Approaching the fork in the road. (Countryfile: Ghana).

Ghana has begun to turn its former lacklustre economic performance around but it will soon have to decided whether to go for accelerated growth or maintain its current pedestrian pace. Neil Ford reports.

The Ghanaian economy is at something of a cross-roads. It has gone from being one of the most developed African states at independence to one of the most lacklustre during the 1970s but the reforms of the past decade have begun to turn the situation around.

Now, with a relatively new government and promising projects on the horizon, there are several routes the economy could take. It could settle into the pattern of many other African states, with average growth maintaining living standards but not really improving them; and IMF inspired deregulation policies helping some sectors and hampering others.

Or it could go on to generate the kind of optimism that has gripped the continent's success stories like Botswana and Mozambique, recording the type of growth levels that can really make a difference.

Perhaps fortunately, Ghana does not have a single commodity that can bring about this kind of change, despite its gold wealth, so it is unlikely to become another Botswana or Gabon. And it does not have a prosperous and supportive neighbour like South Africa to provide investment, ready markets and infrastructural support, so it is quite unlike Mozambique. Indeed, given the recent decline into civil strife that has affected Cote d'Ivoire, Ghana itself has become the stabilising influence within its own region.

But through a combination of successful macro-economic management and growth across several sectors, a strengthening economy is a real possibility.

Opposition to privatisation is widespread and sometimes justified but the state needs to divest itself of many financial responsibilities if it is to act efficiently. There can be no excuse for the kind of burden that the debts of the Tema oil refinery place upon the state.

Despite such problems, there can be no doubt that political and economic stability have improved a great deal since the coup which brought flight lieutenant Jerry Rawlings to power in 1981. The economy remains heavily dependent upon the export of commodities. Cocoa and gold are by far the most important revenue earners, although coffee, kola nuts, palm oil and timber also make a substantial contribution.

While all these sectors have strengthened over the past two decades, the economy remains vulnerable to fluctuating prices and the government would do well to nurture the small but growing processing industry - currently focused on cocoa by-products and fruit juices.

The rapid depreciation of the cedi during 2000 has been stemmed but inflation remains stubbornly difficult to subdue. It fell from 46.6% in 1996 to 12.4% in 1999 before climbing to 25.2% a year later. Otherwise, the government has put a great deal of effort into improving the investment climate. Taxes on foreign companies have been reduced and currency regulations relaxed, while foreign control of key resources is now permitted to a far greater extent.

FORESTS PAVED WITH GOLD

One of the main areas, which the government has tried to make more attractive to foreign investors, is the gold mining sector. Production of around 2.2m ounces last year generated almost half of the government's foreign currency revenues and secured Ghana's position as the second biggest producer in Africa. In an effort to boost production still further, the government took the controversial decision in February to offer mining licences in the country's previously protected forest reserves.

Many major gold mining companies, including Ghana's own Ashanti Goldfields, Newmont of the US and Red Back of Australia, had indicated that they would invest large sums in the country is they were allowed access to the reserves.

Increased government revenues and the scale of job creation seem to have been too much for the government to resist, despite opposition from Ghanaian and foreign environmental groups.

Very few new mines have opened in recent years and the government is keen to maximise revenues from the industry. The interested mining concerns are reported to be ready to invest $2bn in new mine development, but many of the prospective sites lie in the formerly protected areas. Newmont, which is the world's biggest gold producer, has drawn up plans to invest a total of $450m in two Ghanaian mining projects, at Ahafo and Akim, promising to create over 1,000 jobs. The latter is located within a forest reserve.

As often happens during wars of global interest, the price of gold is currently high, and although it could fall before the government is able to benefit from production at Ahafo and Akim, the price could have influenced the government's decision.

The Minister of Mining, Kwadwo Agyei Darko said of overtures from the mining companies: "Our doors are open. The government has committed itself to measures that will enhance mining and restore it to its former glory".

At the same time as opening up the reserves, a new mining law has streamlined the licensing process, formalised acquisition rights and reorganised the royalty system.

Diamonds, bauxite and salt are also mined in Ghana. The government is planning to sell a stake in Ghana Consolidated Diamond Mines in an effort to raise funds and attract additional investment capital in the sector, while the u-turn on the forest reserves may lead to another major investment project.

Anglo-Australian BHP Billiton plans a $1bn aluminium project in the country if sufficient bauxite reserves can be discovered. The company believes that large reserves exist in forest areas at Nyinahin in Ashanti and Kyebi in Eastern Region.

The company plans to set up facilities to process bauxite into alumina and another operation to process this into aluminium. Many developing countries lose out on the economic benefits of this second processing stage, so setting up a full industry operation in Ghana would be a major coup for the country.

ENERGY CONSUMPTION AND PRODUCTION

After a long struggle, the government finally removed fuel subsidies in January, causing prices to double overnight. Continued subsidies have cost the government dearly over the past decade and have pushed debts at the Tema Oil Refinery Company (TORC) to astronomical levels.

The previous administration had used subsidies to reduce the impact of oil price swings upon the public but subsidies rocketed during periods of high oil prices. The country's only refinery has been producing fuel at a loss and is now believed to be 4.5 trillion cedi or $527m in debt.

Minister of Oil, Kan Dapaah admitted: "We've left it a bit too long, but now we've taken the bold decision to stop the rot." He said that the increases in petrol and diesel prices would enable TORC to service its debts if not to erode the capital debt. The government has long hoped to privatise the company, but with such a millstone around its neck, a remarkable financial package would be required to attract foreign investors.

Public opposition to the price rises has been great and the government has attempted to moderate the protests by ordering 550 buses in order to improve public transport and it has also indicated that the minimum wage is likely to be increased. In a politically astute move, MPs are to give up their fuel allowances and will not take a pay rise this year. The popularity of the governing New Patriotic Party (NPP) does not seem to have been hit particularly hard by the price increases. The government won two by-elections in March, giving it overall control of parliament for the first time.

Although Ghana is only a modest oil producer with output of around 6,500 barrels a day, there is some potential for more substantial offshore oil and gas discoveries. However, the government would do well to entrust that task to private operators rather than banking upon the state owned Ghana National Petroleum Corporation (GNPC) to provide all the required investment and expertise.

Some progress is being made in the power sector, which was so badly effected during the late 1990s by the impact of drought upon hydroelectric power production. The fabled West African Gas Pipeline (WAGP) project may improve power supply security in the long term. Although work on the scheme has progressed painfully slowly, at least it is still moving forward.

While the government is supporting the plan to import Nigerian natural gas via an offshore pipeline, it should not put all its eggs in one basket. Cote d'Ivoire possesses sufficient reserves to supply both its own power plants and Ghana's power industry, and could supply the Ghanaian Volta River Authority (VRA) with gas at an earlier date than the WAGP. The ideal solution would be to diversifying Ghana's sources of the supply in order to improve gas security.

PRIVATISATION LAGS BEHIND

One of the main obstacles to further economic reform in Ghana is the country's experience of privatisation to date. Although Ghana was one of the first African countries to privatise its state telecoms company, when a 30% in Ghana Telecom was sold to Telekom Malaysia (TM) in 1997, the sector is currently in some difficulty.

With a contract to manage the national operator, TM has invested in fixed line infrastructure over the past six years but the company was hit by the depreciation of the cedi, which has slashed the value of its Ghanaian revenues in international terms. The cedi fell from 3,530 to the US dollar in January 2000 to 7,100 a year later. TM is now trying to sue the Ghanaian government, a process that is likely to take a long time.

Although TM is undoubtedly suffering financially because of depreciation, its difficulties may have more to do with the general downturn in the telecoms market than anything specifically to do with macro-economic management in Ghana.

Nevertheless, problems in the telecoms sector have fuelled the fire of opposition to privatisation. The water sector has long been listed for privatisation, probably by means of offering a contract to manage Ghana Water Company (GWC) rather than selling both the company and national infrastructure outright However, the scale of public opposition to the move has brought the concession process to a standstill.

The government of President John Kufuor may still feel as if it is in the early years of its term of office, but the Ghanaian economy has spent long enough stabilising and needs to move on to the next level.

The key to strengthening the economy is to diversify away from the export of raw commodities. Rising cocoa and gold exports may boost government revenues but dependency upon such products will not enable the country to keep inflation under control nor to prevent currency swings. A manufacturing sector cannot be developed overnight but if the government can invest in diversification now, while it is in an already fairly strong position, it can sow the seeds of a stronger Ghana for all the people of the country.