1. The candid and concise staff report reflects well the open and frank discussions with the authorities who appreciate the significant value added in this consultation. The constructive and collaborative efforts of the authorities and staff of the IMF/WB have resulted in a report that acknowledges the achievements of the authorities and recognizes the historic opportunity of the present stage of the evolution of Ghana’s economy. It appropriately identifies the challenges, realistically assesses the resource constraints, and pragmatically maps out policy responses to accelerate growth and meet the Millennium Development Goals (MDGs) while preserving macroeconomic stability and debt sustainability. The authorities express appreciation for the high–quality policy dialogue, and the recent technical assistance from MCM, including a mission to advise them on access to the international capital markets. They also extend their gratitude for continued support of management and the Executive Board.

2. Ghana’s achievements include a marked increase in per capita GDP; significant reduction in poverty; sizable disinflation; reduced economic vulnerabilities; and strengthened institutions that have enhanced governance and democracy and fostered socio–political harmony and stability. Ghana has benefited from IMF financial and technical support which has been instrumental in this progress. This performance, along with strengthened business environment, has boosted confidence and earned higher rating for Ghana as well as recognition for rapid progress in the Ease of Doing Business Index. The authorities are committed to sustaining this strong performance to accelerate progress toward achieving the MDGs.

3. Economic performance improved further in 2006, with strong growth, decline in inflation, and further accumulation of reserves. The fiscal deficit, however, increased as a result of revenue shortfall and expenditure overruns. The latter, to a large extent, is the result of one–off expenditures. A severe energy crisis due to region–wide drought affecting hydropower generation has meant higher subsidies to the energy and water sectors as well as spending on critical investments in these sectors. Public sector wages also increased, most of which went to the critical health and education sectors, where Ghana faces major manpower shortage. Some of these expenditures were associated with the 50th Independence Anniversary celebration and the leadership role of Ghana on the continent, including hosting of the upcoming African Union Conference. Other one–off expenditures were in respect to purchase of equipment for the security agencies and spending on the National Identification program. The authorities, in consultation with staff, have designed a package of measures to reduce the deficit.

4. The staff report recognizes, perceptively, that the most important challenges ahead are to accelerate growth and achieve the MDGs against the backdrop of unlikely scaling up of concessional financial assistance, while maintaining macroeconomic stability and debt sustainability. To ensure macroeconomic stability, measures are being taken to reduce the fiscal deficit in 2007 and over the medium term. On the expenditure side, spending on nonessential investments is to be curtailed along with subsidies and transfers with the adoption of a system of cost–recovery energy and utility tariffs, which is being implemented. The public sector wage–setting process is to be streamlined, linking real wage increases to productivity increases. Civil service reform will attempt to rightsize the service while promoting efficiency and improve remuneration. Additional revenue is expected from strengthening tax administration, broadening the base, including by reducing the scope of exemptions, and intensified collection of arrears. Progress in implementation of PFM is expected, including in fiscal reporting, treasury reform, and deployment of the new automated payroll management system. The authorities see merit in shifting to total public debt/GDP as the new fiscal anchor, in view of the fact that the traditional line between ‘domestic’ and ‘external’ debt is blurred, to focus on overall debt sustainability. A fiscal responsibility law is under discussion, building on the 2003 Financial Administration Act, to underpin fiscal discipline and anchor expectations. To preserve debt sustainability, the authorities are planning a debt management framework consistent with the best international practice, hopefully, with the assistance of their development partners.

5. Monetary policy will continue focusing on its primary objective of targeting inflation. Recognizing the detrimental effect of exchange rate instability, monetary policy began in earnest in 2001 to target inflation and shift the focus of the Government and the public away from exchange rate fluctuations to inflation. The documents before the Board reflect well the effective success of this strategy. Considerable effort has been devoted to developing the infrastructure for adoption of an inflation–targeting (IT) framework, with much appreciated technical assistance from the Bank of England. Some of the institutional infrastructure and conditions for IT are already in place, while progress is being made on others. The staff report appropriately refers to the present monetary regime as “IT lite,” suggesting that “there seems to be a secondary policy objective for the exchange rate in support of the inflation target.” It is worth noting that according to the findings of a number of studies on IT, choice of secondary policy objectives, including exchange rate, is not inconsistent with “IT lite” regimes. While the authorities appreciate the acknowledgement that the exchange rate regime of Ghana does not serve as a monetary anchor, they do not agree with the assessment that the exchange rate is “heavily” managed. In their view, neither the fact of exchange rate stability nor the statutory responsibility for market intervention logically constitute prima facie evidence of intervention beyond that necessary for smoothing purposes.

6. As the staff report suggests, the financial system is sound, with adequate capitalization, liquidity and high profitability. Nonperforming loans are at a fairly low level and loan provisioning is adequate. The Bank of Ghana is in full compliance with recommendations of the 2003 FSAP update. The authorities will continue to promote competition, efficiency, and deepening in the financial sector. Supervision will be reinforced and banks will be encouraged to strengthen their risk management practices. Domestic capital market development remains a prime goal to promote alternative sources of financing.

7. The authorities are committed to building on the progress in structural reforms to strengthen further the productive potential of the economy and position it well to achieve the accelerated growth projected over the medium term. In the energy sector, additional generation capacity is being installed to address the ongoing power crisis and mitigate its potential effect on economic activity. Subsidies that were provided to the energy and utilities sectors in the face of the ongoing crisis will be curtailed as cost–recovery tariffs are being reinstated while measures are implemented to improve efficiency of services. The authorities will continue to improve the business environment and strengthen private sector development. In this regard, the divestiture process will be accelerated, particularly in the oil and telecommunications sectors. Active private sector participation in major infrastructure projects will be encouraged through public–private partnerships. The regulatory burden will be reduced and protection of private property and investments will be improved. Strengthening good governance further remains a priority of the Government and the relevant institutions will be given the necessary support to carry out their respective mandates effectively.

8. The medium–term outlook remains positive, with strong growth projected, and inflation expected to decline to low single digits. The overall fiscal deficit will stabilize slightly below 6 percent of GDP and, along with prudent debt policy, contribute to a reduction in total public debt to about 40 percent of GDP. Progress toward the MDGs is continuing. The poverty goal is within reach, but more progress is needed in the health, water, and sanitation sectors, where additional resource availability and enhanced spending efficiencies would be required. As the joint IMF–World Bank DSA confirms, Ghana’s debt is sustainable and the risk of distress is moderate to low. The authorities appreciate the recognition and the acknowledgement that scaling up of concessional assistance is no longer reliable to anchor infrastructure investments urgently needed to remove supply–side bottlenecks. Therefore, access to minimal level of nonconcessional financing is imperative. Such levels of resort to external saving to carry out critical investments will not jeopardize the debt profile to the extent that these investments are expected to induce active supply response, have high returns, and enhance growth. The authorities recognize that supportive macroeconomic and reform policies, together with judicious borrowing policy, are critical to long–term debt sustainability. Decisions regarding further liberalization of the capital account and the foreign exchange market will be made in consideration of the associated risks and the need to ensure orderly foreign currency flows.

9. The authorities recognize and value the perceptible paradigm shift in surveillance toward key macroeconomic and structural policy issues and their interlinkages as demonstrated in this Article IV consultation. Its value added has served to strengthen Ghana/IMF relations. The authorities will maintain a close relationship with the IMF to continue to benefit from its sound policy advice and advocacy for international assistance to support Ghana’s developmental efforts. They have taken note of staff’s suggestion for a follow–up formal engagement. The candid policy discussions and close collaboration with staff have produced the fundamental building blocks of a solid framework that has crystallized their vision of a home–grown program that—anchored by strong macroeconomic policies and structural reform—can mobilize additional financial resources from a domestic financial sector that is to be well developed as well as from the international capital markets. An important anchor of such a program will be the establishment of a cutting–edge debt management framework to assist in maintaining debt sustainability. In short, the core building block of the program envisioned by the authorities includes orderly and prudent access to the international capital market, sound development of a domestic financial market, and a debt management framework of best–international–practice quality. The authorities intend to manage expectations prudently in order to maintain macroeconomic stability and support to the reform process, especially during this pre–election period. The authorities consider the IMF as an important partner in their effort to achieve the full potential of the historic opportunity to accelerate growth and reduce poverty at a faster pace than has been possible thus far. The authorities, once more, register their appreciation for the strong support from Ghana’s development partners in the form of financial and technical assistance and debt relief. They continue to count on this support, which remains critical for Ghana to remain on track to achieve the MDGs and middle–income status by 2015.