Country Report

Ghana

Ghana at a glance: 2005-06

OVERVIEW The newly-re-elected president, John Agyekum Kufuor, and his New Patriotic Party, are expected to remain committed to donor-directed policies over the forecast period, and are having little difficulty in fending off domestic pressure to reverse the February fuel price increase, the toughest reform measure of 2005. Growth in both gold and cocoa production will drive further strong rates of economic growth over the forecast period; real GDP is forecast to rise by 4.8% in 2005 and 5.2% in 2006. However, because the government is committed to raising domestic-fuel and other administered prices to cost recovery levels as part of the reform programme, it will be difficult to bring inflation under control. The Economist Intelligence Unit forecasts average inflation of 16.5% in 2005, falling to 12.5% in 2006

Key changes from last month Political outlook • The findings of the National Reconciliation Commission have been published, and may lead the opposition National Democratic Congress to reconsider its association with Jerry Rawlings, who is heavily implicated in the report. The government will benefit from the fact that the public's attention has been diverted from criticism of fuel price reforms, and from its announcement of reparations for victims of human rights violations, which will be positive for its public image. Economic policy outlook • The 2005 budget indicates the government's continued commitment to the priorities of donor-driven policies, including the removal of utility subsidies. Economic forecast • We have revised our forecast for imports and inflation over the outlook period, based on the upward revision to our international oil price forecast to US$46/b in 2005 (previously US$42/barrel) and US$40/b in 2006 (previously US$37/b). Our forecast for the current account has therefore been adjusted upwards to 2.1% of GDP in 2005 and 2.6% in 2006.

May 2005

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

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Contents

Ghana

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

19 Economic policy

27 The domestic economy 27 Economic trends 29 Mining 30 Financial markets

31 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 24 Budgeted revenue 25 Budgeted expenditure 25 Budgeted deficit financing, 2005 29 Inflation 31 Companies listed on the Ghana Stock Exchange 32 Current account

List of figures

13 Gross domestic product 13 Consumer price inflation 21 Petrol prices in Sub-Saharan African countries 27 Interest rates 33 Inward remittances 33 Foreign-exchange reserves

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Ghana 3

Ghana May 2005 Summary

Outlook for 2005-06 The newly-re-elected president, John Agyekum Kufuor, and his New Patriotic Party, are expected to remain committed to donor-supported policies over the forecast period. The government is expected to have little difficulty in continuing to fend off domestic pressure to reverse the February fuel price increase—a key reform required by donors. Growth in both gold and cocoa production will drive further strong rates of economic growth over the forecast period; real GDP is forecast to rise by 4.8% in 2005 and 5.2% in 2006. However, because the government is committed to raising domestic fuel and other administered prices to cost recovery levels as part of the reform programme, it will be difficult to bring inflation under control. We forecast average inflation of 16.5% in 2005, falling to 12.5% in 2006.

The political scene Mr Kufuor has chosen his new cabinet. Although he has retained his most experienced ministers, the size of his executive administration is a concern. The opposition has organised four demonstrations against the fuel price increase, but most Ghanaians have decided to accept the price reform. The findings of the National Reconciliation Commission have been published and heavily implicate the military regimes led by ex-president Jerry Rawlings.

Economic policy The IMF has conducted the third review of progress under the poverty reduction and growth facility. The minister for finance and the economy, Kwadwo Baah Wiredu, has presented the 2005 budget, which prioritises economic reform and poverty reduction. The government has announced a 20.5% increase in the minimum wage. The Bank of Ghana (BoG, the central bank) has kept interest rates unchanged at 18.5%.

The domestic economy Provisional data from the BoG indicate that the economy grew by 5.8% in 2004, owing mainly to increases in cocoa production. Inflation accelerated to 16.7% in March 2005, reflecting the initial impact of the fuel price increase. The government has entered into a strategic partnership with a US firm, Alcoa, to develop an integrated aluminium industry. The Ghana Stock Exchange all-share index grew by 91.3% in 2004.

Foreign trade and payments According to provisional data released by the BoG, a large increase in imports caused the current account to swing into a deficit of 1.4% of GDP in 2004. Foreign-exchange reserves also rose substantially, ending 2004 at US$1.6bn.

Editors: Nicola Prins (editor); David Cowan (consulting editor) Editorial closing date: May 25th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Ghana

Political structure

Official name Republic of Ghana

Form of state Unitary republic

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

National legislature Parliament; 230 members elected by universal suffrage every four years

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

Head of state President, elected by universal suffrage for a maximum of two four-year terms; John Agyekum Kufuor was sworn in on January 7th 2001 for the first time; he secured re- election in December 2004 for a second and final term

National government Cabinet, appointed by the president in January 2005

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

President John Agyekum Kufuor Vice-president Aliu Mahama Key ministers Defence Kwame Addo Kufuor Communications & technology Albert Kan Dapaah Education & sports Yaw Osafo-Maafo Energy Mike Ocquaye Finance & economic planning Kwadwo Baah Wiredu Fisheries Galsys Asmah Food & agriculture Ernest Debrah Foreign affairs Nana Akufo-Addo Heath Courage Quashigah Interior Pap Owusu Ankomah Land, forestry & mines Dominic Fobih Justice & attorney general Ayikoi Otoo Local government & rural development Charles Bintim Manpower, youth & employment Joseph K. Adda Mines Cecilia Bannermann Ports, harbours & railways Christopher Ameyaw Akumfi Private sector development & Presidential Special Initiatives Kwamena Bartels Public sector reform Paa Kwesi Nduom Regional co-operation & NEPAD Kofi Knadu Apraku Trade & industry Allan Kyeremanteng Works & Housing Hackman Owusu Agyeman

Central bank governor Paul Amoako Acquah

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Economic structure

Annual indicators 2000a 2001a 2002a 2003a 2004b GDP at market prices (C bn) 27.2 38.1 48.9 65.2b 76.8 GDP (US$ bn) 5.0 5.3 6.2 7.5b 8.5 Real GDP growth (%) 3.7 4.2 4.5 5.2b 5.8 Consumer price inflation (av; %) 25.2 32.9 14.8 26.7 12.6 Population (m) 19.6 20.0 20.5 20.9 21.4 Exports of goods fob (US$ m) 1,936.3 1,867.1 2,015.2 2,562.4 2,901.4 Imports of goods fob (US$ m) 2,766.6 2,968.5 2,707.0 3,276.1 4,149.0 Current-account balance (US$ m) -386.5 -324.6 -31.8 254.9 -123.1 Foreign-exchange reserves excl gold (US$ m) 232.1 298.2 539.7 1,352.8 1,626.7 Total external debt (US$ bn) 6.6 6.7 7.3 7.7b 6.7 Debt-service ratio, paid (%) 15.7 10.0 6.5 6.8b 6.1 Exchange rate (av) C:US$ 5,455.1 7,170.8 7,932.7 8,677.4 9,004.6 a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2002 % of total Agriculture, forestry & fishing 33.8 Private consumption 82.7 Industry 24.3 Government consumption 9.9 Manufacturing 9.0 Gross domestic investment 18.8 Services 41.9 Exports of goods & services 45.2 Imports of goods & services -64.8

Principal exports 2003 US$ m Imports 2003 US$ m Gold 830.1 Non-oil 2,406.4 Cocoa beans & products 802.2 Oil 562.9 Timber & products 174.7

Main destinations of exports 2003a % of total Main origins of imports 2003a % of total Netherlands 11.2 Nigeria 21.2 UK 10.8 China 8.6 France 7.8 UK 6.7 Germany 6.2 Côte d'Ivoire 5.8 Italy 4.6 US 5.6 a Based on partners' trade returns; subject to a wide margin of error.

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Quarterly indicators 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Central government finance (C bn) Revenue & grants 3,255.0 4,133.9 4,679.3 4,792.8 4,442.5 5,650.3 5,777.5 n/a Expenditure & net lending 3,204.6 5,099.4 4,918.8 5,758.4 5,004.5 5,942.4 5,693.6 n/a Balance 50.4 -965.5 -239.5 -965.6 -562.0 -292.1 83.9 n/a Prices Consumer prices (Accra; 2000=100) 180.8 195.9 198.4 198.1 206.9 218.3 223.4 222.2 Consumer prices (% change, year on year) 25.2 29.8 27.8 24.0 14.4 11.4 12.6 12.2 Financial indicators Exchange rate C:US$ (av) 8,540.4 8,671.1 8,716.2 8,781.8 8,912.2 9,022.8 9,040.0 9,043.5 Exchange rate C:US$ (end-period) 8,600.3 8,700.4 8,732.3 8,852.3 9,018.3 9,046.5 9,051.8 9,054.3 Deposit rate (av; %) 13.8 13.9 15.0 14.6 14.1 13.8 13.4 n/a Discount rate (end-period; %) 27.5 27.5 26.0 21.5 20.0 18.5 18.5 n/a Treasury rate (av; %) 27.2 30.7 29.5 21.6 16.9 16.7 16.3 n/a M1 (end-period; C bn) 7,408.3 7,719.3 7,679.8 10,723.4 10,063.3 10,857.9 10,987.9 13,745.3 M1 (% change, year on year) 54.5 55.5 39.7 33.2 35.8 40.7 43.1 28.2 M2 (end-period; C bn) 14,785 15,690 15,530 20,123 19,775 21,126 21,794 25,645 M2 (% change, year on year) 39.7 43.9 30.6 34.2 33.8 34.6 40.3 27.4 GSE all-share index (end-period;1990-1993=100) 1,644 2,068 2,643 3,553 5,665 6,879 6,998 6,795 Sectoral trends Gold price, London (US$/fine oz) 352.1 346.8 363.3 391.9 408.5 393.2 401.30 434.00 Cocoa beans price, New York & London (US$/tonne ) 2,136.8 1,746.8 1,582.6 1,546.1 1,565.6 1,417.8 1,612.1 1,607.4 Foreign trade (US$ m)a Exports fob 565.1 650.5 574.0 772.9 645.5 700.6 700.8 n/a Cocoa beans 187.7 202.1 161.5 124.8 270.6 272.7 280.8 n/a Gold 189.0 201.0 204.4 235.3 229.5 195.8 195.5 n/a Imports fob -692.7 -801.8 -834.7 -903.6 -935.2 -1,117.2 -958.5 n/a Trade balance -127.7 -151.3 -260.7 -130.7 -289.7 -416.6 -257.7 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 510.2 788.3 906.2 1,352.8 1,255.9 1,287.9 1,353.4 1,626.7 a Balance of payments basis. Sources: IMF, International Financial Statistics; Bank of Ghana, Quarterly Economic Bulletin; Statistical Bulletin; Standard & Poor's, Emerging Stock Markets Review.

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Outlook for 2005-06

Political outlook

Domestic politics During their second term in office, the president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will focus on the need to deliver a visible improvement in the standard of living of ordinary Ghanaians and on carrying out donor-supported economic reforms. After the NPP’s first term failed to deliver a noticeable reduction in poverty, there is considerable pressure to produce visible results in the second term, or face being voted out of power in the 2008 elections. The government is also under pressure from donors to continue implementing economic reforms, although some of these may prove unpopular as they will initially raise the cost of living for Ghanaians. The most important reform, the deregulation of the domestic fuel industry, was partially implemented in mid-February 2005, when fuel prices were increased by 50%. Although the fuel price increase was highly unpopular, the remaining reforms, such as the removal of electricity and water subsidies, are expected to be far less drastic. However, popular discontent may increase as the full burden of the reforms is felt, and it remains unclear whether the government will have sufficient political will to continue its commitment to reforms throughout its second term, or whether it will be tempted to reformulate economic policy along more nationalistic and populist lines. The risk of the government opting for more populist policy will be highest after the current poverty reduction and growth facility (PRGF) runs out in May 2006. If the government does not agree to a successor PRGF, relations with donors will become highly strained and could potentially break down towards the end of the forecast period. Public attention will be diverted from the government's economic agenda to some extent as debate focuses on the findings of the National Reconciliation Commission (NRC), which were published in a white paper in April 2005. The report details human rights abuses committed under military regimes during Ghana's post-independence period. The release of the white paper has been carefully managed, with an emphasis on national reconciliation rather than recrimination, and this will help to prevent the political temperature in the country from becoming too raised over the coming months, when individuals who have been implicated in the report are likely to become entangled in a defensive battle to clear their names. The government has stated that it is committed to carrying out the recommendations of the report, and has announced plans to provide reparation to victims and improve the professionalism of the country’s security forces, which should attract much positive publicity and popular support. No provision has been made in the 2005 budget for reparations, which suggests that these may not be paid until 2006, and given Ghana’s limited resources the level of compensation may not be large, but the gesture is nonetheless certain to count in the government’s favour. This will help to counter much of the public criticism that is likely to build up over 2005, as the hardship created by fuel and utility-price increases becomes fully evident.

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The release of the NRC’s findings is likely to refocus the attention of the main opposition party, the National Democratic Congress (NDC), on whether the close link that exists between the ex-president, Jerry Rawlings, and the party is a positive or negative factor. Already some factions within the NDC believe that the party’s links with Mr Rawlings were responsible for tipping the balance of votes in favour of the NPP in the December 2004 election. As leader of the two military regimes that were most heavily implicated in the NRC's report, Mr Rawlings is certain to become entangled in a defensive battle, both publicly and within his party, over his past. The extent to which bad publicity is generated by the issue will have an important bearing on the stance of the NDC. The party’s current strategy for building popularity ahead of the 2008 election rests on challenging the NPP over the hardship created by the fuel price increase, but it will be difficult for the NDC to build an image as the protector of Ghanaians if it becomes too closely associated with the human rights abuses of the past through its connection with Mr Rawlings. Mr Rawlings would not react favourably to any attempt by the party to marginalise him, as he remains politically ambitious. If this were to occur, he would be likely to form a breakaway party, but if such an attempt was unsuccessful and a constructive role was not found for him within mainstream party politics in Ghana, he might become involved in unconstitutional, or extra- parliamentary, politics. Given that he retains strong support in several sectors of Ghanaian society, Mr Rawlings continues to be an influential figure who needs to be handled carefully to ensure that his actions do not undermine the country's nascent democracy.

International relations Ghana will maintain a leading role in regional affairs and, now that the country's profile has been boosted by the successful holding of the fourth set of democratic elections, Mr Kufuor will become increasingly prominent as a regional spokesman. The importance of this role will be reinforced by the need for regional leaders to make rapid progress in pushing ahead with political reconciliation in Côte d'Ivoire and supporting democratic processes in Togo following the reversal of the recent coup. Mr Kufuor will maintain good relations with the West and will be a leading proponent of the New Partnership for Africa's Development (Nepad) and of adherence to its underlying principles, including good governance and peer review. Ghana was one of the first countries to volunteer for peer review; the initial goal was for a report by the review committee to be submitted at the G8 Summit in July 2005. However, the peer review mechanism is currently experiencing delays, and Ghana's review has had to be postponed, which means that the review committee’s report may also have to be delayed.

Economic policy outlook

Policy trends The Economist Intelligence Unit expects that, in the short term, donors will retain a central role in economic policy formulation, and that the government will continue to focus on implementing the reforms agreed with the IMF in the country's three-year PRGF, which runs to May 2006. A third review of the PRGF by the IMF is currently under way, which is likely to be generally positive, but

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highlight the need for the government to intensify its efforts to push ahead with reform. The IMF is likely to put pressure on the government not to slacken on progress with the privatisation programme, the modernisation of the financial sector and the implementation of the Ghana poverty reduction strategy (GPRS). The PRGF also demands tough measures to strengthen public-expenditure management and increase revenue in order to reduce the fiscal deficit and allow the government to cut domestic debt—the government has already, in February 2005, delivered on its promise to lift petroleum prices closer to cost- recovery level, and delivered an annual budget that indicates that subsidies for utilities are being withdrawn. The GPRS is typical of the poverty reduction strategies followed by many Sub-Saharan African countries in that it prioritises the improvement of social services (with particular emphasis on health and education), good governance, private-sector development, rural development and investment in infrastructure. Economic policy did not go severely off track in the run-up to the elections, and early indications are that it is unlikely to do so in 2005-06. Initial concern that domestic pressure might force the government to reverse the 50% fuel price increase is diminishing, as the government has maintained a firm position and the public seem to have largely accepted the increase—albeit grudgingly. Now that the toughest reform measure has been carried out, donors are likely to be open to compromise solutions over future reforms to utility prices, such as replacing one-off adjustments with increases that are phased in over time. However, the government is likely to come under heavy criticism from donors over its acquisition of majority ownership in the Volta Aluminium Company (Valco), although they may accept that the recent agreement of a strategic partnership has reduced the risk presented by the acquisition. This issue alone is unlikely to throw the PRGF programme off-track at this stage; serious problems are only likely to arise for Ghana if by the time negotiations start for a new PRGF—the current programme ends in May 2006—the introduction of price reforms has not been completed, the budget deficit is overly large, and concrete plans for the future of Valco have not been agreed.

Fiscal policy Fiscal discipline will improve in 2005 as the government keeps expenditure growth under control following the elections and now that the petroleum subsidy has been eliminated, resulting in a narrowing of the fiscal deficit to 2.8% of GDP. Revenue may be affected by a reduction in corporate tax in 2005, and by an expected decline in cocoa production, but overall, revenue is expected to grow healthily, owing to ongoing efforts to improve tax collection and widen the tax base. Although the new government has demonstrated its commitment to IMF-supported reforms in the 2005 budget, by 2006 we expect that it will have bowed to increased domestic pressure to boost spending, particularly on social services. Although faster economic growth will lift tax revenue, this will be partially offset by falling international gold and cocoa prices and further reductions in corporate tax. As a result, we expect the fiscal deficit to widen marginally, to 3.1% of GDP, in 2006. Government budgets will continue to target a net repayment of domestic debt but, given our forecasts for the fiscal deficit, we expect that repayments will fall short of the target.

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Monetary policy Given that inflation is likely to remain in double digits, the Bank of Ghana (BoG, the central bank) is expected to keep monetary policy relatively tight over the forecast period in an attempt to reduce inflation. Ghana has tended to have relatively high interest rates, partly because of the government's historically high level of domestic borrowing. Although the reduction in the deficit in recent years has reduced the need to have such high real interest rates, domestic borrowing will still be substantial and this will make it hard to bring down interest rates in the short term. In the 2005 budget statement, the minister of finance and economic planning, Kwadwo Baah Wiredu, put pressure on the BoG to ensure that the banking system operates more effectively and efficiently. Specifically, the BoG is under pressure to strengthen the creditworthiness of borrowers, by operationalising the national identification scheme, the Credit Reference Bureau, and the street naming and house numbering projects in the country’s districts.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.1 4.2 3.9 OECD 2.0 3.3 2.4 2.3 EU25 1.1 2.4 1.9 2.1 Exchange rates ¥:US$ 115.9 108.1 102.7 93.8 US$:€ 1.132 1.244 1.350 1.400 SDR:US$ 0.714 0.675 0.646 0.628 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.34 US$ 3-month commercial paper rate 1.10 1.48 3.31 4.38 Commodity prices Oil (Brent; US$/b) 28.8 38.5 46.0 40.0 Cocoa (US cents/lb) 78.8 70.1 64.0 59.9 Gold (US$/troy oz) 363.3 409.5 435.0 402.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.1 -6.5 -1.4 Industrial raw materials (% change in US$ terms) 13.0 21.0 3.5 -6.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Global economic growth (on a purchasing power parity basis) will remain healthy over the forecast period, although it will slow from the very strong performance of 5.1% estimated for 2004 to 4.2% in 2005 and 3.9% in 2006, in response to policy tightening in leading economies. As investors and funds are increasingly buying gold as a safe investment at a time of market uncertainty and geopolitical tension around the world, we forecast that gold prices will remain high in 2005, averaging US$435/troy oz. Owing to rising interest rates and greater political certainty, prices should then fall back, but only moderately, to US$402.5/troy oz in 2006. Despite a short-term price spike in November 2004, brought about by a resumption of fighting in Côte d'Ivoire, and assuming normal weather conditions and a resumption of moves towards peace, we

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forecast that cocoa prices will moderate, averaging 64 US cents/lb in 2005 and 59.9 US cents/lb in 2006.

Economic growth Developments in gold mining will support relatively strong real GDP growth throughout the forecast period. AngloGold Ashanti, the country's largest producer, began a rehabilitation programme for its mines in 2004, which should be completed by late 2005, and other mining companies are bringing new mines on stream. In particular, Australia's Newmont is planning to open a 500,000 troy oz/year mine (which will lift the company's current production by around 22%) in mid-2006. After the record cocoa harvest in 2003/04 (October- September), slightly drier weather will cause the cocoa harvest to decline in 2004/05, reducing agricultural growth. However, the government is expected to continue increasing the provision of support services to the sector, and, assuming normal weather conditions, cocoa output is forecast to rise again in 2005/06. Increased cocoa processing will boost manufacturing growth, particularly in 2006, as capacity is rising steadily. Various Presidential Special Initiatives will ensure that the domestic processing of other local raw materials also increases. The reductions in corporate tax in 2005 and 2006 (announced in the 2004 and 2005 budgets, respectively) should also lead to increased investment by businesses. Services growth will remain robust, after the election-related boost in 2004, owing to further increases in trade through Ghana because of political tensions in Côte d'Ivoire and continued expansion in tourist arrivals. Overall, reduced cocoa output will cut real GDP growth from 5.8% in 2004 to 4.8% in 2005, before higher gold and cocoa production lifts real GDP growth to 5.2% in 2006.

Inflation Although the fiscal deficit is likely to decline in 2005, the inflationary impact of increased government spending in 2004 will continue in early 2005. In addition, the 50% increase in fuel prices that took place in February will have a significant impact, as will the rise in international oil prices, the 21% increase in the minimum wage and the 20% increase in government salaries that were announced in the 2005 budget. Price rises for other utilities will further add to inflation, which is forecast to rise to an average of 16.5% in 2005. Inflation is forecast to fall in 2006, as all of these one-off price rises will drop out of the year-on-year comparison. Nonetheless, the steady depreciation of the cedi— which will put upward pressure on the price of imported goods—expansionary fiscal policy, and strong inflows of workers' remittances, will limit the expected fall in inflation. Thus inflation is expected to average 12.5% in 2006.

Exchange rates Relatively high export earnings, strong remittances and a weak US dollar will provide support for the cedi over the forecast period. In addition, improved foreign-exchange reserves should give the BoG increased confidence to intervene in the market to smooth out any sudden sharp fluctuations in the value of the cedi. However, structurally higher demand than supply for foreign exchange (owing to the economy's import dependence) will ensure that the cedi steadily loses value on an annual basis, and since the current-account deficit is forecast to widen in 2005 and 2006, the depreciation of the cedi is expected to accelerate. Overall, the exchange rate is forecast to fall from an average of C9,005:US$1 in 2004 to C9,260:US$1 in 2005 and C9,632:US$1 in

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2006, although the cedi will remain vulnerable to sudden downward falls, potential triggers for which include a sudden deterioration in the terms of trade or delayed disbursements by donors. Although official plans remain in place for the launch of the eco—a common currency for Ghana, Guinea, Nigeria, Sierra Leone and The Gambia—in July 2005, this is not expected to happen, owing to the inability of the countries involved to reach the various convergence criteria. The greatest progress possible in this regard during the forecast period would be the launch of a limited range of eco-denominated financial products.

External sector Receipts from gold and cocoa are expected to remain high over the forecast period. In the case of gold, rising production as a result of the opening of new mines and the rehabilitation of existing ones will be supported by high gold prices. In the case of cocoa beans, although total export earnings are forecast to fall back after the record crop in 2004, they will remain high by historical standards. Moreover, the fallback in exports of cocoa bean exports will be partly the result of increased domestic processing, which will cause exports of higher-value cocoa products to increase substantially. A number of initiatives to boost the production of cassava, textiles and palm oil should increase non-traditional exports. Mining development work, robust domestic demand and continued high oil prices will support relatively high levels of imports over the forecast period. But to some extent, import levels in 2004—and possibly in 2005-06—are likely to reflect goods in transit to neighbouring countries, as shippers use Ghana’s ports owing to the uncertain political situation in Côte d'Ivoire. Having risen sharply in 2004, services debits will continue to rise in line with the increase in imports. The deficit on the income account will widen as debt relief under the IMF-World Bank's heavily indebted poor countries (HIPC) initiative is offset by increased profit repatriation by foreign mining companies. Strong inflows of expatriate remittances and donor support will ensure a healthy surplus on the current transfers account. Overall, the current- account deficit is forecast to widen from 1.4% of GDP in 2004 to 2.1% of GDP in 2005 and 2.6% of GDP in 2006.

Forecast summary (% unless otherwise indicated) 2003a 2004b 2005c 2006c Real GDP growth 5.2b 5.8 4.8 5.2 Gross agricultural production growth 6.1b 7.5 4.0 4.5 Consumer price inflation (av) 26.7 12.6 16.5 12.5 Consumer price inflation (year-end) 23.6 11.8 17.0 11.0 Short-term interbank rate 21.5 19.1 21.0 17.0 Government balance (% of GDP) -3.3b -3.0 -2.8 -3.1 Exports of goods fob (US$ bn) 2.6 2.9 3.0 3.0 Imports of goods fob (US$ bn) 3.3 4.1 4.3 4.4 Current-account balance (US$ bn) 0.3 -0.1 -0.2 -0.3 Current-account balance (% of GDP) 3.4b -1.4 -2.1 -2.6 External debt (year-end; US$ bn) 7.7b 6.7 6.9 7.1 Exchange rate C:US$ (av) 8,677.4 9,004.6 9,259.6 9,632.4 Exchange rate C:¥100 (av) 7,486.9 8,328.0 9,020.6 10,274.6 Exchange rate C:€ (year-end) 11,166.3 12,257.7 13,310.7 13,537.0 Exchange rate C:SDR (year-end) 13,154.3 14,061.4 15,068.2 15,471.6 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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

Ghana Sub-Saharan Africa Ghana Sub-Saharan Africa 6.0 35

5.0 30

4.0 25

3.0 20

2.0 15

1.0 10

0.0 5 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000

The political scene

A new cabinet is appointed Now that the December 2004 elections are over, the president, John Agyekum Kufuor, has appointed a new cabinet. All but five of the ministers appointed served in the previous cabinet, but mostly in different ministries. Furthermore, all but four of the cabinet ministers are members of parliament (MPs)—the constitution stipulates that at least half of the ministers in the cabinet must hold seats in parliament. This has allowed Allan Kyeremanteng and Jake Obetsebi-Lamptey to retain their respective positions as minister of trade and industry and minister for tourism and modernisation of the capital city, despite the fact that they are not MPs.

A new finance minister is Kwadwo Baah-Wiredu, who was previously minister for education, youth and appointed sports, was appointed minister for finance and economic planning—swapping positions with Yaw Osafo-Maafo. The removal of Mr Osafo-Maafo from the key position of finance is surprising, given his good record of managing the economy over the last four years. During this time, the economy made important gains in terms of sustained economic growth, reduced fiscal deficits, lower inflation and greater exchange-rate stability—these trends even continued during 2004, an election year. While several theories have been circulating in Ghana as to why he was moved, the most credible suggests that Mr Osafo- Maafo may have presidential ambitions and is likely to contest the 2008 presidential election on the New Patriotic Party (NPP) ticket. NPP rules require that anyone wishing to run for president in 2008 must resign their ministerial position in 2006, so it is possible that Mr Kufuor’s decision reflects his unwillingness to break the continuity of finance policy over his second term, especially as the performance of the economy, and the effect this has on the standard of living, will be key election issues in 2008. Some political commentators have speculated that Mr Osafo-Maafo could have been moved away from the Ministry of Finance as it provides him with a high profile and access to resources, both of which would have benefited his campaign to become the next president. However, this theory does not explain why Mr Kufuor would want to quash Mr Osafo-Maafo’s presidential ambitions.

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Mr Kufuor cannot run for another term of office, although it is not yet clear who he favours to lead the NPP into the next presidential election. Furthermore, the importance of the Ministry of Education, Youth and Sports in Ghana should not be underestimated. There is currently considerable public dissatisfaction over the state of education and the development of sport, and, provided that Mr Osafo-Maafo is able to achieve success in these areas, it would be easier for him to build a large following amongst Ghanaians, than if her were at the Ministry of Finance, where difficult decisions, such as over the fuel price, have to be made.

A total of 88 ministers are Mr Kufuor also appointed a number of non-cabinet ministers, deputy ministers, appointed and regional ministers to represent the ten regions, making a total of 88 ministers and deputy ministers. This is one of the biggest executives that Ghana has had in recent times; under the previous National Democratic Congress (NDC) government, the total number of ministers and deputy ministers did not exceed 77. Although, in the past, Mr Kufuor had been critical of the size of the NDC’s executive, he is now coming under similar criticism for having such a large administration. The president has attempted to defend his appointments as necessary to administer the economy more efficiently, but his critics in Ghana have accused him of creating the additional positions to reward his key political supporters following his re-election. Certainly, the size of the executive does appear to be overly large for a country of Ghana’s size and resources, and this raises concern as to how committed the government really is to controlling expenditure during its second term.

A new speaker of the house is Ghana’s newly-elected parliament has endorsed Mr Kufuor’s nomination of appointed Ebenezer Sakyi-Hughes as speaker of the house. The nomination of Mr Sakyi- Hughes apparently came as a surprise to the previous speaker, Peter Ala Adjetey, who had not been informed that he was to be replaced. Before taking up the position of speaker in 2001, Mr Adjetey was the NPP's chairman and a veteran politician in Ghana. While serving as speaker between 2001 and 2004, Mr Adjetey has built up considerable popularity, to the extent that when Mr Kufuor failed to re-nominate him for the 2005-08 term, the opposition NDC nominated him as its preferred candidate for the position. Although the election of Ghana’s speaker of the house is usually accompanied by consensus- building behind one candidate, in this case, parliament was roughly divided along party lines between the two candidates that had been nominated. However, the NPP used its majority in parliament (128 seats, compared to the NDC’s 94) to secure the election of Mr Sakyi-Hughes. Election of speaker of the house reveals political undercurrents

The position of speaker of the house is important, as the speaker provides key leadership to parliament on its agenda. Furthermore, and according to the constitution, the speaker of the house is next in line to take over the presidency if the president and the vice-president are unable to occupy the position, which accords him a certain degree of status in Ghana. Many Ghanaians believe that Peter Ala Adjetey was dropped because the New Patriotic Party (NPP) thought he was too objective, and not sufficiently biased towards the party. If the president, John Agyekum Kufuor, questions this loyalty to the NPP then he may also have wanted to

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deny Mr Adjetey the status that comes with being second in line to the presidency. Aware of these perceptions, when Ebenezer Sakyi-Hughes was sworn in as speaker he insisted that he was not there to implement any agenda. Demonstrations take place In response to the increase in fuel prices implemented in early 2005, a number over fuel price hike of opposition figures have formed the Committee for Joint Action (CJA) to rally for a reversal of the increase through organised demonstrations, which have been dubbed "Wahala". The National Democratic Congress (NDC), the National Reform Party (NRP), the Every Ghanaian Living Everywhere (EGLE) party and the People’s National Convention (PNC) have all joined the CJA. The first march was held in Accra, but only a 500-strong crowd attended. The march culminated in the handing of a petition to parliament and addresses by various prominent politicians, including Jerry Rawlings, in which the government was given a deadline of March 7th to reverse the fuel price increases. However, the government did not comply with this ultimatum, but continued to reiterate its message that the fuel price increase was necessary to redirect government spending away from subsidies and into important social services, such as health and education. In response, the CJA organised further demonstrations in Accra, Ho (Volta region) and Wa (Upper West region); the Wa demonstration attracted an estimated 3,000 people. Ghana’s main trade union, the Trade Union Congress (TUC), did not join in the demonstrations, nor was there a strong student presence, and the low turnout signals that the Wahala campaign has attracted only limited support to date. This probably reflects the fact that most people have largely accepted fuel price reforms for the moment. However, the full impact of the fuel price increase has not yet been felt—it will take months to work through the economy—and more Ghanaians may yet decide to join the protests. However, at this stage, the Wahala campaign looks unlikely to reproduce the national strikes that took place in Nigeria in 2004 over fuel price increases, not least because fuel is a more emotive issue in Nigeria—given that Nigeria is one of the world's top oil exporters, many Nigerians consider cheap fuel to be a birthright, and they were supported in this conviction by very active campaigning on the part of the country’s trade unions against any sharp fuel price increases.

NRC's report is published The government published a white paper on the findings of the National Reconciliation Commission (NRC) in April. The NRC was set up in April 2002 to investigate human rights violations committed under the various regimes that have ruled post-independence Ghana, and presented its findings to the government on October 12th 2004 (January 2005, The political scene). The main findings of the NRC are that: • most of the abuses were committed when military regimes were in control—84% were committed by the Armed Forces Revolutionary Council (AFRC) and the Provisional National Defence Council (PNDC), both led by Jerry Rawlings; • the main perpetrators of abuse were the military, the police and the prisons service;

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• most executions happened in Accra and Kumasi, and abuses were generally concentrated in the Greater Accra, Ashanti and Western regions; and that • violations mainly took place against adult males. The NRC made a number of recommendations, which the government stated that it fully endorsed. The recommendations include: • a monument should be erected displaying the names of the victims; • a scholarship scheme should be set up for victims; • transparency, fairness and the highest level of professionalism should be ensured in the military, the police and the prison service. In this regard, the government has ordered the respective councils of these security services to study the NRC's recommendations and implement them; and • a reparation and rehabilitation fund should be established for victims of human rights abuses who appeared before the NRC. The government has announced that a fund will be established by the end of the year. The formal publication of the NRC's findings has the potential to raise the temperature of Ghanaian politics in the coming months. Although the emphasis of the NRC’s work has been on national reconciliation, with no recommendations made on legal proceedings against the perpetrators of abuse, those individuals who were implicated in the report will find themselves on the defensive in the public debates that ensue in the Ghanaian press over the coming months. The report implicates Jerry Rawlings, in particular, and the NDC will have to decide whether, in light of the report’s publication, the party's ongoing close association with Mr Rawlings constitutes a liability to it. The NDC’s political agenda is likely to remain focused on attacking the government over the hardship that the fuel price increase is causing, but the party may find it difficult to maintain an image as the protector of Ghanaians if it is perceived as being too closely associated with the human rights violations of the past. Already, various factions within the party are likely to be questioning whether their association with Mr Rawlings was partly responsible for the NDC losing the December 2004 elections.

The NDC wins a by-election in The NDC's candidate, Alhaji Muntaka Mohammed Mubarak, has won the by- the Ashanti region election held on April 21st in Asawase, in the Ashanti region. The seat became vacant after the NDC candidate who won it in the December 2004 election, Adam Mugtari Gibil, died unexpectedly on February 25th. Asawase is the only constituency held by the NDC in the Ashanti region—the NPP’s key stronghold area—and therefore carries great significance for the NDC. Winning the seat could possibly represent the start of the party making fresh inroads in a new region of Ghana, which would ultimately help it to become a more nationally representative, as opposed to just a regionally based, party. Given that the NDC beat the NPP by a margin of 11,145 votes in the February by-election, compared with the 2,472 margin in the December election, the party’s foothold in the Ashanti region—although still relatively small—seems to have strengthened. Although the NDC attributes its victory to what it perceives as the increasing

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unpopularity of the NPP, especially after the fuel price increases, the NPP has downplayed the election defeat as nothing other than a sympathy vote for the late Mr Gibil.

Disagreement over Dagbon The burial of the late king of the influential Dagomba tribe, Ya Na Yakubu successor delays burial of king Andani II, which was scheduled for April 11th, has had to be postponed because of a disagreement between two Dagomba sub-groups, the Andani and the Abudu. The two sub-groups have been in dispute over the succession since the late king died in March 2002—according to tradition, a new king should be in place before the burial takes place. The Abudu claim that it is their turn to take over the kingship of Dagbon, whereas the Andani claim that it should be one of them, since the late Ya Na never finished his tenure, because he was murdered. The Andani believe that the Abudu killed the Ya Na in order that an Abudu could become king (July 2002, The political scene). A succession of specially set up government committees have failed to identify those responsible for the death of Ya Na Yakubu II—the situation is complicated by the persistent perception that the NPP supports the Abudu and the NDC supports the Andani. This perception has yet to be dispelled and the Andani, who are known to be distrustful of the government's involvement in the crisis, have rejected the government’s latest mediation attempts to secure agreement for the burial to go ahead, and for the succession issue to be resolved at a later stage. Meanwhile, tensions remain high around Yendi in Northern region, where the Dagomba tribe is centred. Owing to high levels of poverty and overlapping claims of chieftaincy, property rights and land ownership, the northern parts of Ghana are generally more vulnerable to violent ethnic clashes than other parts of the country. The Commission for Africa

The Commission for Africa, set up in 2004 by the British prime minister, Tony Blair, delivered its report in mid-March 2005. It is a weighty volume—running to 453 pages—but, despite appearances, not a particularly ground-breaking one. The report maps out a number of ways in which rich countries can dramatically increase their role in tackling poverty in Africa. The British government is keen to use its presidency of the G8 and overlapping six-months’ presidency of the EU in the second half of 2005 to win the backing and, importantly, the financial support of rich states. In July the issues of world poverty, aid and debt will be top of the agenda at the G8 summit in Scotland; in September the UN will host a UN Millennium Summit of the General Assembly, which will highlight the progress, or lack of it, with the Millennium Development Goals (MDGs); and in December there will be a meeting of the World Trade Organisation (WTO) in Hong Kong, which is supposed to see the launch of a new round of world trade talks. The Commission calls for:

• the immediate doubling of donor aid to Africa, from US$25bn to US$50bn, over the next three to five years; • a renewed focus on the war against HIV/AIDS; • the cancellation of 100% of the debts of low-income African states; • the dismantling of developed-world trade barriers to African agricultural imports; and

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• more rapid progress by African administrations on democratisation, improved governance and the eradication of corruption.

None of this is new. Indeed, the Commission’s call for “a big push” simultaneously on all fronts to break Africa’s poverty trap is strikingly similar to a recent UN study, led by Jeffrey Sachs, entitled A Practical Plan to Achieve the Millennium Development Goals. The main thrust of the report is that, although the UN does not expect many Sub-Saharan African countries to meet its MDGs if the current status quo is maintained, this would be possible if there were a large increase in aid in the coming decade. Moreover, the report forcefully sets out the case that, despite decades of academic work which has led to the prevailing pessimism about what development aid can achieve, there is now new research which shows that aid can be effective in reducing poverty.

Education and health are also flagged as priority areas for additional aid and investment, which implies increased opportunities for firms in construction and engineering, healthcare, educational publishing and computers. The Commission wants African governments to allocate 15% of their budgets to healthcare, supported by an additional US$10bn a year from donors. In addition, donors are asked to commit resources to meet the US$3.2bn shortfall in the fund to fight HIV/AIDS, malaria and tuberculosis. The Commission also wants US$3bn to be spent on the development of scientific and technological centres of excellence in Africa over the next ten years.

The Commission believes that Africa needs to invest an extra US$20bn a year in physical infrastructure, half of which should be funded by donors until 2010, with the possibility of a further increase, to US$20bn a year, thereafter. As part of wider measures to promote agriculture and rural development, Africa must double the area of arable land under irrigation by 2015, again with substantial financial support from donors. In a related move, rich countries must agree to the immediate elimination of support programmes for crops like cotton and sugar, and all tariffs should be reduced to zero by 2015, according to the Commission. In the interim, quota- and duty-free access should be extended to exports from low-income African countries. Time to change tactics The report’s call to channel more aid through African governments rather than through non-governmental organisations (NGOs) harks back to the past and clearly reflects the make-up of the Commission, which includes African leaders. The best way to deliver support, according to the report, “is to put aid into African government budgets and let them prioritise the spending of it”. Many will regard the Commission’s call to channel more aid through African governments rather than NGOs and the private sector as an open invitation to even greater corruption, which the Commission itself concedes is already “systemic”. Moreover, putting more aid money through African government budgets implies that the capacity and governance is in place to ensure that the funds are spent wisely. This is far from clear. There is also an implicit assumption that aid agencies are willing to hand over control of their funding to African governments.

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Is the money there? The Commission calls on rich countries to double aid, but has no means—other than moral suasion—to enforce this. Even if the will is there, rich countries may not be able to afford the extra funding as easily as the aid lobby imagines. Two years ago the World Bank warned that several developing countries that had in the past relied on net capital inflows would find it harder to do so over the period to 2015. By 2015, it said, some low- and middle-income countries that are currently capital importers will have become capital exporters. Over the same period a number of rich countries—particularly the US and Japan—which currently export US$67bn a year to emerging economies, will become capital importers. If the World Bank is right, funding the doubling of aid could become much more problematic than the Commission envisages.

If the Commission’s proposals are implemented, even in part, there are a number of implications for companies. Clearly, a stronger, faster-growing and eventually more self-reliant Africa means bigger and better business opportunities. In terms of infrastructure alone, the Commission’s plans imply extra spending of some US$20bn a year, much of which would go to suppliers and firms in OECD countries, Asia (notably China and South Korea) and—very probably—South Africa. Much the same can be said of aid-funded public spending on education, healthcare and information technology, although OECD and South African firms are more likely to have the edge here. However, there is a risk that the Commission’s demands on Western administrations in respect of aid and trade, coming at a time when governments are preoccupied with global terrorism and trade relations between the EU and the rest of the world, could lead to a backlash in 2010 and beyond. If the hugely optimistic aid and trade targets are not met—given past performance, the size of the US budget deficit, and the pensions and social-services crises in the EU—the Commission will have given African leaders one more excuse for economic failure, and for attacks on the West. Economic policy

IMF visits Ghana to review An IMF team visited Ghana for two weeks from March 29th to April 15th to progress under the PRGF carry out the third review of the current poverty reduction and growth facility (PRGF) and Article IV consultations. Meetings were held with the government and donors participating in the Multi-Donor Budgetary Support Programme (MDBSP), which seeks to harmonise the policies and procedures of Ghana’s donors. The third review of the PRGF will assess whether Ghana has met the conditionalities of the current programme, and whether further disbursements should be made under the PRGF. The government’s achievements in keeping fiscal expenditure relatively under control in 2004, which helped to maintain macroeconomic stability despite an election being held, will have been welcomed by the Fund. In particular, provisional data from the Bank of Ghana (BoG, the central bank) indicate that although expenditure was higher than budgeted, the only domestically financed expenditure that substantially exceeded the 2004 budget target were utility price subsidies. The budget had assumed that fuel price subsidies would be removed, but later in the year the IMF agreed that this could be postponed to February

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2005, while in the interim high international oil prices in 2004 caused subsidies to be large. The increase in expenditure was in any case offset by rapid revenue growth in 2004, and the budget deficit was kept within conservative limits, which the Economist Intelligence Unit estimates at 3% of GDP. As well as fiscal issues, the talks will also have concentrated on the implementation of the critical condition under the PRGF, the upward adjustment of the fuel price in order to remove the need for the government to subsidise fuel prices. Given that the government increased fuel prices by 50% in February 2005, it is likely to be seen as having demonstrated good commitment to the PRGF. Probably the most controversial issue still to be resolved with the Fund is the government’s takeover of the Volta Aluminium Company (Valco) in November 2004, despite earlier pressure from the IMF not to do so (January 2005, The domestic economy). The IMF had concerns over the risk that investing in Valco presented, especially given the company’s poor record of profitability. But, given that the government has more recently acquired a strategic partner for running Valco—a US firm, Alcoa—it is arguable that the investment presents less risk than originally thought, and the IMF may choose to play down the seriousness of the issue. Another possible area of concern to the IMF is the number of ministers appointed to Ghana’s government—88 ministers and deputy ministers in total. The government will have to demonstrate that it remains committed to keeping expenditure under control in spite of this large number of personnel. In general, the Ghanaian government will have to demonstrate very clearly to the IMF that it is committed to carrying out further economic reforms, including unpopular measures such as increases to water and electricity tariffs, and to further improving fiscal discipline. This, together with its record on implementing fuel price reforms and keeping expenditure under control, will be critical to convincing the IMF to overlook areas of concern, such as the takeover of Valco, and to accord Ghana a generally positive review.

Fuel price is increased by 50% On February 18th the government announced that the domestic fuel price would be increased by 50% with immediate effect. This most visible impact of this was on the price of petrol, which rose from C20,000/gallon (US$2.20/gallon) to C30,000/gallon. The measure is one of the key reforms agreed with the IMF to remove costly subsidies and thereby contain fiscal expenditure. The government has acknowledged that the fuel price includes a 40% tax component—in 2004, C1.8trn (US$197m) was provided in fuel subsidies, but C3.1bn was raised in fuel taxes and in 2005 the government expects to increase this to C3.9bn. However, the announcement did not make explicit whether the new price represented the full increase required to bring fuel prices to cost-recovery level. In March the National Petroleum Tender Board said that if subsidies had been removed entirely, the petrol price would have been closer to C40,000/gallon. But in the debate that followed in the press between the government and its critics it was implied that the increase meant that prices had risen to near full cost-recovery level. Moreover, the 2005 budget statement allocated expenditure for fuel subsidies that would only be sufficient to last through February 2005, when the announcement was made. The IMF has not yet made any public announcements on whether the price increase

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meets its expectations, although according to the Ghanaian press, donors had only requested a 30% increase in fuel prices. The next priority in the deregulation of the fuel industry is to put in place a formula for an independently derived market price for fuel—the fuel price used to be set by the National Petroleum Tender Board, but now the private sector’s oil marketing companies will take over this role. The fuel price is to be reset monthly, based on achieving full cost recovery using average oil prices over the previous three months, and will include government taxes. It is not yet clear when the new price-setting formula will be put in place, and whether it will imply another large increase in petrol prices. The government is also required to remove subsidies on water and electricity provision, which will involve increasing the tariffs by an overall 7.5%. The increase is scheduled to take place by the end of April 2005. Fuel subsidies kept Ghana’s fuel prices amongst the cheapest in Africa

The subsidising of fuel prices in Ghana in 2004 proved extremely costly, as international oil prices increased from an average of US$28.8/barrel in 2003 to US$38.5/b in 2004. In total, the government spent C1.8trn (US$197m) on subsidies, equivalent to 6% of budget expenditure; this was difficult to justify at a time when the government needs to moderate overall expenditure and prioritise spending towards specific poverty reduction measures. The fuel price in Ghana was amongst the lowest on the African subcontinent, and even after the increase to C30,000/gallon, fuel remains relatively cheap. This price does include a large tax component—40% of the price—but even so, this is a relatively low tax component compared with international rates, which are typically 75% to 90%. Ghana’s fuel prices are also relatively low when it is taken into consideration that the country has a higher income per head than many other Sub-Saharan African countries.

Petrol prices in Sub-Saharan African countries C 60,000 3,000 Price/gallon; right scale 50,000 2,500 Per capita income; left scale 40,000 2,000

30,000 1,500

20,000 1,000

10,000 500 n/a 0 0 Somalia Central African South Africa Sierra Leone Lesotho Ghana (a) Republic (a) Before February 18th fuel price increase. Source: Business & Finance, Vol. 118, February 15th, 2005.

Steps are taken to ease impact In order to counter the negative impact caused by the increase in the fuel price, of fuel-price increase on poor the following measures were announced in the 2005 budget in February (except for the minimum-wage increase, which was announced separately by the government):

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• a reduction of personal income tax on lower-income households; • an increase in the minimum wage from C11,200/day (US$1.21/day) to C13,500/day; • increases in government salaries; • increased spending on public transport: the Metro Mass Transit system is to be extended to more regional capitals, bus services will be increased, and new train services are to become operational; • the removal of all fees for cultural, sport and "development" activities provided for public primary and junior high school pupils; • the piloting of a new school feeding programme for 500,000 pupils; • increased provision of low-income housing; • scholarship awards for cocoa farmers; and • the acceleration of rural electrification schemes. The government is aware of the public perception that the fuel price increase will exacerbate poverty in Ghana. It has responded with the argument that such one-off adjustments should be accepted in return for benefits to be had elsewhere, such as higher spending on social services. Despite the public criticism that has been vocalised in Ghana’s press, indications so far in 2005 are that the population has largely accepted the petrol price increase—albeit begrudgingly. However, it is not clear how easily any further price increases for petrol or other commodities would be accepted, especially if inflation was to accelerate sharply in the second half of 2005.

B u d g et fo r 2 0 0 5 fo c u s es o n The new minister for finance and the economy, Kwadwo Baah Wiredu, reforms and reducing poverty presented the budget for 2005 on February 24th. As outlined in the budget speech, the key priorities for the government in 2005 include: • human resource development; • accelerating private sector-led growth; • making further inroads into reducing poverty; and • improving governance. Mr Wiredu explained that these objectives were to be supported by the following specific measures: • the maintenance of a tight monetary policy in order to help reduce inflation and support the building of foreign-exchange reserves; • the strengthening of the fiscal position by consolidating public expenditure, improving the administration of tax collection, and implementing public-sector reforms; • the reduction of the public debt stock in order to help "crowd-in" private- sector investment—the domestic debt stock is to be reduced to 13.5% of GDP by the end of 2005; and

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• the deregulation of the petroleum sector, by opening it up to private-sector participation and establishing a market-based pricing regime. The priorities laid out in the budget reflect the need to continue with the economic reform agenda begun during the New Patriotic Party's first term, boost the growth rate and make inroads into poverty reduction in Ghana. Although it is intended that economic reform will benefit wealth creation in the long term, certain economic reforms may result in one-off adjustments that cause economic hardships over the short term. The government’s awareness of this was clearly illustrated by the introduction of counter-measures, aimed at increasing the disposable income of those socio-economic groups hardest hit by the reforms.

Budget predicts 25% growth in According to the budget for 2005, domestic revenue (excluding grants), is revenue expected to rise by 25%. Domestic revenue has been rising rapidly, by more than 50% per year between 2000 and 2003—owing mainly to the introduction of more efficient tax collection systems and the widening of the tax base. Provisional data indicate that in 2004 domestic revenue grew by 38% and exceeded the programmed targets for the year, although a significant part of this was due to the effect of high import growth in driving up import-related tax revenue. Efforts to improve efficiency in tax collection and widen the tax base will continue in 2005, although the extent to which these factors can continue to drive high growth in domestic revenue is diminishing. In addition, taxes from import revenue are likely to show a more modest increase, given our forecast for slower import growth in 2005. The budget made a number of other notable revenue projections. • The budget forecasts a decline in revenue from duty on exports, reflecting the government’s expectation that cocoa bean production will decline. However, we expect that higher gold prices and production will outweigh this, and that modest export growth will result in a positive increase in export duties. • Growth in revenue from company tax is forecast to be minimal, which appears to be realistic given the reduction in the corporate tax rate from 32.5% in 2004 to 30% in 2005. • Revenue from taxes on petroleum is expected to increase quite substantially, and given that we forecast higher average international oil prices for 2005, the target appears achievable. (However, the effect of deregulation on how the government sets taxes on petroleum remains unclear). Overall, it is our view that another large increase in revenue is possible in 2005, but that the rate of growth is likely to slow somewhat from the high levels of recent years. The target of 25% growth is possible, but it probably represents the maximum rate of growth achievable. However, an indication that the figure is not wildly unrealistic was provided by revenue data for January and February 2005, which show that revenue had increased by 24% compared with the same period in 2004.

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Budgeted revenue (C bn, unless otherwise indicated) 2004a 2004b 2005c Growth(%)d Tax revenue 16,693.8 17,403.1 21,027.8 20.8 Direct taxes 4,964.9 5,344.0 5,903.5 10.5 Personal 1,671.3 1,908.2 2,217.1 16.2 Self employed 247.3 285.9 372.0 30.1 Company 2,215.2 2,340.3 2,425.0 3.6 Other 831.1 809.6 889.4 9.9 Indirect taxes 7,641.8 8,250.2 10,362.9 25.6 VAT 4,203.9 4,515.7 5,681.0 25.8 Petroleum 2,824.3 3,119.4 3,920.2 25.7 Excise 613.6 615.1 761.7 23.8 International trade taxes 3,666.7 3,808.9 4,761.4 25.0 Other revenue measurese 420.4 458.7 1,339.2 192.0 Non-tax revenue 678.3 1,136.3 1,372.3 20.8 Total revenue 17,372.1 18,998.0 23,739.3 25.0 Grants 3,053.8 4,940.3 5,618.0 15.0 Project 870.7 2,125.3 2,872.0 35.1 Programme 1,188.0 1,762.5 1,599.4 -9.3 HIPC assistance 995.1 1,052.5 1,146.6 8.9 Total revenue & grants 20,425.7 23,938.4 29,357.4 22.6 a Budgeted. b Provisional. c Budgeted. d Growth of 2005 budget over 2004 provisional budget. e The figure for Other revenue measures is included in the total for Tax revenue in the 2004 budgeted year. Source: Ministry of Finance and Economic Planning, Budget statement 2005.

Expenditure is expected to rise According to the 2005 budget, expenditure is budgeted to increase by almost modestly in 2005 17% in 2005, a more modest increase compared with the 31% increase in spending in 2004. As 2004 was an election year, which normally results in higher spending in most countries, it is not surprising that a more modest increase has been targeted for 2005. As we are forecasting average inflation of 16.5% in 2005, it only reflects a modest increase in spending in real terms. Important savings will be made through the removal of all subsidies. However, this will be more than outweighed by a very substantial increase in public- sector pay: following continued pressure on the government to raise salaries in line with inflation, particularly following the fuel price increase, personal emoluments are to rise by 20%.

Discretionary spending items A number of other large increases are tabled in the budget, but a number of are unpredictable these, particularly "discretionary payments", are separately funded and, therefore, actual spending on these items is likely to be determined by how much funding is actually raised for them in 2005. For example, a large increase in spending on the National Health Fund (NHF) accounts for most of the 56.3% rise in transfers to households; but this is a separately financed initiative that is being funded by an additional tax (in effect, an increase in the value-added tax rate) that was introduced in August 2004. Similarly, the 21.1% increase in capital spending is largely accounted for by foreign-financed investment, but foreign funding is not a very predictable resource—Ghana’s Multi-Donor Budgetary Support Programme (MDBSP) seeks to harmonise donor interaction with the country to help reduce the unpredictability of foreign funding. The forecasts for spending on these items appear to extrapolate from the growth trends for 2004,

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which were on the whole very positive, but the actual outcome is very difficult to predict, and could be much higher, or lower, than the targets.

Budgeted expenditure (C bn, unless otherwise indicated) 2004a 2004b 2005c Growth(%)d Statutory payments 9,870.5 8,951.6 12,240.4 26.9 External debt service 3,658.8 2,847.5 3,620.9 21.4 Principal 2,686.6 1,920.1 2,615.3 26.6 Interest 972.1 927.4 1,005.6 7.8 Domestic interest 2,456.5 2,545.0 2,555.0 0.4 District Assemblies Common Fund 787.2 749.4 1,048.4 28.5 Transfers to households 1,475.3 1,279.4 2,927.7 56.3 Education Trust Fund 810.5 823.4 1,124.2 26.8 Road Fund 607.7 639.2 883.3 27.6 Petroleum-related Fund 74.6 67.5 80.8 16.5 Discretionary payments 14,982.6 19,773.2e 22,378.5 11.6 Personal emoluments 6,631.9 6,946.7 8,683.3 20.0 Administration & services 2,734.3 2,360.3 2,727.6 13.5 VAT refunds 126.1 54.9 60.0 8.5 Total investments 3,725.7 5,805.2 7,360.2 21.1 Arrears clearance 166.2 270.8 1,116.7 75.7 Utility price subsidies 392.0 2,207.2 349.5 -531.5 HIPC-financed expenditure 1,206.4 1,869.6 1,594.4 -17.3 Other transfers 0.0 11.1 350.0 96.8 Divestiture liabilities 0.0 0.0 136.5 - Discrepancy 0.0 258.5 0.0 - Total expenditure 24,853.1 28,736.8e 34,618.9 17.0 a Budgeted. b Provisional. c Budgeted. d Growth of 2005 budget over provisional 2004 budget. e Does not sum in source. Source: Ministry of Finance and Economic Planning, Budget statement 2005.

Methods for calculating the Given the way the budget is presented in Ghana, determining the size of the deficit are unclear deficit is often confusing; one particular source of confusion is the inclusion of financing items in revenue receipts so as to present a balanced budget. The problem is made worse because different figures for the overall budget deficit are presented in different parts of the speech—2.2% of GDP is cited at one point and 2.7% of GDP at another. Our own forecast is for a budget deficit (including grants) of 2.8% of GDP in 2005, based on faster growth in revenue than expenditure over the year. The budget is expected to be financed mainly by external loans—shown as project loans and programme loans in the budget.

Budgeted deficit financing, 2005 (C bn, unless otherwise indicated) Divestiture receipts 524.0 Project loans 2,962.5 Programme loans 1,351.5 Exceptional financing 1,539.2 Traditional debt rescheduling 692.9 HIPC relief (Cologne terms) 846.3 Domestic (net) -997.7 Savings due to inflation-indexed bonds -118.0 Total financing 5,261.5

Source: Ministry of Finance and Economic Planning, Budget statement 2005.

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Net repayment of domestic One of the priorities laid out in the 2005 budget is the reduction of the public debt is targeted for 2005 domestic debt stock to 13.5% of GDP by the end of 2005. According to the budget, at the end of 2000 the domestic debt stock was equivalent to 30% of GDP, and by the end of 2004 it was estimated at 17.6% of GDP. Although the government did not manage to make a net repayment of domestic debt in 2004, it plans to make a repayment of C997.7bn (US$108m) in 2005. Because we are forecasting a larger budget deficit than that targeted for 2005, we expect that the government will not be able to make the full net repayment of C997.7m. However, the government has managed to make net repayments since 2001— with the exception of 2004, when spending was higher owing to the election— and so there is good reason to believe that a net repayment will be made again in 2005. The government has stated that reducing domestic debt is important to help "crowd-in" the private sector—net repayments of domestic debt since 2000 have helped to drive down interest rates. However, further reductions in public domestic debt may not necessarily lead to interest rates moving lower. In Ghana, as in many other African countries, banks function very poorly as financial intermediaries, owing to a number of structural problems—poor credit histories for borrowers, a lack of credit bureaux, and the high cost of administration. The government is aware of these problems and some constructive measures to address them were outlined in the 2005 budget, although a complete resolution is only likely to be achieved in the long term.

Mr Wiredu expresses concern In the budget statement Mr Wiredu expressed concern at the high level of over high lending rates lending rates being charged by banks to their customers. According to Mr Wiredu, despite the decline in the Treasury-bill rate over the last four years, banks are charging lending rates that are sometimes almost twice the rate on Treasury bills. The minister cited an example from January 2005, when the Treasury bill rate was 17.8%, but actual lending rates were between 31% and 36%. Mr Wiredu also stressed that the spread between savings and lending rates remains unacceptably high, while real savings rates are often negative. He called on the BoG to exercise its mandate more effectively and ensure that the banking system operates more effectively and efficiently. Mr Wiredu stressed the need to strengthen the creditworthiness of borrowers, by operationalising the national identification scheme, the Credit Reference Bureau, and the street naming and house numbering projects in the country’s districts.

BoG prime rate remains The BoG decided to keep the prime rate unchanged at the last meeting of the unchanged in March Monetary Policy Committee (MPC) in March—this follows a similar decision at its January meeting. The prime rate has been unchanged at 18.5% since May 2004; earlier in 2004 the prime rate was cut by three percentage points. The BoG appears to be reluctant to increase already-high interest rates, despite evidence that inflation is increasing in 2005. The BoG explained that its decision was based on the assumption of ongoing progress towards achieving low and stable inflation, and that core inflation had remained stable following the domestic fuel price increase in February. However, we expect that the fuel- related price increases have yet to work their way through the economy and may drive up core inflation through the course of 2005, forcing the BoG to increase interest rates.

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Interest rates %

Prime (a) Average annual inflation Deposit (b) Savings Real savings Real deposit 80 60 40 20 0 -20 -40 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04

(a) Bank of Ghana's discount rate, end of period. (b) Three-month time deposit rate. Sources: IMF, International Financial Statistics; Economist Intelligence Unit.

Study will determine readi- The establishment of a monetary union by members of the West African ness for a common currency Monetary Zone (WAMZ)—including Ghana, Guinea, Nigeria, Sierra Leone and The Gambia—by July 2005 appears increasingly unlikely to take place. In the budget statement for 2005, Mr Wiredu noted that at a WAMZ meeting in September 2004, the respective heads of state had acknowledged that progress on meeting the convergence criteria was still inadequate. According to Mr Wiredu, the WAMZ meeting concluded that a detailed study of the West African Monetary Institute should be undertaken to determine the state of preparedness for monetary union. At a subsequent meeting of WAMZ in January 2005, its director-general, Michael Ojo, said that the study would be ready in March or April, although we were not aware of any published study at the time of going to print. Mr Ojo advocated that even if only two countries are found to meet the convergence criteria—the likely candidates being Ghana and Nigeria—that they should go ahead with monetary union, and that the other countries could join later. However, at this stage the greatest progress that is likely to take place is the launch of a limited range of eco-denominated financial products.

The domestic economy

Economic trends

The economy grows by 5.8% According to provisional data in the 2005 budget, real GDP grew by 5.8% in in 2004 2004. This exceeded the government’s original forecast of 5.2% growth for 2004, and is the highest growth rate achieved since 1984. The largest contribution to growth came from the agricultural sector, which grew by 7.5%, largely because of the strong performance of the cocoa sector. Cocoa production rose by 29.9%, the second consecutive year of high growth—production increased by 16.4% in 2003. The government attributed this to the mass spraying exercise and better husbandry practices implemented in 2004. Good weather, an increase in producer prices, and smuggling from Côte d’Ivoire (as farmers can obtain higher prices for their crop in Ghana at present) also played a major role in boosting production. Healthy growth was also experienced in other agricultural

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industries: forestry and logging production increased by 5.8%, and crops and livestock production increased by 5.4%. The industrial sector is estimated to have grown by 5.1% in 2004. The strongest performance was shown by the construction industry, which grew by 6.6%. Over the last three years, construction has shown strong growth as a result of acceleration in roads development. Growth in mining and quarrying was also high, at 4.5%, reflecting ongoing investment in the gold sector. Other sectors of industry showed good growth, although growth in the electricity and water sectors slowed to 3.7%.

Services growth remained Services grew by 4.7% in 2004, slightly higher than in the previous two years. high The highest growth was shown by the transport, storage and communications sector, at 5.6%. This may well reflect the increased use of Ghana’s ports by shippers, who have shifted from using Côte d’Ivoire's Abidjan port while the political uncertainty in that country continues. This should also result in the increased use of Ghana’s transport services (and insurance services) to carry goods overland to and from neighbouring countries, notably Burkina Faso and Mali. All of the services sub-sectors showed relatively good growth. For example, growth in government services picked up to 4.4%, which is not surprising given that 2004 was an election year and that government spending did pick up during the year. Economic growth remains vulnerable to external shocks

Although Ghana recorded its highest growth for 20 years in 2004, it is of concern that the economy is still heavily reliant on the agricultural sector to drive higher growth. Agriculture is vulnerable to unpredictable trends in the weather and fluctuating commodity prices. Moreover, Ghana’s high dependence on a single crop, cocoa, makes it even more vulnerable to external shocks. In 2005 cocoa production is expected to be lower than in 2004, owing to slightly drier weather. Prices are also forecast to be lower than in 2004—the Economist Intelligence Units predicts that average prices will fall from 70 US cents/lb in 2004 to 64 US cents/lb in 2005 and 60 US cents/lb in 2006—which means that earnings from this sector will drop significantly. However, Ghana’s gold production is increasing and this presents an alternative source of growth. But, as with cocoa, gold is vulnerable to changes in international prices—we predict that average prices will rise from US$409.5/troy oz in 2004 to US$435/troy oz in 2005, before dropping significantly again to US$402.5/troy oz in 2006. Together, cocoa and gold make up two-thirds of Ghana’s exports—a situation that has remained unchanged for almost two decades—reflecting the lack of real diversification in the country’s export sector. Despite ongoing efforts to develop alternative exports, such as wood, manganese and cocoa products, the growth in these exports has not managed to outpace that of cocoa and gold. Nonetheless, export diversification will remain a central element of economic policy in the next few years. Inflation accelerates in March According to the Ghana Statistical Service, year-on-year inflation has continued to increase, reaching 16.7% in March. From a six-month low of 11.6% in January, it rose to 14% in February, and the latest increase reflects the effect of the 50% increase in the fuel price in mid-February. Inflation is likely to remain high as the fuel price increase works its way through the economy in 2005, and as the

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impact of the 21% increase in the minimum wage and the expected 20% increase in government salaries takes effect. The government's target of end- year inflation of 13.5% for 2005 does, therefore, appear to be optimistic, and we forecast a year-end inflation rate of 17%. Our forecast for average inflation in 2005 is 16.5%, slightly below the end-year rate as we expect the general trend in inflation to be acceleration in the first half of the year, before prices plateau in the second half.

Inflation (% change ) 2004 2005 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Month-on-month 2.1 1.2 1.4 1.1 0.2 -0.8 -0.6 0.4 0.8 0.9 4.8 4.2 Year-on-year 11.2 11.2 11.9 12.4 12.9 12.6 12.4 12.3 11.8 11.6 14.0 16.7 Average 21.9 20.3 18.8 17.4 16.3 15.2 14.3 13.5 12.7 15.2 14.9 17.3

Sources: Ghana Statistical Service, Statistical Newsletter No. B3/2005, April 15th, 2005.

Ghana has a history of high The government is targeting single-digit inflation by the end of 2006, once the inflation fuel price increase has dropped out of the annual comparison. But historically Ghana’s inflation has struggled to reach single digits, and this target will be difficult to achieve in the short term. Since 1990 year-end inflation has never been below 10%, despite repeated efforts to pursue single-digit inflation targets. This is because of a number of factors, the most important being fiscal laxity, which has led past governments to rely on domestic borrowing to fund the fiscal deficit. Another factor is the structurally high demand for imports compared with foreign-exchange reserve levels, which ensures that the currency continues to depreciate every year, and that imports become more expensive, resulting in imported inflation. However, the outlook for inflation in the medium term is more positive. Government spending has come under tighter control under the administration of the current president, John Agyekum Kufuor, which has been focused on economic policy reforms, and if maintained, this will help to reduce inflationary pressures. The cedi has also shown greater stability in recent years, as reserve levels have been bolstered by stronger external inflows, and this will help to reduce imported inflation. However, the decline in inflation may be slowed by the fact that historical trends have led businesses to expect high levels of inflation, which are then factored into their prices, and it remains unclear how soon this cycle of expectations will be broken.

Mining

Alcoa and the government sign A US firm, Alcoa, has signed a Memorandum of Understanding (MOU) with an agreement on Valco the Ghanaian government to develop the country’s integrated aluminium industry. Alcoa already owns 10% of the Volta Aluminium Company (Valco), and the government owns the remaining 90% share, which it bought from Kaiser International in October 2004 (January 2005, The domestic economy). The government had been looking for a strategic partner to help run the Valco smelter, and also to exploit the country’s bauxite deposits, which could then be refined to produce alumina for the Valco smelter. According to the MOU, Alcoa

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will initially restart three of Valco’s five potlines, which should result in the production of 120,000 tonnes of aluminium a year. Alcoa will be working with the government on a feasibility study for building a 1.5m tonnes/year alumina refinery and undertaking railroad and other infrastructure upgrades. The study is expected to be completed by 2006 and to lead to a more detailed MOU. No indication was given of how much Alcoa intends to invest in these projects. Importantly, when a more detailed MOU is agreed, majority ownership of the total integrated aluminium industry project is expected to pass to Alcoa. This is a critical aspect of recent developments, as the IMF had originally put pressure on the government not to buy the 90% share in Valco, owing to concerns about the company’s profitability (July 2004, The domestic economy). Production at Valco under Kaiser had been intermittent, and power shortages were a frequent problem. Under the recently signed MOU, interim power supply measures have been planned with the Volta River Authority, which it is hoped will improve the reliability of power supply; reference was also made to the possible use of natural gas from the West Africa Gas Pipeline (WAGP) once it becomes operational. The new developments surrounding Valco will certainly have been on the IMF’s agenda during its recent visit to Ghana; and the extent to which the new strategic partner will shoulder the risks of the project is likely to determine how willing the IMF is to accept the government’s involvement in Valco. It will also be a key issue with the IMF under the existing poverty reduction and growth facility (PRGF) and any future PRGFs.

Financial markets

GSE all-share index rises by The Ghana Stock Exchange (GSE) all-share index rose by 91.3% in 2004, 91.3% following growth of 154.7% in 2003. Market capitalisation increased by 673.6%, largely because of the floating of AngloGold Ashanti shares on the stockmarket. Gains were made in all but three share prices, and two shares, AngloGold Ashanti and Standard Chartered Bank, reached the highest prices yet recorded on the GSE, at C300,000 (US$33.13) and C170,00 respectively. Five new companies listed on the stock exchange: • Benso Oil Palm Plantation (BOPP); • Clydestone (CLYD); • Cal Bank; • Starwin Products Limited (SPL); and • AGA Depository Receipts. The Initial Public Offerings (IPOs) for the five companies were successful, with three of the IPOs being oversubscribed. The increase came despite 2004 being an election year, which has in the past had the effect of making Ghana’s investors, particularly foreign investors, bearish. The GSE’s strong performance reflects not only AngloGold Ashanti’s listing and the five IPOs, but also the fact that large inflows of remittances from abroad have increased the funds available for investment in the GSE—and given the poor returns offered by

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Ghana’s banks on savings accounts, Ghanaians are finding the GSE a far more attractive option.

Companies listed on the Ghana Stock Exchange Company Sector Share price increase (%) Fan Milk Manufacturing 426 Mechanical Lloyd Transport 342 Enterprise Insurance Financial Services 280 Trust Bank (Gambia) Financial Services 217 CFAO Ghana Retail/general 193 Standard Chartered Financial Services 178 Produce Buying Company Mining 176 Accra Brewery Breweries 168 Aluworks Manufacturing 150 HFC Bank Financial Services 150 Guinness Ghana Breweries Breweries 124 Clydestone Ghana Information Technology 80 Camelot Ghana Manufacturing 76 PZ Ghana Retail/general 74 Cocoa Processing Company Manufacturing 58 Unilever Ghana Retail/general 56 British-American Tobacco Manufacturing 48 SSB Bank Financial Services 28 Ghana Commercial Bank Financial Services 24

Source: Ghana Stock Exchange.

Foreign trade and payments

Rapid import growth causes According to provisional data released by the Bank of Ghana (BoG, the central current-account deficit bank) in its Statistical Bulletin for January 2005, Ghana’s current account moved into deficit in 2004, mainly because of the large increase in imports during the year. Strong domestic demand, higher oil prices and rapidly rising imports of capital equipment for mining investments accounted for much of the growth. However, the increase still appears unusually high. In the budget statement for 2005, the minister of finance and economic planning, Kwadwo Baah Wiredu, attributes the increase in non-oil imports to 20% growth in capital imports, which was apparently due to "increased investment in economic activity". The increase in non-oil imports may also to some extent reflect an increase in goods in transit to neighbouring countries, as shippers continue to use Ghana’s ports because of the uncertain political situation in Côte d’Ivoire, although this amount is not then recorded as re-exports, possibly because of the weakness of Ghana’s statistical authorities.

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Current account (US$ m) 2003 2004 Exports 2,562.4 2,733.2 Cocoa beans & products 817.7 1,071.1 Gold 830.1 838.7 Timber & timber products 174.7 211.7 Other exports 739.8 611.7 Imports 3,232.8 4,158.5 Non-oil 2,669.9 3,383.5 Oil 563.0 775.0 Trade balance -670.4 -1,425.3 Net services -269.8 -343.6 Net income -156.7 -197.9 Net private transfers 1,017.2 1,283.0 Net official transfers 382.0 532.7 Current-account balance 302.3 -151.1

Source: Bank of Ghana.

Export growth is weak The BoG estimates that exports grew by only US$170m to US$2.7bn in 2004. This growth was due to increased cocoa exports, driven by the large rise in cocoa bean production. Gold export earnings also rose—although marginally— because higher international prices compensated for lower gold production as rehabilitation work was carried out at AngloGold Ashanti. However, the figure for "other exports" is lower than in 2003, which seems unlikely given that evidence from a number of other sources tends to indicate that non-traditional exports are rising (January 2005, Foreign trade and payments). This may be because not all the data about non-traditional exports have been obtained by the BoG, as this information comes from numerous different sources—whereas figures for gold and cocoa production, which come from a few single sources, are easier to compile.

Services and income accounts In the case of the invisible trade account, the deficit on both the services and move further into deficit income accounts widened. On the services account, this is likely to have been the result of increased demand for import-related services, in line with rapid import growth. The wider deficit on the income account reflects the fact that the benefits of debt relief obtained under the heavily indebted poor countries (HIPC) initiative were outweighed by the need to service newly-acquired debt— which highlights one crucial weakness of the HIPC initiative. Owing to the marginal growth in gold export earnings in 2004, profit repatriation by foreign mining companies is unlikely to have increased significantly.

Large inflows of remittances The negative impact of import growth on the current account was partially are recorded mitigated by growth in inward remittances. BoG estimates show that net private transfers, which mainly comprise inward remittances, increased from US$1bn in 2003 to US$1.3bn in 2004. However, in the BoG’s World Economic Outlook and External Sector Developments for March 2005, private inward remittances are recorded at US$3bn for 2004—a very large discrepancy. Even if outward flows on the private transfers account—which are traditionally very small—are taken into account, the discrepancy remains large. Nevertheless, the

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growth in Ghana’s inward remittances in 2004 was substantial, and follows large increases in previous years.

Inward remittances US$ m

1,200

1,000

800

600

400

200

0 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04(a)

(a) Election year. Sources:Bank of Ghana; Economist Intelligence Unit.

Foreign-exchange reserves rise Ghana’s foreign-exchange reserves rose from US$1.4bn at the end of 2003 to to US$1.6bn US$1.6bn at the end of 2004, an increase of 20%. The increase took place despite the deterioration in the current account—from an estimated deficit of Foreign-exchange reserves US$714m in 2003 to a deficit of US$1.2bn in 2004—and was the result of a large US$ m 1,800 increase in inward remittances, continued donor support and foreign direct 1,600 investment. Ghana’s foreign-exchange reserves have increased substantially in 1,400 recent years, rising nearly sixfold since 2000, when reserves levels were only 1,200 US$232m. The biggest increase was recorded in 2003, when reserves increased 1,000 from US$540m at the end of 2002 to US$1.4bn by the end of 2003; a surge in 800 export earnings and inward remittances was largely responsible for this. The 600 growth in Ghana’s foreign-exchange reserves resulted in a rise in import cover 400 from 2.3 months in 2002 to 4.2 months in 2003. However, given the rapid rise in 200 imports in 2004, despite further growth in foreign-exchange reserves, import 0 2000 01 02 03 04 cover declined slightly to 4.1 months. Structurally high demand for imports, Source: IMF, International Financial Statistics. which exceeds Ghana’s foreign-exchange supply, will continue to make it difficult for the country to reach higher levels of import cover.

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005