Ghana: Fourth Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria and for Extension of the Commitment Period

This paper examines Ghana’s Fourth Review Under the Poverty Reduction and Growth Facility and Requests for Waiver of Performance Criteria and for Extension of the Commitment Period. Most end-August 2001 quantitative performance criteria were met, but waivers are requested for nonobservance of two structural performance criteria and the ceilings on short-term official external debt and the stock of arrears in the road sector. The authorities’ program for 2002 seeks to consolidate on the macroeconomic gains of 2001, accelerate structural reforms, and create the conditions for faster growth and poverty reduction.

Abstract

This paper examines Ghana’s Fourth Review Under the Poverty Reduction and Growth Facility and Requests for Waiver of Performance Criteria and for Extension of the Commitment Period. Most end-August 2001 quantitative performance criteria were met, but waivers are requested for nonobservance of two structural performance criteria and the ceilings on short-term official external debt and the stock of arrears in the road sector. The authorities’ program for 2002 seeks to consolidate on the macroeconomic gains of 2001, accelerate structural reforms, and create the conditions for faster growth and poverty reduction.

I. Introduction

1. A mission visited Accra from October 17-31, 2001 to conduct discussions for the fourth review under the Poverty Reduction and Growth Facility (PRGF) arrangement.1 In collaboration with World Bank staff, the mission also prepared a joint assessment of Ghana’s PRSP Preparation Status Report, and a document proposing a decision point for Ghana under the enhanced HIPC Initiative (both forthcoming).

2. On May 3, 1999, the Executive Board approved a three-year arrangement under the PRGF in the amount of SDR 155 million (EBS/99/57). During the third review of the arrangement, which was completed on June 27, 2001 (EBS/01/88), Executive Directors noted the difficult economic situation inherited by the incoming government, commended the actions that had been taken to begin restoring macroeconomic stability, and expressed support for the authorities’ economic program for 2001. Directors endorsed, in particular, the planned fiscal tightening, in order to ease the pressure on interest rates and reduce the burden of domestic debt interest on the budget, thereby creating room for increased social and other priority spending. They also emphasized the importance of a firm monetary stance to bring inflation down and support exchange rate stability. Directors urged the authorities to implement vigorously the strengthened systems for public expenditure control, move toward full cost recovery in the energy and public utility sectors, take steps to develop an efficient interbank foreign exchange market, and develop a bold and clearly articulated privatization program. They also attached high importance to the work underway to improve the accuracy and timeliness of data provision to the Fund.

3. On June 27, 2001, the Executive Board also discussed a report on a noncomplying PRGF disbursement, arising from the nonobservance of a performance criteria on new nonconcessional external borrowing contracted or guaranteed by the government or the Bank of Ghana, and the existence of external payments arrears that had previously been reported as cleared. Ghana was asked to repay the noncomplying disbursement of SDR 26.752 million be end-2001, which it did. A further report on noncomplying disbursements (EBS/02/9), relating to the misreporting of monetary data, is scheduled for Board discussion on February 4, 2002. In this case, management has proposed waivers for the nonobservance of the performance criteria on reserve money and short-term external debt, on the grounds that the objectives of the program had nevertheless been preserved. The extensive work that was required to recompile Ghana’s monetary data in light of the reporting problems necessitated a delay in completing the PRGF review and decision point under the enhanced HIPC Initiative, which had originally been planned for December 2001.

4. In the attached letter to the Managing Director dated January 31, 2002 (Appendix I), the authorities set out their economic program for 2002 as the basis for conclusion of the fourth review, and request waivers for the nonobservance of (a) end-August 2001 quantitative performance criteria on the stock of short-term external debt outstanding contracted or guaranteed by the government or the Bank of Ghana and the stock of government road sector arrears, and (b) end-August structural performance criteria on completion of an audit of 2000 domestic payments arrears, and completion of an agreement with creditors on the restructuring of the debt of the Tema Oil Refinery. In order to allow time for completion of the final review and disbursement under the arrangement, the authorities request an extension of the three-year commitment period, from May 2, 2002 until November 30, 2002.

II. Performance Under the 2001 Program

A. Macroeconomic Performance

5. Following a severe terms of trade shock and uneven macroeconomic management in 1999–2000, the authorities succeeded in stabilizing the main macroeconomic indicators in 2001. Having peaked at 42 percent in March 2001, the twelve-month CPI inflation rate fell to 21 percent in December 2001, compared with a program target of 25 percent (Figure 1). The cedi, which lost half of its value against the U.S. dollar during 2000, depreciated by only about 3½ percent in nominal terms in 2001 (Figure 2). The gross reserve position of the Bank of Ghana continued to recover, from US$264 million (1 month of imports) at end-2000 to a projected US$352 million (1.2 months of imports) at end-December 2001. These developments are reported by financial market participants to have been important factors in restoring business confidence in Ghana. The quantitative performance criteria for end-August 2001 on net domestic assets of the Bank of Ghana, the net domestic financing and domestic primary balance of government, and net international reserves of the Bank of Ghana were all observed, with comfortable margins (Table 1).

Figure 1.
Figure 1.

Ghana: Inflation, Money, and Exchange Rate

Citation: IMF Staff Country Reports 2002, 038; 10.5089/9781451814781.002.A001

Sources: Ghana Statistical Service; and IMF, International Financial Statistics.
Figure 2.
Figure 2.

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

Citation: IMF Staff Country Reports 2002, 038; 10.5089/9781451814781.002.A001

Sources: Ghanaian authorities; and Fund staff estimates.
Table 1.

Ghana: Quantitative Performance Criteria and Benchmarks, PRGF Arrangement, 20011/

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

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The definitions of line items and terminology are elaborated in the Technical Memorandum of Understanding (TMU).

Before application of adjusters.

After application of adjusters.

Excluding domestic financing due to the government’s takeover of debt owed by TOR.

Based on fixed exchange rate of 7205 cedi/$, the rate prevailing at end-March 2001.

Value at end of month indicated. Adjusted for cumulative differences between actual and projected amounts of program support, divestiture receipts and debt service paid, with an upside cap

Adjusted for cumulative differences between actual and projected amounts of program support, divestiture receipts and debt service paid, with a downside cap of $50 million, as explained in t

End-June 2001 figure nets payments made in the second quarter against new arrears arising from unbudgeted commitments in the first quarter.

Reserve money was a performance criterion with respect to the December 1999 and August 2000 performance criterion targets.

The March 2001 number was reported incorrectly as zero in EBS/01/88.

6. The authorities maintained a tight rein on government finances in cash terms. Strict limits on cash expenditures resulted in substantially lower-than-programmed recourse to domestic financing through August 2001 (Table 4). This was achieved despite a somewhat larger wage settlement for civil servants than had been planned, a modest shortfall in tax revenues, and lower-than-expected program grants.

7. Discipline at the commitment stage was less impressive, however. The new expenditure commitment control system—which the program had envisaged would be in place by end-July 2001 (Table 2)—became operational only in September, due to poor cooperation from spending ministries. As a result, new domestic expenditure arrears totaling 0.8 percent of GDP were accumulated during January-August.2 In addition, the government withheld around 1 percent of GDP in statutory transfers due to the District Assemblies Common Fund (DACF), the Education Trust Fund (ETF), and the Social Security and National Insurance Trust (SSNIT). After adjusting for the government’s failure to pay all its bills, the underlying budgetary position during January-August 2001—taking into account the clearance of more pre-2001 arrears than planned and excess program financing—was somewhat weaker than programmed, as shown in Box 1.

January-August 2001 Fiscal Outturn Adjusted for Arrears

(percent of 2001 GDP)

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Source: Table 4b
Table 2.

Ghana: Structural Performance Criteria and Key Benchmarks for 2001 Program

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8. On the revenue side, a number of measures adopted in the 2001 budget had lower-than-expected yields, in some cases because of delays or modifications in their implementation. On petroleum, in particular, the specific duties scheduled to take effect on September 1 were not put in place until October 31. The VAT and trade taxes performed well, however, so that total revenues for 2001 are now conservatively projected to come in only about 3½ percent below their programmed level.

9. For the final quarter of 2001, the authorities prepared detailed expenditure ceilings that would keep the domestic primary surplus for 2001 as a whole in line with the original program target of 4 percent of GDP. The ceilings assumed partial liquidation of the arrears amassed during the first three quarters, and no accumulation of new arrears. Despite shortfalls in divestiture receipts (see below), it is now expected that net domestic financing for 2001 will be less than 1 percent of GDP, down from 8½ percent of GDP in 2000.

10. Fiscal prudence supported a firm monetary stance. Net government repayments to the Bank of Ghana, coupled with a return to positive real interest rates, reduced the pace of reserve money expansion by almost half, from 53 percent in the twelve months ended December 2000 to a projected 27 percent in December 2001.3 The annual inflation rate was similarly reduced by roughly half over the same period, allowing the central bank to ease nominal interest rates during the second half of the year (Figure 4). While tight monetary policy led to some real appreciation of the exchange rate during 2001, the real effective exchange rate remained well below pre-2000 levels, thus preserving the necessary adjustment that had occurred in response to the 1999–2000 terms of trade shock (Figure 2). Conditions in the banking system were broadly stable during the first half of 2001 (the latest period for which data were available), with most banks showing unchanged or rising capital adequacy ratios, and modest increases in provisioning for bad debts. The launch of inflation-indexed bonds in September 2001—intended as a means to diversify the array of funding instruments and reduce borrowing costs—proceeded smoothly, albeit with complaints from some banks that the real rates of return being offered were artificially low.4

Figure 3.
Figure 3.

Ghana: Central Government Finances, 1996–2006 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2002, 038; 10.5089/9781451814781.002.A001

Sources: Ghanaian authorities; and Fund staff estimates and projections.1/ Projections before assumed HIPC debt relief.2/ Including guarantees and short-term external debt. External debt stock is evaluated at the period-average exchange rate.
Figure 4.
Figure 4.

Ghana: Treasury Bill Rates, January 1997 - December 2001

(In percent)

Citation: IMF Staff Country Reports 2002, 038; 10.5089/9781451814781.002.A001

Source: Ghanaian authorities; IMF, International Financial Statistics; and Fund staff estimates.

B. Structural Reforms

11. Progress was made on structural reforms, albeit in many cases with delays:

  • Of the two measures established as structural performance criteria for end-August 2001, the restructuring of the bank debt of Tema Oil Refinery was completed with a delay of two weeks. The other measure—completion of the audit of 2000 domestic arrears and a plan for their liquidation—is not now expected to be completed until March 2002, since the donor-funded consultants conducting the audit determined that the necessary work was considerably more extensive than anticipated. The auditors have, however, provided an interim report, which the authorities have supplemented with their own audit of 2001 arrears (as of August 2001), and this information has been used to formulate a plan for arrears clearance.5 Accordingly, waivers are being sought for these performance criteria.

  • The launch of a plan for moving toward full cost recovery in the electricity and water sectors, originally planned for end-September 2001, was held up by an extensive public consultation process which was completed only in November 2001.

  • The financial and management audits of 11 (originally nine) major public enterprises were completed in December 2001, three months behind schedule.

  • A delay on the part of the Council of State in constituting the Divestiture Implementation Committee—the body charged with planning and carrying out the sale of state assets with full public disclosure—prevented progress on divestiture. The Committee is now in place, and has begun work on the “fast track” list of assets that had been planned for sale in 2001.

  • The phased elimination of direct central bank sales of foreign exchange to importers, scheduled to begin November 1, 2001, has also been delayed. The new Governor of the Bank of Ghana is in the process of consulting with banks on the steps needed to create a functioning interbank market, and would prefer to complete these consultations before committing to a particular schedule for action.6

  • The submission to parliament of a revised Bank of Ghana law, clarifying the objectives of the central bank and strengthening its independence, was completed on schedule in August, and the law was passed in December 2001. As envisaged, this measure was reinforced by the Bank of Ghana’s divestiture in December 2001 of all remaining shareholdings in financial institutions that it supervises.7

III. Medium-Term Macroeconomic Strategy

12. Ghana’s medium-term macroeconomic strategy is intended to take the economy out of the trap of rising domestic debt, interest costs, and escalating inflation, which have hindered private sector development and consumed public resources that the government needs to improve the provision of social services and public infrastructure. This broad approach was endorsed in the course of the public discussions during 2001 on the Ghana Poverty Reduction Strategy (GPRS), and the specific macroeconomic goals have been designed as an integral part of the strategy to reduce poverty in Ghana.

13. The medium-term fiscal targets will generate domestic primary surpluses sufficient to cover all domestic debt service, approximately halving the ratio of domestic public debt to GDP by 2003 from its end-2000 level of 29 percent of GDP (Table 4). Reduced reliance on the banking system for budgetary and parastatal financing, combined with positive real interest rates, are expected to curtail monetary growth and bring inflation down to single digits by end-2003. The framework allows for rising noninterest government spending as a share of GDP,8 as well as substantial expansion of credit to the private sector in real terms (annual increases of 10-15 percent), in support of the targeted growth in real GDP of 5 percent from 2003 (Table 3).

Table 3.

Ghana: Selected Economic and Financial Indicators, 2000–2006

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

Based on 2001 and 2002 program in EBS/01/88.

Including capital outlays financed through external project aid and transfers to the local authorities, and HIPC-financed expenditures.

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.

IV. Main Elements of the 2002 Program

A. The Macroeconomic Framework

14. In anticipation of possible debt relief under the enhanced HIPC Initiative, the authorities have defined two policy scenarios for 2002: (i) a baseline, which defines what the macroeconomic framework would be in the absence of HIPC relief, assuming that traditional mechanisms for debt relief could have been exercised, and (ii) a scenario incorporating the additional debt relief available under the enhanced HIPC Initiative (see Box 2). The fiscal frameworks corresponding to the two scenarios are shown in Tables 4a. and b., and Tables 4c. and d., respectively. Both scenarios target a reduction in the 12-month inflation rate to 13 percent by end-2002, and a modest acceleration in real GDP growth from the 4 percent expected in 2001. Although the outlook for growth in Ghana is not likely to be substantially affected by the deterioration in the world economic environment, since the terms of trade are expected to move in Ghana’s favor, the authorities wished to be prudent and hence have revised the projected GDP growth rate for 2002 down from 5 to 4½ percent.

Table 4a.

Ghana: Central Government Budgetary Operations and Financing, 1999–20061/(PRE-HIPC)

(In billions of Cedis, unless otherwise specified)

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

From 2001 above the line data for domestic recurrent and capital expenditure are presented on a cash basis (payment vouchers); arrears not reflected in line expenditure. Prior to 2001 domestic capital expenditure contained a balancing item.

From 2002 subvented agency expenditure for wages and salaries and goods and services are subsumed under their respective line items

Before assumption of TOR debt in fiscal data; Domestic debt stock estimates for end-2001 include TOR bonds.

Table 4b.

Ghana: Central Government Budgetary Operations and Financing, 1999–20061/(PRE-HIPC)

(In percent of GDP, unless otherwise specified)

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

From 2001 above the line data for domestic recurrent and capital expenditure are presented on a cash basis (payment vouchers); arrears not reflected in line expenditures. Prior to 2001 domestic capital expenditure contained a balancing item.

From 2002 subverted agency expenditure for wages and salaries and goods and services are subsumed under their respective line items.

Before assumption of TOR debt in fiscal data; Domestic debt stock estimates far end-2001 include TOR bonds.