Ghana: Ghana—Fourth and Fifth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Nonobservance of Performance Criteria

Ghana’s macroeconomic performance has continued to improve, and the program’s objectives are being met. Progress has also been made toward achieving the Millennium Development Goals. Public expenditure and financial management has shown improvement. The medium-term outlook appears favorable and the economy is poised for acceleration in growth. Recent petroleum price adjustments have delayed the disinflation process. The transparency of exchange rate policy is essential. Executive Directors agree with the government’s determination to lay a strong foundation for the private sector to lead growth.

Abstract

Ghana’s macroeconomic performance has continued to improve, and the program’s objectives are being met. Progress has also been made toward achieving the Millennium Development Goals. Public expenditure and financial management has shown improvement. The medium-term outlook appears favorable and the economy is poised for acceleration in growth. Recent petroleum price adjustments have delayed the disinflation process. The transparency of exchange rate policy is essential. Executive Directors agree with the government’s determination to lay a strong foundation for the private sector to lead growth.

I. Progress Under the Fund-Supported Program

1. The key macroeconomic objectives under Ghana’s poverty reduction strategy—supported by a PRGF arrangement—have generally been met (Table 1). The rate of real GDP growth has been raised, exceeding the target in the last two years. This has led to a doubling of the growth of real GDP per capita to above 3 percent, which is a core indicator of the authorities’ program. At the current pace, the Millennium Development Goal (MDG) of halving income poverty by 2015 should be achieved ahead of schedule. Economic activity has broadened recently and, while agriculture continues to be a key sector, manufacturing and construction are emerging as important contributors to growth. The process of disinflation has not been smooth. However, inflation has been well contained more recently, despite several adjustments in petroleum product prices—including a sharp increase in February 2005 when such prices started to be determined by an independent and automatic mechanism. Overall inflation at end-2005 was contained at around 15 percent and has declined gradually to 9.5 percent in April 2006.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2002–08

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Sources: Data provided by Ghanaian authorities; and staff estimates and projections.

Baseline scenario.

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 and errors and omissions.

Before domestic arrears clearance.

After domestic arrears clearance.

Including “net savings due to inflation indexed bonds.”

Including exceptional financing.

From 2005 onwards, figures are based on the new LIC DSA framework while figures prior to 2005 are based on the HIPC initiative framework.

Excluding non-interest bearing perpetual revaluation stocks and bonds issued in 2004 for recapitalization of Bank of Ghana and Tema Oil Refinery, and including deferred interest payment (cumulative) on inflation indexed bonds.

After grants and transfers.

Contribution to the Growth of Real GDP, 2001–05

(Annual percentage change)

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Sources: Ghana Statistical Service; and Fund staff estimates and projections.
A01ufig01

Ghana: CPI Inflation Rates, January 2000-February 2006

(12-month percentage change)

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.A001

Source: Ghanaian authorities.

2. The stability of the nominal exchange rate vis-à-vis the U.S. dollar has helped to dampen inflation. Since mid-2004, the cedi-U.S. dollar exchange rate has remained largely unchanged, with the nominal exchange rate for the cedi depreciating by 1.1 percent by end-2005. Although vis-à-vis the euro the cedi fluctuated somewhat during the period, by end-2005 it had appreciated by only 2.6 percent. The real effective rate for the cedi appreciated by 19.7 percent during 2005, mainly because of the inflation differential with major trading partners.

A01ufig02

Exchange Rate Developments, January 1999-December 2005

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.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.
A01ufig03

Exchange Rate Developments, January 1999-January 2006

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.A001

Sources: IMF, African Department and Information Notice System.

3. The external current account (after official transfers) shifted from a surplus in 2002–03 into a deficit in 2004 that widened in 2005 (Table 2). The shift reflected mainly a strong growth in investment imports associated with ongoing mega projects (mining and the West African Gas Pipeline), increased imports associated with donor loan inflows, and the impact of higher world oil prices (equivalent to some 3 percent of GDP in 2005). However, large capital inflows—reflecting a pickup in foreign direct investment in mining, energy, and service sectors—and increased concessional loans more than financed the current account deficit. Consequently, gross international reserves reached US$1.9 billion, equivalent to 3.2 months of imports—compared with less than two months’ cover in 2002—and increasing the cushion against shocks.

Table 2.

Ghana: Balance of Payments, 2002–06

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

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

Debt service to bilateral creditors is net of relief from 2005 onward.

Including the capital transfer in 2006 under the MDRI.

A01ufig04

Gross International Reserves

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.A001

Sources: Data provided by the Ghanaian authorities; and staff estimates.

4. Satisfactory policy implementation continues to underpin economic performance. Fiscal prudence, together with enhanced public expenditure and financial management, and strong growth, are delivering a faster-than-envisaged reduction in the ratio of domestic debt to GDP—the government’s fiscal anchor. Fiscal consolidation has resulted in a significant reduction in domestic debt service and is allowing the “crowding-in” of private sector investment through a sharp drop in interest rates.

A01ufig05

Interest Rate Developments, January 2002-February 2006

(In percent)

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.A001

Source: Ghanaian authorities
A01ufig06

Central Government Domestic Debt and Interest Payments

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 228; 10.5089/9781451814965.002.A001

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

5. The fiscal outturn for 2005 was broadly in line with the program’s end-year targets (Table 3). Despite a significant shortfall in revenue and grants, the overall deficit (after grants) was 3 percent of GDP compared to the target of 2.6 percent. The revenue shortfall was mainly from VAT and trade taxes. Even though budget execution was monitored carefully, cuts—particularly new hirings and nonessential vehicles in domestically financed capital outlays—were insufficient to offset the shortfalls in revenue and grants in the first half of the year. As a result, the government resorted to domestic borrowing to fill the resource gap, which led to the nonobservance of the quantitative performance criterion on net domestic financing of government for end-June 2005. The recourse to bank borrowing was reversed in the second half of the year, with the catching-up of external aid disbursements, stronger containment of the wage bill, and improvements in nontax revenue collection.1 Net domestic debt repayment by the government was 1.6 percent of GDP, compared with the programmed 1 percent.2 As a result, the decline in the ratio of domestic debt to GDP was larger than envisaged under the program, with the outstanding stock of debt to 10.8 percent of GDP at end-2005 compared with the program target of 11.4 percent.

Table 3.

Ghana: Summary of Central Government Budgetary Operations and Financing, 2002–06 1/

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Sources: Tables 4-6; data provided by the Ghanaian authorities; and staff estimates and projections.

Above-the-line data for domestic recurrent and capital expenditure are presented on a cash basis; arrears not reflected in line expenditures.

Includes additional resources and spending from the MDRI debt relief.

The figure for 2006 program reflects the MDRI debt relief from World Bank and African Development Fund.

Payments associated with wages for Ghana Universal Salary Structure, additional duty hourly allowances and subvented agencies, pension arrears, and outstanding Tema Oil Refinery (TOR) under-recovery.

Dicrepancy in 2006 indicates float checks from the previous year and scope for additional contingency expenditure.

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 2004–06 for recapitalization of BoG and TOR, including deferred interest payment (cumulative) on inflation indexed bonds, and less government deposits.

6. The wage bill of the government was held below the budgeted ceiling throughout the year. This was a direct result of accounting and technical improvements in the computerized personnel and payroll databases. The government planned to have databases cover all employees under the central government and subvented agencies (police, universities, and research centers) by end-September 2005. However, this timeframe turned out to be ambitious, with only three-quarters of subvented agencies’ employees covered by end-September 2005 (a structural performance criterion), but the remainder was completed by year end. The government was concerned that accelerating the implementation to meet the deadline would have compromised the robustness and security of the data.

7. The central bank has maintained its efforts to control liquidity and reduce inflation. The growth of the monetary aggregates continued to slow in 2005 (Table 7), with broad money expanding significantly less than the annual rate of nominal income. This pattern—particularly in the latter part of the year—reflected containment of government bank borrowing, with intensified fiscal efforts to reduce domestic debt in the fourth quarter of 2005. These efforts have helped to contain inflation, even with significant increases in domestic petroleum prices that raised inflation markedly early in the year. Indications are that the direct and indirect effects of petroleum price adjustments so far have been largely absorbed. The lowering of the secondary reserve requirement in mid-year and the reduction in the prime rate of the central bank—200 basis points in May 2005, followed by further 100 basis points reduction in September 2005 and January 2006—may have contributed to keeping credit expansion to the private sector robust. However, there are no indications that the quality of loans to the private sector has deteriorated. The average lending rate—which remains significantly positive in real terms—has not declined commensurately with the reduction in the prime rate.

Table 4.

Ghana: Central Government Revenues, 2002–06

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Sources: Data provided by the Ghanaian authorities; and staff estimates and projections.

Includes additional resources and spending from the MDRI debt relief.

Table 5.

Ghana: Central Government Expenditures, 2002–06 1/

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Sources: Data provided by the Ghanaian authorities; and staff estimates and projections.

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

Includes additional resources and spending from the MDRI debt relief.

The figure for 2005 program reflects interest and amortization due before traditional rescheduling, because of the inability to separate the two; the figure for 2006 program reflects the MDRI debt relief from World Bank and African Development Fund.

For 2004, includes payments on diputed claims; for 2005 includes payment on float from the previous year only.

Payments associated with wages for Ghana Universal Salary Structure, additional duty hourly allowances, and subvented agencies, pension arrears, and outstanding Tema Oil Refinery (TOR) under-recovery.

Table 6.

Ghana: Central Government Financing, 2002–06

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Sources: Data provided by the Ghanaian authorities; and staff estimates and projections.

Includes additional resources and spending from the MDRI debt relief.

Dicrepancy in 2006 indicates float checks from the previous year and scope for additional contingency expenditure.

The figures for 2005 program reflects interest and amortization due before traditional rescheduling, because of the inability to separate the two; the figure for 2006 program reflects the MDRI debt relief from World Bank and African Development Fund.