Country Report

Ghana

Ghana at a glance: 2007-08

OVERVIEW The president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will continue to focus on delivering an improvement in the standard of living and carrying out donor-supported economic reforms. However, in the face of ongoing corruption allegations and attempts by the opposition National Democratic Congress (NDC) to discredit the NPP, the government will struggle to show that its policies have delivered results, and the ruling party may face internal divisions over the nomination of its presidential candidate. Disagreements over the nominations may also affect the NDC, amid fears that its leadership will try to exert excessive control over the selection process. However, the NDC has strong support in northern Ghana, and the outcome of the forthcoming presidential and legislative elections, which are due in 2008, will be close. On the plus side for the government, real GDP growth is forecast to remain strong and broad based. Against the background of a stable inflation rate and a steady cedi, this will allow the NPP to campaign on a sound macroeconomic record. However, there are fears that election-related expenditure may push the budget further into deficit, storing up potential problems.

Key changes from last month Political outlook • There has been no major change to the Economist Intelligence Unit!s political outlook. Economic policy outlook • There has been no major change to our economic policy outlook. Economic forecast • There has been no major change to our economic forecast.

November 2006

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Ghana 1

Contents

Ghana

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

20 Economic policy

26 The domestic economy 26 Economic trends 27 Agriculture 28 Infrastructure 30 Mining

31 Foreign trade and payments

List of tables 10 International assumptions summary 13 Forecast summary 18 Offinso South by-election result 21 PRGF receipts 26 Interest rates 26 Changes in consumer price index 28 Cocoa production 29 Power generation

List of figures 13 Gross domestic product 13 Consumer price inflation

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Ghana 3

Ghana November 2006 Summary

Outlook for 2007-08 The president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will focus on delivering an improvement in the standard of living and carrying out donor-supported economic reforms. However, in the face of ongoing corruption allegations and organised labour protests over wages, the government will struggle to show that its policies have delivered results. Meanwhile, the National Democratic Congress (NDC) is likely to be affected by a dispute over nominations for the presidential election, amid fears that its leadership will try to exert excessive control over the selection process. However, the NDC has strong support in northern Ghana, and the outcome of the forthcoming presidential and legislative elections, which are due in 2008, will be close. Positively for the government, real GDP growth is forecast to remain strong. Against the background of a stable inflation rate and a steady cedi, this will allow the NPP to campaign on a sound macroeconomic record. However, there are fears that election-related expenditure may push the budget further into deficit, storing up potential problems.

The political scene Ghana has held local elections in which national parties were not permitted to take part. The poll suffered from low voter interest. Meanwhile, the NDC has been preparing itself for a December vote to nominate a candidate for the 2008 presidential elections. The ruling NPP has suffered from a number of corruption scandals that threaten its support in the run-up to the election. The NPP has accepted recommendations to make payments to victims of abuse under previous regimes, a move that the NDC has criticised as a being partisan.

Economic policy The IMF has completed its final review of the poverty reduction and growth facility (PRGF). The government has decided that, following the end of the PRGF, it will move to a poverty support initiative. Fiscal data have revealed that future spending increases are likely to depend on increased aid. Petrol prices have been lowered for the first time since the sector was liberalised in 2005.

The domestic economy Inflation has fallen after a brief upward spike earlier in 2006. However, inflation has remained above the levels in comparable African countries. The cedi has remained stable against the US dollar.

Foreign trade and payments The current account has posted an unexpected surplus in the first quarter of 2006. This surplus has been caused by an increase in the credit on the transfers account due to the Multilateral Debt Relief Initiative.

Editors: Ewan Wheeler (editor); David Cowan (consulting editor) Editorial closing date: November 1st 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report November 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 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; 230 members elected by universal suffrage every four years

National elections December 2004 (presidential and parliamentary); next elections due in December 2008

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 the first time; he secured re-election in December 2004 for a second and final term

National government Cabinet, appointed by the president in January 2005; last major reshuffle took place on April 27th 2006

Main political parties New Patriotic Party (NPP), the ruling party; National Democratic Congress (NDC), the main opposition party; other parties include People!s National Convention (PNC), 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 Communications & technology Mike Ocquaye Defence Kwame Addo Kufuor Education, science & sports Pap Owusu Ankomah Energy Joseph Kofi Adda Finance & economic planning Kwadwo Baah-Wiredu Fisheries Galsys Asmah Food & agriculture Ernest Debrah Foreign affairs, regional integration & Nepad Nana Akufo-Addo Health Courage Quashigah Information & national orientation Kwamena Bartels Interior Albert Kan Dapaah Justice & attorney-general Joe Ghartey Land, forestry & mines Dominic Fobih Local government, rural development & environment Stephen Asamoah Boateng Manpower, youth & employment Boniface Saddique National security Francis Poku Ports, harbours & railways Christopher Ameyaw Akumfi Public-sector reform Paa Kwesi Nduom Tourism & diaspora relations Jake Obetsebi Lamptey Trade, industry, private-sector development & Presidential Special Initiatives Alan Kyeremanten Transport Va can t Works & housing Hackman Owusu Agyeman

Central bank governor Paul Amoako Acquah

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Economic structure

Annual indicators 2002a 2003a 2004 a 2005 b 2006b GDP at market prices (C bn) 48.9 66.2 79.9 98.6 115.3 GDP (US$ bn) 6.2 7.6 8.9 10.9 12.6 Real GDP growth (%) 4.5 5.2 5.8 5.9 5.7 Consumer price inflation (av; %) 14.8 26.7 12.6 15.1 a 10.9 Population (m) 20.8 21.2 21.7 b 22.1 22.6 Exports of goods fob (US$ m) 2,015.2 2,562.4 2,704.5 2,802.2 3,284.0 Imports of goods fob (US$ m) 2,707.0 3,232.8 4,297.3 5,345.4 5,665.7 Current-account balance (US$ m) -31.9 302.3 -315.9 -811.6 -220.9 Foreign-exchange reserves excl gold (US$ m) 539.7 1,352.8 1,626.7 1,752.9 a 1,980.8 Total external debt (US$ bn) 7.0 7.6 7.0 7.3 3.5 Debt-service ratio, paid (%) 5.4 11.4 5.1 6.1 3.2 Exchange rate (av) C:US$ 7,932.7 8,677.4 9,004.6 9,072.5 a 9,178.9 a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2005 % of total Components of gross domestic product 2003 % of total Agriculture, forestry & fishing 36.1 Private consumption 77.4 Industry 25.2 Government consumption 11.5 Manufacturing 9.1 Gross domestic investment 22.9 Services 29.8 Exports of goods & services 40.3 Imports of goods & services 52.2

Principal exports 2005 US$ m Principal imports 2005 US$ m Gold 945.8 Non-oil 4,171.6 Cocoa beans & products 753.3 Oil 1,108.2 Timber & products 226.8

Main destinations of exports 2004a % of total Main origins of imports 2004a % of total Netherlands 12.0 Nigeria 12.7 UK 10.5 China 10.0 France 6.7 UK 6.5 US 6.2 US 6.5 Belgium 4.5 France 4.5 a Based on partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (C bn) Revenue & grants 6,055.4 7,401.8 5,338.3 6,836.0 7,219.9 8,862.2 6,024.0 8,843.4 Expenditure & net lending 6,647.7 7,970.1 5,705.1 7,786.9 8,430.9 7,783.4 7,052.4 7,835.2 Balance -592.3 -568.3 -366.8 -950.9 -1,211.0 1,078.8 -1,028.4 1,008.2 Prices Consumer prices (Accra; 2000=100) 223.4 222.2 236.1 253.7 256.6 256.0 264.7 278.2 Consumer prices (% change, year on year) 12.6 12.2 14.1 16.2 14.9 15.2 12.1 9.7 Financial indicators Exchange rate C:US$ (av) 9,040.0 9,043.5 9,058.6 9,073.7 9,067.0 9,090.8 9,123.0 9,154.0 Exchange rate C:US$ (end-period) 9,051.8 9,054.3 9,075.5 9,074.9 9,086.5 9,130.8 9,138.8 9,191.0 Deposit rate (av; %) 13.4 13.3 11.4 10.5 10.3 8.5 9.3 9.3 Discount rate (end-period; %) 18.5 18.5 18.5 16.5 15.5 15.5 14.5 14.5 Treasury bill rate (av; %) 16.3 16.4 16.5 16.3 14.4 12.4 10.2 9.5 M1 (end-period; C bn) 10,987.9 13,745.3 13,007.0 12,633.2 12,962.0 14,707.5 14,859.5 14,242.5 M1 (% change, year on year) 43.1 28.2 29.3 16.4 18.0 7.0 14.2 12.7 M2 (end-period; C bn) 21,794.0 25,645.0 24,656.0 25,389.5 25,272.2 28,041.8 29,428.7 26,998.0 M2 (% change, year on year) 40.3 27.4 24.7 20.2 16.0 9.3 19.4 6.3 GSE all-share index (end-period;1990-1993=100) 6,998 6,799 6,454 5,863 4,878 4,769 4,764 4,833 Sectoral trends Gold price, London (US$/troy oz) 401.3 434.0 427.1 427.3 439.5 485.6 554.0 627.4 Cocoa beans price, New York & London (US$/tonne ) 1,612.1 1,607.4 1,677.8 1,544.7 1,491.6 1,464.6 1,555.9 1,584.4 Foreign trade (US$ m)a Exports fob 733.5 664.5 730.8 716.4 676.6 678.4 963.6 895.4 Cocoa beans 306.0 179.4 305.8 254.3 176.1 172.2 360.1 262.8 Gold 195.5 219.5 222.9 231.2 225.6 266.1 293.9 320.5 Imports fob -1,034.9 -1,225.9 -1,175.8 -1,266.9 -1,488.3 -1,414.3 -1,465.7 -1,460.3 Trade balance -301.5 -561.4 -445.0 -550.5 -811.7 -735.9 -502.1 -564.9 Foreign reserves (US$ m) Reserves excl gold (end-period) 1,353.4 1,626.7 1,439.8 1,347.8 1525.4 1752.9 1,697.9 1,823.6 a Balance of payments basis. Sources: IMF, International Financial Statistics; Bank of Ghana, Quarterly Economic Bulletin; Statistical Bulletin; Ghana Stock Exchange.

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Outlook for 2007-08 Political outlook

Domestic politics During their second term in office the president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will intensify their focus on the need to deliver an improvement in the standard of living of ordinary Ghanaians and on carrying out donor-supported economic reforms. As the NPP!s first term in office failed to deliver these changes or a noticeable reduction in poverty, the government is under considerable pressure to produce results in its second term or face being voted out in the next presidential and legislative elections, due in 2008. Recent by-elections have shown that voters are increasingly focusing on economic issues. The pressure is likely to intensify, as the issue of how much progress has been made in developing the economy is becoming a national preoccupation as Ghana celebrates its 50th anniversary of independence in 2007. There are concerns that the government will resort to more populist policies, including high-profile prestige projects such as building sports stadiums or a second international airport. Although this may secure it a limited "goodwill" vote, the long-term economic benefits would be questionable. Ostensibly to improve the performance of the government, the president reshuffled his cabinet extensively in early 2006, reducing the number of ministers and ministries. However, as the NPP is close to selecting its presidential nominee for the 2008 election, the reshuffle was scrutinised for any insight into the fate of potential contenders. Some ministers with presidential ambitions were retained, which is bound to be seen as favouritism and is likely to cause divisions within the party that could hamper election campaigning and the government!s effectiveness. The reshuffle also seems to have sent out mixed signals in the battle against corruption, which has become increasingly controversial in recent months. Although some ministers facing corruption allegations were removed, others were not. This further strengthens the perception that Mr Kufuor!s "zero tolerance" campaign against corruption has been ineffective, and this will continue to weigh on the NPP!s popularity as the elections approach. Whether the NPP can secure victory in the elections will depend not only on its own performance but also on that of the opposition National Democratic Congress (NDC). The electorate!s view of the NDC has been clouded by allegations that violence and intimidation were used against those who apparently did not agree with the views of the former president, Jerry Rawlings, at its December congress. Such claims may again come to the fore should he attempt to control the nomination process for the NDC!s presidential candidate. There are rumours that Mr Rawlings!s wife, Nana Konadu Rawlings, will seek to gain the presidential nomination, raising fears of further strong-arm tactics by her husband to secure it for her. Already, in the wake of the contentious December congress, a splinter group has left the party and registered a new group, the Democratic Freedom Party (DFP). Although it is not yet clear to what extent the new party will attract voters, or NDC members of parliament, a lack of transparency in the nomination process may encourage further defections.

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Against this background, the NDC is likely to intensify its strategy of deflecting attention from its own weaknesses by seeking to discredit the NPP on as many issues as possible. The NDC has been assisted in this aim by public-sector strikes and unpopular rises in fuel prices that followed the removal of government subsidies in 2005. In addition, the NDC will try to ensure that controversy does not die away over recent corruption allegations against the government, as well as over recent legislation that allows Ghanaians not living in the country to vote in the 2008 elections. This is particularly important to the NDC, as the new legislation could deliver an increase in the NPP!s support base, because the business- and investor-friendly policies of the NPP are likely to be more in tune with the overseas diaspora. This issue could prove decisive in the event of a close contest. The NDC!s ability to deliver a decisive blow to the NPP will be hindered by the fact that its two decades in power, and particularly the closing stages of its final term in office in 1996-2000, are clouded by concerns about its record on economic management and by outstanding allegations of corruption. However, there is no doubting the NDC!s enduring popularity and the electoral threat that it presents to the NPP, demonstrated by the fact that it has won all the by- elections held since the last parliamentary election, in December 2004.

International relations Ghana will continue to play a leading role in regional affairs. Mr Kufuor is a prominent spokesman for the region, and Ghana is positioning itself as a key proponent of the New Partnership for Africa!s Development (Nepad). In particular, Ghana is promoting adherence to Nepad!s underlying principles, such as good governance and the process of peer review, having been one of the first countries to undergo a peer-review examination, in April 2005. The committee!s provisional conclusions were broadly positive, and it is claimed that Ghana!s co-operation played an important part in helping to jump-start the peer-review process. Mr Kufuor will maintain good relations with Ghana!s major trading partners and donors.

Economic policy outlook

Policy trends Although the government has announced that it will not renew its poverty reduction and growth facility (PRGF) following its expiry in October, the Economist Intelligence Unit does not expect economic policy to change significantly over the forecast period. As underlined in the IMF review of the PRGF in June, Ghana has had a relatively good record of policy implementation in recent years, and it will seek to remain in favour with donors by continuing to push ahead with economic reform, led by improvements in fiscal discipline and good governance. We expect that the government will opt for the IMF!s policy support instrument (PSI), in which no financial support is given but policy implementation is closely monitored to signal to donors that the country remains on track. This is likely to ensure a continuation of the current goals of strengthening public expenditure management and increasing revenue to ensure that the fiscal deficit remains relatively low.

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Nevertheless, as outlined in the latest poverty reduction strategy, produced in consultation with the IMF, there is likely to be a change of emphasis, with the government focusing increasingly on the creation of wealth through accelerated economic growth and less on economic stability. The government has a target of 8% annual growth in the medium term, but it would like to achieve at least 6% in the immediate future. It aims to do this by extending credit and support to the private sector, expanding and modernising agriculture, and expanding agro-processing-based manufacturing. However, it may take some time for this approach to make inroads into poverty, and the funding needed to finance such strategies exceeds the government!s current domestic revenue-raising capacity. Although aid inflows will remain high, they may still be insufficient for such purposes. Since the expiry of the PRGF, the government has suggested that it may seek to borrow externally from the commercial debt markets.

Fiscal policy In recent years the government has used the net domestic debt/GDP ratio as its stated fiscal policy anchor, rather than any particular spending targets or budgetary deficit. A low fiscal deficit has been important, but largely in the battle against inflation, while also allowing the Bank of Ghana (BoG, the central bank) to reduce interest rates. Moreover, the government has steadily reduced the budget deficit, from 9.7% of GDP in 2000 to 2% of GDP in 2005. Although greater control of expenditure (despite some slippages) has been an important element of this lower deficit, revenue growth"both from domestic sources and from high levels of donor support"has probably been more important. However, recent indications are of a change in the emphasis of government policy. This was apparent from the recent IMF-agreed Ghana Poverty Reduction Strategy II, which shifted the emphasis away from macroeconomic stability and towards a strategy that is likely to see an increase in government spending in order to drive growth. Although it appears from recent government statements as if much of the financing for this strategy is expected to come from external concessional loans and the international capital markets, we believe that the improved fiscal discipline of recent years will slip as the limited capacity of the government impedes its ability to control increases in spending. Although domestic revenue growth is expected to continue, it is likely to slow from the high rates of recent years, especially as the 2006 budget includes substantial tax cuts for individuals and businesses. This will give the government less scope to raise spending. Furthermore, in addition to the planned increases in capital expenditure, with elections approaching in 2008"and following strikes by doctors and teachers earlier this year"the government will face significant pressure to boost public- sector wages, especially in 2007, and to provide support for businesses. As a result, we expect the fiscal deficit in 2006 to increase for the first time since 2000, to 2.6% of GDP. The continuation of this looser fiscal strategy will see the deficit increase further, to 3.5% of GDP in 2007 and to 3.9% of GDP in 2008.

Monetary policy The BoG has had two competing and partly contradictory monetary policy aims in recent years. The first of these, and the main focus of monetary policy, has been to restrain liquidity growth with the aim of reducing the average annual inflation rate to single digits. This has been achieved through increased

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sales of foreign exchange, although this strategy has resulted in real appreciation of the cedi, but also through tighter financing of the fiscal deficit. The reduced deficit has been funded primarily through issuing Treasury bills rather than through more expansionary forms of credit to the public sector. As shown by the fall in inflation in 2006, this policy has largely been a success, even if, as we expect, Ghana will narrowly miss its inflation target for the year. However, perhaps as a result of increasing pressure from the government, which has one eye on securing noticeable economic benefits ahead of the 2008 elections, the BoG has also been lowering interest rates. This policy seeks to boost credit to the private sector and stimulate economic growth. However, in contrast to the monetary policy aim of reducing inflation, this has an expansionary effect on the money supply. The political pressures on the central bank are apparent from the fact that it continued to cut interest rates on the grounds that inflation was on a downward trend, even though the fall was modest and the rate remained in double digits (the last rate cut, in January, was by 1 percentage point, to 14.5%). Although we believe that the steady cuts in interest rates since mid-2005 have been premature, the central bank is likely to consider further reductions as long as inflation continues its downward trend (no matter how marginal the decline). However, overall, we believe that the BoG will continue to try to tread a careful path between these two policy aims throughout the forecast period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2005 2006 2007 2008 Real GDP growth World 5.0 5.3 4.6 4.8 OECD 2.6 3.0 2.2 2.4 EU25 1.7 2.7 2.2 2.2 Exchange rates ¥:US$ 110.1 116.2 105.0 97.5 US$:€ 1.245 1.250 1.363 1.338 SDR:US$ 0.677 0.681 0.645 0.644 Financial indicators ¥ 2-month private bill rate 0.00 0.23 1.13 2.00 US$ 3-month commercial paper rate 3.38 5.05 4.83 5.09 Commodity prices Oil (Brent; US$/b) 54.7 65.8 65.0 63.3 Cocoa (US cents/lb) 69.8 71.8 70.1 69.5 Gold (US$/troy oz) 445.0 631.5 700.0 650.0 Food, feedstuffs & beverages (% change in US$ terms) -0.5 12.3 -0.4 0.8 Industrial raw materials (% change in US$ terms) 10.2 48.8 -3.4 -10.6 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Although the global economy is growing rapidly, tighter policies in the developed economies are likely to cause world GDP growth (on a purchasing power parity basis) to slow from 5.3% in 2006 to 4.6% in 2007, before rising fractionally, to 4.8%, in 2008. Continued uncertainty on global markets and the

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weakness of the US dollar will keep the price of gold"Ghana!s main export" high in 2006, at an average of US$631.5/troy oz. Continued buoyant demand will push gold prices up further in 2007, to an average of US$700/troy oz. Coffee prices will trend downwards over the forecast period as global oversupply outweighs the speculative pressures that boosted prices in 2005. Continued high global demand and a lack of spare production capacity will keep international oil prices high, at an average of US$65/barrel in 2007. Increased production and reduced demand should ensure that oil prices fall slightly in 2008, although they will remain high, at an average of US$63.3/barrel.

Economic growth Despite a shortage of rain, which led to power shortages in the third quarter of 2006 that have affected mining output and are likely to have increased production costs for the industrial sector, Ghana!s real GDP growth is expected to be both broad based and robust, at 5.7% for the year as a whole. We expect this trend to continue over the forecast period. Following a record year for cocoa production in 2005-06, we expect growth in the cocoa sector, and in the agricultural sector in general, to continue to be strong. However, the outlook for industry is mixed. Manufacturers will continue to struggle, owing to the strong exchange rate, high inflation and growth in imports. High gold prices and new investment in the mining sector are expected to lead to a substantial rise in gold output. The services sector is expected to record strong growth, particularly telecommunications, transport, tourism and government services. Construction should also post robust growth, driven by donor- and government-funded infrastructure projects and housing development. Overall, we expect the current rate of real GDP growth to be maintained during the forecast period, with the economy set to grow by 5.8% in 2007 and 6% in 2008.

Inflation Inflation declined steadily in early 2006. In March the year-on-year rate moved into single digits (for the first time since May 1994), before falling further, to 9.5%, at the end of April. However, the year-on-year rate had risen again, to 11.4%, by the end of July, owing to the inflationary pressure of international petrol price rises. Although the stable cedi will help to keep import prices under control, several factors will make it difficult for the BoG to push inflation down much further in the forecast period. These include continued high international oil prices, which will result in steady increases in domestic fuel prices; expected tariff increases for utilities, most notably within the power sector, as low water levels have led to reduced hydroelectric production at the Akosombo dam; an expected loosening of fiscal policy that may include public-sector pay increases; and the BoG!s pursuit of lower interest rates. We therefore forecast that the government will miss its single-digit target, with inflation averaging 10.9% in 2006. As growth is expected to remain strong in 2007 and as most of these broad trends will be unchanged, we expect inflation to remain at around the same level (but a little lower, owing to decreased pressure from international petrol prices), averaging 9.2% for the year. By 2008 we believe that the expected loosening of fiscal policy will have had a noticeable inflationary effect, with the inflation rate climbing slowly, to average 10.5% for the year.

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Exchange rates The apparent use of a stable cedi as an anti-inflationary tool, particularly in 2005, has eroded the competitiveness of non-traditional exports and increased the volume of imported goods. These factors contributed to the large current- account deficit in 2005. The real effective exchange rate increased in value by over 10% during the course of last year. Although currency stability continued during the first three quarters of 2006, the cedi declined fractionally in real terms, possibly heralding a softening of the BoG!s policy in a bid to relieve pressure on the export sector in order to boost growth. Nevertheless, given high global prices for gold and cocoa, and rising remittances, we expect inflows of foreign exchange to be strong. We forecast that the cedi will fall back only modestly against a weak US dollar, from an average of C9,073:US$1 in 2005 to C9,179:US$1 in 2006 and C9,370:US$1 in 2007. An expected strengthening of the US dollar and a slight fall in the price of gold on international markets is likely to lead to a quicker depreciation in the value of the cedi in 2008, which we believe will average C9,700:US$1 for the year. However, given Ghana!s limited foreign-exchange reserves, its high dependence on commodity exports, and the fact that demand for foreign exchange is structurally higher than supply (owing to the economy!s import dependence and small manufacturing base), the cedi will remain vulnerable to external shocks, which could lead to a sharp collapse in its value, as occurred in 2000 and 2002.

External sector Ghana posted an unexpected surplus on its current account in the first quarter of 2006, owing largely to an increase in revenue from cocoa production and gold mining that narrowed the trade deficit. The current account was also supported by rising remittances and donor grants, which boosted current transfers. However, we expect the current account to post a deficit for the year as a whole, largely because of ongoing water shortages and power rationing, which is likely to curtail the rate of export growth in the second half of the year. In particular, power rationing has been extended to the mining sector, reducing gold production. Meanwhile, imports will continue to grow unimpeded. We expect the current account to post a deficit equivalent to 1.8% of GDP for full-year 2006. However, assuming a return to normal weather conditions, we expect a lower current-account deficit in 2007. A modest rise is forecast in overall exports; the mining sector is again expected to be crucial, with large increases in the value of gold exports as production from the Ahafo mine attains its optimum level and prices reach a forecast US$700/troy oz. Imports are also expected to rise modestly, owing to mining developments and robust domestic demand. However, to some extent the high level of imports will reflect goods in transit to neighbouring countries as uncertainty over the political situation in Côte d!Ivoire leads shippers to use Ghana!s ports. In addition, 2007 will be the first full year in which Ghana benefits from the reduced interest payments from the Multilateral Debt Relief Initiative (MDRI), which will offset increased profit remittances from mining companies on the income account. As a result, we forecast that the current-account deficit will fall to 1.6% of GDP. A probable slight fall in the price of gold, combined with the expected continuation of an inflated cedi, which will harm non-traditional exports, will result in an increase in the deficit in 2008 to 2.5% of GDP.

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Forecast summary (% unless otherwise indicated) 2005 a 2006 a 2007b 2008b Real GDP growth 5.9 5.7 5.8 6.0 Gross agricultural production growth 4.1 5.9 5.8 5.9 Consumer price inflation (av) 15.1 c 10.9 9.2 10.5 Consumer price inflation (year-end) 14.8 c 10.0 10.2 10.8 Short-term interbank rate 14.9 c 11.9 11.0 12.5 Government balance (% of GDP) -2.0 -2.6 -3.5 -3.9 Exports of goods fob (US$ bn) 2.8 3.3 3.6 3.8 Imports of goods fob (US$ bn) 5.3 5.7 6.0 6.4 Current-account balance (US$ bn) -0.8 -0.2 -0.2 -0.4 Current-account balance (% of GDP) -7.5 -1.8 -1.6 -2.5 External debt (year-end; US$ bn) 7.3 3.5 3.9 4.1 Exchange rate C:US$ (av) 9,072.5 c 9,178.9 9,369.8 9,700.2 Exchange rate C:¥100 (av) 8,242.1 c 7,900.9 8,923.6 9,949.0 Exchange rate C:€ (year-end) 10,770.7 c 11,992.7 12,982.7 13,042.8 Exchange rate C:SDR (year-end) 13,050.4 c 13,866.6 14,875.2 15,298.6 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Ghana Sub-Saharan Africa Ghana Sub-Saharan Africa 7.0 30.0

6.0 25.0 5.0

4.0 20.0

3.0 15.0 2.0 10.0 1.0

0.0 5.0 03 04 05 06 03 04 05 06 07 07 2002 2002

The political scene

Ghana holds local elections In September Ghana held elections for district-level assemblies and unit committees. In contrast to the highly partisan national politics, as outlined in the 1992 constitution the campaign for these positions must be party-free, with voters voting for individual candidates and not parties. This clause was introduced at the insistence of the then president, Jerry Rawlings, as a limitation on organised political opposition. However, on a positive note, as a result of the regulation, in the local elections local issues are discussed more prominently than would be the case if national parties competed. In addition, with no party funding and no parties organising the elections, diverse candidates have an equal opportunity to present their programme. The main campaign issues included promises to improve sanitation and education, the construction of school buildings, security, youth development and the empowerment of women, and the construction of local markets and boreholes.

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However, a less positive by-product of the no-party ruling is the lack of popular interest and low voter turnout and mobilisation. Exact figures are not available for participation levels; however, based on accounts from observers, voter turnout appears to have been low, especially in urban areas. In addition, in some areas there were difficulties in persuading candidates to stand in the elections. The Electoral Commission announced that in Western region there were no candidates for 433 of the 1,689 unit committees, which are the building- blocks of local politics, while a further 734 committees had insufficient candidates to hold an opposed election. What is perhaps of even more concern is that there are signs that these local elections are becoming more partisan. There is anecdotal evidence of skirmishes between supporters of the two major parties who had been backing a particular candidate. This was especially the case in rural areas, which is one reason why the turnout may have been higher there than in urban areas.

NDC prepares to nominate The local elections were, however, really just a minor distraction for the main presidential candidate parties, whose real focus of attention is now firmly on selecting a candidate for the forthcoming presidential election in 2008. The opposition National Democratic Congress (NDC) is to hold a national delegates congress on December 16-17th 2006 to nominate its presidential candidate. To date, four front-runners have emerged and completed the basic formalities to take part in the primary. Notably, all four candidates have stressed their ability to bring unity to the party. Ensuring that NDC representatives believe this message is likely to be key to any candidate!s success in gaining the nomination, given the breakaway movements from the NDC that have already reduced their electoral chances in 2008. However, the December conference and the nomination process will stretch this unity to the limit. The formation of the two largest breakaway movements, Goosie Tannoh!s National Reform Party in 1999 and Obed Asamoah!s Democratic Freedom Party (DFP) in 2005 (February 2006, The political scene) were precipitated by intimidation and the autocratic behaviour of pro-Rawlings factions at the NDC national congress. The NDC presidential candidates

• John Attah Mills: Mr Mills was vice-president between 1992 and 2000 and the presidential candidate of the National Democratic Congress (NDC) in 2000 and 2004. Mr Mills is close to the founder of the NDC, Jerry Rawlings, who may try to support Mr Mills in the party congress in December. • Eddie Annan: Mr Annan is a wealthy businessman and long-term NDC member and backer. Mr Annan contributed significantly to the Mills campaign in 2004 and has threatened to withdraw financing for the 2008 campaign if he does not secure the nomination. Although he is unlikely to gain nomination on this basis, Mr Annan is a popular choice among NDC supporters, and if he does not gain the nomination he may well be given the role of running-mate to the winner in the 2008 campaign in order to keep him close to the party. • Alhaji Iddrisu Mahama: Mr Mahama was one of the longest-serving defence ministers in Ghana!s history. In 2002, he contested the chairmanship of the NDC, which he lost to Obed Asamoah. He has been campaigning on two fronts: first, stressing the need to bring the Democratic Freedom Party back into the

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party fold; and second, focusing on the financing of NDC politicians, which he believes is corrupt. • Ekow Spio Garbrah: Mr Spio Garbrah was the NDC communications minister in the last NDC government. Mr Spio Garbrah has focused his campaign on discrediting Mr Mills, who he sees as his main rival, and in encouraging a more positive politics through increased pride in Ghana and opening up the political processes.

Mr Rawlings remains influential within the NDC and may seek to influence the outcome of the congress. However, after the splintering of the party in 1999 and 2005, any attempt by Mr Rawlings to impose a candidate on the party could threaten party unity. Mr Rawlings has insisted that he will remain neutral in the campaign; however, it is unclear if he will stick by this pledge. This is a struggle that goes to the very heart of the NDC and the role that Mr Rawlings plays in it. The former communications minister, Ekow Spio Garbrah, in particular represents a new generation of politicians using a different language from that of the older generation of NDC politicians, stressing the need not to be tied to old loyalties and for a more open, non-confrontational form of politics, both in the NDC and across the country. This more optimistic and less antagonistic strategy has revitalised the NDC, which had previously focused more on discrediting the policies of the ruling New Patriotic Party (NPP) than producing any positive political message. As a result, Mr Spio Garbrah has been propelled into becoming one of the favourites in the nomination race. However, his nomination, or that of a similar outsider, is far from certain, and the successful nomination of Mr Mills would be seen, both inside and outside the NDC, as, in effect, a continuation of the Rawlings dynasty. In 2000 and 2004 Mr Mills proved to be unable to motivate voters, and his nomination would reduce the NDC!s political chances in 2008. If the NDC does not win the election, and in particular with the ageing pro-Rawlings group still in control of the party, some commentators question whether the party will remain a major political force in the future. In this respect, the selection of the candidate for the 2008 election may help to decide the future of the NDC.

Breakaway party echoes In the meantime, the DFP continues slowly to establish its identity (The political Mr Spio Garbrah's call scene, February 2006). In an October interview with the Accra Daily Mail, the former acting general secretary of the NDC, now a senior DFP member, Bede Ziedeng, argued that the party was "concerned about issues affecting the welfare of the people of this country, the issue of living conditions of the people, the issue of development and how we can progress as a nation. We are not going to be dealing with the politics of insult, denigration, acrimony". This message of a more open and honest politics is markedly similar to the speeches of Mr Spio Garbrah, and some political observers believe that, if Mr Spio Garbrah wins the NDC presidential nomination at the December 2006 National Delegates Congress, an electoral pact could be established between the NDC and the DFP, even to the point of reintegrating the former NDC members into the party. Interestingly, having split from the NDC only in December 2005, in the same statement Mr Ziedeng did not rule out a possible alliance with the NDC, but instead argued that it was too early for the party to address this question. Indeed, there may even be a possibility that if

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Mr Spio Garbrah does not secure the NDC nomination he may choose to defect to the DFP with a view to taking over the leadership at some stage from its octogenarian leader, Mr Asamoah. He has denied that this is the case; however, if it were to occur, this would be likely to gift the NPP the 2008 election and hasten the decline of the NDC.

Two n ew NPP p re sid enti al The battle to lead the NPP into the elections has also continued to gather pace

aspirants in recent months, with two new candidates entering the fray: Kwabena Agyepong is a former press secretary to the president, John Agyekum Kufuor; and Dan Botwe is a former minister of information and previously the general secretary of the NPP. Both new candidates are younger than the current aspirants and have declared that they see themselves as a change from the old generation that they claim have failed Ghana. As a result, a new angle has been added to the NPP nomination contest, which has already been complicated by ethnic splits between Ashantis and non-Ashantis. However, as with the NDC nomination process, there is now a political battle emerging between the older and younger generations for control of the party. It is likely, given the recent electoral success of the NPP, that the party will not feel the need to opt for the younger candidates, although, of the two new entrants, Mr Botwe is seen as having the better chance of success. He is a skilful orator and an Akyem, leading to comparisons with the NDC!s Mr Spio Garbrah.

The minister of transport The NPP!s chances of success in 2008 have been hindered by a number of

resigns recent corruption scandals. The foremost of these involves Richard Anane, the minister of transport, who resigned in October following an investigation by the Commission for Human Rights and Administrative Justice (CHRAJ). The CHRAJ investigated alleged corruption, conflict of interest and abuse of power by Mr Anane when he was the minister of health. The 18-month investigation stemmed from an affair that Mr Anane had with a US citizen, Alexandria O!Brien. As a result of the affair, Ms O!Brien had a child and it is claimed that Mr Anane made a payment of US$100,000 in child support. The payment of such a large amount of money prompted the accusations of corruption. However, the CHRAJ cleared the minister of the corruption allegation, essentially due to lack of evidence, although it found him guilty of abuse of power and conflict of interest. Political analysts and media commentators have pointed out that Mr Kufuor should never have reappointed Mr Anane in the first place, but was instead blinded by his close friendship with him. This was due to a poor performance during parliamentary vetting in 2005 when these same issues were brought up. During the vetting, Mr Anane said that he had transferred only US$10,000 to Ms O!Brien and that US$70,000 was transferred by friends from their own personal resources and without any prompting from him. However, analysts were highly sceptical of these claims and it was assumed by many commentators that Mr Anane had gained the funds through graft. This view was reinforced by the fact that the roads and construction sector is widely regarded as the hub of corruption within the Ghanaian government, and earlier tape recordings, known as the Haruna Esseku tape, pointed to kickbacks from the road sector that involved Mr Anane. The fact that Mr Kufuor did not react

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swiftly to dismiss Mr Anane, and that Mr Anane was forced to resign because of issues that were already known to the president, has severely tarnished his anti-corruption credentials, regardless of whether Mr Anane is guilty or not.

Newspaper connection adds to Mr Anane received widespread support from NPP members. One of his

scandal possibilities supporters was George Kofi Adjei, the Nhyiaeso NPP constituency chairman, who accused The Statesman newspaper, its editor and owners of having a vested interest in exploiting the recommendations made by the CHRAJ. This followed a campaign by The Statesman to have Mr Anane removed. Interestingly, the implication of The Statesman brings a new dimension to the scandal. The Statesman is owned by Nana Addo Danqua Akufo-Addo, a non- Ashanti NPP member who is widely viewed as a potential successor to Mr Kufuor. However Mr Kufuor does not support Mr Addo Akufo-Addo!s campaign, but is instead believed to support either Kwame Addo Kufuor (the president!s younger brother) or Alan Kyeremanten to be the next leader of the NPP. According to Haruna Esseku, the former NPP national chairman, Mr Anane, who was a close ally of the president, was given the responsibility by the president of overseeing the financing and support of his chosen candidate. With Mr Anane being so close to attempts by the president to install a successor, but being forced to resign, in part by the efforts of an NPP-owned paper, some political analysts have regarded the scandal as the opening salvo in a political battle within the NPP to gain the candidacy for 2008.

Missing cocaine causes Another recent scandal in which the NPP has been implicated concerns the scandal disappearance of 77 packages of cocaine while in police custody. The cocaine was confiscated by the authorities following a raid on a ship, the MV Benjamin, when it was docked at Tema Harbour. There are allegations that several senior police officers accepted a US$200,000 bribe from a 23-year-old woman, Grace Asibi, who it is alleged is the girlfriend of a suspected Venezuelan drug baron, Vasquez Gerrado Duarte David. A committee, the Justice Georgina Wood Committee (JGWC), was set up to investigate the affair. However, after several weeks the committee reported back that it was unable to locate the 77 parcels of cocaine or indeed implicate anyone in its disappearance. The inability of the police to make any prosecutions resulted in the NDC describing the committee as a cover-up presided over by the NPP.

Increased tribalism worries As well as issues of basic government competency, there are ethnic elements to

many the scandal that have caused further problems for the NPP. These result from the linking of the Asantehene (the paramount chief of the Ashanti people), Otumfuo Osei Tutu II, to the affair. There is no hard evidence that the Asantehene has done anything wrong; however, his name was mentioned in tape recordings submitted as evidence to the JGWC, and his wife!s brother was questioned by the committee. However, the JGWC has not asked the Ashanti leader to report to them at all, something that critics of the NPP believe they should have done based on the implication that he may have some association with the scandal. As the Ashanti make up the core support basis of the NPP, this led to accusations from non-Ashanti groups that the NPP was protecting the Ashanti tribal leader.

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Angered by criticisms of the Asantehene, the two main tribal associations in the Ashanti heartland of Kumasi, the Ashanti Youth Association (AYA) and the Ashanti United Front (AUF), warned four journalists who had criticised the Asantehene not to set foot in Kumasi again and threatened them with "eradication". The threats were quickly condemned by senior NPP officials. However, one of the threatened journalists, Kwasi Pratt, the chief editor of Insight newspaper, underlined the unhealthy depth of the inter-ethnic tension, when he referred to the era of the Ashanti empire that dominated much of what is now Ghana up till colonialism. He argued that many Ashanti do not realise that their days of "medieval slave raiding" are over and that they act as if they are above the law. Such language and actions by both sides does not bode well for the 2008 election, when ethnic splits that mirror both party political and regional divisions may come to the fore.

Offinso South holds There were also some ethnic overtones to the Offinso South by-election that

by-election was held on October 24th. Four candidates contested the poll, following the death of the NPP member of parliament, Kwabena Sarfo, in August 2006. However, the only candidates with a realistic chance were Owusu Achaw Duah, contesting on the NPP ticket, and Barbara Serwaah Asamoah, representing the NDC. In the 2004 elections Mr Sarfo had won the seat for the NPP by polling 51.9% of the votes cast, while the NDC received 30.7%. However, despite what should have been a comfortable victory for the NPP, the three by- elections that had been held since 2004 had all been won by the NDC. As a result, the Offinso South by-election became a critical test for the two political parties ahead of 2008 and of the government!s popularity, or lack of it, following the recent corruption scandals and public-sector strikes. In the event, the election was won comfortably by Mr Duah and the NPP, with an increased majority of 65.5% of the public vote.

Offinso South by-election result Candidate Party Vote (no) Vote (%) Dr Owusu Achaw Duah National Patriotic Party 20,763 65.52 Barbara Serwaah Asamoah National Democratic Congress 10,666 33.66 Emmanuel Kwasi Addai Independent 177 0.56 Doris Appiah Democratic People's Party 84 0.27

Source: The government of Ghana website, www.ghana.gov.gh.

TheDagbon commitment crisis still to simmers peace is Tribal tensions have also remained high in the north of Ghana, after three

doubtful youths from the Abudu gate died in clashes with security personnel on August 25th following attempts to occupy the Gbewaa Palace at Yendi. Two others sustained injuries and were admitted to hospital. The clash came about as a result of attempts by some Abudu youths to take over the Gbewaa Palace and perform the funeral of the Ya-Naa Mahamadu Abudulai, who died in 1988. Given that the previous attempt to storm the palace resulted in the death of the Andani Ya-Naa (The political scene, August 2002), this attempt by the Abudu to storm the palace not surprisingly raised tensions significantly. However, of more concern for the longer-term outcome of the crisis is that the action leads to some doubt over the commitment of the Abudu to the "road map to peace", which both the Abudu and the Andani have signed up to in an attempt to resolve the conflict. The actions of the Abudu are a clear digression from the

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road map. Furthermore, perceptions that there are links between the NPP and the Abudu, which are held by many from the Dagbon ethnic group, owing to the fact that no Abudu has yet been arrested for the death of the Andani Ya- Naa, were further strengthened, as the police have made no arrests following the latest attack. However, the Abudu also doubt the Andani commitment to the road map. They point to a letter written by the Andanis to the Otumfuo Committee of Eminent Chiefs, a committee formed by the government to try to find traditional solutions to the Dagbon chieftaincy crisis, which suggested that the road map to peace document was not going to be honoured.

More efforts are made to find In an attempt to forestall further violence and keep the fragile peace in the

peace Dagbon area, the Otumfuo Committee held a closed-door meeting at the Asantehene!s Manhyia Palace in Kumasi following the incident. Members of the Committee who attended the crisis meeting included Otumfuo Osei Tutu II, who was the chairman of the Committee; Nayiri Bohagu Abdulai Mahami Sheriga, the paramount chief of Mamprugu; and Yagbonwura Bawa Doshie, the paramount chief of Gonja. The meeting was also attended by leaders of the Abudus and the Andanis; Alhaji Mustapha Idris, the Northern regional minister; Emmanuel Asamoah Owusu-Ansah, the Ashanti regional minister; and a number of top security personnel. The fact that the two gates are engaged in dialogue is encouraging, and following the meeting Mr Idris declared that the perpetrators of the violence and any perpetrators of future clashes would be dealt with severely. Furthermore, he appealed to the chiefs and elders to instil discipline into their youth to prevent them from taking the law into their own hands. He also asked the security services to be on "high alert" and to deal swiftly with any people trying to disturb the peace. Patrick K. Acheampong, the inspector-general of police, visited Yendi to access the situation on the ground and held a closed-door meeting with security personnel there. Since then, security has been escalated in the area.

Government implements The historical danger of such strains in the social fabric of Ghana can be seen

reconciliation proposals in the ongoing work of the National Reconciliation Commission (NRC). The NRC was set up to hear, investigate and document cases of people who suffered injustices, violations and human right abuses as a result of the country!s socio-political history from 1966 until January 7th 1993, focusing specifically on government actions under military rule. The commission recommended that compensation be paid to victims of abuse, and in October the government announced that it would accept the recommendations. Victims will be paid varying sums, ranging from C2m (US$220) to C30m (US$330) per person, depending on the extent of abuse or violation The list of beneficiaries to be paid each week is to be published each Monday, commencing on Monday October 16th 2006. The attorney-general and minister of justice, Joe Ghartey, said that the budget had already allocated C13.5bn (US$1.5m) for that purpose, and in the supplementary budget a further C27.4bn was allocated to the Ministry of Justice and the attorney-general.

Reconciliation has mixed In a statement, Ken Attafuah, the executive secretary of the Commission,

support summed up the NRC as an exercise in helping to heal the wounds of the past and an attempt to write an accurate Ghanaian historical record for the periods

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involved. However, the popular reaction to the NRC has been more mixed, with some people openly disagreeing even with its establishment, believing that it will be a waste of time and money and that it will create a deep wedge within the population rather than any kind of reconciliation. A straw-poll conducted by a radio station in the capital, Accra, showed that about 80% of respondents believed that the commission would not reconcile the nation. Instead, some local commentators believe that the reason behind the govern- ment!s willingness to undertake the NRC proposals has more to do with the popularity that it will gain from the generous payments. Certainly, the most vocal of the dissenters were NDC supporters, as the founder of the NDC, Mr Rawlings, was himself an unelected former military ruler in 1979 and in 1981-92. Unsurprisingly, the NDC alleges that the NRC is itself merely an attempt by the NPP to garner political points by discrediting Mr Rawlings ahead of the 2008 election. This allegation has been fuelled by the abrasive style of the NRC chairman, a former Supreme Court judge, Kweku Etrew Amua-Sekyi. In addition, the NDC claim that the focus of the NRC appears to have been placed on the Rawlings governments. However, given the proximity of the Rawlings era, as well as the many allegations of abuse from this period, this is understandable. In his first brief government, seven senior army officers, including three former heads of state, were executed in a purge; and in his second period in government there were many allegations of extra- judicial killings, disappearances and serious human rights violations.

Economic policy

Relations with the IMF remain The IMF has conducted its sixth and final review under the poverty reduction

good and growth facility (PRGF). Following the completion of the review, a final payment of SDR26.4 (US$39m) was made available to Ghana. In the concluding statement, the Executive Board praised Ghana!s economic performance over the course of the three-year facility, singling out policy implementation and financial sector reform as areas in which Ghana has been strong. The Fund further pointed out that it believed that good policy implementation was behind Ghana!s sound macroeconomic performance; real GDP growth increased from 3.7% in 2000 to 5.9% in 2005, and real GDP per head growth more than doubled, from 1.2% in 2000 to an estimated 3.2% in 2005. The Fund also praised the reduction in year-on-year inflation, from 40.5% in 2000 to 14.8% in 2005, despite a period of high world oil prices. Poverty-related spending also increased, from 4.7% of GDP in 2001 to 8.5% in 2005, and the IMF noted that, at its current development pace, Ghana could achieve the Millennium Development Goals of reducing poverty by half in 2012, well ahead of the 2015 target date. Although it is clear that growth has picked up in Ghana, the Economist Intelligence Unit believes that the IMF assessment is overly favourable. A considerable part of the pick-up in growth in Ghana in recent years has been driven by increasing production of commodities, in particular cocoa and gold, coupled with an increase in the international prices for these commodities rather than by improved policy. Moreover the pick-up in growth has still not

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improved the standard of living of the average Ghanaian, something that will prove to be a key election issue in 2008. This reflects the fact that, although real GDP growth has averaged 5.1% over the last five years, this is not enough to significantly affect the widespread poverty. A growth rate of 8-10% would probably be required to achieve this. As a result, with one eye to an election in 2008, the government is looking to move the focus of economic policy towards accelerating economic growth rather than the macro-economic stability that has been the main focus of recent IMF programmes. How the government will boost growth substantially in the coming years is still an open question. The government has indicated that it will seek to boost development spending. However, this clearly has fiscal implications. As recent fiscal data have shown, finding large increases in expenditure will require donor inflows to remain high. In addition, the potential problem of such a change in policy was underlined in the latest, and final, PRGF review by the IMF, which warned the government that in the future "the main challenge for Ghana is to find the necessary resources to fund a large increase in expenditure while preserving debt sustainability". Certainly, previous attempts by the government to gain funding from the international markets were not approved of by the IMF (August 2006, Economic policy).

PRGF receipts (US$ m unless otherwise indicated) 2000 2001 2002 2003 2004 2005 Funds received under PRGF 35.3 66.9 68.1 73.7 39.0 38.9 Total overseas assistancea 600.4 643.6 649.8 954.2 1,357.6 1,512.8b PRGF receipts as % of overseas assistance 5.9 10.4 10.5 7.7 2.9 2.6 a Disbursements minus repayments. Official development assistance is defined as grants and loans with a grant element of at least 25%, provided by OECD and OPEC countries with the aim of promoting development and welfare in the recipient country. b Economist Intelligence Unit estimate. Sources: IMF; OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients 2000-04.

The issue of how much the government can boost spending will therefore be central to the discussions with the Fund over Ghana!s new policy support instrument (PSI), which will replace the current PRGF. Introduced in a number of countries in the last six months, the aim of the PSI is to provide the government with the IMF!s approval of its macroeconomic policy, but without any formal lending programme. This reflects the fact that for most African countries the amount of funding provided by the IMF is minimal in the scale of overall aid inflows, but donors continue to support the idea that the IMF should be responsible for monitoring economic policy. However, negotiations over the agreement of a PSI between the Fund and the government are unlikely to prove completely straightforward. The government of Ghana has already indicated that in its opinion the new initiative will have less conditionality attached than the existing PRGF facility. In fact, the president, John Agyekum Kufuor, was recently quoted as saying that he believed that the role of the IMF and the World Bank with regard to Ghana should no longer be to provide aid and define policy, but instead to help to access investment. In effect, the government is hoping that a less rigorous programme will allow it to ease its fiscal stance and boost spending. The Fund, meanwhile, is keen to stress

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that that will not be the case and that a PSI will be just as rigorous in terms of policy support as a PRGF. Moreover, in anticipation of the agreement of a PSI, in the latest PRGF review the IMF has even outlined what it believes will be the framework of a future PSI. According to the IMF this will include: • enhancing growth-critical policies while maintaining the hard-earned macroeconomic stability; • further strengthening debt management; • deepening the domestic capital markets; and • creating the environment to access international capital markets in the appropriate circumstances.

Fiscal data is mixed What is also clear is that the government will have to keep donors on its side if it is to boost spending, as the most recent fiscal data for 2006 clearly suggest that the government will struggle to fund any large increase in spending through domestic sources (other than large-scale borrowing). Preliminary estimates up to the third quarter of the year show that total government receipts, comprising both revenue and grants, amounted to C23,210bn (US$2.5bn). This exceeded the end-September target of C20,274bn and is about 19.8% above what was recorded for same period in 2005. However, worryingly for the government, the gains have come from grants, and in particular from flows related to the Multilateral Debt Relief Initiative (MDRI), instead of from increased domestic revenue. Domestic tax revenue amounted to C15,912bn, slightly short of the programmed target of C15,935bn for end-September and a reduction in real terms on the C14,844.7bn earned in the same period of 2005. However, non-tax revenue, which includes grants, assistance under the IMF- World Bank!s heavily indebted poor countries (HIPC) debt-relief initiative and MDRI resources, amounted to C6,997bn, of which C1,930bn came from the MDRI. This exceeded the inflows for the same period in 2005 by 91.5%.

Domestic revenue needs to be The domestic revenue shortfall, although small, will therefore be of concern to

increased the government. Although the shortfall is due partly to over-optimistic GDP projections leading to an over-estimation of revenue targets, it also reflects chronic problems in the revenue collection system. The government is increasingly keen to clamp down on such problems, notably: • corruption among revenue agencies; • ineffective coverage of informal-sector economic activities; and • exemptions to many organisations, including non-governmental organisations, vested interests and the diplomatic community. As part of the long-term plan to address these problems, the Revenue Agencies Governing Board has said that it will increase efforts to tighten the revenue- raising process, in particular by widening the tax net to include the informal economy and ending corruption in the revenue-collection agencies. One reform already under way is the reintroduction of the "tax stamp" by the Internal Revenue Service. The tax stamp allows small-scale business and self-employed people to pay their tax on a periodic basis rather than after a once-yearly

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assessment. The new system will allow the purchase of the tax stamp in bulk and at a reduced rate in order to encourage the informal sector to pay it.

Execution of expenditure On the expenditure side, total payments for the January-September 2006 period

improves amounted to C25,482bn, including expenditure under the supplementary budget. This level of spending represents an 80% execution rate on programmed levels, compared with an execution rate of only 72% for the same period in 2005. Although this is an increase in the rate of execution, the inability of the government to fully spend its planned budget continues to cast a shadow on the extent to which the government is really capable of increasing spending as part of its growth-driven strategy. Certainly, without reform of the apparatus of government, in particular the civil service, there is a danger that increased spending will be squandered by an ill-equipped bureaucracy.

Award of funds from the Millennium Challenge Account

One development that will assist the government!s fiscal situation was an announce- ment in August by the US government of a five-year, US$547m aid package to be paid from the Millennium Challenge Account (MCA). The MCA is managed by the Millennium Challenge Corporation (MCC), established in 2004 by the US president, George W Bush, to direct funding to some of the world!s poorest countries in order to promote good governance, economic freedom and growth. The US$547m grant to Ghana is by far the largest grant yet made under the MCC initiative. Ghana is the ninth recipient of the aid programme, following grants to Madagascar, Honduras, Cape Verde, Nicaragua, Georgia, Benin, Vanuatu and Armenia. Overall, the work that will be undertaken with MCA funds in Ghana dovetails closely with the overall blueprint for development, the Growth and Poverty Reduction Strategy II (GPRS II 2006-09; August 2006, Economic policy). This programme is centred on wealth creation through an agricultural-led growth strategy and a vibrant private sector. In line with the aims of the GPRS, the funds are, in effect, broken down into two broad main areas. The first involves an agricultural and rural development programme with US$342m of funding. This will focus on initiatives to improve land tenure and to unlock access to credit for small farmers and agribusinesses, but will also involve improving access to education, water, sanitation and electricity in rural areas. The overall aim is to raise the income potential of farmers through focusing on the increased production of high-value horticulture and basic food crops, improving the transportation network, developing food-processing industries and handling facilities, and increasing living standards in rural areas. The other major component of the MCA award is transport, for which US$143m has been set aside. Work to be undertaken with these funds include the rehabilitation of a 14-km stretch of the main highway linking the international airport in the capital, Accra, and the port city of Tema, and the construction of 230 km of two-lane roads to improve access to agriculture markets and social services in the Central Afram Basin area.

Price of petroleum products is In late September Ghana experienced the first significant downward adjust-

reduced ment in the prices of petroleum products since the process of deregulation of the petroleum sector began early in 2005. From September 25th premium petrol has cost C36,466.61 (US$4) per gallon, down from C40,000, while gasoline or diesel has cost C35,395.52 per gallon, from a previous price of C37,000. The aim

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of the deregulation process is to see the private sector playing a more active role in the petroleum industry by setting a price for petroleum products at which the private sector!s participation in the importing, refining and marketing of the product is feasible. An additional aim of liberalising the sector was to eliminate the need for a government subsidy to the crude oil import bill"the subsidy paid on petroleum products had increased from US$350m to US$1.9bn between 1995 and 2005. Under the new system there are three main determinants of retail prices of petroleum products. These are: • the price of crude oil on the international market; • the dollar/cedi exchange rates; and • a composite set of taxes and levies, which include commission and margins to distributors and retailers. Given that the cedi has remained strong against a weakening US dollar and the price of oil has fallen in recent months on the international markets, a cut in the pump price of fuel had been expected for some time (August 2006, Economic policy). There was some opposition to the lowering of the price from the new oil marketing companies responsible for the sale of the product within Ghana. This was in contrast to their obvious eagerness to see price increases implemented. The oil marketing companies argued for a delay in the price reductions because they claimed that the stock at the Tema Oil Refinery had not fallen sufficiently to allow the refinery to order new stock at the reduced prices on the market.

Quarterly utility tariff The lowering of fuel prices is also likely to have been a key factor in the

adjustment is ended decision of the Public Utilities Regulatory Commission (PURC) to abolish the quarterly automatic adjustment of utility tariffs. This process had allowed utility companies to pass cost increases through to consumers on a quarterly basis. Instead, from now on utility companies seeking tariff adjustments are to apply to the PURC on an individual basis with detailed explanations justifying their request. Mr Kwame Pianim, the chairman of the PURC, said that the request for tariff reviews would be considered, with changes in costs, external develop- ments in the global energy industry and the operational efficiencies of the utility companies being taken into account. The PURC will continue to monitor developments in the utilities and, as the quality of service improves, tariffs may be raised in order to keep the utility companies financially sound while still giv- ing consumers value for money. Mr Pianim went on to explain that the decision not to pass on the tariffs to consumers was taken because the PURC believed that utility companies were making insufficient efforts to halt the decline in quality of services to warrant a tariff adjustment. This decision is likely to further reduce the inflationary pressure caused by the lowering of fuel prices.

Petrol price reduction will ease Although the petrol price reduction is timely for the New Patriotic Party (NPP)

inflationary pressure government, as the price of petroleum is one of the major factors influencing inflation, the government still has to resolve a number of other issues that potentially impact on inflation, notably growing pressure for wage rises. In

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particular, the government has been under significant pressure to grant generous wage concessions to striking civil servants. Although earlier in the year the Civil Servants Association called off the strike set for August 15th following the government!s agreement that a new salary scale be implemented from November 1st, the National Association of Graduate Teachers remains on strike and health workers who went on strike earlier in the year have threatened to do so again, potentially increasing the pressure on the government to grant further wage rises. Falling petrol prices will therefore reduce inflationary pressure and increase the government!s room to grant wage rises ahead of the 2008 elections.

Payment system project is to Together with a number of other African countries, the Bank of Ghana (BoG,

be implemented the central bank) is embarking on an ambitious project to implement a national electronic payments system. According to the BoG, the new system will include electronic funds transfer, a domestic Switch, a wide-area network, an automated clearing house, codeline cheque truncation and a smart-card payment system. Although banking analysts have praised the idea, some critics have noted that the reform will have limited impact, as Ghana has a large informal-sector economy with a low level of banking penetration. The main beneficiaries are therefore likely to be businesses and the minority who hold bank accounts. Having said that, there are wider potential benefits to the move, as a more efficient, electronic-based banking system should be better placed to develop low-cost bank accounts for a wider section of the population.

Interest-rate spreads hinder Although the introduction of a national payments system is welcome, it is

banking expansion arguably more important to push ahead with reforming more fundamental constraints to the financial sector, perhaps most crucially that of narrowing the large spread between the interest rates that banks charge for borrowing and lending. As part of a policy to achieve this, in January 2006 the BoG lowered the prime rate"the interest rate charged by the central bank to lend to private- sector banks"by 1 percentage point, to 14.5%. However, in response, the average base rate"the rate at which the banks lend to blue-chip customers"has declined by only 20 basis points, to 21.25%. Furthermore, the base rate is available only to blue-chip customers; the lending rate offered to all banking clients, which varies depending on the customer and the size of the loan, varies from 18.5% to 33.5% and averaged 26% in July 2006. In contrast, the rate that banks pay on deposits currently ranges between 7% and 10%, and even then these rates apply only to deposits in excess of specified amounts. Therefore, the interest-rate spread between what a bank earns on its loans and pays on its deposits averages around 18%, or 12.75% in the case of solely blue-chip clients. In real terms, the cost of credit is therefore higher than it has been for any year since the NPP came to power, except for 2004. The size of this spread is a major concern to policymakers, who believed that, with the prime rate and inflation declining, lending rates should be moving in tandem, decreasing the spread between lending and borrowing rates and increasing the use of private-sector credit. The government points to high banking costs and excessive profit-taking by banks as the cause. However, the banking sector counter-argues that the fusion of tribal law, custom and

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legislation surrounding land ownership is very unclear, making the use of land as collateral in loans difficult and the recovery of bad loans expensive, time consuming and quite often unsuccessful. This therefore makes the banking sector unwilling to lend unless at high rates of interest.

Interest rates (end of year) 2000 2001 2002 2003 2004 2005 2006a Prime rate 27.0 27.0 24.5 21.5 18.5 15.5 14.5 Inflation 25.2 32.9 14.8 26.7 12.6 15.1 10.9 Base rate 43.5 37.5 29.0 29.0 25.0 21.5 21.3 Average borrowing rate (demand deposit) 18.0 14.5 13.0 9.8 9.2 8.5 8.5 Base rate/borrowing rate spread 25.5 23.0 16.0 19.3 15.8 13.0 12.8 Real base rate/borrowing rate spread 0.3 -9.9 1.2 -7.4 3.2 -2.2 1.9 a At end July. Source: Bank of Ghana, Statistical Bulletin.

The domestic economy

Economic trends

Inflation falls again As highlighted by the IMF, inflation has been on a downward trend. However, how much further it will fall has been a subject of some dispute, following a rise in April that broke this trend. Nonetheless, new data released by the Bank of Ghana (BoG, the central bank) have confirmed that the downward trend in inflation has continued. Under the present government the year-on-year rate of inflation has declined from a high of 41.9% in March 2001 to a low of 9.5% in April 2006. However, an increase in inflation since April has ended the downward trend and cast some doubt over the direction of inflation over the rest of the year; the year-on-year inflation rate increased to 11.4% in July 2006 from 10.5% in June. The rise was the result of increases in the price of petroleum products implemented in the first half of 2006 that created transport and utility inflation; non-food inflation spiked by 3.6% month on month in July. However, even before the effect of the lowering of fuel prices in August could be passed through to the inflationary environment, the year-on-year inflation rate fell to 11.2% in August and then to 10.8% in September. The BoG is yet to release a breakdown of inflation for this period; however, with the main Ghanaian crop harvest period between July and the beginning of October, the reason for the fall is likely to have been a reduction in food price inflation.

Changes in consumer price index (% change) 2004 2005 2006 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Combined 5.5 4.9 0.5 0.5 10.1 4.0 -0.2 0.4 5.4 Food 7.1 8.2 -0.4 0.1 8.7 6.5 -0.7 -0.1 5.3 Non-food 3.8 1.4 1.5 1.0 11.6 1.4 0.4 1.0 5.3 Transport & communications 4.9 1.4 0.1 1.0 26.9 2.5 1.3 1.7 12.5 Housing & utilities 7.3 2.0 4.8 3.9 17.0 0.6 -1.3 0.6 7.1

Source: Bank of Ghana, Statistical Bulletin.

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Despite the successes of the present government in tackling it, inflation remains above the average for Sub-Saharan Africa. In 2005 inflation in Ghana averaged 15.1%, while inflation in Sub-Saharan Africa as a whole averaged 10.8%, or just 6.9% when the distorting effects of Zimbabwe!s inflation are removed. An even more telling comparison shows that the inflation rate of countries that had reached completion point under the IMF-World Bank!s heavily indebted poor countries (HIPC) initiative averaged 8.2% in the same year. Ghana!s comparatively high inflation rate is likely to reflect a number of structural factors, in particular the length of time that it has taken to dampen the infla- tionary expectations that had been caused by many years of fiscal slippages and the imported inflation resulting from the devaluation of the cedi in 2000.

The cedi remains stable Although the cedi continued to trade within a narrow range against the US dollar in the third quarter of 2006, it depreciated against the UK pound and the euro, by 10% and 8.5% respectively. This followed a modest strengthening of the US dollar following falls in the first half of 2006. BoG records also show that the foreign-exchange market has experienced a significant increase in depth, as seen in an increase in interbank trading. Purchases and sales of foreign exchange by the private-sector banks and foreign-exchange bureaux increased by 14.4%, to US$4.26bn, over the period January-August 2006. In terms of currency composition, data for August 2006 show that the US dollar accounted for 84.8% of total transactions in the foreign-exchange market. This reflects the fact that the two major trade transactions, crude oil and cocoa, are usually both conducted in US dollars.

Exchange rate, 2006 (C:US$; scale inverted)

9,100 9,120 9,140 9,160 9,180 9,200 9,220 9,240 9,260 9,280 Jun Jul Aug Sep Oct

Source: Bloomberg.

Agriculture

Cocobod increases cocoa price The Ghana Cocoa Board (Cocobod) has announced that, with effect from October 13th 2006, the producer price for cocoa for the 2006-07 cocoa season will be raised from C9m/tonne (US$979/tonne) to C9.15m/tonne. Announcing the new prices, the chief executive of Cocobod, Isaac Osei, said that this had been made possible because of a higher price than expected for the produce on the international market. Furthermore, Mr Osei noted that during the 2005-06 season Cocobod had sold its cocoa at an average price of US$1,487, compared

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with the average international market price for the season of US$1,450, thereby earning a premium for Ghanaian cocoa. In addition, cocoa farmers will be paid bonuses for their production for the 2005-06 crop year totalling C178bn (US$19.4m). This is the first time in three years that the government has paid bonuses under a scheme that was introduced in 2001.

Ghana has record cocoa year The price increase was part of an overall package of incentives that the government has offered the country!s cocoa farmers following a record year for cocoa production. In the 2005-06 crop year Cocobod estimates that it purchased 740,457 tonnes of cocoa, up from the projected output of 550,000 tonnes. This surpassed the previous record of 736,911 tonnes achieved in the 2003-04 crop year. Cocobod!s target is now to reach 1m tonnes in the near future. Other items in the package are an expanded road-tarring project and solar lighting systems that will be fixed in remote cocoa-growing villages. These are aimed at improving the standard of living of farmers and their families in rural areas. However, there are problems that remain and that must be overcome in order for the new Cocobod target to be realistic. These include purple beans resulting from a too-short fermentation period, congestion at takeover centres and delays in paying for cocoa purchased from farmers.

Cocoa production ('000 tonnes; crop years) 2001/02 2002/03 2003/04 2004/05 2005/06 Côte d'Ivoire 1,220 1,360 1,386 1,273 1,195 Ghana 306 497 737 583 740

Source: ED&F Man.

Some increased production The government has been at pains to emphasise that the increased production

may be from Côte d'Ivoire was not due to smuggling of cocoa from neighbouring countries, in particular Côte d!Ivoire, into Ghana, but to domestic policy initiatives by the government. In particular, the government has highlighted that it has initiated a number of reforms, including a massive spraying programme to control pests and disease, and effective re-engineering to increase production from older cocoa trees. However, most commodity traders argue that, just as Ghanaian cocoa was smuggled into Côte d!Ivoire when the latter paid higher prices, so cocoa from Côte d!Ivoire is likely to be smuggled into Ghana. This point is reinforced by the fact that cocoa farmers in Côte d!Ivoire went on strike in October because of the low producer prices paid to farmers.

Infrastructure

Power rationing is started The Volta River Authority (VRA) and Electricity Corporation of Ghana (ECG), the two bodies responsible for the generation and supply of power, began electricity rationing throughout Ghana from July 2006. This is as a result of low water levels at the Akosombo Dam, the main source of electricity in Ghana. In July water levels dropped to 236 ft 8 ins, the lowest-ever level in the history of the dam. The minimum technically approved level for electricity production is 240 ft. As a result, the VRA has been forced to embark on a load-management programme to optimise the use of the available water in the reservoir, with the

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intended goal of restoring the lake to a level where normal electricity production can be resumed. However, local commentators have blamed the problem on a lack of foresight in anticipating the increasing demand for energy. Currently, all the sources of power in Ghana produce a total of 1,778 mw, and demand for energy in Ghana is growing by an average of 12% a year. A lack of foresight seems particularly applicable to the case of the VRA and the resumption of operations by the Volta Aluminium Company (Valco) in 2005. Not only has Valco increased the demand for power from the ageing Akosombo Dam, but the agreement with the VRA means that it is purchasing the electricity at below the market price (August 2006, The domestic economy: Infrastructure). The extent of this subsidy was clearly shown in the 2006 supplementary budget, when C320.1bn (US$35m) was earmarked to be paid as a subsidy to the VRA for energy consumed by Valco (August 2006, Economic policy).

Power generation (gwh) 2004 2005 Takoradi thermal (combined cycle) 535.5 831.4 TICO (simple cycle) 222.6 327.7 Akosombo hydro station 4,404.4 4,718.1 Kpong hydro station 876.5 910.6 Total domestic production 6,039.0 6,786.8

Source: Ministry of Energy.

Another source of concern over the VRA!s and ECG!s management of electricity is the high level of illegal connections. Anecdotal evidence suggests that people and businesses have been illegally connected to the national grid and that they do not pay for the energy they use. In an effort to reduce this, as well as to attempt to quantify the impact of illegal connections, the government plans to introduce pre-paid meters for the ECG and the VRA. This, it is claimed, will allow energy companies to maintain closer control of electricity use and to proactively find those exploiting an illegal power supply.

Power shortages will affect As part of a long-term strategy to boost electricity production, the VRA plans to

business install a 300-mw thermal plant estimated to cost US$300m in Tema. However, this will not be ready for at least two years. In the meantime, the VRA is to build a 120-mw emergency thermal power generator at Tema, which will be ready at the beginning of 2007, in case levels at the Akosombo Dam fall again before the plant is ready. However, until this is installed power outages will continue. For economic activity in particular, most of the large companies have resorted to the purchase and use of private power generators to be able to meet their power needs without any interruptions. As a result, their costs of operation are likely to increase, making them less competitive. The mining and manufacturing companies have been the hardest hit in this case. Many of the micro, small and medium-scale enterprises that cannot afford the generators have had to close down for prolonged periods. The Economist Intelligence Unit therefore expects that power rationing will detrimentally affect the overall performance of GDP in 2006.

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West Africa Gas Pipeline As part of the long-term solution to the energy problem, the Resource Centre project is under way for Energy Economics and Regulations has launched its Guide to Natural Gas in Ghana. The guide is intended to provide information about natural gas supply ahead of the start of its transfer to Ghana via the West African Gas Pipeline (WAGP) in 2007. The pipeline runs for 1,033 km, from Nigeria to Ghana, with branches extending to Benin and Togo. The gas will be used to generate electricity for domestic and industrial use. Plans to transport the gas to domestic homes for use in heating and cooking are unrealistic given the infrastructural requirements needed. The gas through the WAGP will serve as a replacement for the crude oil that is currently being used for fuelling the Takoradi thermal plant (TTP). It is estimated that about 80% of the gas will be channelled into powering the TTP and the remaining 20% to Tema for industrial purposes. The first power plant to use natural gas, to be constructed in Takoradi, replacing the TTP, will generate an additional 660 mw on present levels. More power plants are planned as the pipeline is extended through Ghana.

Mining

Mining firms come under In August Stephen Asamoah Boateng, the minister of local government, rural

attack development and environment bemoaned the state of infrastructure in mining communities in the country, saying that the facilities in some of the areas encouraged "abject poverty, serious deprivation and wretchedness". Mr Asamoah Boateng, singled out as examples the townships of Tarkwa, where a mine is operated by a South African company, Goldfields Ltd; Obuasi, where a mine is operated by a UK-listed company, Anglogold Ashanti; and Konongo, where a mine is run by another UK-listed company, African Gold. The environment minister made the remarks during a visit to the Wassa West district of the Western Region. Mr Asamoah Boateng advised that the various district assemblies should sit down and negotiate improved economic, social and infrastructural development for their respective areas. Furthermore, he said that his own ministry would look at the activities of mining companies with regard to ecology and resettled communities. As a result, pressure on mining companies can be expected to grow, particularly in the run-up to the 2008 elections, when tough action against digressions by multinationals is likely to be a vote-winner.

More demonstrations are held These comments have come at difficult time for the mining industry in Ghana,

by local communities notably in the Wassa area. In September four local communities held a demonstration against a Canadian mining company, Golden Star Resources Limited, highlighting what they perceive to be gross disrespect to the local tribal chiefs, unemployment and environmental problems in the town of Akyempin. The demonstrators wore red arm-bands, burned lorry tyres and paraded the streets. A spokesman for the protestors said that, after five years of the mine!s operations in the area, there had been no meaningful development. He went on to complain that the roads were bad, there was no reliable source of drinking water and that, with the operational area of the mine only about 100 metres away from the community, the impact of blasting, noise and dust was adversely affecting the health of the local people. He claimed that attempts

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to interact with the officials of the mines had been rebuffed and that the local people were denied access to mining properties. In July the Wassa Association of Communities Affected by Mining condemned AngloGold Ashanti for the shooting of a suspected small-scale miner (known as a galamsey) named Awudu Mohammed. Anglogold claimed that Mr Mohammed had been operating illegally on its Obuasi mine but denied shooting him, instead claiming that he had fallen on spikes while trying to scale the fence. However, a medical report confirmed gunshot wounds as the cause of death. Anglogold!s denial of the shooting has served to anger local groups.

Mining groups are making Not surprisingly, mining groups have started their own campaign against the

some progress negative publicity. At a recent exhibition the president of the Ghana Chamber of Mines said that mining companies had spent about C174bn on social responsibility programmes between 2003 and 2005, as well as C646bn paid as royalties to the government over the same period. Critics who oppose mining activities were quick to point out that such expenditure was insignificant when compared with the profits repatriated by mining companies. They estimate that only 5% of the total profit from mining activities is retained in Ghana, while some 95% is repatriated. However, improvements in the social and environmental responsibility of mining groups are taking place as the government and citizens of Ghana look for increased local benefits from buoyant commodity prices. An Australian company, Newmont Mining, was recently loaned US$125m by the International Finance Corporation, part of the World Bank, for its Ahafo mine in order to limit its environmental impact and ensure that best practices are observed for the resettlement of local communities (August 2006, The domestic economy: Mining).

Foreign trade and payments

Ghana posts surprise current- The latest data from the Bank of Ghana (BoG, the central bank) reveal that

account surplus Ghana posted an unexpectedly large surplus on its current account in the first quarter of 2006. The BoG estimates that the current-account surplus was US$393.7m, as opposed to a deficit of US$229.9m in the last quarter of 2005 and of US$90.4m in the first quarter of 2005. The main cause of the turnaround in the current account was an increase in the positive balance on the services, income and transfers balance, which recorded a surplus of US$735m, compared with a surplus of US$354.6m in the comparative quarter in 2005. This was despite an increase in the deficit on the services account caused by higher costs to pay for burgeoning imports. The increase in the surplus on the services account is due to debt write-offs, and, in particular, the Multilateral Debt Relief Initiative (August 2006, Foreign Trade and Payments). In the first quarter of 2006 the IMF officially wrote off its debt with Ghana and, as a result, the BoG passed a credit of C1.9trn (US$207m) across the services line of the current account. However, whether or not this is the correct statistical method for treating the IMF write-off is still unclear. The IMF has treated the write-off as a one-off repayment, which in effect is a current transfer. However, to date the Economist

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Intelligence Unit has treated it as a capital-account transaction with no implication for the current account. We have also treated the subsequent African Development Bank and World Bank write-offs in a similar fashion. What is clear is that if the BoG were to treat the World Bank write-off in a similar fashion to the IMF one, this would have a major distorting effect on the current account for the year. Furthermore, the trade deficit in the first quarter of 2006 was lower than in previous quarters. Booming cocoa and gold exports caused a rise in merchandise exports to US$953.3m, from US$730.8m in the first quarter of 2005; a bumper cocoa harvest meant that cocoa exports increased to US$360.1m, from US$305.7m in the first quarter of 2005, while a rise in global gold prices combined with increased production led to the value of gold exported posting a 31.9% increase, to US$293.9m, compared with the same quarter in 2005. However, although the value of imports increased, the increase was tempered by a reduction in the value of oil imported. The value of imported oil was US$156.3m in the first quarter of 2006 compared with US$214.2m in the first quarter of 2005, despite significant increases in the international price of petroleum. The cause of the decline was the shutting of the Tema oil refinery for maintenance.

Country Report November 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006