Gold

For those interested, here is an entry, without pictures, about Ghana's economy. Many thanks to our volunteer friend, Anthony, for his research, thoughts and ideas.

A recent article in the Times Newspaper predicted that in 2010, “...the gold bubble will burst. Gold is one of the most overpriced assets. The precious metal serves no purpose and pays no income. Despite this, its value keeps going up and up. ... Gold is considered to be safe and is thought to hold its value in inflationary times. But price rises remain unlikely over the short term. Investors may discover that holding gold could mean large losses.”

Ghana is Africa’s second biggest gold exporter (after South Africa). Ghana relies on gold as the country’s most important source of foreign exchange.Today, as in the past, Ghana barely manufactures anything. It has to import almost all manufactured goods and pay for them through the international markets based abroad. To pay for these goods, it is almost entirely dependent on gold and cocoa.

Government elections were held in Ghana in early 2009 and there was a change of government. The previous government, confidently riding on the booming price of gold, and eager to earn another term in office, increased public sector wages. (A fully qualified secondary school teacher at the top of the pay scale now earns just under £100 per month). It also gave increased funding to schools and hospitals. For example, to increase school enrolment, all primary and junior high school students receive free school meals. They lost the. election. The new government, as part of its manifesto, made a key election promise to increase fuel subsidies.

Climate change is manifesting itself in Ghana, as in other parts of the world. It was a bad year for rainfall in 2007. As most of Ghana’s electricity is produced as hydroelectricity, this led to electricity shortages. The previous government was forced to respond by buying expensive foreign oil to supplement the electricity supply. The new government has estimated that the previous government exceeded its forecast budget deficit for 2008 by nearly seven times.It is therefore unsurprising that the new government accepted an International Monetary Fund (IMF) loan of $600m in July 2009, the same month that Barak Obama visited Ghana. This is not unusual. Since 1984, there have only been nine years when Ghana has not received money from the IMF. In total since 1984, Ghana has received $13,424,373,622 from the IMF.

The IMF, to ensure that their loans will be repaid, attaches conditions to all of its loans. The idea is to adjust the structure of the Ghanaian economy, so that the country improves its income, repays its debt and makes the need for more loans unnecessary. As a new loan was necessary in 2009, the previous sixteen structural adjustment loans over the past twenty five years have, presumably, failed. Let us hope that 2009 is different.

The following is from the IMF website: “Ghana’s public sector wage bill has risen sharply over the past decade, in relation to GDP. Planned reforms to the wage structure will be complemented by steps to strengthen oversight and control of recruitment, and initiate a rightsizing of public agency staffing.”

A number of VSO volunteers are already experiencing some of the outcomes of this “rightsizing”. For example, planned training for teachers in the Upper East Region on science education has been “postponed”, even though a range of resources for the training have been delivered. A VSO colleague phoned the education department in Accra to find out what was happening and was told that, “...due to government cutbacks, the money is delayed and the project is on hold”.

It also has to be assumed that “planned reforms to the wage structure” is not going to mean a pay rise for the teachers. It also has to be assumed that the “rightsizing” of public agency staffing is not going to mean training and recruiting more teachers, despite the huge class sizes.

The road leading from Accra to Kumasi, Ghana’s two main cities, has to be seen to be believed. There are diggers and steamrollers littering the roadside alongside girders and concrete. Traffic, which belongs on the promised three lane highway, bumps its way along the dirt, next to the half finished construction project. There are no markings on the red mud and, seemingly, no rules. What should be a fifteen minute journey takes two hours. The new road has been under construction for over five years. It is like having a section of the M40 between London and Birmingham diverted along a farm track. The effect on the economy must be enormous.

Why, everyone asks, doesn’t the government sort the problem out? Also from the IMF report:“The fiscal deficit, which had already risen to 9 percent of GDP in 2007, rose to 14½ percent of GDP in 2008, boosted by strong pre-election government spending growth, notably including high public sector wage increases, petroleum product subsidies, and new infrastructure projects.”A condition of accepting the 2009 loan from the IMF, therefore, is that the government is not allowed to spend money on “infrastructure projects” such as the Accra to Kumasi road. It also means the new government cannot deliver on its promise to increase fuel subsidies. This is causing a great deal of anger, and people are talking about corruption and lack of trust in the new government’s promises.

The transfer of power from one democratically elected leader to another took place for the first time in Ghana in December 2000. Ghana therefore has a short history of political stability and, during the very close and very tense election last year, some VSO volunteers were temporarily evacuated for their safety from one of the larger towns, Tamale, during the run up to the elections. Clearly, anger at politicians for breaking their promises is not good for the future of political stability, in a relatively new democracy.

The big hope on the horizon is oil. In 2007, Tullow Oil announced that it had discovered 600 million barrels of oil offshore. The IMF report states that “.... the start of oil production in 2011 is projected to generate new budget resources of up to 7 percent of GDP, on an annual basis. The government intends to dedicate revenues partly to reduce Ghana’s fiscal deficit and strengthen debt sustainability, and partly to finance growth-promoting infrastructure investments.” So the oil money in 2011 is going to be used to pay off the loan in 2009 that was needed to buy oil for electricity in 2008. Whatever is left can be spent on that Accra to Kumasi road.

Unfortunately, the IMF admits that “proven oil reserves are modest, and peak production could be relatively short lived [so] there will be a premium on using oil wealth wisely.” This presumably means that there’s going to be none left for increasing teachers’ wages, reducing class sizes, enabling the training of teachers to take place, and generally improving education, so that the country can make progress on the 30% illiteracy rate, 30% unemployment rate etc.

So, despite all the oil hopes, the country is still reliant on gold for foreign exchange. Over 90% of the countries gold output comes from the Ashanti region of the country. In 1993, the IMF, as a loan condition, insisted that the nationally owned industry, Ashanti Goldfields Corporation (AGC), be privatized. A British company, Lonrho, bought the operations and now extracts gold using bacterial oxidation – a relatively environmentally friendly method. The remaining 10% of gold output is from small scale miners. One of the conditions of the 1989 IMF loan was that government regulation of unregistered gold mining should be lifted. Government regulation was to prevent people doing it illegally and to collect the tax revenue.

With the current price of gold being high, there has been a large increase in the number of (now) unregulated gold mining operations. A VSO colleague lives in Bolgatanga and nearby, there is one of these unregulated gold mines. Young boys mine here to earn money for the family. Some do it to pay for their senior high school fees. Now this mine is unregulated, mercury is being used in the extraction process. Young boys tip several drops of it into their hands and smear it into the mud. The mercury forms a partial amalgam with the gold. This, being larger and heavier than the small grains of gold, makes it easier to separate the gold from the silt. It is then heated to evaporate the mercury, leaving the gold behind. Needless to say, this can cause significant health issues – mercury is absorbed through the skin and mercury vapour is absorbed through the lungs. It also causes environmental damage when released into the water supply.

There are other dangers. On Tuesday 10th November 2009, fifteen people were killed when an unregulated mine collapsed in western Ghana. Despite the dangers, people continue to scrape a living from these unregulated mines. So if, as the Times predicted, the “gold bubble will burst in 2010” and investors make big losses, it will have to be the unregulated mine workers and the Ghanaian economy that will get our sympathy!