Ghana at a Glance: 2002-03

COUNTRY REPORT

Ghana

Ghana at a glance: 2002-03

OVERVIEW The New Patriotic Party (NPP) government will persist with its investigations into cases of maladministration and corruption on the part of the previous government. While this will lead to tensions between the opposition National Democratic Congress (NDC) and the NPP, a military coup is not expected. The government will meanwhile continue to focus on reforms designed to improve macroeconomic stability. Efforts to reduce the country’s fiscal deficit, together with a range of other policy reforms, donor support and recovery in the agricultural sector, should lead to a gradual acceleration of GDP growth. As fiscal and monetary policy is more co- ordinated, the Economist Intelligence Unit forecasts a gradual decline in the inflation rate, while improved macroeconomic stability should see the value of the cedi stabilise. Key changes from last month Political outlook • The president, John Agyekum Kufuor, has performed his first cabinet reshuffle, in an attempt to improve the government’s ability to implement economic policy. Economic policy outlook • The government has issued a three-year Government of Ghana index- linked bond (GGILB), to replace up to 50% of the domestic debt of C6trn (US$844m), now held in 91- and 182-day Treasury bills. The instrument’s interest and principal are linked to the consumer price index, providing full inflation protection to the holder. Economic forecast • Our economic forecasts have been moved on by one year to 2003. We now expect growth to pick up to 4.8% of GDP in 2003, against a background of falling inflation. The fiscal deficit will fall substantially as a percentage of GDP. The return of macroeconomic stability and donor support should help to stabilise the value of the cedi.

October 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 1350-7052

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Ghana 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 22 Agriculture 23 Industry and mining 25 Infrastructure and communications 25 Financial and other services

27 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 19 Government finances 22 Exchange rates, 2001 28 Current account 29 FDI inflows

List of figures

12 Gross domestic product 12 Real exchange rates 21 Inflation, 2001

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001

Ghana 3

Summary

October 2001

Outlook for 2002-03 The New Patriotic Party (NPP) government will persist with its investigations into cases of maladministration and corruption on the part of the previous government. This will lead to tensions between the opposition National Democratic Congress (NDC) and the NPP. The government will continue to focus on reforms designed to improve macroeconomic stability. Efforts to reduce the country’s fiscal deficit—together with a range of other policy reforms, donor support and recovery in the agricultural sector—should lead to a gradual acceleration of GDP growth. Thanks to more co-ordinated fiscal and monetary policy, the inflation rate should steadily decline. The improvement in the macroeconomy should stabilise the value of the cedi.

The political scene President John Kufuor has carried out a cabinet reshuffle, seeking to improve the ability of the government to push through economic reform. The corruption investigations have increased tensions with the former president, Jerry Rawlings, and the NDC has threatened to boycott the investigation panels. Parliament has approved a loan from the International Development Association, after initially refusing.

Economic policy Although it has not produced a secondary budget, as promised earlier in the year, the government has outlined measures to boost revenue and control expenditure. These will form the basis of the 2002 budget, although the government’s projections may prove overoptimistic. Ghana has been working to repair its relations with the IMF, after an earlier disbursement under the country’s poverty reduction and growth facility (PRGF) arrangement was deemed non-complying.

The domestic economy Inflation has fallen since March 2001 and the trend is expected to continue, thanks to an expected bumper food harvest and the relative stability of the exchange rate. New producer prices for cocoa have been announced, while cashew-nut farming is set to increase. The government has said that it will sell the Tema Oil Refinery. A new three-year inflation-indexed bond has been launched; initial take-up has been good.

Foreign trade and payments The IMF has produced a detailed forecast of Ghana’s current-account position. In line with the government’s projections, it hopes for rapid growth in non- traditional exports, driven by new policy initiatives and supported by a more competitive cedi. The UN Conference on Trade and Development says that flows of foreign direct investment into Ghana have increased, whereas the Ghana Investment Promotion Centre believes that they have fallen.

Editors: John Arthur (editor); David Cowan (consulting editor) Editorial closing date: October 17th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 4 Ghana

Political structure

Official name Republic of Ghana

Form of state Unitary republic

Legal system A new constitution, based on the US model, was approved by referendum in April 1992

National legislature Parliament; 200 members elected by universal suffrage every four years

National elections December 2000 (presidential and parliamentary); next elections due December 2004

Head of state President, elected by universal suffrage for a maximum of two four-year terms; John Agyekum Kufuor was sworn in on January 7th 2001 for his first term

National government Cabinet, appointed by the president in January 2001

Main political parties New Patriotic Party (NPP), the ruling party; National Democratic Congress (NDC), the main opposition party; other parties include the People’s National Convention (PNC), the Convention People’s Party (CPP), United Ghana Movement (UGM) and National Reform Party (NRP)

President John Agyekum Kufuor Vice-president Alhaji Aliu Mahama

Key ministers Attorney-general & justice Nana Akufo Addo Communications & technology Felix Owusu Adjapong Defence Kwame Addo Kufuor Economic planning & regional integration Paa Kwesi Nduom Education Christopher Ameyaw Akumfi Energy Albert Kan-Dapaah Environment, science & technology Dominic Fobih Finance Yaw Osafo-Maafo Food & agriculture Courage Quarshigah Foreign affairs Hackman Owusu Agyeman Health Richard W Anane Interior Alhaji Malik Yakubu Alhassan Lands & forestry Kasim Kasanga Local government Kwadwo Baah-Wiredu Manpower development & employment Cecilia Bannerman Mines Kwado Adjei Darko Parliamentary affairs J H Mensah Roads & transport K Adjei-Darko Tourism Hawa Yakubu Trade & industries Kofi Konadu Apraku Works & housing Yaw Barimah Youth & sports Edward Osei Kwaku

Central bank governor Kwabena Duffour

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Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (C bn) 11.4 14.2 17.3 20.6 27.1 GDP (US$ bn) 7.0 6.9 7.5 7.8 5.1 Real GDP growth (%) 4.6 4.2 4.7 4.4 3.7 Consumer price inflation (av; %) 46.6 27.9 14.6 12.4 25.2 Population (m) 17.5 17.9 18.4 18.8 19.3 Exports of goods fob (US$ m) 1,570 1,490 2,091 2,006 1,898 Imports of goods fob (US$ m) 1,937 2,128 2,897 3,228 2,741 Current-account balance (US$ m) –325 –550 –443 –933 –413 Foreign-exchange reserves excl gold (US$ m) 829 480 377 454 232 Total external debt (US$ bn) 6.4 6.3 6.9 6.9 7.0 Debt-service ratio, paid (%) 23.8 28.5 20.0 17.7 18.9 Exchange rate (av) C:US$ 1,637 2,050 2,314 2,647 5,322

9th October 2001 C7,200:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Agriculture, forestry & fishing 35.8 Private consumption 82.7 Industry 25.4 Government consumption 13.6 Manufacturing 9.0 Gross domestic investment 21.0 Services 38.8 Exports of goods & services 31.9 GDP at factor cost 100.0 Imports of goods & services –49.2 GDP at market prices 100.0

Principal exports 2000 US$ m Principal imports 2000 US$ m Gold 705 Manufactures 1,650 Cocoa beans & products 437 Fuels 250 Timber & products 175 Non-fuel primary products 140

Main destinations of exports 2000a % of total Main origins of imports 2000a % of total Togo 15 Nigeria 17 US 11 UK 10 UK 9 Netherlands 9 Netherlands 9 US 5 Germany 6 Germany 5 a Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (C bn) Revenue and grants 1,025.1 1,084.7 1,018.0 1,251.4 1,950.6 1,538.6 2,085.2 n/a Expenditure and net lending 1,345.2 1,404.9 1,504.1 1,630.4 2,336.3 2,577.8 2,208.0 n/a Balance –320.1 –320.2 –486.1 –379.0 –385.7 –1,039.2 –122.8 n/a Prices Consumer prices Accra (1995=100) 248.1 246.1 262.3 289.2 315.0 342.9 369.9 399.3 % change, year on year 12.2 13.1 14.9 18.7 27.0 39.3 41.0 38.1 Gold price, London (US$/fine oz) 259.18 295.62 290.19 280.15 276.51 269.16 263.54 267.68 Financial indicators Exchange rate C:US$ (av) 2,591.6 3,165.0 3,716.5 4,613.5 6,200.3 6,756.5 7,000.0 7,143.6 C:US$ (end-period) 2,702.7 3,448.3 4,166.7 5,555.6 6,666.7 7,142.9 7,142.9 7,142.9 Interest rates (%) Deposit (av) 20.4 20.2 23.5 24.7 32.8 33.5 33.5 33.2 Discount (end-period) 27.0 27.0 27.0 27.0 27.0 27.0 27.0 27.0 Treasury (av) 24.5 29.8 31.5 33.4 39.6 40.6 42.9 46.4 M1 (end-period; C bn) 1,948.2 2,129.4 2,269.4 2,183.1 1,986.2 2,607.5 2,778.0 2,697.1 % change, year on year 13.2 2.7 15.7 10.7 1.9 22.5 22.4 23.5 M2 (end-period; C bn) 3,586.1 3,843.8 3,984.4 4,183.4 4,058.5 5,321.6 5,759.7 5,993.8 % change, year on year 26.0 16.2 19.6 21.1 13.2 38.4 44.6 43.3 GSE all-share index (end-period;1990-1993=100) 765 736 763 818 856 858 900 933 Sectoral trends Cocoa beans Exports (‘000 tonnes) 105.0 24.3 87.4 101.0 115.3 6.2 113.7 n/a Price, New York & London (US cents/lb) 48.0 43.3 40.9 41.9 41.2 40.0 49.6 47.4 Foreign trade (US$ m) Exports foba 487.9 556.9 458.4 463.5 466.6 431.9 483.6 n/a cocoa beans 130.8 18.3 105.6 113.3 118.7 7.5 112.2 n/a gold 160.9 180.9 175.8 148.6 141.3 143.6 141.8 n/a Imports cifa –790.6 –831.2 –860.3 –698.4 –648.6 –905.8 –722.9 n/a Trade balance –302.7 –274.3 –401.9 –234.9 –182.0 –473.9 –239.3 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 349.5 453.8 410.8 396.3 237.2 232.1 163.8 123.1 a DOTS estimates. Sources: IMF, International Financial Statistics; Direction of Trade Statistics; Bank of Ghana, Quarterly Economic Bulletin.

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Outlook for 2002-03

Political outlook

Domestic politics The president, John Agyekum Kufuor, together with his New Patriotic Party (NPP) government, will continue to focus on implementing a reform programme aimed at improving macroeconomic stability in Ghana. In addition, the government will persist with its investigations into cases of maladministration and corruption on the part of the previous government. This could heighten political tensions within the country, but the risk of a military intervention remains low.

The overall thrust of economic policy, and the need to effect reforms, has been broadly accepted in Ghana, where the disastrous impact of the fall of the cedi in 2000 is fresh in memory. However, the government is still under pressure to make use of its honeymoon period to introduce the most difficult reforms, with increases in utility prices likely to prove the hardest. As it has already found out, speedy implementation is not easy. In many cases the civil service lacks the capacity quickly to make the changes required; it can take a long time before policy initiatives announced by the government are implemented. Moreover, the government does not have a majority in parliament, and some legislation will continue to be rejected. The government received its first parliamentary defeat in July, when a proposed loan from the International Development Association (IDA) initially failed to gain the necessary votes to be passed by parliament. There are also concerns that some members of the NPP itself are not fully supportive of the reform process. While it is perhaps too early to tell whether the president will be able to ensure continued commitment to the process in the future, the significant number of NPP MPs who failed to attend the loan vote raises real questions about the commitment of some of the party to government policy.

As part of his effort to make the party understand the urgent need for reform, rather than bathe in its election victory, Mr Kufuor announced a minor cabinet reshuffle in mid-October, just ten months after assuming office. Opinion is still much divided as to why the reshuffle was implemented so early in the government’s term, but the three main suggestions are a revitalisation of the administration; an effort to ensure that NPP members understand the necessity of supporting the reform process; and the removal of those ministers whose performance has proved unsatisfactory. The real reason is likely to be a combination of all three factors. The reshuffle highlights the problems facing the government and underlines the difficulties inherent in pushing through its proposed reform programme.

Apart from economic policy and reform, the main problem for the government is the danger of further polarisation of the country over its ongoing investigations into cases of maladministration and corruption on the part of the previous government. The National Democratic Congress (NDC—the main opposition party and the previous party of government) has condemned the government’s actions as witch-hunting, and there is little doubt that the

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investigations are increasing political tension between the two parties. However, it remains unlikely that these tensions will spill over into wider society. Moreover, the NPP has tightened its grip on the security forces over the past ten months, making a military coup unlikely.

Election watch With the next national elections due to be held beyond the Economist Intelligence Unit’s forecast period, the main focus in 2002-03 will be on the efforts of the opposition parties to reform themselves, to reach a position from which they can unseat the NPP government. The NDC is now close to completing its reorganisation exercise, following the departure of the former vice-president and the party’s appointed flag-bearer for 2002, Professor John Atta Mills. However, it has still not fully confronted the problem of the future role of the former president Jerry Rawlings in the party. While some members want Mr Rawlings to continue to play a frontline role in the NDC, others feel that he should take a back seat. Meanwhile, the other opposition parties have been considering an alliance. They have formed an Inter-Party Co-ordinating Committee (IPCC) to consider proposals for unification, which would see them contest the 2004 presidential and legislative elections as a single political front. However, the alliance is already showing signs of splintering, and the NDC is likely to remain the main opposition to the NPP, so long as it can avoid splitting itself.

International relations Ghana is keen to encourage closer regional economic co-operation, focusing in particular on preparation for the creation of the West African Monetary Zone (WAMZ). The timetable for the establishment of this zone is likely to be extended, as few countries are close to meeting the ambitious entry criteria. The government will also seek to maintain good relations with its main bilateral donors. Its decision to apply for debt relief under the heavily indebted poor countries (HIPC) initiative has led to the loss of new lending from Japan, but grant aid will still be available.

Economic policy outlook

Policy trends Having announced earlier in 2001 that it would produce a secondary budget during the year, the government seems to have lost its way in this regard, preferring to concentrate on preparing a full poverty reduction strategy paper (PRSP, known as the Ghana Poverty Reduction Strategy—GPRS). The paper is due to be published in December 2001 and will form the basis for the 2002 and 2003 budgets. The draft version has much in common with PRSPs in other African states applying for HIPC relief, and will aim at reducing the government’s domestic debt burden and restoring macroeconomic stability, to provide a basis for private-sector-led economic growth and sustainable poverty reduction. The government intends to achieve its goals through a combination of sustained surpluses in the domestic primary budget and a firm monetary stance. It will continue to rely upon strong donor support, including debt relief, to channel increases in expenditure on social areas such as health and education.

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Following the decision to opt for debt relief under HIPC, a number of countries, including the UK, Canada, Spain and Italy, have announced their decision either to cancel or write-off part of the debt owed to them by Ghana. In addition, there has been a significant increase in the flow of grant assistance. The government has presented a proposal—including the reduction of the fiscal deficit, restructuring of the current debt stock and the dedication of future privatisation receipts to reducing the stock of domestic debt—to a meeting of World Bank, IMF and bilateral donors, who have accepted it. Should the government’s PRSP be accepted by end-2001, it will lead to further early write-offs of external debt.

Fiscal policy Weak fiscal management has resulted in persistently large budget deficits over the past several years. In its election manifesto, the NPP promised a deficit of 2% of GDP by end-2003 and, more recently, Mr Kufuor committed his government to balancing the budget and paying off domestic debt by the end of his first term in office. Implementing these and other measures outlined in the government’s budget statement—such as overhauling the revenue- collection agencies to increase revenue yields, implementing anti-corruption procedures and restoring expenditure-monitoring—will be time-consuming. The government’s chances of achieving these targets is doubtful, given its lack of a parliamentary majority, little real commitment to the reform process outside of the government elite, and the shortcomings of the civil service. However, the government’s pro-business stance, and its commitment to reform, will probably produce better results than under the previous administration. We forecast a budget deficit of 6.4% of GDP in 2001, 5.5% of GDP in 2002 and 5.1% of GDP in 2003.

Monetary policy The Bank of Ghana (BoG) has the broad policy goal of bringing down inflation into the single-digit range within three years. It will be assisted in this by the fact that for the first time in recent years, monetary and fiscal policy will be working in concert, rather than pulling in opposite directions. We also expect it to be helped by a reduction of political interference in the conduct of monetary policy. From September 2001 the bank ceased to provide liquidity support to public enterprises, either directly or through banks; it will also have greater ability to limit lending to government. In addition, the bank will focus its efforts on restructuring the government’s domestic debt portfolio, while mobilising sufficient new lending. Since the start of the year the BoG has effected an increase in nominal Treasury-bill rates of almost 4 percentage points, and it will reduce these only as the inflation rate falls. Following on from the successful introduction of three-year indexed bonds, we expect the central bank to try to introduce other longer-term financial instruments, to lengthen the maturity profile of domestic debt and reduce debt-servicing costs.

Economic forecast

International assumptions The slowdown in the world economy already under way prior to the terrorist attacks on the US on September 11th is now likely to be prolonged. We estimate real GDP growth of just 1.1% in the US in 2001 and 1.4% in 2002,

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although growth is expected to rebound to 3.6% in 2003. This rise in US growth will in turn drive an expansion in global growth, forecast at 4.1% by 2003. The price projections for Ghana’s main commodity exports are mixed. Gold prices will decline gradually, from an estimated US$269/troy oz in 2001 to US$255/troy oz in 2002 and US$250/troy oz in 2003. Cocoa prices, however, will show a marginal recovery to 50 US cents/lb in 2001, rising to 55 US cents/lb in 2002 and 57 US cents/lb in 2003.

International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.3 3.0 4.1 OECD 3.7 1.1 1.6 2.9 EU 3.4 1.7 1.8 2.5 Exchange rates (av) ¥:US$ 107.8 121.2 124.0 121.5 US$:¤ 0.924 0.903 0.968 1.015 US$:SDR: 1.32 1.28 1.30 1.33 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.63 US$ 3-month commercial paper rate 6.32 3.61 2.38 5.13 Commodity prices Oil (Brent; US$/b) 28.5 25.4 21.5 20.5 Gold (US$/troy oz) 279.3 269.1 255.0 250.0 Cocoa (US cents/lb) 40.3 49.6 54.5 57.3 Food, feedstuffs & beverages (% change in US$ terms) –6.1 0.8 14.1 10.9 Industrial raw materials (% change in US$ terms) 13.4 –6.9 3.3 12.2 Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates. Economic growth We project a gradual acceleration in Ghana’s GDP growth over the forecast period, from an estimated 3.9% in 2001 to 4.8% in 2003. This will be driven by increased agricultural production, led by cocoa and food crops, which we expect to experience a dramatic recovery from the extremely low growth rate of 2.1% recorded in 2000. However, growth in agriculture can be erratic, and the forecast for this sector remains vulnerable to unpredictable weather patterns. Growth in agricultural GDP will be supported by strong expansion in most other sectors of the economy, notably mining and quarrying. However, with the government committed to a relatively tight fiscal stance, growth in the government sector will remain subdued. The long-term growth prospects of the country could be improved if the fall in the cedi proves able to boost export-competitiveness sufficiently to drive non-traditional export growth. At present, we remain optimistic that this could start to occur. Meanwhile, import growth will be constrained by the sharp devaluation that occurred in 2000.

Inflation The annual rate of inflation reached a peak of 41.9% in March 2001, primarily owing to increases in petroleum prices in that month and a shortage of local food stocks. Since March inflation has been falling steadily, with the rate at the end of August at 32%. The downward trend is a result of the relative stability of

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the cedi and the government’s tight fiscal and monetary policies. The government has reiterated its commitment to bringing year-end inflation down to 25%, and this target appears almost attainable, given a stable currency and improved food production resulting from good rainfall. We expect year- end inflation of 28% in 2001. In 2002 inflation should continue its downward trend. However, given the increases in utility and petroleum prices expected next year, the overall fall will be slow, to an average of 22% in 2002 and 11% in 2003.

Forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth 3.7 3.9 4.3 4.8 Gross agricultural production growth 2.1 4.0 4.5 5.0 Consumer price inflation Average 25.2 35.3a 21.7 11.1 Year-end 40.6 28.0 14.0 7.0 Short-term interbank rate 36.3 45.3 29.2 19.6 Government balance (% of GDP) –7.9 –6.4 –5.5 –5.1 Exports of goods fob (US$ bn) 1.9 2.0 2.1 2.2 Imports of goods fob (US$ bn) 2.7 2.8 2.9 3.0 Current-account balance (US$ bn) –0.4 –0.3 –0.4 –0.4 % of GDP –8.1 –5.2 –5.5 –5.7 External debt (year-end; US$ bn) 7.0 7.4 7.6 7.9 Exchange rates C:US$ (av) 5,321.7 7,105.0 7,514.5 7,795.4 C:¥100 (av) 4,938.5 5,872.6 6,088.4 6,446.0 C:¤ (year-end) 6,706.4 6,737.3 8,003.6 7,817.5 C:SDR (year-end) 9,306.4 9,298.2 10,506.8 10,278.0

a Actual. b EIU estimates. c EIU forecasts.

Exchange rates In contrast to its rapid fall in 2000, the cedi was relatively stable during the first eight months of 2001, depreciating by just 3.1% against the US dollar. This steadiness reflects the fact that the currency probably overshot its equilibrium value during 2000, as well as policy benefits such as the suspension of the repayment of maturing external debts as part of interim benefits under the HIPC initiative. An increase in donor inflows and export earnings during the first eight months, and a fall in the value of imports, also played a part. With donors pledging more support for the Ghanaian economy, relative stability is likely to be maintained, although the persistent current-account deficit and continuing low prices for Ghana’s export commodities will see the cedi continue slowly to depreciate. The average annual exchange rate is forecast at C7,105:US$1 in 2001, C7,515:US$1 in 2002 and C7,795:US$1 in 2003.

External sector With cocoa prices set to rebound over the next few years, relatively stable gold prices, and improved competitiveness thanks to the fall in the cedi, we forecast a modest rise in Ghana’s export earnings, from an estimated US$2bn in 2001 to US$2.1bn in 2002 and US$2.2bn in 2003. In addition, current transfers should pick up, as donor disbursements rise in support of a government that seems committed to accelerating the reform process—there will be a sharp

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surge in transfers in 2001 and 2002, as some of those delayed because of the 2000 elections are released, with more usual levels resuming in 2003—and as private transfers from the Ghanaian diaspora increase. Remittances from the diaspora represent the third largest source of foreign-exchange inflows into the country. The increase in foreign-exchange inflows, coupled with the forecast upturn in GDP growth, will raise demand for imports. However, this will be offset by the fall in the value of the cedi, and the overall value of imports will rise only modestly, from US$2.8bn in 2001 to US$2.9bn in 2002 and US$3bn in 2003. Tourism earnings, which have grown relatively strongly in recent years, will experience a temporary decline as a result of the reluctance by many to travel following the attacks on the US, and the services and income accounts will therefore stay in deficit. As a result of these trends, we forecast a current- account deficit of 5.2% of GDP in 2001, 5.5% in 2002 and 5.7% in 2003.

The political scene

President Kufuor reshuffles On October 14th, in a not entirely unexpected move, the president, John his cabinet Agyekum Kufuor, made his first major changes to ministerial portfolios. The public, and especially the media, had been speculating for some time that the president would move some of his ministers around, perhaps even sacking some outright. However, the popular view was that he would wait to celebrate his first anniversary in office on January 7th 2002. That Mr Kufuor embarked on his first reshuffle only ten months into his tenure shows the extent to which he must have been compelled to move fast. There are differing views as to the stimulus behind the rearrangement. Some political analysts believe it was an attempt to revitalise the administration; some claim that certain ministers were not capable of carrying out their assigned responsibilities; others point to the president’s considerable annoyance at the proposal to extend US$20,000 car loans to MPs to facilitate their work. The loans were not supported by the executive, but the initiative, coming from parliament, enjoyed the support of both sides of the House. The executive only had the task of finding the means of implementing the policy. The decision to approve

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the loans drew heavy criticism from the media and political commentators, who argued that it was wholly inappropriate, given Ghana’s economic malaise. It was felt that MPs should be seen to be supporting the government’s efforts to limit expenditure and to end cronyism and corruption.

The changes are minor The government has made economic policy the centrepiece of its reform efforts over the past year, and it was no surprise that the reshuffle concentrated mainly on improving the performance of the economics team. The president has sought to create a group of key ministers, to take charge of driving through the changes in economic policy that have been proposed but not yet implemented. The group includes the following.

• Joseph Mensah, formerly leader of government business and responsible for co-ordinating government policy, now senior minister and chairman of the government’s economic team.

• Charles Nyanor, who takes the role of minister at the office of the economic team.

• Professor Kasim Kasanga, previously deputy minister of lands and forestry, who is nominated as substantive minister of the portfolio.

• Paa Kwesi Nduom, who has been given additional ministerial responsibility as minister for economic planning and regional integration, and nominated as chairman of the National Development Planning Commission.

• The former presidential affairs minister, Jake Obestebi Lamptey, now minister of information and presidential affairs.

• Elizabeth Ohene, formerly the media relations minister, who moves to the office of the president, where she will support the president in communicating the government’s overall economic policy.

• Kwamena Bartels, former works and housing minister, who moves to replace Mr Nyanor as minister of private-sector development.

• Yaw Barimah, previously deputy interior minister, who has been nominated as works and housing minister.

Although the reshuffle was widely welcomed in the press, some felt that the president should have gone further and carried out a number of dismissals. The opposition National Democratic Congress (NDC) picked up on this theme, arguing that the reshuffle amounted to little more than “musical chairs”. However, the president’s own popularity remains undented, and his decisiveness in making the changes has impressed many people, who now expect further progress with economic reform and in implementing the policy of “zero tolerance” of corruption in the political arena.

Corruption investigations The ruling New Patriotic Party (NPP) is continuing with its investigations into are intensified cases of corruption under the previous government. The investigations have led to a gradual increase in political tension within Ghana, most notably between the NPP and NDC, but the government appears strongly committed to pushing ahead with the cases. It is also prepared to take on high-profile

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cases, as illustrated when it ordered an audit of the 31st December Women’s Movement—a non-governmental organisation (NGO) headed by the former first lady, Nana Agyeman Rawlings, which was a beneficiary of public funding under the NDC government. In a statement, Mrs Rawlings described the investigation as a witch-hunt, a comment the NDC has frequently made in relation to the cases. A range of other state institutions, including the Ghana National Petroleum Corporation (GNPC), the State Insurance Company, the Electricity Company, the Tema Oil Refinery (TOR) and the Divestiture Implementation Committee (DIC), are also undergoing criminal investigations. In addition, six NDC stalwarts, including the former finance minister, Kwame Peprah, are facing trial, accused of causing financial losses to the state of some US$26m. The former deputy finance minister, Victor Selormey is also on trial, for allegedly misappropriating funds totalling US$1.3m.

An ex-minister is jailed for Meanwhile, Mallam Ali Yusif Isa, the former youth and sports minister, has corruption been found guilty on two counts of theft and of fraudulently causing financial loss to the state (of US$46,000). He is to serve four years’ imprisonment with hard labour on each count, with the sentences to run concurrently. The former minister is obliged, in addition, to refund the US$46,000 in one month or serve an extra two years. The money was supposed to be used to pay a winning bonus to the national football team and officials in their Federation Internationale de Football Association (FIFA) World Cup qualifying soccer match in Sudan in February. Although a relatively minor case compared with those currently under consideration by the government, the conviction of the former sports minister is seen as an affirmation of the zero tolerance policy, although whether more important former ministers will be dealt with in the same way remains unclear.

If other, more senior, ministers are formally charged with corruption, there is little doubt that this would substantially increase political tensions—it could create a minor political crisis. The potential for this has already been clearly illustrated: following the announcement of the investigations into the December 31st Women’s Movement, the former president, Jerry Rawlings, accused the government of pursuing politically motivated corruption charges against senior members of his administration, and warned that such moves could be “dangerous”.

NDC may boycott inquiries Meanwhile, in a move that partly supports the stance of Mr Rawlings, the NDC has declared that it does not consider it prudent to continue to co-operate with the numerous inquiries by the NPP into its tenure of office. In its view, the numerous investigative panels and bodies set up by the NPP are designed to harass, intimidate and persecute NDC functionaries, in the absence of credible evidence. NDC officials have stated that they would rather defend themselves in court than answer to undercover investigative panels, whose objectives they feel are unclear and suspicious. However, it is not clear whether the unilateral decision by the NDC to boycott the investigations is constitutional. Article 278 of the 1992 constitution states that the president shall, “by a constitutional instrument, appoint a commission of inquiry into any matter of public interest where the president is satisfied that a commission of inquiry be appointed”.

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Furthermore, according to Article 279, a “commission of inquiry shall have the powers, rights and privileges of the High Court or a Justice of the High Court at a trial in respect of:

• enforcing the attendance and witnesses and examining them on oath, affirmation or otherwise, and

• compelling the production of documents”.

Most political commentators feel that the NDC has miscalculated how it can best oppose the probes. They note that the public seems to be broadly supportive of the investigations, and that the party has left its challenge to the legality of any probe too late. Most lawyers in Ghana feel that the NDC should have challenged the legal or constitutional status of the bodies they are describing as “inquisition panels” before deciding not to co-operate with them, rather than waiting for some time before unilaterally declaring the probes as inquisitorial and then deciding to boycott their proceedings. With the legal basis of any challenge likely to be weak, the Economist Intelligence Unit views the initial statement by the NDC that it will boycott any hearings as little more than an act of bravado, designed to illustrate to party members and the wider public the NDC’s defiance of the government. In the absence of any further statements from the NDC, we would expect the NDC members under investigation to continue to submit to the panels of inquiry.

The military remains loyal While recent events clearly illustrate the political tensions that exist in Ghana, we still do not expect a military coup. Mr Rawlings’s statement that the pursuit of politically motivated corruption charges against senior members of his administration could be “dangerous” was widely condemned as a threat to instigate a military coup. However, the military subsequently issued a statement avowing their loyalty to the government.

The Ghana Armed Forces have also publicly denied media speculation that the 64th Infantry Regiment, a commando unit said to have a fierce loyalty to Mr Rawlings, is to be disbanded and replaced by a pro-NPP regiment (January 2001, page 7). A statement from the public relations directorate of the armed forces explained that the 64th Infantry Regiment was undergoing training for Operation Focus Relief, in which it will act as a standby peacekeeping force for the sub-region. The statement also emphasised that the minister of defence had nothing to do with transfers in the military and that the military considered the publication of rumours that the minister was organising secret transfers as calculated to create disunity in the armed forces. The statement advised the media and the public to be circumspect in their writing, to avoid creating an atmosphere of instability in the country. While the 64th Infantry has long been regarded as a prime element in any potential coup attempt by Mr Rawlings, it appears unlikely that it will be replaced so soon by a pro-NPP unit. The government has undertaken stringent measures to ensure the loyalty of the military (January 2001, page 14), and has replaced, much to his chagrin, Mr Rawlings’s army security with a police team. However, during the trial of Alhaji Shehu Jack Bebli (previously known as Regimental Sergeant-Major Jack Bebli) and six others accused of a daylight gold robbery of C2.4bn (US$337,800), it was alleged that some of the heavily armed soldiers who

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actively participated in the robbery belonged to the 64th Infantry Battalion The commandos are all still at large, underlining the necessity of continued close monitoring of discipline within the battalion and the wider military.

Mr Rawlings’s future role The media attention created by Mr Rawlings’s statement on the investigations in the NDC is questioned highlights a major problem for the NDC in its ongoing attempts to re-invent itself in the wake of the 2000 election defeat. There is growing disagreement within the party as to whether Mr Rawlings should speak on behalf of the NDC, as other leading party members do. This ties into the more fundamental debate as to whether the former president should continue to play a major frontline role within the NDC at all, or seek a back seat so that the party can more easily re-invent itself before the next elections.

Whether these differences of opinion will be severe enough to split the party remains unclear, but they are certainly a concern for many of the NDC’s leading members. We still do not expect the party to fracture, but this possibility will continue to be raised by the media until the reorganisation of the party has been agreed and a new leadership is firmly in place. This is especially the case now that Professor John Atta Mills—long considered a unifying force within the party—has accepted an appointment to be a visiting scholar at the University of British Colombia.

Other opposition parties The four smaller Nkrumahist opposition parties earlier announced that they prove unable to unite would seek to form a single political front to contest the 2004 presidential and legislative elections; however, this process has recently suffered a setback (July 2001, page 16). While the parties agreed to form an Inter-Party Co-ordinating Committee (IPCC) to consider proposals for unification and a draft platform for the alliance, they seem to have failed to resolve underlying tensions. As a result, the Great Consolidated Peoples Party (GCPP) has withdrawn from the talks, claiming a lack of commitment from the other parties. In an interview, Dan Lartey, the leader of the GCPP, claimed that the three other parties had demonstrated bad faith and adopted entrenched positions without due consideration of other interests and modern politics in the country. Mr Lartey also said that officials from the Peoples National Convention (PNC) and the National Reform Party (NRP) had attended the talks without the mandate of their members, and questioned the seriousness and commitment of such parties to unity. He alleged that the PNC and the Convention Peoples Party (CPP) were more interested in developing and organising their regional, district and ward structures than in the unity of the larger Nkrumahist tradition. Mr Lartey said that the energies of the Nkrumahists must now be focused on the broader leftist unity and not on traditions and dogmatic policies in which people had lost confidence. The prospects of the IPCC succeeding in bringing about unity now appear extremely slim, although it must be remembered that electoral success for the smaller opposition parties in 2004 depends in great part on the actions of the NDC.

The law on criminal libel is Meanwhile, the government has emphasised its commitment to the repealed democratic process with the repeal of the criminal libel law, which the NDC used in the past to prosecute many journalists, thus restricting press freedom.

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The press has welcomed the move. However, the government must now contend with a rejuvenated and vibrant independent media; on several occasions, the administration has had to respond to criticism on radio, television and in the press. Mr Kufuor, for example, has been obliged to offer explanations in minute detail on issues such as oil-procurement contracts, the controversial decision in March to apply for debt relief under the IMF and World Bank’s heavily indebted poor countries (HIPC) initiative—which was seen by the press as an admission of poverty—and his frequent foreign trips. Given the detailed grilling he has experienced in various interviews, the move of Elizabeth Ohene into the office of the president should provide Mr Kufuor with more support. The NDC has also become much more media-friendly than when it was in government, holding frequent press conferences to answer questions about its policies.

Government suffers its first The NPP government has not had things all its own way in the past few parliamentary defeat months. In an interesting about-turn, it suffered its first parliamentary defeat on July 25th, when it failed to receive the necessary votes to pass an agreement on a US$110m International Development Association (IDA) loan through parliament. The NDC had submitted the same loan agreement to parliament in 2000, where it was opposed by the NPP; however, this time the NDC opposed the agreement, arguing that the conditions attached were too demanding (see Economic policy). Whether the NDC’s opposition to the bill reflects a decision by the party leadership to oppose the government on all matters, regardless of party ideology, or a genuine change of mind, perhaps prompted by the additional burden of the NPP’s austerity measures, is unclear. With political tensions rising, it is perhaps more likely to be the former than the latter.

Perhaps more importantly, and more worrying for the government, is the fact that the resolution authorising the loan needed only 100 votes in the 200- member parliament to pass, but only 67 MPs voted in favour, with 63 voting against. In other words, many parliamentarians from the ruling NPP, which has exactly 100 seats, failed to show up for the vote, raising more fundamental questions about the commitment of NPP MPs to government policy, and the authority of the NPP leadership over its MPs. When the loan agreement was again presented to parliament the following day, it was passed. Nevertheless, if the government is to pursue its reform agenda aggressively over the forecast period, it will need the firm support of all its MPs.

Economic policy

Government develops fiscal When the government presented its first budget earlier in 2001, it said that it and monetary framework would present a secondary budget later on in the year (April 2001, page 15). However, the government seems to have backtracked on this initial commitment, preferring instead to develop an overall fiscal and monetary framework with the IMF over the course of the year. This has recently been published as its Memorandum of Economic and Financial Policies and builds on the initial attempts to boost revenue and control spending outlined in the

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budget. On the revenue side, the four new measures outlined to boost revenue are:

• the pursuit of dividend collection and loan recovery from companies in which the government has an interest;

• the automation of customs systems and improved control of customs, excise and preventive service (CEPS) warehouses;

• the creation of a National Tax Audit Team to assist the revenue collecting agencies; and

• cutbacks in domestically financed capital expenditure, owing in part to the willingness of some donors to forego the domestic counterpart for donor- funded projects.

All of these are fairly straightforward measures, and are likely to be outlined in more detail when the finance minister, Yaw Osafo-Maafo, presents his next budget.

In addition, the government has provided considerable details of its plans to control expenditure, probably a far more important goal if it is to meet its budget targets. These plans include:

• the establishment of an Economic Policy Co-ordinating Committee (EPCC), which will oversee the forecasting and monitoring of expenditure commitments and cash transactions on a monthly basis;

• setting of a quarterly expenditure ceiling for each ministry, department and agency, using the cash-flow forecasts prepared for the EPCC. Unlike some of the stricter forms of cash budgeting that the IMF has helped to introduce for African governments, these ceilings will have some flexibility, with small levels of over- or under-shooting of the monthly targets permitted; and

• the establishment of a reporting system which, when operational, will be gazetted in parliament to increase the accountability of those involved in setting and meeting the various expenditure targets.

While the measures should help to bring expenditure under control in the medium term, they will no doubt encounter some teething problems when first introduced, and it will take time for them to be effective. Moreover, it could be argued that the government has been too optimistic in its belief that the revenue gains and expenditure cuts will actually materialise. For example, the government claims that the strong revenue collections in the first quarter of 2001 provide proof that efforts to improve revenue collection are working. However, it remains unclear whether this initial gain in revenue can be maintained, or to what extent it includes back-payments of taxes that were not made as a result of the crisis in the economy and the political uncertainty surrounding the 2000 elections. In this respect, it is likely that the projections will prove over-optimistic.

On the expenditure side, the key to controlling growth remains the government’s ability to control the wage bill and interest payments on its domestic debt. The government forecasts that the total wage bill will rise from

C1,992bn (US$280m) in 2001 to C2,996bn in 2003, an increase of only 50%. However, the Economist Intelligence Unit is forecasting cumulative inflation of 183% over these three years. While there will be some gains from reductions in the workforce, this still implies a substantial erosion in public-sector wages, which the government is likely to find extremely difficult to support. The case for interest payments is similar. If the budget deficit is larger than forecast and the inflation rate does not drop as quickly as anticipated, these payments may rapidly turn out to be much larger than projected. These points strongly indicate the need for caution in fiscal projections.

Government finances (C bn) 1999 2000a 2001b 2002b 2003b Total revenue 3,366 4,811 6,605 9,441 10,914 Tax revenue 3,056 4,415 6,255 8,935c 10,324c Direct taxes 918 1,409 2,246 2,847 3,038 Indirect taxes 1,353 2,018 2,668 3,594 4,223 Trade taxes 785 987 1,341 2,012 2,311 Non-tax revenue 310 396 350 506 590 Grants 343 574 1,919 2,158 2,116 Project grants 193 337 707 1,291 1,177 Programme grants 150 238 1,212 867 938 Total revenue & grants 3,709 5,385 8,525 11,599 13,030 Recurrent expenditure 3,382 5,034 7,375 8,469 9,186 Non-interest 2,232 3,001 3,791 5,000 5,965 Wages & salaries 1,161 1,423 1,992 2,546 2,996 Goods & services 485 700 797 1,109 1,293 Subventions 287 445 505 645 760 Transfers to households 298 432 497 700 916 Interest 1,150 2,033 3,584 3,468 3,221 Domestic 872 1,446 2,651 2,345 1,873 External 278 587 933 1,123 1,348 Capital expenditure 2,007 2,491 4,254 5,534 6,231 Domestic 851 1,145 1,300 1,887 2,503 Foreign 1,157 1,346 2,954 3,648 3,728 Total expenditure 5,389 7,525 11,629 14,003 15,416 Overall balanced –1,654 –2,624 –3,651 –2,866 –2,515

a Provisional. b Projections. c Does not sum in source.d Cash basis after arrears clearance. Sources: Ghanaian authorities; IMF staff estimates and projections.

The World Bank approves Although the government was initially defeated in parliament in its attempt to US$330m credit to Ghana secure World Bank funding for part of its reform efforts (see The political scene), the loan was eventually approved, and the money will form an integral part of the government’s overall economic strategy. The part of the loan initially rejected by parliament was from the International Development Association (IDA), but actually formed part of two credits totalling US$330m for Ghana. These are specifically targeted at helping the government restore macroeconomic stability through strengthening the management and control of public expenditure and supporting the preparation and implementation of the Ghana Poverty Reduction Strategy (GPRS). The remaining part of the credits is to be used for road development, through the government’s national

programme to address the inefficiencies and deficiencies in the roads and transportation sector.

The IDA loan controversy However, there are more controversial elements to the US$110m IDA loan, relates to privatisation related to the country’s privatisation process. The privatisation efforts are expected to yield some US$50m, through the divestment of government shares in companies such as Ghana Telecom, Coca-Cola, Westel, Aluworks, Ghana Consolidated Diamonds, Ghana Oil Palm Development Corporation, Benso Oil Palm Plantation, Twifo Oil Palm Plantation and the Tema Steel Company. The planned sell-offs would be accompanied by job losses in all of the enterprises listed. According to a report from parliament’s finance committee, the loan’s conditions included a rise in the price of petroleum products and in electricity and water tariffs, to reduce the strain on public finances. The government was also required to start selling its stake in Ghana Commercial Bank, the country’s largest financial institution, and to put forward proposals for the divestment of the state-run electricity company. Whatever its underlying motive for opposing the loan agreement, the opposition National Democratic Congress (NDC) argued that these aspects of the loan, together with the need to raise utility fees, were too harsh, and would bring economic hardship on the population. The NDC MPs also claimed that in a developing economy, subsidies were sometimes needed to prop up productive elements in the economy. In the government’s defence, the leader of the NPP parliamentary group noted that the government had agreed with the World Bank that the loan would go ahead even if some of the conditions were not met. Utility rates have already risen by 91% this year, while fuel prices have increased by 60%.

Ghana is asked to repay Ghana has also been working to rebuild its relations with the IMF, after the non-complying loan Fund’s Executive Board reviewed a non-complying disbursement to Ghana of SDR26.75m (US$35.2m) under its three-year poverty reduction and growth facility (PRGF) arrangement. Subsequent to the disbursement in August 2000, it became apparent that the information available to the IMF at the time of approval of the disbursement was incorrect—this related to a prior action on the clearance of external payments arrears and a performance criterion on non- concessional external borrowing. As a result of these inaccuracies, the disbursement was deemed to be non-complying. The Executive Board concluded that waivers of non-observance of the prior action and performance criterion could not be granted, and Ghana was asked to repay the non- complying disbursement, together with any interest accrued. It was agreed that Ghana could repay the IMF in two tranches, of SDR13.75m by July 15th 2001 and SDR13m by the end of December.

The domestic economy

Economic trends

Inflation continues its Since March 2001—when the year-on year inflation rate reached an annual steady fall high to date of 41.9% (driven primarily by increases in petroleum prices and utility charges)—inflation has been on a steady downward trend, although the level remains high. Year-on-year inflation at the end of August was 32%. The fall in the inflation rate is much more dramatic when viewed in terms of the annualised monthly rate, as illustrated in the chart. Tighter fiscal and monetary policy and improved food supplies were behind the fall in the rate, helped by the stability of the local currency, which dampened the effect of the rate of increase in the prices of both imported consumer goods and raw materials. Inflation is expected to continue its downward trend in the coming months, thanks to lower food prices stemming from a forecast bumper harvest, as well as the continuing relative stability of the exchange rate. However, this trend will be partly offset by increases in utility prices and petroleum products, which we expect the government to introduce during the course of 2002.

Interest rates are falling Despite the downward trend of inflation, interest rates have remained but are still high extremely high. The 91-day Treasury bill peaked at 47.17% in early July, and on September 24th the quoted yields for the 91-day and 182-day T-bills were 37.11% and 37.49%, respectively. The high level is primarily due to high government borrowing and the open-market operations of the Bank of Ghana (BoG) aimed at mopping up excess liquidity in the economy. Total government borrowing through T-bills for the first half of the year amounted to C4.8trn (US$2bn), which highlights the fact that the IMF forecasts on the government’s budgetary position may be already out of date. While the conversion of up to 50% of the domestic debt into three-year bonds (see Financial and other services) will reduce the government’s immediate interest obligations, any decline in the debt stock will be only slow in the remainder of the year.

Cedi remains fairly stable After the problems of 2000, the cedi was relatively stable during the first nine months of 2001, and has even appreciated modestly in the past few months, according to data from the Association of Bankers in Ghana. The relatively stability of the currency has been driven by the authorities’ efforts to restore fiscal discipline, along with substantial foreign-exchange inflows from both exports and donor assistance. Receipts from cocoa exports, for example, shot up from US$12m in the fourth quarter of 2000 to US$116m in the first quarter of 2001. Meanwhile, total grants received in the first quarter of 2001 rose from US$1.1m in the last quarter of 2000 to US$78.8m. In addition, a reduction in speculative demand for the US dollar as a store of value has contributed to the stability of the local currency. There is, however, a problem with the data reported by the IMF, which has yet to be resolved. According to the IMF, the stability of the end-of-period rates noted in its International Financial Statistics (IFS) is a consequence of incomplete data being delivered by the BoG—rather than updating the end-of-period data, the BoG has sent the same rounded figure, 0.00014, each month. The IMF claims that fresh data will be forthcoming in November. If this does not occur, the IFS will probably suppress the data. The incident highlights the need to treat all data on Ghana, whether published by the authorities, or by multinational lenders, with caution.

Exchange rates, 2001a (C:US$) Jan Feb Mar Apr May Jun Jul Aug Sep Association of Bankers’ rate 6,875.77 6,949.86 7,075.26 7,121.75 7,147.87 7,154.13 7,121.98 7,106.56 7,102.84 Rate quoted in IFS 7,142.86 7,142.86 7,142.86 7,142.86 7,142.86 7,142.86 7,142.86 n/a n/a a End-period. Sources: IMF International Financial Statistics (IFS); Association of Bankers in Ghana.

Agriculture

New cocoa producer prices The government has announced that the new producer price for cocoa for the are announced 2001/02 season, which began on 12th October, will be C274,000/bag (US$39/bag). This represents a 35% increase over the 2000/01 price. A tonne of cocoa will therefore be sold for around C4.4m (US$619), compared with almost C3.9m in the previous season. The producer price at all buying centres is set at C131,520 per load of 30 kg for Grade I and II cocoa beans. At an exchange rate of C7,200:US$, this represents a price of US$0.61/kg, compared with the minimum farm-gate price of US$0.46/kg announced in Côte d’Ivoire for the 2000/01 growing season. This reflects the better quality of Ghanaian cocoa and the price premium that its more reliable marketing structure attracts, compared with the uncertainty that has affected Côte d’Ivoire in recent years and the reported decline in crop quality in that country. The Ghanaian minister for economic planning and regional integration, Paa Kwesi Nduom, who announced the increase, said that it was in line with the government’s commitment to paying remunerative prices to cocoa farmers.

Cashew farming is set to The Ministry of Food and Agriculture has received a loan of US$13.3m from increase by 50% the African Development Fund (ADF) to assist in the development of the country’s cashew-nut farming industry, which has high potential. The loan agreement, awaiting ratification by parliament, will help to finance Ghana’s plans to double the area of land used to farm cashew nuts to 36,000 ha. The project aims to generate income, diversify the country’s export base and improve living standards in the main production area, which includes Northern, Upper West, Brong Ahafo and Central regions. The project also aims to raise the number of small-scale cashew producers operating in the area from 600 to 500,000 over six years, and to support women’s farming initiatives. Portions of the loan are to be directed towards research, private-sector farming initiatives and rural infrastructure. The ministry also plans to introduce an improved variety of cashew nut, which will mature in two years instead of three. The loan will help Ghana reduce its reliance on its main exports, cocoa and gold. Cashew nuts earned the country US$2.5m in foreign-exchange earnings in 2000, down from US$3.8m in 1999.

Industry and mining

Ashanti makes steady After its hedging debacle in the first half of 2000, which brought the company progress to the brink of bankruptcy, Ashanti Goldfields, Ghana’s largest company and an important symbol of national economic prestige, has made steady progress in rebuilding its financial health. During the second quarter of 2001 it recorded earnings of US$14.1m, representing an increase of 120% year on year. This was achieved through higher production, a higher spot price for gold and lower operating costs. Total gold production for the quarter was 437,043 oz, 10% higher than in the previous quarter. Cash-operating costs for the second quarter were US$181/oz, 7% lower both than the previous quarter and the corresponding quarter of 2000, thanks to increased production and continuing efforts to reduce costs. During the second quarter Ashanti reduced its gross and net debt levels by US$9.7m. More positive news for the company came with the announcement of the results of a pre-feasibility study on the Nyankanga underground resources at Geita, Tanzania. Although Ashanti was forced to sell one-half of this mine to South Africa’s Anglogold, it retains a 50% share, and the study indicated potential for a five-year operation capable of producing 150,000 oz/year, at cash-operating costs of approximately US$170/oz.

The government will keep In May the finance minister, Yaw Osafo-Maafo, said that the government its Ashanti shares might sell some of its stakes in listed companies, including Ashanti, to reduce its domestic debt. More recently, however, the minister announced that the government was not currently planning to sell any of its 20% stake in Ashanti. In a statement, the minister said that there was no intention to sell any shares at present, as the company’s share price was “not very attractive”. The shares have been depressed since the disastrous hedging exercise in 1999, after which Ghana's former government opposed a take-over by the UK-based Lonmin, causing it to withdraw its offer of US$7/share. US-listed shares in Ashanti have not risen above US$4 since that time, and fell to lows of around US$1.50 in 2000, although they closed at US$2.58 on October 3rd 2001. Pressure has been

growing for the government to drop its “golden share” in Ashanti, which has no monetary value but allows it to override board decisions, giving it a veto over mergers (July 2001, page 24).

Tema Oil Refinery will be According to Mr Osafo-Maafo, Ghana will proceed with selling its national sold petroleum refinery—the Tema Oil Refinery (TOR), built by Ghana’s first president, Kwame Nkrumah—to offset a C2.3trn (US$3.3bn) debt accumulated over the past two years. However, while the minister has said that the sale of the TOR is imminent, he has declined to give a specific date. Fuel costs in Ghana remain among the lowest in West Africa, with the government continuing to subsidise prices. Whoever takes over the refinery will need concrete assurances that the government is prepared to abandon its fuel-price support and either liberalise prices or implement a formula linked to the world price of oil, as exists in some other African countries. Mr Osafo-Maafo said that the government had not reached a decision on who would be selected to join the government and Ghanaians in the ownership of the refinery, but he noted that the government had renewed a memorandum of understanding (MoU) with Samsung International of South Korea, signed by the previous government, in June 2000, considering the firm as a partner for the sale. Even so, the renewal of the MoU does not entail the automatic sell-out of the refinery to Samsung. Meanwhile, the minister has denied recent local news reports that a US investor is being considered as a candidate to buy the refinery.

Libya will supply oil to According to the foreign minister, Hackman Owusu Agyeman, Libya has now Ghana agreed to supply 30,000 barrels/day of oil to Ghana to augment the country’s supply from Nigeria. Supplies from Nigeria are often erratic, owing to domestic refining problems. This agreement reinforces Libya’s recent foreign policy push into Africa, which started with the support given by Colonel Muammar Qadhafi for the recently established African Union (AU, which replaces the Organisation of African Unity—OAU). Mr Qadhafi says that Libya has also agreed to Ghana’s request for US$250m to establish an investment fund for small-scale and agro-industries, as well as for assistance to business. It is estimated that Ghana has a daily demand of 60,000 b/d of oil: the TOR has the capacity to refine 45,000 b/d, while the Aboadze thermal plant at Takoradi in western Ghana can handle 15,000 b/d. When questioned as to why the government had not chosen to procure supplies from other oil-producing countries within the sub-region, Mr Agyeman argued that “we could not have gone to the open market to bid for oil, due to the urgency of Ghana's requirement and especially when Libya has agreed to offer us oil on concessionary terms.” He said that he also held bilateral discussions on the strengthening of relations between the two countries, on the future exchange of ambassadors, and regarding the next meeting of the Ghana-Libya Permanent Joint Commission.

Infrastructure and communications

Problems of energy sector The government has developed a three-pronged strategy for addressing the and utilities are addressed problems of the energy sector and the public utilities. To halt the huge

operational losses incurred by the parastatals—the Tema Oil Refinery, the Electricity Company of Ghana, the Volta River Authority and the Ghana Water Company—the government is raising prices and tariffs. To stop the problem re- emerging, the Public Utilities Regulatory Commission is developing a price- adjustment mechanism, which aims to avoid future deficits and attain full cost recovery. Meanwhile a financial and management audit of these companies has been ordered, with the view of making substantial efficiency gains. The government is also restructuring the outstanding debt of these enterprises, part of which it will assume itself.

Ghana Telecom gears up for Meanwhile, Ghana Telecom has outlined plans for its expansion over the next expansion three years. The centrepiece of the plans is the construction of a US$24m link to Africa ONE, an undersea fibre-optic cable system that will surround the continent. The project, which involves laying fibre cables under the sea to link terminal stations from 17 other countries in Europe and Africa, will provide a secure, high-quality and reliable alternative traffic route between Western Europe, the US and Asia. Africa ONE is being managed, organised, regulated and constructed by the UN International Telecommunications Union, the pan- African telecoms agencies; the Regional African Satellite Communications Organisation (Rascom); the Pan-Africa Telecommunications Union; American Telegraph and Telephone (AT&T); and Alcatel. The project, which should be completed by the first quarter of 2002, will help to decongest the traffic experienced on international communications. Other planned services for Ghana include:

• GT SAR—a facility that uses satellite communication to link companies with their remote branch offices anywhere in the country and in selected neighbouring countries; and

• GT FASTnet—a digital broadband multi-service data network that supports multimedia applications and network computing for transmission speeds from 64 kilobytes per second up to 2 megabytes per second.

Financial and other services

APEX Bank will begin In common with many African countries, the commercial banking sector in operations next year Ghana is not structured towards lending to small-scale businesses and farmers, many of which operate in the informal sector. This has led to the growth of informal micro-credit schemes, to help finance rural and urban informal economic activity. African governments are keen to see this lending put on a more formal footing, and the establishment of the APEX Bank, a central bank for rural and community banks in Ghana, is an important step forward in this respect. The bank will begin operations next year with an initial capital of US$11m, provided by the International Fund for Agriculture Development (IFAD), the African Development Bank (ADB) and the World Bank. The Ghanaian parliament has already approved the amount needed for APEX to begin to streamline the activities of the rural banks, with the aim of achieving greater mobilisation of funds, enhancing the community-ownership structure and strengthening service delivery. APEX will focus on the decentralisation of

financial services and decision-making and on achieving greater community participation in the rural development process. Approximately 39% of the rural population are expected to benefit from the project. A number of innovative features have been built into the design of the project, including:

• multiple donor projects targeted at different income earners who may wish to borrow;

• an emphasis on capacity-building within the rural banking sector, rather than simply the extension of credit; and

• the pre-testing of promising ways of delivering financial support, such as the financial services associations (FSAs) developed in Benin by IFAD, and other innovative processes and products with potential for wider replication.

The bank will administer cheque-clearing services, fund-management, the sourcing of funds for on-lending to the country’s 114 rural and community banks, inspection services, credit control and product pricing. It will also perform some non-banking services, such as training for employees and directors, the supply of stationery and the provision of deposit insurance against the loss of customers’ deposits in the event of bank failure.

Bond market gets a boost In an important boost for the bond market, the government has issued a three- year Government of Ghana index-linked bond (GGILB), to replace up to 50% of the domestic debt of C6trn (US$844m), now held in 91- and 182-day Treasury bills. The instrument’s interest and principal are linked to the consumer price index (CPI), thus providing full inflation protection to the holder. Because the inflation adjustment to the principal is payable at maturity, the instrument will enable the government to pay interest at a relatively low real return (currently 6%), thus easing the current debt-servicing burden. With inflation rates on a downward trend, the GGILB will enable the government to make immediate savings on the cost of borrowing as the rate falls. Banks are mandated to hold government securities as part of a secondary reserve, currently set at 35% of deposits, and the GGILB is therefore expected to have a ready market. Since the first auction in September, a total of C200bn (US$28m) has been sold. Financial-market players expect the GGILB to provide a major boost to the bond market, which has been prevented from taking off by the unwillingness of investors to hold fixed-income instruments in a high inflation environment. The government has decided to list the GGILB on the Ghana Stock Exchange (GSE). This should bring additional revenue from listing fees, trading levies and membership fees from a new category of government securities dealers, who will constitute the dealing network of the nascent bond market.

Mutual funds may be From next year Ghana’s capital market will move closer to the commencement introduced of pooled investment vehicles in equities, bonds and other financial instruments. Nine applications have been made to the Securities and Exchange Commission (SEC) to operate either mutual funds or unit trust schemes. This boosts the prospects for liquidity and stockmarket performance in 2002. Parliament has yet to approve the final regulations governing the running of

mutual funds and unit trusts; the indications are that it will deliberate and approve the regulations during its last session for the year.

Whether the move to allow mutual funds, and the listing of the new GGLIB, will improve the poor performance of the GSE remains unclear. The GSE was initiated in 1990 with nine equity listings, amid high hopes for a vehicle that would help Ghana’s fledging private sector raise long-term capital. Eleven years on, the GSE has only managed to add 13 more listings, giving it a total of 22 equity listings. In 2000 volumes traded fell to one-quarter of the levels attained in 1997, while annual returns on the market have fallen behind inflation and the money market for three years in a row. The cumulative effect of the poor performance of the market has been a large gap between the GSE’s income and expenditure, resulting in a substantial deficit. In the past, the GSE has managed to survive with donor grants, but this has now become unsustainable. The management of the GSE has stated that the exchange will have to close by end-2001 unless it is bailed out.

Foreign trade and payments

Export receipts decline According to new data published by the IMF, the value of Ghana’s exports fell to US$1.9bn in 2000, from US$2bn in 1999. This was largely driven by the sharp fall in the world market price of Ghana’s second largest export commodity, cocoa. Earnings from cocoa fell to just US$436.8m, compared with the US$552.3m realised in 1999. Gold earnings also fell moderately in 2000, while those from timber were relatively constant. There was a corresponding decline in the value of imports, from US$3.25bn in 1999 to US$$2.76bn in 2000, driven by the fall in the exchange rate and the slowdown in the economy. This led to a sharp narrowing of the trade deficit. With total trade slowing, there was also a decline in the services deficit relative to 1999. Current transfers held up, resulting in a slight fall in the current-account deficit from 11.5% of GDP to 9.2% of GDP (the decline was not as great as could be expected, owing to the fall in the US dollar value of Ghana’s GDP, as a result of the fall in the value of the cedi). It should be noted that these new IMF data differ somewhat from the figures used in the Economist Intelligence Unit’s standard tables (although the values remain broadly similar). We forecast a stronger recovery in both cocoa prices and volumes, and a higher level of imports, driven by real GDP growth. We project current-account deficits of 5.2% of GDP in 2001, 5.5% in 2002 and 5.7% in 2003.

Recent work by the IMF has stressed that of all its forecasts, those for the current account tend to be the least reliable. In the African context, this stems from the twin difficulties of forecasting commodity prices (and production, which is influenced by the weather) and invisible earnings and payments. These problems are clearly illustrated when considering the projected increase in cocoa export earnings. The IMF expects these earnings to increase only modestly over the forecast period, while the EIU expects a combination of higher international prices and domestic reforms to feed into more impressive rates of production.

Current account (US$ m unless otherwise indicated) 1999 2000 2001a 2002b 2003b Exports fob 2,006 1,898 1,907 2,075 2,204 Gold 711 705 609 670 697 Cocoa 552 437 493 519 529 Timber 174 175 184 210 243 Others 569 581 621 677 736 Imports fob –3,252 –2,759 –2,725 –2,810 –2,957 Non-oil –2,919 –2,239 –2,234 –2,395 –2,521 Oil –333 –520 –492 –415 –436 Trade balance –1,246 –860 –819 –735 –753 Services (net) –269 –246 –305 –334 –353 of which: interest payments –131 –109 –143 –166 –185 private transfers (net) 472 496 521 536 538 Current-account balance (excl official transfers) –1,044 –611 –603 –533 –568 % of GDP 13.4 12.3 12.4 10.0 9.9 Official transfers (net) 148 154 266 276 247 Current-account balance (incl official transfers) –895 –457 –337 –257 –321 % of GDP 11.5 9.2 6.9 4.9 5.6

a Estimates. b Projections. Sources: Ghanaian authorities; IMF staff estimates and projections.

Ghana will export cassava Significantly, the IMF forecasts show export growth being driven over the starch and textiles forecast period by the “others” category, which mainly comprises non- traditional exports. This is predicated on the assumption that the fall in the cedi in 2000 significantly improves the competitiveness of Ghanaian exports, while policy initiatives boost non-traditional exports, notably as the government takes advantage of the US African Growth Opportunity Act (AGOA) to raise its exports to the US. The president, John Agyekum Kufuor, has launched a president’s special initiative (PSI), under which the government will promote the aggressive exporting of garments, textiles and cassava starch, which it optimistically hopes will earn Ghana some US$690m by 2003. This ambitious initiative is forecast to garner overall export revenue from these products of US$3.4bn over the next four years.

• In the case of cassava exports, the government is hoping that exports will provide a ready market for 25,000 farmers in ten selected districts that have comparative advantages in the production of this crop. About 70,000 jobs will be created in other areas. The Ministry of Food and Agriculture plans to introduce an improved variety of cassava for starch production, and will help private entrepreneurs to set up cassava starch production plants.

• In the case of the garment and textile industry, the government has outlined a strategy, which it hopes will operate on three levels. The first level consists of an initiative to persuade ten large-scale manufacturing firms from Asia to relocate to Ghana within the next four years, through attractive investment incentive packages. It is anticipated that at the end of the four-year

period, total export revenue from the first level will be US$400m. On the second level, the initiative will target 25 Ghanaian-owned, new and existing medium-size garments and textiles manufacturing firms each year, for the next four years, providing intensive technical and marketing support to enhance their competitiveness on the global market. At the end of the period, export revenue from this level should amount to US$2.5bn. The third level concerns the merchant class of garments and textile exporters, who will organise a critical mass of small-scale garments and textile producers, seamstresses and tailors to produce for the export market through sub-contracting arrangements.

There are mixed signals on According to data from the Ghana Investment Promotion Centre (GIPC), FDI data foreign direct investment (FDI) flows into Ghana fell sharply from US$233.8m in 1999 to US$132.1m in 2000, a 43.5% decrease. The GIPC argues that the fall was the result of the difficult macroeconomic environment, as reflected in high inflation rates and the rapid depreciation of the cedi against major foreign currencies. Furthermore, the unpredictability of the outcome of the 2000 elections made potential investors adopt a “wait-and-see” attitude. The centre also cites a range of more long-term bottlenecks to attracting foreign investment, including the difficulties associated with the acquisition and registration of land, the attitude of Ghanaian workers and the lack of labour skills in the country. Having identified these shortcomings, the GIPC is working to review the country’s investment act, to bring it in line with current investment practices elsewhere.

By contrast, data published by the United Nations Conference on Trade and Development (UNCTAD) in its World Investment Report 2001, show that FDI flows to Ghana in 1999-2000 increased by 75%, to US$110m. The reasons for the large discrepancy between the sources are not clear, but a major problem with data from organisations such as the GIPC is that they are usually based on project proposals made to them. If an investor does not proceed through them, the investment is not recorded. When asked to comment on the data, Emmanuel Gyasi, Director of the research and development division of the GIPC, acknowledged that it was difficult to determine the exact amount of investment flows because of a lack of co-ordination among the various investment-attracting agencies.

FDI inflows (US$ m) Annual av 1989-94 1995 1996 1997 1998 1999 2000 Ghana 72 107 120 82 56 63 110 Africa 3,952 4,694 5,622 7,153 7,713 8,971 8,198 Source: UN Conference on Trade and Development (UNCTAD), World Investment Report 2001.