Amount because it provides the liquidity gap created by a shortfall in revenue collections within the fiscal year either due to price or production fall. This means that the revenue management model favours substantial current spending. This might be due to the development challenges faced by the country. For example, the World Bank Infrastructure Diagnostic Report puts Ghana's infrastructure finance deficit at US$2.3 billion for the next decade. and accountability systems and improve expenditure planning. Ghana may also need to consider the enactment of a Fiscal Responsibility Law. This will introduce some discipline in the economy. Whilst fiscal responsibility may restrict spending powers, it is important to institute it because the cost of fiscal mismanagement on the economy is quite huge. What remains problematic however is the rate at which the Stabilisation Fund will be built. With the high levels of fiscal deficits in Ghana's budgets, and the tendency to allocate about 70% of benchmark revenues to the budget, a slower build-up of the Stabilisation Fund may not create significant stabilisation reserves in the event of a significant fall in oil prices, which will subject the Ghanaian economy to unanticipated volatility in the oil market. Ghana can get out of this dilemma in two ways. First, the country could postpone the spending of oil revenues for 2011 and save the money in the Stabilisation Fund to build sufficient reserves before subsequent allocations to the budget. Second, the country could allocate smaller percentage of benchmark revenues(for example 40 – 50%) to the budget for the first few years of oil production and leave substantial balance for savings in the Stabilisation Fund. Another problem is with the fiscal rule itself which favours current spending as opposed to future spending. Even if the entire annual revenues are allocated to the budget, it may not exceed 10% of GDP which makes Ghana less dependent on oil. Revenues may only clear the deficits without actually delivering tangible benefits to the country in terms of economic growth and development. Therefore, any fiscal rule for managing oil revenues must not see oil revenue as performing magic in the economy but must be seen as creating a fiscal space to correct the fiscal challenges of the non-oil economy. This will require allocation of oil revenues based on sustainable fiscal benchmarks such as the Non-Oil-Primary-Deficit(NOPD). 7.0. POLICY RECOMMENDATIONS Fiscal policies require discipline to implement. Ghana must therefore work to improve the public financial management system especially the budget processes, the Bank of Ghana Act and the Financial Administration Act must be implemented seriously because they address some of the weaknesses in the public financial management system. The development of a sound institutional framework is very important if Ghana is to avoid the fiscal challenges that accompany oil booms. This will open up public institutions for scrutiny by citizens on the management of public resources. A strong and open public financial management system will ensure citizens are well informed about the size of oil revenues, the rate of its spending and the composition of spending. It will also introduce sound budget procedures Whilst budget allocations may be appropriate, the efficiency of spending may be negligible. Efficiency spending is very necessary to ensure value for money. The government should also enact a legislation to prohibit oil­backed and forward loans. The danger with these transactions is that oil is exhaustible and its prices are volatile, therefore, a commitment of oil to commercial transactions subjects our country to serious future fiscal challenges particularly when oil prices are on a downside. They have high interest rates and short maturities and favour the banks and not the state. They reduce fiscal sustainability and adversely affect intergenerational equity. There is also the need for a transparent process in the management of oil revenues and the budget. Ghana's 2010 Open Budget Index stands at 54% but this could be improved to ensure proper public tracking of revenues and expenditures. Particularly, if Ghana adopts a Fiscal Responsibility Law, citizens can monitor to ensure compliance. Another measure is to adopt a prudent fiscal policy around a sustainable path for the non-oil fiscal deficit over the medium-term. This is to avoid the Dutch disease effects, volatility effects of oil prices and introduce fiscal discipline especially regarding excessive spending and borrowing. 8.0 CONCLUSION There is no doubt that oil revenues will provide fiscal relief to the Ghanaian economy. However, it requires sound fiscal policies to ensure the prudent and sustainable utilisation of these resources. The country must recognise that many countries in the developing world with abundant natural resource wealth have not been able to turn this wealth into lasting benefits for their people and Ghana may not be an exception if its new-found wealth is not used to diversify the economy and build appropriate capital to support short­term and long-term growth of the economy. The country also needs to strengthen its institutions and enhance transparency in the management of public resources. This ensures public confidence-building in the overall public financial management system and reduces the governance risks associated with managing natural resource wealth; a situation which has become very essential if Ghana is to escape the'curse' of oil. Contact Friedrich-Ebert-Stiftung P. O. Box KA 9722 Tel: 030 2 772471 761535 772687 Fax: 0302 772990 Web: www.fesghana.org ISBN: 9988-572-15-8 About the Author Mohammed Amin Adam Coordinator National CSO Platform on Oil and Gas, Accra Disclaimer The views expressed in this publication are not necessarily those of the Friedrich-Ebert­Stiftung or of the organisation for which the author works. PARLIAMENTARY BRIEFING PAPER FISCAL POLICY OPTIONS FOR MANAGING AN OIL ECONOMY Mohammmed Amin Adam 1.0. INTRODUCTION The poor economic performance of most natural resource rich countries in the developing world has raised doubts regarding the usefulness of these resources. In development literature, some have described this phenomenon as'resource curse' or'resource trap'. The 'resource curse' phenomenon in its simplest form refers to the inverse relationship between economic growth and dependence on natural resource revenues. However, it takes other forms including environmental degradation, political instability and the corruption of the political system. This phenomenon has occurred repeatedly in countries with resource wealth. For example studies have shown that countries that are resource poor grew four times more rapidly than resource rich countries. Other studies show that countries that are dependent on oil exports have performed worse than their resource poor counterparts; they have also performed far worse than they should have, given their revenue streams. However, it is not the endowment of these natural resources that is a problem but rather its management. A number of factors are responsible for the resource curse syndrome. One factor is that oil revenue inflows can hurt other sectors of the economy through real currency appreciation which then renders other exports non-competitive – a phenomenon called the Dutch Disease. The Dutch Disease takes different forms. The first, called the'resource effect' relates to mobility of factors of production from non-oil sectors to the oil sector. This raises factor prices in the oil sector and thereby contracting other sectors(Fardmanesh, 1991). For instance, McMahon(1997) reports that oil booms result in a shift of both labour and capital inputs to non-tradables 1 . The second- the'spending effect'- describes increased use of revenues accruing to exporting countries from oil exports. The'spending effect' is of the view that with increased resource revenues, aggregate demand rises in both tradables 2 and non-tradables. Prices of the tradable sector are determined by the international market, and since real exchange rate appreciates as a result, the increased aggregate demand is met by increased imports. The non-tradables sector prices then go up and thereby moving resources to non-tradables from the tradables sector(Corden and Neary, 1982). Another factor is that the long-term price deflation and price volatility of the international primary commodities market usually obstruct the development path. Oil prices in particular have been very volatile over the years especially since the 1970s. This situation has subjected the economies of resource rich countries and their budgets to extreme economic shocks which sometimes trigger economic adjustments that have become too costly for these 1 Non-tradable sector: private non-tradable activities are financial services, construction,trade, retail, transport, and other services; and public non-tradable activities are utilities and government services. 2 Tradable sector: mining, agriculture, and manufacturing