Ghana Economic Alerts (2009 and Beyond)

Tuesday, January 13, 2009 

By Bright B. Simons and Franklin Cudjoe 

Accra_MarketThe newly elected government has barely settled in, and the three-man committee tasked to coordinate the transition from the economic policy of the erstwhile government to a new regime under the incoming administration has yet to issue a preliminary report.

In keeping with IMANI’s oft-repeated assertion that civil society ought to take the lead in defining the terms of national discourse concerning the national agenda, we have decided to set in motion a national debate on the economy using as our principal guidepost the ongoing global economic crisis.

In an earlier comment, a colleague of ours highlighted the impact of the global crisis on commodity price trends and related matters. We will build on the issues identified by focussing on three principal areas of discussion: the oil discovery, remittances and investment (foreign direct investment – FDI), and the fiscal picture, with the understanding that the latter issue combines elements of the preceding two with general and partial analyses of a range of various factors affecting the state of the Ghanaian economy in 2009 especially and a few years thereafter.

We intend to be critical and assertive in our conclusions, in the hope that better specialised commentators in all the aforesaid areas will in their responses moderate our positions.


Insofar as Government of Ghana has in the two previous dispensations, from 1993 to date, been operating with a fiscal deficit, it goes without saying that the incoming administration, whatever its policy orientation, has nearly no room to implement any radical departures from the current trend in government spending. Nor is the prospect likely that revenue mobilisation would accelerate dramatically in the next few years.

The oil find has thus come to be viewed as the magic wand to wipe away all the structural constraints in government fiscal policy, and put Ghana on a genuinely transformational growth path.

We have grave reservations about this view. Our earlier comment placed a $3 billion dollar per annum price tag on oil receipts accumulating to the state from 2010 onwards. We now have strong cause to considerably revise this outlook downwards, and not merely because the $100 per barrel mean range we adopted has been shattered by recent developments on the crude market. There are other issues.

We are compelled after close scrutiny of the matters involved to question the forecasts of Tullow and Kosmos regarding crude oil output from the companies’ concessions off the coast of Ghana (note: the GNPC and the fourth partner have been restrained in issuing forecasts).

The joint oil prospecting operation covers three blocks in the western coastal area of Ghana. Crudely speaking, the prospecting operation aims to demarcate oil producing fields for development and eventually for the production of petroleum. One such field is the Jubilee, which lies in the deepwater section between West Cape Three Points and Tano. Our understanding is that prospects in the shallow section are less significant.

Initial forecasts suggested a recoverable load of between 500 million and 1.3 billion barrels of oil from the Jubilee field, with subsequent upward revisions of the upper bound to 1.8 billion barrels. It must be noted that Tullow, the unit and technical operator, has always been particularly bullish about the outlook for the Jubilee field. The technical blueprint for the development of the concession called for 7 exploratory and appraisal wells (think of these as giant holes in the seabed dug or ‘drilled’ with the aim of measuring how much oil is down there and not necessarily for actual production though they may in fact be eventually used for the latter purpose).

Tullow’s first forecast (i.e. projecting a maximum commercially viable lifetime output of 1.3 billion barrels) was made when just two exploratory wells were in place. While there is no doubting the fertility of the oil-bearing rocks identified during that initial exploration, some experts are inclined to consider this approach highly optimistic. Indeed it is safe to say that the more exploratory wells there are across the concession the more accurate projections are likely to be, especially also when the practice is to overlay the concession with a seismic map followed by the effort of determining correspondences between the data yielded by the wells and the imaging of the field produced by seismography (a process that can significantly reduce the risk of fruitless search investments). Simply put, forecasting oil reserve quantities with data from too few wells is somewhat equivalent to projecting election results from too few declared constituency results.

We concede that the geological issues can be highly technical and experts frequently disagree. Our concerns were nonetheless heightened by an analysis of Tullow’s recent operational and financial history.

 Our understanding is that Tullow currently produces about 80,000 barrels of oil a day from its operations around the world. Its 23-country profile is concentrated in the prospecting or exploration rather than in the production business. As an ‘independent’ oil company it maintains no retailing or marketing (‘downstream’) commitments. As such, and as a FTSE-100 company, the bulk of its assets are valued by the financial markets in correspondence with investors’ perception of the worth of its exploratory holdings, that is to say the value of oil and or gas beneath its licensed concessions across the 23 countries in which it operates. To put this in perspective, consider that Tullow’s share price has risen from under £1 to nearly £10 over the past five years (nearly 1000% increase), and also that by some expert’s reckoning 60% of the company’s stockmarket value is tied to its exploration prospects.

Jubilee is now the jewel in Tullow’s crown. The company’s North Sea holdings are mature, and none of its prospects, not even in Uganda, are in the same leagues as Jubilee. Indeed since its Gawain South East exploration well in the North Sea failed to strike any load, and the declines in output from its Kelvin and Orwell fields, the Anglo-Irish company has shifted most of its investments to better prospects in Africa and Latin America.

The Gawain South East incident however highlighted the downside of Tullow’s usual strategy of fast-paced field development, in that it tends to incur higher than industry-average costs in a number of its core operations. Adding this factor to the company’s usual operational optimism provides the backdrop to another incident of interest to this analysis: Tullow’s underperforming Ivorien operation, owing primarily to the 30,000 barrel a day Espoire field’s disappointing results.

We must stress that all our inquiries confirmed that Tullow is a well managed company. The sole purpose of the foregoing analysis was to identify reasons why it may be necessary to downgrade Tullow’s forecasts for the near-term future by establishing a structure of incentives which underlie a posture of chronic optimism.

But besides the concern over quantities, and before presenting our own independent view about likely output levels, there are other relevant factors that merit mention and serious consideration.

Tullow’s present debt position is at least $800 million. It needs to restructure this debt in order to raise the $2.3 billion it says it needs, inexplicably revised downwards from an initial estimate of $3.2 billion, (or the $3.5 billion some experts estimates it actually needs) to develop Jubilee’s deepwater oil resources (bear in mind that deepwater drilling is more expensive than shallow or onshore drilling).  Furthermore, by its figures, it needs to keep production costs at $15 to meet the performance standards it has promised investors. One might, in this light, want to consider that the United States Energy Information Administration puts the production cost profile for Africa at roughly $30 per barrel.

The combined effect of all the foregoing analyses leads us to conclude that firstly, oil production is unlikely to begin in Jubilee by mid 2010 as anticipated. Even late 2010 will be optimistic. We suspect mid-2011 is a more realistic timeline. The reason is that in the current environment Tullow will encounter difficulty raising even the $1 billion it requires to construct the offshore platform (or FPSO) needed to begin production at jubilee within the timeframe it first announced. What finance it raises will be on less salutary terms not least because the downturn in oil prices means banks’ and investors’ appetite for exploration is likely to diminish. Secondly, it is unlikely to be taken for its word that it can produce offshore oil as cheaply as it can in this environment of heightened investor scepticism, which will in turn impact on its projected profit/loss fundamentals and dampen investor enthusiasm.

As far as Ghana’s external earnings account is concerned, this means oil production will start late and the output is likely to be restrained. We now suspect that sometime in 2011, 60,000 barrels a day will be issuing forth for sale at $60 spot market prices. But we must hasten to add another clarification. The quoted prices on the NYMEX and IPE indices are hardly what Tullow can expect for its oil. It will probably be selling at a decent discount to brent, meaning that $50 is more like it. This takes us to $1 billion gross per annum. Tullow expects to be selling 30m cubic feet of gas to Ghana for energy generation within the same timeframe as it will be producing crude. We suspect this expectation is also overoptimistic and at any rate any such production will not occur, at least not in any significant quantity, within the four-year window that is our concern.

We will work with $1 billion per annum gross. Assuming that a significant proportion of production costs will be retained in Ghana (this is by no means a mundane assumption), we will peg accruals to the wider economy at $150 million (henceforth we will be separating Government earnings from financial effects on the economy for ease of analysis).  Using $25 production costs suggests gross earnings of roughly $700 million. Tax and royalties of 30% and dividend returns to the state’s 10% holdings would have brought some $300 million to Government of Ghana, but there is a catch. As far as we understand it corporate taxes are levied on net earnings, and giving the debt profile we have described for Tullow that is likely to be negative. So, regrettably, it is highly likely that Government’s earnings will be confined to the <5% of royalties it has negotiated. Government will be lucky to get $40 million per annum in 2011 and 2012 directly from Tullow’s earnings. Taxes on the accruals to the general economy should bring in a further $40 million or so.

$80 million per year, beginning with 2011, is the additional receipts the national budget should realistically anticipate and even that, as we have said, not before 2011 (this is 8% of the gross take, but recall that the corresponding figure for gold is 6% base). To put this figure into perspective, consider that the National Health Fund is worth $230 million thereabouts and government expenditures on heath is in the region of $520 million.

INFLOWS (Remittances & FDI injections)

Many pundits have predicted a decline in the inward flow of remittances to Ghana as dead certain. We disagree.

The logic is that as unemployment increases in the West migrants who fall victim to that situation are likely to become less disposed to sending money home. There are many flaws in this assumption.

Firstly, the bulk of migratory flows are south-south. That is to say, the majority of migrants are actually not resident in the West at all. It cannot be taken for granted that the global effects of the global recession will be increased, uniform, unemployment around the world. Indian migrants from Kerala in the UAE may not experience the same level of labour market turmoil as Mexican migrants in California; nor are Philippino nurses in the UK subject to the same culling effects as Polish plumbers in Germany.

The detail is simply too much to allow anyone to accurately paint a uniform picture of the global situation. But even if we control for variability and assume that the bulk of remittances that come into Ghana originate from Western-based migrants, we must still make room for the fact that a good majority of Ghanaian migrants work in the lower segments of the labour market, which, counter-intuitively, can be highly resilient during downturns. Anecdotally, such Ghanaians take jobs that locals refuse to touch even when faced with unemployment (an option the latter can choose to exercise because of welfare provisions that guarantee a minimum standard of decent living).

 Nor is it far-fetched to suppose that certain types of jobs thrive during recessions. Goods and services targeted at the poorer segments of society may receive a boost in demand as middle class consumers relax their disdain for such products. Providers of these types of goods and services may, unlike their higher-end competitors, be better disposed to employing migrants. Meanwhile increased public spending, as part of the recession-fighting package, may expand job opportunities in construction, cleaning and public works, among others. Consider also that Ghanaian migrants, unlike say their Eastern European counterparts, are rarely ‘boom migrants’, that is to say they are not very responsive to economic growth cycles in prospective host countries. They take, in their decision to migrate, a longterm view of their desired host countries, informed by opinions garnered from a reasonable variety of sources.  That may be taken to mean that fewer Ghanaians than is the norm are trapped in the ‘bubble sectors’ of western economies.

At any rate, remitting Ghanaians may exhibit what migration theorists call ‘translocality’. That is to say they consider their sphere of residence as straddling both Ghana and their present location. In those circumstances, they may treat their remitting behaviour as part of a social security arrangement. Anecdotally, during downturns the devotion of such persons to Ghana increases substantially and their horizon of ‘return’ to Ghana narrows positively. They may be more disposed to expanding or accelerating their investments in Ghana in view of their heightened concern about social security.  Those who have entrepreneurial orientation may intensify their trading and other business activities across the Ghana-Western frontier.

But what does the empirical evidence portend?

There are some reports of slowing inflows between the relatively wealthier host countries of Russia and Poland and the poorer Central Asian sending countries, but this trend is far from established or even conclusive.

Figures from the Philippines suggest that the outlook in that country is robust due to, in the view of the central bank, the improving skill profile of recent Philippino migrants and increased efficiency in the remittance system itself as a result of recent introductions of technologies and products in the sector by innovative operators.

UNCTAD expects a general decline of 6% in 2009 but an upturn of 6.4% in 2010. As we have said previously, there is no suggestion that this projected downturn will be felt uniformly.

Our view, perhaps in contrast to informed opinion in several quarters, is that the downside risks to inward remittance flows are minimal.

FDI inflows are another matter entirely.

Inward Foreign Direct Investment flows to Ghana amounted to $855 million during 2007 (a more than 5-fold rise from 2005 levels), the latest year for which comprehensive figures are available. This is equivalent to 6% of the total inflow of FDI for the West African region, and less than 0.0005% of the global total – insignificant in the scheme of things. Nonetheless, what little has been coming in is likely to reduce, though not by much. It is the downside risks to FDI growth rather than a reduction in absolute values that appear most pronounced. The Bank of Ghana expects a significant reduction in cross-border equity investment, and we concur: the astounding rise in the Ghana Stock Exchange All Share Index in recent months is unsustainable on that score.


Considering our bearish views about oil proceeds, we are inclined to argue that the economic outlook for the next four years is unlikely to alter dramatically. In that sense many of the abiding concerns about constraints in the Ghanaian economy should persist, certainly for 2009.

The fiscal outturn for 2009 is framed by divergent movements in external payments and inward receipts. 70% of the national import bill consists of petroleum and petroleum product purchases. The sharp reduction in prices on the spot market should prove very positive for the balance of payments situation. On the other hand, multilateral and bilateral Debt relief proceeds will decline significantly even compared to last year’s low estimates of $210 million, while divestiture receipts would be almost negligible. Readers may recall that relief proceeds for 2007 was in the region of $630 million.

Consider the macroeconomic framework projected for 2008 by the Bank of Ghana:

I.         a real GDP growth of at least 7 per cent ;

II.       an end period inflation rate of between 6 and 8 per cent;

III.       an average inflation of 7 per cent;

IV.   accumulation of international reserves of the equivalence of at least three months of import cover; and

V.     an overall budget deficit of 4.0 per cent of GDP

The severe reversal of these projections cautions against any brazen defiance of the clear prospect: a mild deterioration in fundamentals for 2009. As we indicated above, a reduction in payments will be offset by a reduction in donor receipts in one category, debt relief. As far as general donor inflows are concerned, the onset of the multi-donor budget support mechanism means that the bulk of donor receipts are committed, and are unlikely to succumb to erratic fluctuation.

We are very comfortable, in view of the foregoing, to forecast a stable outlook for 2009 fundamentals, with marginal variability from the 2008 picture. But that assessment is under the assumption that planned public spending does not proceed on the basis of the type of forecasts that produced the above-mentioned, overoptimistic, 2008 macroeconomic framework. Perhaps it is at this juncture, that we must wade into the policy debates.

In 2008, total payments were a little in excess of GHC7 billion while receipts was a couple of GHC100 million below this figure. Government expenditures was in excess of GHC5 billion while receipts amounted to GHC4.75 billion.  The structural fiscal deficit for the year is estimated at 10% (with a small adjustment for depreciation of capital stocks).

Government policy is necessarily constrained by this picture, especially as regards spending on new policies and social interventions. Nor can deficit financing be adopted as a deliberate growth strategy in view of the bearish forecasts for oil and other receipts we have outlined in the preceding. This is the benchmark we must apply in judging policy options and prospects.

Firstly, we will consider employment.

The Ghana Living Standards Surveys have consistently shown that unemployment is not a problem in Ghana. It is barely 3.5%. The observation of note is that self-employment is 80% plus, with the vast majority in agriculture and agric-related services (such as food retail), the sector that incidentally is showing the slowest growth in output (until it was recently outpaced by the services industry, has been the fastest expanding sector, contrary to much commentary).

In such a context, standard labour-responsive policies do not work.  With public sector wages already constituting 14% of GDP and 30% thereabouts of government expenditure (even excluding pensions and some social security outgoings), the remedy available to some welfare states elsewhere of boosting public sector employment is totally out of consideration. We wonder whether it will be open to government to expand the National Youth Employment Program, and whether this is desirable at all.

It is entirely justifiable to argue, considering the proportion of the population in self-employment, especially in agriculture, that Government’s attention should be directed to providing debt-guarantees and other entrepreneurial support measures to boost the incomes of those who have taken responsibility for their own livelihoods.

In fact, the only flexibility open to Government, on the face of the fiscal evidence, may be to embark on a further retrenchment in the public sector. This is justified by the convergence of wage values in the public and informal sectors, and therefore by the suggestion that public sector employment is no more welfare-enhancing than self-employment in the private sector, the dominant labour pattern in the economy. Recall again that Government is spending in excess of a third of its receipts on public sector wages even before the presumably inflationary single-spine structure has been implemented (the situation recalls that of Ghana Airways which at the time of its liquidation had an asset base of $25 million (a single aeroplane?), debts in excess of 200 million, and an employee base of 1400).

Secondly, we will throw the spanner into the works by suggesting that public-led investment may not be a feasible approach to bridging the North-South divide. A development fund for the northern sector may require anywhere between $300 million to $500 million to have the remotest prospect of genuine impact. Our reading of the nation’s books indicates that the public sector may not be able to raise that level of funding by 2010. Creative approaches such as differential taxation may be required for the private sector to lead the surge in investment, at least over the short to middle term horizon.

Government is yet to clarify its position on the National Health Insurance Scheme, and so we must reserve comment until the facts are in. We note though that a shift from a premium-sustained (admittedly only 15% of costs are defrayed by premiums) to a tax-sustained structure may involve a revision of the program’s ‘insurance’ character in favour of a welfare-based approach (as obtains in the United Kingdom’s NHS for instance).

Lastly, we will pass some comments on the banking sector. The current and forthcoming situation advises strongly against compromising the lending environment. The alarming growth in outstanding credit to the public sector since 2007 ought to be reversed immediately by fiscal tightening. That said, and notwithstanding movement towards Basel II, capital reserve requirements may be moderately loosened with limited risk of regulatory degeneration. This could happen alongside a greater use of debt guarantees by government to stimulate investment in high potential but low growth sectors such as agriculture in lieu of direct public investment.

We end by conceding that there are no easy answers, and anyone who disagrees probably does not understand the questions.

Bright B. Simons and Franklin Cudjoe are affiliates of IMANI: Centre for Policy and Education and Eric Mawudeku is content manager at IMANI was this month named 6th most influential think tank in Africa by Foreign Policy magazine.