The authorities thank staff for the constructive policy dialogue, and management and the Board for their continued support to Ghana. They are also grateful for the assistance Ghana continues to receive from its development partners. Significant progress has been made under the PRGF-supported program in preserving macroeconomic stability, strengthening growth performance, reducing poverty, and bringing Ghana to the completion point under the enhanced HIPC Initiative. This commendable performance owes much to prudent policies and steadfast implementation of structural reforms. The authorities’ commitment to financial discipline was particularly manifested during the last presidential and parliamentary elections held in December 2004, which, for the first time since 1992, broke the pattern of election-related fiscal slippages that had plagued Ghana and had interrupted the country’s economic and social progress on similar previous occasions. Also, the authorities’ decision to deregulate the petroleum sector, despite strong public opposition, represents one of the boldest and most important reforms undertaken in the country with far-reaching, beneficial macroeconomic consequences.

Performance under the PRGF arrangement continues to be satisfactory, as most of the performance criteria and benchmarks for this review were observed. Some slippages, however, occurred, which, as the authorities detail in the LOI, were due either to factors beyond their control or to weak systems that are being strengthened to avert reoccurrence of these breaches. For these reasons, they request their waiver and completion of the third review, as well as extension of the PRGF arrangement from May 8, 2006 to October 31, 2006, to allow for completion of the sixth and final review.

Macroeconomic performance exceeded program targets in 2004. Real GDP growth was robust at 5.8 percent, driven by a record cocoa crop and complemented by a strong performance in other sectors as well. Headline inflation was halved to 11.8 percent and, although it accelerated to around 16.7 percent in March following the increase in petroleum prices by about 50 percent in February, underlying inflation remained broadly stable, which, together with stable interest and exchange rates, suggests that expectations are being contained. The external current account position moved from a surplus to a deficit, as increased export receipts from cocoa, timber, and gold, and higher private remittances—reflecting growing confidence in the economy—were more than offset by higher imports, driven by donor-financed capital goods and a larger oil bill. Reserves were higher than programmed in absolute terms, and the import cover increased to 3.7 percent, slightly short of the target of 3.9 months. The strengthened reserve position, together with firm macroeconomic policies, contributed to stability of the nominal exchange rate, while the real exchange rate depreciated, thereby reversing the slight appreciation in 2003 and preserving competitiveness.

Fiscal policy was implemented broadly in line with the program. The overall deficit was higher than programmed as a result of larger petroleum-related subsidies (due to high world oil prices), increased capital spending as a counterpart to higher donor-related—including HIPC—inflows, and larger wage payments to subvented agencies due to weak payroll management. Nevertheless, the deficit declined by 0.8 percent of GDP, compared to 2003, bringing the cumulative fiscal adjustment during 2001–04 to 5.4 percentage points of GDP. Monetary policy provided a firm anchor for price stability by keeping monetary aggregates within the program targets through reinforced open market operations buttressed by an active interest rate policy. In March, immediately following the petroleum price increase, the Monetary Policy Committee (MPC) determined the prevailing policy stance to be appropriate to contain the indirect effects and, therefore, kept the prime rate unchanged at 18.5 percent. In May, assessing the balance of risks to favor continued progress toward low and stable inflation and relative exchange rate stability, the MPC reduced the prime rate to 16.5 percent.

Ghana has moved its structural reform agenda forward. Public expenditure management was further reinforced through strengthened reporting and profit transfer requirements for state-owned enterprises (SOEs). The restructuring of Ghana Commercial Bank was kept on schedule, and the central bank added its bills to the management of liquidity. The automatic pricing mechanism for utilities has been implemented in line with full cost recovery and avoidance of budgetary subsidies. More significantly, as elaborated in paragraph 6 of the MEFP, the authorities honored their long-standing commitment to deregulate the petroleum sector by adopting a pricing mechanism in February that essentially ensures full recovery of all costs and taxes and ends petroleum subsidies. It is noteworthy that the highly politicized deregulation is being carried out at a rather difficult time, with unusually high world oil prices and strong domestic opposition.

Looking ahead, the authorities’ strategy is to consolidate the gains in macroeconomic stabilization and to reinforce reforms to sustain a high growth trajectory to achieve a faster pace of poverty reduction and the other MDGs. In 2005, real GDP growth is expected to be maintained at 5.8 percent, while inflation will be contained at an average of 14.5 percent. Further accumulation of gross reserves would bring the import cover to 3.9 months.

The authorities agree with staff on the need to create fiscal space for priority spending, with the domestic debt-to-GDP ratio remaining as the anchor. In this context, the domestic primary surplus will be increased to allow a reduction in the net domestic debt ratio to less than half its level at end-2002. This will bring about lower interest rates and will create room for strengthened support for private sector activities as well as for growth-enhancing and poverty-related spending. Public expenditure management will be reinforced by tightening controls and increasing transparency and accountability. The wage bill, on an accrual basis, will be maintained at 8.9 percent despite the wage award to foster capacity building and productivity, and the 2004 arrears will be eliminated. On the revenue side, reduction of corporate tax to spur investment and an increase in the personal income threshold to reduce the burden on low-income earners, would be offset by improved tax administration, larger yield of petroleum taxes from high oil prices, and the full-year impact of the national health insurance levy. Accordingly, the revenue-to-GDP ratio is projected to rise to 24.5 percent.

Monetary policy will be tailored to achieve the inflation and reserve targets. To this end, monetary growth will be kept in line with nominal income growth. As staff advise, the Bank of Ghana (BOG) will remain vigilant and will maintain a firm monetary stance so as to prevent secondary effects of the hike in inflation resulting from the deregulation of the petroleum sector. BOG will continue to develop and gear its policy instruments to reinforce open market operations and will maintain its open policy by regularly communicating its assessment of economic conditions and the decisions of the MPC to the public. Ghana will continue to maintain a managed floating exchange rate regime, which has been appropriate for absorbing shocks, safeguarding competitiveness, and building needed reserves. The BOG is proceeding in its efforts to build institutional capacity for an effective interbank foreign exchange market. The current system of foreign exchange surrender requirement has ensured orderly management of foreign exchange flows that have increased substantially. The BOG would keep the system under review, cognizant of the need to balance the objectives of stability and efficiency.

The authorities recognize the importance of intensifying structural reforms in order to sustain the robust growth. Particular attention will be given to strengthening public resource management, improving the environment for private sector activity, including through investment in human and physical capital and the deepening of financial intermediation, and reinforcing economic governance, in particular through public sector reform. Efficiency, transparency, and accountability in public expenditure management will be further reinforced by following through with the relevant pieces of legislation, including in the areas of fiscal reporting, public procurement, and audit. The financial sector will be strengthened through stricter enforcement of prudential regulations, institutional capacity building, and reinforced competition and corporate governance. Financial intermediation will also be enhanced by implementing legislation toward promoting long-term savings, reinforcing creditor and borrower rights, and accelerating the judicial and legal process regarding collaterized lending. The authorities see a need for increased availability of credit to the private sector at competitive cost. In this regard, access to credit will be facilitated and lending risks reduced, while consideration would be given to a phased reduction of the secondary reserve requirement as liquidity control takes hold.

The authorities attach great importance to public sector reform as a vehicle for enhancing economic efficiency and as a complement to their private sector-led growth strategy. A Minister of State has been appointed to accelerate the process. For the civil service, a comprehensive reform is contemplated that will address employment and wage policies based on an action plan to be derived from the policy document, Towards a New Public Service, whose implementation is to begin by January 2006. While fiscal consolidation and divestiture of several SOEs have reduced government’s involvement in economic activities, further reduction is envisaged to enhance efficiency. In this regard, the privatization efforts will be intensified. Furthermore, the financial performance and monitoring of the largest SOEs will be enhanced, and their current and contingent liabilities to government reduced. While the ultimate goal is to improve performance of all SOEs over time, immediate attention will focus on the largest ones, particularly the public utilities, the oil refinery, and the railway corporation. The government will also ensure that commercial entities adopt cost-recovery pricing policies to avoid dependence on budget subsidies.

The authorities are determined to complete the deregulation of the petroleum sector by ensuring that the automatic pricing formula is implemented without government involvement. In this regard, the establishment of the independent National Petroleum Authority, a prior action for this review, is a further evidence of the authorities’ seriousness of intent.

The authorities firmly believe in the benefits of and remain committed to an open trade policy, which will be used as a vehicle to foster FDI and technology transfer. In this regard, initiatives will be taken towards enhancing regional trade integration, including by adopting the common external tariff system of the Economic Community of West African States. The export base will also be broadened in the context of the Presidential Special Initiatives to reduce the economy’s vulnerabilities.

Reaching the completion point under the enhanced HIPC Initiative has improved Ghana’s external debt profile significantly. Agreement has been reached with Paris Club creditors on the required debt stock relief, with almost all pledging additional relief. Ghana has also been seeking to restructure the terms of some external liabilities on more favorable terms, while reinforcing its debt management capability. In order to sustain high growth, necessary to achieve the MDGs in accordance with the GPRS, Ghana needs additional resources to increase investment, particularly in infrastructure.

Progress has been made in improving the quality, timeliness, and availability of statistics, and greater effort will be devoted to further improvements. Ghana is working towards participation in the GDDS and is already providing metadata to the Fund. It is intended to make economic and financial data available on the internet to enhance dissemination. In December 2005, the Ghana Statistical Service will publish revised national accounts (from 1990 onwards), including by expenditure-based categories. A Consumer Price Index reflecting current consumption patterns will also be published at the same time.

In conclusion, Ghana continues to make important strides in promoting macroeconomic discipline, implementing structural reforms, improving governance, enhancing the role of the private sector, accelerating growth, and alleviating poverty. The support of the international community has been instrumental in Ghana’s progress and will remain crucial while the country consolidates recent gains and moves to a higher growth path capable of delivering durable poverty alleviation and other MDGs. Ghana appreciates Fund policy advice and support in catalyzing assistance from the international community.