Ghana: Selected Issues

International Monetary Fund

doi:10.5089/9781451814750.002.A004

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Ghana: Selected Issues

Author: International Monetary Fund

Publication Date:: 18 Feb 1999

eISBN:: 9781451814750

Language:: English

Keywords:: ISCR; CR; Ghana; rate; bank; Ghana's competitiveness; effective tariff rate; competitiveness vis-à-vis; export deflator; exchange rate movement; CPI products; exchange rate system; Competition; Exchange rate arrangements; Exchange rates

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This Selected Issues paper reviews public service reform in Ghana. The paper highlights that a range of public service reform initiatives have been undertaken in Ghana since the early 1980s. The public service in Ghana is composed of centrally managed agencies, ministries, subvented agencies, district assemblies, and state enterprises. The civil service, which covers the centrally managed agencies, ministries, and local government, accounts for only about 20 percent of total public sector employment as a result of the spin-off in the 1980s of the internal revenue, customs, education, and health services as subvented agencies.

Abstract

IV. External Competitiveness in Ghana²⁵

A. Introduction

77. At the time of its independence in 1957, Ghana was the world’s largest producer of cocoa, and its external reserves were equivalent to three years of imports. Ghana was basically an export-driven economy, and its per-capita income was second only to South Africa in sub-Saharan Africa. After independence, Ghana’s leadership changed the economic strategy to emphasize industrialization and import substitution to be achieved through increased government intervention in the economy. By 1982, Ghana’s economy had virtually collapsed. The country had depleted its foreign exchange reserves and incurred large external payments arrears. Inflation was running at more than 100 percent, the parallel exchange rate was over 20 times the official rate, and cocoa production had declined to less than one third of its peak. Ghana’s external competitiveness was declining precipitously.

78. In 1983, Ghana launched an economic recovery program (ERP) aimed at restoring growth and stabilizing prices. During the period 1983-91, relative prices were realigned to encourage domestic production and exports, a floating exchange rate regime was adopted, and the exchange and trade system was gradually liberalized. Moreover, through 1991, considerable progress was made in reducing macroeconomic imbalances, although inflation remained high and variable. However, in the wake of the 1992 elections, the government granted a large increase in civil service wages, rekindling inflationary pressures despite its subsequent efforts to regain control of the fiscal situation. Since a floating exchange rate regime was in place, the expectation was that any loss of competitiveness from domestic price inflation would be offset by exchange rate movements. The question that this chapter addresses is whether the floating exchange rate system, as well as other policies used by the authorities since 1983, were able to avoid an erosion of Ghana’s external competitiveness.

B. Evolution of the Exchange Rate System²⁶

79. Following independence the cedi was pegged to the pound sterling until 1971, when the peg was changed to the U.S. dollar (Box 1).²⁷ The collapse of cocoa prices during the sixties forced the government to devalue in December 1971 to moderate the domestic effects of the deterioration in the terms of trade. The government was toppled soon after the devaluation and the cedi was appreciated in steps and then pegged at ¢1.15 per US dollar in March 1973. During the remainder of the seventies the authorities were generally unwilling to devalue the cedi and, faced with balance of payments problems, tended to resort to ad hoc restrictions on trade and exchange rate payments. The cedi parity was maintained until June 1978, when the cedi was devalued to €2.75 per US dollar, and then kept unchanged until April 1983, when it was again devalued in the context of the ERP.

Box 1.

Ghana: Exchange Rate Arrangements, 1983-1997

Initial conditions

Official exchange rate pegged; the intervention currency was the pound sterling until December 1971; thereafter, the U.S. dollar.
An active parallel market with rates that differed significantly from the official rate.
Widespread restrictions on trade and payments.
Direct allocation of foreign exchange through licenses and import programs.
Import deposit requirements.
Bilateral payments arrangement with various countries

Measures after 1983

Adoption of a real exchange rate rule, in which exchange rate movements were linked to the inflation differential between Ghana and its major trading partners. Also a system of bonuses on foreign exchange receipts and surcharges on payments was introduced (April 1983).
The system of bonuses and surcharges was abolished (October 1983)
Authorized foreign exchange dealers permitted to open foreign accounts for residents and non-residents (June 1985)
A dual exchange rate system with two windows was introduced, one of the windows being an auction. Bank of Ghana (BoG) sold foreign exchange to end users only (September 1986)
Foreign exchange bureaus were established resulting in two spot foreign exchange markets (February 1988)
A wholesale foreign exchange auction system was introduced and the retail one was discontinued (April 1990)
Weekly wholesale foreign exchange auction coordinated by BoG was replaced by an interbank market (March 1992)
Ghana accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Funds Articles of Agreement (February 1994).

80. From April 1983 to September 1986, the authorities adopted a real exchange rate rule with periodic adjustments in the cedi rate in accordance with the inflation differential between Ghana and its major trading partners (see Figure 5).²⁸ During the seventies and most of the eighties, administrative controls still played an important role in the allocation of foreign exchange, giving rise to a very active parallel foreign exchange market. In 1982, the parallel market exchange rate reached as high as 2,100 percent of the official rate, but after the adoption of the real exchange rate rule it fell to twice the official exchange rate in early 1986. In September 1986, a dual exchange rate market was introduced, in which the exchange rate in one of the windows was determined by auction.²⁹ In February 1987, the dual exchange rate system was eliminated, and all operations began to be conducted at the auction rate. In order to curb the parallel market for foreign exchange, foreign exchange bureaus were allowed to operate beginning February 1988. This initiative led to the absorption of the parallel market in the redefined legal structure. The result was, however, an exchange system with two spot foreign exchange markets: the bureau rate and the auction rate. This system remained in place until April 1990.

81. By April 1990, the spread between the bureau rate and the auction rate had narrowed to around 8 percent, and the Bank of Ghana was able to unify these two rates. It also introduced, at the same time, a system of weekly wholesale foreign exchange auctions, which remained in place until an interbank market in foreign exchange was set up in March 1992.

82. With foreign exchange being allocated by market mechanisms, the need for exchange restrictions gradually declined. From October 1986, the reforms of the exchange rate system were accompanied by the removal of import licencing, rationalization of import tariffs and the removal of all restrictions on payments and transfers for current international transactions. By February 1994, Ghana was able to accept the obligations of Article VIII, Sections 2, 3 and 4 of the IMF Articles of Agreement.

C. Traditional Competitiveness Indicators

83. A useful measure of competitiveness is the real exchange rate, whose movements are associated with changes in a country’s balance of trade in goods and nonfactor services. The real exchange rate is usually constructed by deflating the nominal exchange rate, using price indices, such as the consumer price index (CPI), GDP deflator, export deflator, import deflator, or cost indices, like unit labor costs.

84. No single indicator provides an unambiguous assessment of competitiveness, with each indicator having pros and cons. Therefore, each indicator needs to be carefully considered. Regarding the price indices, CPI-based real exchange rates are easily available and cover a large range of products that are fairly comparable across countries (Turner and Van’t dack (1993)). In addition, because wages are often influenced by ÇPI developments, CPI-based real exchange rates could be a good proxy for developments in a country’s cost competitiveness. However, CPI-based real exchange rates also reflect taxes and other institutional distortions, include the prices of services, many of which are nontradable, and do not take directly into account the prices of many tradable goods, like intermediate goods. Real exchange rates based on GDP deflators incorporate the ratio of the relative prices of nontradable to tradable goods at home and abroad, and accordingly, movements in important determinants of trade flows; however, these data are less frequently available and less accurately constructed. Real exchange rates based on export and import deflators provide useful information on a country’s export and import performance, respectively, and consequently on its trade balance. However, as each indicator does not contain information relevant for assessing both import and export performance, they may not incorporate all the information on competitiveness needed to explain movements in the trade balance (Marsh and Tokarick, 1994). Furthermore, these indicators cover country-specific range of products, that are often difficult to compare across countries.

85. Indicators based on unit labor costs provide information about underlying costs of production and are defined similarly across countries. However, they are essentially focused on the manufacturing sector and cannot detect changes in the costs of other components of production, such as capital and intermediate inputs, and they are subject to large measurement errors (Lipschitz and McDonald (1991)).

D. Competitiveness Indicators for Ghana

86. In this section, Ghana’s competitiveness is assessed using indicators based on prices and unit labor costs. In particular, real effective exchange rates are calculated considering the consumer price index, GDP, export, and import deflators, and unit labor costs. The choice of competitiveness indicators is limited by the availability and accuracy of data. The results are analyzed taking into consideration these limitations, as well as advantages and disadvantages of each indicator.

Price-based indicators using CPI, GDP, export, and import deflators

87. Ghana’s CPI-based real effective exchange rate (REER) vis-à-vis its major trading partners (United Kingdom, Germany, United States, Japan, France, Netherlands, Italy, Canada, Belgium, Brazil, Korea, Australia, Switzerland, China, Spain, Sweden, the Taiwan Province of China, Malaysia, Austria, and India)³⁰ was calculated for the period 1980-97 (Figure 6, top panel). The figure shows an appreciation of the REER of 180 percent over the period 1980-82, clearly indicating a deterioration of Ghana’s competitiveness. However, in 1983 this tendency started to reverse, and Ghana’s REER depreciated by 93 percent by 1987 in comparison with its peak in 1982. The gain in competitiveness continued, although at a lower pace, through 1994. The last three years, 1995-97, are instead characterized by a slight deterioration of Ghana’s competitiveness, as shown by the CPI-based REER that in 1997 had already appreciated 35 percent with respect to its 1994 level (Figure 7, top panel).

88. Ghana’s competitiveness as indicated by the CPI-based REER reflects the nominal appreciation of the cedi over the period 1980-82, followed by a series of devaluations, in particular, during the first stage of the reform of the exchange rate system that started in 1983. As seen above, the cedi was devalued in stages from ¢2.75 per U.S. dollar in April 1983, to C90 per U.S. dollar by January 1986, which meant a devaluation of 3,172 percent in less than three years. As the reform of trade and the exchange rate continued through 1994, the cedi continued to depreciate, reaching a value of ¢1,052 per U.S. dollar at the end of 1994. In 1995, the CPI-based REER started to appreciate, reflecting a surge in inflation from 35 percent at the end of 1994 to 70 percent in 1995. The appreciation of the CPI-based REER continued in 1996-97, although at a lower pace.

89. The real effective exchange rate based on the GDP deflator presents a picture very similar to the one given by the CPI-based REER (Figure 6, bottom panel). From 1980 to 1982, Ghana’s competitiveness deteriorated markedly, as indicated by the appreciation of 139 percent of the GDP-deflator-based REER. However, it improved noticeably after 1983, as the GDP-deflator-based REER depreciated by 75 percent and 91 percent in 1984 and 1987, respectively, with respect to its 1982 level. The gain in competitiveness continued until 1994, although at a lower pace. Afterward, the GDP-deflator-based REER shows a slight appreciation over the period 1995-97 (Figure 7, bottom panel).

90. The real effective exchange rate based on the export deflator (Figures 8 and 9, bottom panel) shows an overall gain in competitiveness over the entire period under consideration. Unlike the other two indicators, the export-deflator-based REER indicates a gain in competitiveness over the period 1995-97. This gain could be attributed to the fact that the export price grew less than consumer and GDP indices, which in turn could be explained by the fact that Ghana exports mainly commodities such as cocoa and gold, whose prices are determined in the world market. If the depreciation of the REER based on export deflator was mainly related to the fact that Ghana is a price taker, an assessment on competitiveness based on such an indicator could be misleading.

91. Like the previous indicator, the real effective exchange rate based on import deflator (Figures 8 and 9, top panel) shows an overall gain in competitiveness over the period 1983-1997. This gain could reflect that the growth of import prices was slower than the growth of the prices of local products that are part of the basket of the CPI products. In 1997, this difference could be attributed to the sharp reduction in petroleum prices. However, to the extend that similar declines were observed by Ghana’s competitors in international markets, it is not clear that the external competitiveness of Ghana was affected in a significant manner.

Unit-Labor-Cost-Based Indicators

92. The real effective exchange rate based on unit labor cost indices (ULCI)³¹ was calculated for the period 1981-97 (Figure 10).³² This indicator suggests that there was a strong deterioration of Ghana’s competitiveness from 1981 to 1982, followed by a remarkable gain thereafter. The ULCI-based REER appreciated by 49 percent from 1981 to 1982, and in the following five years it depreciated by 77 percent with respect to its 1982 level. After a slight appreciation in 1989, the ULCI-based REER continued to depreciate, reaching its lowest point in 1991. In 1992, Ghana’s ULCI-based REER appreciated by 41 percent with respect to its 1991 level, and in the following two years it regained approximately the level reached in 1991. During the last two years under study, 1996-97, the ULCI-based REER shows a slight appreciation, suggesting that Ghana’s competitiveness has recently shown a tendency to deteriorate.

93. Over the period 1981-90, the pattern of Ghana’s competitiveness suggested by the ULCI-based REER was mainly driven by the behavior of the cedi before and during the ERP. In 1992, the ULCI-based REER appreciated remarkably, as a wage increase of 80 percent was granted to public employees. In the following years, Ghana’s government made efforts to contain wage increases. These efforts are reflected in the slight gain in Ghana’s competitiveness in 1993-94. However, despite the wage containment, over the last three years, 1995-97, the indicator suggests a slight tendency for Ghana’s competitiveness to weaken.

A comparison with some neighboring countries

94. Ghana’s competitiveness was compared with that of its neighboring countries, Burkina Faso, Côte d’Ivoire, Nigeria, and Togo, from the first quarter of 1980 to the second quarter of 1998. The comparison is built on the CPI-based REER, calculated considering three different groups of trading partners. The first group comprises all major trading partners of the country; the second one consists of the major trading partner;³³ and the third one comprises all major trading partners, excluding the major partner. The analysis covers two periods, from the first quarter of 1980 to the second quarter of 1990, and from the third quarter of 1990 to the second quarter of 1998. The two periods highlight the performance of Ghana’s competitiveness with respect to its neighboring countries before and after Ghana concluded its exchange system reform, which occurred in the second quarter of 1990.

95. Ghana’s competitiveness vis-à-vis its major trading partners deteriorated markedly from the first quarter of 1980 to the first quarter of 1983, while the competitiveness of its neighboring countries remained relatively stable, with the exception of Nigeria. This tendency was reversed between the second quarter of 1983 (Figure 11, top panel) and the second quarter of 1985, when Ghana began to gain competitiveness with respect to all other countries, a trend that continued until the second quarter of 1990.

96. After the conclusion of the exchange system reform in 1990, Ghana continued to gain in competitiveness with respect to all other countries, except Nigeria, until the first quarter of 1994, when the CFA devalued (Figure 12, top panel). Afterwards, Ghana’s competitiveness followed a behavior close to that of the CFA countries considered in the study (Burkina Faso, Côte d’Ivoire, and Togo), while Nigeria’s competitiveness deteriorated markedly. From the third quarter of 1990 to the second quarter of 1998, Ghana’s real effective exchange rate followed closely the pattern of the real effective exchange rate of the CFA countries, although after the devaluation of the CFA it appreciated slightly faster.

97. Ghana’s competitiveness against its major partner country, the United Kingdom, shows a similar pattern, over the period 1980-89 (Figure 11, middle panel). Overall, from the third quarter of 1990 to the second quarter of 1998, Ghana’s competitiveness remained broadly unchanged, after a slight improvement through the first quarter of 1994, followed by a slight deterioration that continued until the first half of 1998 (Figure 12, middle panel). In the third quarter of 1992, Ghana’s competitiveness experienced a slump, as the pound sterling devaluated and exited from the European Monetary System. Over the period under consideration, Ghana’s bilateral real effective exchange rate roughly followed the bilateral real effective exchange rates of the CFA countries, Burkina Faso, Côte d’Ivoire, and Togo.

98. Ghana’s competitiveness against its other major trading partners, mostly the European Union, the United States, and Japan, also showed a deterioration from 1980 to the end of 1983, followed by a markedly gain through the beginning of 1990 (Figure 11, bottom panel). From the third quarter of 1990 to the second quarter of 1998, Ghana’s competitiveness followed smoothly the behavior of the CFA countries under consideration (Figure 12, bottom panel). Overall, Ghana’s competitiveness remained quite stable from 1990 to the first half of 1998, with its level in the second quarter of 1998 very close to its 1990 level. However, while from 1990 to the first half of 1994, Ghana’s competitiveness showed a tendency to improve, from the second half of 1994 to the first half of 1998, there seems to have been a slight but continuous deterioration of Ghana’s competitiveness.

E. Conclusions

99. On the basis of a set of price (consumer, GDP, export, and import price indices) and unit labor cost indicators, Ghana’s competitiveness deteriorated sharply from 1980 to 1982, followed by an improvement through 1994. The evidence for the three year 1995-97 is mixed. The REERs based on the CPI and the GDP deflator, and on unit labor costs indicate an appreciation, while the REER based on export and import deflators shows a depreciation. Different factors, as reflected by the different indicators, can account for this mixed evidence, including the fact the Ghana’s import and export deflators declined faster than the GDP deflator, the CPI, and ULCI. This faster decline, in the case of the export deflator, mainly reflects the fact that Ghana, whose main exports are commodities like cocoa and gold, is a price taker. In that case, the REER based on the export deflator could lead to misleading results. Compared with its neighboring countries, Ghana’s competitiveness shows a similar, although smoother, pattern as the CFA countries Burkina Faso, Côte d’Ivoire, and Togo from the third quarter of 1990 to the second quarter of 1998, although after the devaluation of the CFA its tendency to appreciate was slightly steeper. Overall, Ghana’s competitiveness remained quite stable from 1990 to the first half of 1998, with its level in the second quarter of 1998 very close to its 1990 level. However, while from 1990 to the first half of 1994, Ghana’s competitiveness improved, from the second half of 1994 to the first half of 1998 most indicators point to a deterioration.

References

Kapur, Ishan, and others, 1991, “Ghana: Adjustment and Growth, 1983-91,” IMF Occasional Paper, No 86 (Washington: International Monetary Fund), September.
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Lipschitz, Leslie, and Donogh McDonald, 1991, “Real Exchange Rates and Competitiveness: A Clarification of Concepts, and Some Measurements for Europe,” IMF Working Paper 91/25, (Washington: International Monetary Fund).
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Marsh, Ian W., and Stephen P. Tokarick, 1994, “Competitiveness Indicators: A Theoretical and Empirical Assessment,” IMF Working Paper 94/29, (Washington: International Monetary Fund).
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Turner, Phillip, and Jozef Van’t dack, 1993, “Measuring International Price and Cost Competitiveness”, BIS Economic Papers, No. 39, (Basle, Switzerland: Bank for International Settlements).
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Wickham, Peter, 1993, “A Cautionary Note on the Use of Exchange Rate Indicators”, IMF Paper on Policy Analysis and Assessment 93/5, (Washington: International Monetary Fund).
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Prepared by Stefania Fabrizio, with the collaboration of Andrew Bvumbe.

See Kapur, I. and others (1991) for details.

In the period from independence to 1971, the cedi was devalued only once in mid-1967.

In April 1983, the government also introduced a system of bonuses for foreign exchange receipts and surcharges for payments. This cumbersome system was abolished in October 1983.

Foreign exchange for debt service payments for debt contracted before January 1, 1986, petroleum imports, and essential drugs were provided at a pegged rate (C90 per US dollar) through the first window. All other transactions were conducted through the second window. Foreign exchange earnings from cocoa and residual oil products were surrendered at the first window exchange rate.

The trading patterns and their relative weights for the calculation of the REER are those used by the IMF’s Information Notice System.

The ULCI is defined as the ratio of the index of monthly compensation per worker to the index of monthly production per worker in the manufacturing sector. The calculation of the ULCI for Ghana for the period 1992-97 is based on the assumption that the growth rate of the monthly compensation per worker and the number of workers in the manufacturing sector are equal to the growth rates of the average monthly salary of contributors to Ghana’s social security system and the number of contributors to the system in the manufacturing sector, respectively.

The trading partners for the calculation of the ULCI-based REER are those used by the IMF’s Information Notice System, excluding Brazil, China, Malaysia, and India. The selection of the trading partners was limited by the availability of data.

The major trading partner of Ghana, is the United Kingdom, which accounts for almost a 17 percent weight in the effective exchange rate. The major trading partner of Burkina Faso, Côte d’Ivoire, and Togo is France; for Nigeria is the United Kingdom.

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