Stefanski R., van der Ploeg F., Wills S. (2011) ‘Harnessing Oil Revenues in Ghana’

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. Doing so involves making instrumental and design decisions on resisting spending pressure, adapting to absorption constraints and managing volatility.  The paper by Stefanski et al provides a number of insights on managing resource revenues in a low income country.


Stefanski et al examine how Ghana ought to best harness revenues from its recently discovered oil. This is done by addressing two major questions; firstly, should the windfall be saved or spent? This is a matter of choosing between domestic consumption benefiting the current generation or investment in foreign assets, benefiting future generations and investment in domestic assets. This decision is not one of absolutes but lies on a continuum between investment and consumption. The authors recommend for Ghana to bring its spending forward if that spending is used to promote growth through investment. 


Secondly, how should those windfalls be used? Focusing upon investment, three options are considered:

     - With regards to alleviating capital scarcity it is argued that if foreign debt stock is increasing the cost of borrowing, the focus should be reducing that debt. Borrowing costs are reduced, in turn stimulating investment.

     - With regards to accumulating foreign capital in a Sovereign Wealth Fund it is argued that doing so is beneficial as a temporary measure for stabilizing oil volatility.

     - With regard to accumulating domestic capital, the paper finds that for Ghana it would be optimal to invest heavily in domestic assets for the duration of an oil boom. 


The paper also takes into consideration that Ghana does not have a steady business cycle model and that oil shocks are a common occurrence. As such, for an anticipated shock it is recommended that domestic capital be consumed before and accumulated during the shock whilst slowly returning to a non-oil growth path afterwards.


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