Ghana Ghana at a Glance: 2005-06

Country Report

Ghana Ghana at a glance: 2005-06

OVERVIEW The December 2004 elections passed off peacefully and, as expected, were won by the incumbent president, John Agyekum Kufuor, and his New Patriotic Party. The Economist Intelligence Unit expects that the government will initially continue to adhere to donor-driven policies, but tensions with donors could mount if the government seeks to further delay the introduction of politically sensitive reforms that had already been postponed until after the election. Meanwhile, growth in both gold and cocoa production will drive further strong rates of economic growth over the forecast period, with real GDP forecast to rise by 4.8% in 2005 and 5.2% in 2006. However, with the government 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 an average inflation rate of 17.3% in 2005, falling to 13.2% in 2006.

Key changes from last month Political outlook • In his second term of office Mr Kufuor is expected to be more focused on delivering visible results on poverty reduction. Policy will be largely unchanged over the forecast period. There is pressure for the report of the National Reconciliation Commission to be made public, but its release will need to be carefully managed to prevent its conclusions from being seen as partisan. Economic policy outlook • There has been no major change to our economic policy outlook. Economic forecast • New data from the Bank of Ghana indicate that Ghana will run a substantial current-account surplus in 2004, for the second year in a row. This is because, although the trade deficit has continued to widen, current transfers have continued to pick up. We now forecast a current-account surplus of 2.3% of GDP in 2004 (compared with our forecast of 0.3% of GDP in December). Partially helped by the current-account surplus and partially due to the weakness of the US dollar on international markets, the Bank of Ghana has also been able to build up foreign-exchange reserves in 2004, which reached over US$1.4bn in October. January 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 10 Economic forecast

13 The political scene

20 Economic policy

23 The domestic economy 23 Economic trends 27 Manufacturing 28 Infrastructure

28 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 14 Presidential elections 16 Legislative elections 17 Regional breakdown of parliamentary results in the 2004 election 17 Presidential results by region in the 2004 election 24 Gross domestic product 26 Inflation in 2004 29 Performance of major exports, Jan-Sep 2004 31 Foreign-exchange reserves

List of figures 13 Gross domestic product 13 Consumer price inflation 23 Budget deficits 26 Exchange rates

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Ghana January 2005 Summary

Outlook for 2005-06 The December 2004 elections passed off peacefully and, as expected, were won by the incumbent president, John Agyekum Kufuor, and his New Patriotic Party (NPP). The Economist Intelligence Unit expects that the government will initially continue to adhere to donor-driven policies, but tensions with donors could mount if the government seeks to further delay the introduction of politically sensitive reforms that had already been postponed until after the election. Meanwhile, growth in both gold and cocoa production will drive further strong rates of economic growth over the forecast period, with real GDP forecast to rise by 4.8% in 2005 and 5.2% in 2006. However, with the government 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 an average inflation rate of 17.3% in 2005, falling to 13.2% in 2006.

The political scene As expected, Mr Kufuor and the NPP won, respectively, the presidential and legislative elections in December 2004. There is speculation over whether a coup attempt was thwarted in November 2004. The National Reconciliation Commission (NRC) presented a report to the government in October, which has not yet been publicised.

Economic policy The potential for delays in the implementation of agreed economic reforms seems to have increased since the election. In particular, the government may seek not to fully implement the increases in domestic fuel prices agreed with the IMF. The Bank of Ghana!s Monetary Policy Committee left interest rates unchanged in November, at 18.5%.

The domestic economy The Bank of Ghana Composite Indicator of Economic Activity has risen by 8.7% in the third quarter of 2004. Year-on-year inflation declined marginally, to 12.3%, in November 2004, reflecting improved food supply conditions and slower increases in non-food prices. The government has taken over Volta Aluminium Company, despite the IMF!s earlier objections.

Foreign trade and payments The current account was in surplus for January"December 2004, despite a widening of the trade deficit. The World Bank approved US$110m in funding for the West African Gas Pipeline. Foreign-exchange reserves reached a record US$1.4bn in October 2004.

Editors: Nicola Prins (editor); David Cowan (consulting editor) Editorial closing date: January 20th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report January 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

Cabinet, appointed by the president in January 2001; last reshuffle in April 2003

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 No new cabinet has been appointed following the December election, although substantial changes are expected

Key ministers from the last cabinet Defence Kwame Addo Kufuor were: Finance & economic planning Yaw Osafo-Maafo Foreign affairs Nana Akufo-Addo Interior Hackman Owusu-Agyeman Mines Cecilia Bannermann

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 75.9 GDP (US$ bn) 5.0 5.3 6.2 7.5b 8.4 Real GDP growth (%) 3.7 4.2 4.5 5.2b 5.4 Consumer price inflation (av; %) 25.2 32.9 14.8 26.7 12.7 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 3,080.8 Imports of goods fob (US$ m) 2,766.6 2,968.5 2,707.0 3,276.1 3,908.2 Current-account balance (US$ m) -386.5 -324.6 -31.8 254.9 191.8 Foreign-exchange reserves excl gold (US$ m) 232.1 298.2 539.7 1,352.8 1,465.0 Total external debt (US$ bn) 6.6 6.7 7.3 7.7b 7.4 Debt-service ratio, paid (%) 15.7 10.0 6.5 6.7b 6.7 Exchange rate (av) C:US$ 5,455.1 7,170.8 7,932.7 8,677.4 8,998.1 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 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Central government finance (C bn) Revenue & grants 3,081.6 3,255.0 4,133.9 4,679.3 4,792.8 4,404.1 5,617.6 n/a Expenditure & net lending 3,782.0 3,204.6 5,099.4 4,918.8 5,758.4 4,615.6 5,089.4 n/a Balance -700.4 50.4 -965.5 -239.5 -965.6 -211.5 528.2 n/a Prices Consumer prices (Accra; 2000=100) 159.8 180.8 195.9 198.4 198.1 206.9 218.3 223.4 Consumer prices (% change, year on year) 14.1 25.2 29.8 27.8 24.0 14.4 11.4 12.6 Financial indicators Exchange rate C:US$ (av) 8,301.2 8,540.4 8,671.1 8,716.2 8,781.8 8,912.2 9,022.8 9,040.0 Exchange rate C:US$ (end-period) 8,438.8 8,600.3 8,700.4 8,732.3 8,852.3 9,018.3 9,046.5 9,051.8 Deposit rate (av; %) 16.5 13.8 13.9 15.0 14.6 14.1 13.8 13.4 Discount rate (end-period; %) 24.5 27.5 27.5 26.0 21.5 20.0 18.5 18.5 Treasury rate (av; %) 26.2 27.2 30.7 29.5 21.6 16.9 16.7 16.3 M1 (end-period; C bn) 8,048.6 7,408.3 7,719.3 7,679.8 10,723.4 10,063.3 10,857.9 n/a M1 (% change, year on year) 59.9 54.5 55.5 39.7 33.2 35.8 40.7 n/a M2 (end-period; C bn) 14,991 14,785 15,690 15,530 20,123 19,775 21,126 n/a M2 (% change, year on year) 48.9 39.7 43.9 30.6 34.2 33.8 34.6 n/a GSE all-share index (end-period;1990-1993=100) 1,395 1,644 2,068 2,643 3,553 5,665 6,879 6,998 Sectoral trends Gold price, London (US$/fine oz) 323.0 352.1 346.8 363.3 391.9 408.5 393.2 401.30 Cocoa beans price, New York & London (US$/tonne ) 2,017.4 2,136.8 1,746.8 1,582.6 1,546.1 1,565.6 1,417.8 1,612.1 Foreign trade (US$ m)a Exports fob 542.8 565.1 650.6 575.0 771.8 644.0 699.9 n/a Cocoa beans 99.1 187.7 202.1 161.5 124.8 278.2 276.3 n/a Gold 184.2 189.0 201.0 204.4 235.3 229.5 195.8 n/a Imports fob -660.0 -703.8 -814.6 -848.0 -909.7 -963.2 -1,144.7 n/a Trade balance -117.2 -138.7 -164.0 -273.0 -137.9 -319.2 -444.8 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 539.7 510.2 788.3 906.2 1,352.8 1,255.9 1,287.9 1,353.4 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 Having secured a second term of office in the December 2004 elections, the president, John Agyekum Kufuor, will focus on delivering a visible improvement in the standard of living of ordinary Ghanaians. Although yet to be announced, the composition of the new cabinet is likely to be much changed from that of the previous government, as some ministers have not been re-elected and there is a constitutional stipulation that half the cabinet must be selected from parliament. Furthermore, Mr Kufuor may avoid appointing New Patriotic Party (NPP) members known to have presidential ambitions, as new party rules stipulate that they would have to resign in 2006 if they wished to run for office, which would cause disruption to policy halfway through the term. The new ministerial team is likely to be selected for their ability to drive through economic reforms, as the ruling party is under pressure to produce visible results in reducing poverty or face being voted out of power in the 2008 election. This means that, as in his previous term, economic reform will continue to be the main area of concern for the government. What is not clear, however, is whether the government will continue with its current policy agenda, which it has agreed with donors, or try to formulate its own economic policy with a more nationalistic and populist bias when the current poverty reduction and growth facility (PRGF) runs out in May 2006. In the latter case, relations with donors could become highly strained and may even break down altogether towards the end of the forecast period. Away from economic reform, Mr Kufuor will come under increasing pressure to publicise the report of the National Reconciliation Commission (NRC), which was presented to the government in October 2004. This details human rights abuses committed under military regimes during Ghana!s post-independence period. Revelations in the report may initially draw sharp reactions from those accused of wrongdoing, and the release will therefore have to be carefully managed in order to prevent a sharp rise in political tension. Mr Kufuor is expected to act on some of the report!s recommendations, particularly those on strengthening institutions to further entrench the rule of the law; but legal action against the perpetrators of abuse is likely to be kept to a minimum, if pursued at all, in the interests of national reconciliation. Any reparations to victims of abuse are likely to be kept to a minimum, as few resources are available to the government for this. Mr Kufuor!s domestic political outlook is expected to be less partisan and more oriented towards national reconciliation, as in his last term he will probably want to leave a legacy as a figure of unity in Ghana!s history alongside his reputation as a mediator in the region!s conflicts.

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Following the defeat of the National Democratic Congress (NDC) in the recent election, the party is likely to go through an initial period of soul-searching. Divisions between those who support the ex-president, Jerry Rawlings, and those who do not want the party to be associated with him are expected to deepen. Any further revelations of his wrongdoing in the past arising from the publication of the NRC report would exacerbate the situation. Mr Rawlings would not react favourably to any attempt by the party to marginalise him, as he remains politically ambitious. If this were to be the case he is likely to form a breakaway party, but should such an attempt be unsuccessful and a constructive role not found for him within mainstream party politics in Ghana, he may become involved in unconstitutional or extra-parliamentary politics. Given that Mr Rawlings retains strong support in several sectors of Ghanaian society, he 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. The NDC may become temporarily weakened by the division of opinion over Mr Rawlings and any attempted breakaway by a faction supporting him, but the party!s strong support base will ensure that it remains a large opposition party capable of challenging the NPP at the next election.

International relations Ghana will maintain a leading role in regional affairs and, with the country!s profile boosted by the successful holding of the fourth 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 the stalled process of political reconciliation in Côte d!Ivoire. 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 the first country to subject itself to peer review, and the report of the peer review committee is likely to be released by mid-2005.

Economic policy outlook

Policy trends In the short term we expect that donors will retain a central role in economic policy formulation, with the government continuing to focus on implementing the reforms agreed with the IMF in their three-year PRGF, which runs to May 2006. Under this, the priority is to lift petroleum prices to a full cost- recovery level and introduce an automatic adjustment formula that keeps them at this level. 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. Acceleration of the privatisation programme, the modernisation of the financial sector and the implementation of the Ghana poverty reduction strategy (GPRS) are other important requirements. The GPRS is typical of the poverty reduction strategies followed by many Sub-Saharan African countries, prioritising infrastructure development, the modernisation of agriculture, rural development, the improvement of social services (with particular emphasis on health and education), good governance and private-sector development.

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Although economic policy did not go severely off track in the run-up to the elections, there is a possibility that it could do so in 2005-06. In particular, since the poll the president seems to have backtracked on the government!s commitment to the critical reform of raising domestic fuel prices in February 2005. Although donors will react badly to any slippage, it is likely that a compromise solution can be reached, with the increases phased in over time, along with those for water and electricity tariffs. This would lead to only a temporary, if any, delay in disbursements. However, the real problem would arise if this phased introduction were not completed by the time negotiations to renew the PRGF were nearing, if there had still been no progress with resolv- ing the ownership of the Volta Aluminium Company and if the fiscal deficit remained large. With the government keen to be seen as the key driver in terms of economic policy, this means that the negotiation of a new PRGF could take considerable time and may even break down altogether, with the government opting to run a far more populist policy in the run-up to the next elections.

Fiscal policy Fiscal discipline will improve in 2005 as the government moderates expenditure growth following the December 2004 election and the petroleum subsidy is eliminated, resulting in a narrowing of the deficit, to 3.2% of GDP. However, revenue will be hit by a reduction in corporate tax#a measure announced in the 2004 budget but effective from 2005, although, in anticipation of this, companies are likely to attempt to shift their 2004 profits into 2005. Tax revenue from cocoa producers is also expected to fall owing to lower international prices, although production will remain buoyant. Although the new government is likely to demonstrate its commitment to the reforms agreed with the IMF when announcing the 2005 budget, by 2006 we expect that it will bow to intense pressure to increase public-sector pay and to boost spending. Although faster economic growth will lift tax revenue, this will be partially offset by falling international gold and cocoa prices. As a result, we expect the fiscal deficit to widen to 3.5% of GDP. Government budgets will continue to target a net repayment of domestic debt but, given our fiscal deficit forecasts, we expect repayments will fall short of the target.

Monetary policy The Bank of Ghana (BoG, the central bank) is expected to keep monetary policy relatively tight in an attempt to reduce inflation. In the past domestic interest rates have remained high because of inflationary pressure caused by the government!s high level of domestic borrowing. A deterioration in the fiscal deficit in the months preceding the December 2004 election is likely to force the administration to increase domestic borrowing, putting pressure on the central bank to tighten monetary policy in early 2005. Although the central bank is concerned that high rates are constraining lending to the private sector, rising inflation in early 2005 may give it little choice but to raise the prime rate. Improved fiscal discipline and a slowdown in underlying inflation (that is, excluding the projected utility price increases) will allow rates to be eased from late 2005, unless the inflationary effect of the utility price rises is much greater than the central bank is anticipating. Interest rates will be lowered further in 2006 as inflationary pressures continue to dissipate. In addition, pressure from the BoG will cause a narrowing of the differential between lending and deposit

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rates, although it is likely to remain at over 10 percentage points. Commercial banks have been pushing for a reduction in their secondary reserve requirements, but the central bank will proceed slowly with this, as it is concerned about its capacity to mop up the liquidity that such a move would generate.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.8 5.0 4.1 4.0 OECD 2.0 3.3 2.5 2.4 EU25 1.1 2.3 2.1 2.2 Exchange rates ¥:US$ 115.9 108.1 95.5 94.0 US$:€ 1.132 1.244 1.380 1.400 SDR:US$ 0.714 0.675 0.634 0.627 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.38 US$ 3-month commercial paper rate 1.10 1.48 3.19 4.38 Commodity prices Oil (Brent; US$/b) 28.8 39.0 36.8 29.0 Cocoa (US cents/lb) 78.8 70.1 64.0 59.9 Gold (US$/troy oz) 363.3 412.3 435.0 396.3 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.3 -5.1 -2.7 Industrial raw materials (% change in US$ terms) 13.0 20.5 -2.1 -4.7 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% estimated for 2004 to 4.1% in 2005 and 4% in 2006 in response to policy-tightening in leading economies. With the dollar continuing to fall to an all-time low against the euro, we have revised our gold price forecast. As investors and funds are increasingly buying gold as a safe investment in times of market uncertainty and geopolitical tension around the world, we forecast that the price will remain high in 2005, averaging US$435/troy oz. With rising interest rates and greater political certainty, it should then fall back, but only moderately, to US$396/troy oz. Despite a short-term price spike in November 2004 with the resumption of fighting in Côte d!Ivoire, assuming normal weather and a resumption of moves towards peace we 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 the gold mining sector will support 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; notably, Australia!s Newmont is planning to open a 500,000 troy oz/year mine (lifting current production by around 22%) in mid- 2006. After the record harvest in 2003/04 (October-September), slightly drier

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weather will cause the cocoa harvest to fall in 2004/05, reducing agricultural growth. However, with global cocoa prices remaining relatively high, the government is expected to continue to increase the provision of support services and, assuming normal weather conditions, cocoa output is forecast to rise again in 2005/06. Increased cocoa processing will contribute to manufacturing growth, particularly in 2006, when capacity is targeted to reach over triple its current level of 70,000 tonnes. Various Presidential Special Initiatives will ensure that the domestic processing of other local raw materials is increased. The reduction in corporate tax in 2005 (announced in the 2004 budget) should also boost the sector. Despite the expected slowdown after the election-related boost in 2004, service growth should remain robust owing to further increases in trade through Ghana because of political tensions in Côte d!Ivoire and to further expansion in tourist arrivals. Overall, reduced cocoa output will cut real GDP growth from 5.4% in 2004 to 4.8% in 2005, before higher gold production lifts real GDP growth to 5.2% in 2006.

Inflation Although expenditure control will improve during 2005, the inflationary impact of increased government spending in 2004 will continue in early 2005; in addition, the government is committed to raising fuel prices to cost-recovery level in February. The impact that this will have is difficult to quantify, as it depends on international fuel prices at that time, but we expect it to add around 3 percentage points to the inflation rate. Price rises for other utilities will further add to inflation, which is forecast to rise to an average of 17.3% in 2005. Inflation will fall in 2006, as all these price rises will drop out of the year-on- year comparison. Nonetheless, the faster depreciation of the cedi means that we expect average inflation to ease only slightly, to 13.2%, in 2006.

Exchange rates Favourable prospects for exports of gold and cocoa, strong remittances and a weak US dollar will provide support for the currency over the forecast period. Foreign-exchange reserves have reached a level that will allow the government to buy up local currency in order to slow down monetary growth, which may cause a short-term appreciation of the cedi. However, high inflation and structurally higher demand than supply for foreign exchange (owing to the economy!s import dependence) will ensure that the cedi loses value on an annual basis. With the current account swinging into deficit in 2005 and remaining there in 2006, the pace of cedi depreciation will accelerate. Overall, the exchange rate is forecast to fall from an average of C8,998:US$1 in 2004 to C9,288:US$1 in 2005 and C10,196:US$1 in 2006. The cedi will remain vulnerable to any sudden deterioration in the terms of trade, owing to structural weaknesses in the economy. 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, but the inability of the countries involved to reach the various convergence criteria means that this is not expected to happen. The greatest progress that is possible in this regard during the forecast period is the launch of a limited range of eco-denominated financial products.

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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 over the forecast period. In the case of cocoa bean exports, 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 bean exports is partly the result of greater domestic processing, which means that exports of higher-value cocoa-product exports will increase substantially. A number of initiatives to boost the production of cassava, textiles and palm oil should increase non-traditional exports. Ghana!s strong export performance will release more foreign exchange onto the local market, which will be used to satisfy the high demand for imports. Mining development work will also boost imports, as will high oil prices in 2005. Having risen sharply in 2003, the growth of service credits will continue to rise given that there is unlikely to be a quick end to the ongoing political crisis in Côte d!Ivoire that will encourage shippers to switch their traffic back to that country!s ports. The deficit on the income account will grow 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 is forecast to deteriorate, from a surplus of 2.3% GDP in 2004 (the second year running in which a surplus has been recorded), to a deficit of 2.4% of GDP in 2005 and 3.9% of GDP in 2006.

Forecast summary (% unless otherwise indicated) 2003a 2004b 2005c 2006c Real GDP growth 5.2b 5.4 4.8 5.2 Gross agricultural production growth 6.1b 7.0 4.0 4.5 Consumer price inflation (av) 26.7 12.7 17.3 13.2 Consumer price inflation (year-end) 23.6 11.8 16.7 13.0 Short-term interbank rate 21.5 20.0 18.5 17.0 Government balance (% of GDP) -3.3b -4.6 -3.2 -3.5 Exports of goods fob (US$ bn) 2.6 3.1 3.0 3.0 Imports of goods fob (US$ bn) 3.3 3.9 4.2 4.3 Current-account balance (US$ bn) 0.3 0.2 -0.2 -0.4 Current-account balance (% of GDP) 3.4b 2.3 -2.4 -3.9 External debt (year-end; US$ bn) 7.7b 7.4 7.6 7.8 Exchange rate C:US$ (av) 8,677.4 8,998.1 9,287.9 10,195.8 Exchange rate C:¥100 (av) 7,486.9 8,321.9 9,725.5 10,846.6 Exchange rate C:€ (year-end) 11,166.3 12,192.5 13,363.4 14,968.6 Exchange rate C:SDR (year-end) 13,154.3 13,986.6 15,219.8 17,117.0 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

John Kufour wins the As had largely been expected, John Agyekum Kufuor, Ghana!s incumbent presidential election president and the candidate for the New Patriotic Party (NPP), won the presidential elections in December 2004, giving him a second term in office. According to the final results released by the Electoral Commission, Mr Kufuor polled 4,524,074 votes, representing 52.45% of the total votes cast, to win the presidential election. John Atta Mills of the National Democratic Congress (NDC) received 3,850,368 votes, representing 44.64% of the total votes cast. The other candidates made only a minor impact at the polls: • Edward Mahama of the Grand Coalition#comprising the People!s National Convention (PNC), the Great Consolidated People!s Party (GCPP) and the Every Ghanaian Living Everywhere (EGLE) Party#polled 163,648 votes, representing 1.93% of the total; and • George Oppesika Aggudey of the Convention People!s Party (CPP) won 84,501 votes, representing 1% of the total. Altogether, 8,813,908 votes were cast, of which 188,123 were declared invalid, representing 2.13% of the total. Given that the December poll was the country!s fourth democratic election since its return to multiparty politics in 1992 and there was the possibility that enthusiasm for democracy could be waning, voter turnout was high, at 84% of the total registered number of voters. Moreover, despite the fact that fewer candidates contested the poll, the high voter turnout and relatively limited number of problems with spoilt ballots tend to indicate that democracy in Ghana is still very widely supported in a country that has experienced four military coups since independence.

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Presidential elections Votes ('000) % of total 1992 Jerry Rawlings (NDC) 2,327 58.3 Albert Adu Boahen (NPP) 1,213 30.4 Hilla Limann (PNC) 267 6.7 Kwabena Darko (National Independence Party) 114 2.9 Emmanuel Erskine (People's Heritage Party) 68 1.7 Total 3,989 100 1996 Jerry Rawlings (NDC) 4,092 57.5 John Kufuor (NPP) 2,807 39.5 Edward Mahama (PNC) 210 3.0 Total 7,109 100 2000a John Kufuor (NPP) 3,132 48.2 John Atta Mills (NDC) 2,896 44.5 Edward Mahama (PNC) 190 2.9 George Hagen (CPP) 116 1.8 Augustus Goosie Tanoh (National Reform Party) 79 1.2 Dan Lartey (GCPP) 68 1.0 Charles Wereko-Brobby (United Ghana Movement) 22 0.3 Total 6,503 100 2004 John Kufuor (NPP) 4,524 52.5 John Atta Mills (NDC) 3,850 44.6 Edward Mahama (PNC) 164 1.9 George Aggudey (CPP) 85 1.0 Total 8,814 100.0 a As neither John Atta Mills nor John Kufuor polled 50% in the first round of voting, a run-off election was held; Mr Kufuor won 56.9% of the vote and Mr Atta Mills won 43.1%. Source: Ghana Electoral Commission.

The battle is really a two- Although four candidates contested the presidential elections, the race was horse race really a two-way battle between Mr Atta Mills of the NDC and Mr Kufuor of the NPP. Although in the 2000 elections the smaller political parties! candidates had sufficient support to force a run-off between Mr Atta Mills and Mr Kufuor, in 2004 they were too weak to make an impact and this helped Mr Kufuor to secure a small majority in the first round of voting. The ongoing problem facing Mr Atta Mills was that in the eyes of many Ghanaians he remains too closely associated with Jerry Rawlings, whose final years in power were characterised by growing popular disenchantment with his rule. Mr Kufuor will now enter his second and last term as Ghana!s president, as the constitution denies a third term in office.

The NPP wins the As expected, the NPP also won the parliamentary election in December. The parliamentary election party secured 128 out of the 230 seats (in a parliament that has been expanded from 200 in 2000), giving them a small majority. The NDC secured 94 seats, the PNC four and the CPP three, with one independent candidate. The EGLE Party and the National Reform Party did not win any seats. Out of the 230 elected parliamentarians in 2004, 25 are women, compared with 19 out of 200 in the previous parliament.

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The parliamentary results closely resembled those of the 2000 elections, indicating that feelings of disenchantment over the NDC!s performance in their last term of office (1996-2000) remain strong. The NPP has continued to benefit from this at the polls, despite their inability to produce a visible improvement in living standards since coming to office. Although without reliable exit polls it is always difficult to gauge the mood of voters, in general most political analysts believe that the electorate gave the ruling party credit for success in macroeconomic stabilisation and in implementing a number of crucial infrastructure projects during their first term, with the hope that there will be more tangible benefits to the population in their next term.

The NDC's support broadly Although prior to the election the general expectation#particularly among the holds up media and within the NPP government itself#was that the NDC would perform poorly at the 2004 polls, and that this could even herald the break-up of the party, the results indicated that not only did this not happen, but that the NDC has broadly held its ground in both the presidential and the parliamentary elections. In particular, in the parliamentary election, the NDC won 94 seats against the NPP!s 128 in the 230-set parliament. By comparison, in 2000 the NDC won 92 seats in the then 200-seat parliament. Particularly encouraging for the party was that, although following the 2000 poll it lost six seats in a row in by-elections, in the December elections it regained all these seats. It also won an additional seat in the NPP!s stronghold, Ashanti region, increasing its 22% of the vote in 2000 to 26% in 2004. This means that, as in the case of the NPP, the NDC has won seats in all of Ghana!s ten regions, reinforcing the fact that it is a national party. The robust performance of the cash-strapped NDC certainly seems to have shocked a number of NPP stalwarts. In addition, senior members of the NPP were clearly embarrassed when such a large number of key incumbent ministers lost to NDC candidates, some whom have made only their first appearance. The national organiser of the NPP, Laud Commey, could not hide his admiration for the impressive performance of the NDC when he commented after the polls that "we have always acknowledged the fact that the NDC was a force to reckon with and one cannot just underrate them given their huge grassroots organisation". However, while the NDC has demonstrated some considerable resilience, it remains unclear whether the party can still unify itself after two defeats in a row. Although the performance of the NDC does give cause for hope that if it can unify itself around a single candidate it might wrest power back from the NPP in 2008, the outlook for many of the smaller parties is bleaker. The smaller parties did very poorly compared with their performance in the last election, as their lack of cohesion and constant fighting over leadership positions made them appear less viable alternatives to the main parties.

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Legislative elections Seats in parliament 1992 National Democratic Congress (NDC) 189 National Convention Party (NCP) 8 Independents 2 Every Ghanaian Living Everywhere (DGLE) 1 Total 200 1996 National Democratic Congress (NDC) 133 New Patriotic Party (NPP) 61 People's Convention Party (PCP) 5 People's National Convention (PNC) 1 Total 200 2000 New Patriotic Party (NPP) 100 National Democratic Congress (NDC) 92 Independents 4 People's National Convention (PNC) 3 Convention People's Party (CPP) 1 Total 200 2004 New Patriotic Party (NPP) 128 National Democratic Congress (NDC) 94 People's National Convention (PNC) 4 Convention People's Party (CPP) 3 Independent 1 Total 230

Source: Ghana Electoral Commission.

Voting is still influenced by Although the results of the 2004 elections indicate that there has been some regional loyalties progress with the NPP and NDC establishing themselves as national parties, this cannot hide the fact that a regional breakdown of the election results shows that traditional loyalties remain an important factor in Ghanaian politics. The NPP continues to be dominant in most of the southern regions, including Ashanti, Eastern, Central and Western regions, where the Akan-speaking are predominant; the NDC support base is situated mostly in northern Ghana and the Volta region, which are dominated by non-Akan-speaking groups. While the NDC has been winning seats in all regions in all the elections since 1992, the NPP only achieved this for the first time in December, with the critical addition of a seat in the Volta region. In general, most local political analysts have viewed this development positively, as it is now possible that in the long term both parties now have the potential to develop a national support base. Therefore, even if the majority still vote according to traditional loyalties in 2008, assuming that this trend is continued it is hoped that an increasingly significant proportion of the electorate will vote on wider political and economic issues, which could potentially prove to be the key factor in swinging an election in favour of either one or the other of the two main parties.

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Regional breakdown of parliamentary results in the 2004 election Region Inda NPPb NDCc PNCd CPPe No. of seats Ashanti - 36 3 - - 39 Eastern - 22 6 - - 28 Greater Accra - 16 11 - - 27 Northern - 8 17 - - 26 Brong Ahafo 1 14 10 - - 24 Western - 12 8 - 2 22 Volta - 1 21 - - 22 Central - 16 2 - 1 19 Upper East - 2 9 2 - 13 Upper West - 1 7 2 - 10 Total 1 128 94 4 3 230 a Independent candidate; b New Patriotic Party; c National Democratic Congress; d People's National Convention; e Convention People's Party. Source: Ghana Electoral Commission.

The regional breakdown of support for the presidential candidates in the 2004 election largely reflects that of the parliamentary polls. It reinforces the current dominance of traditional regional loyalties to the main parties in Ghanaian politics. However, as with their parties, both of the main candidates were able to garner support in all regions, reinforcing the potential for Ghana!s politics to become more national in character in the long term.

Presidential results by region in the 2004 election (% of total votes cast) Region John Kufuor John Atta Mills Edward Mahama George Aggudey Ashanti 74.61 24.06 0.85 0.48 Eastern 60.27 38.38 0.60 0.74 Greater Accra 51.99 46.37 0.92 0.72 Northern 36.2 56.94 5.09 1.77 Brong Ahafo 51.96 46.05 1.22 0.77 Western 56.64 40.89 0.85 1.62 Volta 14.26 83.83 0.91 0.99 Central 58.57 39.21 0.81 1.41 Upper East 31.66 53.9 12.68 1.75 Upper West 32.23 56.67 9.59 1.52 National level 52.45 44.64 1.92 1.00

Source: Ghana Electoral Commission

Voters reject many incumbent Despite the importance of traditional regional loyalties to specific parties, a politicians notable feature of the 2004 polls was the relatively large number of prominent members of the NPP, including those who had held ministerial office in the previous government, who failed to secure re-election. These included: • Christopher Ameyaw-Akumfi, minister for railways, ports and harbours; • Kwaku Owusu Afriyie, minister of health; • Mustapha Idris Ali, minister of works and housing; • Kwesi Owusu Yeboah, Volta regional minister; • Elisabeth Ohene, minister of state at the Ministry of Education;

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• Rashif Bawa, minister of state at the Ministry of Education; • Agasika Agambilla, deputy minister for railways, ports and harbours; • Majeed Haroun, deputy minister, Ministry of Mines; • Gloria Akuffo, deputy attorney-general; • Ambrose Deri, deputy attorney-general; • Thomas Broni, deputy minister of the interior; and • Andrews Awuni, deputy minister of information.

Health, education and The voting-out of the incumbent ministers for health, works and housing, and employment are key issues education underscores the electorate!s discontent with the lack of real progress made in reducing poverty and improving living standards, and in the delivery of social services. According to research conducted before the election by Ghana!s National Commission for Civic Education, voters considered education, health and employment as the most important issues that they wanted the government to address. Voters! increasing willingness to ignore traditional party loyalties at the polls in order to hold politicians to account for their performance is also an encouraging sign that Ghana!s fledgling democracy is growing in political maturity. This further emphasises the pressure on the NPP in their next term of office to make significant progress in all these areas or face the very real prospect that they could lose power in the 2008 polls. The failure of many prominent NPP politicians to secure re-election also poses a challenge to Mr Kufuor in putting together his new cabinet. The constitution stipulates that at least half the cabinet must be selected from members of parliament. Although this gives Mr Kufuor scope to re-appoint ministers who lost their seats, he may decide against this if he considers their loss of popularity a liability to his new government. Furthermore, NPP party rules were changed in 2004 to require members wishing to contest the presidential primaries in the next election to resign from public office by 2006; in order to avoid disruption halfway through his last term, Mr Kufuor may therefore seek to avoid appointing to a cabinet post anyone whom he suspects of having presidential ambitions. Hence, there is much uncertainty over how the new cabinet will be constituted. The appointment of key portfolios relating to the country!s economic development carries particular significance in Ghana, as often individual ministers can be more influential in formulating policy than the president himself. The announcement of a cabinet may be delayed for some time

There could be a considerable delay before the president, John Agyekum Kufuor, announces a new cabinet, given the number of leading ministers who lost their seats at the elections. Mr Kufuor also faces the problem that, at its Special Delegates Conference in 2004, the ruling New Patriotic Party (NPP) ruled that anybody who wished to contest the presidential primaries would have to relinquish any public post held by 2006. This means that potential candidates will have to resign their ministerial positions in order to mount a bid for the presidency in 2008. For the president, this means that ministers who have presidential ambitions for 2008

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would have to relinquish their positions to contest the primaries, creating a lack of continuity at a time when the government is likely to be being judged on policy implementation. Key politicians in the NPP who have already started various manoeuvres towards the presidency in the 2008 election, and may not therefore seek ministerial positions, include Aliu Mahama, the current vice-president; Yaw Osafo-Maafo the minister of finance and economic planning; Alan Kyerematen the minister of trade, industry and presidential initiatives; Nana Akufo Addo, the minister of foreign affairs; and Kofi Konadu Apraku, the minister of regional co- operation and Nepad. Elections are generally Independent observers generally described Ghana!s elections as free and fair, considered free and fair although irregularities were reported in some constituencies. The Electoral Commission recounted the re-collated results in instances where complaints that they found to be credible had been received, such as in the Pru constituency in the Brong Ahafo region and the Tolon constituency in the Northern region. The presidential runner-up, Mr Atta Mills, congratulated Mr Kufuor on his re-election but complained that acts of intimidation had taken place against supporters of the NDC. In general, international observers confirmed that only isolated incidents of intimidation had taken place during the polls.

There is speculation over a Despite the success of the 2004 polls, the past involvement of the military in coup attempt politics still continues to cast a shadow over the country. In November 2004 the Criminal Investigations Department of the Ghana Police Service announced that seven people were being questioned over "acts to subvert the constitution and destabilise the state". This led to speculation as to whether a coup attempt had been thwarted, as some of the detainees were ex-military personnel and their alleged leader was ultimately charged with illegal possession of weapons and military equipment. No further details have since emerged. The announcement did, however, raise considerable concerns among the opposition NDC. Although formally the NDC presidential candidate, Mr Atta Mills stated his objection to any attempt to destabilise the country, while other senior party leaders were more critical of events. The former president, Jerry Rawlings claimed that the announcement was a hoax, a view broadly supported by the NDC general-secretary, Nii Josiah Aryeh, who cautioned the government against using coup scares as an election tactic#an accusation that the government strongly denied. Although the whole event still remains clouded in uncertainty, many political commentators feel that the groups! intentions may not have extended beyond carrying out isolated incidences of sabotage or intimidation during the election. If a coup was being planned, it is likely that it was in its early stages when it was discovered. No more mention has been made of the detainees since November, and at this stage it appears that the group posed no real threat to Ghana!s democratic processes or political stability.

Violence erupts in the Despite the generally peaceful conduct of the polls themselves, three people Northern region were killed and another three injured in pre- and post-election violence. Of particular significance was the death of a leading political activist of the CPP, Issah Mobila, who died while in the custody of security forces in Tamale. Mr Mobila was working closely with the NDC, helping it to win three seats in

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Tamale, the capital of the Northern region. An investigation into his death has been ordered by the inspector-general of police. After the election there were armed clashes between NPP and NDC supporters in the Northern region towns of Bawku, Tolon, Nanton, Zabzugu and Yapei. The situation in the region has been tense since unrest broke out in March 2002 in Dagbon between two subgroups of the Dagomba ethnic group over the murder of their king (July 2002, The political scene). Many Ghanaians suspect that the NPP favours the Abudu subgroup and the NDC backs the Andanis. Campaigning for the December 2004 election heightened tensions in the region.

The NRC report is presented to The National Reconciliation Commission (NRC) presented its report to the government government on October 12th 2004. The NRC was set up in April 2002 to investigate human rights violations committed under the military regimes that have ruled Ghana for the most part since 1966. Provision was also made to investigate violations during periods of constitutional rule. The five-volume report includes 4,000 petitions from people who suffered human rights abuses, the proceedings of the NRC in which testimonies were heard from people across the country and hearings of institutions such as the media, security agencies and judicial bodies. The government has not yet made the contents publicly available, but excerpts were leaked to the media in which specific individuals are accused of perpetrating abuses. In response, the named individuals accused the government of leaking stories about them because of their connection with the NDC in order to discredit the party ahead of the December elections. The tensions caused by the leaks to date seem to lend support to calls that a full timetable be announced for making the document public. Mr Kufuor has so far not revealed whether the NRC report will be debated in parliament or whether he will be acting on any of the report!s recommendations, which are expected to include institutional reforms to further entrench the rule of law and pay the victims compensation. On receiving the report from the NRC chairman, Justice K E Amua-Sekyi, Mr Kufuor was widely quoted in the local press as stating that legal action would not be taken against the perpetrators of abuse in the interests of focusing on national reconciliation. However, a lawyer for the NRC, Abena Manful, claimed that the president said that the perpetrators "may not" be prosecuted, which she interpreted as meaning that the government has not yet made a decision on whether or not to prosecute. Even if legal action is taken, it is likely to be against only a select few, as the aim of the NRC report was to help to establish the truth about the abuses committed in the past and make recommendations about how they could be prevented from recurring. Adhering to the spirit of national reconciliation throughout the process is crucial for reducing the underlying socio-political tensions that built up during the post-independence era and is widely seen as an important step in ensuring the ongoing development of democracy and political stability in the country.

Economic policy

Relations with the IMF may be So soon after the elections, and with no new minister of finance in place yet, strained the overall thrust of economic policy in the second term of office of the

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president, John Agyekum Kufuor, unsurprisingly remains unclear. For the immediate future it is probably fairly safe to expect that overall economic policy will continue to be guided by the government!s poverty reduction and growth facility (PRGF) agreement with the IMF, which is due to run until May 2006. The big imponderable, however, is whether the fact that the president cannot seek a further term will push Mr Kufuor into adopting a more conciliatory approach to policies proposed by the Fund or whether this will lead to increasingly strained relations. The doubt arises because many of the key policy decisions that should have been implemented prior to the elections under the current PRGF were put off until after the polls, with the IMF granting various waivers on key economic policy reforms. However, whereas the IMF was willing to grant a number of waivers prior to the elections, it will now expect the government to implement these reforms. In terms of economic policy, this would seem to give the government a number of options, one being that the government could seek to implement the agreed reforms quickly and hope that the negative impact of the price rises on real in- comes and inflation will have been largely forgotten by the time the next polls are due. Moreover, unlike after its first election victory, when it was widely accepted that the New Patriotic Party (NPP) was not really prepared to form a government and formulate a coherent economic policy, this time the government is in a position to act quickly on the implementation of economic reform. It is also clear that the NPP!s lack of preparedness for office in early 2000 meant that in order to get the policy up and running it was willing to negotiate the PRGF with the IMF quickly in order to join the IMF-World Bank!s heavily indebted poor countries (HIPC) debt-relief initiative. This time, however, the government has a much clearer idea of what it wants to achieve and may be willing to look more critically at the IMF!s proposed reforms. In particular, there is a feeling that a re-elected Kufuor government will want to be seen to be in the driving seat over the implementation of economic reforms rather than to be seen as the passive implementers of IMF reforms. Notably, the president is keen to implement his Presidential Special Initiatives and to pursue a range of other social policies.

Fuel and utility price increases The two most obvious areas of potential tension between the government and may be sources of contention the IMF are set to be the deregulation of domestic fuel prices and the public- sector wage bill. Under the present agreement with the IMF, the agreed change to the petroleum pricing regime is to be implemented by February 15th. However, in his first speech following the election, the president publicly promised that he would not increase the prices of petroleum products. Although no increase seems implausible, this may well indicate that the government is not prepared to push through the full increases, which in the case of petroleum products would push the price up by around 35%, and may seek to re-open negotiations with the IMF to ensure that the increase is staggered. Whether the Fund will agree to this remains unclear. Similarly, it is not clear whether the government will be able to meet all of the critical conditions agreed with the IMF over the size of the public-sector wage bill. Although in order to meet the conditions agreed with the IMF in 2004 the

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government reduced government wages in June 2004, faced with industrial action before the election the government not only restored salaries to their previous levels but also made the December salary payment prior to the polls. With the government unlikely to be willing to backtrack on the issue again, this threatens to become a major bone of contention with the IMF. There are two other key issues concerning the overall direction of economic policy that could lead to major clashes between the government and the IMF. The first will be over what the government eventually chooses to do with the Volta Aluminium Company (Valco), which it has now purchased, as it is seeking a strategic partner to operate the smelter, which is something that the IMF opposes (see The domestic economy: Manufacturing). Another issue that is unlikely to find favour with the IMF, but which would receive widespread popular support, is the strong possibility that the government will push through increased tariff protection for rice and poultry farmers.

Raising alternative funding Throughout its first term in office the government has shown a strong desire to could strain relations with IMF obtain access to sources of funding other than from multilateral and bilateral donors. These have included negotiations with the controversial International Finance Consortium (which has no links to the World Bank!s private lending arm, the International Finance Corporation) and, more recently, a reported US$300m deal that would have involved China New Technic Construction Investment. It has also set up a number of committees to look into the prospects for raising money on the international capital markets, taking advantage of its recently acquired sovereign rating from Standard and Poor!s. Ghana was awarded a B+/B sovereign credit rating in September 2003 (October 2003, The domestic economy: Economic trends). Although the government will struggle to raise money from outside its traditional sources, it is clear that if it can obtain a suitably large loan#it will continue to actively seek to do so#it may be tempted to adopt more populist programmes that could lead to a major breakdown in relations with the IMF.

Fiscal performance is likely to Provisional fiscal data from the Bank of Ghana (BoG, the central bank) for remain off target January to September continue to indicate that the government is unlikely to achieve its target of a fiscal deficit of 1.7% of GDP in 2004 (April 2004, Economic policy). According to the BoG, a domestic primary surplus (fiscal balance before interest payments) of 0.3% of GDP was recorded for the period, lower than the programmed budget surplus of 0.7% of GDP. Total receipts for the first three quarters of 2004 amounted to C15.9trn (US$1.76bn) (the data do not indicate whether this is above or below target level), while expenditure totalled C16.6trn, modestly higher than the C16.2trn target. According to the BoG data, the overspend in the run-up to the elections does not seem to be as severe as in past elections. There are, however, a number of issues that also have to be considered, the most important of which is that spending discipline weakened substantially in December with the decision to reverse the agreed cut in government salaries. More importantly, this will continue to have a knock-on effect on government spending in 2005. Moreover, it is not clear to what extent official data on spending actually capture the diversion of government funds to finance NPP election activities. Finally, owing to weak

expenditure-monitoring procedures, actual expenditure often tends to be substantially above provisional estimates. All this means that there is likely to be a sharp deterioration in the deficit in the second half of the year, which may become fully apparent only when the 2005 budget is presented to parliament. The Economist Intelligence Unit estimates the fiscal deficit at 4.6% for 2004.

Budget deficits % of GDP 2

-2

-4

-6

-8

-10 1992(a) 93 94 95 96(a) 97 98 99 2000(a) 01 02 03 04(a) (a) Election year. Source: Economist Intelligence Unit.

Interest rates remain In November 2004 the Monetary Policy Committee (MPC) of the Bank of unchanged in November Ghana decided to leave its prime rate unchanged, at 18.5%. The MPC cited economic data that suggested that inflationary pressures continued to be subdued. Exchange-rate stability and improvements in the fiscal and external payments positions were also highlighted, together with the decline in non-food inflation to 5.3% year on year in September 2004, the lowest rate recorded since 1982. However, the MPC made no mention of the potential for looser fiscal policy ahead of the December election to push up the inflation rate in early 2005, nor of the expected sharp rise in inflation in February 2005 as a result of the deregulation of the petroleum industry. This had led some local economists to predict that the BoG would seek to raise rates in order to try to offset the potential inflationary surge. Instead, by delaying the decision, the BoG may have to increase rates in early 2005 more as a reactive than a pro-active process.

The domestic economy

Economic trends

The real GDP growth target of The Bank of Ghana (BoG, the central bank) reported in November 2004 that it 5.2% is likely to be exceeded expected real GDP growth to exceed the government!s target of 5.2% set for 2004. Although GDP is not calculated on a quarterly basis, the BoG has started to compile a Composite Indicator of Economic Activity (CIEA) to measure real sector activity. The CIEA rose by 8.7% in the third quarter of 2004 compared with 4.5% in the second quarter of 2004. According to data from the BoG, healthy growth is expected across all major sectors of the economy in 2004. However, the biggest increase in output, of 6%, is expected from the agricultural sector, owing to a sharp rise in cocoa

production. Production levels in the cocoa sector have been particularly high during the 2003/04 season (October-September), with a total of 736,000 tonnes of cocoa produced compared with 497,000 tonnes in the previous season, a massive increase of 48%. Not only is this the second successive year of high growth for the sector, but the 2003/04 harvest also superseded the existing record of 580,000 tonnes in 1964/65. Production gains have resulted from good weather, an increase in producer prices, government initiatives on disease and pest control, improved farm husbandry techniques and smuggling from neighbouring Côte d!Ivoire (as farmers can obtain higher prices for their crop in Ghana at present). In contrast to the record levels of cocoa production, gold production has been affected by ongoing constraints caused by rehabilitation work at the country!s largest producer, AngloGold Ashanti (January 2004, The domestic economy), which means that overall production for the year will have declined. However, high international gold prices have encouraged investment in the gold sector and boosted export earnings and, coupled with a general pick-up in activity in mining and quarrying, manufacturing, and construction, the BoG estimates that the industrial sector should expand at around 5.1%. Construction growth is also expected to have been strong owing to work commencing on publicly funded projects, in particular road construction. Growth in the agricultural and mining sectors was supported by a reasonable performance in the services sector. The tourism sector is expected to have performed well in 2004 owing partly to buoyant global growth, but will have been supported also by increased activity in the transport sector, trade and government services.

Gross domestic product (C bn in 1993 constant prices unless otherwise indicated) 2001 2002 2003 2004 Agriculture 1,923.4 2,007.2 2,128.9 2,256.6 Agriculture & livestock 1,314.3 1,382.6 1,455.9 1,534.5 Cocoa production & marketing 176.1 175.2 204.0 230.7 Forestry & logging 190.8 200.4 212.6 226.0 Fishing 242.2 249.0 256.4 265.4 Industry 1,333.2 1,396.2 1,466.8 1,542.9 Mining & quarrying 281.4 294.0 307.8 322.9 Manufacturing 489.1 512.6 536.2 561.4 Electricity & water 137.9 143.5 149.5 156.0 Construction 424.8 446.1 473.3 502.6 Services 1,602.7 1,678.1 1,756.7 1,838.6 Transport, storage & communication 258.4 273.1 288.9 305.1 Wholesale & retail trade, hotels 369.4 390.1 409.6 428.5 Finance, real estate & business services 229.9 242.5 255.2 267.4 Government services 593.0 614.4 639.0 667.1 Community, social & personal services 103.6 108.2 112.6 117.3 Producers of private non-profit services 48.3 49.8 51.4 53.2 Sub-total 4,859.2 5,081.5 5,352.5 5,638.1 Net indirect taxes 497.9 519.3 542.2 565.5 GDP in purchasers' values 5,357.1 5,600.8 5,894.6 6,203.6 GDP growth rate (%) 4.2 4.5 5.2 5.2

Source: Bank of Ghana.

Constraints to achieving higher growth rates

The Economist Intelligence Unit expects that the government will exceed its real GDP growth target of 5.2% in 2004, although growth will probably only be marginally above this, at 5.4%. Whereas this reflects a substantial pick-up in growth compared with the 3.7% growth rate recorded in 2000, the problem for the government is that the growth rate is still well below the 7-10% growth rate that would be required to make substantial inroads into poverty levels and lead to the improvements in the standard of living that the government hopes to achieve prior to the next elections. For the government to achieve sustained higher real GDP growth rates in Ghana it will have to overcome a number of key constraints at the firm, industry and macro levels.

At the firm level, constraints include: • obsolete machinery and equipment; • a weak technological base; and • poor management capacity.

At the industry level, constraints include: • an unfavourable tariff structure; • the high cost of utilities; • inadequate infrastructure; • weak local raw material supply; and • poor institutional capacity (both public and private).

At the macro level, constraints include: • ongoing high rates of inflation, which undermine competitiveness; • high lending rates; • overvalued exchange rates that tend to serve as a tax on exports and a subsidy on imports; and • a lack of medium- to long-term investment capital.

These constraints have created an environment that has made it difficult for local industries to grow. In addition, coupled with corruption and bureaucratic bottlenecks they continue to serve as major disincentives to foreign direct investment. Inflation falls towards the end The overall inflation rate declined marginally in the last few months of 2004, to of 2004 12.3% year on year in November 2004 and a low for the year of 11.8% in December. According to the BoG, the slight decrease since August, when year- on-year inflation peaked at 12.9%, reflects improved food supply conditions and slower increases in non-food prices. The year-on-year increase in the food and beverage component of the consumer price index (CPI) fell from 21.5% in December 2003 to 15.1% in November 2004, although it did rise marginally, to 15.6%, in December 2004. The very modest rise in food prices in December is worrying given the deterioration of fiscal discipline ahead of the December elections and the impact of a 2.5 percentage point rise in value-added tax from August in order to fund the National Heath Insurance levy. Inflationary pressures also look set to rise in the coming months, with increases in domestic fuel prices due to be

implemented in February 2005 and other utility price rises also needing to be introduced during the year as the government struggles to reduce its deficit. All this means that the Economist Intelligence Unit expects that the BoG will struggle to push the inflation rate into single digits.

Inflation in 2004 (% change ) Month on month Year on year Average Jan 1.1 22.4 27.1 Feb 2.5 11.3 25.5 Mar 1.8 10.5 23.6 Apr 2.1 11.2 21.9 May 1.2 11.2 20.3 Jun 1.4 11.9 18.8 Jul 1.1 12.4 17.4 Aug 0.2 12.9 16.3 Sep -0.8 12.6 15.2 Oct -0.6 12.4 14.3 Nov 0.4 12.3 13.5 Dec 0.8 11.8 12.7

Sources: Ghana Statistical Service, Statistical Newsletter No. B8/2004, September 13, 2004; Economist Intelligence Unit.

The cedi remains stable against The nominal cedi exchange rate against the US dollar remained relatively stable the US dollar during 2004. Having started the year trading at around C8,500:US$1, the cedi ended the year only marginally lower, at C9,002:US$1, according to Bloomberg!s daily closing exchange rates. In fact, having weakened to around C9,000:US$1 during the first quarter of 2004, it then traded in a narrow band of between C9,000:US$1 and C9,100:US$1. However, as with many African currencies, the stability of the cedi against the US dollar largely reflects the ongoing weakness of the dollar on global foreign-exchange markets. The cedi has shown a much faster rate of depreciation against the euro and sterling. Nonetheless, given Ghana!s high level of inflation compared with that of its major trading partners, the cedi has remained strong in 2004.

Exchange rates 12,500 9,200 12,250 C:US$; left scale 9,150 12,000 C:€; right scale 9,100 11,750 9,050 11,500 9,000 11,250 8,950 11,000 8,900 10,750 8,850 10,500 8,800 10,250 8,750 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2004 05 Source: Bloomberg.

The strength of the cedi is clear from the trade-weighted real effective exchange rate produced by the Bank of Ghana, which shows that the cedi appreciated by

6.5% between January and September 2004 (compared with a depreciation of 5.6% for the same period in 2003), a trend that will have been maintained in the final quarter of the year. Although the weakness of the US dollar helps partially to explain these trends, it is only part of the story. Strong receipts from both cocoa and gold exports and growing expatriate remittances have also helped to support to the currency (July 2004, The domestic economy: Economic trends), helping to slow down the rate of depreciation. More worryingly for the government, the ongoing real appreciation of the currency and the undermining of the competitiveness of Ghana!s exports on international markets will make the government!s long-term goal of trying to diversify the export base away from cocoa and coffee more difficult.

Manufacturing

The government's purchase of The Ghanaian government took over operations at the Volta Aluminium Valco is completed Company (Valco) in November, after parliament approved the government!s purchase of a 90% share in the company from Kaiser International in October (the remaining 10% is held by a US firm, Alcoa). An initial deposit of US$5m was paid on the purchase price of US$18m, and the balance of US$13m was put aside in a special account pending parliament!s approval. This has now been transferred to Kaiser for completion of the sale. The purchase took place despite earlier pressure against such a move from the IMF (July 2004, The domestic economy) on the grounds that if Kaiser International could not run the company for profit, it would be unlikely that the government, whose past record in running manufacturing businesses is extremely poor, could do so. Kaiser International filed for Chapter 11 bankruptcy protection in the US in February 2004 and began selling off its non-profitable assets, such as Valco, which has not been operational since 2003. The problem for the government has been that as Valco was the biggest private-sector entity in Ghana the government was loathe to see it close. Ghanaian governments since that of the late Kwame Nkrumah, the first president of Ghana, have held aspirations for the development of an integrated aluminium industry in Ghana, comprising an aluminium smelter, an aluminium refinery and a bauxite-mining project that would make use of the country!s locally produced salt, limestone and hydroelectric power. The government is now looking for a strategic partner to run the smelter. Val co !s director, Charles Mensah, confirmed that the government is reviewing applications from three companies that have all expressed an interest in running the smelter: Alcoa, BHP Billiton of Australia and Russian Aluminium (Rusal) of Russia. Mr Mensah further indicated that the decision on the winning bid is unlikely to be finalised quickly, as the government wants to take its time in consulting experts and advisers. The IMF is generally opposed to the approach adopted by the government, arguing that taking on a strategic partnership would still expose the authorities to the large potential liabilities of the company and give the impression that they would bail the company out again if need be. We are equally concerned that Valco could prove to be a burden to the government, although the terms of any new strategic partnerships will be critical to assessing the amount of risk that it has assumed.

Infrastructure

The West African Gas Pipeline The World Bank has approved US$125m in finance for the West African Gas gets World Bank funding Pipeline (WAGP) project. The funding consists of a US$50m loan and a US$75m guarantee from the Multilateral Investment Guarantee Agency (MIGA). The Bank conducted a study into the economic sustainability and financial viability of the US$500m project, which aims to move Nigerian gas to Ghana via a 680-km sub-sea pipeline with spurs running off to Togo and Benin. The WAGP is almost entirely owned by an investment consortium comprising ChevronTexaco West African Gas Pipeline Limited (36.7%), the Nigerian National Petroleum Corporation (25%), Shell Overseas Holdings Limited (18%) and the government of Ghana, represented by the Takoradi Power Company Limited (16.38%). The remainder is jointly owned by Sotogaz and Sobegaz of Togo and Benin respectively. The project could transform the energy business in the region by offering cheaper and cleaner electricity. The backing of the World Bank should now give some long-overdue momentum to the project ,which has been on the drawing board for nearly a decade.

Foreign trade and payments

Current-account is in surplus Provisional figures released by the Bank of Ghana (BoG, the central bank) show for the second year running that Ghana continued to run a current-account surplus in 2004, after recording the first surplus since 1980 in 2003. Provisional data for January"September 2004 show that the current-account balance was US$217m for the period, 51% higher than for the same period in 2003. As was the case in 2003, the growing surplus on the current account continues to reflect the strong performance in current transfers, offsetting the deficits on the trade, services and income

accounts. In particular, according to the BoG, there continues to be strong growth in private transfers.

The trade deficit increases The current-account surplus would have been even higher had it not been for despite record cocoa sales the ongoing deterioration in the trade deficit. According to the BoG, the trade deficit was US$1.2bn for the first three quarters of 2004, a large increase on the US$575m deficit recorded for the same period in 2003. This was the result of the large increase in imports, from US$2.4bn in 2003 to US$3.2bn in 2004 over the same period. In particular, there was strong growth in capital and intermediate goods imports, which accounted for approximately 75% of the overall increase in imports. According to the BoG, this was due to improvements in the central bank!s ability to capture data and to high demand for imports for the mining, construction equipment, transport and tourism sectors. In addition, the value of oil imports rose from US$440m in 2003 to US$568m in 2004 for the same period, owing to higher international crude oil prices. Growth in exports failed to keep up with imports, despite record cocoa production levels and high gold prices. Exports rose from US$1.8bn for the first three quarters of 2003 to US$2bn for the same period in 2004. Cocoa-bean exports increased by 46% in value over the 2003 level during the first three quarters of 2004, owing to a 48% increase in production levels in the 2003/04 season. Gold exports increased by a more modest 4.5%, to US$620.5m, for the same period in 2004, as a result of higher prices on the international market (production levels are expected to have fallen in 2004 owing to rehabilitation work at major gold mines).

Performance of major exports, Jan-Sep 2004 Growth in US$ Commodity US$ m Volume growth (%) terms (%) Cocoa 825 78 46 Gold 621 -9 4 Timber & timber products 151 2 17 Diamonds 23 14 25 Manganese 24 10 6 Bauxite 8 1 -11

Source: Bank of Ghana.

Non-traditional exports are Encouragingly for the government, and despite the loss of competitiveness increasing caused by the ongoing real appreciation of the cedi, non-traditional exports also showed healthy growth in 2004. Data from the Ghana Export Promotion Council (GEPC) indicate that non-traditional exports rose by 20%, to US$306m, in the first half of the year compared with the same period in 2003; this is equivalent to 27% of total exports for the first half of 2004. Non-traditional exports include agricultural products, semi-processed goods and handicrafts. The GEPC attributes the growth to marketing initiatives, an increase in the number of exporting companies and the success of credit facilities made available by the Export Development and Investment Fund (EDIF). Between January and August 2004 the EDIF disbursed C50.6bn (US$5.6m) in new loans to 23 indigenous export-oriented projects; cumulative loans approved between June 2002 and August 2004 stand at C256.6bn. Funding is allocated on a demand-driven basis and has gone mostly to agro-processing, followed by salt-

mining and -processing and the timber industry. The regional distribution of funding is concentrated in Greater Accra, the Ashanti and Central regions, with weaker allocation in the remaining regions. Impediments to the development of non-traditional exports

Despite the healthy growth in Ghana!s non-traditional exports in 2004, the Ghana Export Promotion Council (GEPC) continues to highlight the considerable challenges to the more rapid and widespread development of this industry. Factors limiting growth include in particular the following:

• lack of access to long-term financing from formal financial institutions; • non-tariff barriers; • high input costs, including low labour productivity; • lack of knowledge about potential external markets; • undeveloped market support systems such as haulage, packaging and storage; and • the problem of remaining competitive following the appreciation of the real exchange rate in the last few years.

A new initiative launched recently by the government could help to overcome some of these problems. According to Ghana!s Ministry of Trade and Industry, an Export Trade House (ETH) has been set up in order to help local exporters to understand and build up contacts in external markets. The ETH is intended to act as a commercial clearing house for export products. Specialised departments within the ETH advise on sourcing markets for different commodities, including providing information on any export requirements and conducting sales on behalf of exporters. If successful, the clearing house will reduce the time spent by exporters on sourcing markets for their goods, allowing them to focus instead on production, and this would help to boost non-traditional exports gradually over the long term. A one-stop investment shop is In another attempt to attract foreign investment and boost non-traditional to be launched exports, the government has announced that a "one-stop shop" (OSS) for potential foreign and domestic investors is to be launched in order to speed up the time taken to work through Ghana!s investment procedures. The OSS will be modelled on similar institutions that have been set up in many other Sub- Saharan African countries in recent years, with its main benefit being that rather than investors having to deal with a myriad of different government departments that do not co-ordinate their respective activities, they can now deal with all the key government departments in one building. In the case of Ghana, investors should be able to deal with Customs, Excise and Preventive Services, the Ghana Immigration Service, the Ports and Harbours Authority, the Ghana Civil Aviation Authority, the Ghana Free Zones Board and the Ghana Investment Promotion Centre (GIPC) in the OSS offices. The deputy chief executive of the GIPC, Ruth Nyakotey, explained that the OSS was necessary in order to cut down administrative bottlenecks when investing in Ghana. The introduction of the OSS should help to boost foreign direct investment inflows, which rarely rise above US$200m and were as low as US$59m in 2002. However, although the idea is a positive one in principle, the experiences of other countries show that there can be problems in persuading government

ministries and departments to co-operate fully, although these are more often teething problems as opposed to long-term issues.

Foreign exchange reserves Foreign-exchange reserves of US$1.43bn were recorded by the BoG at the end of October 2004, an all-time high. Strong inflows of gold and cocoa revenue and expatriate remittances in recent years have helped to build up reserves from US$287m in June 2002 to their current level. Seasonal inflows from cocoa in the last quarter of 2004 will have boosted reserves further in the final quarter of the year. Current reserve levels are equivalent to 3.5 months of imports of goods and services, which is above the IMF!s recommended minimum of three months although still low by the standards of many other African countries. Strong demand for imports, which usually exceeds the supply of foreign exchange, continues to constrain the growth of import cover, and this continues to be a worrying trend for the central bank.

Foreign-exchange reserves (US$ m unless otherwise indicated; end of period) 2000 2001 2002 2003 2004a Total foreign exchange reserves 232.1 298.2 539.7 1,352.8 1,575.0 Gold (national valuation) 79.3 78.9 96.5 116.1 116.9 Months of imports of goods & services 1.1 1.3 2.3 4.2 4.2 a Economist Intelligence Unit estimates; October figure was US$1,452.2m, of which US$116.9m was gold (national valuation). Sources: IMF; Economist Intelligence Unit.