stable politics and a good image suddenly becomes the mix that engineers strong growth. Foreign direct investment pours into Ghana and she becomes an economic powerhouse in sub-Saharan Africa by the year 2020. To add insult to Nigeria’s injury she exports electricity and petroleum products (through the pipelines that we built) to us. Giant of Africa - Beware!