Is this a convenient step towards the ‘curse’ of oil?

Dr. Oteng Adjei - Minister for Energy

Ghana is close to first oil, and even before it drops, indications are that the country may be heading towards the ‘oil curse’. Parliament is considering the Petroleum Revenue Management Bill, which in clause 5 provides for the prohibition of using its petroleum accounts and oil reserves as collateral for loans. However, the government has proposed an amendment to the clause, to allow it to collateralise 70% of benchmark oil revenues that are earmarked for budget support.

This proposal, coming from the Ministry of Finance and Economic Planning, which laid the original bill, confirms the lack of a clear policy on oil-backed loans, and indicates that due diligence, has not been conducted on the possible options for managing oil revenues.

It is well documented that most countries which have borrowed against future oil revenues have become victims of the ‘oil curse’, an experience which should prompt Ghana about the consequences of this proposal.

The policy on collateralisation of oil revenues became prominent during the booms of the 1970s, when oil rich countries, excited by the prospects of increased future oil revenues, embarked on heavy borrowing. The effect was that their economies were tied to their creditors, whiles the subsequent servicing of these debts crippled economic transformation.

An analysis of Ghana’s economy shows that Ghana will certainly join the ‘oil curse’ countries if it adopts this proposal. The curse will manifest in high indebtedness, high fiscal deficits, high costs of investment, and intergenerational burden. These have implications for debt sustainability, fiscal sustainability, and sustainable development.


There is no doubt that collateralisation of future oil reserves and revenues will provide additional funding for massive development financing.  That Ghana is a capital scarce country, faced with serious developmental challenges, is no secret. However, this argument about ‘economics without limits’ may not work for Ghana, which must learn to live within its means. The repercussions of living above your means are also well known, as we have already experienced, through our persistently high fiscal deficits.

It must be noted that Ghana’s developmental challenges cannot be overcome at once, but requires a cautious plan for a faced development process. Thus, the big-push model of development often leads to overheating of developing economies, which are consequently confronted by future resource scarcity, and the possibility of delayed development impacts.


Rather than create fiscal respite for Ghana and enhance fiscal sustainability, oil revenues are going to be used to make Ghana heavily indebted. At the Highly Indebted Poor Countries (HIPC) completion point, Ghana’s debt levels were around 45% of GDP, which was considered sustainable.

However, by the end of 2010, Ghana’s debt profile will constitute about 66% of GDP, after reaching 62% in 2009, which brings the country to its pre-HIPC status as a highly-indebted country. If the Parliament allows the collateralisation of future oil revenues, the result is to increase the country’s appetite for loans, which has been our bane, but which have undermined the country’s economic independence. It is even worrying when the government is not cautious of fiscal sustainability.

The danger is that future oil revenues are not permanent, but are also volatile, due to uncertain crude oil prices. Therefore, while revenues will eventually decline during the depletion stage of our oil fields, debts are also accumulated to the extent that oil revenues will become insufficient and unreliable sources of servicing the debts.

In this case, future development is sacrificed in favour of debt service, as financial resources meant for development, will be used for repaying debts, and thereby, undermining sustainable development. This was the case of Norway, between 1978 and 1981, when it started repaying its debts following debt accumulation as a consequence of its oil revenues.

Furthermore, the high-indebtedness weakens the international reserve levels, especially, when the country starts servicing the debts which thereby, reduces the country’s credit worthiness. This then undermines the sovereign guarantee of the country, and subsequently, limits future development financing opportunities for the country.


Ghana is largely associated with low absorptive capacity, because of weak institutions and weak budgetary planning and execution among others. Collateralisation of future oil revenues therefore, triggers more borrowing for investments at high investment costs.

The problem here is that an intergenerational burden is imposed on future generations, who have to pay for the inefficiencies of current investments, financial mismanagement, and corruption notwithstanding. This has both economic and governance implications, particularly, when the loans are not invested productively.


Since 2007, Ghana has been grappling with high fiscal deficits, with the highest recorded in 2008, at 14.5% of GDP. If oil revenues meant for budget support are collateralised for loans, this could lead to the doubling or tripling of government expenditures.

The reason is simple. Budget support revenues from the petroleum accounts will be spent through the budget, in addition to the loans that are contracted. Such high spending could compromise the efforts of the country at reducing its fiscal deficits. The effect is that future oil revenues and non-oil revenues will not go to direct development effort, but used for deficit financing, with its implication for the health of the economy.


One of the main features of resource-rich countries is the effects of large capital inflows into their economies. Annual oil revenues, coupled with new loans, will no doubt lead to the real appreciation of Ghana’s currency, and depending on the elasticity of foreign demand for Ghana’s commodities of cocoa, timber or other manufactured products, the international competitiveness of the country will be weakened.

Apart from worsening the terms of trade, this will result in the decline of agriculture and manufacturing growth, two important sectors that provide the largest employment opportunities for the population. Social upheavals that follow high unemployment levels could lead to ‘oil nationalism’, a consequence of the ‘curse’ of oil.


Perhaps, Norway, which has been touted as a success story in oil revenue management, could be a good lesson for Ghana. Norway’s oil boom in the 1970s led to serious problems for its economy, including being the highest current-account deficit, and most indebted country among the OECD countries by 1975. Realising the effect on its economy, the then government of Norway put a stop to its previous ‘expenditure imprudence’.

They also stopped borrowing, due to the difficulties it posed to the economy, and started repaying its debts at the expense of development between 1978 and 1981. Norway’s economy was stagnant during these times, and they could only rely on its high productivity levels and good institutions to take off again with economic transformation.

Even with its strong institutions and good governance, Norway could not escape the ‘Dutch disease’, when its agriculture declined from 6% to 4% of GDP, and manufacturing from 20% of GDP to 15% of GDP, whiles the value of its total exports fell appreciably, due to a weakened competitive position.

One wonders whether Ghana has what it takes, like Norway, to halt borrowing and find internal resources to repay our debts and take off with economic transformation, when future oil revenues are declining.

Our institutions are weak, domestic mobilisation of resources is not significant, and the short-term interests of political leaders (demonstrated by excessive spending during election years), as opposed to the long-term interest of the state’s sustainable development, are some of the reasons Ghana should reconsider its proposal for collateralisation of its future oil revenues, since they expose our inability within the next decade,  or more to be financially independent with potentially high debt levels.

The cases of developing countries such as Nigeria, Venezuela, Ecuador and Algeria, after the oil booms, were even catastrophic, relative to Norway. These countries used their future oil revenues to plunge their countries into debt crises.

The long-term effects of these crises are still with these countries. Ghana cannot go this way with our relatively insignificant oil reserves and small size of future oil revenues


Ghana has a window of development opportunity with the fiscal space provided by expected oil revenues. These resources must be managed well, by investing in pro-growth and pro-poor sectors such as agriculture and industry. The country must also be mindful of its fiscal difficulties, demonstrated by the huge fiscal deficits, and learn to live within its means.

Borrowing is not necessarily bad if the money is spent productively. Borrowing becomes bad when it is unsustainable, and thereby, leads to long-term insolvency. Ghana’s experience with HIPC rings a bell.

That is, a country with unsustainable debt levels is in crisis, whiles the cost of rebuilding the economy requires serious austerity cuts that affect social and development spending, a significant cost which may undermine sustainable development. As Parliament passes the Petroleum Revenue Management law, the nation awaits the choice our members of parliament make for us – whether the short-term benefits of political leaders to overspend and win elections, without considering the negative effects of excessive borrowing, or the long-term sustainable development of the state, which is the owner of the country’s petroleum resources.

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