Country Report Ghana at a Glance: 2005-06

Country Report

Ghana

Ghana at a glance: 2005-06

OVERVIEW The president, John Agyekum Kufuor, and his New Patriotic Party are expected to remain committed to donor-directed policies over the forecast period, although pressure to follow more populist policies is mounting. Economic growth in 2005, at 4.3%, will be robust and broad-based; increased gold production will compensate somewhat for setbacks in agricultural production. In 2006 higher gold and cocoa production, together with a recovery in agriculture, will lift growth to 5.6%. However, the fuel-price increase, high international oil prices, possible utility-tariff increases, food shortages caused by drought and a possible weakening in the currency, will make it difficult to bring inflation under control. The Economist Intelligence Unit forecasts average inflation of 15.7% in 2005, falling to 12.3% in 2006. Strong remittance inflows will support a narrowing of the current-account deficit from 2.7% of GDP in 2004 to 0.7% of GDP in 2005, and produce a surplus of 1.3% of GDP in 2006.

Key changes from last month Political outlook • There has been no change to our political outlook. Economic policy outlook • The Bank of Ghana (BoG, the central bank) has introduced a number of reforms to the monetary policy framework. These include lower reserve requirements, which are intended to encourage greater lending to the private sector. Reforms were also made to money market instruments, including changes to repo facilities, to give the BoG more control over money supply growth, and the introduction of BoG bills to separate open market operations from auctions for the public-sector borrowing requirement. Economic forecast • Our forecast for real GDP growth in 2005 has been lowered from 4.8% to 4.3%, following reports that food crop production is expected to be negatively affected by erratic rainfall earlier in the year. Assuming normal weather conditions in 2006, a recovery in agricultural production will drive growth higher to 5.6% (revised upwards from our earlier forecast of 5.2%).

August 2005

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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 9 Economic forecast

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 23 Agriculture 24 Manufacturing 26 Mining 26 Oil and gas

27 Foreign trade and payments

List of tables

9 International assumptions summary 12 Forecast summary 21 Inflation, 2004-05 22 Fiscal performance, Jan-May 2005 28 Current account 30 External debt

List of figures

12 Gross domestic product 12 Consumer price inflation 29 Inward remittances

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Ghana 3

Ghana August 2005 Summary

Outlook for 2005-06 The president, John Agyekum Kufuor, and his New Patriotic Party (NPP) are expected to remain committed to donor-supported policies over the forecast period, but pressure for the government to pursue more populist policies will increase in 2006. Broad-based growth will drive strong rates of economic growth over the forecast period; real GDP is forecast to rise by 4.3% in 2005 and 5.6% in 2006. However, fuel price increases, possible increases to utility tariffs, and food shortages caused by drought will make it difficult to bring inflation into single digits. The Economist Intelligence Unit forecasts average inflation of 15.7% in 2005, falling to 12.3% in 2006.

The political scene The NPP has supported an extension of the vote to the 3m-strong diaspora, which is expected to benefit it at the next election. An indication of the NPP’s current popularity will be evident from a by-election in Greater Accra at the end of August. Mr Kufuor’s reputation could be tarnished if allegations that he abused his position to help his son purchase a hotel next to his home are proved to be true. The Africa Peer Review Mechanism’s report on Ghana has highlighted numerous economic and political strengths and weaknesses.

Economic policy The IMF’s third review of Ghana’s performance under its poverty reduction and growth strategy was positive and should lead to donors releasing further financial support. The Bank of Ghana (BoG, the central bank) has continued to reform monetary policy, with the aim of promoting the greater use of indirect policy instruments. It has also reduced reserve requirements.

The domestic economy Inflation has fallen for three consecutive months to reach 15.7% in June, but shortages in food production have been identified. A fiscal deficit of 1.6% of GDP was recorded for January-May 2005, confirming that the government has remained committed to fiscal discipline. Producers of agricultural and manufactured goods, notably textiles, have voiced their concern over competition from cheap imports. Alcoa has provided US$30m to restart operations at the Volta Aluminium Company, while the petroleum industry has a new authority to oversee deregulation.

Foreign trade and payments New data from the BoG indicate that exports rose by 50% in the first half of 2005. Owing to continued growth in remittances, we now expect only a small current-account deficit, of 0.7% of GDP, in 2005. World Bank data show that external debt rose in 2003, but it may fall significantly in coming years if Ghana is awarded the additional debt relief agreed at the G8 summit in July. Editors: Nicola Prins (editor); David Cowan (consulting editor) Editorial closing date: August 8th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report August 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 Health 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 66.2 78.0 GDP (US$ bn) 5.0 5.3 6.2 7.6 8.7 Real GDP growth (%) 3.7 4.2 4.5 5.2 5.8 Consumer price inflation (av; %) 25.2 32.9 14.8 26.7 12.6a Population (m) 19.9 20.3 20.8 21.2 21.7 Exports of goods fob (US$ m) 1,936.3 1,867.1 2,015.2 2,562.4 2,784.6a Imports of goods fob (US$ m) 2,766.6 2,968.5 2,707.0 3,276.1 4,297.3a Current-account balance (US$ m) -386.5 -324.6 -32.0 255.2 -235.7a Foreign-exchange reserves excl gold (US$ m) 232.1 298.2 539.7 1,352.8 1,626.7a Total external debt (US$ bn) 6.6 6.7 7.3 8.0 7.0 Debt-service ratio, paid (%) 15.7 10.0 5.9 11.4 8.4 Exchange rate (av) C:US$ 5,455.1 7,170.8 7,932.7 8,677.4 9,004.6a a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2003 % of total Components of gross domestic product 2003 % of total Agriculture, forestry & fishing 35.8 Private consumption 77.2 Industry 24.9 Government consumption 11.5 Manufacturing 8.5 Gross domestic investment 21.9 Services 39.3 Exports of goods & services 40.3 Imports of goods & services 52.2

Principal exports 2003 US$ m Principal imports 2003 US$ m Gold 830.1 Non-oil 2406.4 Cocoa beans & products 802.2 Oil 562.9 Timber & products 174.7

Main destinations of exports 2003a % of total Main origins of imports 2000a % 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 2005 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (C bn) Revenue & grants 4,679.3 4,792.8 4,676.2 5,844.5 6,055.4 7,401.8 5,003.1 n/a Expenditure & net lending 4,918.8 5,758.4 5,230.7 6,278.5 6,647.7 7,970.1 5,245.9 n/a Balance -239.5 -965.6 -554.5 -434.0 -592.3 -568.3 -242.8 n/a Prices Consumer prices (Accra; 2000=100) 198.4 198.1 206.9 218.3 223.4 222.2 236.1 n/a Consumer prices (% change, year on year) 27.8 24.0 14.4 11.4 12.6 12.2 14.1 n/a Financial indicators Exchange rate C:US$ (av) 8,716.2 8,781.8 8,912.2 9,022.8 9,040.0 9,043.5 9,058.6 9,073.7 Exchange rate C:US$ (end-period) 8,732.3 8,852.3 9,018.3 9,046.5 9,051.8 9,054.3 9,075.5 9,074.9 Deposit rate (av; %) 15.0 14.6 14.1 13.8 13.4 13.3 11.4 10.5 Discount rate (end-period; %) 26.0 21.5 20.0 18.5 18.5 18.5 18.5 16.5 Treasury rate (av; %) 29.5 21.6 16.9 16.7 16.3 16.4 16.5 16.3 M1 (end-period; C bn) 7,679.8 10,723.4 10,063.3 10,857.9 10,987.9 13,745.3 13,007.0 n/a M1 (% change, year on year) 39.7 33.2 35.8 40.7 43.1 28.2 29.3 n/a M2 (end-period; C bn) 15,530 20,123 19,775 21,126 21,794 25,645 24,656 n/a M2 (% change, year on year) 30.6 34.2 33.8 34.6 40.3 27.4 24.7 n/a GSE all-share index (end-period;1990-1993=100) 2,643 3,553 5,665 6,879 6,998 6,799 6,454 5,863 Sectoral trends Gold price, London (US$/fine oz) 363.3 391.9 408.5 393.2 401.3 434.0 427.1 427.3 Cocoa beans price, New York & London (US$/tonne ) 1,582.6 1,546.1 1,565.6 1,417.8 1,612.1 1,607.4 1,677.8 1,544.7 Foreign trade (US$ m)a Exports fob 575.0 771.8 686.5 700.2 733.5 664.5 735.1 n/a Cocoa beans 207.6 158.2 288.9 296.8 306.0 179.4 269.5 n/a Gold 204.4 235.3 229.5 195.8 195.5 219.5 222.9 n/a Imports fob -834.7 -903.6 -934.8 -1,101.7 -1,034.9 -1,225.9 -1,047.6 n/a Trade balance -259.7 -131.8 -248.3 -401.5 -301.5 -561.4 -312.5 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 906.2 1,352.8 1,255.9 1,287.9 1,353.4 1,626.7 1,439.8 1,347.8 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 in office, which 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. However, the most important of these, the deregulation of the petroleum industry, has already been implemented, giving the government some room for compromise on remaining issues, such as reforms to utility pricing. However, popular discontent may increase as the full burden of the reforms is felt, and there is likely to be an increasing temptation for the government to reformulate economic policy along more nationalistic and populist lines. Pressure is already mounting for the government to take a more interventionist stance towards the economy, in particular, to support local producers. The government’s administration of trade liberalisation is coming under increasing criticism from business associations representing various different sectors of the economy, and if this gains more momentum it could become a key political issue that undermines the NPP’s popularity. At present, businesses are only calling for minor protectionist measures, and the government has already bowed to calls to impose higher duties on textile imports. In this way, the NPP government will be hoping to keep the business community on side and to appear to be addressing the country’s key economic problems, while maintaining good relations with the IMF. But with Ghana likely to be awarded substantial further debt relief following the G8’s recent commitment to eliminating poor countries’ external debt, public expectations that further funding is available and should be delivering more tangible results to ordinary Ghanaians are likely to rise. Recent by-elections have shown that the electorate is becoming more focused on economic issues. With this in mind, the opposition National Democratic Congress (NDC) is increasingly focused on efforts to try and discredit the NPP’s performance on managing the economy. The NPP’s difficulty in raising living standards quickly could well swing the next election in favour of the NDC, and it is with this in mind that the NPP is supporting an extension of the vote to the Ghanaian diaspora, who are widely believed to support the ruling party. The NDC is also aware that focusing on the economy may not be sufficient to win it the next election, and will be looking for ways to discredit Mr Kufuor. The president’s reputation at home has been boosted by his high profile within the West African region, the consolidation of democracy during his time in office and perceptions that he is a reform-minded politician. In contrast, the NDC is associated with Gerry Rawlings, the ex-president whose previous regime has

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been accused of gross human rights violations. The NDC therefore has an interest in pursing recent allegations in the press that Mr Kufuor abused his position in power by attempting to buy a hotel next to his residence. If true, this could have serious implications for the president’s reputation for probity.

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

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 poverty reduction and growth facility (PRGF), which runs to October 2006. A third review of the PRGF by the IMF has taken place and is positive about policy implementation in 2004, despite some slippages in fiscal policy due to higher spending than expected on fuel subsidies and the wage bill. The IMF is likely to maintain pressure on the government to strengthen public-expenditure management and increase revenue in order to reduce the fiscal deficit and allow the government to cut domestic debt. However, given that the toughest reform, the deregulation of the petroleum industry, has now been carried out, there is likely to be more room for compromise on other issues. In particular, we expect that there will be delays in increasing utility tariffs, that the government’s takeover of the Volta Aluminium Company (Valco) will be sidelined (the IMF warned that it was too risky a venture), and that recent hikes in import duties on textiles will be accommodated. However, pressure for the government to adopt more populist measures are building, and there is a risk that this may force the government to opt out of a successor PRGF after the current programme ends in October 2006, in which case relations with donors could become highly strained and could potentially break down towards the end of the forecast period.

Fiscal policy Provisional data from the Bank of Ghana (BoG, the central bank) indicate that the fiscal deficit was around 1.6% of GDP in the first half of 2005, and we expect that a slightly smaller deficit will be recorded for the remainder of the year, resulting in a fiscal deficit of 2.8% of GDP for the year as a whole. Although this is above the government’s target of 1% of GDP, it would still represent an improvement on previous years, reflecting continued improvement in fiscal discipline. Expenditure remains under control and domestic revenue is rising, particularly as efforts to improve tax collection and widen the tax base continue. In addition, although donor inflows in the first

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half of the year were below target, they are expected to pick up in the second half of 2005. Although the new government has demonstrated its commitment to IMF-supported reforms in the 2005 budget, by 2006 we expect that it will have started to bow 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.

Monetary policy Given that inflation is expected to remain relatively high over the remainder of 2005, we think that the central bank will employ greater caution over the management of monetary policy, although a rise in interest rates is highly unlikely. The BoG’s apparent reluctance to increase interest rates reflects its recent, more proactive stance on encouraging banks to lend money to the private sector. In fact, despite the strong possibility that inflation may not reach the BoG’s target of single-digit inflation by the end of 2005, the BoG may be tempted to make a marginal cut in interest rates, as long as inflation does not threaten to move too far out of control. Given that inflation is expected to fall in 2006, there will be greater pressure on the BoG to meet the single-digit inflation target, and the central bank will carefully monitor inflation to identify opportunities for interest rate cuts. However, inflation will remain in double digits, although these are expected to be fairly small. Ghana has tended to have relatively high interest rates, partly because of the government’s historically high level of domestic borrowing. Now that the fiscal deficit is coming under control, the BoG will focus on helping to reduce the considerable barriers commercial banks face in increasing lending to the private sector.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.1 4.2 4.0 OECD 2.0 3.3 2.3 2.3 EU25 1.3 2.4 1.7 2.0 Exchange rates ¥:US$ 115.9 108.1 107.8 103.0 US$:€ 1.132 1.244 1.227 1.260 SDR:US$ 0.714 0.675 0.680 0.671 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.00 0.17 US$ 3-month commercial paper rate 1.10 1.48 3.41 4.63 Commodity prices Oil (Brent; US$/b) 28.8 38.5 53.3 50.5 Cocoa (US cents/lb) 78.8 70.2 71.0 61.6 Gold (US$/troy oz) 363.3 409.5 425.6 402.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 8.6 -0.6 1.1 Industrial raw materials (% change in US$ terms) 13.0 21.0 4.2 -6.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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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% in 2004 to 4.2% in 2005 and 4% in 2006 in response to policy tightening in leading economies. With investors and funds continuing to buy 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$425.6/troy oz. However, owing to rising interest rates and greater political certainty, prices should fall back, but only moderately, to US$402.5/troy oz in 2006. We forecast that cocoa prices will increase slightly in the forecast period, averaging 71.0 US cents/lb in 2005, before falling to 61.6 US cents/lb in 2006 because of over-supply on international markets.

Economic growth We expect the broad-based growth seen in recent years to continue over the forecast period, reflecting in part the progress made with macroeconomic reforms. Economic growth in the services sector is expected to remain robust, particularly in telecommunications, transport, tourism, government services and business. Construction will also post strong growth, owing to donor- funded infrastructure projects and housing development. This more broad- based growth is expected to compensate for setbacks in agricultural production, particularly in cocoa and food crops, caused by erratic rains earlier in 2005. However, the government is expected to increase the provision of support services to the agricultural sector, and, assuming normal weather conditions, cocoa output is forecast to rise again in 2005/06. The outlook for industry is mixed. Manufacturers will continue to struggle owing to the strong exchange rate, high inflation and growth in imports. Although manufacturers of cocoa products will benefit from a surge in international prices, volumes will be lower, in line with lower cocoa bean production. Investment in the mining sector is expected to result in a substantial increase in gold production, which will make a significant contribution to overall GDP growth in 2005. 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 plans to open a 500,000 troy oz/year mine in mid-2006, which will lift the company’s current production by around 22%. Overall, given the setbacks in agricultural production, we have reduced our forecast for real GDP growth in 2005 from 4.8% to 4.3%, but expect that in 2006 a rebound in agriculture, together with higher gold and cocoa production, will lift real GDP growth to 5.6%.

Inflation Although the fiscal deficit is likely to decline in 2005, the inflationary impact of the fuel price increase in February is expected to keep average inflation high for the year, at 15.7%. Given that year-on-year inflation rate fell from a recent peak of 16.7% in March to 15.7% in June, it is possible that inflation has peaked. But any further decline in 2005 is unlikely to be substantial, as a number of inflationary pressures will keep inflation high, including: high international oil prices; a possible weakening of Ghana’s exchange rate over the second half of the year; expected tariff increases for utilities; food shortages caused by drought; and the 21% increase in the minimum wage and 20% increase in government

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salaries that were announced in the 2005 budget. Average inflation is forecast to fall to 12.3% in 2006 as the fuel-price rise drops out of the year-on-year comparison. Nonetheless, currency depreciation is expected to put upward pressure on the price of imported goods and fiscal policy is expected to be more expansionary.

Exchange rates The cedi has remained relatively stable in the first half of 2005; from C9,054:US$1 at the end of December 2004 the currency was trading near to C9,075:US$1 at the end of June 2005. This stability stems from strong inflows of donor support and remittances, combined with government intervention to maintain a stable exchange rate"intended to keep imported inflation to a minimum while the fuel-price increase is absorbed into the economy. However, one cost of maintaining this stability has been a rundown in foreign-exchange reserves, from US$1.6bn at the end of December 2004 to US$1.3bn at the end of June 2005. The central bank is, therefore, expected to allow the exchange rate to fall back in the second half of 2005, and the cedi is forecast to average C9,152:US$1 for the year. Structurally higher demand than supply for foreign exchange (owing to the economy’s import dependence) will ensure that the cedi steadily loses value during 2006, to average C9,476:US$1 for the year. Following the downward trend in foreign-exchange reserves in early 2005, we expect that reserves will rise in the second half of 2005 if the BoG abandons its recent strategy of defending the currency. Reserves tend to rise at this time of year in any case as cocoa export proceeds pick up and remittances rise towards the festive season. In addition, stronger inflows from donors are expected.

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. Mining development work, robust domestic demand and continued high oil prices will support relatively high levels of imports over the forecast period. To some extent, however, high imports 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, and are expected to drive a narrowing of the current-account deficit from 2.7% of GDP in 2004 to 0.7% of GDP in 2005, and to result in a small surplus, of 1.3% of GDP, in 2006.

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Forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growth 5.2 5.8c 4.3 5.6 Gross agricultural production growth 6.1 7.5c 3.0 5.5 Consumer price inflation (av) 26.7 12.6 15.7 12.3 Consumer price inflation (year-end) 23.6 11.8 16.5 11.0 Short-term interbank rate 21.5 18.5 21.0 17.0 Government balance (% of GDP) -4.4 -3.6 c -2.8 -3.1 Exports of goods fob (US$ bn) 2.6 2.8 2.9 3.1 Imports of goods fob (US$ bn) 3.3 4.3 4.3 4.5 Current-account balance (US$ bn) 0.3 -0.2 -0.1 0.1 Current-account balance (% of GDP) 3.3 -2.7 c -0.7 1.3 External debt (year-end; US$ bn) 8.0 7.0c 7.1 7.4 Exchange rate C:US$ (av) 8,677.4 9,004.6 9,151.6 9,475.9 Exchange rate C:¥100 (av) 7,486.9 8,328.0 8,491.4 9,199.9 Exchange rate C:€ (year-end) 11,166.3 12,257.7 11,083.6 12,790.1 Exchange rate C:SDR (year-end) 13,154.3 14,061.4 13,505.0 14,760.4 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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

Vote of the Ghanaian diaspora The government has proposed an amendment to the Representation of the is under debate People Bill, which would allow Ghanaians resident abroad to vote in general elections. At present, Ghanaians must be resident in the country in order to vote, although supporters of the amendment argue that denying citizens abroad the opportunity to vote actually contravenes the constitution, which states that every citizen of Ghana over the age of eighteen has the right to vote. The Select Committee on Legal and Parliamentary Affairs was tasked with carrying out a national campaign to publicise the proposed amendment and sample the views of Ghanaians from across the country, but members of the committee belonging to the main opposition party, the National Democratic Congress (NDC), boycotted the campaign.

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The NDC has argued against amending the bill, claiming that in the government’s haste to place it before parliament, insufficient consultation has taken place with all interest groups. It therefore recommended that the Electoral Commission be put in charge of conducting consultations with all political parties and interest groups and that, in the meantime, the bill be withdrawn. The NDC warned that without proper consultation first, the amendment could result in future election results being disputed, possibly leading to instability that could threaten Ghana’s young democracy. The party has also raised a number of technical issues that need to be resolved, such as whether Ghanaians living abroad would be able to vote in both the presidential and parliamentary elections. The difficulty with this is that the parliamentary election requires voting in designated constituencies, of which there are presently 230, by residents who have lived in those constituencies for six months prior to registering to vote.

The NDC fears the diaspora Although there are certainly ways of resolving the technicalities of how the vote will favour the NPP overseas vote is organised, there are also deeper political issues at stake for both sides that are fuelling the debate over amending the bill. For the ruling New Patriotic Party (NPP), the diaspora vote is expected to go largely in its favour at future polls. Given that according to some political analysts recent polls have indicated that the party has reached the limit of its ability to expand its support base within the country, looking abroad for further support from the 3m-strong diaspora (equivalent to 15% of Ghana’s population) appears to be the best strategy for expanding the NPP’s base. Not only does the NDC fear that the NPP will gain further support, it has also voiced concern that the staff in Ghanaian diplomatic missions abroad, where the voting would take place, are largely made up of the ruling party, which might encourage electoral fraud in favour of the NPP. If the government decides to leave the amended bill before parliament, then a vote on the matter is likely to find in favour of the NPP, as it carries a majority in parliament, but concerns over a possible legal challenge to the amendment may force it into a compromise. John Kufuor’s government has been courting the diaspora

The New Patriotic Party (NPP) has been courting the Ghanaian diaspora since coming to power in 2000. Only a year after taking office, the government organised a conference for the diaspora, which was held in Accra. The conference had many aims, including: maximising the economic contribution that Ghanaians abroad could make to their country, enticing Ghanaians to return home and creating a favourable relationship between the NPP and the diaspora. The government’s latest attempt to extend the vote to the diaspora is a continuation of these efforts. Giving the diaspora political representation not only acknowledges the important contribution its members are making to national income: by giving them a say over the political future of the country it may also encourage them to make more long-term investments in Ghana. A by-election is to be held in A by-election is to be held on August 30th in the Odododiodio constituency in Greater Accra region the Greater Accra region. The seat became vacant after Samuel Nii Ayi Kwei Mankattah, the NDC’s representative for the area, died after suffering from hypertension and diabetes. The contest over the seat has been fairly intense, as

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it is known to be a swing-seat, with voters appearing to be swayed more by national issues, such as delivery on social services, and by their appraisal of their MP’s performance in parliament, rather than loyalty to any one party. The NDC’s election campaign is therefore expected to remain strongly focused on criticising the government’s performance in fighting poverty, highlighting the fact that standards of living have worsened under the NPP’s regime. The Odododiodio by-election could, therefore, provide an insight into the current popularity of the NPP, especially after it lost the Asasewa by-election to the NDC in April 2005 in what political pundits consider an NPP stronghold (May 2005, The political scene). The NPP hopes to gain an advantage by choosing Lennox Sidney Asafoatse Mankattah as its candidate, the son of the late MP. Mr Mankattah was chosen over five other contestants, including a former NPP MP of the area, Niibi Ayibontey, presumably with the aim of gaining sympathy votes. However, in the process of choosing its candidate, the NPP disqualified eight other contenders, which apparently was met with some dissatisfaction from a number of NPP members, to such an extent that police reinforcements had to be called to the constituency to maintain order. Following the infighting, some NPP members in the area have warned that they may decide not to vote for the party, which could harm its prospects at the polls. The NDC has not yet elected its parliamentary candidate either and is also experiencing infighting over choosing a candidate, which may dent its prospects at the polls as well.

The president’s involvement in In recent months allegations have been levelled in the press against the a hotel deal is questioned president, John Agyekum Kufuor, that he sought to buy a US$3.5m hotel next to his home in Accra. The hotel, owned by a Lebanese businessman, Anthony Saoud, is in the upmarket airport district and was built in the late 1990s. According to press reports, Mr Saoud was forced into selling the hotel because it posed security problems to the president, although Mr Saoud has denied this. There have also been allegations that Mr Saoud was forced into selling the hotel at a very low price, after having been accused of not holding the correct permits for building the hotel. Although Mr Saoud has denied that the hotel was sold to Mr Kufuor, he confirmed that it had been sold to Mr Kufuor’s son, John Addo Kufuor, who is more commonly known as Chief Kufuor. A US- based financial consultant, Gizelle Yazji, has substantiated this, claiming that she negotiated the purchase of the hotel on behalf of Chief Kufuor. Mrs Yazji has also claimed that she was a professional advisor to the president after he came to power in 2000, and says that this developed further into a personal relationship with the president. In response to the allegations mounting against the president in the Ghanaian press, the opposition NDC has led calls for an official inquiry to be held into the matter. Mr Kufuor has denied any involvement, accusing the NDC of spreading the rumours in the press to discredit him. Mr Kufuor also described the hotel purchase as a purely private affair, which involved no state funds. His son is alleged to have promised to reveal full details of the purchase agreement if any inquiry is held. The acting head of the Commission on Human Rights and Administrative Justice (CHRAJ), Anna Bosman, has stated that preliminary inquiries have already begun"the Commission is the main institution in Ghana

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responsible for investigating corruption allegations made against public officials. If inquiries can prove that the president used state funds to secure the purchase, or abused his position in power to force Mr Saoud to sell the hotel, especially at less than the market price, then the political consequences could be serious for Mr Kufuor, and might include the instigation of an impeachment hearing.

President responds confidently Despite the growing speculation in the press, the presidency has responded to allegations fairly confidently in response to the allegations, neither attempting to obstruct Mr Saoud and Mrs Yazji from talking freely with the media, nor seeking to avoid inquiries being held. Although this may merely constitute a front to convince the public of his innocence, Mr Kufuor has a record in office of being fairly reform-minded, and there were no serious incidents of corruption surrounding him prior to taking office. His performance at home has led to him being held in high esteem within the West African region, and under him Ghana has been seen as a role model for neighbouring countries. This stands in contrast to the NDC, which has been tainted by its association with Gerry Rawlings, the ex-president whose previous regimes were heavily implicated in a report on human rights abuses that was published earlier in the year. The NDC’s recent campaigns to gain more support from the electorate have focused on trying to expose weaknesses in the NPP’s performance, and the party would have much to gain if Mr Kufuor’s reputation were to be spoiled by the revelation of any wrong-doings in the hotel deal.

African Peer Review Forum On June 19th the third Summit of the African Peer Review Forum was held in reports on Ghana Abuja, Nigeria, at which peer review reports were presented on Ghana and Rwanda. The African Peer Review Mechanism (APRM) seeks to establish a self- monitoring process for African states, which will drive domestic, political and economic reforms in participating countries. Ghana was one of the first countries to volunteer for peer review when the APRM was launched in March 2003, and was finally reviewed in April 2005 after substantial delays. The report made a number of wide-ranging recommendations organised around four main areas: democracy and political governance, economic governance, corporate governance and socio-economic development. Ghana’s government is now required to come up with a Programme of Action (PoA) on how it proposes to overcome the problems identified in the report. The APRM’s report has been received with much lively debate in Ghana. There has been a fair amount of cynicism in the press over whether the findings actually present anything new"problems relating to corruption, for example, are already widely known about. The press also highlighted the fact that promises had previously been made to address certain issues that were included in the report"which have not been fulfilled"and raised the question of why the government should be more likely to tackle such problems now that it is participating in the APRM than previously. Moreover, as with reform initiatives in general, there are also questions over whether there is sufficient funding and capacity to implement the resulting PoA.

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Findings of the African Peer Review Forum

The African Peer Review Forum’s report on Ghana highlighted both the strengths and weaknesses of the current political, corporate and economic environment, making a number of recommendations. Democracy and political governance: • Strengths include the holding of three post-transition democratic elections and participation in regional peacekeeping operations. • However, there is a potential for conflict to arise from disputes over land, chieftancy and election results. • There is an insufficient separation of power between the executive, legislature and judiciary. • There are concerns about the large size of the government, which has 88 ministers. • Women are under-represented in key decision-making posts. • There is a lack of decentralisation of political and administrative power. • There is a high level of corruption"an anti-corruption commission needs to be established and the “Whistle Blowers” and “Access to Information” bills need to be enacted. Corporate governance: • There are difficulties in accessing finance or mobilising alternative domestic resources. • The legal and regulatory framework needs to be reviewed"the Companies! Code, which was enacted in 1963, is now outdated. • Commercial dispute resolution is lengthy and costly"special courts for handling commercial disputes are required. • Business registration needs to be decentralised to improve efficiency. • Awareness needs to be raised with regard to good corporate governance and social responsibility. • The support available for small- and medium-sized enterprises (SMEs) is commended, but needs to be taken further. Economic governance: • The economy is highly vulnerable to external shocks and regional instability"diversification and the further development of infrastructure is needed. • There is a high level of dependence on external assistance to fund development expenditure and for policy advice; there is a need for greater domestic resource mobilisation and more effective country ownership of policymaking. • The private sector needs to be further developed. • There is a lack of fiscal decentralisation. • Corruption is prevalent in public administration. • The management of public debt, particularly foreign debt, needs to be improved. Socio-economic development: • Although the government is committed to achieving the millennium development goals (MDGs) and implementing the Ghana Poverty Reduction Strategy (GPRS), some MDGs are unlikely to be met, including those relating to universal education, child mortality, and the combating of disease. • The northern regions and some of the coastal regions are less developed than the rest of the country. • The Domestic Violence bill needs to be enacted.

Perceptions of corruption are The corruption allegations against the president come at a time when several increasing studies have suggested that corruption is endemic and increasing in Ghana. Notable among these are a recent survey report by the Ghanaian-based Centre for Democratic Development (CDD), which noted that about 75% of a sample population interviewed felt that corruption was on the increase in Ghana. At the same time, another Ghanaian organisation, the Ghana Integrity Initiative, released a report highlighting its concerns about the extent of corruption. In addition, the APRM report presented to the APRM Forum in July noted the

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prevalence of widespread corruption, which was deemed to be undermining the quality of governance in the country. A lively debate has ensued in the press in response to the reports on corruption. Although some analysts have questioned the surveys’ findings, others have argued that irrespective of the apparent flaws in the survey reports, corruption is a problem and that the government needs to take a tougher stance on tackling it. Mr Kufuor and his vice-president, Aliu Mahama, responded by urging those who have made corruption allegations to provide evidence so that the authorities can take the necessary action. Tackling the problem is certainly very difficult, and requires a long-term commitment by the government; the APRM report highlighted the necessity of establishing an anti-corruption commission, and enacting the “Whistleblowers” and “Freedom of Information” bills, which will help to empower civil society groups and anti-corruption agencies in their efforts to confront the problem.

Economic policy

IMF’s third review of the PRGF The Executive Board of the IMF has completed the third review of Ghana!s is broadly positive performance under the current poverty reduction and growth facility (PRGF). The Fund decided to waive the non-observance of three quantitative and one structural performance criteria (although the IMF’s press release does not mention what these are), as it is satisfied that the government has put in place adequate measures to ensure that the conditions will still be met. The successful completion of the review resulted in a further disbursement of SDR26.4m (US$38.7m) and also, somewhat unusually, an extension of the PRGF, which was scheduled to end in May 2006, but will now end in October 2006. The extension is necessary to allow sufficient time for the sixth and final review, as well as all disbursements under the arrangement, to be completed. The third review has already been delayed as the Fund was waiting for key reforms to the fuel pricing system to be completed. In the third review, the IMF highlighted the government’s commitment to policy implementation, which contributed to the country’s reasonably strong economic performance in 2004. But it also pointed out that the improved performance was due to favourable external factors, such as higher-than- expected donor inflows. On the policy front, the IMF noted that monetary policy had been effective in helping to reduce inflation, despite large external inflows. It also approved of the building up of foreign-exchange reserves. However, slippages in fiscal policy were noted, particularly as higher-than- expected expenditure on the petroleum subsidy and government wages caused the budget deficit target to be missed"although a narrowing of the budget deficit was still recorded. Progress with reforms on a number of fronts was also highlighted. In particular, improvements in transparency, accountability and efficiency in governance were attributed to reforms in public-expenditure and financial management; and regulatory and legislative reforms were commended for helping to strengthen the financial sectors.

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IMF is satisfied with reforms Most importantly, the IMF emphasised its satisfaction with the introduction of to the petroleum industry reform to petroleum product pricing, which in effect remove the need for petroleum subsidies. The implementation of this reform, which took place in February, when fuel prices were increased by 50%, was probably the key to the success of the third PRGF review, and will have been behind the IMF’s willingness to waive other conditions that were not met. The press release on the third review made no mention of the government’s controversial takeover of the Volta Aluminium Company (Valco), which took place in November 2004, despite the IMF’s earlier warning that the government might expose itself to a large financial liability. This suggests that the Fund has managed to allay some of its concerns over the project, possibly because of the government’s acquisition of a strategic partner in the form of a US firm, Alcoa, which may reduce the risk involved in the project.

Reforms to monetary policy In June the governor of the Bank of Ghana (BoG, the central bank), Paul framework are announced Acquah, announced a number of reforms to the existing monetary policy framework, which will take effect from July 1st, 2005. The reforms include a reduction in reserve requirements and technical changes to money-market instruments. Mr Acquah explained that the reforms are aimed at achieving: • greater efficiency in the transmission of monetary policy; • a differentiation between central bank open market operations (OMO) and the raising of funds to cover the fiscal deficit; • the further development of the secondary financial market; and • increased transparency and competitiveness in the interbank money market, with the goal of developing it as the primary money market for commercial banks.

Reserve requirements for Of these reforms, the changes to reserve requirements are potentially the most deposit money banks reduced important in the short term. Although banks are still required to hold 9% of their eligible deposits as primary reserves at the central bank, the requirement that they should hold 35% of their eligible deposits as secondary reserves"in the form of Treasury-bills and medium-term government securities"has been reduced to 15%. Furthermore, the requirement that 15% of secondary reserves should be held in medium-term securities has also been abolished. This means that the total reserve requirement has been reduced from 44% to 24%. The BoG argued that the previously high reserve requirements had been necessary to make finance available to the government to fund large fiscal deficits. This implies that with the fiscal deficit now under greater control, the BoG can afford to reduce reserve requirements. The BoG hopes that reducing the total reserve requirement will encourage banks to lend more to the private sector, although it is unclear whether this will be sufficient to cause banks to do so. The high secondary reserve requirement had suited commercial banks, as they considered high interest rates on T-bills as preferable to lending to the private sector, which is broadly seen as more risky. In fact, this had often led the banks to hold much higher levels of primary and secondary reserves than were required by the BoG. After the announcement,

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banks’ lending rates remained unchanged, mostly at 30-32%, with many of them arguing that it would take time for them to free up funds from their medium-term investments. The reality, however, is that without more fundamental reform, banks will continue to perceive lending to the private sector as risky. In particular, the culture of repayment by the business community remains poor, and the macroeconomic expectations of banks, particularly on the direction of inflation, are also keeping lending rates high.

Changes are made to money The BoG confirmed that it would continue to use its prime rate to signal the market instruments direction of short-term interest rates and to provide a reference rate for facilities such as repurchase agreements (the so-called repo rate). It also announced further reforms to money market instruments. The main aim of these is to develop a more liquid interbank market for reserve requirements, rather than relying on the central bank to meet reserve requirements. Ultimately, this would enable the BoG to use indirect, or market, instruments to control monetary policy, rather than direct instruments at present. The changes are as follows. • Overnight “repo” and “reverse repo” facilities will be available at the BoG prime rate and the reverse repo rate, respectively. The central bank expects that this will increase its influence over interest rates on the interbank market, thereby giving it more power to control liquidity on the market. • The existing interest rate corridor for BoG money market operations has been increased from 1% to 3%, and reverse repos will be undertaken at two percentage points below the prime rate, rather than one percentage point under the existing framework. This is designed to ensure that the reverse repo rate is below the interbank market rate, in order to stimulate increased interbank lending. • Fine-tuning repos will be available at one percentage point above the BoG’s prime rate on the final day of the maintenance period for meeting reserve requirements. This is to encourage banks to borrow from each other, rather than the central bank, when squaring up their liquidity positions to meet reserve requirements. • Transparency on the interbank market is to be enhanced by providing real- time information on interbank market transactions and quotations to all banks via Reuters screens. • The BoG will hold periodic auctions of its bills as part of its open market operations, rather than using the proceeds of auctions to meet the government’s public-sector borrowing requirement.

Interest rate is cut in May, and In May the BoG’s Monetary Policy Committee (MPC) announced a reduction in no change is made in July the prime rate from 18.5% to 16.5%. The two-percentage-point interest rate cut was premised on the central bank’s optimistic view that inflation would subside over the rest of 2005. The BoG argued that the impact of the 50% fuel price increase in February had been quickly absorbed in the headline consumer inflation rate and that underlying inflationary pressures continued to be subdued. The central bank pointed out that before the fuel price increase, inflation had been on a downward trend, and that following an increase in

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year-on-year inflation from 11.6% in January to 14% in February and 16.7% in March, inflation had declined again, although only marginally, to 16.6%, in April. The BoG also pointed out that money supply growth had declined significantly, from 39.6% in March 2004 to 27.6% in March 2005. Finally, the BoG outlined its expectation that the exchange rate would remain stable for the remainder of the year. The fiscal deficit was reported to have fallen from C959bn in the first quarter of 2004 to C379bn in the first quarter of 2005, and the BoG expected that donor funding would increase over the remainder of 2005, implying that government borrowing would be further reduced over the course of the year. However, the Economist Intelligence Unit still considers that the May interest rate cut may have been premature, and the central bank’s outlook for inflation in 2005 rather optimistic. We expect that a number of inflationary pressures will keep inflation high over the remainder of the year, including the recent loosening of monetary policy. These are: high international oil prices, a possible weakening of Ghana’s exchange rate over the second half of the year, expected tariff increases for utilities, the 21% increase in the minimum wage and 20% increase in government salaries that were announced in the 2005 budget, and crop failures that may result in food shortages. At a subsequent meeting of the MPC in July, the interest rate was left unchanged, which seems to indicate that the BoG has decided to take a more cautionary approach for the remainder of the year with these concerns in mind. Launch of a common currency is officially delayed until 2009

Despite earlier claims by various government officials that plans to introduce the eco, a common currency for five West African countries, in July 2005 would go ahead, there has been yet another setback. At a summit in May in the Gambian capital, Banjul, the heads of state of the five countries in question"Nigeria, Ghana, Sierra Leone, Guinea and The Gambia"decided to postpone the introduction date to 2009. This is because the member countries have not met the minimum convergence criteria set by the West African Monetary Zone (WAMZ). These conditions include the achievement of single-digit inflation, foreign-exchange reserves equivalent to at least three months of import cover, a budget deficit not exceeding 4% of GDP and central bank financing of the budget deficit of not more than 10% of the previous year’s revenue (January 2005, Economic policy). However, the prospect of all members meeting the minimum convergence criteria by 2009 is still not strong, particularly in Guinea and Sierra Leone, where weaknesses in economic policy implementation may show significant improvement only in the very long term. The domestic economy

Economic trends

GDP growth is still robust, but Although the Bank of Ghana (BoG, the central bank) does not yet provide data slower than expected on GDP growth on a quarterly basis, it does compile the Composite Indicator of Economic Activity (CIEA), which provides a measure of activity by sector. The latest CIEA, released in May, shows that economic growth increased marginally by 0.6% from March, and although this represents only two months,

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it is still low when compared with growth of 8.7% in the third quarter of 2004 and 4.5% in the final quarter of 2004. The slowdown in growth seems to reflect setbacks in agricultural production, particularly cocoa, and in some manufacturing industries. However, the CIEA for May had increased by 21.29% compared with May 2004, and there is additional evidence that during the first half of 2005 the number of employees on whose behalf pension contributions are being made rose considerably. There was also a 55.5% rise in the amount of corporate tax paid in the first half of 2005 compared with 2004. The Economist Intelligence Unit therefore assumes that the economy is continuing to experience broad-based growth, reflecting Ghana’s implementation of macroeconomic reforms in recent years and also the rising importance of the service sector, where we expect that growth is currently concentrated in construction, telecommunications, transport, government services and business. Investment in the mining sector is expected to result in a substantial increase in gold production, which will make a significant contribution to overall GDP growth in 2005. Given the setbacks in agriculture and manufacturing, we have revised our forecast for GDP growth in 2005 downwards from 5.2% to 4.3%, although at 4.3%, growth remains fairly robust.

I nf l ati o n fal l s fo r thi rd According to the National Statistical Office, year-on-year inflation has fallen for consecutive month three consecutive months, from 16.7% in March to 15.7% in June. The fall in inflation has been attributed to a slowdown in both food and non-food price inflation. This shows that the impact of the 50% fuel price increase in February has been somewhat curtailed during this period. A number of factors are likely to have been responsible for this. In particular, exchange-rate stability has helped to slow inflation by controlling import prices. In addition, the harvesting of crops during this time will have led to a general increase in food availability, and delays to the implementation of tariff increases for water and electricity will have helped to contain inflation. However, the fall in inflation may prove to be temporary, as inflationary pressures are expected to build over the remainder of the year, owing mainly to faster currency appreciation, utility price increases, high international oil prices and crop failures caused by late rains earlier in the year. We forecast that inflation will reach 16.5% by year-end.

Inflation, 2004-05 (% change) 2004 2005 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Year-on-year 12.4 12.9 12.6 12.4 12.3 11.8 11.6 14 16.7 16.6 16.3 15.7

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

A small deficit is recorded in According to the BoG, the fiscal deficit for January-May 2005 is estimated at the first half of 2005 C1.5trn (US$164m), equivalent to 1.6% of GDP. This is around double the programmed deficit of C772.1bn, largely because of a shortfall in revenue inflows. Total revenue (including grants) for the period is reported to have amounted to only C9.3trn, below the budget target of C10.8trn, mainly as grants received amounted to C1trn, well short of the budget target of C2.2trn. However, it is positive that tax revenue inflows remained strong: at C8trn they were consistent with the budget target for the period and represented a 26% rise on the same period in 2004. Company taxes showed a particularly strong

performance, rising by 50% year on year. Strong growth in tax collection reflects continued efforts by the revenue authorities to improve the efficiency of tax collection and increase the number of companies registered for tax"these efforts have supported high rates of growth in domestic revenue in recent years. Revenue growth also indicates that despite setbacks in cocoa, food and textile production, broad-based growth is taking place within the economy. The BoG estimates that government expenditure for January to May 2005 amounted to only C9.6trn, about 14% below the budgeted expenditure of C11.2trn. Spending on government wages was only C2.9trn"well below the budget ceiling of C3.6trn"and capital expenditure totalled only C3bn, which was below the budget target of C3.9bn. Lower-than-expected spending on government wages probably reflects the fact that although the budget made provision for salary increases, these have not yet been fully implemented. Lower-than-expected capital expenditure will have been a direct result of the shortfall in donor funding, much of which will have been earmarked for infrastructure projects. Since government expenditure has been well below target, the shortfalls in total revenue have not resulted in the fiscal deficit becoming overly large, although, at 1.6% of GDP, it is above the budget target of 1% of GDP. Given that we expect donor inflows to pick up following the IMF’s positive third review of Ghana’s poverty reduction and growth facility (PRGF) in July, total revenue growth should pick up in the second half of the year. Provided that expenditure remains under tight control, this would indicate that a budget deficit of 2.8% of GDP remains possible.

Fiscal performance, Jan-May 2005 (C bn) Budgeted Provisional Total revenue & grants 10,818 9,334 Tax revenue 8,032 8,045 Direct taxes 2,001 2,321 Company taxes 786 1,069 Indirect taxes 4,059 3,840 International trade taxes 1,470 1,689 Non-tax revenue 594 220 Grants 2,190 1,069 Total expenditurea 11,157 9,598 Recurrent expenditure 6,858 6,021 Personal emoluments 3,598 2,900 Capital expenditure 3,900 2,988 Balancea 772 1,513 a Totals do not sum in source. Source: Bank of Ghana.

Agriculture

Cocoa production is to fall by The Ghana Cocoa Board (COCOBOD), which overseas the purchasing of cocoa around 18% in 2005 beans for export, has reported that purchases of the main crop up to May 2005 had reached only 480,000 tonnes, compared with 584,00o tonnes for the same period last year, a fall of 17.8%. In addition, according to the central bank governor, Paul Acquah, cocoa production for crop year 2004/05 (October-

September) is estimated at 600,000 tonnes. This represents a large drop, of 18.4%, on the 735,000 tonnes produced in 2003/04. The fall in production has been attributed to the erratic nature of rainfall during the season, which affected the cocoa crop at a critical stage of development, inhibiting the fruition process of the cocoa trees. However, cocoa production is still relatively high by historical standards, and the pressure to maintain high levels of production has brought new concerns about maintaining the quality of the country’s cocoa crop, which has long been an advantage in Ghana’s favour. Major problems identified include: • older cocoa trees are reported to have been rejuvenated alongside younger high-yielding varieties; • farmers have not been properly equipped to carry out fermentation and drying, which is necessary to get the desired quality; and • not enough time is being allowed to dry the cocoa beans. COCOBOD has urged framers and private buyers to ensure that quality standards are maintained if they are not to be driven out of the market by other producing countries.

A food shortage is expected According to the Ministry of Food and Agriculture, an aggregate food shortage of 400,000 tonnes is expected in 2005, owing to irregular rainfall patterns in the south of the country. The ministry noted that this year’s rainfall pattern had deviated from the norm, and that rains had been delayed for six weeks in the south, which depends on rain-fed agriculture, causing most fields to be planted late. The main food crops that have been affected by the dry spell are maize, yam, cassava, rice, plantain, and cocoyam. In the case of maize, the government has already imported around 600,000 tonnes of white maize and 70,000 bags of yellow maize, which is expected to cover the expected maize deficit and much of the remaining food deficit. However, official figures may not fully take into account trends in subsistence agriculture, and we continue to expect that, as a whole, agricultural production will experience modest growth.

Agricultural producers protest Criticism of the way the government has handled the process of trade against free trade policy liberalisation has recently been levelled by a number of agricultural producers. The most notable criticism came from Kenneth Quartey, president of the National Association of Poultry Farmers, and proprietor of one of West Africa!s largest poultry farms, who has claimed that he is no longer able to compete with the cheap imports of frozen chicken that have flooded Ghana’s markets. The government lowered tariffs and cut agricultural subsidies in the 1990s under various donor-advised structural adjustment programmes. But, according to Mr Quartey, rather than stimulating the Ghanaian economy and boosting employment, free trade has devastated Ghana!s farmers. Mr Quartey announced that he has laid off one-third of the 150 employees at his farm near Accra, and that his poultry farm no longer produces broilers, only eggs. The problem of import competition is also affecting numerous other agricultural producers in Ghana, as well as the country’s manufacturers.

However, as with elsewhere in Sub-Saharan Africa, numerous domestic factors are contributing to the difficulties faced by domestic producers, including unstable macroeconomic conditions, inadequate infrastructure and poorly functioning domestic markets. In particular, Ghanaian producers face relatively high costs owing to high rates of inflation; the real appreciation of the exchange rate; labour which is relatively high-cost and of low productivity; the high cost of energy and water; and high taxes plus delays in tax refunds. If developed countries were to eliminate agricultural subsidies, as was apparently promised by the G8 at its summit in Scotland in July, some African producers might benefit from higher prices and less competition. But for most, domestic factors would still prevent them from being able to compete fully with imports, whether from developed countries or low-cost, large-scale producers in developing countries, such as Brazil.

Manufacturing

Textile producers are under Producers of textiles and garments in Ghana continue to struggle to compete threat with cheaper imports and a number of major producers are having to re- evaluate the viability of remaining in the industry. The largest manufacturer of cloth, Juapong Textiles, has recently ceased operations, while the country’s biggest textile manufacturer, Ghana Textiles Print (GTP), has suspended production while it re-evaluates market conditions, having retrenched 60 workers. Akosombo Textiles Limited (ATL) is believed to be the only manufacturer left that is able to compete in the industry, although it is thought to be considering its long-term viability. Ghana’s textiles industry has been in decline for several decades: in the late 1970s the industry produced around 130m metres of textiles and employed 25,000 workers, but in 2002 the industry produced only 36m metres of textiles and employed 2,000 workers. By 2002, domestic producers were supplying only 30% of the domestic market, as imported textiles dominated the market. High production costs and the non-availability of quality local cotton, coupled with the use of outmoded machinery and technology, are at the heart of the poor performance of the textiles industry in Ghana; other manufacturers and agricultural producers also experience similar problems. Faced with these constraints, the domestic textiles industry has struggled to compete with cheap imports from Asia, particularly China, which benefits from a low fixed exchange-rate regime, a highly productive labour force and the ability to mass produce on a very large scale very quickly.

Government imposes higher In response to the increasing threat posed to local textile manufacturers by duties on textile imports imports, the government has increased duties on textile imports. Importers of textiles have claimed that the increase has been very large, of between 500% and 600%, and that they have had difficulty in raising sufficient funds to clear their goods through customs. An official at the Ministry of Trade and Industry has responded to this by stating that it was necessary to increase customs tariffs in order to prevent the dumping of textiles on the Ghanaian market, and that World Trade Organisation (WTO) rules allowed the ministry to take such measures against dumping in order to protect local industries. An official at the

Customs, Excise and Preventative Service (CEPS) also claimed that the move was necessary to compensate for the practice undertaken by some importers of under-declaring the value of their goods. However, the same difficulties encountered by Ghana’s textiles industry are being experienced by many other Sub-Saharan African producers, and the imposition of protectionist measures appears unlikely to resolve the underlying problem"an inability to compete with cheaper Asian producers"in the long term. Furthermore, it is unclear whether the WTO would agree that the inflow of cheap textile imports into Ghana does constitute dumping, or whether the increased import duties are an anti-competitive practice on Ghana’s part. It is likely that the increased duties will be discussed with the IMF in the context of Ghana’s PRGF, with a view to ensuring that the government does not backtrack on trade liberalisation measures.

Smuggling prompts higher The domestic textiles industry has also been undermined by the smuggling of import duties on textiles textiles into the country, especially through its eastern borders. This has prompted the government to announce a new regulation that textiles may only be imported via the Takoradi sea port, which is expected to make it easier to identify smuggled goods. Furthermore, an official investigation into the processing of imports through customs has identified the fact that a number of exporters to Ghana are under-declaring the value of their goods, sometimes with the collaboration of customs officials, in order to avoid paying more customs. Although combating smuggling and uncompetitive customs practices by importers is important, unless the textiles industry updates its technology and achieves more efficient, low-cost production, including flexible labour practices, the industry may still not be able to withstand the competition from imports. It is also apparent that many textile producers in Ghana benefit from the smuggling of their goods into Nigeria, which has its own import ban.

Manufacturers put pressure on In addition to the textiles industry, many other manufacturers in Ghana are government struggling to compete against cheap imports. At a three-day workshop held by the Private Enterprises Foundation (PEF) to examine the issues affecting the manufacturing sector, it was concluded that Ghana’s manufacturers were failing to cope with three major challenges, namely: • inadequate institutional capacity to manage trade liberalisation; • the inflow of large volumes of cheap imports, some of which are smuggled into the country; and • the imposition of stringent standards on local producers, which are not effectively enforced in the case of imported products. Similar arguments were put forward at a meeting of the Association of Ghana Industries (AGI), which highlighted difficulties such as high lending rates, the use of obsolete machinery, the high cost of raw material inputs and utilities, competition with goods from the US and EU which benefit from subsidies, and relatively high taxes. Participants at the PEF workshop emphasised that they were not against competition or liberalisation, nor were they asking for protectionist measures; instead they argued for better-resourced institutions to regulate competition on Ghana’s markets, ensuring that standards are complied

with and that the correct duties and tariffs are paid to government. Although much of this was echoed at the AGI meeting, various manufacturers also urged the government to provide them with more support, including subsidies to fund the expansion or rehabilitation of their businesses so that they can be made more competitive.

Mining

Alcoa provides US$30m A US firm, Alcoa, which acquired a 10% stake in the Volta Aluminium funding to Valco Company (Valco), has granted a US$30m loan to Valco to buy capital equipment and material, so that the company can be rehabilitated and resume operations. Alcoa signed a Memorandum of Understanding (MoU) with the Ghanaian government earlier in the year, in which it committed itself to developing the country’s integrated aluminium industry (May 2005, The domestic economy: Mining). Valco had earlier expected to resume operations on July 1st 2005, but the president, John Agyekum Kufuor, has since stated that operations will only begin in August 2005. Meanwhile, a feasibility study has begun into the building of a 1.5m tonnes/year alumina refinery"a key undertaking mentioned in the MoU. The study will include consideration of the potential for developing major bauxite reserves at Kibi in Eastern region, which would supply the proposed alumina refinery.

Oil and gas

National Petroleum Authority The government has established the National Petroleum Authority (NPA) to is to oversee deregulation oversee the deregulation of the petroleum sector in Ghana. The NPA includes representatives from the government, the private sector, and non-governmental organisations (NGOs). The NPA will be responsible for monitoring the new pricing mechanism for petroleum products, which will determine retail prices by adding all applicable taxes, levies and adequate distributor margins to the ex-refinery price"which is the cif import price of refined products. The supply of petroleum products has also already been deregulated, so that private-sector oil-marketing companies are now free to participate in competitive tenders for petroleum products. Tenders will occur as needed, and retail price adjustments will not be automatic, but implemented with a lag effect, reflecting the time it takes for the new supplies to reach the market (about six to eight weeks after the tender). Until February 2005 the government was directly responsible for setting petroleum prices, but owing to infrequent adjustments, particularly during times of rising international oil prices, the government has had to subsidise domestic fuel prices. The cost of these fuel subsidies"equivalent to 2.2% of GDP in 2004"was an important cause of the rising fiscal imbalances of recent years. In addition, when adjustments to fuel prices have occurred, they have tended to be quite large, thus creating a sharp upsurge in inflation as a result. For example, the price of petrol was increased by around 96% in January 2003, causing inflation to rise by 12.8% month-on-month and 29.4% year-on-year in February 2003. The 50% increase in petroleum prices imposed by the government in 2005 has also had a strong impact on inflation. Given the

potential for this system to negatively affect Ghana’s macroeconomic stability, the deregulation the petroleum industry has been a key requirement of the IMF’s PRGF for Ghana. Although the creation of the NPA has been lauded as a step in the right direction, critics have voiced their concern that yet another bureaucratic institution has been created to oversee the setting of fuel prices"the Energy Commission and the Petroleum Tender Board were previously tasked with setting fuel prices to cost-recovery level, but the infrequency of adjustments suggests that they had difficulty executing this duty. The Board is continuing to operate, despite the creation of the NPA, supplying information and expertise to the NPA, but no indication has been given as to how the role of the Energy Commission will change. Political interference may well have contributed to the failure of the previous bodies, and the NPA will have to ensure that this is not allowed to happen again. The NPA is to use a three-month moving average of Mediterranean Platt prices (published in Platt’s Oilgram) as a benchmark to gauge anti-competitive, or unfair, behaviour by retailers, which may help to reveal instances where prices have become distorted owing to political interference.

Foreign trade and payments

Exports show a 20% increase Provisional balance-of-payments data released by the Bank of Ghana (BoG, the in the first half of 2005 central bank) indicate that in the first half of 2005 total merchandise exports reached US$1.6bn. This is around 20% higher than the figure recorded for the same period in 2004. This performance is particularly remarkable as export earnings from cocoa for the first half of the year stood at only US$500m, compared with US$565m for the same period in 2004. This implies that non- cocoa exports rose substantially in the first half of 2005, although the BoG has not provided a complete breakdown of exports for the period. Despite lower production, cocoa exports are expected to hold up, benefiting from higher prices in 2005, particularly for cocoa products"the BoG reports that in the first quarter of the year prices for cocoa products rose by 55.5%. Certainly gold exports are expected to rise substantially in 2005, owing to increased investment in a number of gold mines and higher international gold prices.

Current account records small According to the BoG, merchandise imports for the first half of 2005 amounted deficit in the first half of 2005 to US$2.3bn, around 13% higher than in the same period of 2004. Oil imports amounted to US$367m, 12% higher than in the same period of 2004. The rise in imports is likely to reflect strong domestic demand, capital imports for investment in the gold mining industry, and goods in transit to inland neighbouring countries, as Ghana’s ports continue to be preferred to those of Côte d’Ivoire, where the political situation remains uncertain. The BoG estimates the trade deficit at US$659m for the first half of 2005, slightly lower than the US$671m deficit for the same period in 2004. Although no figures are provided for the services, income and transfers balances, the current account is estimated to have shown a deficit of US$49m in the first half of 2005, compared with a surplus of US$60m in the first half of 2004. The services and income accounts traditionally show a large deficit, while it is likely that current

transfers have continued to record a substantial surplus: growth in private remittances is likely to have compensated for a fall-off in donor support in the first half of the year. We forecast that the current-account deficit will increase modestly to US$74m by the end of 2005, as current trends continue, with the exception that donor funding is expected to pick up.

Current accounta (US$ m) Jan-Jun 2004 Jan-Jun 2005 Merchandise exports fob 1,358 1,642 Cocoa exports 565 500 Merchandise imports fob 2,039 2,301 Oil imports 329 367 Trade balance -671 -659 Net services, income & current transfers 740 610 Current-account balance 59.7 -48.7 a Preliminary estimates. Source: Bank of Ghana.

Upsurge in private remittances According to the BoG, inflows of private remittances channelled through banks continues and finance companies amounted to US$1.6bn in January-May 2005, compared with US$1bn in the same period in 2004, representing a 58.7% increase. However, there tend to be discrepancies in the way that the BoG accounts for private remittances in different statistical publications, to the effect that the final total of private remittances recorded in the balance of payments is usually far lower than is quoted elsewhere"although the general trend of high growth is consistent across BoG data (May 2005, Foreign trade and payments). Part of the increase in remittances is probably due to improvements in data coverage and reporting by commercial banks, and also to the improved and cheaper provision of formal money transfer services to Ghanaians living abroad. But the increase probably also reflects the relatively large size of Ghana’s diaspora"estimated at about 3m, or 15% of the resident population, and which is increasing. Preliminary data for 2004 show that most remittances are from the US, Canada and the UK. Private remittances are making a substantial contribution to Ghana’s balance of payments, as they are larger than the combined total of official transfers, official capital, and private capital inflows, and are almost sufficient to outweigh the combined deficits on the services, income and current-transfers accounts. Even using the lower estimates included in the BoG’s balance-of-payments data for 2004, private remittances reached US$1.3bn, which represents 15% of GDP, a substantial contribution to the economy. This compares with private remittances equivalent to 10% of GDP in Lesotho, 3.7% of GDP in Senegal and 2.3% of GDP in Nigeria, indicating that Ghana’s private remittance inflows relative to the size of its economy are well above the average for Sub-Saharan Africa. The ratio is also much higher than that for other countries known for large remittances inflows, such as China at 0.3% of GDP, India at 3.8% of GDP, Mexico at 2.5%, and the Philippines at 9.5% of GDP. Although remittances by NGOs and religious groups seem to be used to support socio-economic development and community projects, remittances by individuals are more

often used to help purchase new homes, and for investment in the stock exchange and the funding of small businesses.

Inward remittances (US$ m) 1,400

1,200

1,000

800

600

400

200

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

Sources: Bank of Ghana; Economist Intelligence Unit.

World Bank data show New data from the World Bank’s Global Development Finance, 2005 show that external debt rose in 2003 the country’s debt stock had risen from US$7.3bn at the end of 2002 to US$8bn by the end of 2003, largely because of the effect of cross-currency revaluations caused by the weakness of the US dollar on global currency markets. Of this stock, 59% was owed to multilateral creditors, 20% to bilateral creditors and 6.4% to private creditors. Ghana subsequently reached completion point under the heavily indebted poor countries (HIPC) initiative in mid-2004, entitling it to a reduction in the debt stock of US$3.5bn (US$2.2bn in net present value terms) over the following 20 years. Because of this, coupled with an immediate reduction in the debt stock made by bilateral creditors, it is estimated that the debt stock fell to US$7bn at the end of 2004.

Debt stock will rise in 2005, Discounting any additional debt write-off under the G8’s new commitment, the unless debt relief is awarded total debt stock is expected to rise in 2005, to US$7.1bn, as new borrowing exceeds debt relief and repayments. Since the government is expected to maintain good relations with the IMF, the vast majority of the new borrowing will consist of medium- and long-term loans from official, mainly bilateral, creditors contracted on a concessional basis. Debt-service payments are forecast to decline in 2005, as lower payments to the IMF will outweigh further (medium- and long-term borrowing), causing a decline in the debt-service ratio from 8.4% in 2004 to 7.9% in 2005. There will be a modest increase in the debt- servicing bill in 2006, owing to the effect of interest-rate increases on short-term debt. However, since exports and workers’ remittances are forecast to be high throughout the forecast period, the debt-service ratio will not deteriorate significantly, reaching 8.0% in 2006 (compared with 16% in 2000).

External debt (US$ m unless otherwise indicated; debt stock as at year-end) 1999 2000 2001 2002 2003 Public & publicly guaranteed long-term debt 5,951 5,744 5,896 6,384 6,805 Official creditors 5,111 4,989 5,085 5,598 6,292 Multilateral 3,682 3,663 3,724 4,085 4,658 Bilateral 1,429 1,326 1,361 1,513 1,634 Private creditors 580 498 556 533 511 Banks 132 114 182 195 213 Short-term debt 718 588 555 593 700 Interest arrears on long-term debt 20 26 18 21 25 Use of IMF credit 310 293 284 363 453 Total external debt 6,979 6,625 6,735 7,340 7,957 Total debt service 519 465 314 192 481 Principal 344 309 216 100 386 Interest 175 155 98 92 95 Short-term debt 38 38 27 17 20 Ratios (%) Total external debt/GNI 92.5 137.1 129.5 121.7 106.7 Debt service/exports of goods & services 20.6 18.7 12.8 7.3 14.7 Short-term debt/total external debt 10.3 8.9 8.2 8.1 8.8 Concessional long-term loans/long-term debt 68.5 71.2 68.8 70.5 73.9

Source: World Bank, Global Development Finance, 2005.

Ghana could get further As expected, at the annual summit of the G8 held in July 2005 in Gleneagles external debt write-offs (Scotland) major agreements were made to boost aid and provide further debt relief for Sub-Saharan Africa, of which Ghana is likely to be a beneficiary. In terms of the G8!s agreement on debt, after months of negotiations it was finally announced that a total of 32 Sub-Saharan African countries could benefit from more substantial debt relief than is currently being provided under the HIPC initiative, with Ghana included as one of the 14 African countries that will qualify immediately. However, despite the substantial publicity around the deal, the exact scale of the debt write-offs for each country will only become clear in time as the final details of the scheme are worked out. The key aspect of the deal for Ghana is likely to be a commitment to provide 100% multilateral debt-stock cancellation, as part of the agreement to relieve those governments that have already reached HIPC competition point, and are on track with their IMF reform programmes, of their debt-service obligations to the World Bank, IMF and African Development Bank (ADB). This is crucial, as in recent years it has become apparent that although countries such as Ghana have benefited from debt write-offs by bilateral donors, their overall external debt stocks have not fallen because of the large outstanding stock of debt owed to multilateral lenders, and because they have continued to borrow from them to fund various priority sector projects.

The write-offs are likely to Given that there are a number of important unresolved issues around the have conditions attached proposed write-offs, a quick debt cancellation seems unlikely. First, it is not clear what the cut-off date will be for the external debt that is being written off, notably whether the G8 will include, or exclude, the large amount of recent

borrowing taken on by many HIPC states"much of which is from the World Bank. Second, it is not clear whether the write-offs alone will actually boost resources flowing into the various states, because it was also stated in the final communiqué at Gleneagles that donor governments would “adjust their gross assistance flows by the amount forgiven”. G8 governments have committed to providing additional money to the World Bank, ADB and IMF to ensure their ongoing financial soundness as they write off debts owed to them. But provisional research by the World Bank has apparently challenged this, claiming that the current pledges made by the G8 are inadequate and suggesting that the proposal will only work if the G8 governments provide legal guarantees of future funding commitments, or if the relief is spread over a greater time period than currently envisaged.