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© 2004 International Monetary Fund
July 2004
IMF Country Report No. 04/210
Ghana: Second Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Ghana
In the context of the second review under the Poverty Reduction and Growth Facility and request for a waiver of nonobservance of performance criteria with Ghana, the following documents have been released and are included in this package:
the staff report for the second review under the Poverty Reduction and Growth Facility and request for a waiver of nonobservance of performance Criteria, prepared by a staff team of the IMF, following discussions that ended on July 9, 2004, with the officials of Ghana on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 15, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of July 9, 2004 updating information on recent developments.
a Press Release summarizing the views of the Executive Board as expressed during the July 9, 2004 Executive Board discussion of the staff report that completed the review and request.
a statement by the Executive Director for Ghana.
The document listed below have been or will be separately released.
Enhanced Initiative for Heavily Indebted Poor Countries—Completion Point Document
Joint Staff Assessment of the Poverty Reduction Strategy Paper Progress Report
Letters of Intent sent to the IMF by the authorities of Ghana*
Memorandum of Economic and Financial Policies by the authorities of Ghana*
Technical Memorandum of Understanding*
Poverty Reduction Strategy Paper—Progress Report
*May also be included in Staff
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Front Matter Page
INTERNATIONAL MONETARY FUND
GHANA
Second Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria
Prepared by the African Department
(In consultation with other departments)
Approved by Siddharth Tiwari and Juha Kähkönen
June 15, 2004
Discussions for the second review under the Poverty Reduction and Growth Facility (PRGF) arrangement, and to finalize preparations for bringing Ghana to the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, were held in Accra during April 8–20, 2004. Program discussions continued in Washington during April 23–29.
The staff team comprised Mr. Bredenkamp (Head), Messrs. York and Mathisen (AFR), Mr. Kinoshita (FAD), Messrs. Mansilla and Choudhury (April 12–20) (PDR), and was assisted by Ms. Muttardy (resident representative). The mission liaised with parallel teams from the World Bank and the Multi-Donor Budget Support group.
Ghana’s three-year PRGF arrangement was approved on May 9, 2003 in the amount of SDR 184.5 million (50 percent of quota). The first review of the program was completed on December 17, 2003. Upon completion of the second review, Ghana will be eligible to draw an amount equivalent to SDR 26.53 million (7.1 percent of quota).
This report covers the second PRGF review; it will be accompanied by a Joint Staff Assessment of the Poverty Reduction Strategy Paper annual progress report, the HIPC completion point document, and a report on a noncomplying disbursement.
The authorities have agreed to publish the staff report and the letter of intent. The principal authors of the report are Hugh Bredenkamp and Robert York.
Contents
Executive Summary
I. Introduction
II. Recent Developments and Program Performance
III. Policy Discussions
A. Fiscal Policy
B. Public Expenditure Management
C. Public Enterprise Reform
D. Monetary, Financial Sector and Exchange Rate Policies
E. Private Sector Development and Trade Policy
F. External Financing, Capacity to Repay the Fund, and Program Risks
IV. Staff Appraisal
Text Boxes
1. Structural Conditionality, 2004–05
2. Fiscal Slippage During Recent Election Years
3. Petroleum Pricing in Sub-Saharan African Countries
4. Sensitivity of the 2004 Budget to Oil Prices
Figures
1. Bank of Ghana’s Index of Economic Activity, February 2000–December 2003
2. Consumer Price Inflation, June 1999-April 2004
3. Nominal and Effective Exchange Rates, January 1991–March 2004
4. Main External Indicators, 1996–2008
5. Central Government Finances
6. Reserve Money and Components, 1998:Q4-2004:Q4
7. Treasury Bills Rates and Open Market Operations, January 1997-April 2004
8. Terms of Trade and the Real Effective Exchange Rate, 1990–2004
Tables
1. Quantitative Performance Criteria and Benchmarks, PRGF Arrangement, 2003
2. Status of Structural Performance Criteria and Benchmarks for the Second Review under the PRGF Arrangement
3. Selected Economic and Financial Indicators, 2000–08
4a. Central Government Budgetary and Financing 2000–2008 1/
4b. Central Government Budgetary and Financing, 2000–2008 1/
5. Monetary Survey
6. Balance of Payments, 2000–2008
7. Public Expenditure Management AAP Indicators
8. Revised Schedule of Disbursements Under the PRGF Arrangement, 2003–06
Appendices
I. Letter of Intent
Attachment I: Memorandum of Economic and Financial Policies Of the Government of Ghana for 2004–05
Table I.1 Quantitative Performance Criteria and Benchmarks, PRGF Arrangement, 2004
Table 1:2 Prior Actions Structural Performance Criteria and Benchmarks For 2004–05
Attachment II: Technical Memorandum of Understanding
II. Relations with the Fund
III. IMF-World Bank Relations
IV. Statistical Issues
V. Core Statistical Indicators
VI. Work Program
Executive Summary
Overview and recent developments
Economic performance has strengthened alongside improvements in macroeconomic policies. GDP growth (at over 5 percent) exceeded program expectations, inflation has fallen to just above single digits, and the international reserve position comfortably exceeds program targets.
All but one of the quantitative performance criteria for the second review were observed. Efforts to consolidate the fiscal position continued, and there was no net domestic financing of the budget in 2003, implying a sharp reduction of domestic debt relative to GDP. A “fiscal dividend” has already begun to emerge, with a sharp decline of nominal interest rates since mid-2003.
Progress in structural policies was generally satisfactory, with the important exception of petroleum pricing. The increases in retail petroleum prices required in early 2004 were not implemented, and the government decided against any adjustment ahead of the general election in December, citing concerns that this could trigger social and political instability. The resulting subsidies have significant implications for the 2004 budget.
Economic policies in the period ahead
In light of the favorable outcomes over the past year, the key objectives of the program have been retained or strengthened, albeit subject to increased risk associated with rising world oil prices. Growth is likely to be at least as strong as in 2003, and inflation is on track to reach single digits by the end of the year.
The fiscal stance remains anchored to achieving the authorities’ domestic debt reduction target. Given the unplanned petroleum subsidies, this requires government to trim nonpriority expenditures equivalent to 0.6 percent of GDP in 2004. While the domestic debt repayment target will have to be scaled back if world oil prices are significantly higher than programmed, a positive repayment is still likely under plausible “high oil price” scenarios. Further steps are planned to strengthen public financial management.
Recognizing the clear need for a more effective institutional framework for setting petroleum prices, the authorities are committed under the program to remove government from the price-setting process. Under the new regime, oil marketing companies will be free to set petroleum prices according to a prescribed formula without prior authorization from any public entity. This regime will be enshrined in a comprehensive petroleum sector deregulation bill later in 2004, and implemented in early 2005 as a condition for the third review.
The program includes steps to improve the financial performance of the major public enterprises. Their balance sheets will be cleared of inter-enterprise arrears and some other longstanding liabilities to clarify their underlying financial position. Monitorable financial performance plans will be established, backed by a range of measures to cut costs and improve service delivery. For the public utilities, the government is committed to allowing the continuation of full cost recovery pricing.
With a focus on promoting private sector development, the authorities plan an extensive array of new legislation in the year ahead, covering companies law, insurance regulation, credit information, private savings schemes, and money laundering. They will also continue to implement the strategy to strengthen the capital and management of Ghana Commercial Bank.
Main issues raised in the staff appraisal
The decision to rule out an adjustment of petroleum prices this year is regrettable. But the staff recognizes that if, in a tense pre-election period, a price adjustment were to undermine social stability, the economic gains achieved so far could be jeopardized. In view of the authorities’ willingness to find expenditure savings to help fund the subsidy bill, and to adopt a fundamental reform of the petroleum pricing regime, the staff believes their program warrants continued Fund support.
It is vital, however, that the new petroleum pricing regime be implemented on schedule, so as to insulate future budgets against fluctuations in world oil prices. The program provides for no further Fund disbursements until this reform is implemented.
The central bank is urged to adhere to its target of bringing inflation down to single digits by end-2004. As it refines its monetary instruments, it should also begin to reduce the secondary reserve requirements on banks, so that lower government debt can “crowd in” private sector credit, as the program envisaged.
The staff is unconvinced by the authorities’ arguments for taking an equity stake in the Volta Aluminum Company, and is concerned at the serious financial risks this could entail. It is important that the authorities adhere to their commitment to complete the due diligence and consult with the Fund before making a final decision on this issue.
Staff supports the authorities’ request for completion of the second review and waivers of nonobservance of one quantitative and two structural performance criteria, and disbursement of the third loan under the PRGF arrangement in an amount equivalent to SDR 26.35 million.
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Press Release No. 04/142
FOR IMMEDIATE RELEASE
July 9, 2004
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
