Ghana: Staff Report for the Article IV Consulation 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—Supplementary Information

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.

1. In light of additional data on inflation that have become available since the staff report was issued, the authorities have proposed modifications to the macroeconomic framework and some of the quantitative performance criteria set out in their letter of intent of March 31, 2003. These modifications are described in the attached addendum to the letter of intent (Attachment I). This supplement reports on the latest inflation data and provides a staff assessment of the modifications to the authorities’ program.

Background

2. As noted in the staff report, the consumer price index (CPI) increased in February 2003 by 12.8 percent over the preceding month, raising the 12-month inflation rate from 16.3 percent in January to 29.4 percent in February. Inflation had been expected to rise in February, as a result of the government’s decision to increase retail petroleum prices by an average 90 percent, but by much less than the data show. Taking into account the experience of the last major adjustment in petroleum prices (in February 2001, when the average product price was increased by about 60 percent), the forecast was for a CPI increase of about 3 percent in February 2003. The outturn therefore exceeded expectations by over 9 percentage points. The disaggregated CPI data showed that, while the largest price increases were in categories affected directly or indirectly by petroleum prices, there were also unusually large adjustments across all the major components of the index.

3. The authorities interpreted the jump in prices in February as a one-time realignment, as traders throughout the economy marked up their prices in response to the larger-than-anticipated hike in petroleum prices. In their view, the impact of the petroleum price shock was proportionately greater this time than it had been two years previously because people had become accustomed in the intervening period to relatively low and stable rates of inflation.1

4. Since the staff report was issued, data for March have become available, and show a sharp fall in the monthly inflation rate, to 2.5 percent. The 12-month rate rose slightly, to 29.9 percent. The monthly increase was only about one percentage point higher than had been assumed in the program. This outcome tends to support the authorities’ view that the February CPI increase represented a “level adjustment” rather than a shift to a higher underlying rate of inflation.2 It is also telling that the exchange rate has shown no signs of weakening, as might have been expected if inflation expectations had increased markedly. As of April 15, the cedi had depreciated by only 3 A percent against the U.S. dollar since the beginning of 2003.

Modifications to the program

5. While there is a good case for believing that the underlying inflation rate for the remainder of the year may stay broadly in line with program assumptions, it is clear that the level of prices in 2003 will be significantly higher than programmed. This has two principal implications. First, the existing program target of reaching single-digit (9 percent) inflation by end-2003 is no longer realistic, and the related monetary targets need to be reconsidered. Second, maintaining the nominal levels of public expenditure approved in the 2003 budget would unduly compress real spending levels, and disrupt the government programs on which effective implementation of the Ghana Poverty Reduction Strategy (GPRS) depends.3 In the view of the staff and the authorities, therefore, an adjustment to components of the nominal expenditure framework is warranted.

6. As regards inflation, the proposed target for the 12-month rate in December 2003 has been revised up from 9 percent to 22 percent (Table 1). This revision corresponds broadly to the overrun in inflation observed during the first quarter of 2003, and assumes that prices evolve approximately in line with the original program for the rest of the year.4 The achievement of single-digit inflation would thus be deferred by only a few months (i.e., until the February 2003 CPI increase drops out of the 12-month growth rate). The original inflation targets for end-2004 and beyond have consequently been retained.

Table 1.

Ghana: selected Economic and Financial Indicators, 2000-08

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Sources Ghanaian authorities; and Fund stair estimates and projections.

As in EBS/03/42.

In percent of broad money at the beginning 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

7. In order to ensure that inflation in the coming months remains subdued, the authorities have decided to make only a modest upward revision to the original targets for monetary growth. The modified program provides for an expansion of both broad money (M2) and reserve money of around 25 percent in 2003, compared to 21 percent in the original program (Table 3). The underlying assumption is that the sharp price rises in the first quarter of 2003 contributed to a necessary erosion of excess real money balances that had emerged in late 2002.5 The revised monetary targets are therefore only partially accommodating with respect to the higher level of prices. Bank credit to the private sector is set to grow by around 16 percent in real terms, down from 20 percent in the original program.

Table 2a.

Ghana: Central Government Budgetary Operations and Financing 1999-2008 1/

(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 expenditures. Prior to 2001 domestic capital expenditure contained a balancing item.

As in EBS/03/42.

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

From 2002 subvented agency expenditure for wages and salaries and goods and services are subsumed 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 80 percent of E-HIPC relief to poverty spending and 20 percent to domestic debt reduction, projections for proverty spending from 2004 onwards are not available.

Table 2b.

Ghana: Central Government Budgetary Operations and Finfancing. 1999-2008 1/

(In percent of GDP, unless otherwise specified)

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Source: Gbanaian 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.

As in EBS/03/42.

Prior to 2002, non tax revenue included positive balance on commited accounts outside the consolidated fund. From 2002 onwards, this is treated seperately as unspent releases.

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

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

Projected discrepancy in 2003 reflects float.

The GPRS dedicates 8O percent of E-HIPC relief to poverty spending and 20 percent to domestic debt reduction. Projections for poverty spending from 2004 onwards are not available.