Managing future oil revenues in Ghana - an assessment of alternative allocation options

Contemporary policy debates on the macroeconomics of resource booms often concentrate on the short-run 'Dutch disease' effects on public expenditure, where exchange rate appreciation and competition for domestic resources causes a reduction in the competitiveness of non-oil sectors, and corruption further undermines effective spending.

Such views ignore the possible long-term effects of alternative revenue-allocation options and the supply-side impact of royalty-financed public investments. Considering the example of Ghana, the study uses a model to simulate the effect of temporary oil revenue inflows to Ghana. The simulations show that beyond the short-run Dutch disease effects, the relationship between windfall profits, growth and households’ welfare is less straightforward than what the simple model of the "resource curse" suggests.

This brief highlights several findings, including:

• Newly found oil resources along the coast of Ghana provide new opportunities to further accelerating growth and achieving economic transformation and the total reserves of the Jubilee oil field are estimated at between 500-1,500 million barrels and the potential for future government revenues is estimated at around 1-1.5 billion annually.
• The ability to capture synergies, trade-offs and linkages between macroeconomic balances and the sector and household level have made general equilibrium models an important tool to analyze the impacts of resource booms.
• The main impact from oil will occur through an increase in foreign exchange revenues to the government given that the local content of setting up and running the oil operations are highly technology-, capital- and skill intensive,
• In the scenario in which all oil revenues are spent as they occur, the GDP effect is largest in the short-run. Over the long-run the differences between spending and saving are relatively small as interest earned from the oil fund can be used to finance investments in the long run.

The paper provides the following recommendations:

• The creation of an oil fund can also help to smooth global commodity price shocks. It is therefore especially important for countries like Ghana with high vulnerability to world market price volatility for both imports and exports to consider the creation of foreign exchange reserves in an oil fund.
  
• Oil revenues are likely to challenge the government's ability to address inefficiencies and corruption often associated with resource rents. Oil revenues and the establishment of an oil fund will require improved government capacity to manage the macroeconomic policies.