Ghana: Second Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria

The staff report for the Second Review Under the Poverty Reduction and Growth Facility on Ghana highlights economic developments and policies. 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. Progress in structural policies was generally satisfactory, with the important exception of petroleum pricing. Oil marketing companies will be free to set petroleum prices according to a prescribed formula without prior authorization from any public entity.

Abstract

The staff report for the Second Review Under the Poverty Reduction and Growth Facility on Ghana highlights economic developments and policies. 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. Progress in structural policies was generally satisfactory, with the important exception of petroleum pricing. Oil marketing companies will be free to set petroleum prices according to a prescribed formula without prior authorization from any public entity.

I. Introduction

1. During the first PRGF review, Executive Directors commended the authorities for the restoration of fiscal discipline and maintaining a monetary policy stance that held out the prospect of achieving single digit inflation in early 2004. They encouraged the authorities to build on this momentum to achieve the medium-term goals of the Ghana Poverty Reduction Strategy (GPRS). In this regard, they stressed the need to safeguard the gains in macroeconomic stabilization by addressing weaknesses in the finances of public enterprises. In particular, Directors urged the authorities to adjust petroleum, electricity and water prices promptly to maintain full cost recovery.1

II. Recent Developments and Program Performance

2. Real per capita incomes increased in 2003 at the fastest pace in a decade, as GDP growth rose to 5.2 percent, exceeding program expectations. The recent upturn is confirmed by the Bank of Ghana’s (BOG) index of economic activity (Figure 1). A near-record cocoa harvest was a major driver behind recent growth, and this reflects the favorable impact of good weather, improved crop management practices, and higher producer prices. The estimates for this year’s harvest have been revised upwards, implying the program assumption for GDP growth in 2004 (5.2 percent) may now be on the conservative side.2 The 12-month CPI inflation rate fell to 11.2 percent in April 2004, down from 23.6 percent at end-2003, as the effect of last year’s petroleum price hike dropped out (Figure 2).

Figure 1.
Figure 1.

Ghana: Bank of Ghana’s Index of Economic Activity, February 2000-December 2003 1/

Citation: IMF Staff Country Reports 2004, 210; 10.5089/9781451814897.002.A001

Source: Bank of Ghana.1/ The composite index is based on trade volumes, electricity consumption, tourist arrivals, formal sector employment, domestic VAT collection, port activity, credit to the private sector, as well as some other indicators of private sector activity.2/ Linear trend calculated using the least squares method.
Figure 2.
Figure 2.

Ghana: Consumer Price Inflation (total, food, and nonfood), June 1999-April 2004

(Twelve-months percent change)

Citation: IMF Staff Country Reports 2004, 210; 10.5089/9781451814897.002.A001

Sources: Ghana Statistical Service; Bank of Ghana; and Fund staff estimates.

3. The relative stability of the nominal exchange rate has probably helped dampen inflation expectations. Over the past year, the cedi depreciated by 4½ percent vis-à-vis the dollar, compared with more than 13 percent during 2002, and the real effective exchange rate has remained broadly stable (Figure 3). The shutdown of the Volta Aluminum Company (VALCO) affected exports and, combined with a rebound in imports stemming from strong domestic demand and higher aid flows, led to a widening of the current account deficit (excluding official transfers) to 3½ percent of GDP last year (Figure 4).

Figure 3.
Figure 3.

Ghana: Nominal and Effective Exchange Rates, January 1991-March 2004

Citation: IMF Staff Country Reports 2004, 210; 10.5089/9781451814897.002.A001

Sources: Ghanaian authorities; and Fund staff estimates.
Figure 4.
Figure 4.

Ghana: Main External Indicators, 1996-2008

Citation: IMF Staff Country Reports 2004, 210; 10.5089/9781451814897.002.A001

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

4. The satisfactory implementation of macroeconomic policies has provided a good basis for sustained growth and reducing inflation. The fiscal outcome for 2003 was broadly in line with program projections, with a small improvement in the domestic primary surplus (Table 4). The performance criterion on (zero) net domestic financing of the budget for last year was observed. This implied a sharp reduction in the burden of domestic debt relative to GDP to below 20 percent in 2003, from just over 26 percent a year earlier (Figure 5). Tax revenue collections, though slightly below expectations for 2003, exceeded 20 percent of GDP for the first time. Partial fiscal data for the first quarter of 2004 suggest that budget implementation remains on track. However, initial figures also suggest a somewhat larger-than-expected float from 2003, which will put additional pressure on the financing target for this year.3

Table 1.

Ghana: Quantitative Performance Criteria and Benchmarks, PRGF Arrangement, 2003 1/

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

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

Before application of adjusters, as indicated in the TMU.

After application of adjusters, as indicated in the TMU.

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.

Based on a fixed exchange rate of 8,504 cedis/$, the rate prevailing at end-December 2002.

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, and for higher-than-programmed oil prices, with an upside cap of $30 million, as explained in the TMU.

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, and for higher-than-programmed oil prices, with a downside cap of -$30 million, as explained in the TMU.

This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by Decision 12274-(00/123) of August 24, 2000 but also to commitments or contracted for which value has not been received, as specified in paragraph 15 of the TMU.

The term “debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by Decision 12274-(00/123) of August 24, 2000, as specified in paragraph 14 of the TMU.

This is a continuous criterion. The TMU stipulates the precise program definition of payment arrears.

Debt service to be paid by Ghana after projected HIPC relief in 2003.

Average from beginning of 2003 to end of month indicated, as explained in the TMU.

Table 2.

Ghana: Status of Structural Performance Criteria and Benchmarks for the Second Review under the PRGF Arrangement

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Table 3.

Ghana: Selected Economic and Financial Indicators, 2001-08

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

As in (IMF Country Report No./03/395).

Assumes government take-over of remaining TOR debt at start of 2003.

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

Credit from deposit money banks to public enterprises and the private sector respectively. The historical series have been revised to ensure consistency with the new banking supervision reporting form introduced in July 2003, which uses a residency rather than currency definition of foreign assets and liabilitiies.

Before domestic arrears clearance.

After domestic arrears clearance and including contingency funds.

Including official grants.

Table 4a.

Ghana: Central Government Budgetary Operations and Financing, 2001–2008 1/

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

From 2001 onward, above-the-line data for domestic recurrent and capital expenditure are presented on a cash basis (payment vouchers); arrears not reflected in line expenditures.

As in (IMF Country Report No./03/395).

Prior to 2002, nontax revenue included positive balances on committed accounts outside the consolidated fund.

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

Indicates scope for additional expenditure and tax cuts (if negative) or expenditure cuts and tax increases (if positive), in line with the GPRS goal of reducing the domestic-debt-GDP ratio in half by end-2005 from the end-2002 level.

Projected discrepancy in 2004 reflects float.

Domestic debt stock estimates exclude non-interest bearing perpetual BoG revaluation stocks.

The GPRS dedicates 80 percent of enhanced HIPC relief to poverty spending and 20 percent to domestic debt reduction. Projections for poverty spending from 2005 onward are not available.

Figure 5.
Figure 5.

Ghana: Central Government Finances, 1996-2008

(In percent of GDP)

Citation: IMF Staff Country Reports 2004, 210; 10.5089/9781451814897.002.A001

Sources: Ghanaian authorities; and Fund staff estimates and projections.1/ Including guarantees and short-term external debt. External debt stock is evaluated at the period-average exchange rate and assumes that Ghana reaches the completion point under the HIPC Initiative during 2004.
Table 4b.

Ghana: Central Government Budgetary Operations and Financing, 2001-2008 1/

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

From 2001 onward, above-the-line data for domestic recurrent and capital expenditure are presented on a cash basis (payment vouchers); arrears not reflected in line expenditures.

As in (IMF Country Report No./03/395).

Prior to 2002, nontax revenue included positive balances on committed accounts outside the consolidated fund.

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

Indicates scope for additional expenditure and tax cuts (if negative) or expenditure cuts and tax increases (if positive), in line with the GPRS goal of reducing the domestic-debt-GDP ratio in half by end-2005 from the end-2002 level.

Projected discrepancy in 2004 reflects float.

Domestic debt stock estimates exclude non-interest bearing perpetual BoG revaluation stocks.

The GPRS dedicates 80 percent of enhanced HIPC relief to poverty spending and 20 percent to domestic debt reduction. Projections for poverty spending from 2005 onward are not available.