Ghana
2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Ghana
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International Monetary Fund
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Publication Date:
14 Aug 2009
eISBN:
9781451815047
Language:
English
Keywords:
ISCR; CR; bottom; government; staff appraisal; consumer price inflation; foreign currency; investment strategy; deficit target; core inflation; inflation-targeting framework; Inflation; Credit; Currencies; Global
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This 2009 Article IV Consultation highlights that Ghana’s overall financial system remains stable. The regulatory and supervisory framework is strong, backed by a modern payment and settlement infrastructure. Financial soundness indicators point to a banking system that is liquid and with capital above statutory levels. Directors have supported the authorities’ efforts to restore macroeconomic stability by seeking to achieve fiscal sustainability. Noting that Ghana remains at moderate risk of debt distress, Directors have emphasized that further fiscal consolidation will be critical over the medium term.

Abstract

This 2009 Article IV Consultation highlights that Ghana’s overall financial system remains stable. The regulatory and supervisory framework is strong, backed by a modern payment and settlement infrastructure. Financial soundness indicators point to a banking system that is liquid and with capital above statutory levels. Directors have supported the authorities’ efforts to restore macroeconomic stability by seeking to achieve fiscal sustainability. Noting that Ghana remains at moderate risk of debt distress, Directors have emphasized that further fiscal consolidation will be critical over the medium term.

I. Introduction

1. Ghana completed a Poverty Reduction and Growth Facility (PRGF) arrangement in October 2006. Under the PRGF, it achieved strong growth, single-digit inflation, major debt reduction,1 and a decline in the poverty rate from 39 percent (1998-99) to 28 percent (2005-06); other social welfare indicators also improved. Fiscal stability was elusive, however, with the deficit rising sharply by end-2006.

2. Discussions in 2007–08 on a program to be supported by the Policy Support Instrument (PSI) did not advance. Responsiveness to the Fund’s 2008 surveillance advice on fiscal management was also limited (Box 1). The most fruitful areas of collaboration in 2007–08 centered on Fund staff advice on building access to global financial markets and developing the framework for an inflation targeting regime.

Ghana: Response to Fund Advice

Fiscal policy: A central message of the 2008 Article IV consultation concluded by the Board on June 30, 2008 was the urgency of fiscal tightening to avoid deteriorating debt dynamics and risks to external sustainability. In practice, a highly expansionary fiscal stance was maintained through the end-2008 elections, with large over-runs in public sector wages.

Monetary and exchange rate policy: In line with Fund advice, the Bank of Ghana continued to tighten monetary policy through the second half of 2008 and into early-2009. However, given the expansionary fiscal stance, this was not sufficiently aggressive to stem inflation. On exchange rate policy, the greater flexibility in the exchange rate since mid-2008 was in line with Fund advice.

Structural reforms: Little progress was made in 2008 on macro-critical reforms to public financial management (PFM) and the civil service.

3. The macroeconomic dialogue has strengthened under the new government. At the authorities’ request, a staff team visited Accra in February 2009 to support preparatory work for the 2009 budget (adopted in March), and technical assistance was requested on tax policy, revenue administration, and natural resource taxation (with missions completed in April-June).

4. The authorities have requested a new PRGF arrangement. This will underpin fiscal consolidation and a program of structural fiscal reforms ahead of Ghana’s move to oil producer status starting in 2011 (Section IV).

II. Background

5. Economic growth rose to a two-decade high of 7.3 percent in 2008. This reflected expansionary fiscal policies combined with an upswing in private sector activity based on strong credit expansion, buoyant remittances, and strong agricultural yields. For 2009, growth is projected to slow, based on policy tightening and spillovers from the global recession.

6. Inflation has risen on account of external shocks and strong domestic demand. After falling briefly to single-digits in 2006, inflation rose through 2007–08, reflecting global food and fuel price shocks, strong domestic demand, and the pass through from currency depreciation. In early-2009, inflation stabilized in the 20 percent range. With easing demand pressures, inflation is projected to decline to 14½ percent by end-2009.

7. Presidential and parliamentary elections were a factor behind fiscal slippages in 2008. The fiscal deficit surged to 14.5 percent of GDP, reflecting rapid public spending growth, with capital spending, energy subsidies, and wage and salaries each rising by more than 1 percentage point of GDP. Following earlier power shortages, new investments were made in thermal power capacity; large subsidies were incurred when electricity tariffs were not adjusted to reflect the rising cost of power generation; and public sector salaries were increased, on average, by more than 30 percent (15 percent in real terms). The 2008 fiscal deficit drew on exceptional foreign financing amounting to 7.3 percent of GDP, comprising resources from the late-2007 Eurobond issue and proceeds from the sale of Ghana Telecom.2 In addition, the central bank provided financing equivalent to more than 3 percent of GDP.

8. The 2009 budget targets a deficit of 9.4 percent of GDP, largely based on spending cuts and higher grant receipts. Following the completion of power sector and other investments, capital spending has been cut by 3 percent of GDP (Text Table 1). Energy sector subsidies are also projected to decline by more than 1 percent of GDP, in line with global oil prices. These savings are partly offset, however, by higher interest costs and a larger provision for clearing domestic arrears. Updated fiscal projections developed during the May mission suggested a potential deficit overrun of 1 percent of GDP. To maintain the 2009 deficit target the authorities have cut tax exemptions, identified wage bill and investment savings, and are adopting a temporary increase in the profit tax for selected industries (MEFP, ¶24).

Text Table 1.

Fiscal Adjustment Under 2009 Program

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Source: Official data; and Fund staff projections.

Fiscal adjustment in program, relative to GDP, including June 2009 measures.

The 2009 data have been adjusted to ensure comparable coverage to 2008.

9. Monetary policy was tightened in response to rising inflation. The Bank of Ghana increased its benchmark lending rate by 6 percentage points between October 2007 and February 2009, and market conditions tightened by more, as reflected in interbank and treasury bill rates. The policy rate was left unchanged in May 2009 on an assessment that inflationary pressures were easing. Despite rate increases, the real prime rate has been negative since early-2008 (based on backward-looking inflation), while the real interbank rate remains in the 0-2 percent range. The banking sector has continued to register strong asset growth, with private sector credit up 56 percent in the year to April 2009, only partly due to valuation changes on foreign currency-denominated loans. This expansion continues to reflect local deposit mobilization, with broad money up 28 percent on the same basis.

uA01fig01

Ghana: Real Interest Rates, 2005–2009 1/

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

10. Ghana’s overall financial system remains stable. The regulatory and supervisory framework is strong, backed by a modern payment and settlement infrastructure. Financial Soundness Indicators (FSIs) point to a banking system that is liquid and with capital above statutory levels. However, some recent deterioration is evident: non-performing assets are high and rising (9.6 percent in March 2009); profitability is declining; and a few banks are financially strained. The Bank of Ghana has required banks to raise their minimum capital to GH¢60 million (about $40 million) to allow them to play a larger role in the rapidly growing economy.3 The non-banking sector (insurance, pensions and capital markets) has continued to perform well.

11. Ghana’s external current account deficit widened to 19 percent of GDP in 2008, up from 12 percent of GDP a year earlier. This largely reflected a 33 percent increase in non-oil imports values, driven by strong domestic demand. Financing was provided through an increased external capital account surplus, buoyed by Ghana Telecom privatization proceeds (5½ percent of GDP), and a draw-down of gross international reserves from US$2.8 billion to US$2.0 billion. Reflecting the latter, gross reserve cover declined from 2.7 to 2.2 months of projected import cover.

12. Exchange rate flexibility has increased since mid-2008. Reflecting Ghana’s macroeconomic imbalances and declining foreign exchange inflows, the exchange rate depreciated about 50 percent against the dollar during 2008 and the first half of 2009. Much of this adjustment was offset, however, by Ghana’s high inflation rate and the appreciation of the dollar in the context of the global financial crisis. Accordingly, the real effective exchange rate in April 2009 was just 8 percent more depreciated than in 2007. Over the recent period, illiquidity in the foreign currency market has been associated with a decline in interbank trading and a widening of spreads.

III. Policy Discussions

A. Growth Prospects and Risks

Discussions focused on the uncertain growth outlook, where staff are less optimistic than the authorities, and see downside risks. In 2011, the start of oil production will boost growth and government revenues, but create new challenges for macroeconomic management.

13. Growth prospects for 2009–10 are particularly uncertain, reflecting divergent influences. On the positive side, Ghana is benefiting from a terms of trade improvement projected at 20 percent in 2009, as cocoa and gold prices remain buoyant while oil import costs have declined. In addition, credit growth remains strong and favorable rainfall trends are expected to continue to benefit hydroelectricity and agricultural production. Given these factors, the authorities envisage only a modest slowdown, to a little under 6 percent in 2009. By contrast, the mission expects fiscal tightening to be a significant drag on growth in 2009. In addition, credit growth is projected to slow, and the global recession is having an impact through the remittances channel, with first quarter inflows down 18 percent on a year earlier. On this basis, the mission projected growth of 4½ percent in 2009, consistent with a composite indicator series compiled by the Bank of Ghana (Figure below). For 2010, the mission projected growth of 5 percent, based on an improving external environment. While viewing the staff’s forecast as overly pessimistic, the authorities agreed to use it for fiscal planning (Section III.B).

uA01fig02

Bank of Ghana composite indicator and real GDP growth

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

14. From 2011, Ghana will benefit from the start of oil production. The proven reserves are relatively modest at present, with the offshore Jubilee field estimated at 490 million barrels.4 However, test results from other fields are favorable, and reserves could rise to 1.5 billion barrels or more (matching Chad and the Republic of Congo). Production from the Jubilee field is planned to start in 2011, with peak production over an initial 5-6 years, followed by a progressive decline. Initial production is projected at about 17 percent of non-oil GDP, with more than one third accruing to government revenues (6-7 percent of GDP in 2011–12). Oil production would largely substitute for oil imports, except in 2011–15, when an exportable surplus is projected (figure overleaf).

uA01fig03

Ghana: Oil Trade Balance

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

15. Macroeconomic management will need to be alert to the consequences of oil production. The oil sector and related spending of oil revenues will boost demand pressures starting in 2011. On the assumption that demand pressures are prudently managed, the medium-term framework projects a return to robust non-oil growth in the 5-6 percent range, and a decline in inflation to about 5 percent. A projected fiscal deficit of 4 percent on average over the medium-term is projected to result in a small decline in the net debt-GDP ratio. The external current account deficit would increase in 2010 due to oil-related infrastructure imports, before declining over the medium term as oil exports come on stream (Text Table 2).

Text Table 2.

Macroeconomic Outlook

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Sources: Official data and Fund staff projections.

16. Risks to growth are on the downside. Although Ghana is projected to achieve a “soft landing”, spillovers from the global recession may prove larger than currently projected, possibly through an intensified decline in remittances or a deterioration in gold or cocoa prices. In addition, a shift by domestic banks to more cautious lending standards in the context of rising non-performing loans could trigger a larger than expected slowdown in private sector investment.

B. Policy Mix in 2009 and 2010

17. The authorities’ policy framework seeks to reduce inflation while rebuilding the external reserve position. Reserve and broad money growth are projected to slow to reduce inflation to single-digit rates by end-2010 (Text Table 3). The decline in domestic credit growth is more marked than for overall liquidity, releasing resources to rebuild Ghana’s foreign currency reserve position. For 2009, the financial program aims to avoid further losses in net international reserves from end-March levels, while the program for 2010 targets a modest reserve accumulation. The authorities and staff would have normally have preferred a larger near-term reserve build-up, but the additional fiscal adjustment and reduction in net domestic financing needed to accomplish this was not seen as realistic.

Text Table 3.

Monetary Framework

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Source: Bank of Ghana and Fund staff estimates.

Contributions to reserve money growth.

Contribution to broad money growth.

C. Strategy for Fiscal Consolidation

A highly expansionary fiscal stance has contributed to macroeconomic instability. Plans for near-term fiscal consolidation need to be backed by a strategy for using oil wealth.

18. Deficit reduction is the immediate macroeconomic priority. The authorities recognize the destabilizing impact of the fiscal deficit: the 2008 outturn is comparable to levels last seen in 1992–99, when inflation peaked at over 70 percent, and public debt rose from under 50 percent to more than 110 percent of GDP. The planned deficit reduction to 4½ percent of GDP in 2011, and subsequently lower, will address inflationary pressures and stem a renewed upturn in public debt.

19. Fiscal measures in 2009 are being augmented to preserve the deficit target. The mission welcomed the emphasis on spending restraint in 2009, which will partially reverse the upward trend that contributed to the 2008 deficit. The prompt adoption of measures in June to avoid over-runs in the fiscal deficit are also welcome (MEFP, ¶24). The authorities have intensified cash management, and in the event of an even larger slowdown in economic growth and revenue collections, are ready to maintain the deficit target through cuts in discretionary spending.

20. The 2010 budget will be challenging. The mission noted that fiscal measures of about 3½ percent of GDP will be needed to achieve the 6 percent deficit target for 2010 (see Table 2A). On current estimates, this target could largely be achieved by expenditure restraint, including in the public wage bill, combined with higher utility prices to address a projected power sector shortfall.5 In practice, however, the authorities will also need to explore options to strengthen revenue mobilization. The fiscal gap is likely to be larger than currently estimated, reflecting the potential need to clear remaining arrears from 2008 (MEFP, ¶53). Equally, the projected compression of the wage bill in 2010 may not be feasible, given the planned salary structure reform, and the squeeze on capital spending may not be sustainable, given emerging infrastructure needs.

21. Ghana maintains a broad social safety net program. Current protection for the most vulnerable include subsidized electricity tariffs (up to a maximum monthly usage), a cash transfers to qualifying households, school feeding, free maternal health care, grants and subsidies for basic education, and a national youth employment program. The authorities plan to expand cash transfers for qualifying households, provide free school uniforms to children in deprived communities, and free books for pupils in basic public schools. Staff welcomed these measures, which should safeguard low-income groups from fiscal tightening.

22. At the same time, the authorities intend to re-examine budget flexibility. The growth of mandatory and similarly-protected spending commitments limits the space for fiscal maneuver. With a rising wage bill, an expansion of health care transfers in 2007, and the majority of capital spending protected from annual budget review (in the form of trust funds with earmarked financing), the inflexible element of the annual budget has risen from 92 percent of revenues and grants in 2006 to 107 percent in 2009 (Text Table 4). Staff recognized the case for reviewing funding arrangements for capital spending, providing that poverty-reducing programs retain appropriate protection.

Text Table 4.

Mandatory and Inflexible Public Expenditures

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2009 wage figure includes “Category I” employment allowances.

Education Fund, Road Fund, District Assembly Fund, Petroleum Fund, and HIPC/MDRI outlays.

Wages and salaries, transfers, interest, and foreign-financed and trust fund capital spending.

23. A medium-term fiscal strategy is needed, integrating the potential revenues from the oil and gas sector. The authorities provisionally plan to use oil incomes in 2011–12 to finance infrastructure projects; these investments would then be scaled back in subsequent years, to allow part of oil revenues to be saved in a “heritage fund” to support public programs as oil revenues decline. The mission supported a front-loaded investment strategy, given Ghana’s infrastructure needs, while cautioning that spending should be based on cautious oil revenue assumptions and take into account the country’s absorptive capacity. Firm control will be needed over recurrent spending, to ensure that it does not expand to fill the newly available fiscal space. Equally, oil receipts should not be at the expense of strengthened non-oil revenue mobilization; the latter will be needed if donor support were to decline following Ghana’s move to oil producer status. The mission noted that these considerations should be reflected in a fiscal rule for managing oil revenues, a topic to be revisited after the June 2009 technical assistance mission on resource sector taxation. The mission welcomed the authorities intention to ensure that the oil accounts are fully and transparently integrated into the fiscal accounts, and the plan to extend Ghana’s EITI participation to the oil sector (MEFP, ¶38).6

24. The joint Bank-Fund external debt sustainability analysis (DSA) suggests that Ghana’s external debt dynamics remain subject to moderate risk of debt distress. This assessment is broadly unchanged from the 2008 DSA, though the baseline debt trajectory is more favorable, reflecting the incorporation into the baseline of the Ghana’s projected move to oil producer status in 2011. Assuming successful fiscal consolidation and sustained robust growth in the non-mineral economy, net public debt is projected to decline by about 35 percentage points of GDP during 2010–2029, to about 37 percent of GDP (or slightly below the post-HIPC/MDRI debt-GDP ratio in 2006). Stress tests suggest that external debt indicators remain generally resilient to less favorable outcomes, while sustainability of the overall net debt position depends critically on maintaining a strong primary fiscal position.

D. Monetary, Exchange Rate, and Financial Sector Policies

To stem the inflationary impact of currency depreciation and higher fuel prices, monetary policy may need to be tightened further. Banking risks have risen, and supervisors will need to be alert to emerging strains.

Monetary policy

25. Discussions focused on the factors contributing to rising inflation under the IT framework. The required elements of an IT regime are in place (Box 2). The mission noted, however, that IT peer countries were typically more aggressive in monetary tightening than Ghana during 2007–08. The authorities noted that inflation in these countries also exceeded target levels, owing to the global food and fuel price shocks. More crucially, in Ghana’s case, monetary tightening was overwhelmed by highly expansionary fiscal policies. With an end to fiscal dominance, the Bank of Ghana views its tools for monetary management as adequate for controlling inflation. Based on evidence of tightening credit conditions and easing demand pressures, the central bank projects a decline in inflation to 14½ percent at end-2009, reaching single-digits in 2010.

26. The case for further monetary tightening has strengthened since the mission. In May, staff saw little scope for near-term easing, given the modest level of real interest rates and the vulnerability of inflation expectations to further currency depreciation. Indeed, the mission cautioned that further tightening might be needed to achieve the central bank’s disinflation goal. This argument has been subsequently reinforced by the 30 percent rise in domestic petroleum product prices in early-June, based on rising global oil prices. Further tightening would help resist second-round inflationary pressures. The authorities indicated a readiness to consider a tighter monetary stance in the July MPC meeting, should conditions warrant.

Ghana’s Inflation-Targeting Framework

The Bank of Ghana (BoG) formally launched its inflation targeting (IT) regime in 2007, and has benefited from advice from, among others, the Bank of England and Fund staff. The framework targets the 12-month change in the headline CPI, and the BoG also monitors a number of core inflation measures.

The key institutional arrangements for an IT framework are in place, including central bank policy independence, instrument independence, bi-monthly meetings of a Monetary Policy Committee (MPC), and generally good transparency.

BoG staff produce a range of inflation forecasts for the MPC, using a range of macro models (from simple autoregressive to relatively up-to-date multiple-equation time series models); they also track surveys of inflation expectations. Efforts continue to strengthen the models—for example, to identify a robust link between the fiscal stance and inflation. Real sector data are limited (no monthly production or quarterly GDP data), but the BoG has developed a quarterly composite indicator that tracks GDP trends moderately well (paragraph 13).

The BoG has the operational tools to influence inflationary pressures through credit market conditions. The commercial bank lending rate has closely tracked the BoG prime rate and, more recently, has responded to conditions in the interbank and t-bill markets, which the BoG influences through open market operations.

In the view of staff, the next developmental phase for Ghana’s IT regime is to gain greater comfort in basing policies on the available analytical tools. For example, in February 2009, the BoG’s quarterly macro model suggested that interest rates would need to rise significantly by the end of the second quarter to counter inflationary expectations. In practice, the policy rate was increased 150 basis points in February, and not subsequently (Figure below).

uA01fig04

Ghana: Key Interest Rates, 2006–09

(Percent per annum)

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

27. To enhance the IT framework, the authorities intend to strengthen communication (MEFP, ¶58). The mission suggested that greater clarity was needed about the monetary transmission mechanism and Bank of Ghana’s policy stance. The authorities concurred with staff that a renewed emphasis on communications was needed, including through revamping the central bank website and clarifying its preferred measure of core inflation. The authorities disagreed that more frequent Monetary Policy Committee meetings would be helpful, noting that data limitations preclude a substantial reassessment of the policy stance more often than bi-monthly.

Exchange Rate Policy

28. The authorities intend to maintain a flexible exchange rate regime consistent with the inflation-targeting framework (MEFP, ¶59). They envisage that policy tightening, combined with new external funding, will help stabilize the currency, a necessary condition for successful disinflation. It was agreed that the Bank of Ghana should refrain from intervention in the foreign exchange market, other than through its regular weekly sales of foreign exchange to meet priority demands (e.g., debt service and oil import costs). Consistent with Ghana’s low official reserve cover, the authorities intend to use the possible new SDR allocation to rebuild foreign exchange reserves (MEFP, ¶28). Looking further ahead, the mission suggested that the authorities should aim to develop the role of the private sector in the foreign exchange market to handle the increased turnover that will emerge with the start of oil production.

29. The recent currency depreciation may have partly corrected for earlier overvaluation. Staff analysis suggests that the real effective exchange rate in the first quarter of 2009 may have remained modestly overvalued (Box 3). In the event of further currency pressure, the mission urged tight monetary conditions to limit any inflationary pass-through. The authorities noted that the staff’s currency valuation analysis produced mixed results, including some that suggested undervaluation. They interpreted these findings as consistent with their view that the currency was broadly appropriately valued.

Financial Sector Issues

30. Discussions focused on the impact of the global crisis on Ghana’s financial system and the prospective risks. An in-depth assessment by Fund staff was generally positive about supervisory capacity in Ghana, but noted that banking sector risks were rising (Box 4). The mission discussed how to limit spillovers from the global financial crisis and how to strengthen governance and board oversight in state-owned banks. The authorities indicated that a program to address these risks was being rolled out (MEFP, ¶61).

Ghana: Exchange Rate Assessment

As noted in paragraph 12, the large depreciation of the cedi-dollar exchange rate since mid-2008 was offset, in large part, by high inflation and the strength of the dollar. With Ghana’s real effective exchange rate in early 2009 remaining stronger than in 2003–04 (figure below), a currency valuation exercise was conducted to assess whether further real effective adjustment is warranted.

Analytical approaches based on developments in the external current account tend to suggest currency overvaluation. The underlying current account deficit after eliminating temporary influences is estimated at 11.5 percent of GDP in 2008, well above the norm of 8.7 percent of GDP derived through the macro-balance approach. It is also larger than the net foreign liability-stabilizing current account deficit of 9.8 percent of GDP implied by the external sustainability approach. To reduce the external deficit to the latter range, a real effective depreciation of 7-12 percent would be needed.

Approaches that model the real exchange rate directly suggest potential currency undervaluation. Econometric analysis drawing on Ghanaian and cross-country data suggests that the recent currency appreciation can be explained by Ghana’s faster output growth (Balassa-Samuelson effects) and positive terms of trade changes. These econometric approaches suggest that the real effective exchange rate could be undervalued by 31-39 percent.

Fund staff tend to discount these econometric findings, given the fragility of the estimation results. In particular, the findings are very sensitive to the estimation time period and the explanatory variables included. Until more robust estimates can be developed, more weight has been given to signs of possible modest overvaluation coming from Ghana’s widening current account deficit.

uA01fig05

Ghana: Real and Nominal Effective Exchange Rates, January 2001 - March 2009

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

Source: INS, Information Notice System.

Challenges for Ghana’s Financial System

The direct impact of the global financial crisis on Ghana’s financial system has been relatively limited. This reflects Ghanaian banks’ limited integration with global markets and their reliance on domestic funding. Credit markets remain buoyant, and financial institutions are generally stable. In the debt markets, some foreign investors have exited from government securities, spreads on the international bond have increased, and options for new sovereign issues have narrowed. Domestic inflationary pressures and declining foreign inflows have contributed to higher interest rates in domestic money markets and pressures in the foreign exchange market.

Strong banking sector expansion has created vulnerabilities. Despite strengthened supervision, an environment of rapid financial growth, intense competition, and rising funding costs has encouraged risk taking. Banks’ loan portfolios are often concentrated on a few large borrowers or sectors; some foreign currency loans are to unhedged borrowers; and rapid growth of domestic branch networks against a background of rapidly expanding cross border operations by parent banks has increased potential for strategic and operational risk. Some banks’ internal controls and risk management practices have been stretched. The ratio of non-performing loans have risen to a year high of 9.6 percent at end-March 2009, with above average NPLs in the forestry, mining, and construction sectors (see below); a couple of banks have also incurred substantial losses from their expansion strategy. Weaknesses in corporate governance and board oversight are also evident in some of the state-owned banks, with one recently experiencing apparent high-level fraud. Banks have begun to limit their risk exposure, tightening lending standards. But this may not be enough to avoid a further deterioration in loan books.

uA01fig06

Ghana: Sectoral NPLs

(In percent of total sectoral loans)

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

Gaps in cross border supervision and in the financial infrastructure add to the risks. Some of the home supervisors of parent banks do not undertake consolidated supervision, thus there is no oversight of group risks. In some cases, parent banks are registered in jurisdictions where supervisory oversight is weak, prudential regulations lax and banking systems are exhibiting some stress. Though progress has been made in improving the environment for creditor rights, banks continue to experience difficulties in foreclosing on collateral. Also, credit risk assessment of borrowers is made difficult by weaknesses in accounting and auditing practices in SMEs and the credit registry is just being established.

The Bank of Ghana has a well established framework that enables it to monitor risks in the financial system and to respond to financial system stress in a timely manner. These include an established off-site framework for monitoring risks supported by a well-developed stress testing framework. A Lender of Last Resort facility is available, and the BoG has the legal authority to facilitate prompt corrective actions. Notwithstanding this, the operational framework for providing liquidity support is limited in scope, both in the tenors of the loans that can be advanced and in the range of acceptable securities, which could prove limiting under lengthy adverse conditions. There are also no deposit insurance or contingency cross-border crisis arrangements.

E. Other Issues

31. National accounts statistics. The mission discussed the outcome of a recent Fund review of Ghana’s national accounts rebasing exercise, which suggests that economic activity has been significantly under-estimated, reflecting outdated methodology and lapses in incorporating new source data. Upward revisions could be as large as 50 percent, paralleling revisions observed in other countries’ rebasing exercises (see Figure 1).

Figure 1.
Figure 1.

Possible Impact of National Accounts Revisions (assuming a 50 percent upward revision to real and nominal GDP) 1/

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

Source: Country authorities, and Fund staff estimates.1/ The assumed 50 percent upward revision is consistent with preliminary back-of-the-envelope calculations, based on new source data. Update accounts will be available in late-2009 or early-2010.
Figure 2.
Figure 2.

Ghana: Business and Financial Indicators

Citation: IMF Staff Country Reports 2009, 256; 10.5089/9781451815047.002.A001

Sources: U.S. Energy Information Administration, OPEC, Annual Statistical Bulletin, 2007, and BP Statistical Review of World Energy 2008; World Bank, Cost of Doing Business, 2009, and Governance Indicators, 2008; central bank websites; and IMF Staff calculations and projections.

IV. The New PRGF Arrangement

A. Program Objectives and Design

32. The PRGF-supported program builds on Ghana’s second Poverty Reduction Strategy (GPRS II).7 The arrangement will cover the three-year period from Board approval. Proposed access is 105 percent of quota (SDR 387.45 million), somewhat above the norm for a fifth-time PRGF-user (70 percent of quota), reflecting program strength and balance of payments need. The arrangement has eight disbursements (Table 8), with some front loading into 2009–10 when the adjustment effort and balance of payments need are strongest.

33. The main goal of the program is to eliminate Ghana’s large fiscal imbalances by 2011 and put in place strengthened institutions for public financial management (PFM). Restoring macroeconomic stability will eliminate the most pressing obstacle to continued strong growth and poverty reduction. At the same time, fiscal consolidation will create the necessary room for maneuver, so that when oil revenues come on stream in 2011, they can be dedicated to new growth-promoting and poverty-reducing investments that benefit future generations, rather than being diverted to unproductive recurrent spending. To support macroeconomic stabilization, the inflation targeting regime will be further strengthened, notably in the critical area of communications and transparency. Policy transparency would be underpinned by extending the Extractive Industry Transparency Initiative (EITI) to the oil sector (MEFP, ¶38), and by expanded publication of fiscal data (MEFP, ¶67).

B. Program Monitoring

34. The program will be initially monitored on a quarterly basis, given the near-term risks from the global recession. The first two reviews would assess developments relative to performance criteria for end-September and end-December 2009. Subsequently, program monitoring would move to a semi-annual basis, with tests dates for end-June and end-December through 2011, and a final review based on a test date of end-March 2012. Quantitative targets would be as described below and in MEFP Table 1.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2006–14

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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.

Including public enterprises and errors and omissions.

Before new fiscal measures.

Includes potential new exceptional financing starting in 2009.

Before possible new SDR allocation of US$420 million in 2009.

  • Fiscal performance would be assessed by the overall balance including grants. Given the need for spending restraint, adjusters would limit the scope for new spending commitments in response to higher-than-programmed grant or loan funding. Shortfalls in financing would be partially covered by spending cuts, and partly by higher resort to domestic financing, up to a ceiling (TMU, ¶22).

  • Debt sustainability would be promoted by limiting nonconcessional financing to high-return infrastructure and energy projects. The program would provide for guarantees for Ghana National Petroleum Company borrowing for oil and gas investments of up to US$300 million during 2009–10 (MEFP, ¶54).

  • Monetary policy will be subject to review clauses linked to inflation ranges around the target disinflation path. To underpin the IT framework, net domestic assets of the Bank of Ghana will be an indicative target.

C. Structural Conditionality

35. Structural conditionality focuses on strengthening fiscal institutions (tax policy, revenue administration, PFM) and addressing recurrent sources of spending pressure (particularly energy subsidies and the public sector wage bill) (MEFP, Table 2).

Table 2A.

Ghana: Summary of Central Government Budgetary Operations, 2006–14 1/

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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.

For 2010 onwards, reflects the projected operating deficit of the electricity company, given the utility tariff structure in place as of June 2009.

Includes cumulative fiscal measures.

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

Table 2B.

Ghana: Summary of Central Government Budgetary Operations, 2006–14 1/

article image
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.

For 2010 onwards, reflects the projected operating deficit of the electricity company, given the utility tariff structure in place as of June 2009.

Including cumulative fiscal measures.

36. Tax policy. Ghana has the essential pillars of a modern tax system, but two features erode revenue potential and hinder economic growth. The system is overwhelmed by special, often discretionary, exemptions that undermine confidence in the equity and effectiveness of the tax regime. Thresholds for VAT and business taxation are also too low, leading to wasteful use of scarce administrative resources on small taxpayers. Steps taken in June 2009 to rein in exemptions will be intensified in the 2010 budget (MEFP, ¶24, ¶32). To simplify VAT administration, a review will also be conducted this year to reduce the number of zero-rated VAT items and convert domestic zero-rating to standard rate taxation (MEFP, ¶32). VAT thresholds and small business taxation will also be revisited (MEFP, ¶33).

37. Revenue administration. Ghana, formerly in the vanguard of revenue administration reform, has lagged behind best practice in recent years. In particular, international experience has shown the circa-1980s model of a semi-autonomous revenue service under a governing board to be less effective than the single revenue authority model, under which customs and tax administration are managed by a single executive and benefit from information and other synergies. Further, the separate agencies for income tax and VAT administrations have proven inefficient and costly, and therefore Ghana would benefit from the experience of most other countries by moving towards a single integrated domestic tax agency within the intended revenue authority. The authorities intend to launch a modernization strategy with these goals by end-2009 (MEFP, ¶35).

38. Public expenditure management. Roll out of Ghana’s integrated financial management information system (IFMIS) has stalled at the pilot stage, and institutional capacity for tracking and controlling spending has been weak, giving rise to reoccurring domestic arrears. The government intends to review by end-2009 the shortcomings of the existing IFMIS system, and develop a plan for its wider adoption or for a move to an alternative system (MEFP, ¶42). In the interim, intensified monitoring, supported by strengthened inter-agency coordination, is being adopted to manage the budget through 2009 (MEFP, ¶40–41). The authorities are also taking stock of the outstanding claims from 2008, and will adopt policies to avoid new arrears in the future (MEFP, ¶53).

39. Public sector reform. A comprehensive public sector modernization program is needed, addressing the size, effectiveness, and remuneration system of the public service. The World Bank will support this reform program. In the near-term, the Fund program aims at strengthening monitoring and control of the payroll numbers through comprehensive computerization of staffing data, centralized hiring procedures, payroll audits, and the launch of a rationalization process for public agencies (MEFP, ¶45-49).

40. Energy sector reforms. In the past, under-pricing of electricity supplies and petroleum products has required government subsidies, undermined the financial accountability of the state-owned enterprises, and left a legacy of cross-debts and arrears. The World Bank is supporting a financial restructuring and recovery program for the sector. The PRGF is designed to ensure the adoption and maintenance of cost-recovery pricing (MEFP, ¶52). A key condition will be the adjustment of electricity to cover operating costs from end-2009, with cost-recovery maintained through subsequent quarterly reviews.

D. Program Financing

41. Even with policy adjustment, Ghana faces balance of payments financing gaps of US$450 million in 2009 and $325 million in 2010.

  • The fiscal financing gap is projected at US$250 million in 2009, declining to half that size in 2010. The majority of the gap would be closed in 2009 through a new World Bank Development Policy Loan, which would augment its 2009 funding pipeline by US$200 million. Ghana is a candidate for a new vulnerability facility being developed by the European Commission, which could close up to half of the remaining gap. The authorities have approached other bilateral donors, including the African Development Bank, and expect to close most, if not all, of any remaining gap for 2009. Donors have noted that while additional financing for 2009 has been difficult to mobilize in the context of established multi-year support agreements, the PRGF arrangement would provide the macroeconomic assurances necessary to maintain existing support levels as programs come up for review. The authorities have indicated that any residual financing shortfall would be met through a combination of further spending restraint and some limited additional use of domestic financing (TMU, ¶22).

  • Further balance of payments financing of $200 million in 2009 and 2010 would be provided under the PRGF arrangement. This would stabilize gross reserve levels at 2 months import cover, a level that would rise to 2½ months’ cover with the proposed new SDR allocation. The balance of payments financing need assumes that private capital inflows remain low through 2009–10, except for oil sector investments in imported rig equipment. Net private remittances are also projected to decline 30 percent in 2009, with limited recovery before 2011.

E. Program Risks and Mitigation

42. Program monitoring should be vigilant. The authorities will need to monitor activity and revenue collections closely to ensure that contingency plans for spending restraint can be activated, if needed, to safeguard the fiscal position.

43. Strong communications will also be key. Adjustments to utility pricing to achieve the fiscal deficit target for 2010 will be an important challenge, especially if global oil prices continue to rise. To support this core element of the program, public outreach will be important. Looking further ahead, it will be important to convince interest groups that the momentum of reforms should be sustained after the start of oil production. Although oil revenues will bring the 2011 deficit target within reach, this should not be at the expense of revenue mobilization in the non-oil economy and should not delay steps to rationalize public administration. Without these continuing reforms, recurrent spending programs could expand to absorb the new fiscal space created by Ghana’s oil wealth.

44. Ghana has adequate capacity to meet its financial obligations to the Fund. The country has an established record of timely servicing its obligations to the Fund, and the DSA places Ghana at a moderate risk of debt distress (paragraph 24). Debt service to the Fund would remain modest in absolute terms, and below 1 percent of exports of goods and services by the end of the program period.

V. Staff Appraisal

45. Ghana’s current challenges reflect economic mismanagement, exacerbated by global factors. The pursuit of highly expansionary fiscal policies through 2008 despite growing signs of macroeconomic imbalance contributed to high rates of inflation, rising interest rates, and currency pressures. Macroeconomic correction has been complicated by the global financial crisis, which closed off global market funding options and required resort to exceptional financing from development partners.

46. The external environment remains more favorable than for many countries. Ghana’s terms of trade have strengthened during the global recession, supporting incomes and growth, while the domestic financial system has proved to be relatively insulated from the global financial storm. Given this, while projections are more than usually uncertain, growth is projected to exceed the global average through 2009–10. There are important risks, however, notably to private sector remittances and foreign direct investment. Equally, the terms of trade benefit has declined with the recovery in oil prices. If private sector activity slows sharply, the challenges for macroeconomic management would be complicated.

47. Fiscal consolidation will be central to restoring macroeconomic stability. The deficit target for 2009 is appropriately ambitious, and the focus on expenditure restraint is welcome. Contingency plans for further expenditure tightening will be important to keep the deficit on track in the event of revenue shortfalls. Further fiscal measures will be needed to reduce the deficit to 6 percent of GDP in 2010. An increase in utility tariffs will be needed to cover the rising costs of power generation. Steps to control public wage growth should be pursued, along with options for strengthened revenue mobilization. Even after a significant fiscal consolidation, however, Ghana’s medium-term prospects remain subject to important challenges, including the need to reduce public sector debt to more sustainable levels.

48. Revenues from the start of oil production in 2011 will create important new fiscal space. Part should be used to further reduce the fiscal deficit and accumulate assets for the post-oil period, while part could finance an expansion of infrastructure spending after two relatively tight years in 2009–10. However, oil revenues will be modest relative to many producers, and the production period is expected to be relatively short. Given this, every effort should be made to avoid complacency about the fiscal outlook from 2011. Continuing efforts will be needed to strengthen domestic revenue mobilization, including to safeguard against a potential phasing out of donor grants, and expenditure policies should continue to seek improved value for money in public services. Structural fiscal reforms will be critical to enhance fiscal management, including in the rapidly-approaching oil era.

49. With tighter fiscal policies, the onus for inflation control now falls squarely on the IT framework. With rising global oil prices and an associated large increase in domestic petroleum product prices, the case for further monetary policy tightening is strong. To reinforce the IT framework, clearer communications are needed about the policy framework and monetary stance.

50. Despite currency depreciation, the real effective exchange rate remains relatively appreciated. With some risks that the currency remains slightly overvalued, continued exchange rate flexibility will be important.

51. Risks in the banking system will require careful monitoring. Surveillance should be strengthened, and commercial banks encouraged to reinforce risk management and corporate governance practices. Gaps in cross border supervision require stepped up regional collaboration. Domestically, enforcement of creditor rights should be further strengthened, and further momentum given to the operations of the credit reference bureau. Staff welcomes the authorities’ interest in an FSAP update.

52. Statistical data should be further strengthened for surveillance purposes. Improved data on the national accounts are a priority.

53. Staff supports the authorities’ request for a new PRGF arrangement. The focus of the new program on fiscal consolidation and supporting structural fiscal reforms is appropriate. Progress is needed on a range of fronts to regain a vanguard position in public finance management. Reforms are likely to be resisted by pressure groups, particularly as oil production approaches. However, without reform, Ghana risks dissipating its oil revenues with little long-term benefit for growth and poverty reduction. An active communication strategy will be critical to sustaining the momentum of reform.

54. It is proposed that the next Article IV consultation with Ghana take place within 24 months, in accordance with the decision on consultation cycles in program countries.

Table 3.

Ghana: Monetary Survey, 2006–14

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Sources: Ghanaian authorities; and IMF staff estimates and projections.
Table 4.

Ghana: Balance of Payments, 2006–14

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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.

Before possible new SDR allocation of US$420 million in 2009.

Table 5.

Ghana: Financial Soundness Indicators, 2004–09

(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 6.

Ghana: External Financing Requirements and Sources, 2006–14

(millions of US dollars)

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Source: Ghanaian authorities and Fund staff calculations

includes loans and grants

includes all other net financial flows and errors and omissions

Table 7.

Ghana: Indicators of Capacity to Repay the Fund, 2009–2022 1/

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Sources: Fund staff estimates and projections.

Includes prospective PRGF disbursements of SDR 387.45 million (105 percent of quota).

Total debt service includes IMF repayments.

Table 8.

Ghana: Proposed Schedule of Disbursements Under the PRGF Arrangement, 2009–121/

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In addition to the generally applicable conditions under the Poverty Reduction and Growth Facility arrangement.

Table 9.

Ghana: Selected Indicators on the Millennium Development Goals, 1990–2007

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Source: World Development Indicators database, 2009.

Appendix I—Letter of Intent

June 26, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. Strauss-Kahn:

After another peaceful, democratic and competitive election in Ghana in December 2008, a new government of the National Democratic Congress Party took over power in January 2009. The Government sees its political mandate as an opportunity to manage the economy to achieve prosperity for all Ghanaians.

While the country achieved significant gains in the macroeconomic and social areas through 2005, the last three years were characterized by severe imbalances brought on by external shocks that were compounded by expansionary domestic policies.

The new government is committed to addressing the economic imbalances, re-stabilizing the economy, and placing it on a path of sustained high growth in order to accelerate the pace of progress toward the Millennium Development Goals and middle income status for Ghana.

The attached Memorandum of Economic and Financial Policies (MEFP) reviews recent economic developments and policies, and outlines adjustment and reform policies intended under the program. In support of the policies in the MEFP, the government requests that the Executive Board of the IMF approve a Poverty Reduction and Growth Facility (PRGF) arrangement with access in the amount of SDR 387.45 million (105 percent of quota).

The Government of Ghana will provide such information as the Fund may request in connection with progress in implementing its economic and financial policies. The government believes that the policies set out in the attached MEFP are adequate to achieve the objectives of its program, but it will take any further measures that may become appropriate for this purpose. The Government will consult with the Fund on the adoption of these measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultations.

Sincerely yours,

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Appendix I—Attachment: Memorandum of Economic and Financial Policies, 2009–12

I. Introduction

1. The Government of Ghana has adopted a comprehensive program of macroeconomic stabilization and reform. This memorandum sets out Ghana’s economic and financial policies for the period July 2009-June 2012, to be supported by the International Monetary Fund under a three-year PRGF arrangement.

2. Ghana successfully went through a keenly contested presidential and parliamentary elections in December 2008. A clear winner emerged after two rounds of balloting in the presidential elections with a slim majority. There was, subsequently, a smooth handover of power from the New Patriotic Party to the National Democratic Congress, the second such transfer since Ghana ushered in multi-party democratic governance in 1992. This outcome is a manifestation of the consolidation of the democratic gains, making Ghana a strong functioning democracy in Africa, and stands as the single most remarkable achievement in the country’s governance history.

Recent economic and social achievements

3. Real GDP growth increased steadily from 3.7 percent in 2000 to 7.3 percent in 2008. This growth was fostered by significant debt relief which provided the country with fiscal space to embark on critical infrastructure investments, particularly in the energy and road sectors, as well as targeted social spending, all under the Ghana Poverty Reduction Strategy (GPRS). The combination of higher output growth, declining inflation, and improved social spending under the GPRS framework contributed significantly to lower poverty levels. The national incidence of poverty declined from 39.5 percent in 1998/99 to 28.5 percent in 2005/06. At this rate, Ghana is poised to achieve the Millennium Development Goal (MDG) of halving extreme poverty ahead of 2015.

4. In the education sector, gross enrolment ratios have increased. A major initiative for improved enrolment ratios was the abolition of mandatory school fees for basic education and the introduction of capitation grants in the 2005–06 academic year.

5. In the health sector, there have been progressive improvements in the delivery of a number of important outputs. Most notable are: increase in life expectancy from 55 years in 2003 to 57.9 in 2006; the introduction of a pre-paid National Health Insurance Scheme in 2004; and the introduction of free maternal care for expectant mothers. These, together, have put healthcare within the reach of the poor and vulnerable groups.

6. Gender disparities are gradually declining in some areas of service provision, such as in primary education, where the country has almost achieved gender parity. Recent estimates suggest that gross enrolment ratios have been higher for girls than for boys putting Ghana on track to achieve MDG 3 (gender parity in primary enrolment).

7. The improved macroeconomic environment during the period paved the way for Ghana to make a debut on the international capital markets in October 2007, raising US$750 million as additional capital targeted at infrastructural development for growth, especially in the key area of energy.

8. In the financial sector, important structural and institutional reforms have also been undertaken recently. In particular, a comprehensive legal and regulatory framework and strengthened risked-based prudential supervision policies have been put in place to further deepen the financial sector and safeguard the safety and soundness of the financial system.

Macroeconomic stress during 2007–08

9. In spite of the progress in the macroeconomic and structural areas, the economy has come under severe stress since 2006. The macroeconomic situation deteriorated sharply on the back of both domestic and external shocks. In 2006–07, Ghana suffered a severe energy crisis as a result of severe drought, leading to a significant shift from a predominant hydro to thermal power generation at a time of rising crude oil prices, with adverse impacts on the economy.

10. The global food and fuel price increases in 2007–08 adversely impacted most sub-Saharan African countries, including Ghana. In the context of these global shocks and the 2008 elections, public sector spending increased substantially, raising the fiscal deficit from 7.5 percent of GDP in 2006 to 14.5 percent of GDP in 2008. Contributing to the strong fiscal expansion were high energy-related subsidies, increased infrastructure investment, higher wages and salaries, and a rise in social mitigation expenditures to dampen the effects of the global price shocks.

11. The global financial crisis has contributed to further balance of payments pressures. While export proceeds have not, thus far, been significantly impacted, private remittances are slowing, there has been some outflow of portfolio investments, and the outlook for foreign direct investment is not encouraging. Official access to global market financing is now extremely limited. This has reinforced the urgency of macroeconomic adjustment and efforts to identify new external financing from development partners.

12. Strong public spending growth, combined with rapid credit expansion and rising oil import costs contributed to a widening of the external current account deficit from 9.9 percent of GDP in 2006 to 19.3 percent of GDP in 2008. In 2008, the overall balance of payments recorded a deficit of US$941 million compared with a surplus of US$413 million in 2007 (inclusive of the balances on sovereign bond proceeds). The 2008 deficit was mainly financed by a drawdown of reserves, leading to a decline in the stock of gross international reserves, by US$800 million to US$2,036 million at the end of 2008, equivalent to 2.2 months of import cover.

13. Real GDP growth for 2008 remained strong at an estimated 7.3 percent, up from 5.7 percent in 2007. The pass through from higher global commodity price shocks, combined with fiscal expansion, resulted in a rise in headline inflation from 12.7 percent in December 2007 to 18.1 per cent by end-2008. The Bank of Ghana responded by increasing the prime rate by a cumulative 350 basis points in 2008, ending the year at 17 percent.

14. Inflationary pressures have remained strong in the first four months of 2009, with 12-month inflation in the 20 percent range from January through April 2009. This reflects sharp increases in some components of the non-food category of the inflation basket, mainly as a result of sharp depreciation of the cedi against the major international currencies in the first quarter. The prime rate was further increased by another 150 basis points to 18.5 percent in February 2009, and the Bank of Ghana stands ready to tighten further as needed.

15. The Ghana cedi weakened against the US dollar and the Euro following a surge in demand for foreign exchange in 2008. In the interbank market, the Cedi depreciated by 38 percent against the US dollar. The larger than expected twin deficits of 2008, the drawdown in reserves, and the uncertainties in the domestic and global financial markets continued to weigh heavily on the Ghana cedi in the first quarter of 2009, with the cedi registering a further 16 percent against the dollar through end-May.

16. The banking system remains sound, well capitalized and fairly liquid. In 2008, the sector witnessed a reduction in concentration, intensified competition and expansion in branch networks.

II. The Government’s Economic Program
Medium-term objectives

17. The Government is committed to pursuing measures that will ensure the attainment of macroeconomic stability. The strategy will be accomplished through fiscal discipline that hinges on prudent public expenditure management, enhanced domestic revenue mobilization, adherence to public procurement rules, restructuring of the utility companies to reduce the subsidy burden to the budget, public sector reforms, with particular emphasis on wage reforms, and encouraging the private sector to participate in the accelerated growth agenda through Public Private Partnerships (PPPs).

18. To restore and consolidate fiscal and debt sustainability, the government intends to reduce the fiscal deficit (excluding divestiture receipts) from 14.9 percent of GDP in 2008 to 9.4 percent in 2009, 6.0 percent in 2010, and to 4.5 percent in 2011. Further reduction is planned beyond 2011. Deficit reduction will be driven, to the extent possible, by cuts in low-priority public spending, with a view to reducing public expenditure in relation to GDP, and shifting the balance from recurrent spending to infrastructure investments. Strengthened revenue mobilization would aim to increase revenues in relation to GDP. Consistent with the fiscal deficit targets, domestic financing of the budget would be reduced to low levels over the medium term. This would free financial resources for private sector investments and job creation.

19. To help achieve the above fiscal goals, tax reforms and improved revenue administration will enhance the revenue mobilization effort. There will also be decisive measures to improve public expenditure management, enhance public financial management, restructure state-owned enterprises (SOEs), in particular the utility companies, and ensure the success of the public sector reforms.

20. In line with the above policies, the macroeconomic goals for 2011 include real non-oil GDP growth of a little over 6 per cent; gross international reserves close to three months of import cover; and stabilization of the total public debt relative to GDP, and with subsequent reduction to reduce risks of debt distress over the medium term.

21. Monetary policy will support the government’s fiscal consolidation efforts over the medium term with a focus on stabilizing price and exchange rate expectations. Under the inflation targeting (IT) framework, monetary policy will aim at achieving a medium term inflation target of 7–9 percent within a forward looking time horizon of 18–24 months.

Macroeconomic program for 2009

22. The government’s 2009 budget, approved in March 2009, was based on a growth projection of 5.9 percent. Although the outlook for the global economy has subsequently deteriorated, the government anticipates that Ghana will be somewhat insulated from the global recession on account of buoyant prices for its two main exports, cocoa and gold, and because of strong rain-based agricultural production. For fiscal prudence, the revenue projections have been updated, to reflect revised nominal GDP estimates. The GDP deflator figures, which are somewhat higher than earlier estimated, reflect inflation developments in the first quarter. This is broadly offset by lower growth forecasts of 4.5 percent prepared by Fund staff which recognizes downside risks to external demand and financing in the context of the global recession. Based on these calculations the earlier budget revenue projections have been largely retained. If growth and revenue collections over-perform, this may provide scope to reduce the deficit below the budget target. At the same time, if growth and revenue collections fall short, the government has contingency plans to maintain the deficit target through cuts in discretionary spending, including by delaying non-critical investment projects.

23. The 2009 budget included a combination of expenditure savings and revenue measures. On the expenditure side, cuts were made in spending on overseas travels, workshops, and conferences; by reducing the number of Ministries from 27 to 23; eliminating subsidies to the Volta River Authority (VRA) for oil imports; eliminating transfers to the Bulk Oil Storage and Transport Company (BOST); delaying the contribution to the West Africa Gas Pipeline Escrow Account until 2010; reducing non-developmental capital spending; and by reallocating HIPC relief funds across programs to reflect the most recent poverty-reduction priorities. On revenues, collections are being enhanced by increasing the airport tax, road tolls, fees and charges, and by more effective application of the communication service tax.

24. Data through the first quarter of 2009 suggests that revenue and non-interest expenditures are broadly on track. However, with treasury bill interest rates remaining high through May 2009, interest costs are projected to exceed earlier estimates for 2009 as a whole. To achieve the targeted fiscal deficit of 9.4 percent of GDP, additional fiscal savings totaling 1.0 percent of GDP (GH¢ 209 million) have been identified. Specifically:

  • a)The provision in the 2009 budget for wage structure reform (GH¢ 50 million) has been eliminated, due to the postponement of reform to 2010 and later;

  • b)The agreed 2009 salary increase for medical workers was lower than budgeted, yielding savings of GH¢ 34 million;

  • c)The 2009 allocation for domestic investment spending has been reduced by GHc31 million, by delaying purchases of vehicles, office equipment, and other miscellaneous items. Social protection programs, particularly in health, education, and sanitation, will be preserved;

  • d)Tax exemptions will be reduced, yielding projected savings of GH¢ 40 million. Effective June 17, 2009, special permits and general concessions will no longer be available on a discretionary basis, and the Ghana Investment Promotion Center will no longer have discretionary power to grant exemptions. These exemptions would be available, in future, only with parliamentary approval, through the Ministry of Finance.

  • e)Customs and excise revenue collections are more buoyant than earlier projected, and the 2009 revenue projection has been increased by GH¢ 43 million.

  • f)The government is tabling legislation to establish a National Stabilization Levy, comprising an additional 5 percent profit tax, effective through end-2010, applicable to companies in the following sectors: banking, insurance, other financial services, communications, mining, and brewing. The projected yield in 2009 is GH¢11 million, with a full-year yield in 2010 of GH¢ 22 million or more.

  • 25. The government is confident that these measures will have a combined yield of at least 1 percent of GDP. As noted above, the government has contingency plans to maintain the deficit target through further cuts in discretionary spending, including by delaying non-critical investment projects, in the event of a fiscal shortfall.

26. To further strengthen expenditure control, a temporary pause has also been imposed on the issuance of commencement certificate for new investment projects, with on-going projects subject to a review in order to prioritize them and better sequence their implementation. The government also intends to review the cash management by earmarked funds to identify potential unused resources, provided that this does not jeopardize poverty-reducing expenditures.

27. Based on potential domestic financing for the budget of 4.8 percent of GDP in 2009, and updated projections for external disbursements, Ghana has a financing gap of $250 million. This would be covered by a Development Policy Loan from the World Bank which would augment planned World Bank support by $200 million in 2009, and by exceptional budget support from development partners. In the event of a shortfall in foreign program grant and loan financing, the government will offset this in part through spending cuts and in part through increased resort to domestic financing, up to a maximum of GH¢ 75 million (see details in the Technical Memorandum of Understanding).

28. Fiscal tightening in 2009, combined with a tight monetary policy stance, is projected to ease pressure on the balance of payments. With exceptional budget support and projected Fund financing, gross international reserves are projected at slightly below two months of import cover of goods and services at end-2009. To further strengthen Ghana’s international reserves position, the authorities do not intend to draw on the proposed new SDR allocation.

29. Ghana intends to maintain and strengthen its inflation targeting regime. The disinflation process will be supported by fiscal consolidation, including as greater stability returns to the foreign exchange market. For 2009, the Bank of Ghana will aim for a progressive convergence on the medium-term inflation target range, with inflation projected to decline to a 12-month rate of 14½ percent by end–2009.

III. The Structural Reform Agenda
Strengthening fiscal institutions

30. Achieving success in the medium term will depend on strengthening fiscal institutions and enhancing revenue mobilization and a strong public expenditure management agenda. Key policy initiatives are summarized below.

Tax Policy and Tax Administration

31. Ghana in the 1990s reformed its revenue administration and tax policy with some success. It created new administrative structures, introduced the value-added tax, and made changes to the personal income tax schedule in order to increase the incentives to work and save. The corporate tax has been successively reduced from 35% to 25%. A decade and a half later, the tax system is beginning to face new challenges emanating especially from ad hoc changes to parent acts and the adoption of ad hoc exemptions and discretionary waivers. Against this background, the government requested IMF technical assistance on tax policy and revenue administration which was provided in April-May 2009. Their recommendations will inform the new directions for Ghana’s tax system.

32. Tax policy. The government is committed to streamline the tax legislation process so that all legislation affecting the tax system is reviewed and tabled by the Ministry of Finance and Economic Planning. As a first step, the government is committed to conduct reviews by September to inform the 2010 Budget in the following areas:

  • a)A review will be conducted of the nature and scope of tax exemptions and discretionary waivers by sectors, beneficiaries, and their rationale, including those related to any remaining firm-level customs tariff exemptions, with the objective of phasing out unneeded tax holidays and other business incentives, and curtailing the broad discretion given to other institutions;

  • b)the number of zero-rated items (excluding exports) will be reviewed with the goal of eliminating the zero-rating, or, if necessary, converting some to VAT exemptions.

33. Over the medium-term, to broaden the tax base and minimize distortions, reviews will also be conducted on:

  • c)the VAT regime, especially the threshold and refunds regime to strengthen the effectiveness of the VAT;

  • d)options to simplify the taxation of small businesses below the VAT threshold;

  • e)the coverage of the VAT to the service sector; and

  • f)the taxation of all investment income and the final taxation of dividends.

34. The base of the income tax will also be broadened to cover the large potential taxpayers in the private and informal sectors who currently are not paying any income tax. The retention of internally generated funds by MDAs will also undergo serious review.

35. Revenue administration. Ghana’s three tax revenue agencies operate independently, share no activities and have very little exchange of information at the operational level. This results in high compliance cost for tax payers, high administrative costs for government, and high opportunities for tax evasion. The government intends to consolidate and centralize management of the three agencies, with a specific objective to merge the VAT and income tax services into a single, integrated tax administration. A modernization strategy for these and other aspects of revenue administration is to be developed and approved by Cabinet before end-2009.

36. Efforts will also be directed towards closing the various leakages from the tax system. Leakages have been associated with customs valuation and invoicing, transit goods, free zone exemptions and bonded warehousing facility; VAT collection and payment to the VAT office; and management of the withholding tax by the Internal Revenue Service (IRS). Preventive services of the Customs, Excise and Preventive Service will be strengthened to reduce smuggling and the abuse of the transit goods arrangement.

37. Oil revenue management. Revenues from our oil production activities are expected to come on board by 2011. Like all oil-producing economies, we are faced with a number of challenges, including how much of the oil revenues should be saved, how to insulate fiscal policy from fluctuations in oil prices, and how to protect the economy from possible exchange rate appreciation (the so-called Dutch Disease). The goal is to ensure a cautious phasing of petroleum revenues into the economy. This will be guided by the country’s absorptive capacity, by the balance between how much to spend to accelerate growth and reduce poverty, and by how much to save for the future.

38. The government intends to continue with the national dialogue on the use of oil revenues and with the ongoing work on the technical details of oil revenue management. Work on a petroleum regulatory bill and an oil revenue management bill are ongoing and will benefit from an IMF technical assistance mission scheduled for June 2009. Public consultations on the allocation of petroleum revenues and on the guidelines for the management of the funds will be held prior to legislation. In this area, the government intends to ensure that oil revenues are fully and transparently included within the budget. To further ensure the transparent treatment of oil and gas revenues, the government intends to extend Ghana’s participation in the Extractive Industry Transparency Initiative (EITI) to cover this sector, as well as fishing.

39. Enhancing Fiscal Responsibility. Recent experience suggests that maintaining fiscal discipline remains a major challenge in fiscal management. As first step to instituting fiscal responsibility laws, the government intends, in the short-term, to lay out some fiscal rules that will strengthen fiscal discipline and help ensure desired fiscal policy outcomes. These rules will also provide a solid institutional foundation for managing the oil revenues that are projected to come on stream in 2011.

Expenditure management initiatives

40. Although public financial management reforms have advanced in recent years, continued expenditure slippages and budget over-runs expose weaknesses in the system. Budgetary processes have improved over the years, but current developments indicate the lack of adequate institutional and human capacity (a) to track expenditures at the budget implementation stage and (b) to effectively manage commitments from the Ministries, Departments and Agencies. The result is the inability to block unapproved spending at the commitment stage, with risk of an over-run in commitments and emergence of domestic arrears. The first step to addressing the problem is to strengthen Public Expenditure Monitoring Unit (PEMU) in its human resources and in its processes of monitoring and reporting of expenditure paths. Another important step is the establishment of a cash management framework that will provide an early warning system for management.

41. Cash Management. As part of the resolve to strengthen fiscal management, the government has already adopted a strengthened cash management system involving the Ministry of Finance and Economic Planning, the Bank of Ghana, and the Controller and Accountant General. The three institutions have also initiated a process of developing a Treasury Single Account (TSA) which brings all government accounts under a single composite account structure. The TSA will allow for better cash flow management and better planning of financing the public sector borrowing requirement. Revenue Management and Expenditure Management Committees have been established to support the cash management framework and the work of the EPCC.

42. Budget management systems. To further strengthen the government’s capacity for budget monitoring and control, it intends to press forward with plans for comprehensive adoption of an integrated financial management information system (IFMIS). The existing system has underperformed in the past due to technical factors, and has been rolled out to only a limited number of ministries. Accordingly, this system will be reviewed with a view to either developing a plan to address its shortcomings in advance of comprehensive adoption or to lay the basis for moving to an alternative system. This review will be conducted by end-December 2009.

43. Other expenditure reforms. The efficiency of public spending will be enhanced by re-introducing public expenditure tracking surveys; improving evaluation of investments and projects and identifying programs that do not work, and for which less should be spent or stopped altogether; strengthening performance orientation in the public sector through effective implementation of performance management and development system (PMDS); and strengthening the legal framework for public/private partnerships (PPPs).

Public Sector Reform and Payroll Management

44. The heavy burden of the public sector wage bill remains a major concern. Between 2002 and 2008, wages absorbed an average of 44.5 percent of total tax revenue. This number is expected to rise to 49.5 percent in 2009. The main objective of the reform is to strengthen the link between public sector pay and productivity; maintain the competitiveness of public sector incomes relative to the private sector; and determine the optimal number of employees needed to efficiently deliver public services. The government intends to adopt a comprehensive program of public sector reform, with the support of the World Bank.

45. Payroll management. Incomplete automation has allowed Ministries, Departments, and Agencies (MDAs) to significantly exceed approved hiring budgets. The government is committed to strengthening the existing database management system for personnel and payroll data of all public sector institutions. Sixty-five of the 114 agencies have migrated to the new payroll database as at end of April 2009, though this accounts for just 4 percent of the total staff strength of the subvented agencies. The government intends to migrate all subvented agencies by end-September 2009. A committee would be established to monitor progress of the migration exercise.

46. Hiring controls. To contain the wage bill, the government has adopted a selective hiring freeze under which new recruitment is principally in the education and health services. At the same time, the validation of personnel into the centralized personnel database has been strengthened to ensure that new recruits are consistent with budgetary provisions. This will be comprehensive across the public sector including all subvented agencies by end-September 2009.

47. Payroll audits. An annual audit of the personnel database will be conducted by a joint team of the Auditor General and the Internal Audit Agency. In addition, as an initial exercise, a headcount of all staff of the Ghana Education Service will be conducted as part of the efforts to ensure fiscal consolidation whilst improving the personnel database in the sector. The headcount exercise is expected to be completed by end-September 2009.

48. Subvented agency restructuring. Over the medium-term, a functional review of the public service will be undertaken to provide an objective basis for a plan and schedule for right-sizing. The restructuring of subvented agencies will be stepped up, and those that are no longer relevant to the government’s objectives will be liquidated, while those that need to be partially or fully commercialized will be instructed to do so within an agreed time frame. Institutional responsibilities for this reform effort will be established by end-2009 with a view to making good subsequent progress in auditing and restructuring the subvented agencies.

49. Pay reform. The government will ensure that discussions on a simplified “single spine” public sector salary structure take account of affordability within the medium-term wage and salary budget. Consistent with the government’s objective of ensuring that the outcome of public pay negotiations informs the annual budget, the government intends to put in place measures to complete such negotiations before the Budget is prepared and passed by Parliament. It is, thus, expected that public sector salary and salary-related negotiations would be completed by September before the budget is finalized and submitted to Parliament in November.

Statutory Funds

50. Another area of institutional policy reform has to do with the increasing rigidities in the budget and the limiting effects on policy maneuvering. Current rigidities arise partly from the existence of a number of statutory funds and committed expenditure items determined by contracts and agreements with development partners. Excluding wages and salaries, the total of these payments in the provisional budget outturn for 2008 was 48.5 per cent of total payments, and for the 2009 the estimate is about 60 per cent. Government plans to review the legal provisions and management of some of these statutory funds, with the view to introducing some flexibilities and efficiencies in the overall fiscal management.

Energy sector reform

51. Financial restructuring. The balance sheets of the majority of the state-owned enterprises are under serious financial distress. Government plans to move speedily to ensure that the Power Sector Financial Restructuring and Recovery Study commissioned in May 2008 is completed. This study will review of the financial status of all three power sector utilities and propose a financial restructuring and recovery program that will ensure their long-term viability. The study is expected to produce a comprehensive financial recovery plan to improve upon financial operating ratios, reduce short-term indebtedness and reduce arrears of each of the power utilities to suppliers and creditors. Additionally, the Plan will clearly mark out VRA’s core and non-core assets, effect full transfer of national transmission grid assets from VRA to GRIDCO and ring-fence assets and liabilities associated with GoG-sponsored gas-turbine power projects.

52. Energy subsidies. To address the cost of energy subsidies, the government intends to (a) retain bi-weekly price adjustments for petroleum pricing, which are designed to ensure cost recovery for the oil refinery and bulk importers; (b) adjust electricity pricing by end-2009 to bring the average tariff to cost-recovery levels—that is, to a level that will allow the VRA to cover, at a minimum, its operating costs without resort to government subsidies, other than the lifeline subsidy for low-income consumers, which cost GH¢ 46 million in 2008 (0.3 percent of GDP); and (c) the electricity tariff structure will be subject to quarterly reviews starting in 2010 to ensure continuing cost recovery.

Management of Domestic Arrears

53. Provision has been made within the budget to settle in 2009 GH¢534 million of domestic arrears carried over from 2008. MDAs have been required to report any other potential domestic arrears from 2008 by end-September 2009, and a due diligence process has been launched to validate reported liabilities. If the arrears from 2008 exceed the amounts provided for in the budget, MDAs will be required to settle them, where possible, within their 2009 budget ceilings. Where this is not possible, remaining amounts will be addressed as a priority in the 2010 budget. At the same time, to avoid possible new arrears pressures, all MDAs have been instructed to take steps to avoid over-commitments.

Debt Management

54. To support the government’s goals for debt and fiscal sustainability, the Government will adopt a comprehensive public debt management strategy, providing a clear framework for borrowing, establishing the principles that should guide the debt manager’s decision regarding the currency composition, maturity, interest rates and other risks of the debt portfolio. Under this strategy the government intends to explore all avenues for concessional financing, and will seek to avoid nonconcessional borrowing in foreign currency wherever possible. In some cases, high-return infrastructure projects may require market-related financing (such as for energy, road, and rail projects, and public private partnerships), and may not be feasible without state guarantees. The government will evaluate these projects on a case-by-case basis, based on economic rate of return, impact on debt sustainability, and alternatives for achieving the same developmental goals. The government will provide to the Fund a semi-annual listing of projects being considered for market-related foreign financing, with a first report provided at the time of the first program review. On this basis, the government would request that the limits under the PRGF arrangement imposed on contracting or guaranteeing new external nonconcessional debt be set so as to accommodate such projects.1

Poverty reduction strategy

55. To mitigate the risks associated with slower growth for low income and vulnerable groups, the social protection and safety nets will be strengthened and expanded. Current protection for the most vulnerable include “lifeline” scheme for utility costs, the Livelihood Empowerment Against Poverty (LEAP) cash transfer program, school feeding program, and free maternal care for almost 500,000 women. Others include grants and subsidies for basic education, and national youth employment program. New initiatives include the provision of school uniforms to about 1.6 million pupils in public basic schools in deprived communities throughout the country. Free exercise books will also be provided for every pupil in all public basic schools. In addition, the current capitation grant will be increased by 50 percent. In the context of a move to full cost recovery utility pricing, a review will be conducted of the possible need to expand support provided to poor households.

56. The current Ghana Poverty Reduction Strategy (GPRS) covers the period through end-2009. The government will shortly develop a strategy to extend the GPRS to 2010 and beyond. This extended GPRS will underpin the government’s program of adjustment and reform described in this memorandum.

IV. Monetary Policy, Exchange Rate Policy, and Financial Sector Issues

57. One of the key aspects of BOG’s IT framework is to build confidence and anchor expectations. The 2007–08 global financial crisis and its domestic pass-through effect seems to have dislodged inflation and exchange rate expectations temporarily but the Central Bank remains committed to the path of disinflation. In line with this, the BOG has recently increased the prime rate by 150 basis points, to 18.5 percent. It is projected that inflationary pressures will begin to ease by the second half of 2009, paving the way for reduction in the policy rate. Policies will aim at reducing inflation below 10 percent during 2010.

58. To strengthen the IT framework, the BOG will continue to build its forecasting and analytical capacity to support monetary policy implementation, drawing on the experience of other IT countries. The BOG will liaise closely with Fund staff in this area. In addition, the communication strategy, which includes a press conference after each MPC, will be further strengthened. The Bank of Ghana intends to restructure its website by end-year to consolidate and give greater prominence to its inflation targeting policies and goals, and provide more user-friendly access to MPC press releases, inflation reports, and other IT materials. This transparency will help to reshape public expectations and in the process provide a forum for greater accountability by the Bank of Ghana.

59. The Bank of Ghana will continue to maintain a flexible exchange rate regime, with foreign exchange market interventions limited to smoothing short-term fluctuations.

Financial supervision and regulation

60. The Bank of Ghana launched a multi year program for risk-based supervision of banks in 2007 which is supported by the Canadian Office of the Superintendent of Financial Institutions (OSFI). It has set 2010 as the implementation year for BASEL II and in collaboration with the banking industry, agreed to adopt the Standardized Approach for credit risk and operational risk, and Standardized Measurement Method for market risk. An updated Financial Sector Strategic Plan (FINSSPII), a blueprint for financial sector development, will be completed during 2009, with implementation targeted to start in 2010.

61. The Bank of Ghana is alert to the risks that weak governance structures and inadequate risk monitoring systems can play in the banking system, including in state-owned financial institutions. The Bank of Ghana is addressing risks in this area in the multi-year banking supervision program. Banks have been required to appoint compliance officers; the committee overseeing the BASEL II process meets quarterly to discuss risk management policies; and the Bank of Ghana liaises more closely with external auditors in conducting bank supervision to supplement information available from their written reports. Vigilance has led to early Bank of Ghana intervention in some cases of problems inconsistent with prudential regulations.

62. To further extend the capacity of the banking system to play a key role in a rapidly growing economy, the Bank of Ghana has increased the capital requirements of banks. The Bank of Ghana has set the new minimum capital requirement at GH¢60 million to be met by end of 2009. Banks with majority domestic shareholders however, are required to increase their minimum capital to GH¢25 million by end 2010, and then to GH¢60 million by end 2012.

63. Major financial sector reforms initiated recently and in the early stages of implementation will be brought to full implementation during the program period. Notable among these are (i) National Pensions Act, 2008 which will establish a regulatory framework for a three-tier pension system; (ii) the Financial Services Bill, to provide the legal and regulatory framework for providing nonbank financial services to non-residents; (iii) the full blown establishment of the Financial Intelligence Centre under the Anti Money Laundering Act., 2008; (iv) the Borrowers and Lenders Act; and (v) the Home Mortgage Finance Act.

64. The reform of the domestic debt market is an important component of our efforts to deepen financial markets and to improve the efficiency of the government’s debt operations. Among the measures to be implemented in the medium term are a rationalization of the primary dealer system, the annual publication of an issue calendar to guide portfolio managers to plan an orderly rebalancing of their portfolios, and the implementation of a comprehensive investor relations program targeted at both domestic and international participants in the government debt market.

65. Given the extensive changes in Ghana’s financial sector since the last Bank-Fund Financial Sector Assessment Program (FSAP) update, the government would welcome a new FSAP update at the earliest possible opportunity.

V. Risks and Contingencies

66. Key economic and financial downside risks to the program include lower-than-expected remittances and private capital inflows, a more rapid than expected increase in global oil prices, and a greater than anticipated economic slowdown in trading partner countries. If these risks materialize, the government stands ready to adjust its policies, in close consultation with IMF staff, to ensure the achievement of a sustainable external position by the end of the program period.

VI. Data Provision and Program Monitoring
Statistics

67. The following statistical data will be made available to the public as part of information dissemination strategy of Government and to allow for transparency in government operations:

  • National accounts. With technical assistance from the IMF, the National Accounts numbers have been revised and rebased to 2004. The Ghana Statistical Service plans to publish the new numbers by end December 2009. The GSS also plans to produce quarterly national accounts after the publication of the new national accounts series.

  • Inflation data. Inflation (CPI) data will be announced by the 10th of the month following the one that the outturn relates to. The Prime Building Cost Index (PBCI) will be produced and disseminated quarterly. The Producer Price Index (PPI) will be produced and disseminated with a month’s lag.

  • A population and housing census will be undertaken in 2010. Preparatory work has started, and the census report is expected to be produced and disseminated starting May 2011; and

  • Public finance data. The Controller and Accountant General will release the monthly statement of the Final Accounts of government with a maximum of six weeks lag. The Ministry of Finance will publish monthly fiscal outturns on its website with a maximum lag of eight weeks, starting with the January to March 2009 accounts and historic monthly data for 2008, which will be published by end-June 2009. Annual data on the breakdown of public sector staff strength by MDA in 2008, together with corresponding data on the aggregate wage bill by MDA will be published on the Ministry’s website by end-September 2009, with estimates for 2009 and subsequent years published within three months of end-year.

  • Nonconcessional financing. The Ministry of Finance will provide a listing and status report for projects being considered for nonconcessional financing for end-June and end-December of each year (see para. 52).

Program monitoring

68. To ensure coordinated implementation of the government’s program, the Economic Policy Coordinating Committee (EPCC), with participants from the Ministry of Finance, Bank of Ghana, and other affected ministries, departments, and agencies (MDAs) will meet on a regular basis to track progress under the various reform agendas. The EPCC, together with the Ministry of Finance’s Public Expenditure Monitoring Unit, will have particular responsibility for oversight of public spending to ensure compliance with budget limits.

69. Furthermore, with the view to enhancing data dissemination and transparency, the Ministry of Finance will post a broad range of macroeconomic data on a timely manner on its website on a continuous basis, including (a) quarterly fiscal estimates, with a lag of no more than 8 weeks, starting with the 2009 first quarter accounts and comparable quarterly data for 2008; (b) the Controller and Accountant General’s Department’s (CAGD) monthly statement of the Final Accounts of the government with a maximum lag of 6 weeks; (c) annual data on the staff strength of public sector workers and aggregate wage bill, broken down by MDAs.

70. Quantitative performance criteria and structural benchmarks for 2009–2010 are set out in Tables 1 and 2. Progress on structural reforms in the key areas previously mentioned, namely tax policy and revenue administration, public expenditure management, public sector reform, energy sector reform, the inflation targeting framework, and financial supervision and regulation, will be monitored in the context of reviews. To facilitate such monitoring, structural benchmarks for 2009–10 are set out in Table 2. In addition, given the need for close monitoring in the context of an uncertain global environment, the program includes quarterly reviews for 2009 followed by semi-annual reviews starting in 2010. The first review of the program is expected to be completed by end-December 2009, with end-September 2009 as the test date for the quantitative performance criteria; the second and third reviews under the program are expected to be completed by end-April and end-October 2010, with end-December 2009 and end-June 2010 as the test dates. Detailed definitions and reporting requirements for all performance criteria are contained in the Technical Memorandum of Understanding (TMU) attached to this letter.

71. We believe that the policies specified in the MEFP provide a basis for sustaining growth, reducing inflation, and alleviating poverty—but we stand ready to take additional measures if required. The government will provide the Fund with the information needed to assess progress in implementing our program as specified in the TMU, and will consult with the Fund staff on any measures that may be appropriate at the initiative of the Government or whenever the Fund requests a consultation. The Government intends to make this letter and the TMU available to the public. In this context, it authorizes the IMF to arrange for them to be posted on the Fund’s website, subsequent to Executive Board approval.

72. Accordingly, we are requesting Board approval of the policies set forth in the MEFP, and disbursement of the first loan installment, totaling SDR 387.45 million.

Table 1.

Ghana: Quantitative Program Targets1

(Cumulative from the beginning of calendar year, unless otherwise indicated)

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All items as defined in the attached Technical Memorandum of Understanding (TMU).

Performance criterion.

Indicative target.

The deficit ceiling will be adjusted upward (downward) for the full amount of higher (lower) than programmed project loans. The ceiling will be adjusted downward (upward) by 50 percent of the shortfall, up to a maximum adjustment of GH¢75 million, for lower than programmed program loans (grants). The ceiling will be adjusted downward for higher than programmed program grants.

Net international reserves at end-December 2008 was US$1,300.6 million. The NIR floor will be adjusted upward by any new SDR allocation. The floor will be adjusted upward for higher than programmed program loans and grants.

Includes debt with maturity of more than one year, as well as obligations with maturity of one year or less, excluding normal import-related credit and sales of treasury bills to nonresidents. The maximum ceiling is US$300 million, cumulative from July 1, 2009.

The projects would be conducted by the GNPC.

Consultation arrangements triggered should inflation breach the inner or outer bands are described in the TMU.

Indicative target. The ceiling will be adjusted upward by 50 percent of the shortfall, up to a maximum adjustment of GH¢75 million, for a shorfall in program loans and grants. The ceiling will be adjusted downward for higher than programmed program grants and loans.

At program exchange rate (see TMU, paragraph 2). Net domestic assets at end-December 2008 was GH¢298.5 million. The NDA ceiling will be adjusted downward by any new SDR allocation.

Table 2.

Ghana: Structural Conditionality under PRGF Arrangement, 2009–2010 1/

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Structural conditionality for the third and fourth reviews, to cover the period through end-June and end-December 2010 will be determined in the first and second reviews.

Appendix I—Attachment II: Technical Memorandum of Understanding

Arrangement Under the Poverty Reduction and Growth Facility July 2009-June 2012

1. This technical memorandum of understanding (TMU) defines the variables subject to quantitative targets (performance criteria and indicative targets), as specified in the Letter of Intent (LOI). It also describes the methods to be used to assess the program performance and the information requirements to ensure adequate monitoring of the targets. The authorities will consult with the Fund before modifying measures contained in this letter, or adopting new measures that would deviate from the goals of the program, and provide the Fund with the necessary information for program monitoring.

2. Program exchange rate: The exchange rates for the purpose of the program of the Ghanaian cedi (GH¢) to the U.S. dollar will be GH¢ 1.45 per US$ 1, which is calculated as the average of buying and selling exchange rates reported by banks to the Bank of Ghana as of June 19, 2009. The exchange rates to other currencies will be calculated as the average of buying and selling exchange rates against the U.S. dollar as of June 19, 2009.

I. Quantitative Program Indicators

3. For program monitoring purposes, the performance criteria are set for end-September 2009, end-December 2009, and end-June 2010, while indicative target is set for end-March 2010. The performance criteria under the arrangement are: (a) a ceiling on the overall fiscal deficit (including grants) of the government; (b) a floor on the net international reserves of the Bank of Ghana; (c) a continuous zero ceiling for the accumulation of new external arrears; and (d) a ceiling on the contracting or guaranteeing of new external nonconcessional debt. Indicative targets are established as: (a) a ceiling on the net domestic financing of the government; and (b) as a ceiling on the net domestic assets of the Bank of Ghana. A target is set for the twelve-month rate of consumer price inflation, with triggers discussions or consultations with the Fund if inflation moves outside specified inner and outer bands. Performance criteria, indicative targets, and adjusters are calculated as cumulative flows from the beginning of the calendar year.

A. Government

4. Definition: The government is defined as comprising the central government, all special funds (the Education Trust Fund, the Road Fund, the District Assembly Common Fund, and the National Health Insurance Fund), and all subvented and other government agencies that are classified as government in the Bank of Ghana (BOG) Statement of Accounts (SOA). The Social Security and National Insurance Trust (SSNIT) and public enterprises, including Cocobod, are excluded from the definition of government.

5. The fiscal deficit is defined as the difference between total expenditures and the sum of total revenues and total grants.

6. Revenues comprise all tax and nontax revenues of the government (both in cedi and in foreign currencies), excluding foreign grants and divestiture receipts. Revenue will be measured on a cash basis as gross inflows to the government’s uncommitted treasury collections accounts (as reported by the BOG).

7. Expenditures comprise all spending from uncommitted accounts for Items 1-4, as captured by the accounts of the Controller and Accountant General’s Department (CAGD), transfers, payments to statutory funds, HIPC-financed expenditure, and VAT refunds. Reporting will be based on the current National Expenditure Tracking System (NETS) accounting system and its associated 15-digit chart of accounts and will be fully reconciled with BOG bank statements on spending (outflows) from the ministries, departments, and agencies’ (MDA’s) operational accounts (plus any residual use of existing treasury drawing/overdraft accounts). Expenditure will also be verified by comparing it with accounts produced by the Budget and Public Expenditure Management System (BPEMS) accounting system, until such time as it becomes fully operational.

8. The government will continue to report poverty-related expenditures, including the use of funds from the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Budgeted poverty spending for these categories will be taken from each year’s final appropriations bill and will include spending financed by the government or donors or from internally generated funds. Actual poverty-related spending will be identified using the last 3 digits of the 15-digit chart of accounts of the CAGD’s current NETS and the subcomponent that is financed through HIPC Initiative debt relief. This data will be supplemented with that proportion of transfers to the District Assembly Common Fund, the Ghana Educational Trust Fund, and the Road Fund, which are deemed by those entities to be poverty-related. Accordingly, actual poverty spending will exclude some donor-supported expenditure not currently captured by the CAGD.

9. Net domestic financing of government is defined as the change in net credit to government by the banking system (i.e., the Bank of Ghana plus deposit money banks) plus the net change in holdings of treasury bills and other government securities by the nonbank sector, excluding divestiture receipts. Such credit will also exclude treasury bills issued for open market operation purposes from January 1, 2003 onward (the holdings of which are excluded from the BOG Treasury Department’s Debt Registry of central government securities, and the proceeds of which are sterilized in deposits held as other BOG liabilities, as defined in the monetary template provided to the IMF on December 3, 2003).

10. Outstanding net credit to the government by the Bank of Ghana comprises the sum of claims on government (SOA codes 0401 and 050101-4), including overdrafts of the government with the BOG, less government deposits (1101 including the main HIPC Initiative receiving account, and 1202) as defined in the monetary template.

11. Outstanding net credit by deposit money banks comprises deposit money bank (DMB) holdings of government securities at cost of purchase value, as reported by the BOG Treasury Department’s Debt Registry, plus overdrafts less government deposits (the BOG’s definition of government will be used for program purposes) as reported by DMBs in the revised BSD2 report forms (and defined in the Monetary Template), plus deferred accrued interest on their holdings of inflation-indexed bonds.

12. Nonbank financing is the difference between total net cash receipts to the treasury main cash account (issues/redemptions account when it becomes operational) from the sale/repurchase of government securities, less the corresponding net cash value received from the BOG and DMBs as indicated on the Debt Registry by holder at discount value, plus deferred accrued interest on their holdings of inflation-indexed bonds. For each test date, any adjustment by the BOG to the data reported by individual DMBs, on account of their misclassification of government or for other reasons, will be reported to the Fund.

B. Consultation Mechanism on Inflation

13. The quarterly consultation band for the twelve-month rate of consumer price inflation (as measured by the headline consumer price index (CPI) published by the Ghana Statistical Services) are specified in the text table: Inflation Targets. Projected CPI for end-September 2009, end-December 2009, and end-June 2010 will be subject to the consultation mechanism, while those for end-June 2009 and end-March 2010 are indicative targets.

Text Table: Inflation Targets

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14. When the observed year-on-year CPI inflation rate falls outside a specific band, this would trigger consultation with the Fund.

  • The authorities will complete consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases under the program when the observed year-on-year CPI inflation rate moves outside the outer band as specified for the end of each quarter in the above table. The authorities will not be able to request any further disbursements under the PRGF arrangement if inflation moves outside of the outer band until the consultation with the Executive Board has taken place.

  • The authorities will conduct discussions with the Fund staff when the observed year-on-year CPI inflation rate falls outside the inner band as specified for the end of each quarter in the above table.

15. In line with our accountability principles, we are committed to report to the public the reasons for any breach of the outer bands, and our policy response.

C. Bank of Ghana

16. Net foreign assets are defined in the monetary survey as short- and long-term foreign assets minus liabilities of the BOG that are contracted with nonresidents. Short-term foreign assets include: monetary gold (valued at the spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserve position and HIPC Initiative trust investment in the IMF, the HIPC Initiative Umbrella SDR account (all as reported by the IMF), foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, and other positive short-term or time deposits. Short-term foreign liabilities include foreign currency liabilities contracted by the BOG at original maturities of one year or less (including overdrafts), outstanding liabilities to the IMF, and deposits of international institutions at the BOG. Long-term foreign assets and liabilities are comprised of: other foreign assets (BOG statement of accounts code 303), investments abroad (a subset of 60201), other long-term liabilities to nonresidents (a subset of 1103), and bilateral payment agreements (305). All values not in U.S. dollars are to be converted to U.S. dollars at the exchange rates prevailing at end-June 2009 and then into cedis at the program exchange rate. A more detailed listing of accounts to be included in the measure of net foreign assets is contained in the monetary template referred to in paragraph 7 above.

17. Net international reserves of the BOG are defined for program monitoring purposes and in the balance of payments as short-term foreign assets of the BOG, minus short-term external liabilities. To the extent that short-term foreign assets are not fully convertible external assets readily available to and controlled by the BOG (that is, they are pledged or otherwise encumbered external assets, including, but not limited to, the HIPC umbrella SDR account), they will be excluded from the definition of net international reserves. Net international reserves are also defined to include net swap transactions (receivable less payable) and exclude all positive foreign currency deposits at the BOG held by resident deposit money banks, public institutions, nonfinancial public enterprises, other financial institutions, and the private sector. All values not in U.S. dollars are to be converted to U.S. dollars at the exchange rates prevailing at end-June 2009 and then into cedis at the program exchange rate. A more detailed listing of accounts to be included in the measure of net international reserves is contained in the monetary template referred to in the paragraph above.

18. Net domestic assets of the Bank of Ghana are defined as the difference between reserve money and net foreign assets of the BOG, excluding the HIPC Umbrella SDR account, converted from U.S. dollars to cedis at the program exchange rate.

D. External Debt and Debt Service

19. Short-term external debt is defined as the outstanding stock of external debt with an original maturity of one year or less, including overdraft positions and debt owed or guaranteed by the government or the BOG.1 Data on the BOG’s short-term external debt are those reported from the statement of accounts template as short-term liabilities to nonresident commercial banks (BOG statement of accounts code 1201 plus 301 overdrafts plus Crown Agent).

20. Nonconcessional medium- and long-term external debt is defined as outstanding stock of external debt contracted or guaranteed by the government or Bank of Ghana with an original maturity of more than one year.2 Medium- and long-term debt and its concessionality will be reported by the Aid and Debt Management Unit of the Ministry of Finance and Economic Planning, and will be measured in U.S. dollars at current exchange rates.

21. External payment arrears would accrue when undisputed interest or amortization payments of the government are not made within the terms of the contract, or in conformity with the terms for interim relief provided under the enhanced HIPC Initiative and the deferral agreed with the Paris Club on December 10, 2001.

E. Adjustors to the Program Targets

22. Program’s quantitative targets are subject to the following adjustors:

  • Overall fiscal deficit of the government: the deficit ceiling will be adjusted upward (downward) for higher (lower) than programmed project loans; downward (upward) by 50 percent of lower than programmed program loans (grants), up to a maximum adjustment of GH¢$75 million; and downward for higher than programmed program grants by full amount.

  • Net international reserves of the Bank of Ghana: the floor will be adjusted upward for any new SDR allocation. The NIR floor will also be adjusted upward for any excess of budget grants and loans relative to the program baseline.

  • Net domestic financing of the government: the ceiling will be adjusted upward by 50 percent of any shortfall in programmed program loans and grants, up to a maximum adjustment of GH¢75 million. For higher than programmed loans and grants, the ceiling will be adjusted downward by full amount.

  • Net domestic assets of the Bank of Ghana: the ceiling will be adjusted downward for any new SDR allocation.

F. Provision of Data to the Fund

23. Data with respect to the variables subject to performance criteria and indicative targets will be provided to Fund staff on a monthly basis with a lag of no more than eight weeks (except for select data for which the reporting lag is explicitly specified in Table 1). The authorities will transmit promptly to Fund staff any data revisions. For any information (and data) that is (are) relevant for assessing performance against program objectives but is (are) not specifically defined in this memorandum, the authorities will consult with Fund staff.

Table 1.

Ghana: Data to be Reported to the IMF

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1

Under the Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief Initiative (MDRI).

2

The US$750 million yield from issuing a debut Eurobond in late-2007 was largely spent in 2008.

3

Majority foreign-owned banks are required to meet the target by end-2009, while domestic banks have a deadline of end-2012.

4

Pending more definitive information, no allowance has been made for potential gas exports from the Jubilee field.

5

The fiscal projections reflect unchanged utility tariffs. Based on the global oil price outlook, a depreciating currency, and a projected shift from hydro to more costly thermal power generation, operating shortfalls of the power authority are projected at nearly 3 percent of GDP in 2010. The government’s commitment to adopting cost-recovery utility tariffs by end-2009 will therefore be critical for supporting the 2010 budget (MEFP, ¶52).

6

EITI would also be extended to forestry and fishing.

7

Work to develop an updated GPRS III to cover the period starting 2010 has been initiated (MEFP, ¶56). A status report will be provided at the time of the first review.

1

During the coming year, the government has identified a potential need for debt guarantees during 2009–10 of up to US$300 million to the Ghana National Petroleum Company (GNPC) to facilitate its participation in the first phase of a program to exploit offshore gas deposits starting in 2011. The project would be commercially viable, and is anticipated to involve majority private sector equity participation. Debt service would be financed from gas sales to domestic or regional refineries, and risks to Ghana’s debt sustainability outlook would be low

1

(A) The term “debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000). This includes overdrafts on accounts with correspondent banks. (B) Excluded from this performance criterion are normal import-related credits, pre-export financing credits of public enterprises, cocoa loans collateralized by cocoa contracts, and individual leases with a value of less than US$100,000.

2

(A) 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 (Decision No. 12274-(00/85) August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. (B) Excluded from this performance criterion are: debts with a grant element equivalent to 35 percent or more, calculated using currency-specific discount rates based on OECD commercial interest reference rates; borrowing for specific high-return public infrastructure investment projects, subject to prior consultation with the Fund. For 2009/10, the ceiling is set at US$300 million to allow for possible guarantees to the Ghana National Petroleum Company to facilitate its participation in the first phase of a program to exploit offshore gas deposits. The grant element of each loan will be assessed with regard to the terms of the loan provided by a foreign official entity in connection with the loan in question. Loans provided by a private entity will not be considered concessional unless accompanied by a grant or grant element provided by a foreign official entity, such as both components constitute an integrated financing package with a combined grant element equal to at least 35 percent.

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Cover IMF Staff Country Reports
Ghana: 2009 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Ghana
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 256
Publisher:
International Monetary Fund
ISBN:
9781451815047
ISSN:
1934-7685
Pages:
111
DOI:
https://doi.org/10.5089/9781451815047.002

Ghana: Real Interest Rates, 2005–2009 1/

Bank of Ghana composite indicator and real GDP growth

Ghana: Oil Trade Balance

Ghana: Key Interest Rates, 2006–09

(Percent per annum)

Ghana: Real and Nominal Effective Exchange Rates, January 2001 - March 2009

Ghana: Sectoral NPLs

(In percent of total sectoral loans)
Figure 1.

Possible Impact of National Accounts Revisions (assuming a 50 percent upward revision to real and nominal GDP) 1/
Figure 2.

Ghana: Business and Financial Indicators