Managing the Macroeconomy in an Oil Rich Country

The discovery of commercial quantities of oil and gas off the coast of Ghana in June 2008 has given rise to high expectations and optimism for improved prospects for rapid economic development and poverty reduction. However, there have been public concerns for the proper management of the increased foreign exchange inflows and the transparent use and fair distribution of the financial gains. There are also fears of a possible Dutch disease, which could reduce competitiveness in key export and import-competing sectors and adversely impact the livelihoods of major parts of the population. The challenges of effective fiscal policy relate to the fact that oil revenues constitute a larger part of government revenue and they are volatile, unpredictable, exhaustible and mostly driven by external demand. This paper provides an empirical analysis over the 1970-2011 period using CVAR estimations within a fiscal response framework. The main finding is that oil revenues have the potential to impact positively on macroeconomic performance. This is based on estimated government’s fiscal behaviour or response with respect to foreign aid and tax revenue. The paper concludes by noting that the realisation of these benefits is not guaranteed and will depend crucially on whether the implicit assumption that the incentives associated with oil revenues will be similar to that of foreign aid or tax revenue.