Managing Future Oil Revenues in Ghana - An Assessment of Alternative Allocation Options

Abstract: Contemporary policy debates on the macroeconomics of resource booms often concentrate on the short-run Dutch disease effects of public expenditure ignoring the possible long-term effects of alternative revenue-allocation options and the supply-side impact of royalty-financed public investments. In a simple model applied here, the government decides the level and timing of spending out of resource rents. This model also considers productivity spillovers over time, which may exhibit a sector bias toward domestic production or exports. A dynamic computable general equilibrium model is used to simulate the effect of temporary oil revenue inflows to Ghana. The simulations show that beyond the short-run Dutch disease effects, the relationship between windfall profits, growth and households’ welfare is less straightforward than what the simple model of the "resource curse" suggests. The CGE model results suggest that designing a rule to smoothing in and out of oil revenues between productivity enhancing investments and an oil fund is crucial to achieving both shared growth and macroeconomic stability.