Crude oil production and macroeconomic performance in Ghana

• Published date: 01 December 2021
• Author: Delali Aku Tunyo,Mark Armah,William Godfred Cantah,Shafic Suleman
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/opec.12218

Crude oil production and macroeconomic

performance in Ghana

Delali Aku Tunyo*, Mark Armah**, William Godfred Cantah** and

Shafic Suleman***

*Department of Economic Studies, School of Economics, University of Cape Coast, Cape Coast, Ghana.

Email: delali.tunyo@stu.ucc.edu.gh

**Department of Data Science and Economic Policy, University of Cape Coast, Cape Coast, Ghana. Email:

marmah@ucc.edu.gh Email: william.catanh@ucc.edu.gh

***Institute for Oil and Gas Studies, University of Cape Coast, Cape Coast, Ghana. Email:

shafic.suleman@ucc.edu.gh

Abstract

The objective of this study was to investigate the impact of crude oil production on

macroeconomic performance in Ghana. The study employed monthly data from January 2011

to December 2018. The structural vector autoregressive model was employed to analyse the impact

of crude oil production on macroeconomic performance. The findings of the structural impulse

response function revealed that crude oil production had no impact on the agricultural sector,

services sector, exchange rate and inflation. However, crude oil production had a negative and

positive impact on the manufacturing sector and fiscal balance, respectively. The findings imply

that the government through Ghana National Petroleum Corporation (GNPC) and other major oil

stakeholders should establish oil refineries, petroleum industries and fertiliser plants domestically

to provide a forward linkage for the non-oil sectors. Also, the government through the Ministry of

Trade and Industry should develop the services sectors to meet international standards to provide a

backward linkage to the oil sector and ensure the integration of the sectors into the oil industry.

The government needs to intensify measures to make the manufacturing sector recover from the

adverse effect of the production of crude oil.

1. Introduction

The role crude oil plays in the world economy cannot be underestimated because most

aspects of human livelihoods depend directly or indirectly on energy (Jahangir and

Dural, 2018). It serves as a key input in the production process of several goods and

services across every sector of the economy. Economic expansion and increased demand

from emerging and developed economies in the last two decades have led to increased

production of oil. Whereas fluctuations in oil production generate global supply shocks

and economic downturns through its wide application on key sectors of the economy

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(Arezki et al., 2017). Revenue generated from oil exports has boosted the growth of

many oil-producing countries in the world (World Bank, 2009). Besides, earnings from

oil export are used in financing developmental projects. Countries such as Australia,

Norway, Britain and Canada have used their oil wealth to transform their economies

(Agbefu, 2011).

The revenue generated from oil and gas production in Africa remains an important

source of income and economic growth (IEA, 2014). Leke et al. (2010) provide evidence

to the fact that revenue received by Africa’s oil exporters is used to provide fund

investments, infrastructures, build foreign reserves and reduce budget deficit which

stimulates economic growth. Since the production of crude oil in Ghana, the oil and gas

sector to some extent influenced the growth of the economy and created limited job

opportunities due to the capital-intensive nature of the activities in the oil and gas sector

(Fragkos et al., 2017). The total revenue Ghana received from the production of oil

between 2011 and 2018 amounted to $5.013 billion (Public Interest and Accountability

Committee [PIAC], 2019). Part of this revenue was allocated to the Annual Budget

Funding Amount (ABFA), which is likely to reduce the revenue-spending gap of the

government and affect the fiscal balance of the country (PIAC, 2019). However, the

fiscal balance position of the Ghanaian economy has been deteriorating from 4.3 per cent

of GDP in 2011 to 6 per cent at the end of 2017 despite oil proceeds received (BoG,

2013, 2018).

The contribution of the agricultural sector to GDP has continually declined despite

the revenue from the ABFA channelled for the improvement of this sector. This decline

has been attributed to the inconsistencies of the oil revenue investment in the sector and

the misapplication of agricultural receipts to other sectors such as the use of 69 per cent

of the revenue to fund sea defence projects (Ackah, 2016). The contribution of the

manufacturing sector to GDP has been fairly stable after the production of crude oil. The

sector experienced a slow and negative growth between 2012 and 2015 due to the energy

crisis the country experienced (Ministry of Finance [MoF], 2015). However, the

production of crude oil has helped the sector to get a stable energy supply after the

operation of the Atuabo gas project which has also contributed to the stable performance

of the sector after 2015. Even though the service sector is the leading sector of the

Ghanaian economy, the sector has experienced varied contributions to GDP after the

production with a decline in its contribution to GDP. The contribution of the oil sector to

the growth and development of an oil-exporting economy largely depends on the extent

to which the oil sector is integrated with other sectors of the economy as well as the

extent to which revenue received from the oil sector is used to influence the growth of

the non-oil sector. This has made knowledge of the benefits of crude oil production to

the non-oil sectors of an economy very imperative since these sectors contribute to

economic growth.

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