Ghana’s New Oil Wealth May Trigger Borrowing Spree

Ghanaian President John Atta Mills
Ghanaian President John Atta Mills said, "Those of us in leadership positions must ensure oil is a blessing and is not a curse.” Photographer: Daniel Acker/Bloomberg

Ghanaian President John Atta Mills says the country will learn from the mistakes of other African oil producers and save some of the revenue for future generations after production starts today. Government agreements to borrow more than $14 billion say otherwise.

Ruling party lawmakers amended a bill on Dec. 9 to allow the government to borrow against future oil revenue and are weighing plans to delay the creation of a sovereign wealth fund. The move comes on the heels of September loan accords with China worth about 45 percent of the country’s gross domestic product.

The West African nation’s willingness to leverage its oil wealth may saddle future generations with debt, while failing to avoid the economic decay that has accompanied oil riches in countries such as Nigeria. The borrowing comes just six years after Ghana won $3.5 billion in debt relief from the International Monetary Fund and World Bank.

“By 2014, it is not impossible to imagine over 20 years of Ghana’s future oil revenues tied up in one contract or another,” Sebastian Spio-Garbrah, an Africa analyst at New York-based DaMina Advisors, said in a Dec. 10 e-mail.

In addition to the Chinese loans for transportation and energy projects, Mills plans to borrow $1.5 billion from South Korea’s STX Business Group to build 30,000 houses for security forces and another $500 million from Goldman Sachs Group Inc. to upgrade railroad services. By contrast, Ghana will earn an average $1 billion a year from oil through 2029, the World Bank estimates.

Thanks to God

“We must give thanks to God for giving us this natural asset,” Mills said after opening a tap to release oil aboard a storage ship today. “It means we are assuming very serious responsibilities. Those of us in leadership positions must ensure oil is a blessing is not a curse.”

Ghana’s state-owned oil company, the Tema-based Ghana National Petroleum Corp., owns 13.75 percent of the Jubilee field, U.K.-based Tullow Oil Plc owns 34.7 percent, Dallas-based Kosmos Energy LLC owns 23.5 percent, The Woodlands, Texas-based Anadarko Petroleum Corp. owns 23.5 percent, and two small Ghanaian companies control the remainder. The field will produce 55,000 barrels a day starting today, rising to 120,000 barrels per day within three to six months, according to Tullow’s website. That may reach 240,000 barrels a day by 2014-2015, according to Ghana National Petroleum Corp.

Late Payments

Ghana has been overspending since the oil was discovered in 2007, with the government posting a fiscal deficit in excess of 5 percent of GDP in each of the past three years.

Moreover, it has $1.4 billion of unpaid bills to local contractors and municipalities, according to the Accra-based Centre for Policy Analysis. At least a fifth of the bad loans at Ghana’s commercial banks are directly linked to government arrears, it said.

Given Ghana’s past profligacy, “any kind of oil-backed borrowing should be viewed with some concern,” said Razia Khan, head of Africa research at Standard Chartered Plc in London, in a Dec. 9 e-mail. “It sits somewhat uncomfortably with a longer term picture, where Ghana could have shown more conservatism.”

Some lawmakers in the ruling National Democratic Congress party also are trying to delay by five years plans to save 30 percent of oil revenue, some of it in a sovereign wealth fund. Parliament will probably vote on the oil bill, which has been rewritten to allow the use of oil revenue as collateral, next month.

No Pitfalls

President Mills says the government will avoid the pitfalls other African oil producers have fallen into.

We “must set an example to all and sundry that when natural assets are utilized, they bring nothing but benefits,” he said today.

Ghana has a good track record, after cutting hunger by 75 percent between 1990 and 2004 and maintaining one of Africa’s most stable democracies in the past 20 years. Buoyed by a burgeoning financial sector and record prices for cocoa and gold, its two largest exports, growth has averaged more than 5.5 percent over the past decade.

Still, larger African oil producers have squandered their new-found wealth. The ratio of foreign debt to GDP in Nigeria, Africa’s largest oil producer, ballooned from less than 10 percent in 1980 to almost 140 percent in 1993, according to a 2006 paper published by the World Bank. Oil production rose 50 percent to 1.96 million barrels a day over the same period.

Rail to Nowhere

Gabon, where oil accounts for 46 percent of fiscal revenue according to the U.S. State Department, borrowed to finance the Trans-Gabon Railway in the 1980s. It ran hundreds of miles through jungle to connect the country’s Atlantic coast with Franceville, near the hometown of former President Omar Bongo. In 1998, the country suspended payments on its debts.

Now Ghana is planning to build railway lines, including an extension from Kumasi to Paga on the border with Burkina Faso, at a cost of $6 billion. The government says it will help develop the impoverished north, while the opposition says it won’t make a profit.

“We have weak budgetary systems, weak institutions, and we don’t have enough capacity in terms of engineers and contractors,” said Mohammed Amin Adam, coordinator of an alliance of 115 non-governmental organizations that lobbied the government against using future oil receipts to obtain loans. “A lot of this money is going to leak out.”

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