Ghana hopes to shield economy from African oil curse

Tue May 21, 2013 2:30am EDT

* Economists cite risks of fiscal laxity, Dutch disease

* Nigeria saw agricultural sector ravaged, corruption soar

* Ghana wants to increase investment in cocoa sector

* Ghana has strong democratic institutions, oil wealth funds

By Matthew Mpoke Bigg and Kwasi Kpodo

ACCRA, May 21 (Reuters) - Oil brought riches to Nigeria but also ravaged its economy and fuelled corruption and conflict. Now nearby Ghana has begun production and wants to take the wealth but dodge the oil curse.

Ghana is used to resource riches: it is already the world's number two cocoa producer and Africa's second-largest gold miner. But there are signs it is struggling to manage the new oil money and some people are disappointed.

A budget deficit last year which soared to 12 percent of gross domestic product (GDP), nearly twice the targeted level, raised fears among economists of fiscal laxity, a classic symptom of the resource curse that often feeds corruption.

Investors are also watching the strengthening cedi currency . An inflation-adjusted rise due to an influx of petro-dollars can signal "Dutch disease", where the competitiveness of farming and manufacturing is eroded, as in Holland in the 1960s.

"The government seems to be very much wary of the dangers of Dutch Disease," central bank governor Henry Kofi Wampah said. "Oil will continue to attract attention but not at the expense of cocoa or gold."

In Nigeria, agricultural production plummeted in the 1970s and 1980s as oil came to dominate the economy. Some now fear Ghana's cocoa sector, the largest employer in the country, could be similarly threatened by oil that began flowing in 2010.

The cedi weakened last year as the oil boom fuelled imports but its depreciation has now slowed to below inflation, which stood at 10.6 percent in April, leaving the currency slightly stronger against the dollar year-on-year in real terms.

Ghana, however, has several advantages over its giant neighbour to shield itself from the oil curse, according to senior government officials, economists and watchdog groups.

Not least of these, it is aware of the risks and is trying to avoid the mistakes made by other African states.

FRONTIER MARKET

Ghana, a country of 25 million people that has long lived in Nigeria's economic shadow, is now one of Africa's hottest frontier markets. The stock market is up more than 50 percent this year but many ordinary Ghanaians complain about lack of jobs and basic services.

"I'm not seeing any benefit," said Jennifer Omaboe, a receptionist in Accra. "Those who are really benefiting are those at a high level because they have connections."

An influx of rural workers hoping for jobs in the capital, has spawned shanty towns and spilled vendors across Accra's streets, where cranes loom over construction sites and glossy billboards advertise cars and mobile phones.

In March, oil overtook cocoa as a source of government revenue, standing only behind the mining sector in importance in the $39 billion economy. With output at Tullow's Jubilee field still ramping up to its plateau level of 120,000 barrels a day, and the nearby TEN field yet to come onstream, oil already contributes 6 percent of state revenue.

Ghana's cocoa production, meanwhile, is down 11 percent so far this season year-on-year but industry regulator Cocobod blames bad growing weather. It has forecast a total harvest of 800,000 tonnes for 2013, second only to neighbouring Ivory Coast.

The leaders of Ghana's cocoa sector say their industry may benefit from the oil flows. The involvement of farmers in the decision-making process, close cooperation with government, and internal checks and balances shield the sector from any policy neglect, they say.

"We all admit that oil is a big thing happening to Ghana now but for us it is a positive development because oil inflows will free more resources for the government to implement new programs to further boost cocoa production," said Yaw Adu-Ampomah, deputy chief executive of the Ghana Cocoa Board, referring to programmes for fertilizers and seedlings.

With rising demand from Asian countries, as higher living standards bring increased chocolate consumption, many industry watchers say global cocoa prices are set to rise in the coming years, making the sector an attractive investment bet.

Moreover, to counteract oil's effects on the currency and the broader economy, Ghana is channelling 30 percent of tax revenues from petroleum into a stabilization fund to hedge against price fluctuations and a sovereign wealth fund, which contained $72 million in 2012.

"CAUSE FOR OPTIMISM"

Some fear that oil revenues could encourage Ghana to spend unwisely, squandering money on unproductive "white elephant" infrastructure projects or inflationary wage hikes.

In Nigeria, the wash of oil money made the government less dependent on tax revenue and less beholden to its citizens. It encouraged graft as oil-related contracts become an economic honey pot and sparked conflict in the Niger Delta amid anger the region had not benefited from its oil wealth.

"Our problem is no longer money but how to spend it," General Yakubu Gowon, Nigeria's military ruler from 1966 to 1975, said in the midst of his country's oil boom.

Ghana's advantages start with a strong democratic tradition that pre-dates its discovery of oil.

A series of peaceful electoral transitions of power since 2000 between the ruling National Democratic Congress of President John Mahama and the main opposition have helped empower parliament as a supervisory body of the executive.

A vibrant civil society pressing for better oil industry regulation and accountability is also key.

"There is cause for optimism when you look at Ghana," said Valerie Marcel, energy expert at the Chatham House think tank.

Ghana set up a National Petroleum Corporation (GNPC) before the 2007 discovery of the Jubilee field, ensuring a reservoir of expertise and a structure to handle regulation and contracts was in place. In 2012, the government established a Ghana National Petroleum Commission to oversee licensing and regulation.

The mandate of the commission is being finalised but experts praise the government's decision to split the role of oil licence holder and licence giver into separate institutions.

One danger is that a new law gives the energy minister too much discretion to award contracts, said Mohammed Amin Adam, director of the Africa Center for Energy Policy in Accra.

"We have been talking about transparency but I don't see the transparency being implemented," Amin Adam said in an interview.

DANGEROUS EUPHORIA

Poor allocation of revenue can reduce oil's economic benefits. Nigeria has seen scant improvement in healthcare, education and infrastructure and inequality has deepened, according to Edward Al-Hussainy, analyst at Moody's ratings agency.

"Ghana benefits from being more open and more transparent than many African peers so it is likely to be a better steward of a commodity windfall," Al-Hussainy said.

Mahama's government had promised to channel oil revenues into building new school blocks and improving services, though many Ghanaians complain progress has been slow.

Oil swelled GDP growth to 15 percent in 2011 but may have encouraged the government to spend freely before December's presidential election, according to some economists. The government denies this.

The budget deficit overshot its target of 6.7 percent in 2012 to stand at 12.1 percent and the government has set lowering it to 9 percent as a key fiscal priority for 2013. Fitch in February downgraded Ghana's outlook to negative.

Ghana this year also saw public sector pay strikes that raised concerns about wage growth stoking inflation.

Public expectations of oil-fuelled good times carry their own dangers, Nana Osei-Bonsu, director general of the Private Enterprise Federation, said in an interview.

"The euphoria is heightened to the point where we might fail ourselves. People go to sleep arms folded and think of all the glorious things that might happen," he said.

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