Kojo Appiah-Kubi, Phd
One of the biggest challenges facing Ghana currently, as the newest oil-producing country, is how to use its oil wealth strategically to promote sustainable development. The country can, however, count itself luckier to be able to learn from its big brother, Nigeria, which has been producing oil since 1958 and has consequently accumulated such a worth of experience, both positive and negative. One such experience that Ghana would have to learn is how Nigeria having earned billions of dollars from oil exports today is languishing economically with a massive debt burden and high levels of poverty.
Over the period 1971–2005, for instance, Nigeria is estimated to have earned an extra $390 billion in oil-related fiscal revenues or 4.5 times 2005 gross domestic product (GDP), expressed in constant 2000 dollars. During this same period the proportion of its population estimated to be leaving in poverty rose successively from 28% in 1980 to a peak level of 70% in 1990 before levelling off at 54.4% in 2004. The latest records estimate about 48% of Nigerians to be poor. In absolute terms the per capita GDP of the average Nigerian plummeted from US$1,200 in 1981 to about US$300 in 2000. Economists refer to this coexistence of vast oil resources and extreme personal poverty in Nigeria as the “resource curse”. What is more ironic is that this huge flow of oil revenues has been accompanied by rapid substantial increases in the country’s external debt from $3.4 billion in 1980 to about $33 billion in 2002. This mountain of debts and its associated colossal service burden reached a crisis level in the advent of the new Millennium and contributed to cripple Nigeria’s economy so much as to cause the then President Obasanjo to declare the country insolvent in 2002 by completely halting its debt payments and later applying for the debt (HIPC) relief, which was granted in 2005.
But how did Nigeria land itself in debt problems, its oil wealth notwithstanding and what can Ghana learn from the mistakes of Nigeria? The origins of Nigeria's external debt problems date back to the policies pursued during the 1970s oil boom that led successive governments to emphasise on heavy investment in public works, import-substituting industries and public consumption. During the mid seventies the presence of proven oil reserves amidst increasing oil prices gave Nigeria a perceived credit-rating far higher than its domestic and macroeconomic fundamentals would have otherwise justified. With the industrialised world seeking for other oil sources to meet their ever increasing demand for oil alternative to the volatile Middle East, it turned to Nigeria with offers of new loans to build its social and economic infrastructure. Without any blueprint for the sustainable utilization of its oil revenues, the country began a massive infrastructural development financed with short term loans. Indeed some western countries, with their eyes on Nigeria’s oil, competed among themselves to finance and construct infrastructural projects and import substitution industries.
Nigeria also saw in its oil wealth and increasing oil revenues from rising oil prices a de facto collateral for loans, and, without due consideration to revenue volatility normally associated with oil price instability, borrowed to finance misguided spending programmes. Against all common sense of fiscal caution the government ran deficit budget financing and borrowed against future oil income to finance large-scale ‘iconic’ projects designed ostensibly to boost economic activity, symbolize government achievement and lift local and regional profile. Gigantic projects like the building of a new capital city, Abuja, three huge steel mills, 14 airports, among others, pro¬gressed very fast during this period. That was also the time when many young Ghanaians saw in Nigeria a greener pasture in search of jobs and flooded there after them. With rising oil boom in the 70s and early 80s, the non-oil sector and local agricultural produce became totally neglected and the economy consequently became increasingly dependent on rising imports of consumer goods and other raw materials. During that time, as is reported, due to ship traffic congestion, the vessel turnaround time at the Lagos port exceeded one month.
With so many projects being implemented at the same time the country’s capacity to efficiently implement these projects for which loans have been contracted became seriously challenged and outstripped. The results were a high level of mismanagement and pervasive corruption. The high level of corruption led the World Bank to conclude that 80 percent of Nigeria’s energy revenues benefit only one percent of the population.
It appears that Ghana is poised to repeat the past mistakes of Nigeria. Ghana is beginning to produce oil soon but has no blue print as to how it intends to use the expected revenues productively. There is currently the talk about the need to build the country’s social and economic infrastructure just like the Nigerians did in the late 70s and early 80s. For this reason, the country is ready to borrow huge sums of money against future potential oil-revenues to finance these infrastructural projects without due consideration to availability of implementation capacity, due diligence, economic viability and impact assessment, etc. The 10 billion STX Korean Housing loan, the largest loan deal ever in Africa, is a particular example. This loan alone is equivalent to about 60% of the country’s Gross Domestic Product. Just at the same time this loan deal is being processed the Chinese want to over beat the Korean offers with tens of billions of dollars in loan pledges for infrastructural and trade financing. The Japanese also seem to be doing their utmost best to attract the attention of Ghana with billions of loan offers. The Europeans, with their long colonial, trade and other business affiliations with Ghana would definitely not want to be left out of the Ghana show. The big brothers in the Americas, US and Canada, are indeed also putting together their own dancing and musical tunes to attract the interest of Ghana government most.
But why has Ghana become so attractive to the developed world, when just a few years ago, the country was having difficulty in securing credit financing of about a few tens of thousands? The news is that Ghana is going to export oil soon in commercial quantities, a commodity with an extremely high demand in the developed countries. Just like what happened to Nigeria in the 70s these developed countries are using these jumbo loans to secure the long term development of their own respective economies with regular supply of oil. In the case of Nigeria the first major borrowing of US$1 billion, referred to at that time as the "jumbo loan" was contracted from the international capital market in 1978, increasing the total external debt stock to US$2.2 billion. Thereafter, the debt stock rose astrono¬mi¬cally in epidemic proportions from $3.4 billion in 1980 to $17.3 billion in 1985 and $29.2 billion in 1990 and $33 in 2002. Indeed Nigeria’s checkered past has important lessons for Ghana’s future, lessons that should be learnt if the country does not want to suffer the same resource curse that Nigeria suffers.
The first lesson is the acceptance not to over-blow the relative importance of the oil, despite its tremendous potential economic impact if managed properly. It is unfortunate that the oil is being seen by politicians as the panacea to all of Ghana’s problems. Rather it should be seen as just one of the many finite natural endowments of the country, whose benefits could only be maximised through innovative high-value addition. The present and future generations stand to benefits from this resource only if the country does not follow the Nigerian example of using the oil revenues in frivolous investments.
Utilization of oil revenues should be based on a credible long term monitorable development plan to bring about structural transformation in the economy, meant to reduce Ghana’s growth dependency on a narrow set of low-value agricultural commodities and other natural resources, which are subject to the volatilities of the world marketplace. This plan should best be separated from the annual budget based on the consolidated fund so as to avoid benchmarking government economic policies against the state of the oil sector. The oil revenue spin-off should also be used to strongly strengthen the private sector in the non-oil sector through tax incentives and infrastructure development. Non-tariff barriers to support domestic manufacturing should be tenured and targeted. With so many positive and negative experiences abound from which Ghana can learn, failure to use the oil resources sustainably is not an option.
