Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No. P- 7311 Gil
REPORT AND RECOMMENDATION
OF THE
PRESIDENT OF THE;
INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized TO THE
E:XECUTIVE DIRECTORS
O'N A
PROPOSED SECOND ECONOMIC REFORM SUPPORT OPERATION CREDIT
oF SDR 132.7 MILL:ION (US$180 MILLION EQUIVALENT)
TO5
Public Disclosure Authorized T'HE REPUBLIC OF GHANA
May 4, 1999 Public Disclosure Authorized
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS
Currency Unit = Cedi (0) US$1.00 =2418 (March 31, 1999)
WEIGHTS AND MEASURES Metric System
FISCAL YEAR
January 1-December 31
ABBREVIATIONS AND ACRONYMS
ADB Agricultural Development Bank APL Adaptable Program Lending BHC Bank for Housing and Construction BOG Bank of Ghana BPEMS Budget and Public Expenditure Management System CAS Country Assistance Strategy CEPS Customs, Excise and Preventive Service CG Consultative Group COCOBOD Cocoa Board COOP Cooperative Bank CWIQ Core Welfare Indicators Questionnaire DIC Divestiture Implementation Committee EC Energy Commission ECG Electricity Company of Ghana ERP Economic Recovery Program ERSO Economic Reform Support Operation ERSO 11 Second Economic Reform Support Operation ESAF Enhanced Structural Adjustment Facility GCB Ghana Commercial Bank GDP Gross Domestic Product GNPC Ghana National Petroleum Cooperation GOIL Ghana Oil Company GLSS Ghana Living Standard Survey IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IRS Internal Revenue Service LBC Licensed Buying Company LDP Letter of Development Policy LIL Learning and Innovation Loan MIGA Multilateral Investment Guarantee Agency MTEF Medium Tenn Expenditure Framework NGO Non-governmental Organization NIB National Investment Bank NRS National Revenue Service PBC Produce Buying Company
Vice President Jean-Louis Sarbib Country Director Peter Harrold Technical Manager Charles P. Humphreys Task Team Leader Rocio Castro FOR OFFICIAL USE ONLY
PEPTA Public Enterprise and Privatization Technical Assistance PFP Policy Framework Paper PUFMARP Public Financial Management Reform Program PURC Public Utilities Regulatory Commission RAGB Revenue Agencies Governing Board SDR Special Drawing Rights SSB Social Security Bank TIN Tax Identification Number TOR Tema Oil Refinery WAEMU West African Economic and Monetary Union VAT Value Added Tax
This operation was prepared by a team consisting of Rocio Castro (Senior Economist and Task Team Leader, AFTM4), Ulrich Hess (Economist, AFTM4), Camille Lampart (Economist,World Bank Ghana Office), Gerard Byam (PrincipalEconomist, AFTPS), Paul Murgatroyd (Lead Specialist,AFTPS), Joel Maweni(Senior Financial Analyst,AFEN), SolomonBekure (Senior OperationsOfficer, World Bank Ghana Office), Said Al Habsy (Legal Counsel,LEGAF). Contributionswere receivedfrom Theresa Jones (Country Progam Coordinator, AFCIO), Oliver Campbell-White(Senior Public Enterprise Specialist, AFTPS),Mangesh Hoskote (Power Sector Specialist,EMTEG), Snorri Hallgrimssom(Principal Engineer, AFTT2),Gunter Heidenhof (Senior Public Sector Management Specialist, World Bank GhanaOffice), Jose Sokol (Lead Economist,AFT4) and Luis de Azcarate (Consultant,AFTM4). Peer Reviewers were Sudhir Shetty(Principal Economist, AFTM1) and Heman Garcia (PrincipalPower Engineer,EMTEG). Al Crego (ReasearchAnalyst,AFTM4) and Ann Martinov (Team Assistant)provided operationalsupport.
This document has a restricted distibution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. REPUBLIC OF GHANA SECOND ECONOMIC REFORM SUPPORT OPERATION CREDIT TABLE OF CONTENTS
Credit and Program Summary ...... , i
L THE ECONOMY .1 A. Background. B. Recent EconomicDevelopments .2
R. GHANA'S ADJUSTMENT PROGRAM ...... 3 A. RestoringMacroeconomic Stability .4 B. Structural Reform Efforts .6 C. HumanDevelopment and PovertyReduction ...... 12 D. Medium-TermOutlook and FinancingRequirements ...... 12
IIL THE PROPOSED CREDIT ...... 14 A. CreditRationale and Components...... 14 B. SpecificActions Supported by the Credit...... 15 C. PovertyImpact ...... 16 D. Link to the CAS ...... 17 E. CreditAmount, Disbursement Procedures and ImplementationArrangements ...... 17 F. ProgramBenefits and Risks...... 18
IV. BANK GROUP OPERATIONS AND COLLABORATION WITH OTHER DONORS .... 19
V. RECOMMENDATION ...... 20
Annexes
A. Matrix of Policy Actions B. Ghana at a Glance C. Key Economic Indicators D. External Financial Requirements E. Social Indicators of Development F. Status of Bank Operations G. Impact Indicators H. Timetable of Key Processing Events 1. Letter of Development Policy J. Policy Framework Paper REPUBLIC OF GHANA SECOND ECONOMIC REFORM SUPPORT OPERATION CREDIT
CREDIT AND PROGRAM SUMMARY
Borrower: Republic of Ghana
Amount: SDR 132.7 million (US$180 million equivalent, which includes US$1.8 million IDA Reflows)
Terms: Standard IDA terms with a maturity of 40 years
Description: The proposed Credit will seek to consolidate recent gains in restoring macroeconomic stability and will support the implementation of a deeper and more challenging phase of the reform program in the cocoa, energy, and banking sectors. The proceeds of the Credit will help cover the external financing requirements of Ghana in the context of a vulnerable external position and low level of external reserves. Moreover, by generating counterpart funds for the budget, the Credit will also assist in reducing the government's domestic financing requirements and help support a downward trend in inflation and interest rates, thereby reducing the country's heavy domestic debt burden.
Benefits: Successful completion of the program will enable the Government to create firmer grounds for sustained private sector-led and poverty-reducing growth. In addition to establishing a favorable environment for the private sector, the reduction in inflation will have a beneficial impact on the poor. The anticipated decline in interest rates and reduced debt service payments will allow an expansion of private sector credit as well as increased budgetary allocations to the social sectors. Moreover, proposed reforms in the cocoa sector will boost exports and have a positive impact on the incomes of farmers with significant multiplier effects on the rural economy where most of the poor live. Reforms in the energy sector intended to facilitate private sector participation in power generation and distribution are likely to enhance private investment prospects. Finally, banking restructuring will improve the soundness of the financial system and eliminate sources of quasi-fiscal deficits and inefficient allocation of financial resources.
Risks: As shown by past experience, there is a potential risk of policy slippage in the run-up to elections in the year 2000. The Government is quite aware of this risk and, more importantly, of the damaging effects on the population of repeated policy failure. In this regard, the Government has, over the past two years, demonstrated greater commitment to fiscal discipline and has reinstated politically sensitive measures such as the VAT and the rise in electricity tariffs. ii
The Govemment will likely face opposition to some reforms, i.e., the opening of cocoa exports to private operators, from special groups who may perceive proposed changes as a threat to Ghana's quality standing in the world market as well as to their economic interests. To mitigate this risk the Government has opted to implement reforms in a gradual manner and engaged in wide consultations with stakeholders. Finally, while the export price for cocoa is expected to recover over time after its recent downfall, prolonged depressed prices could offset gains from proposed reforms. The Government's ability to manage external shocks from commodity prices (including gold and timber) is limited in the short terma.
Disbursement: The Credit will be disbursed in three tranches, one of them being a floating tranche. The first tranche in an amount equivalent to US$80 million will be released upon effectiveness. The second and the floating tranches in amounts equivalent to US$80 million and US$20 million, respectively, will be disbursed upon completion of agreed actions.
Map: IBRD23606 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND ECONOMIC REFORM SUPPORT OPERATION CREDIT TO THE REPUBLIC OF GHANA
1. I submit for your approval the following report and recommendation on the proposed Second Economic Reform Support Operation (ERSO II) to the Republic of Ghana for SDR 132.7 million, an amount equivalent to about US$180 million, on standard IDA terms. The Credit is proposed as a three tranche operation, including a floating tranche, that would underpin the Government's adjustment program. The proposed Credit seeks to consolidate recent gains in restoring macroeconomic stability and to support the implementation of difficult reforms in the cocoa, energy, and financial sectors. The proposed Credit will also assist in covering Ghana's external financing requirements for the period 1999-2000.
I. THE ECONOMY
A. Background
2. Since 1983, the Government of Ghana has implemented a gradualist adjustment strategy under the Economic Recovery Program (ERP), designed to stabilize and liberalize the economy. The program succeeded in reversing the profound economic decline suffered in the decade preceding the ERP. Since then, real Gross Domestic Product (GDP) and per capita income have consistently increased at an average annual rate of about 5 and 2 percent, respectively. However, the political liberalization that began in the early 1990s brought about a resurgence of macroeconomic instability and slowdown of reforms which threatened to undermine the economic and social gains achieved thus far. Against this background, since 1997 the Government has taken decisive steps to bring the macroeconomic program back on track and to accelerate structural reforms.
3. Early Stabilization and Reforms. Initial stabilization efforts centered on reducing budget deficits through enhanced revenue mobilization. Fiscal revenues rose from 6 percent of GDP in 1983 to 15 percent of GDP in 1991, allowing for increased public investment, which had collapsed prior to the ERP, and for reduced fiscal deficits. Fiscal and monetary restraint brought down inflation from a peak of 142 percent in 1983 to 10 percent by the end of 1991. Structural reforms focused on removing price controls, liberalizing the trade and foreign exchange regime, and simplifying the regulatory framework for private investment. The Govemment also began a program to divest from parastatals and to restructure the financial sector. 2
4. Adjustment Setbacks. Ghana's adjustment process suffered significant setbacks between 1992 and early 1997. Higher than planned public spending in the run up to the first democratic elections in 1992 and later in 1996 worsened fiscal imbalances and increased inflationary pressures. The domestic rate of inflation averaged 40 percent during the 1993-96 period, peaking at 71 percent in 1995, while the exchange rate depreciated sharply against the dollar. Increased reliance on treasury bills to finance large fiscal deficits and absorb excess liquidity led to a rapid increase in domestic debt, high real interest rates, and a sharp increase in debt servicing obligations. Unbudgeted expenditures and increased non-concessional borrowing in the second half of 1996 and early 1997 caused a one and a half year delay in support under the Enhanced Structural Adjustment Facility (ESAF) arrangement with the Fund. Moreover, key policies were reversed in the midst of considerable social unrest: a 17.5 percent value added tax (VAT) was repealed shortly after its introduction in June 1995 and a 200 percent increase in electricity tariffs was withdrawn in May 1997.
5. Poverty and Social Indicators. Social indicators improved since the inception of the ERP, after a marked deterioration during the preceding decade. According to the third Ghana Living Standard Survey (GLSS3), the incidence of poverty fell between 1987 and 1992 from 36 percent to 31 percent. The reduction in poverty was predominantly a rural phenomenon brought about by the growth in non-farm income, mainly from wholesale and retail trading, while urban poverty increased, mainly in the Accra area. While most of Ghana's social indicators compare favorably with average levels for Sub-Saharan Africa, some indicators appear to have worsened more recently. The 1997 Core Welfare Indicators Questionnaire (CWIQ) indicates that public health has improved with declining levels of sickness while literacy rates have decreased. Poverty predictors from CWIQ, such as household assets, also suggest that more Ghanaians may be below the poverty line than in 1992. More definite results will be available once the GLSS4 is completed in June this year.
B. Recent Economic Developments
6. Ghana's macroeconomic situation began to turn around in 1997. The domestic primary surplus (defined as domestic revenues minus domestically-financed non-interest expenditures) increased sharply from 0.3 in 1996 to 3.2 percent of GDP as a result of substantial expenditure cuts, while inflation was brought down from 33 percent to 21 percent. On the structural front, the Government signaled its intention to move ahead with unfinished reforms. In February 1998, Parliament passed the VAT law for its re- introduction later in the year and electricity tariffs were increased by 90 percent. These actions paved the way for the resumption of the second annual ESAF arrangement in March 1998 as well as the approval of IDA's most recent adjustment credit in June 1998.
7. Economic Performance and Outcomes. Performance in 1998 under the ESAF program has been broadly satisfactory. Notwithstanding the energy crisis that hit the country early in the year, the domestic primary surplus rose to 3.6 percent of GDP, but was slightly short of the program tiarget (3.8 percent of GDP) because of higher capital spending. Net domestic financing of the budget increased to 5.2 percent of GDP and - exceeded its target level (3.8 percent of GDP) as high real interest rates led to 3 substantially higher than programmed domestic interest payments. The 90-day treasury bill rate, which had averaged around 40 percent since 1995, declined only gradually throughout 1998 reaching 27 percent by October. Monetary growth was significantly tighter and broad money increased by only 18 percent (40 percent in 1997). As a result, the end-year annual rate of inflation fell to less than 16 percent while the stability in the nominal exchange rate led to a 4 percent real effective appreciation of the Cedi. Despite the severe energy crisis of early 1998, real GDP grew at 4.6 percent, close to the average level recorded since 1983. A good agricultural crop and buoyant export growth both of traditional, (e.g., of cocoa and gold) and non-traditional exports were main contributing factors. Strong exports and improved terms of trade for Ghana allowed a substantial narrowing of the current account deficit and a higher than targeted increase in gross international reserves.
II. GHANA'S ADJUSTMENT PROGRAM
8. Ghana-Vision 2020 (The First Step: 1996-2000), spells out the Government's medium term strategy aimed at turning Ghana into a middle income country by the turn of the next decade.' The program aims at achieving higher rates of economic growth and eliminating hard-core poverty through increased private sector activity, particularly in non-traditional exports; balanced social and regional development within Ghana; and proper consideration of environmental aspects. The thrust of the strategy is to make the private sector the engine of growth and main provider of goods and services whilst reorienting the public sector toward the creation of enabling conditions for private sector development and the provision of social and basic infrastructure. In light of the adjustment setbacks suffered in the 1990s, the Government recognizes the need to substantially step up reform efforts, if Ghana is to meet its development goals. 2
9. The medium term reform agenda will focus on consolidating recent gains in restoring macroeconomic stability, through sound fiscal and monetary policies, including improved public expenditure management and revenue collection; pursuing liberal economic policies to ensure competitive investment opportunities; establishing an efficient and reliable economic infrastructure (telecommunications, energy, roads, water); enhancing the soundness of the financial system; and restructuring the public sector to improve the quality and delivery of public services. The Policy Framework Paper (PFP) for 1999-2001, prepared jointly by the Government, the Bank, and the Fund in February 1999, provides a detailed account of Ghana's economic and social policies for this period. In support of these policies, a new three-year ESAF program was approved by the Fund's Board on May 3, 1999.
Governmentof Ghana: Ghana Vision2020- Ghana's Long Term "Path to Prosperity",Januaryl995.
2 Ghanawould need to achieve GDP growthrates of 8 percent annually to become a low middle incomecountry by 2010. 4
A. Restoring Macroeconomic Stability
10. The Government's macroeconomic program for 1999-2001 aims at: (i) accelerating real GDP growth, to about 6 percent annually; (ii) bringing down inflation to single digits, to 9 percent in 1999 and 5 percent subsequently; and (iii) maintaining the country's external position at manageable levels by increasing the stock of gross international reserves to about 3 months of imports. Fiscal and monetary policies will aim at substantially reducing the government's net domestic borrowing requirement, thereby reducing pressures on interest rates and freeing resources in the banking system for private sector credit; and containing money growth by limiting reserve money growth.
Fiscal Policies
11. Fiscal Objectives. A central fiscal objective is to reduce the government's net domestic borrowing to about 2.8 percent of GDP in 1999-2000 and to 1.3 percent of GDP in 2001. As a result, the stock of domestic debt should start declining by 2001. To achieve these objectives, and assuming that interest rates fall as anticipated, the Government plans to maintain domestic primary surpluses at around 3.5 percent of GDP and to draw on extemal program aid at a level of about 2 percent of GDP. Domestic revenue is projected to gradually increase to 19 percent of GDP by 2001, allowing for a concomitant expansion in domestically financed expenditures. Revenue efforts will focus on improving tax administration, expanding the tax base, and correcting renmaining distortions in the tax system. Expected increases in tax collections will more than compensate for reduced tax rates (from the replacement of the sales tax by the VAT and from planned reductions in the cocoa export tax).
12. VAT. A cornerstone of the Government's tax reform is the replacement of the 15 percent sales and service tax by a VAT. Following intense preparations and a wide public education campaign, the VAT was smoothly re-introduced in late December 1998. The VAT was set at a lower standard rate of 10 percent3 with a view to ensuring public acceptance and successful implementation. As of March 1999, over 13,000 taxpayers had registered for VAT, against a target of 6,000. Once the VAT is fully implemented, and depending on revenue considerations, the Government will consider the need to raise the rate.
13. Central Revenue Board. Improved tax administration is also expected from the recent establishment of a common revenue board to coordinate the activities of the Internal Revenue Service (IRS), Customs, Excise and Preventive Service (CEPS), National Revenue Service (NRS) an.d the VAT Service. The initially proposed central revenue authority was reformulated as the Revenue Agencies Governing Board (RAGB) because a constitutional amendment would have been required to replace CEPS and IRS. The Act, which was passed by Parliament in December 1998, replaces the boards of respective revenue agencies with a single new board. The RAGB will be responsible for
3 The VAT was proposedat 15 percentwhen tabled to Parliamentin 1997. 4 By comparison,VAT rates in neighboringcountries are mostly in the 15 to 20 percentrange. 5 administering the Tax Identification Number (TIN) system, monitoring the collection and audit activities of the revenue agencies, and designing and implementing uniform personnel, legal, and administrative practices. The TIN system will be extended to all taxpayer categories in 1999.
14. Import Tariffs. Once the VAT is fully operational, the Government plans to further rationalize the import tariff regime. The import tariff schedule currently consists of four duty rates (0,5,10,25 percent)5 . An important objective of future reform would be to reduce dispersion and revenue loss resulting from the large proportion of zero-rated imports (about 50 percent) and the scope of exemption regimes. To carefully assess the revenue and efficiency impact of future changes, the Government will undertake a comprehensive review of its tariff regime in 1999, taking into account developments in the West African Economic and Monetary Union (WAEMU), and will introduce measures based on this review with the 2000 budget (such as a lowering of the top duty rate to 20 percent). In the meantime, the Government has abolished a 17.5 percent 'special tax' levied on a selected group of products, which since last year applied to imports but not to domestically produced goods, thus restoring the top duty rate to an effective level of 25 percent.
15. Road Sector Arrears. The Government reported payment arrears to private road contractors representing some 0.3 percent of GDP as of end 1997. While provisions were made under the 1998 budget to eliminate these arrears, it was later found that arrears had tripled throughout the year. Compounding levels reflected, in part, high interest rates (over 20 percent in real terns) on overdue payments. In order to address this serious problem, the Government commissioned in October 1998, under the IDA-supported Highway Sector Investment Project, an audit of the eight largest contracts, which accounted for 70 percent of the arrears. The audit found that arrears to these contractors amounted to US$63 million (equivalent to 0.8 percent of GDP) with remaining work valued at around US$220 million. The audit noted that the costs of road works in seven of the contracts were well above normal levels and recommended their termination following a review of the legal covenants of each contract. The cost of terminating the contracts was estimated at around US$10 million. In light of these findings, the Government has adopted an action plan to terminate these referred seven contracts, re- tender them under competitive bidding, and pay-off outstanding amounts within the next two years. In addition, the Government has scaled down its investment program in line with available resources and is to apply competitive bidding procedures to award all future road contracts.
16. Planning and Budgetary Systems. The Government is making good progress in implementing its Public Financial Management Reform Program (PUFMARP) initiated in 1996. A major accomplishment in this area has been the adoption, for the first time, of a Medium Term Expenditure Framework (MTEF) as the basis for the formulation of the 1999 budget. The MTEF aims at integrating the planning process for development and recurrent expenditures, increasing transparency in the allocation of government resources
5 The 5 percent rate was introducedin March 1998 to replace some zero-rateditems. 6
(including external funds), and allowing for better prioritization of expenditures according to sector strategies. The MTEF exercise for the 1999 budget covered all sectors rather than the three priority sectors originally targeted. Three-year indicative ceilings were given to ministries, departments and agencies to prepare their detailed annual expenditure plans. All government resources, including external financing, were accounted for in the new budget guidelines and all personnel expenses, including allowances, were consolidated. Future budgets will continue to be prepared on an MTEF basis. In particular, the 2000 budget will extend the allocation of all types of expenditures, including administration and personnel emoluments, to specific sector activities.
17. To accompany the MTEF process, a new set of expenditure control rules will be put in place in 1999. The accounting framework has also been revised to include new codes so that expenditures can be identified not only by type and sectors, but also by activity, source of funds, and geographic location. In addition, the Government has begun the implementation of a Budget and Public Expenditure Management System (BPEMS) to be fully operational by the end 2000. The system will support better budgetary preparation and execution, improved cash management, and strengthened accounting functions, all on an integrated, computerized basis.
B. Structural Reform Efforts
(a) Promoting the Private Sector
18. The creation of an enabling environment for private investment (domestic and foreign) is at the heart of the Government's strategy for accelerated economic growth and poverty reduction. In addition to restoring macroeconomic stability, Government's reform efforts in the coming years will focus on enhancing Ghana's competitiveness in cocoa world markets; establishing the necessary institutional, regulatory and legal framework to attract private investment in economic activities including in the provision of basic infrastructure (telecommunications, transportation, energy, water); moving ahead with the privatization of economically significant public enterprises in the water, transportation and energy sectors; and further strengthening the financial system. The Government's ultimate goals are to make Ghana attractive as a trade and investment gateway to West Africa as well as a major regional financial center.
19. Cocoa Reform. Ghana's cocoa marketing arrangements are currently restrictive. The Cocobod, the state-owned marketing agency, has retained a monopoly on cocoa exports, largely out of concems that liberalization of the external marketing could undermine Ghana's high quality standards and that foreign interests could eventually take control of this strategic national resource. At the same time, while the domestic marketing has been liberalized since the early 1990s, the state-run Produce Buying Company (PBC) still handles arouncl sixty percent of total purchases owing to its large buying network and preferential laccess to Cocobod's financing and warehousing facilities. Moreover, the farmer's share in the fob export price is low compared to other cocoa producing countries, with the exception of Cote d'Ivoire, on account of a high 7 export tax (currently at 26 percent of the fob price) and relatively high marketing costs (around 18 percent of the fob price). In line with the on-going reform agenda, the producer price was raised to 56 percent of the export fob price in June 1998 (matching that offered in COte d'Ivoire). Also, preparations are underway to offer for sale PBC in 1999 while the unification of the extension services of the Ministry of Agriculture and Cocobod has been initiated.
20. With a long-term view of improving the performance and competitiveness of the cocoa industry, restoring Ghana's leading role in world markets, and raising farmers' incomes, the Government has now revised its medium term strategy for the sector, in broad consultation with stakeholders. In September 1998, the Government established a task force comprising representatives across the sector to prepare a comprehensive report on the sector with recommendations on production, marketing, pricing, infrastructure, and financial arrangements. The report was discussed in a national workshop in January 1999 and served as the basis for the formulation of a revised strategy. The vision of the strategy is to create market incentives that lead to broad based rural growth and income enhancement that will reduce poverty. Notably, the strategy features accelerated increases in the farmer's share of the fob export price and the introduction of private competition in external marketing. The main elements of the strategy include: (i) raising the producer price to 65 percent of the fob price in 1999/2000 and to 70 percent by the year 2004/5; (ii) reducing the cocoa export tax to 15 percent of the fob export price by the year 2004/5; (iii) allowing qualified licensed buying companies (LBCs) to export 30 percent of their domestic purchases starting with the 2000/2001 crop season; (iv) deepening internal marketing competition by giving all LBCs equal access to Cocobod's warehousing and crop financing facilities; and (v) abolishing price discounts on exportable cocoa to domestic processors. The Cocobod will undertake a regulatory role and will reduce its share in the fob price. Quality control will remain the responsibility of a public institution. As a result of these measures, cocoa production, currently estimated at about 400,000 tons, is expected to reach 500,000 tons by 2004/5. 6
21. To ensure the successful implementation of the strategy, a reform secretariat will be established by June 1999 for a period of two years. It will report to a stakeholder steering committee in order to assure its independence from vested interests such as the Cocobod. The secretariat will design regulatory and organizational changes with the help of consultancies and will be the interface between donors, stakeholders and the Government regarding the reform program. The Government will assess progress during the first phase of reforms with a view to moving toward a fully competitive system with open entry.
6 The 25 percent projected outputincrease over a period of five years will amount to approximatelya 7 percent increaseof world exports.Considering disease problems of competingproducers in South America,the unique quality of Ghana cocoa that puts it into a specialinput segmentfor processors and a steadilyincreasing world demand,no significantadding up problem is anticipated. 8
22. Energy Reform. The Government's strategic objectives are to create an efficient and reliable energy sector through the establishment of competitive pricing and marketing arrangements, and to foster an enabling environment for the participation of private investment in the provision of petroleum products and power services (generation and distribution). The Govemment has prepared and published a Statement of Power Sector Development Policy. The statement outlines progress made to date and the remaining reform agenda.
23. Reform efforts in the power sector are focused on: (i) establishing transparent regulations for tariff setting, licensing, and operation of the national interconnected system; (ii) coordinating and rationalizing strategic investment planning for the sector taking into account projected demand in Ghana and neighboring countries; and (iii) improving the efficiency of the sector through the restructuring of the utilities, the Electricity Company of Ghana (ECG) and the Volta River Authority (VRA), and the privatization of thermal generation and distribution systems through joint venture arrangements. In addition, the Government is discussing with Cote d'Ivoire the formation of a regional power pool aimed at creating an organized market for electricity trade.
24. In late 1997, the Government established the Public Utilities Regulatory Commission (PURC) with autonomous power to set tariffs. The PURC implemented two increases in 1998 which raised the average tariff by over 200 percent to a level that would cover cash flow operating costs of the public utilities and own-guaranteed debt service obligations throughout 1999. By September 1999, the PURC will have published tariff setting guidelines. Moreover, the Government plans to complete electricity regulations covering the operation of the national interconnected system by end 1999. These regulations will establish transparent rules for the market, including conditions for non- discriminatory access and the criteria for economic dispatch of power into the network, and will provide the basis for issuing licenses. The Energy Commission (EC), established in 1998, will be responsible for licensing both petroleum and power operators and for coordinating power sector investment planning. Pending the creation of adequate planning capacity within the EC, the Government is preparing a Transitional Plan for Wholesale Power Supply for 1999-2001, to avoid over- or under-capacity. New generation and related transmission capacity to be committed during this period will be subject to competitive bidding. The Transitional Plan replaces the Emergency Supply Expansion Plan developed in 1998 to fill critical power shortages through temporary contracts with private operators.
25. To improve the economic and financial viability of the public utilities, a financial recovery plan was adopted in 1998. The tariff adjustments authorized by the PURC in 1998 were an integral part of the financial recovery plan which also included efficiency improvements as well as the settlement of arrears and the postponement of government- guaranteed debt service obligations until the year 2000. The restructuring of the public utilities will also involve the separation of generation, transmission and distribution into distinct business units with no cross subsidization. The separation and corporatization of the transmission activities from generation is expected to be completed by December 1999. The distribution company, the Electricity Company of Ghana (ECG), is being 9 restructured into a holding company and five distribution business units. These business units will be offered for sale by June 2000 to strategic investors with the technical capacity to run the distribution zones. This will be the first such divestiture in Africa.
26. On petroleum, important steps have been taken to deregulate the sector. These include the liberalization of crude oil importation, the adoption of an automatic price adjustment mechanism based on an import parity price, and the introduction of uniform ex-depot wholesale prices. Negotiations are now underway for the divestiture of the Ghana Oil Company (GOIL) and retail prices will be liberalized by end 1999. The Government plans to complete the financial restructuring of the Tema Oil Refinery (TOR) in preparation for its divestiture by end 1999.
27. Financial Sector Reform. When financial sector reforms began in the late 1980s, the government-dominated banking sector (seven out of ten banks) was in deep financial distress. Between 1989 and 1992, all government banks were recapitalized and new banking legislation (the 1989 banking law and the 1992 Bank of Ghana law) was introduced to strengthen the regulatory and supervisory powers of the central bank and allow the entry of new private banks. Since 1992, the Government has also sought to enhance the efficiency of the banking system through a program of divestiture of government banks. The majority share holdings of the Social Security Bank (SSB) passed to a strategic foreign investor in 1995. Forty one percent of the Government's shares in Ghana Commercial Bank (GCB), now the second largest commercial bank, have been sold to the public through the Ghana Stock Exchange.
28. The banking system now comprises seventeen banks, of which twelve are private and account for about 70 percent of deposits. While much of the banking system is functioning reasonably well, some small banks are experiencing financial problems and there is a need to further strengthen the laws and regulations to supervise banks. Three banks (two of which are government-owned) do not meet capital adequacy requirements and have a high proportion of non-performing loans (over 80 percent). In addition, the divestiture program has slowed considerably. The strategic investor selected in 1996 to acquire 40 percent of shares in GCB has recently withdrawn its offer owing to financial difficulties linked to the Asian crisis. Meanwhile, the Government is in the third process of soliciting proposals from potential strategic investors for the National Investment Bank (NIB); after two failed prior attempts, while the bank is deteriorating (with a non- performing loan portfolio of 36 percent).
29. The Government has adopted a program for dealing with these problems and strengthening the financial system. First, Bank of Ghana (BOG) has established limits on deposit mobilization and lending to banks not meeting the capital adequacy ratio. By September 1999, it will withdraw the licenses of these banks and start procedures for their liquidation. Second, immediate steps will be taken to place new management at GCB and to offer for sale at least 30 percent of the Government's shares in the bank to a strategic investor and sell remaining shares through the Ghana Stock Exchange. Third, BOG has entered into a Memorandum of Understanding with NIB and its owner, the Government, which obligates NIB to comply with an agreed quantified and monitored 10 program for strengthening itself. With regard to the government-owned Agricultural Development Bank (ADB), the Government will undertake a study of its role in rural finance and options for ownership to be completed by June 2000. By this time, BOG will have disposed of its shares in all banks (including a 30 percent share in ADB).
30. In parallel, the supervisory and liquidity management functions of BOG will be further strengthened. By June 1999, it will enforce new regulations to limit banks' foreign exchange exposure. In addition, the banking law and the central bank law are being amended to, inter-alia, sharpen BOG's powers to intervene in troubled banks. Revised draft legislation will be presented to Parliament by end 1999. BOG is also taking steps to improve the efficiency of the domestic money market (treasury bills), through the recent introduction of repurchase agreements and planned improvements in its liquidity forecasting capabilities.
31. Divestiture. Initial divestiture efforts mostly focused on small and medium size firms and were conducted on an ad-hoc basis. Major divestitures include the Ashanti Goldfields Corporation (1994) and Ghana Telecom (1996). In 1995, the Government launched a program to accelerate the divestiture of 139 enterprises under the Divestiture Implementation Committee (DIC). However, only sixty enterprises have been divested as of January 1999; ten in 1998. Main difficulties relate to low investor interest, delays in outsourcing companies for divestiture, and problems with land titling and outstanding liabilities. Meanwhile, in May 1998, the Government revised its divestiture list to include all economically significant state owned corporations either for privatization and/or private sector participation and adopted a policy to recruit qualified investment banks/consulting firms to formulate and implement the appropriate divestiture strategy for each enterprise.7 Of the referred list, the non-core assets of Ghana National Petroleum Corporation (GNPC), and GOIL have been offered for sale while TOR, Ghana Ports and Harbours and Ghana Water and Sewerage Company have been outsourced for divestiture. As noted above, the divestiture strategy for remaining government banks has been redefined.
32. To improve the pace and quality of the divestiture process, the Government undertook during April 15-19, 1999 a comprehensive review of the program in the context of the mid-term review of the on-going IDA-financed Public Enterprise and Privatization Technical Assistance (PEPTA) project. On this basis, the Government has decided to assign greater resources and attention to the larger, more significant divestitures, to streamline the bidding process, and increase the speed of decision making. Specifically, all qualification issues will be assessed up-front and selection of winning bids will be based on price only. Smaller enterprises would be disposed of more rapidly through clear procedures that do not require high level decision making. The completion of the entire divestiture program is targeted for end 2001. At the same time, the Government will intensify its public information program on divestitures including, inter-
7 Theseincluded non-core GNPC assets, theTema Oil Refinery, Ghana Airways, Electricity Company of Ghana,Ghana Oil Company,Ghana Water and Sewerage Corporation, Ghana Ports and Haibours Authority,Ghana Railways Corporation, and the remaining(five) state-owned banks. 11 alia, the dissemination of the findings of the forthcoming impact assessment and continued publication of DIC's audited financial statements.
33. Institutional and Regulatory Reforms. There has been considerable legislation enacted to promote private investment, including the Free Zones Act (1995) and the Ghana Investment Promotion Act (1994). Furthermore, the IDA-financed Gateway Trade and Investment Program, approved in July 1998, is now under implementation. The program aims to attract a critical mass of investors in non-traditional exports by providing the off-site infrastructure for a privately owned free trade zone. The program also entails reorganizing the customs and immigration services and enhancing the investment promotion program. The establishment of independent regulatory bodies, such as the PURC and EC, will provide the necessary basis for increased private sector participation in the provision of energy and water services. Furthermore, in February 1998, the Government created a fully independent road fund, financed from a petroleum tax, to ensure adequate maintenance of the road infrastructure.
(b) Public Sector Management Reform
34. The Government has begun to implement a public sector reform program to be carried out over the next decade. The Bank will assist the implementation of this long- term program through an Adaptable Program Lending (APL) operation just approved by the Board. Initial efforts will focus on (i) reforming central management agencies (e.g., the Ministry of Finance, the Public Service Commission, the National Development Planning Commission, the Office of Head of Civil Service) and (ii) rationalizing 175 subvented agencies employing approximately 400,000 staff. All central management agencies will be restructured by end 2001. The objective of the exercise is to address on- going weaknesses such as duplication of functions, lack of uniform standards and guidelines, and poor performance and accountability. In 1998, the Government initiated a pilot program to close down/restructure at least seventeen subvented agencies by end- 2001. The pilot will involve the closure of at least five; the partial commercialization of at least seven (a minimum of 30 percent of whose expenditures will be removed from the budget), and the full commercialization of five. Cabinet is expected to approve the specific agencies to be targeted in the pilot by mid 1999. The legal framework and procedures for closing down or commercializing subvented agencies created by statute will be enacted by end 1999. As part of this program, the Government will develop out- placement and re-deployment initiatives to assist redundant employees. In addition, the Govemment is setting up a new wage structure for public servants. The first phase, which involved a re-grading and re-classification of the entire public service, has been completed and will facilitate the assessment of the financial implications of proposed wage reforms. Inplementation of the new wage structure is to be conducted within budget constraints.
35. Decentralization. The Local Government Act enacted in 1993, recognized the existence of 110 district assemblies. A District Assembly Common Fund, created in 1995, receives by law not less than 5 percent of domestic tax revenue and channels resources from the Village Infrastructure Project and the recently established Social 12
Investment Fund. Several other sources of funds and administrative responsibilities are being deconcentrated, notably those of the new Ghana Health Service and the Ministry of Agriculture. The 1999 budget has allocated 163 billion cedis (about US$65 million) to the District Assemblies Common Fund to finance investments at the local level. As this trend continues, district administrations, which are very weak, will need to strengthen their management and financial capabilities. By mid-1999, draft legislation will be submitted to Parliament to establish a local government service with the aim of improving the districts' capacity to manage expenditure and raise their own revenues. A fiscal decentralization study is to be completed by end 2000.
C. Human Development and Poverty Reduction
36. To accomplish its social development objectives, the Government has emphasized the reorientation of resources to the social sectors and to poverty reduction programs. The share of health and education in total domestically-financed expenditures dropped sharply between 1990 and 1995, from 36 percent to 17 percent. Since then the share of expenditures in health and education has gradually recovered reaching 22 percent in 1998 (5.6 percent and 16.5 percent respectively). Under the MTEF, allocations to health and education are programmed to reach, 29 percent of domestically-financed expenditures by 2001. Key targets for 2001 under the Government's health sector program include: (i) reducing infant mortality to 50 deaths per thousand live births; (ii) reducing the fertility rate to 5 births; and (iii) reducing maternal mortality to 100 per hundred thousand live births. The main objectives in education are to increase the gross enrollment rate in primary schools to 81.2 percent by 2001 and improve pupils achievements in learning tests.
37. The Government has also launched a series of targeted interventions at the local and community level to protect those who have not directly benefited from overall economic growth. Main programs include, the National Program for Poverty Reduction, the Village Infrastructure Project, the Social Investment Fund, and micro-finance and rural-finance schemes. Under these schemes, resources are channeled to poor groups and communities through District Assemblies, non-governmental organizations (NGOs), and community-based organizations. The new IDA-financed Community Development Learning and Innovation Loan (L1L), to be approved in FY99, will target street children, nutrition programs, and poverty monitoring. In addition, the Government's Accelerated Agricultural Growth Strategy supports small-scale and commercial private agriculture, including out-grower schemes. The: Government is also preparing a sector-wide program to coordinate support from all donors involved in agriculture-related activities for implementation in 2000.
D. Medium-Term Outlook and Financing Requirements
38. Ghana's medium-term macroeconomic prospects assume continued political stability, successful stabilization, implementation of the policy agenda for private sector development, and adequate public spending on social services and rural infrastructure. Real GDP growth, averaging about 6 percent annually over the 1999-2001 period, is to be 13 derived from increases in agricultural productivity (e.g., in the cocoa sector) and increased private investment in the agro-processing industry (food, wood products) and light metal manufacturing mainly for exports. Private investmnentis projected to increase to 15 percent of GDP by 2001. Concessional extemal assistance will continue to play a significant role in Ghana's economic development.
39. After a projected slowdown in 1999, reflecting lower cocoa volumes due to unfavorable rainfall patterns, export growth will pick up in subsequent years led by non- traditional exports. New investments in export processing zone activities under the Gateway project should begin to bear fruit by 2001. Import volumes will grow in tandem with real GDP and will stay moderate in nominal terms assuming low oil prices and international inflation. The current external account deficit, including official transfers, is projected to average 2.6 percent of GDP over the next three years. Gross international reserves are projected to reach 3 months of imports in 2001. Adherence to the Government's fiscal and monetary targets should permit it to maintain a stable real exchange rate and thus help preserve Ghana's external competitiveness. Ghana's stock of public external debt stood at about US$5.9 billion at the end of 1998, or about 80 percent of GDP. In net present value terms, the external public debt was estimated at below 200 percent of exports of goods and services. The external debt service ratio (as a percentage of goods and non-factor services) is projected to decline to below 19 percent by the year 2001. This decline in the debt service ratio will be buttressed by the Government's on-going moratorium on non-concessional borrowing. Table 1. Ghana:Selected Economic Indicators, 1995-2001
(annual % change) Real GDP 4.0 4.6 4.2 4.6 5.5 6.0 6.0 Consumer Prices (end-period) 70.8 32.7 20.8 15.8 9.0 5.0 5.0 (as % of GDP) Domestic Revenue 21.4 19.2 17.3 18.3 18.8 18.9 19.1 Total Grants 3.8 2.6 1.4 2.2 2.4 2.0 1.7 Total Expenditure 31.8 32.6 28.6 28.6 26.8 25.6 24.4 Overall Balance (commitment basis) -6.4 -9.5 -9.9 -8.1 -5.5 -4.7 -3.6 Domestic Primary Balance 1.6 0.3 3.2 3.6 3.5 3.6 3.7 NetDomestic Borrowing -0.4 5.1 5.1 5.0 2.8 2.7 1.3
External Current Account Balance a/ -2.3 -4.7 -8.8 -3.5 -2.9 -2.5 -2.4 Gross Intemational Reserves b/ 4.4 4.4 2.6 2.5 2.7 2.8 3.0 Extenal Public Debt (US$ bn) 5.6 5.8 5.6 5.9 6.2 6.4 6.6 Extemal Debt Service ratio (%) c/ 35.8 35.6 31.6 28.1 24.5 24.7 18.7 Source: Government of Ghana and staff projections. a/ Including external grants. bJ In months of imports of goods and non-factor services. c/ In percent of exports of goods and nonfactor services. 40. External financing requirements over the 1999-2000 period would total about US$1.7 billion. While adequate financing has been identified for 1999 (including this proposed Credit), a residual gap of about US$70 million has been estimated for 2000. It is hoped that the gap would be covered by additional donor pledges at the forthcoming Consultative Group Meeting (CG) scheduled for November 1999. 14
III. THE PROPOSED CREDIT
A. Credit Rationale and Components
41. The proposed Credit follows up on the one-tranche Economic Reform Support Operation (ERSO) which was approved by the Board in June 1998. The ERSO supported the completion of an important phase of reforms in Ghana and laid the foundations for the next generation of reforms in the areas of public sector management, privatization, and the cocoa and energy sectors. The Government has made good progress in implementing the ERSO reform agenda including measures identified as triggers for proceeding with further adjustment support. Notably, fiscal performance has remained broadly on track, inflation and real interest rates have declined, the VAT has been re-introduced smoothly, the 1999 budget was prepared for the first time on an MTEF basis, and electricity tariffs have been substantially increased to ensure the financial viability of the utilities. Moreover, a new medium term strategy for the cocoa sector has been developed with a view to enhancing both the growth prospects of the sector and the incomes of cocoa farmers.
Box 1. Ghana: Implementation of Triggers under ERSO a/ Triggersunder ERSO Date of Completion * Achievementof main fiscal targets for 1998 1998 targetsbroadly on track, 1999 agreed in and agreement on programfor 1999 February 1999 . Re-introductionof the VAT December 1998 * Establishmentof CentralRevenue Authority December 1998 * Fornulation of 1999 budget on an MEF basis January 1999 * Adequateprogress hi the divestitureprogram Partiallydone. Goodprogress on large enterprises. . Actionsto restore financialviability of public September1998 energyutilities, includingregularization of arrears and further tariff increase * Completea mediumterm cocoa strategy Februaryl999 . At least match cocoaproducer prices with those On-going.Done for 1998/99crop season of neighboringcountries a/ Excludestwo measures relating to publicsectDr reform which are being monitored under the proposed Public Sector ReformManagement APL.
42. Building on the on-going reform momentum, the proposed Credit seeks to consolidate recent gains in restoring macroeconomic stability and support the implementation of difficult reforms in the cocoa, power, and financial sectors. Fiscal policies supported under the Credit are aimed at improving fiscal sustainability while raising the efficiency of resource mobilization and use. In particular, the termination of specific road contracts will address the root cause of large payment arrears thus removing an important source of fiscal imbalance and resource misallocation. Also, the elimination of the 'special tax' on imports will begin a process to further rationalize the import tariff regime so as to provide adequate incentives to local industry within a regional context. Very importantly, the proposed Credit will support the implementation of a revised strategy for the cocoa sector developed with strong stakeholder ownership. As part of this strategy, and in light of a recent downfall in the export price, the increase in the farmers' share of the fob price will Ibe further accelerated while external marketing will 15 be gradually opened to private competition. In the power sector, the proposed Credit supports the implementation of key elements of the remaining reform agenda as outlined in the recently published power sector strategy, particularly the establishment of regulations for the market and the divestiture of ECG's electricity distribution units. In the financial sector, the proposed Credit will seek to enhance the soundness of the financial system and remove a source of quasi-fiscal pressures by targeting the closure of distressed banks and continuing the divestiture of remaining government banks.
43. The proceeds of the proposed Credit will help cover Ghana's external financing requirements in the context of a vulnerable external position and low level of reserves. Moreover, by providing counterpart funds for the budget, the Credit will help reduce the government's net domestic financing and domestic debt burden by limiting increases in the stock of debt and supporting a decline in real interest rates.
B. Specific Actions Supported by the Credit
44. Prior to negotiations of the Credit, the Government:
i. removed the 'special tax' of 17.5 percent levied on selected import products;
ii. obtained Cabinet approval of an action plan to terminate seven contracts underlying 70 percent of the road arrears;
iii. obtained Cabinet approval of a revised medium term strategy for the cocoa sector, including accelerated increases of farmers' share in the fob price and allowing qualified licensed buying companies to export 30 percent of cocoa purchases;
iv. issued instructions to ensure that all licensed cocoa buying companies will have equal access to Cocobod financing and warehousing facilities;
v. published a Statement of Power Sector Development Policy;
vi. established quarterly targets for banks not meeting the capital adequacy requirements, including limits on deposit mobilization and lending;
vii. agreed on a strategy to resolve the insolvent position of the Bank for Housing and Construction (BHC) and the Cooperative Bank (Coop).
45. Prior to Board presentation of the Credit, the Government:
i. publicly announced its revised medium term strategy for the cocoa sector, including a timetable of agreed actions;
ii. signed a Memorandum of Understanding (MOU) with Bank of Ghana and NIB to stop further deterioration of the bank. 16
46. Prior to Second Tranche release of the Credit, the Government will have:
i. increased the cocoa farmers' share in the fob price to 65 percent in the 1999/2000 crop season,
ii. issued instructions to allow qualified licensed cocoa buying companies to export 30 percent of their domestic purchases starting with the 2000/2001 crop season;
iii. withdrawn the licenses of all commercial banks which do not meet the capital adequacy ratio requirement;
iv. offered for sale8 at least 30 percent of the shares of the GCB to a strategic investor and placed remaining shares in the Stock Exchange;
v. presented to Parliament a legislative instrument establishing the electricity regulations for the operation of the national interconnected electricity system.
47. Prior to Floating Tranche release of the Credit, the Government will have:
i. offered for sale9 shares in ECG's electricity distribution business unit(s) to strategic investor(s).
C. Poverty Impact
48. The Credit would contribute to improving the economic prospects of the poor in Ghana by supporting the Government's efforts to reduce inflation and to stay the course with economic reforms that will enhance the prospects for sustainable broad-based ecofiomic growth and employment generation. The anticipated decline in interest rates will lower interest payments and thus help release public funds to finance expenditures in health and education. Of direct importance to the poor in this Credit will be measures to raise the incomes of cocoa farmers. There are about 800,000 cocoa farmers in Ghana who support about 5 million people. As a result of direct and indirect multiplier effects of proposed measures, it is estimated that roughly one million cocoa household members who are currently below the poverty line would be lifted out of poverty by the year 2005. The divestiture and banking restructuring program would indirectly benefit the poor, by moving the state away from activities that can be better performed by the private sector and thereby releasing funds for development expenditures and basic services.
"Offerfor sale" meansthat the Governmentwould have: (i) prepareda prospectusor information memorandumwith the assistanceof an investmentadviser, (ii) solicitedbids frompotential investors; and (iii) evaluatedtechnical and financialproposals. Seeabove definition of "offerfor sale". 17
D. Link to the CAS
49. The Bank's Country Assistance Strategy (CAS) for Ghana, discussed by the Executive Directors in September 1997, supports the Government's overall strategy for poverty reduction. Key elements of the CAS include restoring macroeconomic stability; ensuring a breakthrough in private investment (especially in non-traditional exports); promoting broad-based social and rural development; and implementing direct poverty- reduction interventions. By underpinning stabilization efforts and including measures to remove constraints for private sector development, the proposed Credit is fully consistent with the CAS. The CAS proposes a base case lending amount in the US$430-660 million rangel'. Within this range, lending would be graduated in response to changes in key indicators during the CAS period, including benchmarks for the primary fiscal surplus and social and health spending, as well as progress in implementing the unfinished reform agenda for promoting private investment, i.e., regulatory reform for infrastructure (power, rails, ports), revenue reform (VAT, central revenue authority), domestic cocoa deregulation (privatization of PBC), and public service reform. The present operation goes a long way towards meeting these goals and takes Ghana closer to the high end of the lending range, particularly, by breaking new ground on cocoa reforms.
E. Credit Amount, Disbursement Procedures and Implementation Arrangements
50. Credit Amount. The amount of the Credit is proposed at US$180 million. This will bring the level of adjustment lending during the FY98-00 to US$230 million compared with US$150 million envisaged under the CAS's base case scenario. The higher amount is justified given progress in implementing the reform agenda in the cocoa, energy, and fiscal areas. Notably, proposed reforms in the cocoa sector represent a major breakthrough in policy dialogue and underscore the Government's commitment to poverty reduction. Moreover, the proposed accelerated increases in the farmers' share of the fob price will result in substantial revenue shortfall which would warrant further financial assistance, particularly in the context of currently weak international prices for cocoa. In addition, the CAS provides for increased adjustment lending, or a "safety net" of adjustment loans, should the domestic debt burden (level of external reserves) be higher (lower) than originally projected under the macroeconomic program. This is certainly the case in Ghana. Despite the recent tight fiscal and monetary stance, interest rates did not come down as rapidly as originally envisaged and domestic interest payments during 1998-2000 will be above earlier projections by about 1.5 percent of GDP (equivalent to US$100 million).
51. Tranche Release. The Credit will be disbursed in three tranches. The first tranche in an amount equivalent to US$80 million will be disbursed upon effectiveness. The second and floating tranches, in amounts equivalent to US$80 million and US$20 million, respectively, will be released upon completion of agreed actions. The program
10 Thebottom end of the range(i.e.US$430 million) assumes no adjustmentlending and is applicableif fiscal performanceis on track but not much progressis made on the reform agenda. 18 was designedto emphasizeactions taken prior to Credit approvalto demonstrateprogress in turning the fiscal situation aroundand Govermment'scommitment to the program.
52. Procurementand DisbursementProcedures. The Credit will follow the Bank's new simplified disbursementprocedures for structuraladjustment operations. Under the revised procedures, the Credit will be disbursed in three tranches against satisfactory implementationof the adjustrnentprogram. Disbursementwill not be tied to any specific purchasesand no procurementrequirements will be needed. Once the Credit is approved by the Board, the proceedsof the first tranche of the Credit will be deposited by IDA in an accountat Bank of Ghana at the request of the Borrower. Subsequenttranches will be depositedin the same accountonce the agreed conditionsare met. If, after deposit in this account, the proceeds of the Credit are used for ineligible purposes as defined in the Credit Agreement,IDA will require the Borrower to either: (a) return the amount to the account for use for eligible purposes; or (b) refund the amount directly to IDA. The administration of this Credit will be the responsibility of the Ministry of Finance. Although an audit of the depositaccount will not be required,the Bank reserves the right to require audits at any time.
53. Implementationof the policy and actions under the programwill be monitoredby a technical committee from the Minister of Finance and the Bank of Ghana. The committeewill prepare progressreports on the various componentsof the program with inputs from participatingministries and agencies. IDA will monitor implementationof the programthrough regular supervisionmissions.
54. Impact Indicators. To monitor the proposed Credit's impact, the following indicatorswill be monitoredon an annualbasis: (i) domesticinterest payments as a share of recurrent expenditures; (ii) expenditures in health and education as a share of domestically-financedexpenditures; (iii) road arrears as a share of GDP; (iv) volume of cocoa exports; (v) non-performing loans in the banking system; and (vi) private investmentas a share of GDP. (For details on impact indicatorssee Annex G).
F. Program Benefitsand Risks
55. Benefits. Successfulcompletion of the programshould enable the Governmentto maintain a stable macroeconomicframework and to create firmer grounds for sustained, broad-based,private sector-ledeconomic growth. The reduction in inflationwill have a beneficial impact on the poor. The anticipated decline in domestic interest rates and reduceddebt service paymentswill allow for an expansionprivate sector credit as well as increased spending in health, education and poverty reductionprograms. Moreover, the proposed reforns in the cocoa sector will provide incentives for increased cocoa productionand will lead to increases in farmers' incomeswith large multiplier effects on the rural economy. Reforms in the energy sector intended to facilitate private sector participationin power generation and distribution are likely to enhance private activity. Finally, financial sector reforms will improve the soundnessof the financial system and eliminatesources of quasi-fiscaldeficits and inefficientallocation of financialresources. 19
56. Risks. As the 2000 elections approach, the risk of policy slippage increases. However, the Government is aware that the population at large has been hard-hit by inflation and low per-capita GDP growth and is politically committed to having in place the necessary policies that will underpin a process of sustained growth and poverty reduction. Over the past two years, the Government has demonstrated greater fiscal discipline and has reinstated politically sensitive measures such as the VAT and the increase in electricity tariffs. In this spirit, it has wholeheartedly embraced the MTEF process as an instrument for more effective and transparent expenditure management. The approval of a new three-year ESAF program offers an additional source of comfort. It should be underscored, however, that the Government will likely face opposition to proposed reforms in the cocoa sectors from special groups, i.e., Cocobod and international cocoa importers, who may perceive these reforms as a threat to Ghana's quality standing in world markets as well as their economic interests. The Government is mitigating this risk by conducting extensive consultations with all stakeholders and by adopting a gradual approach to policy reforms in the sector. In particular, concerns about safeguarding the quality of cocoa beans will be addressed by maintaining the quality control function within the public sector during the transition period. There is also the risk of opposition to proposed reforms in the financial sector. The Government intends to manage these risks by protecting depositors, reimbursing terminated staff, and implementing a public relations campaign. On GCB, there is a risk of not finding a suitable strategic investor both because of some public opposition to the sale and adverse market conditions following the Asian crisis. Given the complex nature of the proposed privatization of ECG, unforeseen delays are likely. The floating tranche provides an appropriate vehicle to address such risk. Finally, after its recent downfall, the export price for cocoa is expected to recover over time, but if it remains depressed for a prolonged period, gains from proposed reforms may not materialize. The Government's ability to manage external shocks from commodity prices (including gold and timber) is limited in the short term.
IV. BANK GROUP OPERATIONS AND COLLABORATION WITH OTHER DONORS
57. Bank Group. As of March 31, 1999, the Bank's active portfolio for Ghana included 24 projects, totaling US$1,014 million, of which US$474 million were undisbursed. The Intemational Finance Corporation's (IFC) total investments amounted to US$60 million, comprised of US$26 million in loans, US$7 million in equity, US$14 million in quasi-equity, and US$13 million in participation. Currently, Ghana does not have guarantees from the Multilateral Investment Guarantee Agency (MIGA).
58. International Monetary Fund (EMF). Bank staff are working closely with the IMF and other donors in helping Ghana design and implement its reform program. The Bank and the IMF collaborated with the Ghanaian authorities on the preparation of the eighth Policy Framework Paper covering the 1999-2001 period. The PFP was distributed to the Bank Board in mid-April 1999. A new three-year ESAF Arrangement for Ghana was approved by the Fund's Board on May 3, 1999. The Government of Ghana plans to 20 conduct, with the Fund, a midterm review of its program supported by the first annual arrangement by September 1999.
59. Other Donors. The Bankl Group is increasing its collaboration with donor agencies, the United Nations system, and NGOs. The Bank, as Chair of the CG, provides the forum for meetings every alternate year. Following the November 1997 CG meeting, the Government and the Bank sponsored the creation of the Government/Donor Economic and Finance Coordinating Group, which meets quarterly under the co- chairmanship of the Minister of Finance and the Bank. The next CG meeting is scheduled for November 1999 in Accra. Consultations with bilateral and multilateral donors also take place in the context of specific projects or programs and also under the Special Program of Assistance for Africa. The development of sector programs in roads and health has enhanced donor coordination considerably. A sector program is also being prepared for agriculture.
V. RECOMMENDATION
60. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and I recommend that the Executive Directors approve it.
James D. Wolfensohn President by Shengman Zhang
Attachments
Washington, D.C. May 4, 1999 Annex A Page 1 of 2 Matrix of Policy Actions The Reform Agenda Supported by ERSO II
Objectives Specific Measures Status Fiscal Reform Enhancerevenue Re-introductionof the VAT Triggerunder ERSO mobilization December 1998 Establishmentof CentralRevenue Authority(now Revenue Triggerunder ERSO AuthoritiesGoverning Board) December 1998 Increase Formulationof 1999 budget on an MTEFbasis Triggerunder ERSO efficiency of January 1999 public spending Cabinetapproval of an action plan to terminate seven contracts Conditionof underlying70 percent of the road arrears and to eliminatethem Negotiations by the end of 2000 ImplementBPEMS systemin targetedministries and spending Budgetsfor 2000 and units 2001 Remove Removethe 'special tax' of 17.5 percent levied on selected Conditionof distortions importproducts Negotiations Completecomprehensive review of tariff regime. September1999 Reduce the tariff top rate to 20 percent in harmony with the Budgetfor 2000 subregion. Cocoa Sector Reform
Define long term Completea mediumterm cocoa strategy ERSO trigger visionFeray19 Cabinet approval of a revised mediumterm strategy for the cocoa Conditionof sector, includingaccelerated increases of farmers' share in the Negotiations fob price and allowing qualifiedlicensed buying companiesto export 30 percent of cocoa purchases Publiclyannounce revised mediumterm strategy for the cocoa ConditionforBoard sector, including a detailed timetable of actions presentation Increase farners' Increase the cocoa farmers' share in fob price to 65 percent in the Second Tranche incentives 1999/2000crop season condition Encourage Issue instructionsto ensurethat all cocoa licensedbuying Conditionof competitionin companieswill have equal accessto Cocobodfinancing and Negotiations cocoa marketing warehousingfacilities Offer for sale the ProduceBuying Company June 1999 Issue instructionsto allow qualifiedcocoa licensedbuying Second Tranche companiesto export 30 percent of their domesticpurchases condition starting with the 2000/1 crop season Annex A Page 2 of 2 Energy Sector Reform Define long term Publish a Statement of Power Sector Development Policy Condition of vision agreeable to IDA Negotiations Rationalize Complete and issue Transitional Power System Development September 1999 sector investment Plan (1999-2001)
Establish a Publish and implement complete guidelines for fixing electricity September 1999 transparent tariffs regulations Submit to Parliament the legislative instrument establishing the Second Tran che electricity regulations for the operation of the National condition Interconnected System Restructure Adopt financial restructuring plan for the electricity utilities ERSO trigger electricity including regularizatio:n of arrears and further tariff increase September 1998 utilities Complete separation of electricity transmission utility (National December 1999 Grid Company Ltd.) from Volta River Authority (VRA) Increase private Offer for sale ECG's distribution units Floating Tranche sector condition participation Financial Sector Reform Stop further Establish quarterly targets for banks not meeting the capital Condition of deterioration of adequacy requirements, including limits on deposit mobilization Negotiations troubled banks and lending Agree on a strategy to resolve the insolvent positions of the Bank Condition of for Housing and Construction (BHC) and the Cooperative Bank Negotiations (Coop) in 1999. Withdraw the licenses of banks not meeting the capital adequacy Second Tranche ratio requirement condition Sign a Memorandum of Understanding between Ministry of Condition of Board Finance, Bank of Ghana and NIB presentation Reduce Offer for sale 30 perce:nt ofGCB's shares to a strategic investor Second Tranche govemment and place remaining shares in the Ghana Stock Exchange condition ownership in banking system Select a strategic investor for NIB or re-launch search with June 1999 assistance of financial adviser Complete study on role of ADB in rural finance June 2000 Strengthen Implement revised guidelines for foreign currency exposure June 1999 banking limits supervision Submit revised draft central bank law and banking law to December 1999 parliament Annex B
Ghana at a glance 4P29age of 2
Sub- POVERTYand SOCIAL Saharan Low- Ghana Africa income Developmentdiamond^ 1998 Population,mid-year (millions) 18.4 614 2,048 Life expectancy GNPper capita(Atlas method, US$) 407 500 350 GNP(Atlas method, US$ billions) 7.5 309 722 Averageannual growth, 1992-98 Population(%) 2.6 2.7 2.1 Laborforce (%) 2.7 2.6 2.3 GNP Gross per primary Most recent estimate(latest year available,1992-98) capita enrollment Poverty (% of population below national poverty line) 31 Urbanpopulation (% of totalpopulation) 37 32 28 Life expectancyat birth (years) 59 52 59 Infant mortality (per 1,000 live births) 69 90 78 Childmalnutrition (% of childrenunder5) 27 27 .. Accessto safewater Accessto safewater (% of population) 56 44 71 Illiteracy(% of populationage 15+) 36 43 47 Grossprimary enrollment (% ofschool-age population) 76 75 91 Ghana Male 83 82 100 Low-incomegroup Female 70 67 81 KEYECONOMIC RATIOS and LONG-TERMTRENDS 1977 1987 1997 1998 Economicratios GDP(US$ billions) 3.2 5.1 6.9 7.5 Grossdomestic investmenVGDP 11.1 10.4 24.1 22.9 Trade Exportsof goodsand services/GDP 10.5 19.7 24.0 26.7 Grossdomestic savings/GDP 10.0 3.9 9.8 13.2 Grossnational savings/GDP 9.6 5.6 15.4 19.4 Currentaccount balance/GDP -4.5 -4.4 -11.1 -6.6 Domestic Interestpayments/GDP 0.5 1.1 1.9 2.0 Domengst Investment Total debVGDP 33.4 64.6 81.3 79.2 | Savngs Total debtservice/exports 3.7 45.8 34.1 31.1 Present value of debt/GDP .. .. 54.2 50.8 Present value of debVexports .. .. 220.3 186.6 Indebtedness 1977-87 1988-98 1997 1998 1999-03 (averageannual growth) GDP 0.4 4.3 4.2 4.6 6.1 GNP per capita -2.7 1.4 1.7 1.9 3.5 Ghana Low-icome group Exports of goods and services -4.7 9.7 -0.4 14.4 5.6
STRUCTURE of the ECONOMY 1977 1987 1997 1998 Growthrates of outputand investment (%) (% of GDP) 30 Agriculture 56.2 50.6 36.6 36.8 20 Industry 15.8 16.3 25.4 25.0 10 Manufacturing 10.8 9.9 8.3 8.3 0 Services 28.0 33.1 38.0 38.2 -10 95 94 X 9 97 9s -20 Privateconsumption 77.4 85.5 77.8 76.5 -30 Generalgovemment consumption 12.6 10.6 12.4 10.3 GDI C GDP Importsof goodsand services 11.6 26.2 38.4 36.4
1977-87 1988-98 1997 1998 Growthrates of exportsand imports (%) (averageannual growth) Agriculture 0.8 2.5 2.2 3.7 25 Industry -4.0 4.5 4.8 5.7 20.A Manufacturing -4.0 2.9 4.0 5.0 15 - Services 1.9 6.0 5.9 4.9 10 Privateconsumption 0.3 3.7 12.1 1.6 s/ Generalgovernment consumption 1.4 4.6 -11.7 11.3 0 Grossdomestic investment -4.6 3.8 3.4 2.8 -s 93 94 9S 97 93 Importsof goodsand services -7.0 7.3 14.7 8.3 Exports -0Imports Gross national product 0.2 4.3 4.3 4.6
Note:1998 dataare preliminaryestimates. 'The diamondsshow four keyindicators in the country(in bold) comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. Annex B Page 2 of 2 Ghana
PRICES and GOVERNMENT FINANCE Domesticprices 1977 1987 1997 1998 Inflation (%)
(% change) 80 Consumer prices 116.5 39.8 27.9 19.3 60 Implicit GDP deflator 67.3 39.2 19.5 17.6 40
Government Finance 20 (% of GDP, includes current grants) 0a Current revenue .. 14.1 17.8 18.9 93 94 95 90 97 98 Current budget balance 2.9 1.6 1.6 -GDP deflator -6---CPI Overall surplus/deficit -5.1 -10.8 -9.7 ___ deflator _ )CPI
TRADE
(US$ millions) 1977 1987 1997 1998 Exportand import levels (USS millions) Total exports (fob) .. 824 1,491 1,830 3,ooO Cocoa .. 495 470 629 2500I Timber .. 91 172 170 Manufactures .. .. 2,000 Total imports (cif. 1,009 2,321 2,417 1r-T0
Food .. 73*,100 2 3 4 5 7 5 Fuel and energy .. 145 240 212 500
Capital goods .. 166 ... ______Export price index (1995=100) .. 97 93 98 Import price index (1995=100) .. 69 97 81 0 Exports Elmports Terms oftrade (1995=100) .. 141 96 121
BALANCE of PAYMENTS (US$millions) 1977 1987 1997 1998 Current account balance to GDP ratio (%)
Exports of goods and services 1,018 903 1,656 2,004 0 -1 - Importsof goods and services 1,121 1,203 2,645 2,732 -2 92 93 97 T Resource balance -103 -300 -989 -728 -4 Net income -35 -127 -134 -142 -6 Net current transfers -6 202 360 378 -8 -10 Current account balance -144 -225 -763 -492 12 Financing items (net) 254 363 787 591 -14 Changes in net reserves -109 -138 -25 -99 -16
Memo: Reserves including gold (US$ millions) 182 332 508 502 Conversion rate (DEC, local/US$) 3.5 147.0 2,050.2 2,314.0
EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 (US$ millions) Composition of total debt, 1997 (USS millions) Total debt outstanding and disbursed 1,067 3,280 5,599 5,943 IBRD 43 151 30 27 G:|28 IDA 79 700 2,617 2,963 F: 704 Total debt service 38 415 578 636 IBRD 5 22 15 9 IDA 1 7 31 46 B: 2,617 Composition of net resource flows Official grants 65 122 160 230 E: 1,075 Official creditors 70 254 350 325 Private creditors 22 3 -76 -74 Foreign direct investment .. 5 110 152 0D:53 Portfolio equity .. 0 46 80 C 1 | ~~~~~C:354 World Bank program Commitments 57 233 54 165 A - IBRD E- Bilateral Disbursements 30 194 237 280 B - IDA D - Other multilateral F - Private Principal repayments 3 13 23 30 C-IMF G - Short-term Net flows 27 181 214 250 1 I Interest payments 3 16 22 25 Net transfers 24 165 192 225
Development Economics 4/29/99 Annex C Page 1 of 3
Ghana - Key Economic Indicators
Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001
Nationalaccounts (as % GDPat current marketprices) Gross domesticproduct 100 100 100 100 100 100 100 100 Agriculturea 36.4 36.3 36.5 36.6 36.8 36.9 31.7 31.0 Industrya 24.9 24.9 24.9 25.4 25.0 25.1 25.3 25.8 Servicesa 28.0 28.2 28.1 28.7 29.1 28.9 33.9 34.0 TotalConsumption 87.4 88.3 88.1 90.2 86.8 85.3 83.7 82.1 Gross domesticfixed 22.6 21.1 20.6 23.2 22.1 23.0 24.0 24.8 investment Governmentinvestment 13.3 14.0 13.3 12.4 11.3 11.1 11.3 10.6 Privateinvestment 10.7 6.0 8.2 11.7 11.6 12.6 13.4 14.8 (includesincrease in stocks) Exports(GNFS)b 22.5 24.5 24.9 24.0 26.7 25.4 26.9 27.9 hmports(GNFS) 33.9 32.8 34.5 38.4 36.4 34.5 35.2 35.5 Grossdomestic savings 12.6 11.7 11.9 9.8 13.2 14.7 16.3 17.9 Grossnational savings' 15.5 13.7 13.8 15.4 19.4 20.8 22.2 23.0 Memorandumitems Grossdomestic product 5440 6457 6926 6884 7501 8070 8568 9334 (IJS$million at current prices) Grossnational productper 327 378 395 383 407 426 441 469 capita(US$, Atlas method) Realannual growth rates (%,calculated from 1975 prices) Gross domesticproduct at 3.3% 4.0% 4.6% 4.2% 4.6% 5.5% 6.0% 6.0% marketprices GrossDomestic Income 4.6% 3.5% 2.2% 4.6% 4.8% 5.8% 6.1% 6.2% Realannual per capita growthrates (%,calculated from 1975prices) Gross domesticproduct at 0.6% 1.4% 1.9% 1.5% 1.9% 2.8% 3.3% 3.4% marketprices Totalconsumption -1.3% 0.7% -0.8% 3.8% 0.9% 2.4% 2.5% 3.2% Privateconsumption -1.5% 0.6% 1.7% 9.2% -0.9% 1.9% 2.3% 3.1% (Continued) Annex C Page 2 of 3
Ghana - Key Economic Indicators (Continued)
Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001
Balance of Payments (US$m)
Exports (GNFS)b 1374 1582 1730 1656 2004 2052 2301 2606 Merchandise FOB 1227 1431 1573 1491 1830 1880 2119 2412 Irnports (GNFS)b 2000 2126 2396 2645 2732 2782 3016 3310 Merchandise FOB 1580 1684 1937 2128 2213 2253 2463 2719 Resource balance -626 -544 -666 -989 -728 -730 -715 -705 Net current transfers, 271 263 276 360 378 380 418 439 (including official current transfers) Current account balance -265 -154 -328 -603 -261 -233 -225 -258 (after official capital grants)
Net private foreign direct 206 259 70 55 -11 45 100 100 investment Long-term loans (net) 228 395 556 660 484 502 284 325 Official 385 268 419 350 325 192 198 198 Private -157 127 137 310 159 311 86 127 Other capital (net, including -6 -289 -312 -87 -112 -236 -125 -79 errors and omissions) Change inreservesd -164 -211 14 -25 -99 -77 -34 -88
Memorandum items Resource balance (% of -11.5% -8.4% -9.6% -14.4% -9.7% -9.0% -8.3% -7.6% GDPat current market prices) Real annual growth rates (1975 prices) Merchandise exports 0.6% 3.8% 12.5% -0.7% 16.3% 3.5% 9.2% 7.8% (FOB) Primary 2.2% 5.4% 11.4% -2.3% 15.2% 1.7% 7.6% 5.9% Manufactures ...... Merchandise irnports -8.4% 1.8% 13.8% 14.4% 24.5% 7.1% 6.2% 6.2% (CIF)
Public finance (as % of GDP at current market prices)e Current revenues 20 22 18 18 19 19 19 19 Current expenditures 18 16 16 16 17 16 14 14 (Continued) Annex C Page 3 of 3
Ghana - Key Economic Indicators (Continued)
Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 Currentaccount surplus ( 2 5 2 2 2 4 5 6 or deficit (-) Capital expenditure 13 14 13 12 11 11 11 11 Foreign fmancing 7 7 6 6 5 4 3 3
Monetary indicators M2/GDP (at current market 19.4 18.4 17.6 19.9 19.0 19.0 19.0 19.0 prices) Growth of M2 (%) 53 41 40 41 18 15 14 12
Price indices( 1975 =100) Merchandiseexportprice 89 100 91 91 103 98 104 112 index Merchandise import price 121 127 129 144 134 126 132 137 index Merchandise terms of trade 74 79 71 63 77 77 79 81 index Real exchange rate 63 72 81 86 93 101 108 117 (IJS$/LCUJ)l Real interest rates Consumer price index 24.9 74.3 46.6 27.9 19.3 10.0 6.4 5.0 (% growth rate) GDP deflator 30.1 43.2 39.8 19.5 17.6 8.6 7.4 5.9 (% growth rate) a. GDP components are estimated at factor cost. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMFresources. e. Central government. f£ "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. Annex D Page 1 of 1
Ghana: External Financing Requirements
1995 1996 1997 1998 1999 2000 Projections
CurrentAccount -414 -534 -763 -492 -470 -422 (excluding officialtransfers) Exports, f.o.b. 1,431 1,573 1,491 1,830 1,880 2,119 Imports, f.o.b. -1,684 -1,937 -2,128 -2,213 -2,253 -2,463 Services (net) -424 -446 -485 -487 -476 -497 Private transfers 263 276 360 378 380 418 Capital account -208 -373 -267 -318 -345 -340 Scheduledamortization -365 -210 -230 -286 -311 -401 IMF repayments -108 -125 -166 -139 -78 -39 Other capital (net)' 265 -37 128 107 45 100 Changein official reserves (increase -) -149 100 140 -72 -59 -55 Changein arrears (decrease -) -35 -100 0 0 0 0 Extemal financing requirements -806 -906 -890 -882 -874 -817
Expected disbursements 806 806 890 882 874 745 Girants 263 206 160 230 235 197 Project 179 153 128 188 185 159 Program 84 52 31 42 51 38
Concessionalloans 501 561 730 540 579 488 Project 415 487 690 447 438 367 Program 86 74 41 93 141 121 Of which IDA 80 80
IMF 43 40 0 111 61 60 Debt deferral/ Financing Gap 0 100 0 0 0 73
Sources:Data provided by the Ghanaian authorities;and Fund staff estimatesand projections. Annex E Page 1 of 1 Ghana Social Indicators
Latest single year Sameregiontincome group Sub- Saharan Low- 1970-75 1980-85 1990-96 Africa income POPULATION Total population,mid-year (millions) 9.8 12.6 17.5 596.4 3,236.2 Growthrate (%annual average) 2.7 3.2 2.7 2.7 1.8 Urbanpopulation (% of population) 30.1 32.3 36.4 31.7 29.1 Total fertilityrate (birthsper woman) 6.6 6.3 5.0 5.6 3.2 POVERTY (% of populafionr National headcount index .. * 31.4 Urban headcount index .. .. 26.7 Rural headcount index .. .. 34.3 INCOME GNPper capita(US$) 300 360 390 490 490 Consumerprice index (1987=100) .. 57 1,070 266 275 Foodprice index (1987=100) .. 60 980 INCOMEICONSUMPTIONDISTRIBUTION (%of incomeor consumption) Lowest quintile .. .. 7.9 Highestquintile .. .. 42.2 SOCIALINDICATORS Public expenditure Health(% of GDP) .. .. 1.3 .. 1.5 Education(% of GNP) .. 2.6 3.1 5.3 3.6 Social security and welfare (% of GDP) .. .. Net primary school enrollment rate (% of age group) Total Male Female Access to safewater (% of population) Total 35 .. 56 45 76 Urban 86 .. 70 63 80 Rural 14 .. 49 34 72 Immunizationrate (% under12 months) Measles .. 1 54 56 80 DPT .. 19 51 55 81 Childmalnutrition (% under5 years) . .. 27 Life expectancyat birth (years) Total 50 51 59 52 63 Male 48 49 57 51 62 Female 52 53 61 54 64 Mortality Infant(per thousand live births) 107 93 71 91 68 Under5 (perthousandlive births) 187 157 110 147 94 Adult (15-59) Male(per 1,000population) 459 400 320 448 231 Female(per 1,000population) 377 334 253 376 206 Maternal(per 100,000 live births) .. 1,000 740
World DevelopmentIndicators 1998 CD-ROM, World Bank Annex F Page 1 of 2
Status of Bank Group Operationsin Ghana Operations Portfolio
Difference Between expected original Amount in US$ Millions and actual Last PSR Fiscal disbursements a/ Supervision Rating b/ Project ID Year Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd Dev Obj Imp Prog
Number of Closed Projects: 75
Active Prjects GH-PE-910 1990 REPUBLIC OF GHANA URBAN II(SEC CITIES) 0.00 70.00 0.00 2.00 -4.30 0.00 S S GH-PE-918 1991 GOVT OF GHANA AGRIC DIVERS (TREE C 0.00 16.50 1.85 5.35 6.40 6.40 S S GH-PE-931 1992 GOVERNMENT AGRIC EXTENSION 0.00 30.40 0.00 6.84 6.40 6.40 S S GH-PE-956 1993 GOVERNMENT URBAN TRANSPORT 0.00 76.20 0.00 10.93 10.79 -3.33 S S GH-PE-953 1993 GOVT OF GHANA NAT'L ELECTRIFICATIO 0.00 80.00 0.00 10.97 13.34 5.39 S S GH-PE-930 1993 GOVERNMENT LIVESTOCK 0.00 22.45 .38 2.74 3.66 3.27 S U GH-PE-961 1994 TBD AGRIC SECTOR INVEST 0.00 21.50 0.00 5.49 2.30 -1.77 S S GH-PE-936 1994 GOVERNMENT LOCAL GOVT DEV. 0.00 38.50 0.00 15.73 6.70 0.00 NA NA GH-PE-924 1994 GOVERNMENT OF GHANA COMMUNITY WATER & SA 0.00 21.96 0.00 8.85 6.82 0.00 S S GH-PE-966 1995 GOVERNMENT MINING SEC.DEV & ENV 0.00 12.30 0.00 6.39 4.12 0.00 S S GH-PE-962 1995 REP OF GHANA FISHERIES 0.00 9.00 0.00 4.86 2.43 0.00 S S GH-PE-960 1995 GOVT OF GHANA PRIV SECTOR DEV 0.00 13.00 0.00 8.98 7.47 0.00 U U GH-PE-948 1995 GOVERNMENT EDUC/VOC.TRNG 0.00 9.60 0.00 5.95 4.03 0.00 U U GH-PE-926 1995 GOVT OF GHANA THERMAL (P-VII) 0.00 175.60 0.00 53.43 48.06 13.46 S S GH-PE-42516 1996 PUBLIC ENTERPRISE/PR 0.00 26.45 0.00 18.99 4.37 0.00 NA NA GH-PE-975 1996 GOVERNMENT BASIC EDUCATION 0.00 50.00 0.00 43.09 20.14 0.00 U U GH-PE-973 1996 MINISTRY OF FINANCE URBAN ENV.SANITATION 0.00 71.00 0.00 51.68 31.81 0.00 S S GH-PE-957 1996 GOVERNMENT HWY SECT INV.PROG 0.00 100.00 0.00 65.05 7.77 0.00 S S GH-PE-943 1996 GOVT OF GHANA NON-BANK FIN INS AST 0.00 23.90 0.00 18.19 13.87 0.00 S U GH-PE-45588 1997 GOVERNMENT PUB. FIN. MGMT. TAP 0.00 20.90 0.00 16.69 10.83 0.00 S S GH-PE-41150 1997 GOV'T OF GHANA VILLAGE INFRASTRUCTU 0.00 30.00 0.00 23.74 -2.23 0.00 S HS GH-PE-949 1998 GOVERNMENT HEALTH SCTR SUPPORT 0.00 35.00 0.00 30.70 5.40 0.00 HS S GH-PE-946 1998 GOVT OF GHANA NAT.RES.MANAGEMENT 0.00 9.30 0.00 9.36 3.03 0.00 S S GH-PE-970 1999 GOV. OF GHANA TRADE GATEWAY & INV. 0.00 50.50 0.00 48.62 .13 0.00 S S
Total 0.00 1,014.06 2.23 474.51 213.34 29.82
Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 508.76 2,639.85 3,148.61 of which has been repaid: 0.00 247.61 247.61 Total now held by IBRD and IDA: 1,011.83 2,281.31 3,293.14 Amount sold 0.00 .38 .38 Of which repaid : 0.00 .38 .38 Total Undisbursed : 474.51 16.07 490.58 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Following the FY94 Annual Review of Portfolio performance (ARPP) , a letter based system was introduced (HS = highly Satisfactory, S - satisfactory, U - unsatisfactory, HU= highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
Note: Disbursement data is updated at the end of the first week of the month. Annex F Page 2 of 2 Ghana STATEMENT OF IFC's Committed and Disbursed Portfolio As of 3 1-Mar-99 (In US Dollar Millions)
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1988/89/91/93 Bogosu 6.48 1.72 5.35 13.44 6.48 1.72 5.35 13.44 1989/91/93 Cont Acceptances 0.00 .88 0.00 0.00 0.00 .88 0.00 0.00 1989/92 Wahome Steel .87 .44 0.00 0.00 .87 .44 0.00 0.00 1990 AEF Alugan .05 0.00 0.00 0.00 .05 0.00 0.00 0.00 1990/91/96 GAGL 4.50 2.55 8.11 0.00 4.50 2.55 8.11 0.00 1991 AEF Packrite .06 0.00 0.00 0.00 .06 0.00 0.00 0.00 1991 GHANAL 0.00 .44 0.00 0.00 0.00 .44 0.00 0.00 1991/92 Hotel Inv. Ghana 1.63 0.00 0.00 0.00 1.63 0.00 0.00 0.00 1992 AEF BMK .92 0.00 0.00 0.00 .92 0.00 0.00 0.00 1992 AEF CFL .28 0.00 0.00 0.00 .28 0.00 0.00 0.00 1992/93 Ghana Leasing 2.01 .75 0.00 0.00 2.01 .75 0.00 0.00 1993 AEFAfariwaa .18 0.00 0.00 0.00 .18 0.00 0.00 0.00 1993 AEF GHUMCO .12 0.00 0.00 0.00 .12 0.00 0.00 0.00 1993/96 ECOBANK 4.85 0.00 0.00 0.00 .75 0.00 0.00 0.00 1994 AEF Shangri-la 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.00 1994 GHACEM .94 0.00 0.00 0.00 .94 0.00 0.00 0.00 1995 AEF Dupaul Wood .50 0.00 0.00 0.00 .50 0.00 0.00 0.00 1996 AEF Pako Bay 0.00 .05 0.00 0.00 0.00 0.00 0.00 0.00 1996 AEF Tacks Farms .37 0.00 0.00 0.00 .37 0.00 0.00 0.00 1997 AEFPTS 0.00 0.00 .31 0.00 0.00 0.00 .31 0.00 1998 AEF NCS 0.00 0.00 .67 0.00 0.00 0.00 .67 0.00 1998 AEF Plantation .50 0.00 0.00 0.00 .36 0.00 0.00 0.00
Total Portfolio: 25.56 6.83 14.44 13.44 21.32 6.78 14.44 13.44
Approvals Pending Commitment Loan Equity Quasi Partic 1995 AEF GHANA PACK .36 0.00 0.00 0.00
Total Pending Commitment: .36 0.00 0.00 0.00 Annex G Page 1 of 1
GHANA
SECOND ECONOMIC REFORM SUPPORT OPERATION
IMPACT INDICATORS
1998 2001
Domestic interest payments as % of total recurrent 30.1 16.0 expenditures
Expenditures is health and education as % of total 22.0 29.0 domestically financed expenditures
Road arrears as % of GDP 0.8 --
Cocoa exports (thousand tons) 382 434
Non-performing loans in banking system (% of total) 23 12
Private Investment as % of GDP 11.6 14.8
Source: Govemmentof Ghana and Bank estimates. Annex H Page 1 of 1 GHANA
SECOND ECONOMIC REFORM SUPPORT OPERATION
TIMETABLE OF KEY PROCESSING EVENTS
1. Time Taken to Prepare the Credit 3 Months
2. Identification Mission December 1-13, 1998
3. Concept Review Meeting February 9, 1999
4. ROC Review Meeting April 1, 1999
5. Appraisal/Negotiations April 8-21, 1999
6. Board Presentation May 27, 1999
7. Planned Effectiveness Date July 1, 1999
8. Closing Date of Project June 30, 2001 Annex I In cam of reply the A mcnberGd dameof thsU MINISTRY OF FINANCE W15eZFho,dd9be quoted~P. 0. BOX N 40 OurRef...... ACCRA. YourRef No___. April 29, 1999
Tel. No ...... ZBSPU3LIC OP QHANA...... 19...
MR. JEAN-LOUISSARBIB VICEPRESIDENT AFRICAREGION WORLDBANK WASHINGTON,D.C. U.S.A.
Dear Mr. Sarbib,
GHANA: SECOND ECONOMIC REFORM POLICY OPERATION LETTER OF DEVELOPMENT POLICY
INTRODUCTION
1. The Governmentof Ghana requests the International DevelopmentAssociation (IDA) to provide a credit in the sum of US$180 million in support of the on-goingeconomic reform programme.
2. The central objective of the Government's macroeconomic policy for 1999 is to accelerate overall growth of the economy, achieve a single digit rate of inflation, and improve the external payments position of the country. The proposed credit follows up on the one-tranche Economic Reform Support Operation (ERSO) which was approvedby the Board in June 1998.
3. The policy measures stated in this letter are outlined in the Government's Policy FrameworkPaper (PFP) for 1999-2001 that was prepared in collaborationwith the staff of the World Bank and the International Monetary Fund (IMF). A copy is attached for your information. I confirm that the PFP is an accurate reflectionof the Government's economic and social policies and this letter presents the policies and programmesto be supportedby this credit.
4. Recent Economic Developments Provisional estimatesindicate that the overall Gross DomesticProduct (GDP)rose by 4.6 percent in 1998,higher than the 1997 rate of 4.2 percent. The energycrisis had a limited adverseimpact on the economy because the agriculturalsector with the largest share in GDP was virtually unaffected by the crisis. Moreover,measures were taken to insulatethe bulk of industry and services from the power outages. Growthin output was largelyobtained from a good cocoa crop and increasedproduction level in the mining sector. On the expenditureside, the growth was export led. The inflation rate continuedits downwardtrend from 20.8 percent at the end of 1997to 13.7 percent at the end of March 1999. Food prices that rose rapidly in the first quarter of 1998 subsequently continued to decline through March with improved domestic harvests. Non-food prices were relatively stable after the first half of the year.
Fiscal Developments
5. Provisional figures show that the overall budget deficit on a commitment basis, dropped from 9.9 percent of GDP in 1997 to 8.1 percent in 1998. The domestic primary balance also improved to 3.6 percent of GDP from 3.2 percent in 1997. Total expenditure remained largely unchanged in 1998 though recurrent expenditure increased significantly because of an increase in domestic interest payments on treasury bills. Expenditures for health and education were on target relative to GDP, and above their 1997 ratios. Total revenues and grants were 20.5 percent of GDP in 1998, two percentage points higher than in 1997. The overall cash deficit was financed predominantly from domestic sources.
Monetary Developments
6. The Bank of Ghana tightened monetary policy considerably in 1998, containing the growth rate of reserve money to 16.7 percent in 1998 from 33.4 percent in 1997. The close collaboration between the Central Bank and the Government resulted in a slower growth in broad money of 17.7 percent for the year. Improvements in the macroeconomic fundamentals led to a decline in both the nominal and real interest rates. Consequently, the Bank of Ghara reduced its rediscount rate from 42 percent to 37 percent in November 1998 and then to 27 percent in March 1999. Credit to the private sector expanded by 31.3 percent in 1998.
External sector
7. The year witnessed strong export growth led by a good cocoa crop. Cocoa production for 1997-98 crop year was 409,000 metric tonnes, up from 323,000 metric tonnes in the 1996-97 crop year. This was due primarily to favourable weather, good husbandry practices and incentives extended to farmers by the Government. Cocoa export receipt also benefited from a higher- than-expected average price on the world market. Considerable increases in volume of export were also recorded in gold that saw an increase of 18.8 percent over the export volume of the previous year. On the other hand, however, timber exports declined due primarily to an intemational price shock.
8. The total value of imports for 1998 showed a 4.0 percent increase over that of 1997 resulting in a trade deficit that was equivalent to 5.2 percent of GDP, compared to 9.3 percent of GDP in 1997. The current account, including official transfers, recorded a deficit equivalent to 3.7 percent of GDP. On the other hand, the capital account showed a net inflow of $371.5 million. These inflows were more than enough to finance the current account deficit, resulting in an overall balance of payments surplus of $99.4 million. The exchange rate of the cedi stabilised by recording a decline of
2 4.1 percent in 1998 against the US dollar compared to a depreciation of 22.7 percent in the previous year.
StructuralReforms
9. The Govermnent has made considerable progress in this area. Cocoa sector reformns are on track and producer's share of the fob price was increased to 56 percent during the 1998-99 crop season. Private licensed buying companies currently purchase about 40 percent of the crop. A medium term strategy to foster development of the cocoa sector has been formulated after broad consultation with stakeholders. The Public Utilities Regulatory Commission (PURC) has been set up as an independent body to regulate tariffs on utilities to the benefit of both consumers and producers. As a first step, the Commission effected new tariffs amounting to 200 percent increase in the rates for electricity consumption to reduce the operating losses of the Electricity Company of Ghana. A new wage policy for the public sector has also been approved to take effect from January 1, 1999.
OUTLOOK FOR 1999-2000
MacroeconomicObjectives
10. For the period 1999-2001, the Government's macroeconomic targets include achieving an average GDP growth rate of 5.8 percent and an end of period inflation rate of 5 percent. For 1999, a real GDP growth rate of 5.5 percent and an end-of- period inflation rate of 9.5 percent have been targeted. Additionally, an overall budget deficit equivalent to 5.3 percent of GDP and a primary budget surplus equivalent to 3.5 percent of GDP are envisaged.
11. The central objective of the macroeconomic policy for 1999 is to accelerate the overall economic growth and to reduce inflation to a single digit to be achieved through a further tightening of fiscal and monetary policies. Growth in broad money is expected to be 15 percent in 1999. The Open Market Operations by the Bank of Ghana will be stepped up to mop-up excess liquidity in the economy, and at the same time, BOG and the newly established Securities Regulatory Commission (SRC) will implement policies to deepen secondary market activity in the money market. The Govenment will also continue to pursue a flexible exchangerate policy so to provide incentives for exporters and enhance Ghana's competitiveness on the international market.
Key Structural Reforms
Fiscal Policy:
12. VAT
Parliament passed the VAT Act for its re-introduction on December 30, 1998. The tax was successfully re-introduced at the rate of 10 percent to replace the sales and service taxes. The returns for January and February received by the VAT Service were encouraging. The performance of this tax is being monitored and measures will
3 be taken to improvethe yield if it should be necessary. In addition,the first phase of the Taxpayer IdentificationNumber (TIN) project was successfully introduced in 1998. This phase concentrated on the VAT registered traders. As of end March 1999, 13,000 traders who had then applied for registration under VAT have been issued with their TINs. The registration scheme is to be extended to cover the remaining categories of taxpayers from May 1St 1999. With the passing of the RevenueAgencies (Governing) Board Act, 1998 (t-.ct 558), a new board has been set up to co-ordinatethe activities of all the tax collectionagencies. This is to eliminate duplication of work and ensure maximum efficiency in the tax collection effort. Under the auspices of this Board, the successes achieved through the integrated tax audits carriedout in 1998 will be augrnented.
13. MTEF
In keeping with the commitment to improve financial management in the public sector, the Governmentin 1999, adopted the Medium Term ExpenditureFramework (MTEF) as its approachto budget preparation. The frameworkhinges on three year rolling budgets as against the annual budgets of the past.
14. To achieve the policy objective of allocating resources most efficiently, the Government in 1998 developed budget guidelines that directed all ministries, departmentsand agencies (MDAs)to prepare strategicplans as the basis for costing activities as inputs for the preparation of the 1999 budget. These steps have ensured that MDAprogrammes and policies are directly relatedto national priorities. Outlays on social services, for example, are targeted to rise from 30.7 percent of total discretionary expenditure in 1999 to 31.8 percent in 2001. The process is also designedto allow for trade-offsof programmes and resourcesamong MDAs over the three-yearperiod. In implementingthis new approachto budgeting,the Government exceeded its initial target of piloting the method in only three ministries, by successfullycarrying it out for all MDAs.
15. As part of a follow up to improve the system, the programmefor the next three years (1999 - 2001) will seek to develop performance indicators and a monitoring mechanism as well as introducing a benchmarking system to aid the budget implementation process. These will ensure not only the measurement of performance, but also facilitate the enforcement of compliance in resource use through performance auditing. Automation of the budget preparation system to ensure that it fits into the Budget and Public Expenditure ManagemenitSystem computerizationprogramme is another major activity planned for the period. A macroeconomic framework model is being designed under Public Financial ManagementReform Programmeto be incorporatedinto the MTEF. Effortswill also be made to link the budget reforms to other public sector reforms such as Civil Service Performance Improvement Programme, National Institutional Renewal Programmeand the decentralizationprogramme in an effort to improve public sector managementin general.
4 16. Tariff Reform
The trade and tariff system in Ghana has undergone substantial changes since the launching of the Economic Recovery Programme (ERP) in 1983 and the implementation of several liberalization programmes through the mid 1990's. The tariff system had three rates namely, 0, 10 and 25 percent. In 1998, a 5 percent rate was added to facilitate shifting zero-rated goods to a positive rate and the hitherto 17.5 percent special tax has been abolished. The index of aggregate trade competitiveness for Ghana, according to the International Monetary Fund, is currently in the moderate range.
17. A major problem in the tariff system in Ghana has been the large share of zero-rated imports and exemptions. Reform of the tariff system aims at addressing the issue of the widespread use of zero-rates, the problem with exemptions and the relatively high top rate of 25 percent. In addition, the Government will embark on a comprehensive study of the current tariff regime with the objective of increasing the effective duty rates and reducing the top rate in harmony with the sub-region. The study will be completed by end September 1999 and recommendations included in the budget for the year 2000.
18. The objectives of the current tariff reforms are multi-facetted. The new Customs and Excise (Duties and Other Taxes) Act, 1999, (Act 565), aims at the gradual upgrading of some zero-rated items into positive rates. Consequently, the import duty rates on specialty vehicles have been increased from zero to rates between 5 and 25 percent. Secondly, the import duties on some items have been lowered to facilitate the objective of harmonising tariffs in the ECOWAS sub-region and also for some health reasons. Finally, top rates on selected items have been lowered to encourage the importation of foreign technology and the rationalisation of tariffs in light of the introduction of VAT
19. Road Arrears
To resolve the problem of road arrears, the Government has decided to terminate in an orderly fashion seven of the eight road contracts that account for 70 percent of the total arrears and the work left to be done. In connection, a team has been formed to inspect the affected projects. This vvill enable the Ministry of Roads and Transport to determine the physical cut-off points of the projects and repackage them for donor support. Future contracts will continue to be awarded on the basis of operi tendering and where they have to be negotiated or sole-sourced because they are tied to donor funds or concessionary facilities, they would be subjected to value for money assessment. At the same time, Government will seek external funding for the construction of major strategic roads. A consulting firm has been engaged to assist the Attomey General, Ministries of Finance and Roads and Transport to negotiate smooth and neat programme for the termination of the contracts with the affected contractors.
20. The total outstanding arrears as of end December 1998 of ¢130 billion (excluding accrued interest) will be eliminated by the end of the year 2000. As a first positive
5 step in this direction, an amount of ¢60 billion has been earmarked for payment in the 1999 financial year. This has been factored into the budget. The other ¢70 billion will be accommodated in the budget for the year 2000.
Cocoa Sector Reform
21. Cocoa remains an important contributor to the Ghanaian economy. Its contribution to the agricultural real GDP amounts to about 10 percent and the sector supports the livelihood of about 800,000 farm families.
22. In April 1999, Cabinet approved a medium term strategy for the sector that was developed through broad consultations with stakeholders in the sector. The objectives of the strategy are to ensure increased and sustainable production and farmers incomes and the maintenance of quality. These are to be achieved through effective intemal and extemal marketing, adequate incentives for farmers through adjustments in the producer price, streamlining cocoa research and extension services, and making the operations of the Ghana Cocoa Board (COCOBOD) more efficient. To avoid duplication of effort and hence waste of resources, a pilot programme to merge the extension services of both the Ministry of Agriculture and COCOBOD is underway. The Govermnent will take steps to complete the merger of both institutions by end 1999, based on lessons from the pilot.
23. Highlights of the Cocoa Strategy include increasing cocoa production to about 500,000 metric tonnes by the year 2004/5 and to 700,000 metric tonnes by the year 2009/10 and sustaining it at that level. The Government has taken steps to deepen the internal marketing of cocoa by giving equal assess to all Licensed Buying Companies (LBCs) to COCOBOD warehouses and financing for crop purchases. In particular, the COCOBOD has invited LBCs to inspect and indicate interest in the use of COCOBOD's warehouses. The Government is also in the process of divesting the state-owned Produce Buying Company that will be offered for sale by June 1999. Moreover, all qualified LBCs, including the PBC, will be allowed to export 30 percent of their domestic purchase beginning with the 2000/1 crop year. The Quality Control Division (QCD) of COCOBOD will be maintained as a public sector institution, while price discounts on exportable cocoa to domestic processors will be abolished at the beginning of the 1999/2000 crop year. Furthermore, the producer price will be increased to 65 percent of the fo.b. price for the 1999/2000 season and gradually to 70 percent by 2004/5. Finally, the tax on cocoa will be reduced from the current level of 25.8 percent of f.o.b. to 15 percent by the year 2004/5. COCOBOD will also be restructured to play a more regulatory and monitoring role and be the main source of information on the industry.
24. The cocoa sector strategy will be publicly announced in early May 1999. To ensure the successful implementation of the strategy, a secretariat will be established for a period of two years, which will report directly to a steering committee made up of stakeholders in the sector. The committee will among other things be responsible for designing the necessary regulatory and organizational framework, coordinating technical and financial support for reform implementation. The secretariat will also
6 provide information on the reform programme to stakeholders. The committee and secretariat will be in place by end June 1999.
25. The Government intends to assess progress during the first three years of the reforms with a view to moving toward a fully competitive system with an open entry.
Financial Sector Reform
Status of Banking System of Ghana
26. The banking system in Ghana consists of seventeen banks. This is composed of nine commercial banks, four merchant banks and four development banks. 27. The system has undergone significant reform since the introduction of Financial Sector Adjustment Programme (FINSAP) in the late 80's, as part of an overall Economic Reform Programme (ERP) to correct the structural imbalances in the economy. The problems of the banking system that necessitated the introduction of FINSAP included too many interventions by Government in the business of the banks such as directed credit ceilings and imposition of management personnel on the financial institutions. Others were bad management practices and increased risk relating to loans and foreign currency exposure. Hence, institutional reform measures were initiated under FINSAP alongside with other measures such as the deregulation of interest rates and bank charges, phased removal of credit and exchange controls, liberalization of trade, market determination of exchange rates and enactment of new laws to strengthen the financial system. The institutional reform measures adopted included the reconstitution of bank boards, the engagement of turn-around management consultants, staff retrenchments, branch rationalization and the strengthening of the regulatory and supervisory framework. An important aspect of the financial sector reform programme involved the conversion/ replacement of non- performing assets of many of the commercial banks into Bank of Ghana bonds. It was recognized that an efficient and responsive financial system with a robust banking sector as its core, would improve financial intermediation considerably and increase the flow of resources to their most productive uses, which was perceived as a necessary condition for the success of the ERP. 28. On the average, the banking system's provision for bad and doubtful debts as a ratio of gross credit stood at 16.7% as of the end of 1998. The ratio of non-performing loans to gross credit was 17.2% at the same time. The overall profitability ratios of the banks for 1998 were however significantly lower than the realized figures for 1997.
Measures to Strengthen the Banking System
29. During 1999, the Bank of Ghana will take measures to increase the soundness and efficiency of the financial system as a whole. The Bank of Ghana will strengthen both on-site and off-site surveillance procedures to ensure compliance with the capital adequacy ratio and monitor trends in the net foreign exchange risk being taken by the banks. The Bank of Ghana has lifted the freeze on new bank licensing. Amendments will be introduced into the Bank of Ghana Law to increase its autonomy in the formulation and implementation of monetary policy. During the year, the Banking 7 Law will also be amended to strengthen the Bank of Ghana's power to supervise the financial system. Draft legislation will be presented to Parliament by end 1999. New technology is being acquired to improve the efficiency of the payments system in order to facilitate financial intermediation. The Bank of Ghana will off-load its shares in Ghanaian banks by mid 2000.
30. Although most banks show signs of improved efficiency and performance in terms of compliance with capital adequacy requirements, there are still some weak banks that require action. All but three banks satisfied the minimum capital adequacy ratio of 6% as of the end December 1998. Banks that do not meet the legally required capital adequacy ratio will have their licenses withdrawn by September of this year and will be liquidated. In implementing this decision, due care will be taken to protect depositors, to manage staff severance costs and to ensure an orderly and transparent process.
31. The banking sector divestiture programme was active and vigorous during the period 1994-96 when a merger was implemented and two Initial Public Offers (IPOs) were completed. Since that time, the search for strategic investors has slowed the pace of the programme. Expressions of interests from prospective strategic investors have, however, continued to be active.
32. With regards to the Ghana Commercial Bank (GCB), the immediate focus of activities will be to (i) establish a new management team; (ii) re-launch the search for a strategic investor; and (iii) continue off-loading shares on the Ghana Stock Exchange. The new CEO will be offered an employment contract by June 30th, 1999. The Government is to engage an investment advisor by end June 1999 to undertake the strategic investor search, in order to issue the investment memorandum by end October 1999. The evaluation of technical proposals should be completed by the end of February 2000. This will enable the Government to open financial proposals and to invite the selected bidder for negotiations in early 2000. By this time, the Government would have placed the remaining shares on the Ghana Stock Exchange.
33. The National Investment Bank (NIB) divestiture has not followed the fast track vision envisaged at the start of the programme in 1995. The exercise is in its third round of discussions and negotiations. Several prospective strategic investors have been identified in the current round and it is expected that a deal will be completed within the next six months. In the event that a firm offer has not been received and is not being negotiated by June 30'h 1999, the Government will re-launch the search for a strategic investor with the assistance of a sales advisor. To prevent a further deterioration of NIB, a memorandum of understanding (MOU) has been signed with the Bank of Ghana and the Ministry of Finance.
34. With respect to Agricultural Development Bank (ADB), the Government will undertake a comprehensive study of agricultural and rural finance. It will prepare a strategic plan for the development of additional sources of credit to the agricultural sector and options for the role, strategy, governance and ownership of ADB to be completed by June 2000.
8 Energy SectorReform
35. Building on the new regulatory framework embodying the Public Utilities Regulatory Commission (Act 538 of 1997) and the Energy Comrnission (Act 541 of 1997), reforms in this sector will remain important to attract private participation in both petroleum and power. To that end, the Government has published a Statement of Power Sector Development Policy to outline the remaining reform agenda for public dissemination and discussion with stakeholders in 1999. In light of the vulnerability to fluctuations in hydroelectric power supply that were highlighted by the 1998 "energy crisis", the Government is preparing a Transitional Plan for Wholesale Power Supply (1999-2001). This plan will indicate a least cost strategy for increasing thermal power supply to complement the projected availability of hydropower until the delivery of natural gas from Nigeria via the proposed West Africa Gas Pipeline Project. Before end-December 1999, the Government will present a draft legislative instrument for Parliamentary consideration and approval, to establish the Electricity Regulations (Operation of the National Interconnected System), under which the Electricity Transmission Unit will operate the National Interconnected System, dispatch the "Power Pool", and administer the wholesale power supply market.
36. The existing power utilities will complete the implementation of the financial recovery plans approved by the Government to deal with past liabilities and to restore their creditworthiness. The VRA is in the process of privatising its thermal generation assets and will complete the operational separation of its Electricity Transmission Utility from its other business units by December 1999. The ECG and the Northem Electrification Department of VRA (NED) are being restructured into a single company with strategic business units to manage the distribution zones. The company will issue invitations for private strategic partners to form joint venture companies to acquire licenses to run electricity distribution services in each zone by June 2000. To this end, a financial advisor will be appointed by December 1999 to assist in this process.
37. The Public Utilities Regulatory Commission (PURC) was established to ensure transparency in the setting and adjustment of tariffs for public utilities, including those involved in the provision of electricity supply services. Since it became operational in November 1997, the PURC has reviewed electricity tariffs on two occasions in response to proposals submitted by the power utility companies. The first review was carried out between November 1997 and January 1998 with new tariffs becoming effective in February 1998. The second review resufted in the approval of new tariffs effective from September 1998 to December 1999.
38. The Government's policy is to base electricity tariffs on the marginal economic cost of supply. Within this policy framework, the PURC will finalize the "Guidelines for Fixing Rates for Electricity Services" to provide for greater transparency in setting electricity tariffs by September 1999. The guidelines will form the basis of electricity pricing from the year 2000 and beyond. In the mid-term, the PURC will rationalize the existing tariff structure and implement appropriate adjustments in rate levels to reflect the economic cost of electricity supply in the country. The PURC is also currently drafting a number of Legislative Instruments to give effect to its mandate of
9 ensuring consumer protection and better quality of service from electricity utility companies.
39. On petroleum,the financialrestructuring of the Tema Oil Refinery (TOR) Ltd. will be completedby June 1999 to enable the Government to offer the company for sale before end-December 1999. The Government will prepare and present for consideration and approval of the Parliament before end-December 1999, the PetroleumRegulations - Marketing of Petroleum Productsto provide the framework for, inter alia, phasing out the practice of setting maximum retail margins for the operationsof the oil marketing companies(OMCs).
Divestiture
40. There is the renewed commitmentto complete the current divestitureprogramme by December 2001. Institutional arrangements will be re-focussed to assign more resources and attention to larger and more significantprivatization, for example the ElectricityCompany of Ghana, the Ghana Railways Corporationand the remaining state owned banks. The Government is committed to streamlining the bidding procedures to improve transparency of the process and significantly increase the speed of decisionmaking. The heart of this strategyis to put all qualificationissues up-front and award tenders based on one variable that is price.
41. Small and medium enterprises will be disposed of more rapidly through clear proceduresthat do not require senior level decision making. The Governmentwill also renew its emphasis on the support for strengthening the regulatory process, notably in the energy,transport and telecommunicationssectors.
Conclusion
42. The reform measures described above are fully consistent with the Government's commitmentto develop a dynamic and efficient public sector to support a sustainable private sector-ledeconomic development. I therefore hope that IDA will approve the requested credit amount to support this programme.
196 KWAMEEPRAH STER OF FINAN E
10 Annex J
GHANA
Policy Framework Paper, 1999-2001
Prepared by the Ghanaian authorities in collaboration with the staffs of the Itnternational Monetary Fund and the World Bank
April 8, 1999
I. Introduction
1. In its document "Ghana-Vision 2020", the government set forth a development strategy aimed at creating a stable macroeconomic environment and implementing a decisive structural transformation to foster strong economic growth and a broad-based improvement of living standards.' The strategy envisages steps to achieve balanced social and regional development, and encourage private sector activity and export orientation. This policy framework paper focuses on the policies for 1999-2001 in support of which the authorities are requesting from the RMFa new three-year Enhanced Structural Adjustment Facility (ESAF) arrangement for the period 1999-2001. Also, in support of this strategy, the World Bank is expected to approve a second Economic Reform Support Operation (ERSO II) in 1999 to deepen the reforms that are being carried out under the first ERSO approved in June 1998.
II. RECENT ECONOMIC TRENDS
2. Growth and prices. After a period of large economic imbalances in the early 1990s, Ghana's macroeconomic performance has improved considerably since 1997 as budgetary discipline has been restored and current account deficits contained. Real GDP growth increased from 4.2 percent in 1997 to 4.6 percent in 1998, in spite of energy shortages early in the year. A good cocoa crop and higher production in the mining sector were key sources of output growth. The inflation rate declined from 21 percent at the end of 1997 to less than 16 percent at the end of 1998.
3. Fiscal. The overall budget deficit on a commitment basis dropped from 9.9 percent of GDP in 1997 to 8.1 percent in 1998, while the domestic primary surplus improved from 3.2 percent of GDP to 3.6 percent over the same period. These results were driven mainly by higher total revenue and grants, as total expenditure remained unchanged as a percent of GDP. Recurrent expenditure rose, mostly as a result of increased domestic interest payments. Arrears to contractors in the road sector reemerged, reflecting a continued difficulty in limiting road construction to the amount budgeted. Expenditures for health and education as a percentage of
'RepubhiCof Ghana,"Ghana-Vision 2020 (The First Step 1996-2000)",AcCra; January 6, 1995. -2-
GDP were above the 1997 levels.
4. A medium-term expenditure framework (MTEF) was adopted for the first time in the preparation of the 1999 budget for all ministries, and, in late-December 1998, a value-added tax was successfully reintroduced at a rate of 10 percent. A central revenue board was appointed to oversee all tax agencies with a view to ensuring better coordination among them.
5. Money and credit. The Bank of Ghana tightened monetary policy considerably reducing the growth rate of reserve money from 33 percent during 1997 to 17 percent during 1998. As a result, broad money expansion decelerated to 18 percent in 1998. The velocity of circulation fell in response to a decline in the inflation rate. Treasury bill rates remained high, at about 40 percent, until the third quarter of 1998 when improved macroeconomic performance brought about a noticeable decline in nominal and real interest rates. The decline in interest rates and inflationary expectations allowed the central bank to reduce its rediscount rate to 37 percent in November 1998, and to 32 percent in January 1999. Credit to the private sector expanded by 31 percent during 1998, well in excess of nominal GDP.
6. External sector. Strong export growth resumed in 1998 propelled by a good cocoa crop. Import growth in value terms slowed as petroleum prices declined markedly. The current account deficit, including grants, is estimated to have been 31/2percent of GDP, over 5 percentage points lower than 1997. The significant improvement in the current account performance allowed an increase of US$100 million in the net foreign assets of the Bank of Ghana, despite some deceleration in official capital inflows and larger amortization of external public debt during 1998. The external public debt service declined from 32 percent of exports of goods and non-factor services in 1997 to 28 percent in 1998. The cedi depreciated by about 4.3 percent against the U.S. dollar during 1998, an appreciation of 4.1 percent in real effective terms.
7. Structural reforms. The government is making progress in implementing key structural reforms, albeit with some delays to ensure stakeholders' support. Cocoa sector reforms continue to move ahead: the producer's share in the f.o.b. price of cocoa was increased to 56 percent for the 1998/99 crop season, and private-licensed buying companies now purchase 40-50 percent of the cocoa crop. However, the sale of the Produce Buying Company (PBC) was delayed as experts were consulted over the details of the privatization. A medium-term strategy to foster development in the cocoa sector was adopted by the cabinet in March 1999. In the energy sector, the Public Utilities Regulatory Commission (PURC), established in late 1997 to set tariffs on an autonomous basis, raised significantly electricity and water tariffs in 1998, so as to eliminate operating losses in these sectors reform. Ex-depot wholesale petroleum prices were introduced, based on a automatic formula for adjusting them in line with petroleum import price changes. The offer for sale of the Ghana Oil Company took place in October, while that of the Tema Oil Refinery was delayed because of ongoing rehabilitation and financial restructuring. A new public sector wage policy, based on a 22-level grade structure, will be implemented from January 1, 1999. - 3 -
III. OBJECTIVES, STRATEGIES AND POLICIES FOR 1999-2001
A. Medium-Term Framework: Objectives and Strategies
8. Macroeconomic framework and strategy. The strategy for the next three years, while continuing to address macroeconomic imbalances, will focus on removing structural bottlenecks and creating an environment for sustained and balanced growth. The government expects to reduce inflation to single digit levels, increase public savings, contain the current account deficit, and achieve higher efficiency in the economy. The government intends to make private investment an engine of growth by creating a supportive environment, in particular by encouraging private sector marketing and exporting of cocoa, by increasing efficiency in the financial sector, and by placing a greater emphasis on social and poverty alleviation issues and the improvement of basic infrastructure.
9. Output growth is projected to accelerate to 51/2percent in 1999 and increase to 6 percent in each of the two succeeding years, allowing output per capita to increase by over 21/2percent on average in the next three years. The share of private investment in GDP is expected to rise by about 3 percentage points, as private sector activity is boosted by rising confidence levels and expanding business opportunities, such as in nontraditional exports. Over the medium term, foreign aid is projected to decline, but it is expected to remain at levels consistent with the program's import and growth targets.
10. The main elements of the macroeconomic program for the next three years are (a) a sound fiscal policy that will maintain the domestic primary balance above 31/2percent of GDP, allowing the net domestic borrowing of the government to be more than halved with respect to I998 while gradually reducing the stock of domestic debt to 20 percent of GDP by 2001; (b) moderate growth of monetary aggregates to ensure that inflation drops to single-digit levels in 1999 and stabilizes at about 5 percent thereafter; and (c) an increase in gross international reserves to 3 months of imports at the end of 2001.
11. The program will imply decisive structural reforms, in particular the strategy for the next three years will focus on: (a) enhancing competition in the cocoa sector by allowing private agents to export cocoa, while ensuring equal access to crop financing and warehousing; (b) increasing efficiency in the banking sector by restructuring distressed banks, strengthening supervision, and introducing improved legislation both for the banking system and the central bank; and (c) continuing the divestiture of public enterprises. In addition, the government will continue to increase the efficiency of the public sector by restructuring subvented agencies and central management agencies and decentralizing operations to local levels. The government will take steps to increase the effectiveness of resources directed to education and health. A national poverty reduction strategy will be prepared. - 4 -
B. Financial Policies
12. Taxes. The government hopes to increase the revenue-to-GDP ratio to 19 percent over the medium term. In particular, the government will monitor the performance of the recently reintroduced value-added tax (VAT) and will, if necessary, adjust the VAT rate. Efforts will also be made to cut back exemptions and reduce the top tariff rate, so as to remove distortions and improve equity. The government will also strengthen tax administration and improve collection procedures and audit practices.
13. Expenditure. Total expenditure will be lowered by about 4 percent of GDP from 1998 to 2001. Prudent wage policies, together with a decline in domestic interest payments as a result of smaller borrowing requirements and domestic interest rates will allow for the reduction in expenditures. Domestic- and foreign-financed capital expenditures are projected to be maintained broadly at current levels. The government expects a reduction in the overall balance (on a commitment basis) of about 21/2percentage points of GDP in 1999.
14. Monetary policy. The main objective of monetary policy is to achieve single-digit inflation in 1999 and to bring the inflation rate in line with that of partner countries in the medium term. To this end, the Bank of Ghana intends to limit broad money growth in line with the projected growth in nominal GDP. Reserve money is targeted to increase I11/2 percent in 1999 and about 10 percent in the following years through the use of indirect monetary policy instruments, including a more extensive use of purchasing agreements.
15. The Bank of Ghana will keep domestic and foreign exchange market developments under close review and will adjust policies as needed. It will continue to take steps to deepen its domestic and foreign exchange markets and has requested Fund assistance in this area.
16. External sector. The current account deficit, including official transfers, is expected to gradually narrow and to reach about 21/2percent of GDP by 2001, an improvement of 1 percentage point with respect to 1998. Gross international reserves are targeted to improve steadily to 3 months of imports in 2001.
17. The government will continue to review the tariff structure to enhance the external competitiveness of the local industry, to harmonize tariff rates with regional practices, and to remove distortions. While taking steps to curtail exemptions, the government will gradually reduce the average tariff ratio over the next three years to less than 10 percent.
18. Debt sustainability analysis. High levels of nonconcessional borrowing in the mid-1990s caused a marked increase in the debt burden. However, since then the government has placed strict limits on contracting and guaranteeing of nonconcessional borrowing. As a result, net present value of debt relative to exports, which stood at 198 percent at the end of 1998, is projected to fall steadily through 2001. The nominal debt stock is projected to decline to about 71 percent of GDP by 2001 from about 79 percent at the end of 1998. Given the favorable -5 -
outlook for exports, combined with the largely concessional nature of Ghana's external debt, debt service is projected to decline to below 20 percent of exports of goods and nonfactor services by the year 2001 from 28 percent in 1998, thus making Ghana's external debt burden sustainable, without recourse to existing debt relief mechanisms, in the absence of major external shocks.
C. Structural and Social Policies
Attaining sustainable growth
19. Agriculture. Consistent with the critical role of agriculture in the economy, the government has formulated an Accelerated Agricultural Growth Strategy (AAGS) designed to create an environment that will enable the private sector to boost agricultural production, agro-processing and exports, and to increase the agriculture sector's growth from the current rate of 3-4 percent to 5-6 percent. To this end, institutional reforms and investment programs will be carried out to (i) improve access to markets and promote the production and export of selected commodities; (ii) facilitate access to agricultural technology; (iii) increase access to rural finance; (iv) improve rural infrastructure and utilities; and (v) enhance human resources and build institutional capacity. The main instrument for implementing the AAGS will be the Agricultural Services Sector Investment Program (AGSSIP). This program will be financed by the government and a pool of donor funds. The program is expected to be launched in mid-2000.
20. Cocoa reforms. In order to adapt to a rapidly changing market environment, the government is reassessing its medium-term strategy for the cocoa sector. In September 1998, a task force with a sector wide representation of stakeholders prepared a report that was discussed in a national workshop in January 1999. On the basis of these discussions the government has formulated a medium-term cocoa sector strategy, to take effect in the 1999/2000 crop season.
21. The objective of the cocoa strategy is to ensure better performance of the industry and to increase farmers' income. Its highlights include: (i) increasing producer prices to at least 60 percent of the f.o.b. price for the 1999/2000season and by at least 2 percentage points in each of the next two years; (ii) reducing the tax on cocoa from the current level of 26 percent of the f.o.b. price; (iii) allowing qualified licensed buying companies (LBCs), including the Produce Buying Company (PBC), to export 30 percent of their domestic purchases, starting with the 2000/01 crop; (iv) giving LBCs equal access to Cocoa Marketing Board (Cocobod) warehouses and crop financing; and (v) abolishing price discounts on exportable cocoa to domestic processors. As a result, cocoa production is expected to reach 500,000 tons by 2004/05. Cocobod, the cocoa marketing board, will have a regulatory role and will continue to reduce its share of the fo.b. price. The extension services of the Cocobod and the Ministry of Agriculture will be unified. The Quality Control Division (QCD) will remain a public sector institution. The PBC will be outsourced for divestiture before end-March 1999 and will be offered for sale by end-June 1999. - 6 -
22. The government believes that this strategy will best serve the interests of the country during the next three years. The authorities will assess progress during the first phase of reforms with a view to moving toward a fully competitive system with open entry.
23. Bank restructuring. The banking system in Ghana is now dominated by private banks, though the 5 majority-public-owned banks still control a third of the deposits. While most banks are sound, a few are not in compliance with the capital adequacy requirements. 2 Therefore, the government will take immediate steps to restructure weak banks and divest public shareholding in commercial banks. To ensure the efficiency and soundness of the financial system, the Bank of Ghana will strengthen both on-site and off-site supervision procedures, ensure compliance with the capital adequacy ratio, and monitor foreign exchange exposure. Both the central bank law and the banking law will be reviewed in line with best international practices. The Bank of Ghana also intends to strengthen its supervisory practices and bring prudential regulations in line with the Basle Core principles. The Bank of Ghana will streamline regulations for entry and exit and has lifted the freeze on applications for banking licenses, but will continue to assess applicants by strict professional and financial standards.
24. Divestiture program. In 1998, the government moved to a new phase of the divestiture process covering major enterprises in the transport, energy, and banking sectors. The overall divestiture program for 1999/2000 covers about 80 companies. The government intends to conduct a comprehensive review in April 1999 of the divestiture process and program. On this basis, it will set a target for program completion and take necessary steps to achieve it. An evaluation of the outsourcing program will be a key input into this overall review. In the meantime, the government will endeavor to solve the problem of the outstanding liabilities of some firns, the sale of which is constrained by end-of-service benefits and substantial customer claims. It will also seek to attract more investor interest by enhancing the quality of sale advisors and by improving disclosure of information on the program. In this respect, the government will reduce the publication lag of the annual financial reports of the Divestiture Implementation Committee (DIC), as well as complete and disseminate a detailed impact assessment of the divestiture program.
Rationalizing government operations
25. Public sector management reform. The government has begun to implement a far- reaching public sector reform program to be carried out over the next decade. The main objectives of the program are to reform central government agencies and to rationalize 175 subvented agencies, which employ about 400,000 staff. In this context, a pilot program to commercialize, restructure, or close down at least 17 subvented agencies will be completed by the end of the year 2001; enabling legislation will be presented to parliament in 1999. The
2For a reviewof the soundnessof the banking systemin Ghana,see "Ghana:Banking Sector Issues" m SM198/255(11/18/98) -7 -
Ministry of Finance, the Public Service Commission, and the National Development Planning Commission will be restructured in the next two years. The exercise will be extended to include the Ministry of Local Government and Rural Development, the State Enterprise Commission, and the Office of the Head of the Civil Service by end-200 1. Moreover, the government intends to improve and streamline policy. design and the implementation. To this end, the government drew a pilot public/private partnership program to increase private sector participation in activities now being performed by central government and subvented agencies.
26. New wage structure. A Civil Service Performance Improvement Program (CSPIP) has been established and has made progress in defining performance targets in some ministries. Further work is planned to apply it throughout the central government. The government has adopted a new wage structure for public servants. In November 1998, a Central Management Board was constituted to oversee the introduction of a uniform salary and grading structure for the public service. The first phase, which involved regrading and reclassification of the entire public service, is complete. Negotiations on the implementation of the new salary structure are ongoing, and the government intends to conclude them as soon as possible.
27. Expenditure management systems. There has been substantial progress on the government's Public Financial Management Reform Program initiated in 1996. A medium-term expenditure framework was adopted as the basis for preparing the 1999 budget and will continue to be used in the future. The exercise covered all ministries departments and agencies rather than the three priority sectors that were originally targeted. For the first time, all government resources, including external financing, have been accounted for in the budget preparation guidelines and all personnel expenses, including allowances, have been consolidated. Line ministries and agencies have based their expenditure plans on operational targets, which will facilitate the ex post assessment of performance. A new accounting framework has been adopted that allows closer monitoring of expenditures. The government has commissioned the development of a computer-based Budget and Public Expenditure Management System (BPEMS), to be fully operational by end-2000. The new rules and the BPEMS will improve expenditure control, and cash and debt management.
28. Decentralization. In order to strengthen institutional development and capacity building, a bill is to be presented to parliament in mid-1999 to create a separate local government service and facilitate human resource development in the districts. District assemblies will be encouraged to intensify their revenue collection efforts and to improve their capacity to manage expenditures. A minimum 5 percent of total tax revenue will continue to be allocated to the District Assemblies Common Fund for development expenditures. In addition, the government has approved the decentralization of 23 line departments to districts.
Strengthening infrastructure
29. The government is pursuing a strategy to improve the delivery of infrastructure services through increased private sector participation and improved pricing and cost recovery. - 8 -
Divestiture programs are under way in energy, water, and transportation.
30. Electricity. A new regulatory framework embodying the PURC (Act 538 of 1997) and the Energy Commission (Act 541 of 1997) has been set up to attract private sector participation in power and petroleum products. In.light of the vulnerabilities in power supply highlighted by the 1998 energy shortages, the government is preparing a "Statement of Power Sector Development Policy", which will outline the remaining reform agenda for discussion with stakeholders in 1999. In parallel, the government is preparing a Transitional Power System Development Plan (1999-2001). This plan will indicate a least-cost strategy for increasing thermal power supply to complement the projected availability of hydropower until 2001, prior to the delivery of natural gas from Nigeria via the proposed West Africa Gas Pipeline Project. Based on the outcome of the Transitional Power System Development Plan (1999-2001) the government will present for parliamentary consideration and approval before end-December 1999, the Electricity Regulations-Operation of the National Interconnected System, and complete the operational separation of the electricity transmission utility (National Grid Company, Ltd.) from other activities of the Volta River Authority (VRA). The VRA will divest its thermal power generation assets, and the Electricity Company of Ghana (ECG) is being restructured and will be offered for sale by end-I 999.
3 1. The existing power utilities will complete the implementation of the financial recovery plans approved by the government to deal with past liabilities and to restore their creditworthiness. Furthermore, the PURC will publish its "Guidelines for Fixing Rates for Electricity Services" to achieve greater transparency in setting electricity tariffs.
32. Petroleum. The financial restructuring of the Tema Oil Refinery (TOR) Ltd. will be completed by June 1999, enabling the government to offer the company for sale before end- December 1999. The government will prepare and present for parliamentary consideration and approval before end-December 1999, the Petroleum Regulations-Marketing of Petroleum Products which will provide the framework for phasing out maximum retail margins.
33. Transportation. The government continues to work toward creating an efficient and integrated transport network by focusing on the maintenance and rehabilitation of the road network, on the rationalization of its capital investment program, and on the participation of the private sector in railway, port, and air transport. While the Road Fund will continue to provide adequate financing for routine maintenance, the management of the program will be strengthened further. To this end, the government has initiated institutional capacity development programs in the three road agencies. The government has been accumulating large payment arrears to road contractors. To resolve the situation, the government has decided to terminate a number of contracts, to scale down domestically-financed road projects, to revise procedures for initiating projects, and to award contracts in line with World Bank procurement rules. - 9 -
34. The government aims to develop Ghana as a major regional hub and is preparing to privatize some operations at the harbors and at Kotoka International Airport. To support its policy of liberalized skies, a program of institutional reform is planned for the Ghana Civil Aviation Authority as part of the World Bank-supported Gateway Project.
Improving natural resource manlagement
35. Urban development and land administration. The government is addressing the infrastructural needs of urban centers throughout the country with special attention to land delivery. Investments will be targeted toward municipalities that have not benefited from previous assistance, while demand-driven allocations will be promoted. To this end, the government efforts will focus on building the capacity for urban sector management throughout the district assemblies and municipalities. It is widely recognized that weak title security and insufficient information have been the main hindrances to the efficient allocation of available land. The government recently commissioned a study on urban land administration, which recommends a realignment of the numerous institutions that govern land delivery and the establishment of a land information bank; it has finalized a draft national land policy.
36. Water and sewerage. In 1993, the government initiated a restructuring program aimed at improving the supply of water and sewerage services and allowing the sector to reach financial viability. The separation of responsibilities for urban and rural water, sanitation and sewage is largely complete. The government is in the process of downsizing and converting the Ghana Water and Sewerage Corporation (GWSC) into the Ghana Water Company (GWC), which will lease the urban water supply network to private operators. Two lease packages, designed to promote competition in urban water supply, will be opened for bids in October 1999. The conversion of the GWSC, including a program of staff rationalization, is expected to be completed by January 2000. The government has also initiated the transfer of all small community systems to the district assemblies. These systems will be operated by the communities, with management support from the Community Water and Sanitation Agency. This transfer should be completed by end-2000. Finally, the government has established a program of tariff increases to ensure the financial viability of the sector. The average water tariff was raised by 140 percent in March 1998. The PURC is currently considering a second tariff increase, which will be sufficient to cover operating costs of the private operators.
37. Environment. Ghana's most pressing environmental problems are deforestation from rapid timber extraction and land degradation from inappropriate cultivation and mining practices. In line with the National Environmental Action Plan the government has strengthened institutions to address environmental issues. In 1997, the government enacted a Timber Resource Management Act aimed at achieving a more sustainable rate of timber extraction and at fostering replanting and reforestation. This act provides for the adoption of transparent procedures for awarding timber rights and periodic increases in forest royalty rates; its regulations were recently enacted. The government has begun to rationalize and strengthen the various forest and timber - 10-
agencies. The government will review the current ban on log exports, with a view to finding more efficient and less costly mechanisms of ensuring sustainable forest exploitation.
38. To arrest land degradation and preserve wildlife, the government will initiate a number of collaborative pilot management schemes in the high forest and the savanna woodlands, involving individual farmers and entrepreneurs, families, schoolchildren and communities. In addition, the govemment has added the preservation of biodiversity to its list of main objectives by initiating plans to strengthen the management of wildlife areas and to implement a new National Biodiversity Strategy, including the demarcation of globally significant areas.
39. Fisheries and aquaculture. Ghana produces on average 400,000 tons of fish annually, which sustain about 1.5 million people. Tuna processing generates important export earnings and fish provides about 60 percent of the animal protein in the country. Marine demersal stocks and small pelagic fishes suffer from overfishing and unsustainable fishing methods, while the large pelagic species, especially tuna, are under exploited. The government intends to develop fisheries in a sustainable manner by improving the institutional and legal framework for proactive management of the fisheries. In particular, the government will promote private investment in fisheries, particularly in tuna, and will encourage comanagement systems in artisanal fisheries.
Investing in human capital
40. Education. The government's priorities in education, as spelled out in "Ghana Vision 2020" are: to achieve universal basic education and adult literacy, increase access to secondary and tertiary education, and strengthen labor force skills through increased provision of technical and vocational training. In line with these objectives, the government launched in 1996 a Basic Education Sector Improvement Program, with the assistance of the World Bank and other donors. Implementation of the program is, however, facing difficulties as teaching and learning goals are not being achieved. The government intends to address these problems through a number of actions to be adopted in close coordination with donors. These include the preparation of plans with clearly established targets; re-allocating resources toward disadvantaged groups; decentralizing management of education, and improving the capacity of the Ministry of Education and the Ghana Education Service. In addition, it will seek to establish partnerships with the private sector for the provision of basic education and adult literacy programs. A textbook program which aims to provide, cost-effectively, a set of textbooks to all children is also under way. To monitor improvements in the quality of basic education, the government has targeted significant improvements in the pupils' achievements in the recently introduced Performance Monitoring Test, Criterion Reference Tests, and the Basic Education Certificate Examination. Gross enrollment ratios for 2001 have been targeted at 81.2 percent for primary schools and 64.9 percent for junior secondary schools. The national net enrollment ratio for girls in primary schools has been targeted at 48.5 percent in 2001. Expenditures in education will increase from 3.8 percent of GDP in 1998 to 4.1 percent in 2001. - 11 -
41. At the secondary level, the government's program aims to increase access to good-quality senior secondary schools. The Ministry of Education's strategic plan for the next three years targets an increase in transition rates from junior secondary schools to senior secondary schools. Investments will be made in schools' facilities and teacher housing in rural areas and the curriculum will be revised to emphasize science and math. Teachers will be given more incentives to work in rural schools. Schools will be required to run at approximately full enrollment, and under enrolled schools will eventually be closed. At the same time, the management of secondary schools will be gradually decentralized with greater participation by district assemblies and the communities. At the tertiary level, efforts are now being made to increase budgetary allocations to that subsector. The government intends to address the problems of the current student loan scheme, which is plagued by default, by redesigning a self-sustaining revolving fund.
42. Health. The government's health sector reform program, which is based on the Medium Term Health Strategy (MTHS) to achieve Vision 2020, aims at providing universal access to basic health services, improving the quality and the efficiency of health services, and fostering linkages with other sectors contributing to health. The main strategies to achieve sector objectives include: (i) strengthening primary health services; (ii) improving the capacity for policy development and analysis; resource allocation, performance monitoring and evaluation, and regulation of service delivery and health professionals; (iii) strengthening national support systems for human resources, logistics and supplies, financial management and health information; and (iv) promoting private sector involvement in the delivery of health services.
43. The government has adopted a sector-wide approach to health that integrates government and donor efforts to achieve defined goals and includes joint systems to monitor sector performance. The overall per capita public expenditure on health (the equivalent of about US$6 in 1997) is low even by sub-Saharan standards. It is recognized that increased funding for health, along with a reallocation of resources to recurrent costs, is an absolute necessity. The Health Sector Program, financed by the government, external aid, and private spending on health, aims at increasing public per capita expenditures to the equivalent of US$9 in the medium term.
44. The government recognizes the need to step up efforts, including providing additional financial resources, to stop the spread of AIDS among the population. The present trends, which indicate that about 600,000 Ghanaian adults will be H1V infected by the year 2000, pose serious social and economic risks and a place heavy burden on the health sector.
Poverty
45. Poverty remains a concern in Ghana. It is more prevalent in rural areas, especially in the north of the country. There are also pockets of poverty in urban areas. The government is committed to developing a coherent approach to poverty reduction and will prepare a national poverty-reduction program for the next three years in collaboration with donors by September - 12 -
1999. Key instruments for poverty reduction will include small-scale pilot programs in rural and urban areas. Furthermore, the street-children problem and poverty monitoring at the district level will be addressed by a new World Bank project. Poverty monitoring at the national level, as well as policy interventions, will be guided by poverty assessments such as the Core Welfare Indicators Questionnaire (CWIQ) 1997 and the fourth Ghana Living Standards Survey (GLSS4), to be completed in June 1999.
D. Statistical Issues
46. The quality and timeliness of the reporting of core economic statistics will continue to require govemment attention over the next three years. The government is taking steps to improve fiscal data. These include strengthening the Research Divisions in the Ministry of Finance, and the Bank of Ghana, the Office of the Accountant General, and the Ghana Statistical Service. An important action to improve statistical reporting is the compilation of all domestic payments arrears, outstanding government loans, and loans guaranteed by the government and the Bank of Ghana. The government is committed to improving the timeliness of national income accounts, the adequacy of data on public enterprises, and the availability of labor market data. The government is also committed to reducing lags in the reporting of consumer prices and monetary accounts to not more than one month, and the budget execution data to six weeks. Furthermore, the Bank of Ghana will revise the reporting system of commercial banks to fully identify the residency of foreign currency deposits as well as expand the coverage of the reporting system to include other deposit-taking intermediaries in line with technical assistance recommendations made in July 1997. In addition, the government will assess and explain the discrepancy between the import data obtained from the Automated System of Customs Data (ASYCUDA) and those from Customs, Excise and Preventive Services (CEPS), and will ensure that national accounts and balance of payment statistics reflect the conclusions of the assessment. A housing and population census will be carried out in 2000.
E. Technical Assistance
47. Ghana's program of macroeconomic adjustment, structural and sectoral reforms will be supported by technical assistance from the World Bank, the Fund, and several bilateral and multilateral agencies.
48. The World Bank will assist the authorities in the following areas: cocoa sector reform; implementation of an expenditure control system; effective delivery of social services; development and implementation of a public service restructuring plan; banking supervision; divestiture of parastatals; private participation in infrastructure; and reform of the management and maintenance of the road network.
49. The Fund will provide technical assistance on national accounts and money and banking statistics; indirect monetary instruments and liquidity forecasting foreign exchange markets; - 13 -
banking supervision, including prudential regulations; financial sector legislation; tax structure; and measures to improve the timeliness and quality of statistics.
F. External Financing Requirements
50. External financing requirements are projected to be about US$2.5 billion over 1999-2001. For 1999, external financing requirements are estimated to be about US$875 million, of which official project grants and loans are projected to be US$617 million, slightly lower than in 1998; and program loans and grants are expected to reach US$197 million, 42 percent higher than in 1998. Financing for 1999 is assured, while under currently identified commitments a gap of about US$155 million is estimated for the years 2000 and 2001. Financing for the two-year period will be firmed up in a Consultative Group meeting expected to take place in late 1999, the gap will be closed if commitments in each year do not fall below their levels for 1999. - 14 -
Table 1. Ghana: TIming and Implementationof Macroeconomicand Structural AdjustmentPolicies, 1999-2001
Timingof Policy Area Objectivesand Targets Strategies and Measures Measures
L Fiscal policies
A. Revenue Improve domestic Review tax systemand make adjustmentsto ensure that the revenue-to- 1999-2001 revenue mobilization GDP ratio does not decline in the medium term. and strengthen tax administration.
B. Expenditure Improve efficiency and Reduce road sector arrears by C 30 bilion in the first half of 1999. June 1999 effectivenessof public expenditurethrough Eliminate road sector arrears. December 2000 improved allocation and management of public resources. C. Budget and Provide weekly cash flow projections of government treasury operations for March 1999 treasury public debt and liquidity management. onwards system
Implement Budget and Public Expenditure Management System(BPEMS) Budgets for systemin targeted ministries and spending units. 2000 and 2001 II Monetary policy and financial sector reform
Enhance the effec- Encourage the use of repurchase agreements. 1999-2000 tiveness of the systemof indirect monetary control and develop the secondarymarket in domestic debt instruments.
Acceleratefmancial Ensure establishmentby Bank of Ghana of monitorablequarterly targets for March 1999 sector reforms and banks not meeting capital adequacy requirements.Fully invest additions to promote greater deposits in government securities. competitionthrough divestiture.
Remove the freeze on bank licensing. March 1999
Withdraw licenses of banks that do not meet capital adequacy requirements. September 1999
Sell at least 30 percent of shares of the National Investment Bank. September 1999
Divest all Bank of Ghana shares in commercialbanks, except for December 1999 Agricultural Development Bank (ADB).
Reduce government participation in Ghana Commercial Bank (GCB)to December 1999 20 percent or less of shares.
Divest Bank of Ghana shares in ADB. June 2000 Strengthenbanking Implement revised regulations for foreign currency exposure limits. June 1999 supervision. - 15 -
Table I. Ghana: Timing and linplementationof Macroeconomicand StructuralAdjustment Policies, 1999-2001
Timing of Policy Area Objectivesand Targets Strategies and Measures Measures Set up an apex institution for the rural banking system, fnal supervision December 1999 authority over the rural banks wiU remain with the central bank. Submit new draft central bank law and banking law to parliament. December 1999
Improve the payments Reduce the maximum float time of checks from 5 to 3 days in Accra and September 1999 system. from 21 to 9 days between Accra and the regions.
IL External sector policy
A. Exchange Deepen the foreign Assess foreign exchange operationswith a view to improving narket 1999-2001 system exchange market. practices.
Gradually reduce the share of export receipts that needs to be surrenderedto 1999-2001 the Bank of Ghana.
B. Extemal debt Reduce extenal debt Strictly limit new short-termborrowing and adhere to ceilings envisaged in 1999-2001 management service burden. the program regarding new nonconcessionalpublic and publicly guaranteed borrowing. Publish annually list of guaranteedloans in the budget documents. 1999-2001
C. Trade policy Ensure that trade system Implement Gateway Project aimed at removing constraints to trade. 1999-2001 enhances extemal competitiveness. Complete comprehensivereview of tariff regime. September 1999
Reduce the tariff top rate to 20 percent in harmony with the subregion. Budget for 2000
Monitor exemptions and report them on a quarterly basis by the Harmonized 1999-2001 System (HS) code. IV. Sectoralpolicies
A. Public sector Reform subvented Obtain cabinet approval of a legal framework for the reform of subvented June 1999 reform agencies. agencies.
Obtain cabinet approval of altemative employmentprogram for retrenched December 1999 workers of subvented agencies.
Obtain cabinet approval of a fully costed program to reform remaining June 2000 subvented agencies. Completepilot reform of at least 17 subvented agencies. December 2001 Complete restructuring of centralmanagement agencies. December2001
B. Local Develop capacity at the Submitto parliament draft legislation to estabhsh local government service. June 1999 government local level.
Completestudy of fiscal decentralization. December 2000 - 16-
Table 1. Ghana: Timing and Implementation of Macroeconomic and Structural Adjustment Policies, 1999-2001
Timing of Policy Area Objectives and Targets Strategies and Measures Measures C. Private sector Improve Ghana's Announce a divestiture work program, including annual targets for March 1999 Development economic divestiture receipts for the period 1999-2000. competitiveness through privatization. Decide on the treatment of the stock of outstanding liabilities of the State Housing Corporation, Electricity Company of Ghana, Ghana Railways, and June 1999 Ghana Airways.
Publish revised privatization impact assessment. June 1999
Publish annual audited accounts of the Divestiture Implementation Committee (DIC): 1998 September 1999 subsequent years. Mid year
Outsource for divestiture Ghana Airways, Ghana Railways, and Electricity December 1999 Company of Ghana.
D. Electricity Implement power sector Issue "Statement of Power Sector Development Policy." March 1999 reforrn program.
Complete and issue Transitional Power System Development Plan (1999- September 1999 2001).
Publish and implement complete "Guidelines for Fixing Rates for Electricity September 1999 Services" (Section 16 of Act 538).
Enact legislation on "Electricity Regulations-Operation of National December 1999 Interconnected System" (Section 546 of Act 541) and complete separation of electricity transmission utility (National Grid Company Ltd.) from Volta River Authority (VRA).
Offer for sale the Electricity Company of Ghana. December 1999
E. Petroleum Promote competition in Completefinancial restructuring for the Tema Oil Refinery (TOR) Ltd. June 1999 marketing and supply.
Enact legislation on 'Petroleum Regulations-Marketing of Petroleum December 1999 Products" (Section 56 of Act 541) and complete phase out of practice of setting maximum retail margins for petroleum products.
Offer TOR for sale. December 1999
F. Transportation Ensure functioning of Adjust-fuel levy as agreed under the Road Subsector Strategy. 1999-2001 road fund.
Complete tolling of approved roads. December 1999
Improve efficiency and Issue invitation for bids to concession Ghana Railways. June 2000 lower costs of rail transport.
Increase competition in Issue invitation for bids to concessionport operations. June 2000 supply of port services. - 17 -
Table 1. Ghana: Timningand lnplementation of Macroeconomic and Structural Adjustment Policies, 1999-2001
Timing of Policy Area Objectives and Targets Strategies and Measures Measures G. Water Promote private Implement a program of tariff increases to achieve cost recovery. 1999-2001 participation and competition to improve Issue invitation for bids for lease of urban water systems. October 1999 supply.
Convert Ghana Water and Sewerage Corporation into Ghana Water January 2000 Company and complete staff rationalization program.
Complete transfer of all small water systems and remaining sewerage December 2000 systems to district assemblies.
H. Agriculture Sustain food security and Subnit Agricultural Services Sector Investment Plan (AGSSIP) to cabinet September 1999 increase foreign for approval. exchange eamings through export Implement AGSSIP. June 2000 diversification.
Improve competitiveness Obtain cabinet approval of the medium-tern cocoa strategy, including March 1999 of Ghana' s cocoa sector. timetable for key measures.
Offer for sale the Produce Buying Company (PBC). June 1999
Accelerate the increase in farmers' share in f.o.b. price of cocoa starting in 1999-2001 1999/2000 crop season to at least: 60 percent in 1999/2000, and 62 percent in 2000/2001.
Ensure equal access to Cocoa Marketing Board (Cocobod) crop financing 1999/2000 crop and warehousing by licensed buying companies. season
Allow qualified Licensed Buying Companies (LBCs) to export at least 2000/2001 crop 30 percent of their cocoa purchase. season
I. Fisheries Develop sustainable Submit to parliament the Fisheries Management and Development Bill. December 1999 fisheries.
J. Forestry and Ensure conservation of Periodically increase forest fees to reflect the stumpage value of trees, with 1999-2001 Environment natural resources and rates ranginigfrom 5 percent to 20 percent of f.o.b. timber prices, depending protection of the on the demand and inventory levels of the species. environment.
Implement the provisions of the Timber Resource Management Act, 1998, 1999 and its regulations.
Promote more effective Initiate pilot scheme on community collaboration in resources management 2000 environmental resource management. Submit to parliament revised wildlife regulations. 2000
Ensure Energy Commission enforcement of standards for gasoline stations. June 2000
K. Land Qbtain cabinet approval of the draft national land policy. 1999 management - 18 -
Table 1. Ghana: Timing and Implementation of Macroeconomic and Structural Adjustnent Policies, 1999-2001
Timing of Policy Area Objectives and Targets Strategies and Measures Measures
V. Social policies
A. Education Improve the quality of, Formulate intermediate targets, monitoring indicators, and a financing plan July 1999 and access to schooling. for free compulsory universal basic education.
Formulate a revised policy framework for tertiary education with sustainable October 1999 fnancing.
Formulate a phased implementationplan for basic education. December 1999
Formulate an implementation plan for decentraization of school December 1999 management responsibilities to districts.
Adopt measures to improve learning outcomes, as evidenced by improving 1999-2001 student test results.
Design and implement an education strategy that will increase national girls 2001 net enrollment in primary schools to 48.5 percent.
Target expenditures on new classroom construction to the deprived areas. Budgets for 2000 and 2001
Design a self-sustaining student loan scheme. October 2000
B. Health Improve coverage and Increase health expenditure as a percent of domestic primary expenditure 1999-2001 quality of health and and maintain a reasonable balance betveen capital and recurrent family planmingservices. expenditures.
Increase the number of budget management centers (BMCs) that are able to 1999-2001 provide quarterly expenditure returns.
Elaborate a hospital development policy. December 1999
Develop three-year rolling procurement plans for BMCs. December 1999
Increase the number of contracts between district hospitals, both with 1999-2001 NongovermmentalOrganizations and with private providers of health services.
C. Poverty Raise living standards of Design small-scalepilot poverty-reduction programs in the urban and rural 1999 the poorest segments of areas. population. Complete the fourth Ghana Living Standards Survey. June 1999
Prepare a national poverty-reduction program in collaboration with donors. September 1999 VI. Statistical issues Improve quality and Set up weekly indicators of market conditions (exchange rates, reserve April 1999 timeliness of statistics. money, net foreign assets of the central bank, net placement of government securities (outside the central bank), interest rates) to be prepared with no more than one week lag.
Assess and explain discrepancy in import data between data reported by - 19-
Table 1. Ghana: Timing and Implementation of Macroeconomic and Structural Adjustment Policies, 1999-2001
Timing of Policy Area Objectives and Targets Strategies and Measures Measures Automated System for Customs Data (ASYCUDA) systems and by June 1999 Customs, Excise and Preventive Services (CEPS).
Reduce lags in reporting consumer prices indices and monetary accounts to June 1999 one month and in reporting budgetary data to six weeks.
Continue the quarterlypublication of updated national accounts (sources 1999-2001 and uses) with a lag of at most six months.
Conduct a housing and population census. 2000 - 20 -
Table 2. Ghana: Selected Economic and Financial Indicators, 1996-2001
1996 1997 1998 1999 2000 2001 Prog. Prel. Prog. Prog. Prog. (Annual percentage change, unless otherwise specified) National income and prices Real GDP 4.6 4.2 5.6 4.6 5.5 6.0 6.0 Real GDP per capita 1.8 1.5 2.8 1.8 2.7 3.2 3.2 Nominal GDP 46.3 24.5 25.1 23.0 14.6 13.7 12.2 GDP deflator 39.8 19.5 20.6 17.6 8.6 7.4 5.9 Consumer price index (annual average) 46.6 27.9 15.5 19.3 10.0 6.4 5.0 Consumerprice index (end of period) 32.7 20.8 11.0 15.8 9.0 5.0 5.0 Extemal sector Exports, fo.b. 9.9 -5.2 9.7 22.8 2.7 12.8 13.8 Imports, f.o.b. 15.0 9.9 9.8 4.0 1.8 9.3 10.4 Exportvolume 12.5 -0.7 7.5 16.3 3.5 9.2 7.8 Jinport volume 13.8 14.4 10.3 24.5 7.1 6.2 6.2 Teems of trade -3.3 -0.7 2.6 26.4 4.3 0.3 1.5 Nominal effective exchange rate 1/ -26.8 -14.7 ... -9.2 Real effective exchange rate 1/ 12.2 7.2 ... 7.8 Cedis per U.S. dollar 1I 1,637 2,050 ... 2,314 ...... Goverrmnentbudget Domestic revenue 26.1 22.5 30.4 29.8 17.7 14.4 13.2 Total expenditure 42.8 19.8 25.3 22.7 7.4 9.0 6.6 Currentexpenditure 46.5 227 18.9 31.4 3.8 4.2 7.7 Capitalexpenditureandnetlending 2/ 38.6 16.4 35.3 11.4 12.8 15.8 5.3 Money and credit 3! Net domesticassets 4/ 32.3 33.5 9.5 15.5 8.6 11.7 7.3 Credit to government 4/ 12.8 22.0 9.2 10.5 5.4 ...... Creditto therest of the economy 4/ 15.7 20.9 5.3 13.0 8.1 ...... Broad money (including foreign currency deposits) 39.7 40.8 18.0 17.7 14.6 13.7 12.2 Reserve money 44.3 33.4 17.0 16.7 11.4 11.2 10.9 Velocity (GDP/averagebroad money) 5.6 4.9 5.0 4.4 4.4 4.4 4.4 Treasuly bill rate (in percent;end of period) 42.8 40.0 ... 26.8 (In percent of GDP, unless otherwise specified) Investment and saving Gross investment 21.5 24.1 17.9 22.9 23.7 24.7 25.4 Private 8.2 11.7 5.5 11.6 12.6 13.4 14.8 Public 13.3 12.4 12.4 11.3 11.1 11.3 10.6 Gross national saving 16.7 15.4 13.7 19.4 20.8 22.2 23.0 Private 13.7 15.0 8.3 16.2 15.2 15.5 16.0 Public 3.0 0.4 5.4 3.2 5.6 6.6 7.0 Government budget Domestic revenue 17.6 17.3 18.3 18.3 18.8 18.9 19.1 Total grants 2.6 1.4 2.9 2.2 2.4 2.0 1.7 Total expenditure 2/ 29.7 28.6 27.5 28.6 26.8 25.6 24.4 Overall balance (commitmentbasis) -9.5 -9.9 -6.3 -8.1 -5.5 -4.7 -3.6 Domestic primacy balance 0.3 3.2 3.8 3.6 3.5 3.6 3.7 Divestiture receipts 1.3 0.7 0.8 0.6 0.5 0.4 0.2 External sector Current account balance 5/ -4.7 -8.8 -4.2 -3.5 -2.9 -2.5 -2.4 External debt outstanding 84.2 82.5 95.2 79.2 76.9 74.6 71.4 Extemal debt service, including to the Fund 8.9 7.6 8.7 7.5 6.2 6.7 5.3 (in percent of exports of goods and nonfactor services) 35.7 31.6 33.2 28.1 24.5 24.7 18.7 (in percent of government revenue) 38.7 44.9 38.1 34.7 29.8 26.2 20.3 (In millions of U.S. dollars, unless otherwise specified) Current account balance 5/ -328 -603 -290 -261 -234 -211 -227 Overallbalanceofpayments -14 25 119 99 77 34 88 External payments arrears(end of period) 0 0 0 0 0 0 0 Gross international reserves (end of period) 591 508 478 502 561 616 730 (in months of inports, c.if.) 4.4 2.6 2.7 2.5 2.7 2.8 3.0
Use of Fund resources Purchases/disbursements 27 41 110 111 61 60 60 Repurchases/repayments 86 -165 137 105 78 39 35 Credit outstanding 377 354 317 321 316 337 362
Quota (in millions of SDR) 274 274 274 274 369 Nominal GDP (in billions of cedis) 11,339 14,113 17,655 17,357 19,885 22,619 25,378 Sources: Ghanaian authorities; and Fund staff estimates and projections. I/Annual average data. 2/ Including capital outlaysfmanced through extemal project aid and transfers to the local authorities. 31From December 1996, the coverage was increased from 11 to 17 banks, 4/ In percent of broad money at the beginmingof the period. 5/ Including official grants. - 21 -
Table 3. Ghana: Selected Social and Demographic Indicators
Latest Single Year Same Region/Income Group Sub-Saharan Low 1970-75 1980-85 1990-96 Africa income
Population Total population, midyear (millions) 9.8 12.6 17.5 596.4 3,236.2 Growth rate (annual average in percent) 2.2 3.7 2.7 2.7 1.8 Urban population (population in percent) 30.1 32.3 36.4 31.7 29.1 Total fertility rate (births per woman) 6.6 6.5 5.0 5.6 3.2 Population age structure (percent) 0-14 years ...... 15-64 years ...... 65 and above ......
Life expectancy at birth (years) Total 50.0 53.0 58.9 52.1 63.1 Male 48.0 52.0 56.9 50.6 61.9 Female 52.0 55.0 61.0 53.8 64.3
Mortality Infant (per 1,000 live births) 107.0 98.0 71.0 91.1 68.0 Underage 5 (perthousand live births) ...... 110.0 147.0 93.5 Adult (aged 15-59) Male (per 1,000 population) ...... 320.0 447.9 231.1 Female (per 1,000 population) ... 253.0 375.9 206.2 Matemal (per 100,000 live births) ... 1,000.0 740.0
Income GNP per capita (U.S. dollar) 300.0 360.0 390.0 490.0 490.0 Consumer price index (1990=100) ... 31.0 1,069.6 266.0 275.3 Food price index (1990=100) ... 26.0 979.9
Income/consumption distribution (percent of income or consumption) Lowest quintile ...... 7.9 ... Highest quintile ...... 42.2
Social indicators Public expenditure (percent of GDP) Health ...... 1.3 .. 1.5 Education 3.6 1.9 3.1 5.3 3.6 Social security and welfare ......
Health and nutrition Access to safe water (percent of population) Total 35.0 ... 56.0 45.0 76.0 Urban 86.0 57.0 70.0 63.0 80.4 Rural 14.0 40.3 49,0 34.4 72.0 Per capita supply (1993) Calories (per day) ...... 2,141 ... Protein (grams per day) ...... 34 .. - 22 -
Table 3. Ghana: Selected Social and Demographic Indicators
Latest Single Year Same Region/Income Group Sub-Saharan Low 1970-75 1980-85 1990-95 Africa Income
Inmunization rate (percent under 12 months) Measles ...... 54.0 60 77 DPT ... 22 51 58 80 Child malnutrition (percent under 5 years) ...... 27.4 ... 42
Labor force Total labor force (in millions) ...... 8 ... Participation rate (in percent) Total ...... 43.0 ...... Male ...... 53.0 ...... Female ...... 4.0 ......
Education (1993) Enrollment rates (in percent of age group) Primary enrollment ...... 76 ...... Of which female ...... 70 ...... Secondary enrollment ...... 36 Of which female ...... 28 ...... Literacy (in percent of population 15 years and older) ...... 60 ......
Poverty incidence (percent of population below the poverty line) 1/ 1987-88 1992 National head count index 36.9 31.4 Accra 8.5 23.0 Other urban 33.4 27.7 rural coastal 37.7 28.6 rural forest 38.1 33.0 rural Savannah 49.9 38.3
Sources: Ghana Statistical Service, Quarterly Digest of Statistics IMF, International Financial Statistics: and the World Bank.
1/ Poverty line estimated at Cedis 132,230 per year as at mid-1992. Based on the living standards surveys conducted by the Ghana Statistical Service in collaboration with the World Bank during 1987-88,1988-89, and 1991-92. - 23 -
Table 4. Ghana: External Financing Requirements and Sources, 1996-2001
1996 1997 1998 1999 2000 2001
(In millions of U.S. dollars)
Current account -534 -763 -492 -470 -422 -419 (excluding official transfers) Exports, fo.b. 1,573 1,491 1,830 1,880 2,119 2,412 Imports, fo.b. -1,937 -2128 -2,213 -2253 -2,463 -2,719 Services (net) -446 .485 -487 -476 -497 -551 Private transfers 276 360 378 380 418 439
Capital account -373 -267 -318 -345 -340 -245 Scheduledamortization -210 -230 -286 -311 -401 -310 IMF repayments -125 -166 -139 -78 -39 -35 Othercapital(net)l/ -37 128 107 45 100 100
Change in officialreserves (increase-) 100 140 -72 -59 -55 -114
Change inarears (decrease -) -100 0 0 0 0 0
Extemal financing requirements -906 -890 -882 -874 -817 -778
Expected disbursements 806 890 882 874 745 695 Grants 206 160 230 235 197 160 Project 153 128 188 185 159 127 other 0 15 33
Concessional loans 561 730 540 579 488 475 Project 487 690 447 438 367 375 other 52 0
IM8F 40 0 111 61 60 60
Financing gap 0 0 0 0 73 83
Sources: Ghanarian authonties; and Fund staff estimates and projections.
1/ Including Errors and Omissions. - 24 -
Table 5. Ghana: Extemal Public Debt and Debt Service Payments, 1996-2007
1996 1997 1998 999 2000 2001 2002 2003 2004 2005 2006 2007
(nmillincs of U.S. dollan)
Total public mndpublicly gvuranteeddebt I/ 5,829 5,679 5,943 6,205 6,371 6,612 6,823 6,976 7,115 7,274 7,436 7,604 Multilateal (inchudingDS) 3,690 3,543 3,639 3,908 4,193 4,419 4,721 4,894 5,043 5,194 5,338 5,472 Bilatamlll/ 1,853 1,849 2,010 2,003 1,883 1,838 1,807 1,787 1,777 1,785 1,803 1,837 Other 1! 285 287 295 295 295 295 295 295 295 295 295 295
xtenmalpublic debtservice Principal 469 396 425 389 440 345 294 287 292 271 268 263 Medium-term 134 156 193 195 251 200 91 78 62 49 35 16 Lasg.term 210 74 93 116 150 110 188 ISS 188 168 179 184 DO repurchases 125 166 139 78 39 35 15 21 42 54 54 63 Interest 148 128 139 113 128 143 131 130 130 130 130 131 Medium-term 61 50 54 41 51 66 71 68 65 63 62 61 LIesg.term 73 68 76 69 74 74 57 59 62 64 66 67 IMFcharges 14 11 9 3 3 3 3 3 3 3 3 2 Total 1ncldinglBe 617 523 563 503 568 488 426 418 422 401 398 394 ExcludingBEf 477 347 416 422 526 450 407 393 377 344 341 329
Memorandumitems: (Inpercent) Externalpublic debt-serviceratio 2/ includingDa 35.7 31.6 28.1 24.5 24.7 18.7 14.6 IZ9 11.8 10.2 9.2 8.2 ExcludingDhf 27.6 21.0 20.8 20.5 22.9 17.3 14.0 12.2 10.6 8.7 7.9 6.9 Ratioof extemalpublic debt-serviceto GDP IncludingIMF 8.9 7.6 7.5 6.2 6.7 5.3 4.2 3.8 3.5 3.0 2.7 2.5 ExcludinglDO 6.9 5.0 5.5 5.2 6.2 4.9 4.0 3.6 3.1 2.6 2.3 2.1 Ratio of edemalpublio debtto GDP 84.2 82.5 79.2 76.9 74.6 71.4 61.3 63.2 58.7 54.8 51.2 47.7 Extemalpublicdebt(NPVyexports 202.6 209.3 197.6 191.2 114.4 164.0 149.4 136.4 125.3 115.7 109.5 101.6
Sources: Ghanaianaudorities; and Fund staffestimates and projecticns.
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