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Ghana's next government must rein in ballooning state spending until crude oil revenues replenish coffers in two years' time and lay foundations for a South Korea-like expansion, the World Bank said on Tuesday.

The winner of Sunday's tight presidential election will oversee the startup of crude oil production, due in late 2010.

But they must first steer Ghana through a cash crunch created by increased state spending during this year's surge in food and fuel prices, compounded by the global financial crisis.

"At the height of this expansionary policy you had the credit crunch, and now its simply not possible for the government to finance this deficit for the next few years," Ishac Diwan, director of the World Bank in Ghana, said.

"The way this is going to be closed is the big question now. What expenditures are going to be cut? Can the revenues be increased? This is a big challenge on day one for the new government," Diwan told Reuters in an interview.

The gold- and cocoa-producing West African country holds parliamentary and presidential elections on Sunday to replace the administration of President John Kufuor, who is stepping down after the maximum two elected four-year terms.

Vying to replace him are Nana Addo Dankwa Akufo-Addo, from Kufuor's ruling NPP party, and opposition leader John Evans Atta Mills. Many analysts say the poll is too close to call.

Diwan said Ghana's economy was in "pretty good shape" after several years of growth of 5-6 percent and poverty rates were down by nearly half to 26-27 percent over Kufuor's term, during which Ghana received billions of dollars in debt relief.

Ghana became the first sub-Saharan African country outside South Africa to issue a Eurobond last year, but as investors' appetite for emerging market debt has withered, yields on the bond have risen to around 18 percent, meaning making further borrowing prohibitive.

LEAN PERIOD BEFORE OIL

"The macroeconomic imbalances are quite large now, and difficult to finance. Ghana was expecting to borrow abroad to finance large infrastructure plans. This will probably not materialise -- we don't expect international markets to pick up very soon ... I would expect some reduction in growth," he said.

This year's high prices for food and fuel, two of Ghana's biggest imports, had worsened the balance of payments deficit by 15 percent of gross domestic product (GDP), he said.

The government's budget deficit this year is expected to be a high 10 percent of GDP, with overall state debts climbing to around 50 percent of GDP, Diwan said.

The World Bank also expects the global slow-down to reduce remittances sent home by nationals working abroad, who account for $3 billion a year, or 15-20 percent of Ghana's GDP.

"The difficult period is going to last a couple of years, and then things are going to improve," Diwan said.

However, he said he expected a striking improvement then, with oil revenues increasing state revenues by an estimated 50 percent in the coming years from 2011 onwards.

"Ghana today to me feels like Korea in 1970, which means the next 10 years are a real opportunity," he said.

When Ghana won independence from Britain in 1957 its economy was on a par with South Korea. But after decades of political instability and poor management Ghana's per capita GDP is around $800 compared to almost $20,000 for the Asian country.

"This country is taking off in front of our eyes," he said.

Source: Reuters