Ghana: 2005 Article IV Consultation, Third Review Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria and Extension of the Arrangement

This 2005 Article IV Consultation highlights that economic performance in Ghana has improved since 2000, with the economy growing at its fastest pace in more than a decade. In 2004, real GDP growth reached 5.8 percent, driven by agriculture and a strong pickup in the services and construction sectors—helped by increased bank credit and private inward remittances. Ghana’s medium-term prospects appear promising, with growth projected to continue at the current relatively high rate, provided that macroeconomic stability becomes further entrenched with fiscal sustainability, inflation declines further, and the government perseveres with structural reform.

Abstract

This 2005 Article IV Consultation highlights that economic performance in Ghana has improved since 2000, with the economy growing at its fastest pace in more than a decade. In 2004, real GDP growth reached 5.8 percent, driven by agriculture and a strong pickup in the services and construction sectors—helped by increased bank credit and private inward remittances. Ghana’s medium-term prospects appear promising, with growth projected to continue at the current relatively high rate, provided that macroeconomic stability becomes further entrenched with fiscal sustainability, inflation declines further, and the government perseveres with structural reform.

I. Retrospective

1. Since the early 1980s, Ghana has experienced relatively strong economic growth and poverty reduction, which compare favorably with other countries in sub-Saharan Africa. Real GDP growth averaged almost 4½ percent a year over two decades, in spite of myriad external shocks and the adverse effects of stop-and-go policies through much of the past that buffeted the economy. Poverty has declined from more than half of the population to an estimated 35 percent, and recent data suggest that the link between growth and poverty reduction has strengthened.1 However, despite the robust economic expansion, per capita income remains low at about US$435.

2. Economic reform began in earnest in the 1980s. The reforms were ushered in by a series of devaluations that reversed Ghana’s deteriorating international competitiveness, the gradual removal of price controls, and the liberalization of trade and investment. Further market–oriented and financial sector reforms, including an ambitious divestiture program, were implemented in the latter part of the 1990s. However, Ghana experienced serious imbalances and volatile inflation during the 1990s. This originated partly from weak macroeconomic policies, especially a lax fiscal stance, and a significant deterioration in the external terms of trade (from rising world oil prices and depressed prices for cocoa and gold) near the end of the decade.

3. Economic performance has improved further since 2000, with the economy growing at its fastest pace in more than a decade. Underpinning this performance has been a marked improvement in macroeconomic management—as noted in recent Executive Board discussions on Ghana (Box 1)—and a generally favorable external environment. Although inflation remains high, it is being reduced through a firm monetary policy; total public debt has declined substantially as a result of debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and fiscal prudence; gross international reserves have reached a record-high level, and the exchange rate vis-à-vis the U.S. dollar and in real effective terms has remained relatively stable since the substantial adjustment in late 1999. Structural reforms have begun to yield some benefits, particularly in agriculture. Also, private sector activity is strengthening, with a consequent broadening of the economic base.

Fund Relations

At the conclusion of the last Article IV consultation in May 2003, Executive Directors endorsed Ghana’s Poverty Reduction Strategy (GPRS) as a sound basis for promoting growth and reducing poverty.1 At the time of the second review of the PRGF arrangement in July 2004, Directors commended the authorities for strengthening macroeconomic management, but regretted the decision to leave petroleum prices unchanged ahead of the elections in December 2004.

Ghana has generally been receptive to the Fund’s policy advice within the context of both Fund-supported programs and surveillance. In this regard, it has made important strides in recent years with respect to macroeconomic stability and has pushed forward an ambitious structural reform agenda. Strong program ownership is also being demonstrated, and, in most cases, delays have been due more to a lack of capacity than to reticence. In the case of adjusting domestic petroleum prices, however, the authorities were somewhat reluctant owing to what they perceived as a difficult socio-political environment that threatened the durability of such reform, if they were to proceed with it before the elections.

1 See www.imf.org/external/country/GHA/index.htm.

II. Recent Developments and Performance Under the Program

4. Real GDP growth in Ghana reached 5.8 percent in 2004, more than a percentage point higher than the average during 2001–03 (Table 1). Agriculture continued to be the main contributor to growth, with productivity improvements in the cocoa sector leading to record-high production. A strong pickup in the service and construction sectors—helped by increased bank credit and private inward remittances (mainly from the United States, Canada, and United Kingdom)—also made a significant contribution to overall economic growth.2

Table 1.

Ghana: Selected Economic and Financial Indicators, 2001-05

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

IMF Country Report No. 04/210.

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 liabilities.

Including public enterprises.

Before domestic arrears clearance.

After domestic arrears clearance.

Including “net savings due to inflation-indexed bonds.”

Including exceptional financing.

Figures for 2003 and onwards are based on an updated DSA, with additional information received from creditors and a reconciliation of external debt to end-2003.

Excluding non-interest-bearing perpetual BoG revaluation stocks and bonds issued in 2004 for recapitalization of BoG and TOR, and including deferred interest payment (cumulative) on inflation-indexed bonds.

Including official grants.

5. Inflation declined sharply in 2004, falling by half to 11.8 percent from the end-2003 rate. Following increases in the prices of petroleum products that averaged 50 percent in late-February 2005, inflation accelerated to around 16½ percent in March-April. However, the Bank of Ghana’s core measure of inflation (excluding energy and utilities) has remained broadly stable. This stable inflation, together with stable interest rates and nominal exchange rate for the cedi vis-à-vis the U.S. dollar, suggests that inflation expectations may be well contained (Figures 1 and 2).

Figure 1.
Figure 1.

Ghana: Interest Rate Developments, January 2002 - April 2005

(In percent)

Citation: IMF Staff Country Reports 2005, 292; 10.5089/9781451814927.002.A001

Source: Ghanaian authorities.
Figure 2.
Figure 2.
Figure 2.

Ghana: Exchange Rate Developments, January 1999 - March 2005

Citation: IMF Staff Country Reports 2005, 292; 10.5089/9781451814927.002.A001

Sources: IMF, African Department and Information Notice System.1/ An increase in the index denotes an appreciation.2/ An increase in the index denotes an improvement in the terms of trade.
Table 2:

Ghana: Private Remittances and Other Foreign Exchange Flows, 2000-04

(In millions of U.S. dollars)

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Sources: Ghanaian authorities; and Fund staff estimates.

6. The external sector experienced some improvement in 2004. The buildup in gross international reserves to US$1.8 billion (equivalent to 3.7 months of imports) by the end of the year was significantly above the target included as performance criterion in the program (Table 3). Private remittances, expanding export receipts from cocoa and gold, and increases in donor support helped in this regard (Table 4). The external current account (after official transfers) moved from surplus into deficit (2.7 percent of GDP) in 2004, reflecting a significant increase in capital imports tied to donor inflows, and a larger oil import bill (by nearly 2½ percentage points of GDP) as a result of higher world oil prices. The volume of exports expanded rapidly in 2004 reflecting higher cocoa and gold exports, and continued growth in nontraditional exports. The real effective exchange rate for the cedi remained relatively stable.

(Cumulative flows from beginning of calendar year 2004 to end of month indicated, unless otherwise indicated)

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Sources: IMF Country Report No. 04/210; and Ghanaian authorities.

Definitions of line items and terminology are elaborated in the technical memorandum of understanding (TMU) of IMF Country Report No. 04/210 is the source of all program data.

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 US$75 million, as explained in the TMU. The actual data have also been adjusted to reflect the repayment of inflation-indexed bonds (GGILBs), which the program had not earlier accounted for.

Based on a fixed exchange rate of 9,012 cedis per US$1, the rate prevailing at end-March 2004.

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 publicly guaranteed debt service paid, and divestiture receipts with an upside cap of US$75 million, and for higher-than-programmed oil prices, with an upside cap of US$30 million, as explained in the TMU.

Program targets adjusted for cumulative differences between actual and projected amounts of program support, public and divestiture receipts with a downside cap of -US$75 million, and for higher-than-programmed oil prices, with a downside cap of -US$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 2004 HIPC relief.

Average from beginning of 2004 to end of month indicated, as explained in the TMU.

Table 4.

Ghana: Balance of Payments, 2001-05

(In millions of U.S. dollars, unless otherwise specified)

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Sources: Bank of Ghana; and Fund staff estimates and projections.

Cumulative from Janauary 2005.

IMF Country Report No. 04/210.

7. Satisfactory policy implementation helped consolidate macroeconomic stability in 2004, although favorable supply shocks and higher-than-programmed inflows from donors contributed. Monetary policy remained firm and the monetary aggregates were in line with the program targets and performance criteria (Table 5). The monetary stance has not changed so far in 2005, with growth in reserve money being maintained at the same rate as in 2004 (about 17 percent). However, the Monetary Policy Committee (MPC) of the Bank of Ghana lowered its policy-controlled interest rate by 200 basis points to 16½ percent after its meeting in May, signaling its intention to ease the policy stance since the indirect effects of petroleum price deregulation have largely been absorbed.

Table 5.

Ghana: Monetary Survey, 2001-05

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Sources: Table 6, Ghanaian authorities; and Fund staff estimates and projections.

TOR debt swap moved 1,421 billion cedis from credit to public enterprises to government in December 2002.

Including foreign currency deposits.

Excluding foreign currency deposits.

Including deposit money banks’ foreign currency reserves with Bank of Ghana.

Credit from deposit money banks to the private sector.

Table 6.

Ghana: Bank of Ghana and Deposit Money Banks, 2001-05

(In billions of cedis, unless otherwise specified; end of period)

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

Starting January 2003, includes holding of T-bills issued for monetary liquidity purposes, and starting September 2004, BOG bills.

A large part of the deposit money banks’ net foreign assets for 1998-2003 were reclassified as net domestic assets to ensure consistency with the new banking supervision reporting form introduced in July 2003, which uses a residency rather than currency definition of net foreign assets.

TOR debt swap moved 1,421 billion cedis from credit to public enterprises to government in December 2002.

8. The execution of fiscal policy improved in 2004, although there were some slippages (Table 7). The overall budget deficit narrowed by 0.8 percentage points of GDP to 3.6 percent in 2004, but this was 2 percentage points of GDP larger than programmed. Total revenue and grants were higher than projected, with domestic resource mobilization (ratio of tax revenue to GDP) reaching its highest level of 23.8 percent of GDP. This improvement reflects strong economic growth, some new tax measures, more efficient revenue administration, and a significant rise in grants. However, the additional resources were more than offset by unanticipated capital outlays, increased subsidy for petroleum products as world oil prices rose, and an overrun in wages. Partly as a consequence of these developments, the envisaged repayment of domestic debt did not transpire. Thus, the programmed reduction in the ratio of domestic debt to GDP was achieved only as a result of faster GDP growth.

Table 7.

Ghana: Summary of Central Government Budgetary Operations and Financing, 2001-05 1/

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Sources: Tables 8-10.

Above-the-line data for domestic recurrent and capital expenditure are presented on a cash basis (payment vouchers); arrears are not reflected in line expenditures. Program data refer to IMF Country Report No. 04/210.

For 2005, includes possible upward revision to income tax (109 billion cedis), cocoa export tax (100 billion cedis), and nontax (92 billion cedis).

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.

Assumes that required subsidies for petroleum products were eliminated in February 2005 following the adoption of an automatic pricing adjustment mechanism. For 2005, reflects estimated recoupment of profits by TOR from petroleum price adjustment (150 billion cedis).

Payments associated with wages for Ghana Universal Salary Structure, additional duty hourly allowances, and subvented agencies, pension arrears, and outstanding TOR underrecovery.

Defined as total revenue plus VAT refunds (negative) and discrepancy, less noninterest and domestic capital expenditure.

Excluding non-interest-bearing perpetual BoG revaluation stocks, and bonds issued in 2004 for recapitalization of BoG and TOR, including deferred interest payment (cumulative) on inflation-indexed bonds, and less government deposits.

Unadjusted for government deposits.

Table 8.

Ghana: Central Government Revenues, 2001-05

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

IMF Country Report No. 04/210.

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