Prior to the discovery of oil, Ghana was one of the stars of the 'Africa rising' story, with an established track record of macroeconomic stability and fiscal discipline. When oil was discovered, there were great hopes that Ghana would avoid the 'resource curse'. Initial signs were promising--the Petroleum Revenue Management Act (PRMA) was established in 2011 to lay down the key parameters for accounting and collecting of petroleum. However, by 2014 the economic situation had deteriorated so badly that Ghana requested another IMF bailout. What went wrong?
Ghana before oil
The year 2000 brought with it a new government in Ghana and a period of macroeconomic stability. As a requirement for receiving heavily indebted poor countries (HIPC) debt relief, Ghana adhered to an IMF programme. This involved a major shift in macroeconomic policy from fiscal relaxation and monetary accommodation to one of fiscal stringency and monetary discipline. The central government budget was cast in a medium-term framework and public finances were set on a fiscal consolidation course to cut the budget deficit and stabilize domestic public debt. Monetary policy was underpinned by the adoption of an inflation-targeting framework through an independent central bank.
This new fiscal and monetary policy framework had positive results. Inflationary expectations declined and the external payments position strengthened. Ghana's overall debt profile improved significantly and relative exchange rate stability was restored.
Fiscal and monetary mismanagement after the discovery of oil
Oil was discovered in Ghana in 2007. With oil production projected to begin in 2010, the Ghanaian government was optimistic--this discovery would have a significantly positive effect on the economy and reduce Ghana's reliance on oil imports. Ghana invested in extensive consultations with other oil-producing regions and put in place two strong pieces of legislation to try avoid the resource curse--the PRMA and the Petroleum Commission Act. The PRMA legislated rules for the management of oil revenue, including limits to the amount of expected oil revenue that could be spent in any financial year. It also created a stabilization fund to smooth revenues over time, and a heritage fund to save for future generations.
However, the discovery of oil raised public expectations substantially. This hope was reflected in the 2008 and 2012 election campaigns, which saw political parties promise much--in...