Graphic Business News

Oil’s shine hides manufacturing’s woes.....Time to remove natural resources from industry sector?

By: Maxwell Akalaare Adombila
Dr Yaw Adu Gyamfi AGI President
Dr Yaw Adu Gyamfi AGI President

THIS year, Ghana marks 11 years of oil discovery and eight years of production, within which a minimum of US$17.1 billion in upfront investments have been made in the three producing fields and the Atuabo Gas Plant, all in the Western Region.

Although production volumes are beginning to ramp up (as more fields come on stream), earnings have not disappointed: As of December 2016, cumulative inflows from the relatively new business to the national treasury totalled US$3.45 billion, equivalent to 8.1 per cent of 2016’s gross domestic product (GDP).

With revenue estimates from the sector in 2017 and 2018 estimated at US$515.47 million and US$669.41 million respectively, the country could close this year with petroleum revenues in excess of US$5.25 billion – 12.3 per cent of GDP.

For an economy that is still awakening to the realities of a lower middle income country, this new stream of revenue is surely a great source of reprieve.

Already, it has cushioned the shocks brought about by the gradual dry up of grants and concessionary loans. It has helped to reduce the country’s strong appetite for risky debts and also served as a pool from which some money is invested for rainy days (the Ghana Stabilisation Fund) and posterity (the Ghana Heritage Fund).

It has even become the lifeline to a laudable policy such as the Free Senior High School (SHS), meant to educate the next generation of human resource for the country’s development aspirations.

These gains, together with the pockets of infrastructure projects across the country that have been co-funded by petroleum proceeds, speak volumes of what oil has done for the country.

Yet, they are not the only fruits of a resource that took almost three decades to discover.

Spillover effects
Since its emergence in 2007, the petroleum sector has also birthed dozens of indigenous entrepreneurs, majority of whom are cashing in on the various opportunities that it avails. A typical example is Rigworld International Services Limited.

Established in 2011, Rigworld is an upstream oil and gas provider that offers onshore, offshore and near shore services to the petroleum industry in Ghana and the sub-region.

In a spate of a decade, the company’s fortunes have overtaken that of the industry, prompting it to expand into neighbouring countries. In November last year, it inaugurated a US$8.5 million training centre at Kejebril in the Western Region to offer hands-on skills to industry practitioners.

While unemployment is still a national crisis, it is undoubtedly clear that the petroleum sector and its allied areas have employed thousands of people nationwide.

Together with the mining subsector, the strong growth in petroleum has helped to prop-up the industry sector of the economy, resulting in mouth-watering growth rates recorded over the years. 

Thus, current and past managers of the fledgling upstream petroleum sector deserve commendations for initiating policies that have attracted and sustained interest in the oil and gas business, leading to the influx of these petroleum dollars and their spillover effects.

What they must now avert their minds to, and quickly so, is the gradual eclipsing of the fortunes and woes of the manufacturing sector by a robust natural resource subsector.

Growth trends
Since 2010, when commercial production of oil began, annual growth in the manufacturing sub-sector (which encompasses all businesses turning raw materials into finished or semi-finished goods) has been on the decline.

From a rate of 6.9 per cent in 2011, growth has weakened consistently to 4.6 per cent in 2016 and estimated 3.1 per cent in 2017, the lowest in more than a decade. In 2010, the manufacturing subsector grew by 10.2 per cent.

While growth in manufacturing has been nosediving for a decade, that of oil and mining – the growth drivers in the industry sector – have been robust, ultimately painting a deceptive picture to policymakers. 

This explains why although the decline in growth in the manufacturing subsector is alarming, it had essentially passed without mention for discussion as an abysmal showing worthy of national attention.

This is not good for national development, especially given that it could signal an emergence of the dreaded Dutch Disease – an economic ailment associated with natural resource-rich countries, where non-oil sectors suffer from growth while oil sectors continue to post strong growth.

Impact on jobs
With the two subsectors – oil and mining – being capital intensive, their strong growth has brought minimal impacts on key economic indicators such as employment, capital retention and reinvestment, improvement in living standards and even revenue accrued to the state.

The situation is even worsened by the dominance of foreign interests in those areas; almost all profits arising out of these strong growths are repatriated, causing shocks to the local currency.

These explain why although the industry has been reporting strong growth, unemployment has rather blossomed into a national crisis now requiring firmer and immediate actions to address in a sustainable basis.

Also, the eclipsing of the manufacturing subsector’s abysmal showing by the oil and mining subsectors have hindered an objective and fact-based national discourse on the need to resuscitate manufacturing. That is because politicians have, over the years, sought to take credit for growth in the industry sector – taking comfort in the overall sector’s performance while ignoring the deterioration in the fortunes of manufacturing.

This also limits their level of commitment, policy initiation and investments in the manufacturing. The result is the continuous decline in growth and the spike in imported substitutes to the detriment of job creation, the value of the cedi and the general well-being of the economy.

Needless to say, something drastic needs to be done.

Separate oil and mining from industry
While it is good to continue encouraging increased investments and policy attention on manufacturing, it is instructive to note that the petty nature of the politicking in the country means that politicians will always take credit for a strong growth in industry in the midst of a declining manufacturing subsector. This undermines the attention the subsector deserves.

Therefore, the first in the list of strategies needed to reverse the fortunes of manufacturing will be to decouple the natural resources (oil and mining) subsectors from industry in the tracking and calculation of GDP.

Once these are grouped into a standalone sector, it becomes easier for economists and policy analysts to track the progress of manufacturing for the purposes of policy advocacy and interventions.

It also gives the government a clearer picture of the impact of policy interventions aimed at revamping businesses.

Should this be done, the government can easily assess and document how a policy such as the district industrialisation programme (DIP), aimed at establishing a factory each in the 216 districts, has impacted growth in industry.