Ghana
2008 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Ghana
Author:
International Monetary Fund
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Publication Date:
20 Oct 2008
eISBN:
9781451815016
Language:
English
Keywords:
ISCR; CR; debt; deficit; Ghana; NPV; real GDP; Ghanaian authorities; fiscal policy; demand management; money multiplier; core inflation; Government debt management; Current account balance
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This 2008 Article IV Consultation highlights that Ghana’s growth has remained strong, fuelled by both the private and public sectors. The Ghanaian economy maintained strong growth of about 6½ percent in 2007 and the first months of 2008. The private sector has responded positively to macroeconomic stability, structural reforms, and an increasingly business-friendly environment. But fiscal spending also increased, leading to excess demand. Supply-side shocks, especially from international fuel prices, have impacted Ghana negatively, although overall, Ghana’s terms of trade continued to improve.

Abstract

This 2008 Article IV Consultation highlights that Ghana’s growth has remained strong, fuelled by both the private and public sectors. The Ghanaian economy maintained strong growth of about 6½ percent in 2007 and the first months of 2008. The private sector has responded positively to macroeconomic stability, structural reforms, and an increasingly business-friendly environment. But fiscal spending also increased, leading to excess demand. Supply-side shocks, especially from international fuel prices, have impacted Ghana negatively, although overall, Ghana’s terms of trade continued to improve.

I. The Economic Setting

1. Growth remained strong in 2007 and in the first months of 2008, but macroeconomic balances have weakened and external vulnerabilities have increased. Buoyant private sector demand and fiscal expansion have led to a high external current account deficit, pressure on international reserves, and a pickup in inflation. Risks of debt distress are rising: total debt reached 50 percent of GDP at the end of 2007. International commodity price shocks have had a negative impact on inflation, but less so on the external accounts, as Ghana’s terms of trade have improved for several years. Moreover, domestic food supplies have been generally good, and Ghana is a (small) net exporter of food. Nevertheless, regional disparities in food supplies and prices are a concern: flood damage in the north has led to localized food shortages and sharp price increases.

A01ufig01

Growth remains strong, bolstered by strong public and private demand.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.

2. The rise in the fiscal deficit to 9 percent of GDP in 2007 reflected both urgent investment needs and policy slippages with regard to utility pricing and the wage bill. Necessary emergency investments to address energy supply bottlenecks amounted to 2½ percent of GDP. But the authorities also repeatedly delayed passing on the increase in oil prices to utility consumers, and eventual price increases in May and November 2007, though significant, were not sufficient to bring prices to cost recovery levels as world oil prices continued to rise. The wage bill was higher than budgeted because of hiring outside the centralized budget process and higher than budgeted wage growth. Revenue performance continued to be strong however, except from gold.

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Fiscal weakening due to increased utility subsidies, wage bill and energy investment spending.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections

3. Headline inflation accelerated to 15.3 percent in April 2008, as a result of both demand pressures and rising world oil, and to a lesser extent, food prices. In recent months food price inflation has started to accelerate, although it continues to be below nonfood inflation.

4. In May 2007 the Bank of Ghana (BoG) announced formal inflation targeting (IT), which staff describe as “IT lite,” since exchange rate stability is an important intermediate objective. Through September 2007, headline inflation stabilized at slightly above 10 percent while core inflation fell to within the inflation target band of 7–9 percent. However, since then both headline and core inflation have diverged from the target path. In response, the BoG has increased its policy rate by a cumulative 350 basis points since November 2007, but the policy rate has remained barely positive in real terms. Money growth remained strong, although the demand for money increased and velocity declined. Reserve money growth exceeded 30 percent for the second year, reflecting some increase in net international reserves, while broad money growth accelerated to about 43 percent, as the money multiplier increased due to the elimination of the secondary reserve requirement in 2006.

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The recent disinflationary trend is being reversed, reflecting strong domestic demand and energy price shocks.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.
A01ufig04

Policy interest rates have fallen in real terms as inflation rate picked up.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.

5. Strong demand pressures have weakened Ghana’s external position, put pressure on the exchange rate, and reduced the international reserve coverage. The trade balance continued to deteriorate as rapid growth of non-oil imports (investment goods and consumption durables) and an increase in the oil bill overshadowed good export performance related to large terms of trade gains (11 percent in 2007 alone) and a significant increase in gold export volumes. As a result, the current account deficit widened from 9 percent of GDP in 2006 to 11 percent in 2007. Strong capital inflows, including from Ghana’s first international bond issue of US$750 million in September 2007 and partial liberalization of the capital account, 1 helped increase gross international reserves somewhat, but reserve import coverage dipped to 2.6 months at the end of 2007 in the face of very rapid import growth. These trends continued through the first months of 2008, with international reserves declining and import coverage falling to a precarious level of about 2 months by April 2008. The cedi has depreciated by 7 percent against the dollar year on year ending mid-May 2008.

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The external current deficit widened, despite terms of trade gains.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.
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The cedi has depreciated against a weakening dollar.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.1 An increase indicates a depreciation.

6. Growth in credit to the private sector accelerated to about 60 percent both in 2007 and in the first quarter of 2008. Part of this is financial deepening in the wake of financial sector reform; a reduction in the reserve requirement and buoyant demand conditions have also played roles, adding to cyclical pressures. Bank profitability has remained generally good; the average risk-weighted capital adequacy ratio (CAR) is at around 15 percent; and all banks conform with the statutory minimum CAR of 10 percent. But worrisome signs have also emerged in recent months. The nonperforming loan ratio and loan loss provisioning have increased and the default rate of households has risen (albeit the level is still low at 1½ percent). Banks’ costs have risen due to higher wage costs and a rapid expansion of bank branches outside Accra. The BoG has raised the minimum bank capital requirement, stepped up on-site inspections, and is taking measures to make the regulatory framework more sensitive to risk, including introducing capital requirements for operational risk.

7. Structural reforms have slowed in some key areas while progressing in others:

  • Public financial management reforms have advanced, but expenditure slippages in 2006–07 have exposed weaknesses in the system. Incomplete payroll automatization has allowed line ministries and decentralized agencies to do significantly more hiring than budgeted.

  • Civil service reform has all but stalled. Plans to “right-size” the large civil service have not advanced. Following the passage of the Fair Wages and Salaries Act in 2007, the Fair Wages and Salaries Commission is not expected to make recommendations before 2009.

  • In contrast, in other macrocritical areas, financial sector reforms continued, most notably with the introduction of a new National Payments System to expand the delivery of financial services, and debt management is being enhanced.2 Fiscal decentralization is advancing cautiously, and the authorities are drafting a fiscal decentralization law aimed at improving public sector efficiency.

  • The overall business environment has also continued to improve (Figure 1).

Figure 1.
Figure 1.

Ghana: External Competitiveness

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: IMF staff estimates, UN Comtrade; “Doing Business 2008, Ghana” World Bank.

8. Overall, risks to Ghana’s external stability have increased significantly over the past year as a result of loosening domestic policies and, to some extent, external price shocks. Backward looking partial estimates of the equilibrium exchange rate still suggest that the exchange rate is close to equilibrium level, and other indicators, such as market share and cost competitiveness, do not suggest deterioration (Box 1). However, high twin fiscal and external deficits during a global downturn are clearly raising both vulnerabilities and prospects for an overvalued exchange rate.

9. Ghana’s oil reserves, if confirmed, could be significant, placing it somewhere between Chad and Equatorial Guinea. Major investments could start in 2009, and production in 2011, and government revenues could reach a cumulative US$20 billion over the production period (2012–2030), or about 4–5 percent of GDP per year (Supplement, Appendix I).

II. Discussions with the Authorities

10. Against this background, the discussions focused on the dual challenge of containing demand pressures and addressing Ghana’s development needs:

  • What is the right policy mix for Ghana to address domestic demand pressures? What fiscal measures are feasible on the short run?

  • How can Ghana maintain macroeconomic stability while both allowing private sector growth and accommodating its large social and infrastructure needs?

11. How should Ghana enhance its policies and institutional framework to prepare for its transition to an emerging economy and the possibility of an oil era?

Ghana. Assessment of Ghana’s REER

Ghana’s real effective exchange rate (REER) seems to have reverted to its long-term equilibrium level consistent with macroeconomic fundamentals.1 The behavioral equilibrium exchange rate (BEER) approach suggests that the REER is approaching its equilibrium.

A01ufig07

Actual and Estimated Real Effective Exchange Rate, 1984Q2-2008Q1

(In natural logarithms)

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

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Relative Prices, and Effective Exchange Rates

(Index Jan. 2003=100)

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Bank of Ghana, Fund staff estimates.
1The REER assessment update is based on Iossifov, Plamen, Loukoianova, Elena, “Estimation of a Behavioral Equilibrium Exchange Rate Model for Ghana,” Working Paper No. 07/155

A. Medium-term Outlook and Risks

12. Ghana’s medium-term economic prospects depend critically on actions taken this year and next.

  • The staffs baseline scenario assumes an implementation of the government’s announced fiscal measures and further monetary tightening in 2008. While crucial, these would still leave the economy in a vulnerable position. If no further fiscal measures are introduced in 2008–09, the fiscal deficit would continue to remain in the neighborhood of 10 percent of GDP over the medium term, growth would slacken, and inflation, while moderating, would still remain well above the authorities’ medium-term target of 5 percent. The current account deficit would remain well above 10 percent of GDP, with total public debt rising to 60 percent of GDP in 2010.

  • An alternative scenario with additional fiscal adjustment in 2008–09 would lead to higher private sector-led growth and lower inflation over the medium term. This scenario would require that the fiscal deficit fall to around 7 percent of GDP by 2011; subsequently, further declines to about 5 percent would be needed to stabilize public debt at around 45–50 percent of GDP. Budget reforms, particularly eliminating generalized utility price subsidies and reducing the size of civil service, would make it possible to concentrate spending on priority development and infrastructure needs. The external position and debt sustainability would firm up, and risks of debt distress would decrease.

Selected Medium-Term Indicators, 2007–10

(Percent of GDP; unless indicated otherwise)

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13. The downside risks to the staff’s baseline scenario are significant, heightening the need for tighter policies in 2008–09. Risks include a pronounced worsening of the global environment, with a deterioration in Ghana’s terms of trade (mainly due to oil prices), as well as a sudden stop or reversal in external financing flows, particularly portfolio investment. Although nonresidents’ holding of domestic government debt amounts to only about 3 percent of GDP and there is a minimum holding period of one year, a sudden withdrawal of capital, or even just a stop in inflows, would pose some risks to budget financing and ultimately to international reserves (Box 2). Weather-related shocks (drought, flood) also can pose risks, which could be magnified by rising world food prices.

How is Ghana’s Widening Current Account Deficit Financed?

Ghana has largely financed a rapidly widening current account with official financing and foreign direct investment. These capital flows are less susceptible to market sentiment, creating less vulnerability than sovereign external bonds and other private capital like portfolio flows or bank borrowing. However, these forms of financing are also growing. In particular, portfolio inflows have been rising since the partial liberalization of capital inflows in late 2006. Nonresidents are allowed to purchase domestic government securities but with restrictions–minimum maturities of three years and a minimum holding period of one year–designed to reduce vulnerability to a sudden reversals. Limitations on foreign equity purchases have also been lifted, but portfolio inflows are concentrated in government securities; foreigners currently hold 11 percent of government securities (equal to less than 3 percent of GDP).1

A01ufig09

Net Capital Flows

(percent of GDP)1

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: National authorities and staff projections.1 Excluding errors and omissions.
1The data on private capital inflows probably understate gross inflows, and the authorities are working to address weaknesses, in cooperation with Fund staff.

B. Near-term Policies to Reduce Risks to Stability

Fiscal policy

14. The authorities and staff agreed that demand pressures had to be reduced primarily through fiscal adjustment. To this end, the government announced in April three measures to limit the rise in the deficit:

  • Adjusting utility prices. A price increase for commercial users to current cost-recovery levels starting in July is projected to reduce associated subsidies by about 1 percent of GDP in 2008 and 2 percent of GDP in 2009. The authorities also stated that cost recovery pricing might be extended to residential users next year, but this needs to be firmed up after the elections; this measure would reduce subsidies by another 2½ percent of GDP in 2009 and 2010 (not included in staffs current projections). Staff urged a return to an automatic price adjustment mechanism to maintain cost recovery pricing and depoliticize the price-setting process. To cushion the impact on poorer households, staff supported strengthening existing targeted utility subsidies. The authorities attributed high production costs and associated subsidies to exogenous shocks (low rainfall, high oil prices, and tight regional gas supply) and considered that electricity production costs could fall in the coming years, making the achievement of full cost recovery easier over the medium term.

  • Increasing the government’s disappointingly low revenues from the gold sector. The result of limited capacity for revenue monitoring and a tax regime that has historically favored gold companies to attract investment. The government has announced its intention to double the rate for the royalties tax in the gold sector; revenues could be also increased by enforcing current tax laws and eliminating administrative loopholes. Possible changes in the tax system would be discussed with investor partners.

  • Temporarily freezing hiring in the public sector (beyond the automatic absorption of trainees in health and education) to keep the wage bill within the 2008 budget. The freeze should last until civil service reforms regain momentum (possibly after the elections). The authorities and staff agreed that it will be also be crucial to keep public sector wage increases in 2008 in line with the budget.

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The government receives only a small proportion of gold export revenues.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities, and IMF staff estimates.1 Net of implicit energy subsidies.

15. Staff agreed that these measures targeted the right areas, but noted that they would not be sufficient to limit the rise in the fiscal deficit from last year’s already high level. Staff projects that even with the planned measures, the fiscal deficit will rise to 10.3 percent of GDP in 2008; without additional measures in 2009, the deficit would further increase to 10.6 percent of GDP. The government therefore needs to prepare additional measures, such as postponing nonessential capital spending.

Monetary and Exchange Rate Policy

16. The Bank of Ghana noted that the policy interest rate increases since October 2007 were appropriately large; nevertheless, they were ready to raise rates further if needed. In particular, they pointed out that core inflation had been within the BoG’s target range until late 2007 and that they had raised rates when it picked up. Notwithstanding the recent significant policy rate increases, staff believes that monetary policy needs to be tightened further to contain demand pressures. The policy rate in real terms has been barely positive as inflation has accelerated. Staffs model simulations, which are broadly indicative, suggest the need to increase the policy rate further to steer inflation back toward the medium-term target of 5 percent, particularly if fiscal policies are not tightened.3 That said, it is increasingly clear that monetary policy alone cannot fight inflation and its effectiveness is being undermined by expansionary fiscal policies.

17. Ghana’s exchange rate regime is a managed float, with a secondary objective on the exchange rate to support the inflation target. The exchange rate has become more flexible in response to market pressures and as the foreign exchange market has gradually deepened. Indeed, the BoG’s share in total foreign exchange transactions has fallen recently. Staff recommended accelerating this trend and decreasing the high foreign exchange surrender requirements for cocoa and gold and phasing out the BoG practice of supplying foreign exchange to oil importers. The authorities reiterated their long-held view that the exchange rate is flexible and fully market-determined, and that surrender requirements need to be maintained to manage lumpiness in foreign exchange receipts. Given rising current account risks and low reserve levels, there is also a need to increase international reserves gradually; the BoG may need to sterilize part of the resulting increase in liquidity that fuels reserve money growth.

Debt sustainability

18. The joint Fund-Bank external debt sustainability analysis (DSA) found that risks to Ghana’s external debt distress have increased, although they remain moderate (Box 3 and Supplement). An analysis of public debt suggests that total debt would rise from 50 percent of GDP in 2007 to above 80 percent over the long term, even with the authorities’ fiscal adjustment in 2008. This would be well above the authorities’ debt ceiling of 60 percent of GDP announced in the 2008 budget—which staff considers too high for a low income country–or any “debt intolerance” level estimated by a number of emerging market studies (between 25–40 percent of GDP). Also, the median debt level in Ghana’s rating category B is about 35 percent of GDP, which is equivalent to about 45 percent or so if account is taken of Ghana’s still significant debt concessionality. Staff considers that limiting total debt to about that level would be appropriate and consistent with a low income country DSA assessment of risks to external debt distress of moderate to low. Staffs analysis indicates that limiting Ghana’s debt to GDP ratio to about that level would require reducing the fiscal deficit to an annual average of about 5 percent of GDP in the long term.

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Total public debt increased to close to 50 percent of GDP at the end of 2007 given high fiscal deficits and large external bond issuance.

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Sources: Ghanaian authorities and staff estimates and projections.

Joint Debt Sustainability Analysis (DSA) 2008

  • Ghana’s risks of external debt distress remain moderate but have increased since the May 2007 DSA. The baseline scenario incorporates the current macroeconomic framework with higher twin fiscal and current account deficits and information on new borrowing, including the government’s US$750 million Eurobond issue in September 2007.

Ghana: Joint DSA 2008 and 2007

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Source: Joint DSA - Supplement to the Staff Report.

  • Stress tests show that debt burden indicators breach the thresholds in four out of five bound standard stress tests. Some relevant shocks that breach the thresholds include the impact of a one-time 30 percent depreciation, and contracting government debt on less favorable terms. In addition, a stress test that reduces drastically non-debt creating flows, including current transfers and FDI, increases the NPV of debt-to-GDP ratio close to or above the thresholds for the period 2012-2020.

  • Ghana’s total public debt increases in the baseline scenario from about 50 percent of GDP in 2007 to 81 percent of GDP in 2028, indicating clearly the risks to overall debt sustainability in the absence of additional fiscal adjustment in the short and medium term.

  • As part of an enhanced focus on overall debt sustainability, a comprehensive debt management strategy should be adopted that is consistent with macroeconomic and other policy objectives, and explicitly recognizes relative costs and risks. The recommendations of a recent Fund-Bank Medium–Term Debt Strategy (MTDS) mission can be useful in this regard.

Financial Sector Stability

19. The authorities and staff agreed that financial deepening was desirable given Ghana’s low financial intermediation. However, very rapid credit growth in the past years raises both demand management and regulatory concerns, as a recent worsening in some asset quality indicators imply. The authorities took comfort in the fact that most of the credit expansion was funded by increases in deposits. Joint stress tests by BoG and staff point to some asset concentration risks, but they do not indicate that interest rate increases would pose significant balance sheet risks for systemically important banks. The BoG noted steps taken to further strengthen supervisory capacity, such as increasing off-site supervision and moving towards the more risk-sensitive regulatory framework of Basel II, several elements of which–regulatory capital for operational risk and more extensive disclosure requirements–have alreay been adopted. Staff advised that continued rapid expansion necessitates prudential measures, such as stricter loan-to-value ratios and debt service limits. Also, it will be important to ensure that banks’ collateral requirements and underwriting standards are not weakened in the context of the credit boom.

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Financial Soundness Indicators

(percent)

Citation: IMF Staff Country Reports 2008, 344; 10.5089/9781451815016.002.A001

Source: Ghanaian authorities.

C. Anchoring Macroeconomic Policy to Sustain Growth

20. Discussions also focused on designing a policy framework that can better anchor economic policy and manage both exogenous and policy-induced shocks.

  • The first element of intended policy anchoring, IT, could benefit from further enhancements in communication and forecasting tools. The adoption of a formal IT regime in May 2007 has enhanced the transparency of monetary policy; the next priority should be to improve operational transparency. To make market interest rates more responsive to inflationary pressures, the BoG could consider communicating ex ante how it is likely to respond to various supply and demand shocks. As some leading IT regimes have done, the BoG could consider publishing its inflation and interest rate forecasts. Further enhancements to the BoG’s modeling and forecasting will also help policy-makers better anticipate trends and policy impacts; Fund staff is providing capacity building support in this area.

  • IT is now being complemented with a fiscal policy anchor. The authorities are working, with support from the Fund, on a draft Fiscal Responsibility Law (FRL) to improve fiscal discipline and anchor fiscal expectations.

  • Other important structural reforms need to advance: (i) public financial management improvements are crucial, as expenditure slippages in 2006–07 amply demonstrated. Particular attention is needed to control expenditure commitments; (ii) civil service reform needs to resume in earnest, with the medium-term goals of attracting high- quality labor and reducing total public sector employment, starting with subvented agencies; and (iii) fiscal decentralization can provide efficiency gains, but staff cautioned against allowing significant borrowing by local governments, based on experiences elsewhere of high associated fiscal risks.

21. The recent major oil discovery, if confirmed, could materially improve Ghana’s medium-term prospects and its timetable for reaching the MDGs, while posing new policy challenges. The authorities and staff agreed that any temptation to start spending future oil revenue could exacerbate current demand pressures. Regarding preparations for the oil era, the authorities have commendably started a national dialogue on the use of future oil revenue, and they have been working on the technical details of an oil revenue and demand management plan, with support from Norway, other development partners, and the Fund. Staff noted that best practice measures for oil management include a well-functioning public financial management (PFM) system and demand management with a medium-term expenditure framework that recognizes absorptive capacity constraints. If oil is declared commercially viable, large capital inflows would take place to finance oil investment, but as much of it would fund imports, its impact on monetary and exchange rate policies would be limited. In contrast, large foreign exchange inflows following the start of oil production at a later stage around 2011 would pose challenges for demand management that will need to be addressed in an appropriate mix of fiscal and monetary-exchange rate policies.

D. Other Issues

22. Policy dialogue between the authorities and staff has remained active since Ghana’s completion of its Poverty Reducing Growth Facility (PRGF) arrangement in October 2006. Discussions on a Policy Support Instrument (PSI) started in the fall of 2007, but they have not advanced.

23. An interim Economic Partnership Agreement (EPA) with the European Union (EU) signed in December 2007 is likely to have a smaller negative fiscal impact in the near term (estimated at about 0.5 percent of GDP). The interim EPA allows for 100 percent trade liberalization of Ghanaian exports to the EU, with a transition period for rice and sugar, and the gradual liberalization of 80.5 percent of imports from the EU over 15 years. Some agricultural and processed goods are excluded from the interim EPA to protect Ghana’s infant industries and preserve tax revenues.

24. Macroeconomic data are broadly adequate for surveillance, but the quality and timeliness of the data need to be improved. Specifically, for a country aspiring to emerging market status and accessing international capital markets, meeting SDDS standards for data production and dissemination should be a priority.

III. Staff Appraisal

25. Ghana’s growth has remained strong, partly fueled by a dynamic private sector response to macroeconomic stability, structural reforms, and an increasingly business-friendly environment. At the same time, there are still daunting development needs. The combination of strong private sector demand and the fiscal expansion of recent years has led to increasing macroeconomic imbalances, a weakening external position, low levels of international reserves, and a rebound in inflation. Rising risks could undermine Ghana’s hard-earned achievements in macroeconomic stability and structural reforms since the early 2000s.

26. In view of the near term risks, there is an urgent need to pull back from the expansionary fiscal policies of the past two years. The authorities’ announcement of a package of fiscal adjustment measures is a welcome start, but its implementation has been slow and more action is needed. The package appropriately focuses on cost recovery in utility pricing, freezing public sector employment, and taxation of the gold sector. Full and timely implementation is of the essence. To lower the deficit, cost recovery utility pricing should be extended to all users and an automatic utility price adjustment mechanism should be reinstated. At the same time, social safety nets should be provided with better targeted subsidies for poor households. Cuts in nonessential expenditures are also necessary in 2008-09. Without additional adjustment, staff forecasts continuing large fiscal deficits and an associated significant increase in total public debt over the medium term, with increasing risks to external stability and of an overvalued exchange rate.

27. Fiscal policy should also make room for private sector growth. Reducing the fiscal deficit gradually and limiting it to 5–6 percent of GDP over the long term would be consistent with the government’s objective of private sector-led growth while still allowing it to undertake well-prioritized, growth-enhancing infrastructure projects. It would also help limit total public debt to below 50 percent of GDP, broadly commensurate with Ghana’s rating peers (after adjustment for concessionality of debt) and in line with moderate-to-low external debt distress in the context of the low income country DSA framework.

28. The ongoing monetary tightening is welcome and needs to continue. The tightening could have started earlier, and further policy rate increases are needed to bring inflation toward its medium term target. It would be also advisable to contain money growth by sterilizing part of the much-needed foreign exchange reserve buildup. Nevertheless, monetary policy alone cannot fight inflation, and its effectiveness is increasingly being undermined by lax fiscal policies.

29. The monetary policy framework has been enhanced by last year’s introduction of an “inflation targeting lite” regime. With progress in goal transparency, the priority now is to strengthen operational transparency. Enhancements to the BoG’s communication strategy would help make the market more responsive to new information about inflationary pressures and enhance the credibility of the IT framework.

30. Increased exchange rate flexibility will help Ghana to move toward a full-fledged IT regime and better respond to shocks. The exchange rate regime is managed float. The BoG’s role in the foreign exchange market that has influenced market conditions is shrinking as markets gradually develop; steps to phase out foreign exchange surrender requirements and BoG sales of foreign exchange to oil importers would usefully accelerate this process.

31. Rapid credit growth to the private sector raises regulatory concerns even if part of the expansion reflects welcome financial deepening. The recent worsening in bank asset quality is a warning sign. The increase in banks’ minimum capital requirements and the introduction of a more risk sensitive regulatory framework, in the form of a simplified version of Basel II, are appropriate. Additional regulations to limit potential prudential risks, such as debt service limits, may also need to be introduced and scrutiny over banks’ collateral requirements and underwriting standards should be stepped up. Credit growth will also be usefully moderated by the ongoing monetary tightening.

32. A faster pace of macrocritical structural reforms would make it easier to address Ghana’s challenges in its transition to an emerging market economy. PFM and civil service reforms are particularly critical to make public spending more efficient and flexible.

33. Oil prospects can materially improve Ghana’s medium-term outlook for growth and poverty reduction if it avoids the “oil curse” of rent-seeking and boom-bust cycles. Ghana’s good track record on transparency bodes well for minimizing rent-seeking, and the Ghanaian authorities are to be commended for already having begun a nationwide consultation on the use of oil resources. Building up an effective oil management regime to avoid costly boom-bust cycles will also require good demand management—an area where Ghana’s track record since 2006 has weakened.

34. It is proposed that the next Article IV consultation will be held on the standard 12-month cycle.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2005–09

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

Percent of broad money at the beginning of the period.

As of May 19, 2008.

Including public enterprises and errors and omissions.

Table 2.

Ghana: Balance of Payments, 2005–13

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

Including MDRI debt relief from the Fund and IDA in 2006, and the African Development Fund in 2007.

Table 3.

Ghana: Summary of Central Government Budgetary Operations, 2005–091

(In percent of GDP, unless indicated otherwise)

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

Above-the-line data for domestic recurrent and capital expenditure are presented on a cash basis.

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

Table 4.

Ghana: Monetary Survey, 2005–09

(Millions of Ghana cedis, end of period; unless otherwise specified)

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

Including foreign currency deposits.

Excluding foreign currency deposits.

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

Credit from deposit money banks to the private sector.

Net international reserves are defined as short-term foreign assets of the BoG, minus short-term external liabilities.

Table 5.

Ghana: Bank of Ghana and Deposit Money Banks, 2005–09

(Millions of Ghana cedis, end of period; unless otherwise specified)

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

Includes holding of T-bills issued for monetary liquidity purposes, starting January 2003, and Bank of Ghana bills starting September 2004.

Table 6.

Ghana: Selected Medium-Term Indicators, 2007–13

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Sources: Data provided by Ghanaian authorities; and IMF staff estimates and projections. Note: The medium-term macroeconomic framework does not include oil prospects due to insufficient data at this stage.

Including public enterprises and errors and omissions.

Table 7.

Ghana: Country Profile, Millennium Development Goals, 1990–2004

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Sources: World Development Indicators, United Nations site for MDG indicators (http://mdgs.un.org/unsd/mdg/Data.aspx?cR293); and IMF staff estimates and projections. Note: In some cases the data are for earlier or later years than those stated. National specification of individual indicators and targets may differ from

As reported in the Ghana Poverty Reduction Strategy 2006 and the Annual Progress Report (2005).

Targets: Halve, between 1990 and 2015, the proportion of people whose income is less than US$1 a day; halve, between 1990 and 2015, the proportion of people who suffer from hunger.

Target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.

Target: Eliminate gender disparity in primary and secondary education, preferably by 2005, and to all levels of education, no later than 2015.

Target: Reduce by two-thirds, between 1990 and 2015, the under-5 mortality rate.

Target: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.

Target: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases.

Target: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, achieve a significant improvement in the lives of at least 100 million slum dwellers.

Targets: Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system. Address the special needs of the least developed countries. Address the special needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communication.

Table 8.

Ghana: Financial Soundness Indicators, 2004–08

(Percent, end of period, unless otherwise specified)

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Source: Bank of Ghana.

Average lending rate minus average (saving and demand) deposit rate.

Table 9.

Ghana: Indicators of External Vulnerability, 2005-2008

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Sources: Datastream, Bank of Ghana; and IMF staff estimates.

Excluding foreign currency deposits.

For 2008, as of end-May.

For 2008, as of June 6th.

Positive outlook, reduced to “stable” in February 2008.

Stable outlook, since 2003.

1

See the accompanying Selected Issues Paper on capital account liberalization.

2

Following the guidance of Executive Directors during last year’s Article IV discussions, Ghana is one of the pilots of the Fund’s medium-term debt management strategy project.

3

See a Selected Issues Paper on Inflation Forecast Targeting.

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Cover IMF Staff Country Reports
Ghana: 2008 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Ghana
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 344
Publisher:
International Monetary Fund
ISBN:
9781451815016
ISSN:
1934-7685
Pages:
92
DOI:
https://doi.org/10.5089/9781451815016.002
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    Growth remains strong, bolstered by strong public and private demand.

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    Fiscal weakening due to increased utility subsidies, wage bill and energy investment spending.

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    The recent disinflationary trend is being reversed, reflecting strong domestic demand and energy price shocks.

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    Policy interest rates have fallen in real terms as inflation rate picked up.

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    The external current deficit widened, despite terms of trade gains.

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    The cedi has depreciated against a weakening dollar.

  • Figure 1.
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    Figure 1.

    Ghana: External Competitiveness

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    Actual and Estimated Real Effective Exchange Rate, 1984Q2-2008Q1

    (In natural logarithms)

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    Relative Prices, and Effective Exchange Rates

    (Index Jan. 2003=100)

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    Net Capital Flows

    (percent of GDP)1

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    The government receives only a small proportion of gold export revenues.

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    Total public debt increased to close to 50 percent of GDP at the end of 2007 given high fiscal deficits and large external bond issuance.

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    Financial Soundness Indicators

    (percent)

Growth remains strong, bolstered by strong public and private demand.

Fiscal weakening due to increased utility subsidies, wage bill and energy investment spending.

The recent disinflationary trend is being reversed, reflecting strong domestic demand and energy price shocks.

Policy interest rates have fallen in real terms as inflation rate picked up.

The external current deficit widened, despite terms of trade gains.

The cedi has depreciated against a weakening dollar.
Figure 1.

Ghana: External Competitiveness

Actual and Estimated Real Effective Exchange Rate, 1984Q2-2008Q1

(In natural logarithms)

Relative Prices, and Effective Exchange Rates

(Index Jan. 2003=100)

Net Capital Flows

(percent of GDP)1

The government receives only a small proportion of gold export revenues.

Total public debt increased to close to 50 percent of GDP at the end of 2007 given high fiscal deficits and large external bond issuance.

Financial Soundness Indicators

(percent)