Working Paper 322- Managing Natural Resource Revenue in Ghana

It is well recognized that infrastructure investment is vital for growth. However, its financial implications could be huge, which could not be met by traditional sources of financing only. Using a general equilibrium model applied to Ghana, this paper combines four fiscal rules for managing oil revenue for public investment spending: i) the government combines both oil proceeds and borrowing (baseline experiment); ii) the government saves all oil proceeds and resort to borrowing (Bird-in-Hand experiment); iii) the government invests all oil proceeds and does not borrow (Hand-to-Mouth experiment); iv) aggressive investment approach; and v) baseline with structural reforms. We find that the baseline rule is susceptible to generate an intermediate impact on non-oil GDP growth and non-oil fiscal balance while minimizing the macroeconomic and fiscal volatility. We find that the baseline rule is susceptible to generate an intermediate impact on non-oil GDP growth and non-oil fiscal balance while minimizing macroeconomic and fiscal volatilities. In contrast, the Bird-in-Hand approach generates a smooth and long lasting non-oil GDP growth, and is susceptible to contain absorptive capacity constraints and Dutch disease effects. The Hand-to-Mouth approach leads to macroeconomic volatility, lower non-oil GDP growth and declining non-oil fiscal balance as a share of GDP. The aggressive investment approach is likely to produce higher non-oil GDP growth compared to the baseline but will accentuate downside risks in the baseline. Furthermore, we find that structural reforms that improve the efficiency of the baseline scaling up of public investment create sizable increase in public capital stock, which has additional positive spillover effect to the rest of the economy. JEL classification: Q32; E22; E62