Ghana: The Emerging Oil Economy Prospects and Challenges
By CEPA Posted date: 16th December 2010
Critical challenges which may underlie the earlier challenges discussed and underpin the extent to which the resources can be used to promote long-term growth and poverty reduction is the management of the revenues from oil extraction. Three critical decisions and issues are involved. First is the decision about the time profile of consumption and savings. Should the revenue be used for government investment in public infrastructure to stimulate economic activity? Should the government use the windfall to reduce government debt and thereby lower interest rates and boost private sector investment? Should the extra income be used to provide more education, health care and other public goods to improve the quality of life or transferred directly to citizens through tax cuts or citizen dividends?
Second is the decision as to what form any savings must take. Should these savings be held in the form of financial assets? Should these savings be invested domestically or abroad? There is the final issue about how the investment in the domestic economy if any, may be split between the public and private sectors.
A number of policy rules and prescriptions to deal with these issues and ensure that oil revenues are effectively managed and contribute to the long-term development of the country have been proposed.
These may be too technical to deal with here. The essence of the conventional wisdom is that a substantial part of the oil wealth should be saved for future generations. And these savings should be held abroad as Sovereign Wealth Funds (SWFs). This appears to be the stand of the Petroleum Revenue Management bill. The bill takes the position that savings should be held as financial assets abroad. There are considerable objections to this approach in the context of an underdeveloped country.
We think that the initial conditions of the economy should determine the decision as to how to use the oil resources and the form in which any savings must be held. Instead of creating financial assets for future generations, one can bequeath to them a diversified vibrant economy and a stable society.
While these standard formulae provide benchmarks, the stage of development and initial conditions in individual countries are important in determining the appropriate management strategy.