Journal Issue

Ghana: Toward Successful Stabilization and Recovery: A major recovery program revamps the economy

International Monetary Fund. External Relations Dept.
Published Date:
March 1988
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Sheetal K. Chand and Reinold van Til

After a period of relative prosperity in the 1960s, Ghana experienced a protracted economic decline in the following two decades. Although the deterioration was caused partly by external factors, such as the two oil price shocks, the sharp rise in world interest rates, and a collapse of primary commodity prices in the early 1980s, the main cause was inadequate economic policies. Beginning in 1983, a major reorientation of economic policies took place with the adoption of the economic recovery program launched in April. Since then, Ghana’s economy has steadily recovered (see table). Beginning in 1984, real GDP growth has averaged more than 5 percent a year, inflation has been reduced significantly, and the growth levels of exports and imports have been satisfactory. The Fund has supported the economic recovery program under three successive stand-by arrangements; agreements covering 1987-90 were recently concluded under the structural adjustment facility and the extended Fund facility. The World Bank has provided a reconstruction import credit and is providing program support under a structural adjustment credit in addition to its project lending.

This article analyzes what went wrong in the 1970s and looks at the changes that brought about Ghana’s economic recovery, focusing in particular on the strategy adopted to revamp the economy. Two distinct phases in the adjustment strategy are delineated. The first phase concentrated on stabilization, with the emphasis on containing inflation and easing constraints on the balance of payments. The second phase emphasized rehabilitating badly damaged economic infrastructure, while preparing the ground for a comprehensive restructuring of the economy to ensure an adequate and sustainable rate of economic growth for the future. It should be noted that although these phases are distinct, there was nonetheless considerable overlap between them, both in terms of objectives and policy instruments. Essentially, the sustained adjustment process that Ghana undertook involved stabilization goals supplemented by policies affecting key relative prices and the organizational structure of the economy, thereby increasing efficiency at the micro level.

The downturn

During most of the 1970s and early 1980s Ghana suffered an economic malaise marked by shrinking output, high and accelerating inflation, and growing external imbalances. By 1983, foreign exchange reserves were nearly depleted and the country had incurred large external payments arrears. With a population growth of about 3 percent a year, per capita income declined by almost half during this period. The productive base of the economy was eroded rapidly as a result of the emigration of skilled labor, lack of capital formation, and a deterioration of infrastructure. These ills reflected a combination of exogenous factors and inappropriate economic policy signals. The latter discouraged production, exports, savings, and investment, while encouraging consumption, imports, and various corrupt practices, including a burgeoning underground economy.

Economic policies. Ghana’s economic decline was fueled by a policy favoring rapid industrialization by an inefficient state enterprise sector to the neglect of an agricultural sector that traditionally had been Ghana’s most important foreign exchange earner. An inward-looking industrialization policy attached overwhelming importance to self-reliance by establishing import-substituting industries under highly protective trade and nontrade barriers. These enjoyed protection under an increasingly restrictive import-licensing system and high tariffs. Protection was rather indiscriminately extended to all industries and justified on infant-industry grounds, irrespective of their longer-term comparative advantage. Despite, or even because of, these protectionist policies, an overwhelming majority of state enterprises suffered heavy losses, which were borne by the Government and ultimately financed by bank credit.

Ghana’s fiscal position was further burdened by a policy in which the Government assumed the role of employer of last resort. A large bureaucracy was built up containing many nonproductive and ghost workers (fictitious names on the payroll), while the revenue base shrank as a result of a sharp decline in cocoa exports and other trade flows on which the tax system heavily depended. Large budget deficits were financed through the banking system. This fueled domestic demand under conditions of declining domestic supply and led to growing balance of payments deficits and accelerating inflation. A vicious circle developed in which successive governments tried to cure macroeconomic imbalances with controls on distribution and prices without addressing the expansionary fiscal and monetary policies. Inflation was countered by price controls; balance of payments deficits were countered by import controls; and scarcities were countered by distribution controls. These interventionist policies suppressed market forces, causing much of the economy to go underground and contributing to the corruption and inefficiency of the administration.

External factors. Except for the occasions when oil prices were increased and world interest rates rose sharply, external conditions have been broadly favorable to Ghana. For example, the international cocoa market was buoyant in the second half of the 1970s. However, the benefits of higher cocoa export prices were not passed on to the farmer, but were retained by the cocoa marketing board and the Government. The declining real cocoa producer price (corrected for domestic inflation) prevented an expansion of cocoa production and diverted exports through parallel market channels. Replanting was neglected and by the second half of the 1970s, the volume of cocoa exports began declining. In the early 1980s, when Ghana’s fundamentally weakened economy was confronted with sharply deteriorating external conditions and a persistent drought, the economic crisis fully surfaced and the economy almost ground to a halt.

The situation in early 1983

By 1983, the year in which the economic recovery program was launched, the economy had been largely devastated. Signs of collapse were everywhere. The real minimum wage had fallen to 13 percent of its 1975 level. Gross investment amounted to less than 4 percent of GDP—barely sufficient to replace the depreciated capital stock and providing no margin for economic growth. The transport system was in poor condition. Roads acutely needed repair; much of the railway line that was vital to transporting exports had ceased to function; and the ports were in only slightly better condition. Communication systems within the country, notably the postal system and international telephone and telegraph connections, had broken down. The economy was starved of imported inputs and, as a result, capacity utilization in the manufacturing sector was reduced to only 15–20 percent. Lack of imported spare parts crippled much of the transport fleet and prevented needed repairs of the infrastructure.

Signs were widespread that an inflationary psychology had become deeply entrenched. Inflation, which had been running for the previous decade at an average annual rate of over 50 percent, surged to 123 percent in 1983. The inflation rate reflected parallel market prices and not the controlled prices to which virtually all of the economy was subject. Nominal interest rates had been kept low—those on savings deposits, for example, amounted to only about 11 percent a year. Holding money had become so unattractive that the money balances, in particular savings deposits, held with the banking system had declined sharply and the income velocity of money had nearly doubled, from an average of about five in earlier years to nine in 1983.

The external sector, too, was devastated. With the exchange rate pegged at

2.75 = US$1 since 1978, the real exchange rate had appreciated sharply. The currency appreciation, together with the pervasive restrictions on Ghana’s international trade and payments, caused official exports to plummet. By the beginning of 1983, the parallel market rate for foreign exchange was about 40 times the official rate. Grave difficulties were being encountered in meeting payments for essential imports and for servicing the external debt. External payments arrears equivalent to about a full year’s export earnings accumulated.

Ghana: selected economic indicators, 1971–87
1971-751976-821983198419851986Est. 1987
(Annual percentage change)
Real GDP-0.2-0.8-
Real GDP per capita-2.8-3.4-
External terms of trade-1.9-9.36.830.2-5.913.9-6.8
Domestic terms of trade1-1.2-12.9-10.548.
Consumer price index16.866.8123.139.710.324.635.0
(year average)
Money supply31.840.436.172.059.553.639.5
(In percent ol GDP)
Current account balance-0.4-0.5-0.3-1.0-2.3-1.6-3.9
Merchandise exports, f.o.b.
Merchandise imports, f.o.b.
Gross investment11.
Domestic savings10.
Budget deficit2-10.1-7.5-2.7-1.8-
Government revenue and grants16.
Sources: Ghana Statistical Office, Bank of Ghana, and Fund staff estimates.

Ratio of prices of tradables and nontradables.

Excludes capital expenditures financed through external project aid.

Sources: Ghana Statistical Office, Bank of Ghana, and Fund staff estimates.

Ratio of prices of tradables and nontradables.

Excludes capital expenditures financed through external project aid.

The public sector was in a precarious state. Tax revenues had collapsed to about 4 percent of GDP, dragging expenditures down and seriously eroding the Government’s ability to function and to maintain the economic and social infrastructure. The budget deficit, while much lower than in the 1970s, was still too high in view of the steep decline in the private savings rate. Civil servants’ salaries and conditions of service had eroded dramatically, contributing to growing inefficiencies in the government apparatus and leading to an exodus of skilled personnel.

As if these problems were not enough, the economy was beset by two additional shocks. It had been caught in an exceptionally severe and prolonged drought in 1983, which led to a major shortfall in the supply of food and hydroelectric power on which much of the nation depended. At the same time, the country had to absorb around one million Ghanaian workers who were being repatriated from Nigeria.

The adjustment strategy

Confronted with this extremely grave situation, the newly installed Government formulated the economic recovery program and sought support from the Fund and the World Bank. The basic elements of an adjustment program were clear. It was more difficult, however, to establish the precise policy actions to be adopted and their phasing each year, taking into account political and social constraints in addition to those concerning the availability and efficiency of policy instruments in an economy that was beset by structural deficiencies.

At the core of the adjustment strategy was the need to effect a substantial improvement in the balance of payments so as to provide for essential imports and to restore normal relationships with creditors. This required a drastic depreciation of the real exchange rate to promote exports. To sustain the exchange rate adjustment, appropriate monetary, fiscal, and incomes policies would have to be implemented. At the same time, a large number of distortions that compromised the efficiency of the economy would have to be removed. In particular, the economy would have to be freed from the strangling effects of the myriad controls on prices, production, and distribution. The success of the adjustment would also depend critically on adequate external financial assistance and strong efforts at domestic resource mobilization to finance the required improvements in the government administration and the investment needed, so as to overcome the infrastructure bottlenecks, promote a rational allocation of resources, and initiate growth.

Obviously, all the acute problems of the economy could not be addressed simultaneously. A strategy had to be developed that was both realistic and carried the promise of success. An immediate priority was to take action to restore confidence. It was felt that this could best be done initially by taking a decisive blow at inflation and restoring relative prices, particularly the exchange rate and the producer price for cocoa, that had fallen completely out of line. This would be followed by a determined effort to reform the tax system to enable it to generate the revenue required to finance rehabilitation in an equitable and nondistortionary manner. A 12-month stand-by arrangement was negotiated with the Fund and took effect in mid-1983. This arrangement, which was successfully concluded, was followed by two additional stand-by arrangements, which were also satisfactorily completed. In addition, since 1983, Ghana has availed itself of the Fund’s compensatory financing facility and has received several credits from the World Bank. The adjustment strategy that was pursued during 1983-86 can be divided into two phases which are also reflected in the broad thrust of the successive Fund- and Bank-supported programs.

The stabilization

At the outset, efforts were aimed at stabilizing the domestic economy and improving the balance of payments. In particular, inflation had to be controlled and a measure of price liberalization introduced, so that the necessary adjustments in relative prices could be effected. Because the drought was prolonged, a quick domestic supply response could not be expected. Consequently, policies to reduce inflation had to rely on demand management. The budget deficit was reduced from 4.5 percent of GDP in 1982 to 2.7 percent in 1983, which helped lower the rate of growth of money supply. As budgetary revenues continued to decline initially, the fiscal adjustment was achieved through a compression in government expenditures to 8.6 percent of GDP from 10.2 percent the year before. Real wages were frozen, government operating and maintenance expenditures were restrained, and development outlays were sharply reduced. These actions, which were thought to be necessary to stabilize the economy, exacted a cost by depressing the level of economic activity and postponing the rehabilitation of the economy.

The centerpiece of external sector reform was depreciation of the exchange rate from

2.75 = US$1 to
30 = US$1 by the end of 1983. The exchange rate adjustment facilitated the first of a series of annual increases in the producer price of cocoa. Since much of the exchange rate adjustment merely made up for past inflation, the depreciation did not appear to add markedly to the increase in the domestic price level. However, prices of important individual commodities, such as petroleum, increased sharply. At the same time, many prices were decontrolled and the principle of a full pass-through of exchange rate adjustments to local prices was established.

The initial economic response, which lasted well into 1984, was disappointing. Instead of subsiding, inflation accelerated to 123 percent. Real growth remained negative, and exports continued to decline. Some relief for the balance of payments was obtained through the substantial financing provided by the Fund. This assistance prevented a further retrenchment of imports and enabled Ghana to pay off a large part of its external arrears. The difference between the parallel market and official exchange rates narrowed rapidly, and the monthly inflation rate began to decline.

It was not until late in 1984 that the economic outlook improved, as a result of both the Government’s perseverance with the stabilization policies and the return of the rains. Agricultural production recovered sharply, stimulating exports and domestic food supplies. Food prices declined markedly. The latter improvement contributed to a significant deceleration of inflation, because prices of food items account for about half of the consumer price index. This improvement in the inflation outlook occurred despite a sharp acceleration in the growth of the money supply, reflecting the financing needs of a recovering economy.

The exchange rate depreciation benefited both the external and government sectors. For the first time in more than a decade, the domestic terms of trade moved in favor of tradables, and an increased producer price stimulated production and official cocoa exports. The tax base improved as a result of the impact of the devaluation on trade-related taxes, which permitted an increase in government spending despite a further reduction in the fiscal deficit. The sizable increase in external assistance permitted a large increase in imports, while at the same time external payments arrears could be reduced.

The recovery

Signs that the stabilization strategy was succeeding permitted a change in emphasis in early 1985 toward the rehabilitation of some of the more severely damaged parts of the economy—in particular infrastructure, the key export industries, and the public sector. With support from the World Bank and bilateral donors, infrastructure rehabilitation projects were undertaken in the transport, power, communications, and water supply sectors.

Rehabilitation projects in the cocoa, gold, and timber sectors were aimed at restoring the export base and major gains were recorded in these areas. These measures were accompanied by efforts to mobilize the private sector actively in the recovery process. A new investment code, designed to attract domestic and foreign investors, was introduced. After many years of real wage declines and the restraint exerted during the first half of the economic recovery program, there were strong pressures for an increase in real wages, which appeared essential in ameliorating conditions in the public sector.

Budget strategy. The budget played a critical role in addressing Ghana’s problems. The budget strategy was designed to provide for the increased infrastructure outlays without sacrificing the stabilization goals. These objectives were achieved by raising additional revenue and allowing expenditures only on priority items. Revenues benefited from higher taxes on luxury consumption, the stimulus provided by the exchange rate depreciation to customs duties and the export related taxes, the windfall gains from lower world oil prices, once domestic petroleum prices had been allowed to rise, and, to a significant extent, from improvements in tax administration. Revenue also increased after a crippling degree of progressivity of the personal income tax was lowered. Broadly, the tax reform strategy emphasized shifting the tax burden on to indirect taxes, while lowering the marginal rates encountered by those directly engaged in production, exporting, and earning wages and salaries. As a result of these and other measures, the ratio of revenue to GDP grew from 8.4 percent in 1984, to 10.8 percent in 1985, to 14.4 percent in 1986, and further to 15.3 percent in 1987.

The increased revenue was used in part to rehabilitate the government administrative machine which had virtually broken down and constituted a major bottleneck to the recovery process. Real wages were more than doubled and major improvements were effected in the civil service salary structure so as to reward skill and competence. Together with the increased infrastructure outlays in the development budget, total budgetary outlays increased by more than 2.5 percent of GDP to 12.8 percent in 1985, and further to 14.9 percent in 1987. As part of a policy to improve efficiency in the public sector, the Government redeployed a number of civil servants and public sector employees who had become redundant, particularly in the cocoa sector. Commensurate with the revenue and expenditure trends, there was a sharp reversal in the traditional pattern of budget deficits (excluding externally financed capital expenditures), which showed a small surplus of 0.1 percent of GDP in 1986, rising to 0.4 percent of GDP in 1987. Increased public savings accounted for the rise in the domestic savings rate from 4.4 percent of GDP in 1984 to 5.1 percent in 1985 and 9.1 percent in 1987. The policy of decontrol and reliance on market forces necessary for restoring efficiency led to a progressive dismantling of domestic price controls and other market restrictions.

External sector policies. Major steps were taken to liberalize the external sector. A special import-licensing scheme, which permitted imports purchased with the importer’s own foreign exchange resources, was reactivated. Recognition of widespread parallel market activities was considered to be a first step in preparing the integration of the official and unofficial economy. Subsequently, the licensing of officially permitted imports was substantially liberalized, while import taxation was simplified through the introduction of a uniform tariff for most imports. In 1984 and 1985 a series of exchange rate adjustments resulted in a cumulative real effective depreciation of the currency of about 90 percent, followed by the introduction of a weekly auction for foreign exchange in September 1986. These policies have helped improve the balance of payments through stimulating exports, promoting the more rational use of imports, and restoring foreign donor confidence.

Financial policies. Measures introduced to restore confidence in the banking system included phased increases in interest rates. With the decline in the inflation rate, and growing perceptions that government policies marked a decisive change from the past, holding money balances became more attractive. This made it possible to ease credit policies to accommodate an increased demand for money. It is noteworthy that despite a higher rate of monetary growth in the period after the stabilization efforts were initiated, the inflation rate has been markedly lower, while the output growth rate has been sharply higher.


Some general observations can be made concerning Ghana’s adjustment strategy since 1983. The first and most obvious generalization is that an adjustment strategy must be tailored to the circumstances of the country. While the imbalances and distortions affecting an economy can be readily identified, it is more difficult to develop solutions that will ensure the attainment of the adjustment goals, taking into account the political and social constraints. The uncertainty surrounding economic relationships and the various trade-offs involved is also a source of difficulty.

Ghana: external debt to official creditors

Source: World Bank

A second generalization concerns the importance of having adequate will to implement a reform program. In Ghana the Government’s strong political will was instrumental both in shaping the adjustment strategy and in successfully implementing it.

Another lesson is that there are no quick and easy solutions, particularly in situations that require a drastic restructuring of the economy and reorientation of economic policies. The initial imbalances between supply and demand were very large and markets were either nonexistent or poorly organized. The gradual liberalization that was pursued in Ghana avoided the excessive relative price shifts that might have disrupted the rest of the economy and adversely affected the distribution of income. In particular, the step-by-step approach contributed both to the sustainability and manageability of the exchange rate depreciation.

Gradualism in one area need not imply gradualism in all areas, as is indicated by the monetary shock treatment applied in the initial phase of the economic recovery program in order to reduce inflationary expectations. The Ghanaian case demonstrates the importance of having a flexible adjustment strategy. This is illustrated by the rapid shift in emphasis in the second phase of the economic recovery prorgram, when the stabilization goals were being realized. It is clear that the substantial increases in real wages during this phase, together with increases in producer prices for cocoa and other agricultural products, while promoting the rehabilitation of the concerned sectors, helped ensure the social acceptability of the program in the face of the losses sustained by those who profited from the overvalued exchange rate and the operation of the underground economy.

A key feature of the adjustment strategy in Ghana was the role played by fiscal policy in promoting stabilization and rehabilitation. On the one hand, a policy of fiscal restraint was adopted to provide essential support for demand management. On the other hand, the budget was used as the principal means for mobilizing domestic resources to finance outlays for rehabilitation and for raising the domestic savings rate. Both these objectives were made possible by the emphasis that the authorities placed on tax reform for the purpose of raising revenue while at the same time promoting equity and reducing economic disincentives.

A final observation relates to the importance of having adequate and timely external financial support over the period of adjustment. For Ghana this was especially critical in the initial phase before the exchange rate adjustment and domestic resource mobilization efforts could bear fruit as large outlays were required for the restructuring of the external finances and for essential imports. The bulk of the initial financing was provided by the Fund (see chart). The subsequent increase in the Bank’s lending, as well as the more recent emergence of other sources of concessional finance following the successes of the program, have now placed Ghana in a position to continue to pursue a growth-oriented adjustment strategy.

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