Ghana: Staff Report for the 2003 Article IV Consultation, and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries

This paper assesses Ghana’s 2003 Article IV Consultation, and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Program implementation in 2002 was mixed. Further gains were made on inflation, and the reserve accumulation target was met. In view of the strength of the authorities’ program, including the prior actions to be taken, the IMF staff supports the request for a three-year PRGF arrangement in the amount of SDR 184.5 million, and for additional interim HIPC relief.

Abstract

This paper assesses Ghana’s 2003 Article IV Consultation, and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and for Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC). Program implementation in 2002 was mixed. Further gains were made on inflation, and the reserve accumulation target was met. In view of the strength of the authorities’ program, including the prior actions to be taken, the IMF staff supports the request for a three-year PRGF arrangement in the amount of SDR 184.5 million, and for additional interim HIPC relief.

I. Introduction

1. IMF missions visited Accra during December 2002 and January 2003 to conduct discussions on the 2003 Article IV consultation, the joint staff assessment of the poverty reduction strategy paper, and a program that could be supported by a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). An earlier mission in September 2002 was unable to conclude the fifth and final review under the 1999-2002 PRGF arrangement, owing to significant policy slippages relating to civil service wage overruns, and nonimplementation of petroleum price increases and a new revenue measure.1 As a result, that arrangement was allowed to expire on November 30, 2002 without disbursement of the final tranche.

2. The 2001 Article IV consultation with Ghana was concluded on June 27, 2001 (EBS/01/88; 6/14/01). At that time, Directors stressed the importance of fiscal tightening to lower the domestic interest burden on the budget, thereby making room for higher social and other priority spending, and to help bring about a more rapid decline in inflation. Directors noted the importance of moving toward full cost recovery in the energy sector, with regular automatic price adjustments to avoid a recurrence of the large quasi-fiscal deficits incurred in 2000. In concluding the fourth review under the PRGF arrangement on February 22, 2002 (EBS/02/16; 2/1/02), Directors noted the progress the authorities had made in stabilizing the macro-economy in 2001. They urged the rigorous implementation of structural reforms, including a strengthening of public expenditure management, implementation of a utility price reform plan, and progress with divestiture and in establishing an interbank foreign exchange market.

3. On May 16, 2002, Ghana signed an agreement with Paris Club creditors on the provision of debt relief and rescheduling in accordance with the terms of Ghana’s decision point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) (EBS/02/20; 2/5/02). This was preceded by a Consultative Group meeting in April, at which donors agreed to fill the residual financing gap identified for 2002. In late 2002, discussions began on the components of a Multi-Donor Budget Support (MDBS) package in support of implementation of the Ghana Poverty Reduction Strategy (GPRS), and with the World Bank on the broad elements of a policy-based program of assistance covering the period 2003-05.

4. Ghana’s statistical data remain weak. The quality of fiscal data has improved recently, with more consistent use of procedures for reconciliation with banking data, but the inability of the present payroll system to track all components of wage expenditure is a continuing vulnerability. Recent work by a peripatetic Fund advisor to the Ghana Statistical Service (GSS) has indicated that, as a result of a methodological change in the compilation of the consumer price index (CPI) in 1999, the level of the CPI, and the national accounts at current prices derived from it, may have been substantially underrecorded for the period since 1999. Problems with the availability of balance of payments and monthly trade data also persist. During the past 12 months, Ghana has received technical assistance from FAD, MAE, and STA in the areas of public expenditure management (including by way of a long-term resident advisor), tax administration, financial sector statistics and monetary reform, and national accounts. These efforts will be reinforced under the proposed new three-year arrangement.

5. In the course of the discussions, the staff also met with donors, nongovernmental organizations, trade unions, think tanks, private sector entities, and the press. These outreach efforts covered a broad range of topics, including macroeconomic policies, the constraints on private sector-led growth, microfinance, and labor reforms.

II. Recent Developments and Program Performance

6. Performance under the 2002 program was mixed; there were further gains on inflation and the rebuilding of foreign reserves, and progress on parts of the structural reform agenda, but significant weaknesses persisted in budget implementation and parastatal finances. Twelve-month inflation (based on current CPI data)2 continued to fall, from 21 percent at end-2001 (down from a peak of 42 percent in March 2001) to 15.2 percent at end-2002 (compared with the program target of 13 percent). The pace of monetary expansion exceeded program targets, however, driven in part by heavy government borrowing (Figure 5 and Table 6). Larger-than-normal inflows of foreign exchange from the prefinancing of the cocoa crop contributed to an acceleration in money growth in the final quarter of 2002. The cedi depreciated by 14.7 percent against the U.S. dollar in the 12 months ended December 2002 (Figure 1), broadly in line with inflation, while gross international reserves recovered to nearly two months of imports despite a shortfall in external support. While data on GDP growth in 2002 are not yet available, the stimulus from a sharp improvement in the terms of trade and a pickup in credit to the private sector suggest that the 4½ percent growth rate for the economy envisaged under the program may have been achieved.

Figure 1.
Figure 1.

Ghana: Inflation, Broad Money (M2), and the Exchange Rate, December 2002

Citation: IMF Staff Country Reports 2003, 133; 10.5089/9781451814842.002.A001

Source: Ghana Statistical Service; and Bank of Ghana.
Figure 2.
Figure 2.

Ghana: Real and Nominal Effective Exchange Rates, January 1990 - November 2002

Citation: IMF Staff Country Reports 2003, 133; 10.5089/9781451814842.002.A001

Sources: Ghanaian authorities; and Fund staff estimates.
Figure 3.
Figure 3.

Ghana: Central Government Finances, 1996-2008

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 133; 10.5089/9781451814842.002.A001

Sources: Ghanaian authorities; and Fund staff estimates and projections.1/Including guarantees and short-terra external debt. External debt stock is evaluated at the period-average exchange rate and valued in nominal terms, before relief under the enhanced HIPC Initiative.
Figure 4.
Figure 4.

Ghana: Treasury Bill Rates, Reserve Money, and Open Market Operations

Citation: IMF Staff Country Reports 2003, 133; 10.5089/9781451814842.002.A001

Sources: Bank of Ghana; and fund staff estimates.
Figure 5.
Figure 5.

Ghana: Reverse Money and Broad Money (M2), 1998:Q4-2003:Q4

Citation: IMF Staff Country Reports 2003, 133; 10.5089/9781451814842.002.A001

Source: Bank of Ghana; and Fund staff estimates and projections.
Table 1.

Quantitative Performance Criteria and Benchmarks, PRGF Arrangement, 2002 1/

(Cumulative flows from beginning of calendar year to end of month indicated, unless otherwise indicated)

article image

The definitions of line items and terminology are elaborated in the technical memorandum of understanding (TMU) in EBS/02/16 (2/1/02).

Before application of adjusters, as indicated in EBS/02/16.

After application of adjusters.

NIR and reserve money affected by reclassification of accounts and net foreign assets (NFA) by reclassification and new definition from July 2002 onward. As a result, NIR declined by about $0.5 million, reserve money grew by about 02 billion, and NFA grew by about $2.5 million (¢20 billion) in July. The net effect on net domestic assets was a decline of about ¢20 billion in July.

Based on fixed exchange rate of ¢7,205 per U.S. dollar, the rate prevailing at end-March 2001.

Value at end of month indicated. Program targets adjusted for cumulative differences between actual and projected amounts of program support, public and publicly guaranteed debt service paid, and divestiture receipts with an upside cap of $75 million, as explained in the TMU in EBS/02/16.

Program targets adjusted for cumulative differences between actual and projected amounts of program support, public and publicly guaranteed debt service paid, and divestiture receipts with a downside cap of-$75 million, as explained in the TMU in EBS/02/16.

Debt service to be paid by Ghana after assumed HIPC relief in 2002.

Table 2.

Ghana: Structural Performance Criteria and Key Benchmarks for 2002 Program

article image
Table 3.

Ghana: Selected Economic and Financial Indicators, 2000-08

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

Based on MEFP of 1/31/02 (EB3/02/16).

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

Credit from deposit money banks to public enterprises and the private sector respectively.

Before domestic arrears clearance.

After domestic arrears clearance.

Including official grants.

Table 4a.

Ghana: Central Government Budgeury Qperations and Financing, 1999-08 1/

(In billions of cedis, unless otherwise specified)

article image
Sources: Ghanaiah 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 for reflected in line Expenditures. Prior to 2001 domestic capital expenditure contained a balancing item.

Priar to 2002 non tax revenue included positive balances on committed accounts outside the fund from 2002 onwards, this is treated separately as uspent releases.

From 2003 subvented agency expenditure for wages and salaries and goods and services subsamed under their respective line items.

Domestic debt stock estimates include TOR bonds issued in 2001 and 2003 but exclude government overdraft at BOG.

Projected discrepancy in 2003 reflects float.

The GPRS dedicates BO percent of E-HlFC relief to poverty spending and 20 percent to domestic debt reduction. Projections for poverty spending from 2004 onwards are not available.

Table 4b.

Ghana: Central Government Budgelury Operations and Financing 1999-08 1/

(In percent of GDP, unlessotherwise specified)

article image
Source. Ghananam 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 not refelcted in line expenditures. prior to 2001 domestic capital expenditure contained a balancig item.

prior to 2002 non tax revenue included positive balances on committed accounts outside the consolidated fund. From 2002 onwards, this is tyreated separately as unspent releases.

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

Domestic debt stock estimates include TOR bonds issued in 2001 and 2003 but excluded government overdraft at BOG.

Projected discrerpancy in 2003 reflects float.

The GPRS dedicates 80 percent of E-HIPC relief to poverty spending and 20 percent to domestic debt reduction. Projection for poverty spending from 2004 onwards are not available.