Ghana
Combined First and Second Reviews Under the Arrangement Under the Extended Credit Facility, Request for Waiver of Nonobservance of Performance Criteria, Modification of Performance Criteria and Rephasing of Disbursements: Staff Report; Staff Statement and Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Ghana.

Ghana’s growth of 3–4 percent in 2009 was about twice the estimated average for sub-Saharan Africa. Fiscal performance in 2009 was weaker than programmed, giving rise to substantial new domestic expenditure arrears. The Bank of Ghana (BoG) eased monetary conditions as inflationary pressures receded. Progress in reinvigorating structural reforms gained momentum through end-2009. Growth is projected to strengthen to 4–5 percent in 2010. For 2010, the authorities are targeting a budget deficit of 8 percent of GDP.

Abstract

Ghana’s growth of 3–4 percent in 2009 was about twice the estimated average for sub-Saharan Africa. Fiscal performance in 2009 was weaker than programmed, giving rise to substantial new domestic expenditure arrears. The Bank of Ghana (BoG) eased monetary conditions as inflationary pressures receded. Progress in reinvigorating structural reforms gained momentum through end-2009. Growth is projected to strengthen to 4–5 percent in 2010. For 2010, the authorities are targeting a budget deficit of 8 percent of GDP.

I. Recent Developments and Program Performance1

1. Ghana’s growth of 3–4 percent in 2009 was about twice the estimated average for sub-Saharan Africa. Robust cocoa and gold export prices and beneficial rainfalls helped cushion against the effects of tighter policies and lower remittances (Figure 1 and Table 1).2 With slower growth and modest currency appreciation since mid-2009, inflation has remained within the inner consultation band under the program.

Figure 1.
Figure 1.

Ghana: Indicators of Activity and Inflation

Citation: IMF Staff Country Reports 2010, 178; 10.5089/9781455204731.002.A001

Sources: Ghanaian authorities; and IMF staff estimates and projections.
Table 1.

Ghana: Selected Economic and Financial Indicators, 2007–13

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

After including SDR allocation in 2009.

Percent of broad money (including foreign currency deposits) at the beginning of the period.

Including public enterprises and errors and omissions.

Before new fiscal measures.

Includes potential new exceptional financing starting in 2010–12.

2. Fiscal performance in 2009 was weaker than programmed, giving rise to substantial new domestic expenditure arrears. Domestic revenues were 1½ percent of GDP lower than budgeted on account of weak trade-related tax collections (Figure 2). Grant receipts also fell short by about 1 percent of GDP. Some expenditures also exceeded budgeted levels, notably the wage and salary bill (in part due to payment of retroactive claims) and domestic interest costs. The fiscal deficit and net domestic financing at year-end were kept within program ceilings3 by deferring revenue transfers to statutory funds (2.4 percent of GDP) and by incurring new arrears to domestic suppliers (1.8 percent of GDP). The budget deficit on a commitment basis was an estimated 3 percentage points of GDP above the program goal, albeit significantly down from 2008 (Text Table 1, and Tables 2a, 2b, and 3).

Figure 2.
Figure 2.

Ghana: Fiscal Developments in 2009

Citation: IMF Staff Country Reports 2010, 178; 10.5089/9781455204731.002.A001

1 Including arrears clearance and VAT refunds.Sources: Ghanaian authorities; and IMF staff estimates.
Text Table 1.

2009 Fiscal Consolidation

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Sources: Official data, and IMF staff estimates.

3. The Bank of Ghana (BoG) eased monetary conditions as inflationary pressures receded (Table 4 and Figure 3). The policy rate was lowered from a peak of 18.5 percent in 2009 to 15 percent by April 2010. Capital inflows at end-2009 partly increased liquidity, leading to a marked decline in interbank and Treasury bill rates in early 2010. The September and December indicative ceilings on BoG net domestic assets under the program were met.

Figure 3.
Figure 3.

Ghana: Financial Indicators

Citation: IMF Staff Country Reports 2010, 178; 10.5089/9781455204731.002.A001

Sources: Ghanaian authorities; and IMF staff estimates.

4. External performance improved substantially during 2009. Strong exports and falling imports narrowed Ghana’s current account deficit from 18.7 percent of GDP in 2008 to 5.1 percent of GDP in 2009 (Table 5). Gross reserves at end-2009 reached 2.9 months of import cover, benefitting from the SDR allocations ($450 million) in 2009 and capital inflows by banks to meet higher statutory minimum capital levels. The program floor on net international reserves was exceeded by a substantial margin.

5. Progress in reinvigorating structural reforms gained momentum through end-2009 (MEFP Table 3). Two September structural benchmarks were missed: progress stalled in computerizing subvented agencies’ payrolls, largely reflecting inadequate funding for software and consultants, and a full review of tax exemptions and waivers was delayed due to capacity constraints. With adequate resourcing for these projects, the authorities intend to meet the benchmarks by July-September 2010.4 All four December 2009 benchmarks were met, some ahead of schedule.

II. Macroeconomic Framework for 2010 and the Medium Term

6. Growth is projected to strengthen to 4–5 percent in 2010. This reflects the continued strength of commodity exports and new oil-related investments. With the move to oil production in 2011, real GDP is projected to rise by about 20 percent, subsequently easing to about 6 percent. The BoG targets a decline in inflation to high single digit levels by end-2010. The external current account deficit is projected to widen in 2010 on account of oil-related capital goods imports, subsequently narrowing as oil exports start (Text Table 2).

Text Table 2.

Medium-Term Macroeconomic Framework, 2008–14

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Sources: Official data and IMF staff estimates and projections.

III. Policy Discussions

A. Reducing the Fiscal Deficit

7. For 2010, the authorities are targeting a budget deficit of 8 percent of GDP. This upward revision from the original program target of 6 percent of GDP reflects a less favorable outlook for tax revenues as well as upward revisions to domestic interest expenditures. Nevertheless, the fiscal effort remains ambitious, with the deficit declining by an estimated 3½ percentage points of GDP on a commitment basis (Text Table 3). The authorities aim to reduce the budget deficit to less than 4 percent of GDP from 2012, reversing the rising trend in the ratio of public debt to GDP (Section III.B and Figure 4).

Text Table 3.

Fiscal Outlook, 2009–13

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Sources: Official data, and IMF staff estimates and projections.

Excludes oil revenues.

8. Projected fiscal consolidation in 2010 reflects a 3½ percentage point of GDP increase in revenues. Tax policy changes include a rise in mining royalties from 3 to 5 percent, a shift from specific to ad-valorem taxes on tobacco and drinks, higher fees and charges, and a restoration of import duties on food products that were eliminated in 2008. The authorities also project an increase in capital gains taxes and transfers from the Ghana Cocoa Board and Bank of Ghana (MEFP ¶19).

9. Expenditures are restrained in 2010. On a commitment basis, projected spending is broadly unchanged from 2009 levels, and about 9 percentage points of GDP below 2008. Areas of spending pressure, relative to the original program, are interest payments and the public wage bill, with the latter reflecting a higher than projected 2009 outturn and the move to a new unified public pay structure. Power subsidies will be reduced by the planned hike in electricity tariffs (para. 19). Consistent with the government’s new poverty reduction strategy (Box 1), pro-poor spending is being protected during the 2010 fiscal consolidation, remaining at 8.4 percent of GDP in line with the estimated 2009 outcome, rising to 9.1 percent of GDP in 2011–12.

Figure 4.
Figure 4.

Ghana: Medium-Term Fiscal Indicators

Citation: IMF Staff Country Reports 2010, 178; 10.5089/9781455204731.002.A001

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

Poverty Reduction Strategy for 2010–13

An updated Poverty Reduction Strategy for 2010–13, the Ghana Shared Growth and Development Agenda (GSDA), will be submitted to parliament by end-August 2010 after consultations with key stakeholders. Key elements are:

  • Macroeconomic stability. Policies will target fiscal consolidation to reduce public debt vulnerability, annual average real growth of about 7 percent, low inflation, and exchange rate stability.

  • Enhanced private sector competitiveness. Policies will remove regulatory and institutional constraints that hamper private sector competitiveness and promote public-private partnerships.

  • Sectoral priorities. To attain the Millennium Development Goals, the GSDA focuses on agricultural reforms, human development, water and sanitation, transportation, ICT, and energy.

  • Transparent and accountable governance. The GSDA seeks to strengthen governance institutions, public policy management, and the role of civil society organizations.

10. Looking ahead, Ghana’s oil “dividend” will initially be modest. The medium-term fiscal framework (Text Table 3) suggests that only around one-third of projected oil revenues of 5½ percent of GDP could be spent on new programs in 2011–12 without jeopardizing the planned fiscal consolidation. The available fiscal space would increase significantly in 2013, as arrears repayments come to an end.

B. Progress Toward Debt Sustainability

11. On current projections, public debt peaks at 65 percent of GDP at end-2010. This increase of more than 20 percentage points of GDP in just four years excludes domestic expenditure arrears projected at 5 percent of GDP and state-owned enterprise (SOE) liabilities to banks from past underpricing of energy products amounting to about 6 percentage points of GDP.

12. A timeline has been agreed for repaying domestic expenditure arrears (MEFP ¶22–23, and Table 3). After an independent audit, arrears repayments in 2009 and early 2010 focused on road and other contractors, where unpaid bills had impacted the banking sector and brought projects to a standstill. Overdue transfers to governmental trust funds will be settled in 2011–12.

13. Options for clearing SOE debts are being examined. In early-2010, new public debt was issued to clear about one-third of the oil refinery’s delinquent debts to the Ghana Commercial Bank, equivalent to 1.7 percent of GDP.5 Options for clearing the remaining delinquent bank debts of the refinery and the public electricity company, amounting to about 6 percent of GDP, are being examined based on advice from an MCM technical assistance mission in April-May 2010. This would likely require new public debt issuance, increasing the debt ratio above levels in the current medium-term fiscal framework. While the resulting debt service burden would be manageable, it would further reduce the fiscal space associated with the move to oil producer status.

14. Given Ghana’s increased debt vulnerability, debt management is being strengthened (MEFP ¶40–41). A debt management strategy is being developed drawing on joint Bank-Fund technical assistance, and projects for nonconcessional financing will be selected based on clearly established guidelines (both structural benchmarks for December 2010). The continuous program limit on contracting or guaranteeing new external nonconcessional debt was breached when the government in November took over $100 million of liabilities of the Ghana National Petroleum Corporation (GNPC; MEFP ¶8). To avoid a recurrence, new structural benchmarks (MEFP Table 3) have been included in the program and the government has reinforced requirements that the Ministry of Finance’s Debt Management Division monitor all public debt contracts to verify compliance with the agreed debt limits (MEFP ¶41).

15. New nonconcessional borrowing will be contracted, consistent with debt sustainability. The original program provision for commercial borrowing of up to $300 million by GNPC has not been used, and the authorities have requested it be scaled back to $200 million. Instead, cost-benefit analysis supports the use of nonconcessional financing for the purchase of firefighting equipment ($49.1 million) and a coastal protection scheme ($100 million). Consistent with the new guidelines on debt limits, the program provides for further nonconcessional borrowing of up to $200 million. Including such borrowing, the updated debt sustainability assessment (Appendix II) indicates that Ghana would remain at moderate risk of debt distress, albeit with some increase in debt vulnerabilities.

C. Structural Fiscal Reforms

16. steps have been taken toward more robust revenue administration (MEFP ¶28–29). Reforms center on the recent establishment of an integrated Ghana Revenue Authority (GRA), supported by FAD technical assistance and development partner financing. Tax policy reforms include an increase in the VAT threshold to bring Ghana into line with international best practice (December 2010 benchmark) and adoption of a tax regime for small businesses (June 2011 benchmark) (MEFP ¶26–27).

17. A new approach is being taken toward budget management (MEFP ¶30–35). Interim efforts to strengthen cash management are being succeeded by steps to streamline and bring a more strategic focus to budget preparation (by March 2011), drawing on FAD advice. A strategy for updating Ghana’s Integrated Financial Management Information System has been adopted (December 2009 benchmark), and the new system will be rolled out to pilot sites by March 2011 (program benchmark). A framework for managing oil and gas revenues is being finalized (Box 2).

Framework for Managing Oil and Gas Revenues

A comprehensive framework is planned for managing oil and gas revenues. Public consultations on the proposed framework were conducted in February-April 2010, and a draft bill is to be submitted to parliament in May-June. Fund staff support the thrust of the proposed model, which is in line with international best practice.

A high degree of transparency is envisaged. Oil and gas revenues would be collected by the Ghana Revenue Authority and credited to a dedicated petroleum account at the Bank of Ghana. Revenue data would be published quarterly and the Minister of Finance would report annually to parliament on petroleum-related transactions. Annual audits would be prepared either by the Auditor-General or an internationally reputable auditor.

A rules-based approach for allocating revenues is planned. Under the current draft, spending of oil revenues would reflect either benchmark revenues (calculated using the 5-year moving average of oil prices and production volumes) or the estimated sustainable income (ESI), a permanent income-based measure of oil wealth. This approach would ensure that a significant portion of revenues is available to finance (i) a stabilization fund to smooth spending in the face of price or production shocks, and (ii) a future generations fund. Balances in the funds would be largely invested abroad.

18. Public administration reform remains a priority. The authorities’ strategy focuses on removing absentee workers from the public payroll, an approach successfully piloted in the health service; computerizing subvented agency payrolls to provide better head count information; identifying agencies to be commercialized or liquidated (benchmark for end-2010); and conducting a survey of pay comparability ahead of future public pay rounds (benchmark for June 2011) (MEFP ¶36–37).

D. Energy Sector Reforms

19. Restructuring plans are being adopted for the electricity sector and oil refinery. Electricity sector SOEs will be recapitalized under a plan supported by the World Bank, supported by a 33 percent increase in power tariffs (prior action for the first and second ECF reviews). If the new tariffs, combined with improved collections and productivity gains, do not result in full cost recovery, a further tariff increase to close any remaining gap would be implemented by the third ECF review (MEFP ¶38). For the Tema Oil Refinery (TOR), the authorities are clearing its bank debts (para. 13) and are seeking World Bank support to develop a comprehensive restructuring plan (MEFP ¶39).

20. Commodities hedging is being considered to help smooth petroleum product prices. Consideration is being given to a levy on petroleum products to finance the purchase of call options on oil prices. Should oil prices rise sharply, the options would yield a profit that could provide the financing to potentially avoid a temporary rise in product prices, or to phase in a sustained increase in prices more slowly. Staff noted that management of the scheme should be subject to clear guidelines to limit risk, and underlined that hedging would not eliminate the need for full pass through of sustained changes in global prices.

E. Monetary and Exchange Rate Policies

21. A high single-digit inflation target is set for end-2010 and 2011 (MEFP Table 2). The monetary easing since November 2009 appears consistent with the Bank of Ghana’s inflation target. However, staff pointed to upside pressures from firming global oil prices and planned hikes in electricity tariffs. The authorities should stand ready to tighten policies, if needed, to avoid an upturn in inflation expectations.6

Table 2A.

Ghana: Summary of Central Government Budgetary Operations, 2007–131

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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.

From 2010, reflects reforms to the remuneration framework, including shifting certain allowances from goods & services to wages & salaries.

From 2010, assumes full cost-recovery pricing for electricity tariffs.

Includes cumulative fiscal measures.

Negative sign represents increase in equity in SOEs.

Table 2B.

Ghana: Summary of Central Government Budgetary Operations, 2007–131

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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.

From 2010, reflects reforms to the remuneration framework, including shifting certain allowances from goods & services to wages & salaries.

From 2010, assumes full cost-recovery pricing for electricity tariffs.

Including cumulative fiscal measures.

Negative sign represents increase in equity in SOEs.

22. The BoG will maintain a flexible exchange rate regime. In the event of stronger than programmed external performance, it would allow some currency adjustment while also using the opportunity to further strengthen reserve cover (MEFP ¶43).

23. Key recommendation of the 2009 safeguards assessment has been implemented. A new BoG Board was appointed in March 2010,7 and the authorities are committed to timely implementation of other safeguards assessment recommendations.

F. Maintaining Financial sector stability

24. Three areas of financial sector vulnerability have emerged (MEFP ¶44–45). The majority state-owned Ghana Commercial Bank (GCB) has heavy loan concentration in the petroleum sector, largely reflecting loans to the loss-making state oil refinery (TOR). Second, a smaller state-owned development bank became insolvent in 2009 as a result of mismanagement. The BoG has taken a majority stake in the latter, pending its restructuring for divestiture. Third, industry-wide nonperforming loans more than doubled to 20 percent of total loans in February 2010 (Table 6), reflecting the slowdown in economic growth, weaknesses in banks’ risk management and losses by some energy sector SOEs.

25. A response to these risks has been developed. In response to a request from the authorities, a mission from MCM in April-May 2010 is reviewing the situation of GCB and the BoG-owned development bank and advising on options for clearing TOR’s debts consistent with the government’s medium-term debt strategy and macroeconomic program. It will also advise on the lessons for banking supervision and liquidity support operations. The BoG intends to continue to strengthen its supervisory capacity, with a focus on risk management aspects (MEFP ¶44). An FSAP update is envisaged for mid-2010.

IV. Program Design and Risks

A. Program Design

26. Quantitative targets through end-June 2011 are presented in Table 2 of the MEFP. Key changes in program design are to:

  • External nonconcessional debt. Modifications to the ceilings are summarized in para. 15.

  • Domestic arrears. To avoid fiscal slippages financed by new domestic arrears, a program ceiling has been adopted.

  • Poverty reducing spending. To protect poverty-reducing spending during the program period, an indicative floor has been adopted.

27. structural benchmarks through end-June 2011 focus on revenue administration, public expenditure management, public debt management, pay and payroll management, and cost-recovery energy pricing (MEFP Table 3).

Table 3.

Ghana: Domestic Payments Arrears, 2008–12

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Source: Ghanaian authorities.

Represents provision for spending contracted in 2009, but not yet paid by the end of the fiscal year.

B. Program Financing

28. To support Ghana’s policy adjustment, financing of $500 million has been identified for 2010.

  • Exceptional fiscal financing of $275 million is being provided in 2010. The majority represents new World Bank lending ($250 million), with the remainder from other budget support partners. The authorities are requesting financing, over and above this amount, to accelerate the repayment of domestic arrears. In 2011, no further fiscal financing gap is projected, reflecting the start of revenues from oil production.

  • Balance of payments financing of about $225 million is provided under the ECF arrangement in 2010, declining to about $135 million in 2011. A proposed change to the phasing of ECF disbursements would reduce the degree of front-loading (MEFP, Table 4), consistent with Ghana’s stronger-than-programmed external performance and revised policy commitments.8

Table 4.

Ghana: Monetary Survey, 2007–13

(Millions of cedis, unless otherwise indicated)

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

Excluding foreign currency deposits.

In millions of cedis. The program exchange rate is GHc 1.45 per U.S. dollar.

Deflated by the Consumer Price Index.