World Bank (2009) ‘Economy-wide Impact of Oil Discovery in Ghana’

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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 adapting to absorption constraints and managing volatility. The World Bank report provides a number of insights on managing revenue volatility and overcoming bottlenecks.

 

The report outlines the economic impact of oil discovery in Ghana and makes suggestions on how oil revenue can be used for pro-developmental purposes. A number of key actions are identified as critical preparatory steps for the pro-poor use of oil revenues. For instance, it is noted that bottlenecks for the non-tradable sector need to be removed to mitigate for Dutch Disease. Removing constraints to competition and domestic supply response in non-tradable sectors. These include high barriers to entry into formal sectors and a lack of public infrastructure for small medium enterprises.

 

The problem of oil price volatility is also addressed. The report states that such volatility ought to be managed by introducing stabilization mechanisms such as setting a reference price and transferring only revenue from oil at that price to the budget, the remainder going to a Stabilization Fund, which is tapped into if the price decreases. Such an approach is however sensitive to political pressure to revise world price assumptions. Another mechanism is building a Permanent Income Fund where only the interest rate on revenue of accumulated assets is included in the government budget. Such a fund should be invested abroad as a permanent income can only be insured if financial returns on the fund are guaranteed. For the establishment of an oil fund the report recommends:

     - Concessions ought to be worked towards at the design stage regarding the use of the oil rents and their management.

     - A clear institutional framework is also important. This means addressing specific issues such as which government institution is responsible for running concession auctions.

     - Transparency and accountability mechanisms are to be built into the institutional frameworks through an oil fund, in order to improve weak institutional contexts.

Access the report here.

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