Ghana: Staff Report for the 2001 Article IV Consultation and the Third Review Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criteria

The Ghanaian economy suffered a fallout from the large terms-of-trade shock that began in 1999. The fiscal program adopted is prudent and faces up to the country's difficult economic circumstances. Effective control of public expenditure commitments will be essential to the success of the program. Monetary policy will have to remain reasonably tight in the very near term. The IMF staff welcomes the new government's emphasis on mobilizing the private sector, its anticorruption campaign, and transparency in its dealings.

Abstract

The Ghanaian economy suffered a fallout from the large terms-of-trade shock that began in 1999. The fiscal program adopted is prudent and faces up to the country's difficult economic circumstances. Effective control of public expenditure commitments will be essential to the success of the program. Monetary policy will have to remain reasonably tight in the very near term. The IMF staff welcomes the new government's emphasis on mobilizing the private sector, its anticorruption campaign, and transparency in its dealings.

I. Introduction

1. Three missions visited Accra between November 2000 and May 2001 to complete the third review under the PRGF and the 2001 Article IV consultation discussions.1 The Presidential and parliamentary elections in December 2000 led to the first change in the party in power in 20 years, and the New Patriotic Party (NPP) government of President John Kufuor took office in January 2001. Starting with the second mission in February, the staff held discussions on the program review and the Article IV consultation with the newly elected government.2 That mission was accompanied by a team of IMF and World Bank staff that undertook a debt sustainability analysis (DSA) and an FAD/MAE team that examined the recording and reporting of external debt flows. Appendix I contains the government’s letter of intent, which requests an augmentation of access of 10 percent of quota3 and waivers for the nonobservance of three quantitative performance criteria for end-August 2000 and one structural performance criterion for end-September 2000. The Memorandum of Economic and Financial Policies (MEFP) describes the policies to be implemented during 2001. This staff report is accompanied by a Financial System Stability Assessment (FSSA) (forthcoming) and the Preliminary HIPC Initiative document (forthcoming).

2. The third review and Article IV consultation discussions have taken longer to complete than initially envisaged, owing to severe policy slippages in late 2000, followed by the change of administration at the turn of the year, The new government required time to formulate policies that would respond effectively to the difficult economic situation it inherited. Furthermore, before presenting the authorities’ request for completion of the third review under the PRGF, work had to be completed, and Executive Board decisions taken, on two instances of misreporting (forthcoming).

3. In proposing completion of the third review, on the basis of the corrective policies set out in the MEFP, the staff recommends the granting of waivers for the performance criteria on domestic financing of government, the nonaccummulation of external arrears, nonconcessional borrowing, and the appointment of a sales advisor for the divestiture of ECG. Staff also supports the authorities’ request for an increase in access of 10 percent of quota (SDR 36.9 million) under the PRGF arrangement, given the large terms of trade loss and associated increase in balance of payments need. Relations with the Fund are contained in Appendix II and a tentative work program is described in Appendix V. The World Bank is preparing a third ERSO adjustment credit of US$100 million to support the policies of the new government, in addition to its large existing loan portfolio (Appendix III).

4. The last Article IV Consultation took place in November 1999 (EBS/99/200; 11/5/99), and in August 2000 the Executive Board completed the second review under the PRGF arrangement (EBS/00/160; 8/4/00).4 That review approved an increase in access of SDR 36.9 million. At the time, Directors supported the authorities’ efforts to tighten monetary policy in order to reduce inflationary expectations and stabilize the exchange rate, and emphasized the need to accelerate structural reforms. They stressed that effective financial management and transparent budgetary execution were crucial, and encouraged the authorities to prevent the accumulation of new arrears. Ghana also received approval under Article VIII, Section 2 (a), to maintain an exchange restriction in the form of special foreign exchange swap transactions between the Bank of Ghana (BOG) and commercial banks through March 2001. Those transactions have now expired.

II. Economic Developments in 2000

A. Overview

5. Ghana suffered from a major terms of trade shock that began in 1999 and intensified in 2000, with cocoa prices falling and oil prices rising. Weak macroeconomic policies and poor management of the major public enterprises compounded the resulting economic difficulties. Compared with the original program projections made in May 1999 (EBS/99/57; 4/16/99), the loss of foreign exchange is estimated at about US$300 million (4 percent of GDP) in 1999 and US$600 million (12 percent of GDP) in 2000 (Box 1). As fiscal and monetary policies were not adjusted promptly, the government’s domestic primary balance worsened and the external current account deficit widened in 1999. Although macroeconomic policies were tightened during the first half of 2000 with some stabilizing effects, they were relaxed during the second half, particularly in the last quarter. Consequently, in 2000 the average inflation rate doubled and the nominal exchange rate depreciated by 50 percent (measured in U.S. dollars).

Ghana’s Terms of Trade Loss

Cocoa prices reached a 27-year low in 2000 while oil prices rose to over $30 per barrel, a threefold increase over 1998. The impact of Ghana’s terms of trade shock from cocoa and oil price movements compared to the initial program assumptions in May 1999, is shown below. The modest improvement in the projected 2001 terms of trade is not sufficient to begin reversing this loss.

Loss of Foreign Exchange 1/

Relative to the 1999 PRGF-Supported Program

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Source: Staff estimates.

Baseline scenario refers to original PRGF-supported program of May 1999 (EBS/99/57).

Share of this commodity in total earnings from goods exports.

Effect of current price compared to baseline price for baseline quantity, which shows the impact relative to program

6. During the second half of 2000, the program veered sharply off track. Reserve money growth accelerated from 18 percent (annual rate) at end-June 2000 to 36 percent by end-2000. While four of the seven quantitative performance criteria for end-August 2000 were met, the ceiling on net domestic financing of the government was missed by a wide margin, as a result of fiscal slippages and shortfalls in divestiture receipts and donor funding (Table 1). None of the fiscal or monetary targets for December 2000 was met. As the macroeconomic situation deteriorated, and with the elections looming, progress in structural reforms came largely to a halt. One structural performance criterion for end-September 2000 and five of the six structural benchmarks were not observed (Table 2).5 The loss of official reserves, coupled with weaknesses in debt management systems, led to the accumulation of external and domestic payments arrears in the second half of 2000.

Table 1.

Quantitative Performance Criteria, PRGF Arrangement, 2000 1/

(Cumulative from beginning of calendar year to end of month indicated)

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The definitions of line items and terminology is elaborated in the Technical Memorandum of Understanding (Appendix. I, EBS/00/160).

After applying the adjuster for program support and for arrears where known.

The domestic primary balance is defined as the difference between total revenue (excluding grants and divestiture proceeds) and noninterest domestic expenditure (excluding foreign financial capital expenditure) on commitment basis.

Benchmark only.

The ceiling will be adjusted upward/downward to the extent that the cumulative net reduction in government payments arrears is larger/smaller than programmed (see memorandum item).

The ceiling on net domestic financing will be reduced by any excess in foreign program support for the budget (program loans and grants) and will be increased by 50 percent of the shortfall in foreign program support. However, performance criterion test dales (other than the last) within one quarter of a programmed disbursement dale will be allowed a temporary 100 percent adjustment. The ceiling on the net domestic financing will be reduced by any excess over programmed total divestiture receipts, but will not be increased for a shortfall in divestiture receipts. The ceiling will also be lowered/raised to the extent that the stock of external arrears are higher/lower than programmed.

The ceiling on net domestic financing will be adjusted upward by the amount of the treasury bills issued on account of the “bank restructuring operations,” but not exceeding the equivalent of US$20 million.

Stock at end of month indicated.

To be adjusted downward lo the extent of any reduction in, or shortfall in compliance with, the legal reserve requirement.

The floor on net foreign assets of the Bank of Ghana will be increased by any excess in foreign program support for the budget (program loan and grants) and will be reduced by 50 percent of the shortfall in foreign program support. Performance criterion lest dales, other than the last, within one quarter of a programmed disbursement date will be allowed a temporary 100 percent adjustment. The floor on net foreign assets of (he Bank of Ghana will be increased by any excess of programmed divestiture receipts in foreign currency, but will not be decreased for any shortfall. The floor will be increased by any unprogrammed increase in external arrears.

External loans contracted or guaranteed other than those with grant dements equivalent to 35 percent or more, calculated using a discount rate based on OECD commercial interest reference rates. Data revised based mi information in EBS/01/B6.

Excluding normal import-related credits and cocoa financing by the Ghana Cocoa Board.

External arrears for August and September 2000 have been verified for some creditors. More information is necessary lo establish their full value.

Before application of adjustor.

Cumulative since end-December 2000.

Table 2.

Ghana: Structural Performance Criteria and Key Benchmarks for 2000 Program

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B. Real Growth, Prices, and the Exchange Rate

7. Real GDP growth slowed in 2000 to an estimated 3.7 percent, from 4.4 percent in 1999, reflecting declining growth rates in agriculture and industry. Import volumes dropped markedly (25 percent), and although the timber sector performed well and the cocoa crop was large, export volume growth was below that of real GDP. The cocoa sector suffered not only because the export price hit a 27-year low during the year, but also because the crop was sold forward before prices began to pick up at the end of the year.

8. The value of the cedi collapsed in November 1999 and continued depreciating throughout 2000, mainly because macroeconomic policies remained loose in the face of the terms of trade shock, but also owing to lower-than-expected aid inflows and reportedly some speculation in advance of the election. The annual inflation rate rose from 13.8 percent at end-1999 to 41 percent by end-2000,6 in the wake of sharp increases in domestic credit and monetary aggregates and the pass-through effects of the accompanying exchange rate depreciation (Figures 1 and 2). Thus, after several years of real appreciation, there was an estimated 34 percent real depreciation between October 1999 and end-2000, some of which has since been reversed.

Figure 1.
Figure 1.

Ghana: Inflation, Money, and the Exchange Rate

Citation: IMF Staff Country Reports 2001, 141; 10.5089/9781451814774.002.A001

Source: Ghana Statistical Service and International Financial Statistics.
Figure 2.
Figure 2.

Ghana: Real and Nominal Effective Exchange Rates, January 1990 - March 2001

Citation: IMF Staff Country Reports 2001, 141; 10.5089/9781451814774.002.A001

Sources: Ghanaian authorities; and Fund staff estimates.

C. Fiscal Developments

9. The government’s fiscal strategy in 2000 was to reduce the domestic debt stock by raising the domestic primary surplus and increasing asset sales. During the first half of the year, the authorities controlled cash expenditures, primarily by squeezing capital outlays. In March, parliament authorized higher levies on petroleum and in June the VAT rate was raised.7 At the time of the PRGF disbursement in August 2000, data for the first half of the year indicated that the programmed fiscal targets, including the domestic primary surplus of 4 percent of GDP and an overall deficit of 8 percent of GDP, were likely to be achieved.

10. In the event, a combination of large expenditure overruns (particular in the last quarter) and spiraling debt service costs led to a poor fiscal outturn for the year as a whole, even though domestic revenues exceeded program expectations (Table 4). Domestic capital and other recurrent outlays succumbed to pre-election spending pressures. In addition, the divestiture of Ghana Telecom did not materialize as planned, and aggregate privatization receipts fell well short of target. Substantial donor disbursements were delayed, partially due to setbacks in policy implementation (Table 1). All of these factors put pressure on domestic borrowing and intensified the vicious circle of rising domestic debt and higher interest costs.8 By end-2000, the overall cash deficit, including arrears clearance, amounted to almost 10 percent of GDP, and the associated recourse to domestic borrowing (8.8 percent of GDP) pushed the domestic debt stock to new heights (almost 29 percent of GDP).

11. Weakened fiscal management and control also led to the accumulation of substantial new domestic arrears. The public expenditure management system in Ghana, which is in the process of a major multi-year reform with World Bank assistance, came under severe strain during the last two years as fiscal problems intensified. The authorities had difficulties in tracking expenditures, and controlling payments and commitments. No audited aggregate accounts, reconciled with banking data, have been produced since 1999. As a result of budgetary pressures and weak control systems, expenditure arrears grew. The staff estimates that the stock of nonroad domestic payments arrears rose by at least 1.4 percent of GDP in 2000.9

12. Budgetary payments for external debt service also exceeded program estimates. This was partly a result of the depreciation of the cedi, and partly a consequence of the parastatals’ inability to service their government-guaranteed external debt as their financial situation weakened and guarantees were called. Owing to a severe shortage of foreign exchange, the government had amassed external payments arrears totaling US$89 million by end-2000.

D. Monetary and Financial Sector Developments

13. Annual broad money growth accelerated to 40 percent at end-2000, from 16 percent at end-1999, propelled by a 36 percent expansion in reserve money during the year (Table 5).10 Reserve money growth had been contained somewhat during the first three quarters by declines in official net foreign assets, but was ultimately dominated by a strong expansion of net domestic assets (Figure 5). For the year as a whole, central bank credit to government expanded by 6.6 percent of GDP, reflecting lax fiscal policy, aid shortfalls, and a desire to limit treasury bill issues as interest rates rose.

Table 3.

Ghana: Selected Economic and Financial Indicators, 1999-2005

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Sources: Ghanaian authorities; and Fund staff estimates and projections.

Based 2000 Program in EBS/00/160

Including capital outlays financed through external project aid and transfers to the local authorities.

In percent of broad money at the beginning of the period.

The large depreciation of the cedi in 2000 reduced the dollar value of GDP and created a sharp jump in foreign currency based items when expressed as a share of GDP.

Including official grants.

Table 4a.

Ghana: Central Government Budgetary Operations and Financing, 1999-2005 1/

(In billions of cedis, unless otherwise specified)

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Sources: Ghanaian authorities; and Fund staff estimates and projections.

Above the line data for 2000 and 2001 are presented on a cash basis as the arrears build up is not reflected in expenditures.

Before assumption of TOR debt; deficit and domestic debt will increase upon assumption of TOR debt.

Cash amortization adjusted to accrual basis to incorporate US$89 million in debt service arrears at end-2000 valued at 7048 cedi to the US dollar.

Table 4b.

Ghana: Central Government Budgetary Operations and Financing, 1999-2005 1/

(In percent of GDP, unless otherwise specified)

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Sources: Ghanaian authorities; and Fund staff estimates and projections.

Above the line data for 2000 and 2001 are presented on a cash basis as the arrears build up is not reflected in expenditures.

Before assumption of TOR debt; deficit and domestic debt will increase upon assumption of TOR debt

Cash amortization adjusted to accrual basis to incorporate US$89 million in debt service arrears at end-2000 valued at 7048 cedi to the US dollar.

Table 5.

Ghana: Monetary Survey, 1999-2005

(In billions of cedis, unless otherwise specified; end of period)

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Sources: Ghanaian authorities; and Fund staff estimates and projections.

New definition of Bank of Ghana net foreign assets begins in December 2000. End 2000 net foreign assets was -148 million US dollars according to the previous definition.

Based on EBS/00/160. Program targets for 2000 have been adjusted according to the new definition of net foreign assets.

Before restructuring of TOR’S debt

Including foreign currency deposits.