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.
July 9, 2004
Key points
Ghana’s strong policy record under the PRGF-supported program has enhanced the economy’s long-term growth potential and the prospects for durable poverty reduction.
Notable progress has been made in restoring macroeconomic stability and in key structural areas.
The authorities will remain particularly vigilant in the election year by maintaining fiscal and monetary discipline.
The first annual report of implementation of the Ghana Poverty-Reduction Strategy (GPRS) indicates solid progress in key areas. Identified shortcomings will be addressed in the coming years.
Reaching the completion point under the enhanced HIPC-Initiative culminates the authorities’ forceful efforts in policy implementation.
The authorities reiterate their gratitude to staff, management, and the Board for their advice and support. They continue to count on the strong support from the international institutions, including the Fund, and the development community.
My Ghanaian authorities thank staff for their diligent work and constructive policy advice. They appreciate the continued support of management and the Board as well as the international community of donors. Ghana has made considerable progress under the PRGF supported program. Against the backdrop of a stable macroeconomic environment, the authorities have implemented strong adjustment and reform policies that have enhanced the economy’s long-term growth potential and the prospects for durable poverty reduction. The completion point under the enhanced HIPC-Initiative will allow the country to benefit from the full complement of debt relief, which will further help the economy to achieve a higher path of growth, accelerated poverty reduction, and more rapid progress toward the Millennium Development Goals (MDGs).
Non-complying disbursement
As Directors note, the authorities have requested a waiver for a lapse in the technical process of implementing higher water tariffs, which leads to a non-complying disbursement. As the Minister of Finance explained in his letter to the Acting Managing Director, the subject matter of the non-complying disbursement was a one-off incident that arose from administrative miscommunication in the water-sector ministry. The authorities have demonstrated a strong track record of commitment to cost-recovery utility tariffs, which they consider vital for enhancing efficiency in the delivery of these services and for avoiding fiscal costs from protracted budget subsidies. They have, thus, adopted automatic adjustment formulas for water and electricity—overseen by an independent body, the Public Utilities Regulatory Commission (PURC)—through quarterly tariff adjustments. In keeping with the established practice, the authorities deemed the PURC’s authorization for water tariff adjustment in October to have been implemented by the water company, and reported same to staff. When it was discovered in April, however, that the Sector Minister had put the adjustment on hold (being concerned about the multiple adverse impact on the poor from the concurrent implementation of the PURC’s authorization to increase electricity tariffs also by 10 percent), the authorities took prompt action to increase water tariffs by a higher rate of 15.2 percent, which restored cost-recovery. Subsequently, the authorities have instituted measures to ensure prompt implementation of PURC’s instructions, including a strict verification mechanism. As the Minister of Finance expressed in his letter, the authorities regret the incident and are committed to its non-recurrence. In view of the corrective actions taken to remedy this anomaly and measures adopted to prevent its re-occurrence, the authorities hope that the Executive Board grant their request for a waiver of the related non-complying disbursement under the PRGF arrangement.
Poverty reduction strategy
The authorities have successfully implemented the first year of the Ghana Poverty-Reduction Strategy (GPRS). Their Annual Progress Report (APR), prepared with helpful donor technical assistance and involving a broad participatory process, demonstrates solid progress in key areas, while acknowledging shortcomings in others. On the macroeconomic front, buttressed by fiscal and monetary discipline, stability has been restored, and strong growth achieved. In the social area, improvements have been made in education, water provision, and sanitation. Notable progress has also been made in the fight against HIV/AIDS. The development of infrastructure, including roads, transport, and energy, has received priority attention to support Ghana’s private sector development strategy. Various initiatives have been adopted to protect the environment and the natural resource base, vital for sustainable development. Priority consideration has also been given to the interests of the more vulnerable and disadvantaged groups in the context of comprehensive social protection and safety net programs.
The authorities recognize the need for progress in addressing impediments to growth, including through diversification to reduce the economy’s vulnerability to shocks. They also acknowledge the inadequate progress on energy sector reform and the persistence of other quasi-fiscal activities within the public sector. Both areas are receiving renewed attention. Moreover, there is a need to remedy shortcomings in health outcomes, especially relating to infant mortality rates as well as for further enhancing the interests of women and children. The authorities are giving careful consideration to staff’s helpful recommendations, and are enhancing the monitoring and evaluation process in the implementation of the GPRS, including in tracking poverty spending. Lack of adequate data for assessment of policy impact on poverty trends will be partially remedied with the upcoming household survey.
The authorities will also continue to broaden the participatory process at all stages of implementation of the GPRS, including in the preparation of the APR, and at all societal levels.
PRGF review
Ghana has maintained a strong record of program implementation under the PRGF arrangement. In the process, all prior actions, all but one of the quantitative performance criteria, and all but two of the structural performance criteria for this review were observed. The quantitative performance criterion on net domestic bank credit to the Tema Oil Refinery (TOR) was not observed because TOR, on commercial grounds, decided to repay some high-interest, short-term external debt that the program assumed would be rolled over. The refinery’s net position with the banking system is expected to improve significantly by mid-2004, and bank exposure to TOR has returned to the program path following a government security issue. The structural performance criterion on utility price adjustments was not met because favorable changes in the electricity generation mix obviated the need for such adjustments. The non–observance of the structural performance criterion on petroleum pricing, on the other hand, was due to concerns that—coming after the average petroleum product price increases of 90 percent last year—another relatively large price increase in the pre-election period could spark social unrest. The authorities have committed instead to bring forward their plans for a comprehensive deregulation of the petroleum sector that will include an effective liberalization of pricing, with effect from February 2005. For these reasons, the authorities request waivers of non-observance of the respective performance criteria.
Recent economic developments and program performance
Economic growth in 2003 was stronger than programmed, spearheaded by a buoyant cocoa sector, while inflation declined sharply during February-May 2004. The external position strengthened, with a stronger current account balance, record reserves, and relatively stable exchange rate. The domestic debt-to-GDP ratio continued to trend downwards. The domestic primary surplus improved over 2002 and was better than programmed. While tax revenue-to-GDP was slightly lower than programmed, it rose to over 20 percent for the first time in many years; and based on provisional data, first quarter budget implementation appears to be on course as well. Poverty spending increased from 4.8 percent to 6.5 percent of GDP, higher than programmed. Driven by strong foreign exchange inflows, monetary growth has been faster than anticipated, though at a decelerating rate. The “fiscal dividend” has allowed a welcome decline in interest rates which should lead to lower spreads and the real cost of capital.
Progress has also been made in key areas of the structural reform agenda. Public expenditure management has been significantly strengthened—backed by new wide-ranging legislation—including capacity to track poverty-related spending. The safeguards of Bank of Ghana (BOG) have been further reinforced, including substantial recapitalization of the bank through government security issue, and its supervisory capacity strengthened under the new Banking Act. The government has initiated a strategy to restructure the Ghana Commercial Bank, including by strengthening its management capacity. The prices of utilities have been kept at cost-recovery levels, as required under the program.
Medium-term objectives and policies for the rest of 2004
The authorities are resolved to consolidate the gains made thus far in macroeconomic stability while reinforcing the implementation of structural reforms. Over the medium term, their objective is to achieve average rate of growth of about 5.0 percent, which will allow an annual increase of 2.4 percent in per capita income. Inflation will be reduced to low single digits, the reserve build-up will continue, reaching more than four-and-half months of import cover, and the declining trend in the domestic debt-to-GDP ratio will be sustained.
In the remainder of 2004, the authorities are committed to avoiding a repetition of loss of fiscal control associated with previous elections. In this regard, they will maintain a strong fiscal stance consistent with the GPRS domestic debt-reduction target, which entails achieving a sizable domestic primary surplus and further reduction in net domestic financing. While government revenues are set to increase, expenditure cuts of around 0.6 percent of GDP will be effected to partly offset provision of petroleum subsidies. In particular, expenditures on goods and services and domestic capital outlay will be reduced. Poverty-related spending will be protected and is projected to increase from 6.5 percent to 6.9 percent of GDP. Furthermore, the authorities intend to limit the wage bill to the level in the budget, which represents the same ratio in terms of GDP as in 2003 and is in accord with the prior action for this review. To this end, the authorities have agreed with public employees to respect the budget wage allocation and have planned a strengthened package of measures to control wage payments as elaborated in the Letter of Intent (LOI). The National Health Insurance Levy (NHIL) will become effective on August 1, 2004—pursuant to the required legislative instrument laid before Parliament—and will provide a full-year revenue of over 1 percent of GDP.
The cautious monetary policy stance will be tailored to the projected decline in inflation and continued build up of reserves. To this end, the BOG intends to intensify liquidity management (including the sterilization of foreign exchange inflows) by issuing its own short-term-maturity paper, and to pursue an active interest rate policy. The BOG is actively considering staff suggestion to reduce the liquidity ratio at a propitious time in order to foster “crowding in” of private sector credit from fiscal adjustment. The floating exchange rate regime has served Ghana well and will be maintained to safeguard competitiveness, with interventions being limited to smoothing short-term fluctuations in the market. Several financial sector legislative initiatives geared to reinforcing competition and efficiency as well as providing adequate safety nets will be pursued. In this regard, an important legislative agenda is planned, including bills related to bankruptcy, companies code, credit referencing, insurance, and anti-money laundering. A long-term savings bill to foster private pensions and housing finance development is also contemplated.
Public expenditure management is expected to be reinforced through implementation of the upgraded legislative and regulatory framework and enhanced transparency and accountability. The authorities recognize that achieving effective control over government finances depends crucially on addressing financial weaknesses of public enterprises. In this connection, they intend to tackle the underlying causes, including inadequate pricing policies, operational inefficiencies, and persistence of cross-debts. The authorities regard addressing the petroleum sector pricing problem to be of overriding importance, given the ramifications on the budget and banking sector. Therefore, the Government has decided to implement an automatic pricing formula within a fully-deregulated petroleum sector. Cabinet approved the deregulation plan, as announced in the 2004 Budget statement, and further endorsed it on June 10, 2004. The new regime, which ensures liberalization of importation of crude petroleum and products and allows independent setting of retail prices according to a prescribed formula, is to become operational in mid-February 2005. The authorities will also ensure that utility tariffs continue to be in line with respective automatic pricing formulas that ensure full-cost recovery through quarterly adjustments authorized by the PURC. At the same time, they have embarked on a program to reduce costs, trim losses, and improve efficiency of the utility companies. This is to purge the automatic pricing mechanism of inefficiencies that would be passed on to consumers. The audited cross-debts among the utility companies and with government were settled at end-June 2004.
The Government of Ghana is strongly committed to development of the private sector as the engine of economic growth. In this context, the privatization efforts are being reinforced: the capital of GCB will be bolstered through floatation of shares on the stock exchange, and bids will be sought by competitive tender for a management contract. Moreover, due diligence is being undertaken to explore options for government involvement in the potential sale of the Volta Aluminum Company (VALCO). Staff concerns are taken into consideration, and commitment of financial resources to invest in the project will be made only after the compilation of relevant information and analysis are completed, and the Fund consulted. The recently-approved National Medium-Term Private Sector Development Strategy aims at creating, inter alia, a more business-friendly environment, reinforcing property rights, seeking expanded access for Ghana’s exports, and building capacity. Ghana is committed to an open trade regime and is in the process of developing a comprehensive trade policy. This will aim at gaining greater access to external markets while supporting regional trade liberalization, including harmonization and reduction in tariff and non-tariff barriers. The statistical base will be further strengthened to facilitate policy decisions and surveillance. In this regard, the authorities intend to participate in the Fund’s GDDS.
HIPC completion point
The authorities are pleased to have been able to reach the completion point under the enhanced HIPC-Initiative, which culminates their forceful efforts in policy implementation that have contributed to improvements in Ghana’s socio-economic conditions. The solid policy track-record established prior to the decision point in February 2002 has been sustained. Implementation of strong adjustment and reforms has restored macroeconomic stability, laid a foundation for sustainable private sector-led growth, achieved progress in poverty reduction, established a firm basis for good economic and political governance, and has enhanced the rights of women, children, and other disadvantaged segments of the population. The development community’s debt relief to Ghana currently stands at 89.6 percent of the total assistance approved at the decision point. This includes the full complement of committed assistance by multilateral and Paris Club creditors, who have also pledged additional debt relief at the completion point. The authorities are pursuing the objective of obtaining comparable treatment under the HIPC-Initiative from other non-Paris Club bilateral commercial creditors.
The authorities have met the completion point conditions in education, health, public expenditure management, decentralization, and governance, surpassing targets in many cases. The trigger on implementation of an automatic pricing formula for petroleum products was not met as the authorities decided to implement a fully-deregulated system to come into effect in mid-February 2005. For this reason, a waiver of this condition and Board approval of the completion point for Ghana has been requested. Reaching the completion point will allow Ghana’s debt ratios to drop below HIPC thresholds and remain so through 2023, barring any severe shocks, while releasing much-needed resources for increased social sector spending. The authorities will maintain their strong adjustment and reform effort, buttressed by a prudent debt management policy to keep Ghana’s debt sustainable.
Conclusion
My Ghanaian authorities reiterate their gratitude to staff, management, and the Board for their advice and support. They wish to underscore their resolve to remain steadfast with the implementation of their program and poverty-reduction strategy to foster the achievement of the MDGs. In this regard, they continue to count on the strong support from the international institutions, including the Fund, and the development community. Their efforts aimed at domestic consensus building, broadening of ownership of the program, and enlarging the constituency for adjustment and reform will provide the public support needed to mitigate much of the risks to program implementation cited in the staff report.