July 9, 2004

1. This statement reports on (i) implementation of the prior actions for completion of the second review under the Poverty Reduction and Growth Facility, as specified in the staff report, Appendix I, Attachment I, Table I.2, and (ii) some economic data that have become available since the issuance of the staff report. This information does not change the staff appraisal.

2. The authorities have informed the staff that all prior actions have been implemented:

• On June 24, 2004 a press release was issued announcing Cabinet endorsement (on June 10) of the details of a new regulatory/pricing regime that gives oil marketing companies the right to adjust retail petroleum prices according to a prescribed formula, without prior review or approval by any national authority or agency; the press release described the key elements of the new regime and indicated that it will take effect February 15, 2005.

• On April 21, 2004 water tariffs were adjusted in line with the program’s automatic adjustment formula (based on calculated values through end-March 2004). The formula did not require an adjustment for electricity prices.

• The legislative instrument implementing the National Health Insurance Levy with effect from August 1, 2004 was gazetted on May 21, 2004, and laid before parliament on June 9.

• On June 16, 2004, the Ministry of Finance and Economic Planning issued maximum cash ceilings to ministries, departments and agencies totaling ¢2,402.5 billion for the third quarter of 2004.

• On June 30, 2004, a modified wage settlement was reached with the representatives of civil service employees that is consistent with the budget allocation for wages and salaries of ¢6,632 billion. The details are provided in an addendum to the letter of intent, dated July 3, 2004.

3. The need for a modified civil service wage settlement arose because an earlier agreement, reached on May 21, 2004, had been based on an erroneous assumption about the budget treatment of the Additional Duty Hour Allowances (ADHA). These allowances were part of the wage bill (Item 1 of the budget) in 2003, but officials in charge of the wage negotiations assumed, mistakenly, that in 2004 they would be covered under administrative charges (Item 2). This appeared to create additional room within the 2004 budget wage bill allocation, and on that basis the May 21 agreement provided for a 31 percent increase in the pay structure for civil servants. Fund staff were initially informed only that the settlement would result in an increase in the wage bill of 15.8 percent over 2003, compared to an increase of around 19 percent assumed in the program. When the erroneous assumption regarding the ADHA became apparent, it was clear that the wage bill resulting from the 31 percent increase in the pay structure would significantly exceed the budget, and the authorities acted immediately to rescind the previous agreement. The staff is satisfied that the revised wage settlement, as set out in the addendum to the letter of intent, is consistent with the programmed wage bill for 2004. While this episode highlights further the risks regarding program implementation, the staff welcomes the additional measures the authorities have committed to take to strengthen control over the wage bill for the remainder of 2004.

4. The following information has become available since the staff report was issued:

• The consumer price index increased by 1.2 percent in May 2004 over the previous month, resulting in a 12-month inflation rate of 11.2 percent.

• Preliminary data from the Bank of Ghana show net international reserves at end-May 2004 (US$718 million) well above the end-June benchmark (US$536 million), while both net domestic assets of the Bank of Ghana and reserve money were below the June ceilings.

• Preliminary data through end-April 2004 also indicate that the fiscal program is on track, with a small overperformance of tax revenue and a lower outturn for recurrent expenditures than projected (Table 1). Net domestic financing of government for January-April 2004 was slightly below program.

Table 1.

Ghana: Fiscal Developments, Jan.-April, 2004

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

^1/Based on EBS/04/82, June 16, 2004.

Table 1.

Ghana: Fiscal Developments, Jan.-April, 2004

					Jan.-Apr. 2003	Jan.-Apr. 2004
						Prog. 1/	Prov.
					(in percent of annual GDP)
Total revenue and grants					6.7	7.6	8.1
	Total revenue				5.6	6.2	6.4
		Of which: Direct taxes			1.6	1.6	1.8
Total expenditure					7.2	8.4	8.2
	Recurrent expenditure				4.8	5.8	5.5
		Noninterest			3.1	4.4	4.1
			Of which: Wages and salaries		2.4	2.4	2.5
				Goods and services	0.3	0.8	0.5
	Capital expenditure				2.4	2.5	2.7
Overall balance (before arrears clearance and VAT refunds)					-0.5	-0.8	0.0
Net domestic financing					0.3	0.9	0.8

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

^1/Based on EBS/04/82, June 16, 2004.

View Table

Table 1.

Ghana: Fiscal Developments, Jan.-April, 2004

					Jan.-Apr. 2003	Jan.-Apr. 2004
						Prog. 1/	Prov.
					(in percent of annual GDP)
Total revenue and grants					6.7	7.6	8.1
	Total revenue				5.6	6.2	6.4
		Of which: Direct taxes			1.6	1.6	1.8
Total expenditure					7.2	8.4	8.2
	Recurrent expenditure				4.8	5.8	5.5
		Noninterest			3.1	4.4	4.1
			Of which: Wages and salaries		2.4	2.4	2.5
				Goods and services	0.3	0.8	0.5
	Capital expenditure				2.4	2.5	2.7
Overall balance (before arrears clearance and VAT refunds)					-0.5	-0.8	0.0
Net domestic financing					0.3	0.9	0.8

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

^1/Based on EBS/04/82, June 16, 2004.