Central Bank Financing of Petro Promises in Ghana and Guyana – Constantine & Khemraj
A Review Essay
By
Terrence Richard Blackman, Ph.D.
April 20, 2025
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Introduction
Oil discoveries often spark great expectations in developing economies, but they can also lead to imprudent policies. Ghana and Guyana – two countries that struck oil in recent decades – provide cautionary tales of “petro promises” financed by central banks, with significant consequences for inflation and exchange rates. The paper “Central Bank Financing of Petro Promises: Inflation and FX Illiquidity in Ghana and Guyana” by Collin Constantine and Tarron Khemraj examines how, in both nations, political pressures following oil discoveries led to increased central bank monetization of fiscal deficits. The authors extend classic Dutch Disease theory by showing that when governments finance spending by printing money (anticipating oil revenues), the usual outcome of a resource boom – a real exchange rate appreciation – can be altered or even reversed. In Ghana’s case, monetization following the 2007 oil discovery contributed to currency depreciation and high inflation, whereas in Guyana’s fixed-rate regime, it fueled inflation and foreign exchange shortages. This review provides historical context on these practices in Ghana and Guyana, compares their experiences to those of other oil-rich developing countries, such as Nigeria and Trinidad and Tobago, analyzes the authors’ policy recommendations against current policy frameworks, and situates the paper’s arguments within the broader Dutch Disease and monetary economics literature.
Historical Context: Central Bank Monetization in Ghana and Guyana
Ghana – Oil, Politics, and Monetization
Ghana’s history illustrates how resource discoveries and political cycles can pressure central banks to finance government spending. In the early 2000s, Ghana enjoyed relative monetary stability – the central bank’s deficit financing was modest from 2000 to 2007 . The Bank of Ghana had adopted an inflation-targeting framework in 2002 under a market-determined exchange rate, aiming to contain inflation . However, this discipline began to unravel after Ghana discovered offshore oil in 2007. In the run-up to the fiercely contested 2008 elections (and subsequent ones), government spending surged on the back of “petro promises,” and the central bank became a primary source of financing . Net central bank claims on government quadrupled between 2007 and 2008 , and by August 2014 had ballooned to GH¢10.6 billion from GH¢1.4 billion in 2008 – a 640% increase in just six years . Figure 6 of a World Bank analysis vividly shows this spike in Bank of Ghana financing after 2007 .
The macroeconomic effects were immediate. Inflation, which had been brought down to single digits (around 8.5% in 2010), jumped to 18% by end-2014 . Inflation also spiked in late 2008, reflecting the monetized election-year spending. The Ghanaian cedi’s exchange rate against the dollar deteriorated rapidly as well, losing value whenever fiscal expansion overheated. Indeed, Constantine & Khemraj document that after 2009 Ghana’s real effective exchange rate actually depreciated (the cedi weakened faster than domestic prices rose) from 2009 to 2014 . This is the opposite of the usual Dutch Disease prediction of real appreciation, and it occurred because the central bank’s money-financing of deficits led to high inflation and nominal depreciation in a freely floating currency environment . In essence, Ghana “imported” inflation and exchanged a potential currency appreciation for instability – a symptom of fiscal dominance.
Political and institutional factors contributed to this dynamic. Ghana’s competitive two-party system incentivized large campaign promises funded by anticipated oil wealth. The discovery of oil intensified public expectations for infrastructure and social spending, and politicians were eager to deliver – or at least signal – these benefits quickly. With limited capacity to rapidly ramp up non-oil revenues, the government increasingly leaned on the central bank. Ghana’s laws did include limits on central bank deficit financing (reportedly capped at 5% of previous year’s revenue), but these were de facto breached under clauses allowing extraordinary circumstances . For example, in 2022 Ghana’s central bank again financed a huge portion of the budget (nearly GH¢38 billion) amid a fiscal crisis, far above legal limits – an action the Bank defended as necessary under emergency provisions . The result was a surge of inflation to over 50% and a collapse of the cedi in 2022, forcing Ghana into a debt default and IMF bailout . Ghana’s experience thus shows a pattern since the oil discovery: election-driven deficits monetized by the central bank led to recurrent bouts of high inflation and currency depreciation, undermining the very oil windfall’s benefits.
Guyana – From Fiscal Restraint to Petro-Fueled Overdrafts
Guyana’s path has parallels to Ghana’s, albeit with a different exchange regime and political trigger. Guyana historically had a tightly managed exchange rate (the Guyanese dollar has been held around G$208 per US$1 for years) and moderate inflation, thanks in part to strict IMF programs in the 1990s that curbed monetary financing. By the 2000s, Guyana’s public finances were relatively disciplined – indeed, its debt-to-GDP ratio fell sharply from over 100% in the early 2000s to around 60% by 2006 after debt relief . However, political developments in the 2010s set the stage for increased central bank financing. In 2011, Guyana’s general election produced a minority government (the incumbent party won the presidency but did not control Parliament) . Unable to get parliamentary approval to raise the debt ceiling, the government turned to the central bank for financing – initially by drawing down its deposits and later by running an overdraft at the Bank of Guyana . This was effectively deficit monetization through the backdoor. Constantine & Khemraj note that Guyana’s central government overdrafts at the central bank began around 2015 (just as oil was discovered) and persisted through 2021 . In other words, Guyana’s monetization commenced even before oil production, spurred by political gridlock, and then accelerated once the 2015 oil discovery raised expectations of future revenue .
Once ExxonMobil’s massive oil finds were confirmed in 2015, Guyana’s politics and fiscal stance shifted further. A new government in 2015 likewise did not immediately restore fiscal orthodoxy – it maintained high spending and, tellingly, failed to repeal the debt ceiling or significantly curtail central bank financing . A period of political uncertainty in 2018–2020 (including a no-confidence vote and delayed elections) saw the government continue to rely on the central bank. By 2020, when a new administration took office, the overdraft had grown enormous – about G$135 billion (over 12% of Gross National Income) owed by the government to the Bank of Guyana . Rather than repay this with accumulated oil funds, the authorities in 2021 converted it into a formal security (the central bank purchased a government debenture to clear the overdraft) . This accounting move briefly reduced measured monetization in 2021, but by 2022 the government resumed borrowing directly from the central bank (now via purchases of new government bonds) .
The macroeconomic impact in Guyana has been somewhat masked by the sheer scale of the oil boom since production began in late 2019. Oil revenues allowed the government to run a large overall fiscal deficit while still accumulating foreign exchange in a Natural Resource Fund (so the non-oil deficit has exploded to nearly 29% of non-oil GDP as of 2023 ). Inflation in Guyana has risen, though not to Ghanaian levels – consumer prices rose ~7% in 2022 and ~3% in 2023, totaling about 146% cumulative inflation from 2000 to 2023 . Notably, with the exchange rate fixed, even moderate inflation means a real appreciation: Constantine & Khemraj report that Guyana’s real effective exchange rate appreciated about 13.5% from 2004 to 2010, and continued a gradual upward trend thereafter . This real appreciation has been driven in part by excess liquidity from the central bank. The authors point out that Guyana’s money supply (monetary base) grew substantially once oil was discovered, even as the money multiplier fell, indicating the central bank was injecting cash faster than the economy’s financial deepening . With the exchange rate held stable, those monetary injections translated into higher domestic prices and import demand rather than nominal depreciation. Indeed, Guyana has experienced periodic foreign exchange shortages – banks and businesses often report difficulty obtaining US dollars at the official rate, especially before the oil boom fully ramped up. This corresponds to the authors’ finding that in a fixed-rate system like Guyana’s, deficit monetization “causes a foreign exchange shortage” . Essentially, if the central bank creates local money while trying to hold the exchange rate fixed, the excess money fuels import demand that drains foreign reserves unless offset by actual FX inflows. In pre-oil years, Guyana’s central bank had limited reserves, so monetization led to rationing of hard currency. Even now, with large oil inflows, the central bank faces a choice: either allow the Guyanese dollar to appreciate or partially sterilize the oil earnings (withhold some FX) – the latter policy can re-create FX scarcity in domestic markets even amid plenty. Guyana so far has chosen to keep the nominal exchange rate roughly unchanged, an approach similar to Trinidad & Tobago’s and (until recently) Nigeria’s, as discussed below.
In summary, Ghana and Guyana both illustrate how political pressures – competitive elections, high public expectations, and weak fiscal controls – led to central bank financing of deficits (“monetization”) after oil discoveries . Ghana did so under a floating exchange rate, resulting in high inflation and a depreciating currency. Guyana did so under a pegged or managed rate, leading to inflation, real appreciation, and periodic FX liquidity crunches. These histories underscore that the mere discovery of resource wealth can erode discipline (“pre-source curse”), especially when central bank independence is fragile.
Comparative Experiences: Ghana and Guyana vs. Nigeria and Trinidad & Tobago
How do Ghana’s and Guyana’s experiences compare with other resource-rich developing countries? Nigeria and Trinidad & Tobago offer instructive contrasts. Nigeria is a large African oil exporter with a long history of oil booms and busts, while Trinidad & Tobago (T&T) is a small Caribbean nation that has produced oil and gas for decades. Both faced the challenge of managing oil revenues and maintaining macroeconomic stability, but their policy choices and outcomes have differed – and provide useful context for Ghana and Guyana.
Oil Revenue Management and Fiscal Discipline
Revenue Funds and Saving: One key difference lies in how excess oil revenues are managed. Trinidad & Tobago established a Heritage and Stabilization Fund (HSF) in 2007 to save windfall revenues for stabilization and future generations . This sovereign wealth fund grew to about 20% of GDP in assets by 2023 , acting as a buffer during downturns. For example, when the pandemic and an oil price crash hit in 2020, T&T financed its 11% of GDP fiscal deficit by withdrawing from the HSF rather than printing money . In contrast, Nigeria’s attempts at oil savings have been much less effective. Nigeria set up an Excess Crude Account in the 2000s and later a sovereign wealth fund, but political pressures led to frequent drawdowns. Savings were often minimal or quickly spent when oil prices fell. Ghana falls somewhere in between – it created the Ghana Stabilisation Fund and Ghana Heritage Fund under its 2011 Petroleum Revenue Management Act. These funds accumulated some savings from the 2010s oil revenues, but Ghana drew heavily on the stabilization fund to plug budget gaps (and even the “heritage” fund was tapped during the 2020 crisis), leaving little cushion. Guyana, learning from others, established a Natural Resource Fund (NRF) in 2019 (operationalized in 2020) to handle its oil receipts. The NRF has a rule-based withdrawal formula: for example, of about US$1.6 billion received into the fund in 2023, the formula allowed $1.16 billion to be used in the 2024 budget (the rest remains invested) . By end-2023 the NRF still held roughly US$2 billion in savings . This approach is commendable on paper – Guyana is at least saving a portion of revenues – but the withdrawals are still very large relative to the non-oil economy, fueling a rapid increase in spending. Nigeria and Ghana, lacking strict rules, tended to spend all available revenue and more, often assuming high oil prices indefinitely. Guyana and T&T have formal mechanisms to save some of the windfall; the challenge is whether those mechanisms are politically protected in the long run.
Fiscal Deficits and Central Bank Financing: Another comparison is fiscal discipline and the role of central banks. Nigeria historically ran pro-cyclical fiscal policy – saving little during oil booms and running deficits when oil prices dropped. A critical issue was the Nigerian central bank’s practice of directly financing fiscal deficits through a “ways and means” facility. In the 2010s, the Central Bank of Nigeria (CBN) lent massively to the government – by 2022, CBN’s claims on the government were estimated at over 40% of the previous year’s revenues, far above legal limits, contributing to macro instability. This is very similar to Ghana’s experience of central bank financing post-2010. The encouraging news is that Nigeria’s new reformist government in 2023 ceased central bank financing of the fiscal deficit as part of sweeping changes . The IMF noted approvingly in April 2025 that Nigeria had ended CBN deficit financing, alongside removing fuel subsidies and improving the FX market . This policy U-turn is aimed at restoring monetary stability in Nigeria – a recognition that years of monetized deficits had stoked inflation and undermined the naira. Ghana, under its 2023 IMF program, similarly committed to “zero central bank financing of the fiscal deficit” . In both countries, these reforms came after severe crises (Ghana’s debt default, Nigeria’s inflation surge and currency collapse in 2022–23). They underscore the importance of central bank independence: neither Ghana’s nor Nigeria’s central bank had been sufficiently insulated from fiscal pressures. It took external pressure (and new political leadership in Nigeria’s case) to enforce discipline.
Trinidad & Tobago, on the other hand, offers a contrast. The Central Bank of T&T has generally not been a significant direct financier of government deficits in recent decades. Instead of printing money, the government of T&T has financed deficits by using saved funds and borrowing mostly from capital markets. During the 2020 downturn, T&T withdrew from the HSF and also issued debt, with the central bank largely playing a conventional role of bond market intermediary and liquidity manager . As a result, Trinidad’s inflation remained very low (under 1% in 2020) despite a double-digit deficit, because it was financed without large monetary expansion . T&T’s public debt rose to ~89% of GDP by 2020, but its debt is mostly in long-term instruments rather than central bank overdrafts . Guyana’s current trajectory is mixed: it is financing much of its ambitious development spending with actual oil revenues (withdrawn from the NRF) and some external loans, but as noted, it also relied on central bank overdrafts especially in the pre-production years . Importantly, Guyana’s overall fiscal deficit has been kept moderate relative to GDP (around 7% of total GDP in 2024) thanks to oil income . However, relative to the non-oil economy the deficit is extremely high (over 20% of non-oil GDP) , an imbalance masked by oil. The IMF has recommended that Guyana gradually trim its non-oil fiscal deficit over time to a more sustainable path (essentially to avoid overspending the oil revenues) . In practice, political pressures in Guyana – a country with pressing development needs and competitive politics – push toward maximizing spending now, similar to Ghana a decade earlier.
Inflation and Exchange Rate Outcomes
Inflation Control: The experiences of Ghana and Nigeria versus Trinidad & Tobago starkly illustrate how policy choices affect inflation in resource-rich economies. Ghana and Nigeria have both suffered recurrent bouts of high inflation, often in the double digits or higher. Ghana’s inflation was over 50% in 2022 amid its crisis , and even after stabilizing, it remains above 20% in 2025 . Nigeria’s inflation likewise hit around 23% in 2023 (and food inflation even higher) due to a combination of money growth and a large currency devaluation . By contrast, Trinidad & Tobago has historically kept inflation low, typically mid-single digits or less (near 0.6% in 2020 as noted) . T&T’s strategy of sterilizing or saving a portion of revenues and avoiding monetary financing helped prevent the excessive money supply growth that plagued Ghana and Nigeria. Guyana falls in between: its inflation in recent years has been moderate (3–7%), but there are warning signs. The authors note that Guyana’s CPI rose 146% cumulatively from 2000 to 2023, while the exchange rate barely moved (only 17% depreciation in that period) . This implies a substantial real appreciation and hints that inflation could rise further if spending continues to outpace the real capacity of the economy. Indeed, the IMF warns of overheating risks in Guyana – if the economy grows too fast and policies aren’t tightened, inflation could accelerate and harm the non-oil sectors .
Exchange Rate Regimes and FX Liquidity: Another important contrast is how countries manage their exchange rates in the context of oil booms or busts. Nigeria has long operated a managed exchange rate with capital controls, often leading to an overvalued official rate and the buildup of FX backlogs. During high oil prices, Nigeria would peg or only slowly adjust the naira, which kept inflation somewhat in check but also made non-oil exports uncompetitive (a classic Dutch Disease symptom). When oil earnings dropped, the central bank often ran down reserves trying to defend the peg until it inevitably devalued in a sharp step, causing a spike in inflation. This stop-go approach contributed to Nigeria’s notorious FX shortages – importers frequently could not get dollars at the official rate, fueling a parallel market. In fact, Constantine & Khemraj’s description of Guyana’s managed rate and FX shortages could well describe Nigeria: the combination of deficit monetization and a quasi-fixed rate “creates foreign exchange shortages” . Recently, Nigeria moved toward exchange rate liberalization (allowing the naira to depreciate significantly in 2023 to unify multiple rates), which eased some shortages but sent inflation higher in the short run .
Ghana has taken a different approach: a floating exchange rate. The cedi’s value is determined by market forces, with the central bank intervening only occasionally. The float meant that when Ghana monetized its deficits or faced external shocks, the currency could depreciate continuously rather than hit a wall of shortage. The upside is that Ghana did not typically have an official-versus-parallel rate problem – the price of dollars simply rose. The downside, however, is evident: the cedi lost a lot of value (e.g. a sharp depreciation in 2014–2015, and again in 2022), which passed through to higher import prices and inflation . Interestingly, Ghana’s real exchange rate (adjusted for inflation) depreciated in the early oil boom years . This suggests that the cedi fell faster than domestic prices rose, temporarily making Ghana’s non-oil sectors more competitive externally – a very different outcome than the typical Dutch Disease appreciation. However, that competitive gain came at the cost of macroeconomic instability and was not sustainable; Ghana’s continual inflation has since eroded many of the benefits.
Trinidad & Tobago maintains an “implicit peg” to the US dollar, keeping the T&T dollar around TT$6.7–6.8 per US$1 . The central bank supplies FX to the market to uphold this rate. This has delivered long-term currency stability – T&T’s nominal exchange rate has moved only marginally in decades – helping anchor inflation expectations. But it too has a trade-off: when oil/gas revenues dip, the fixed rate becomes hard to sustain and the central bank can run down reserves. In 2020, for instance, T&T faced “heightened currency pressures” as energy exports fell, and FX supply was constrained such that some businesses had delays accessing hard currency . The central bank held the line on the peg (reserves remained ample at 8 months of import cover ), and shortages were modest compared to Nigeria’s experiences. Still, the IMF has encouraged T&T to consider greater exchange rate flexibility over time to alleviate persistent FX shortages . The lesson here is that even with sound fiscal policy, a fixed exchange rate in a resource economy can lead to imbalances if the currency is misaligned.
Guyana currently mirrors some of T&T’s and Nigeria’s traits in its exchange regime. The Guyanese dollar is effectively pegged (around G$208) and the central bank tightly manages the market. Before oil, this often meant rationing FX in a chronically dollar-scarce economy. Now with oil, Guyana has a massive inflow of foreign currency – its current account surplus was 25% of GDP in 2024 – yet the central bank still intervenes to smooth any upward pressure on the exchange rate. As a result, the Guyanese dollar has not meaningfully appreciated despite the oil boom. That choice protects sectors like agriculture from a sudden loss of competitiveness, but it also means domestic liquidity has expanded (from spending oil funds in local currency) without an offsetting currency adjustment. The outcome, as Constantine & Khemraj warn, can be higher inflation and an appreciated real exchange rate that squeezes non-oil tradable sectors . In effect, Guyana could import a Trinidad-style Dutch Disease: stable nominal exchange rate, low measured inflation initially, but gradually rising prices and costs in the economy that undermine other exports and create dependency on the oil sector.
Ghana and Nigeria demonstrate the perils of loose monetary/fiscal policy in oil booms – they experienced high inflation and/or currency collapse. Trinidad & Tobago demonstrates the value of saving windfalls and maintaining a stable currency – achieving low inflation – but even T&T must manage occasional FX shortages due to its peg. Guyana is at a crossroads, trying to spend on development without stoking runaway inflation: its early signs of real appreciation and central bank financing indicate a need for caution. The contrasts suggest that central bank independence and prudent fiscal rules are as important as the existence of a sovereign wealth fund in determining whether oil wealth leads to stability or volatility.
Policy Recommendations vs. Current Frameworks in Ghana and Guyana
Constantine and Khemraj conclude that better management of resource wealth requires political commitment to central bank discipline . They argue that a sovereign wealth fund alone is not a silver bullet if politicians can bypass it by pressuring central banks to finance deficits . Key policy recommendations from the paper include:
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Limit central bank financing of budgets by law – essentially a fiscal rule against monetization. The authors suggest the “most critical element of an effective fiscal rule is to limit the growth of the non-resource fiscal deficit to the size of foreign borrowing and withdrawals from a wealth fund”, thereby explicitly preventing central bank money-printing to fund the gap .
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Strengthen central bank independence through legislation that protects the bank from political pressure . This might involve stricter limits (with no easy “emergency” escape clause) on central bank lending to the government, longer tenure for governors, and clear price-stability mandates.
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Political reforms to instill moderation: The authors even allude to deeper constitutional or electoral reforms to curb the winner-takes-all, high-pressure environment that leads governments to overspend after oil discoveries . In countries like Ghana and Guyana, where elections are zero-sum and often along ethnic lines, the temptation to use public spending (financed by any means available) for short-term gain is high. The paper implies that more consensus-based political systems or stronger checks and balances on executive power could help tame this impulse .
How do these recommendations stack up against what Ghana and Guyana are actually doing?
Ghana’s Current Framework
After its recent crisis, Ghana is implementing some of these recommendations, at least temporarily. Under the IMF-supported program (2023–2026), Ghana’s government has agreed to zero central bank financing of deficits . The Bank of Ghana is now required to strictly adhere to the limit (and indeed, through 2023 the central bank reportedly did not extend new financing to the government). This external enforcement is effectively a fiscal rule in practice – if followed, it forces the government to fund any deficit via real revenues or external borrowing, not the printing press. In addition, Ghana passed a Fiscal Responsibility Act in 2018 (setting a deficit ceiling of 5% of GDP) and though it was suspended during COVID, there are efforts to reinstate such rules. The challenge will be credibility: Ghana had rules on paper before, but broke them under pressure. True central bank independence in Ghana remains a work in progress. The recent change of central bank governor (in 2023) might strengthen the perception of a fresh start. The new Governor, in early 2025, emphasized that inflation is still “uncomfortably high” and that balanced monetary policy is needed to durably lower it . This rhetoric aligns with an independent stance. Yet it remains to be seen whether, in the next election cycle, political forces will lean on the Bank of Ghana once again. Real institutional independence often requires years of demonstrated restraint – something Ghana’s central bank lost when it monetized nearly 40% of the government’s 2022 deficit.
On the fiscal side, Ghana does have a Petroleum Revenue Management framework that set up the Ghana Stabilisation Fund and Heritage Fund. In theory, this framework limits how much oil revenue can be spent in the budget and saves the rest. In practice, however, Ghana has consistently spent the maximum allowed (and then some, by using oil as collateral for loans or drawing down the stabilization fund in bad times). The authors’ point that a sovereign wealth fund is “insufficient” by itself is vividly illustrated by Ghana: despite having those funds, Ghana still fell into an inflation and debt crisis . The missing component was adherence to rules – something the IMF program is now trying to enforce. Ghana’s experience underscores the authors’ argument that political commitment is key. When political will existed (in the early 2000s under debt relief programs), Ghana exercised restraint and inflation dropped; when oil wealth arrived and politics heated up, rules were bent. Going forward, Ghana’s framework will need not just laws but enforcement. This could include empowering Parliament or an independent fiscal council to monitor central bank financing and compliance with deficit rules. Without such oversight, the risk is that once the IMF program ends, old habits return. In short, Ghana’s current policies are in line with the paper’s recommendations (no monetization, tighter fiscal belts), but these have essentially been externally imposed. The true test will be sustaining them domestically – a challenge Ghana’s own history and the authors’ political economy analysis suggest is difficult without deeper reform.
Guyana’s Current Framework
Guyana, as an oil newcomer with surging revenues, has an opportunity to implement lessons from Ghana and others before a crisis hits. To its credit, Guyana’s Natural Resource Fund and fiscal planning are steps in the right direction. The NRF withdrawal rules act as a de facto fiscal rule on how much of the oil money can be used annually. Moreover, Guyana’s public debt is relatively low (around 24% of GDP in 2023, excluding the new oil wealth) and the government so far has avoided reckless external borrowing. However, when we focus on the non-oil fiscal deficit – which is what the authors emphasize – Guyana is currently violating the spirit of what Constantine & Khemraj recommend. The non-oil deficit has widened to nearly 20–30% of non-oil GDP in recent years , far above what sustainable non-inflationary financing would allow. Essentially, Guyana is spending in advance of its future oil earnings, just as Ghana did. The government defends this by pointing to huge developmental needs and the fact that oil production is scaling up dramatically (Guyana’s oil output is set to triple in the next few years, which will bring in even more revenue) . The risk, however, is that if oil prices dip or planned projects face delays, a large fiscal overhang would emerge – and the temptation would be to cover it by central bank financing or rapid drawdown of the NRF (jeopardizing sustainability).
Crucially, Guyana has not yet enacted a formal fiscal rule tying the non-oil deficit to the NRF or foreign financing. Experts have suggested such a rule; for instance, the IMF staff has recommended Guyana target a non-oil primary deficit path that converges to the level of sustainable oil transfers by 2030 . Others have explicitly echoed the paper’s point: Guyana should legally limit its non-oil deficit to what can be financed by the NRF and other non-inflationary sources . As of now (2025), this is not in place. The government does produce a Medium-Term Fiscal Framework in the annual budget, which shows projections of declining non-oil deficits in the future, but those are not binding. Politically, Guyana’s situation – a highly centralized executive government with a comfortable parliamentary majority – means there are few checks on fiscal decisions. The central bank (Bank of Guyana) is not independent by global standards; its governor traditionally changes with administrations and the bank has routinely accommodated government financing requests (e.g., the overdraft). If anything, the current abundance of FX from oil might reduce overt central bank financing (since oil revenue converted to local currency provides liquidity), but the effect is similar: the Bank of Guyana could end up printing local dollars against expected oil dollars that haven’t yet arrived in the NRF. The authors’ findings already noted that Guyana’s monetary base shot up once oil was discovered .
On a positive note, Guyana’s inflation has been contained so far, and the government has taken some prudent steps like not removing all fuel taxes when oil prices spiked (to avoid price shocks) and planning to reintroduce a medium-term fiscal savings rule. There is also discussion of strengthening the central bank law. If Guyana enacts a new central bank act that explicitly prohibits monetary financing of deficits (except perhaps in narrowly defined emergencies) and grants the Bank of Guyana greater independence, it would align well with Constantine & Khemraj’s prescriptions. As it stands, however, Guyana’s framework falls short of the paper’s recommendations: the political leadership is very much in control of fiscal purse strings and, by extension, the central bank’s balance sheet. The notion of “political moderation” may be hard to realize when an enormous oil boom is under way and elections loom (Guyana’s next general election is due by 2025, and historically public spending ramps up before votes). The authors’ call for even constitutional reforms resonates here – Guyana’s political system, a winner-take-all model with ethnic party competition, tends to reward maximizing short-term gains. That environment is a risk to long-term stability, unless anchored by strong institutions.
In summary, Ghana’s current policy framework is temporarily aligned with the recommended discipline (under IMF auspices), whereas Guyana’s framework is nascent and permissive, relying on the government’s self-restraint which may prove tenuous. Both countries would benefit from formalizing rules that commit to the principles of no monetization and saving for the future. The paper’s policy message is essentially that without such commitments, oil wealth can destabilize economies – a warning both governments would do well to heed.
Linking to Broader Literature: Dutch Disease, Resource Curse, and Monetary Economics
Constantine and Khemraj’s contribution can be viewed in light of two strands of economic literature: the Dutch Disease/resource curse literature and the monetary economics literature on fiscal dominance and inflation. Their paper builds on these and departs from them in important ways:
Dutch Disease and the Resource Curse: Classic Dutch Disease models (e.g., Corden and Neary 1982) focus on real exchange rate appreciation and deindustrialization when a country gets an influx of foreign exchange from natural resources. The assumption is often that resource revenue is spent into the economy, raising demand for non-tradable goods and thus their prices, leading to a stronger real exchange rate that hurts tradable sectors. This framework largely abstracts from how the spending is financed – it assumes the revenue exists. The resource curse literature (e.g., Sachs and Warner, 1995; Ross, 1999) adds that institutional weaknesses and political incentives often cause resource booms to be mismanaged, leading to worse outcomes like corruption, conflict, or overspending. The paper at hand provides a nuanced twist: it shows that if governments anticipate resource revenues and finance spending by creating money (ahead of or in excess of actual resource inflows), the straightforward Dutch Disease outcome can change. Specifically, they find Ghana had a real depreciation because monetary expansion led to such a sharp nominal depreciation of the currency that it outpaced domestic inflation . This is a departure from the orthodox view and highlights an omitted variable in many empirical studies of Dutch Disease – the behavior of the central bank. The authors suggest future studies on resource booms should control for central bank financing and money supply effects . In essence, they are inserting monetary economics into a traditionally real-sector discussion.
The paper also resonates with what might be called the “presource curse” – a term used by some economists to describe how mere discoveries (before revenues flow) can distort policymaking. Ghana in 2007–2010 and Guyana in 2015–2019 exemplify this presource curse: unsustainable promises and fiscal expansion before oil money arrived. There are studies (Cust et al. 2017, for example) documenting how countries that discover oil often increase borrowing and spending in anticipation. Constantine & Khemraj cite evidence that oil discoveries “increase unsound political promises and commitments”, leading to pressure for quick financing of government spending – namely via central banks . This aligns with the political economy literature that emphasizes expectations and institutions (e.g., Mehlum, Moene and Torvik 2006, who argue the resource curse strikes worse under weak institutions). The authors specifically reference Persson and Tabellini’s work (2000) regarding political incentives – in Guyana’s case, they note how incumbents tried to cling to power in 2020, consistent with resource-fueled patronage incentives . By calling for constitutional reforms, they echo the broader literature that lasting resource management improvements often require changing the “rules of the game” (Karl 1997’s thesis, for example, that oil states need stronger governance frameworks).
Monetary Economics and Fiscal Dominance: From a monetary perspective, the paper builds upon classic analyses, such as Sargent and Wallace’s “Unpleasant Monetarist Arithmetic” (1981), which demonstrated that if fiscal policy is not disciplined, monetary policy will eventually be compelled to finance deficits, ultimately leading to inflation. What Constantine & Khemraj observe in Ghana and Guyana is a textbook case of fiscal dominance – fiscal needs dictating monetary expansion. Their innovation is contextualizing this in an oil economy. They highlight, consistent with IMF research on aid inflows, that if foreign exchange from resource income is not fully “absorbed” (i.e., converted to imports), and the central bank instead accumulates reserves while financing government spending in local currency, the result is an “excess supply of money” that causes either inflation or a distorted exchange rate . They cite studies of aid surges in Africa (Hussain 2007; Aiyar 2007) that found similar outcomes: central banks monetized aid by accumulating the foreign funds and printing the local counterpart, leading to inflation and real exchange rate effects that sterilization efforts could not fully contain . In fact, the epigraph of their paper quotes Isard et al. (2006) to illustrate how spending unbacked by foreign exchange leads to inflation with no competitive gains . Their theoretical model and diagrams (Figures 1 and 2 in the paper) integrate these monetary insights with the Dutch Disease framework. Essentially, they extend the standard aggregate demand–supply model to include a money market alongside the goods market in a small open economy with a booming resource sector. This helps explain why Ghana’s outcome diverged (because money supply was allowed to explode, shifting the AD curve dramatically and depreciating the currency) and why Guyana’s fixed rate created a different constraint (excess money showed up as balance of payments pressure instead).
In engaging the academic literature, the authors both confirm and challenge prior findings. They confirm the importance of absorption versus spending of windfalls, a theme from IMF studies (e.g., the spend-and-save or spend-and-absorb framework). They also reinforce the idea that central bank independence matters for price stability in resource-rich settings – a notion supported by empirical research (e.g., countries with independent central banks generally have lower inflation, all else equal). However, they challenge the notion that having a sovereign wealth fund or an inflation-targeting regime alone is sufficient. Ghana had both an SWF and inflation targeting, yet still succumbed to high inflation once those policies were overridden by political pressures . This underscores research arguing that institutional commitments must be credible – a point noted by scholars like North and Weingast (1989) in other contexts. Here, credible commitment means not just passing a law, but also aligning incentives so that it is followed.
Ultimately, the authors’ work contributes to the broader debate on managing resource booms. There is a spectrum of views on how much to save vs. spend resource revenues. One view, based on the permanent income hypothesis, suggests saving a significant portion to avoid overheating the economy. Another view argues for spending on development now, given pressing needs (the Friedmanian “to hell with the future, let’s get rich now” critique of excess saving). Ghana initially opted to spend a significant portion of its oil revenue on infrastructure and social programs, as Guyana has. The paper by Constantine & Khemraj doesn’t deny the need for development spending, but it implicitly warns that how you finance that spending is crucial. Financing it by non-inflationary means (using actual revenue or genuine savings) is fundamentally different from financing by printing money in advance of revenue. In that sense, their argument is a caution to policymakers: don’t count your barrels before they’re pumped. This aligns with historical anecdotes – many countries, from Venezuela in the 1970s to Mexico in 1982, over-borrowed or overprinted on the back of high oil prospects only to crash when reality undercut optimism.
“Central Bank Financing of Petro Promises” enriches the literature by bridging the gap between Dutch Disease theory and real-world monetary policy practice. It shows that sustaining low inflation and a stable currency in a resource boom is not automatic – it requires deliberate institutional safeguards. Ghana’s and Guyana’s stories, as analyzed in the paper, confirm that without such safeguards, resource riches can indeed become a curse of instability. The comparative evidence from Nigeria and Trinidad & Tobago further demonstrates that countries that enforce rules (or have the discipline to save) tend to avoid the worst outcomes, whereas those that monetize freely suffer inflation or currency crises. For a well-informed policy audience in Guyana and similar countries, the takeaway is clear: guarding against Dutch Disease is not just about managing the exchange rate or setting up an oil fund – it is also about empowering your central bank to say “no” to the Treasury when necessary. Economic history and the academic literature both support this, and Constantine and Khemraj drive the point home with the case studies of Ghana and Guyana. The hope is that policymakers heed these lessons to ensure oil wealth translates into sustained prosperity, not just petro promises financed by the printing press.
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Sources:
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Constantine, C., & Khemraj, T. (2024). “Political Pressure and Central Bank Monetization: ‘Dutch Disease’ and Monetary Developments in Ghana & Guyana.” (Preprint) .
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World Bank (2017). “Oil Discovery and Macroeconomic Management: Ghana’s Recent Experience.” Policy Research Working Paper 8209 .
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Bank of Guyana Annual Reports and IMF Article IV Reports (various years) .
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IMF (2025). Press Release: IMF Staff Completes 2025 Article IV Mission to Nigeria. .
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IMF (2024). Article IV Consultation – Trinidad and Tobago. .
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Reuters (2025). “Ghana inflation ‘uncomfortably high’, new central bank governor says.” .
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OilNOW Guyana (2024). “Guyana withdrew US$1 billion from oil fund for 2023.” .
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Economic Commission for LAC (2021). “Trinidad & Tobago Economic Survey.” .
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Global Anticorruption Blog (2023). “Protecting Guyana from the Natural Resource Curse.” .
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Aiyar, M. (2007). “Managing Economic Volatility in Aid-Dependent Countries.” (IMF) .
