Bright Simons, Vice-President of IMANI Africa, has noted that when Ghana discovered oil in 2007, some experts warned of the risk of the “resource curse,” specifically the “Dutch Disease” variant, which could afflict the country.
Bright Simons highlighted that recent research conducted by Colin Constantine Tarron Khemraj reveals that, contrary to expectations, Ghana has not experienced the typical symptoms of Dutch Disease, even after nearly 15 years of oil production.
“The classical Dutch Disease proceeds as follows: Country discovers oil (or other major tradable natural resource); A sudden surge of exports generates massive forex inflows; The country’s currency strengthens; Imports become cheaper, undermining some local industries; There is a shift of resources and emphasis to the new oil sector; and Legacy industries suffer and the economy comes under pressure”.
“Constantine and Khemraj provide evidence in their new preprint that this sequence doesn’t apply in the case of Ghana. It does fit the case of Angola though. As well as Trinidad and Tobago’s”.
Bright Simons
Bright Simons pointed out that, in a liberalized economy with minimal trade barriers, a significant influx of foreign exchange from resource exports should not typically lead to currency overvaluation, which is the initial step in the Dutch Disease sequence.
He explained that this is because the liberal economic setting allows for frictionless and efficient importation of goods, preventing currency overvaluation.
Bright Simons observed that in Ghana, as well as in Algeria and Mexico, the discovery of new oil reserves has paradoxically been accompanied by a depreciation of the exchange rate, rather than the expected appreciation.
Bright Simons pointed out that Ghana’s experience is particularly striking, as since it began producing oil in 2007, the value of its currency has plummeted by a staggering 93%, a drastic devaluation that raises concerns about the country’s economic health.
“The Constantine and Khemraj paper spotlights one important cause of the Cedi’s precipitous decline: the role of the Central Bank in the ‘monetization’ of the fiscal deficit”. – Bright Simons
Ghana’s Economic Struggles: Calls For Fiscal Discipline Intensify
Bright Simons mentioned that the issue of monetizing fiscal deficits gained attention in 2022, a year in which the Ghanaian currency experienced a staggering decline of over 50% of its value in just a few months, highlighting the urgent need for fiscal discipline and responsible monetary policies.
“However, this paper is one of the few empirical investigations into the interconnected variables at the root of the phenomenon, even if its focus was not on the acute factors that precipitated Ghana’s debt default and is instead on the long-term currency movements linked to the fiscal and current accounts”.
“Whilst the paper does require a careful analysis of the relations among such important macroeconomic indicators as bank credit, government deposits, and resource rents, the emphasis on central bank behavior will find perfect resonance with the mood of analysts and activists in Ghana who have been skeptical of the policy conduct of the Bank of Ghana”.
Bright Simons
Bright Simons expressed his opinion that the size and development of the oil industry in the countries studied may also have a significant impact on whether the discovery of oil leads to an appreciation or depreciation of the currency.
He suggested that the maturity and scale of the oil industry could shape the monetary consequences, implying that more established and larger industries might have a different impact on currency value compared to smaller or newer ones.
Bright Simons emphasized that any thorough research that sheds light on the central bank’s role in navigating fiscal challenges is a valuable addition to the discussion, providing much-needed insight and clarity during tumultuous economic times.
Bright Simons expressed dismay at the persistent decline of the Ghanaian currency, highlighting the irony that despite being an oil-producing nation, Ghana is not reaping the expected benefits from its oil resources, suggesting that the country is not maximizing its potential economic gains.
READ ALSO: Market Turbulence Expected In Q3 As Economic and Global Trends Converge- Analyst
