Potential Impact of Oil (and gas) in Ghana - World Bank

Potential Impact of Oil
(and gas) in Ghana

Sébastien Dessus
Lead Economist, World Bank

November 30, 2009

• New World Bank report on the “Economy-
wide impact of oil discovery in Ghana”

• This report aims to integrate in a coherent
manner many of the dimensions of the
challenges that entail the discovery of oil, with
a view to lay down a consistent range of policy
options

• Complements other reports more focused on
specifics (environment, taxation, etc)

• Hope to be an input to the debate which
ought to take place on this topic

Report’s main messages

• Oil (and gas) finds are not large enough to radically
transform the economy, yet sufficient to deeply affect
the non-oil economy and institutions. Quality of
spending is key – converting oil revenue in high social
returns projects

• A number of actions need to be taken to raise Ghana’s
absorptive capacity of oil revenue and turn it into an
opportunity for development:

– Increase transparency on oil revenue
– Restore fiscal sustainability
– Remove bottlenecks in services
– Introduce stabilization mechanisms
– Increase the provision of agricultural goods

Report’s main messages

• These reforms (even more needed with oil) will
take time, but oil will start flowing next year,
hence the great risk of misuse.

• Transfers to the budget should be predictable,
and aligned to the institutional and economic
absorptive capacity.

• Transparency is a key element to build the
coalition for good use of the rent and reduce the
risk of political capture.

• Consensus building is possible in Ghana’s context
and should be sought given the high likelihood of
democratic transition and absence of clear
majority at the Parliament.

Outline

• Oil Facts – how much?
• Institutional challenges – why would politicians

be interested in quality of spending?
• PFM challenges – how to make sure the revenues

are spent for their intended purpose?
• Macroeconomic challenges – how to promote

growth and stability?
• Jobs and poverty – who will benefit?
• Concluding remarks

Oil (and gas) facts

• Central estimate of 490 million barrels from
Jubilee Phase 1 over the period 2011-29

• Central estimate of US$ 20 billion Government
revenue (+US 3 billion from gas, inc. rent).

• Wide margin of error: prices, reserves, costs,
equity structure.

• The oil management strategy needs to
address the uncertainty

Oil (and gas) facts

Government Revenues at different oil prices
US$mn

3500 $100
3000 $75
2500 $50
2000 $30
1500
1000

500
0

2011
2013
2015
2017
2019
2021
2023
2025
2027
2029

Oil (and gas) facts

• Gas can generate downstream activities in
phase 2 (large investments and predictability
needed). Industrial choices & regional
planning.

• Oil will mostly impact the budget. Revenue
management.

• Sound Regulatory framework critical for good
investments (output), transparency, public
choice.

Institutional challenges

• Expectations high: The combined manifestos of
the two major parties running for presidential
elections in late 2008 expressed intentions to
apply oil revenue to “priority areas of
infrastructure, agriculture and food processing,
ICT, education, health, rural development,
housing, water and sanitation, among others”.

• Political economy analysis suggests high risk of
political capture, in spite of Ghana’s good
institutional record. Mining example. Earmarked
funds. Wage bill increases.

Institutional challenges

• Recognition of risks (of letting next administration
using funds opaquely) needed for consensus building
and possible given likely democratic transition

• Increased transparency to build coalition for good
spending. EITI, Freedom of information,
CSO/parliamentarians capacity building

• Inclusiveness: agriculture, non oil sectors, outer
regions, compensation (insurance scheme?) for
potential losers

• Clear rules (accountability mechanisms for disclosure,
revenue management)

• Citizen funds: renouncement to the ambition of using
oil revenue for the public good.

PFM challenges

• Fiduciary risks (funds not used for their intended
purpose). Budget deviations as a symptom. Legal
earmarking not a solution: budget rigidity /
accountability.

• PFM agenda - GIFMIS
• Investment effectiveness (budget predictability,

MTEF, cost-benefit analysis, competitive bidding,
PPP agenda)
• Payroll management, public sector reform
• Infrastructure: inefficiencies, pricing, regulation

Macroeconomic challenges

• Managing volatility/uncertainty/absorptive capacity
through the Revenue Management framework

• Stabilization choices: prices, output, investment,
pace (borrowing, saving)

• Transparent with flexible rules: managing uncertainty
while insuring predictability

• Cannot be conceived in isolation from current issues
and potential answers: fiscal deficit (investment vs.
consumption, fiscal sustainability), energy subsidies
(volatility), fiscal responsibility law

Jobs and Poverty

• Significant Dutch disease risks: already many
symptoms (moribund manufacturing sector,
productivity, Eurobonds) and possible causes
(land management, labor market duality, poor
infrastructure).

• Ex-ante quantitative analysis suggest risks of RER
appreciation and boom and bust cycles

• Agriculture exports to suffer

• Contrasts with the poverty alleviation potential
from agriculture

Jobs and Poverty

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

0.8 2011 2014 2017 2020 2023 2026 2029

2008 No oil

Oil mostly consumed oil mostly invested

Real per capita disposable income (index 1: 2008)

Concluding remarks

• Oil exacerbates many of the already existing
issues, calling for

– Increasing transparency (on oil revenue)
– Restoring fiscal sustainability
– Removing bottlenecks in services
– Introducing stabilization mechanisms
– Increasing the provision of agricultural goods

Concluding remarks

Reforms would pay off, over time.

14% 0.9% 0.9% En erg y secto r
12% 5.1% refo rm
10% 2.9% Civil service refo rm
1.7% 0.5%
8% 2.0% 1.1% Private secto r
6% 3.6% refo rm
4% 3.3% PFM refo rm
2%
Ag riculture refo rm

0%

Un d iscounted income Disco unted In come

Revenue Change in Real Per Capita Disposable Income During 2011-29, with Respect to a Non-Reform Scenario