Ghana
2011 Article IV Consultation and Third and Fourth Reviews Under the Arrangement Under the Extended Credit Facility, Requests for Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria, and Rephasing of Disbursements-Staff Report; Staff Supplement; 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:
10 Jun 2011
eISBN:
9781455281596
Language:
English
Keywords:
ISCR; CR; ECF arrangement; Ghana faces inflation risk; revenue; budget management system; GDP ratio; debt service; reserve cover; GDP range; Arrears; Currencies; Global
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Ghana showed strong growth underpinned by high commodity export prices, the start of oil production, and strong non-oil activity. Executive Directors welcomed this development, and stressed that monetary policy implementation will need to remain vigilant. Directors welcomed the recent approval of an oil revenue management bill. They appreciated measures taken to address stability risks in the banking sector identified by the Financial Sector Assessment Program (FSAP) Update. They emphasized that the focus of the Extended Credit Facility (ECF)-supported program is to expand economic growth through prudent macroeconomic policies supported by structural reforms.

Abstract

Ghana showed strong growth underpinned by high commodity export prices, the start of oil production, and strong non-oil activity. Executive Directors welcomed this development, and stressed that monetary policy implementation will need to remain vigilant. Directors welcomed the recent approval of an oil revenue management bill. They appreciated measures taken to address stability risks in the banking sector identified by the Financial Sector Assessment Program (FSAP) Update. They emphasized that the focus of the Extended Credit Facility (ECF)-supported program is to expand economic growth through prudent macroeconomic policies supported by structural reforms.

I. Introduction

1. Ghana has been implementing adjustment policies under the Extended Credit Facility (ECF) since the July 2009 Article IV consultations. External adjustment was achieved relatively early in the program, supported by fiscal tightening and currency adjustment during 2009. Buoyant cocoa and gold prices helped Ghana ride out the global financial crisis and, over the past year, financing constraints have eased as nonresident demand for domestic currency bonds re-emerged. The start of oil production in late-2010 has further reinforced the fiscal and external outlook. The emphasis in the remainder of Ghana’s ECF-supported adjustment program is on relaunching the fiscal adjustment effort after slippages in 2010, tackling long-standing weaknesses in fiscal institutions, and addressing vulnerabilities that have emerged in the banking sector.

2. Implementation of the adjustment program has not been straightforward. The first ECF review was completed with the second review only after additional measures were identified in early-2010 to reinforce that year’s budget, and the third review was delayed and is being combined with the fourth review only after policies were agreed to strengthen fiscal policies for 2011 and beyond. Box 1 summarizes Ghana’s responsiveness to the 2009 Article IV recommendations.

Responses to Fund Advice

Fiscal policy: The 2009 Article IV consultation urged fiscal consolidation through revenue mobilization and expenditure restraint, with steps to control public wage growth and increase power tariffs. Goals for revenue collections and power tariffs were met, but spending ran ahead of plans and the wage bill was increased by a new pay structure. A large part of initial oil revenues is being saved, as recommended in the 2009 Article IV.

Monetary and exchange rate policy: In line with Fund advice, the authorities further tightened monetary policies during 2009 and banking sector surveillance was the focus of the 2010 FSAP update. Currency flexibility was maintained, as advised.

Structural reforms: Structural fiscal reforms were launched in 2009 as recommended, but progressed more slowly in 2010 for diverse reasons.

II. Recent Developments and Program Performance

3. Growth is recovering, and incomes per capita have been substantially revised. On rebased national accounts data,1 the economy is estimated to have expanded by 5½—6 percent in 2010, after a period of slower growth (4.7 percent) in 2009. Growth is being driven by buoyant commodity exports and increased construction and service activities. In the rebased accounts, recent annual growth rates have been revised up by an average of 1 percent, in part reflecting the rapid growth of services that now account for one-half of the economy. The level of incomes has been dramatically revised, increasing by an average of 65 percent for 2006-09, putting Ghana into the lower-middle income country grouping (Figures 1 and 2).

Figure 1.
Figure 1.

Ghana: Rebased National Accounts

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Source: Ghanaian authorities; and IMF staff estimates.
Figure 2.
Figure 2.

Ghana: Real Sector Indicators, 2001-13

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

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

4. External performance has been favorable. Total exports grew by US$2 billion in 2010, with cocoa and gold exports benefiting from high global commodity prices. Imports also staged a strong recovery after a decline in 2009, partly reflecting capital goods imports by the oil sector. The current account deficit of 7.2 percent of GDP in 2010 was more than financed by strong capital inflows, including foreign direct investments in the oil sector and bond purchases by nonresident investors. Net international reserve targets were met by wide margins, and gross reserve cover rose to 3.2 months of import cover at end-2010 (Figure 3).

Figure 3.
Figure 3.

Ghana: External Indicators, 2000-10

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Source: Ghanaian authorities; and IMF staff estimates.

5. A stable currency has helped the disinflation process. With a strong balance of payments, the cedi has traded in a relatively narrow range since mid-2009. This, together with the lagged effects of monetary tightening in 2009 and favorable crop yields, contributed to a decline in inflation from a 20 percent annual rate in 2009 to about 9 percent from mid-2010, close to the center of the ECF target band. With inflation remaining higher than in partner countries, the real effective exchange rate appreciated by 6 percent during 2010.

6. Cash fiscal deficit and domestic financing targets for end-December 2010 were missed. The fiscal deficit (measured from financing side) exceeded the adjusted program ceilings by 0.8 percent of GDP. Tax revenues exceeded programmed levels, but nontax revenues and grants fell short, and expenditures exceeded program targets, mainly due to higher capital spending. Poverty-reducing expenditure was safeguarded, with indicative targets met throughout the year. The government raised new revenues in an effort to reduce the end-year cash deficit slippage to less than 0.2 percent of GDP, but the incomes were realized in January 2011, rather than in December 2010 as planned.2 The end-year indicative target on net domestic financing of the budget was missed by 0.8 percent of GDP, in part reflecting a slippage of a World Bank loan disbursement ($215 million, or 0.6 percent of GDP) from 2010 into early 2011.

7. Fiscal pressures also gave rise to expenditure arrears. On a full-year basis, arrears were accumulated in 2010 in a net amount equivalent to 1.9 percent of GDP, compared to a targeted reduction of 0.2 percent of GDP under the program, breaching the December performance criteria on domestic arrears.3 The estimated commitment basis fiscal balance, which adjusts the cash deficit for arrears accumulation, rose from 6.4 percent of GDP in 2009 to 8.4 percent of GDP in 2010, exceeding the adjusted program by 2.9 percent of GDP (Figure 4).4

Figure 4.
Figure 4.

Ghana: Fiscal Indicators, 2006-12

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Source: Ghanaian authorities; and IMF staff estimates.

8. Public debt ratios continued to edge higher in 2010. Total public debt was an estimated 39 percent of GDP at end-2010, up 3 percentage points from 2009. Two-thirds of this increase comprised higher domestic debt. The debt data exclude expenditure arrears and central government liabilities for unpaid SOE debts, estimated at 9 percent of GDP at end-2010.

9. The monetary policy stance has been unchanged since mid-2010. With stable inflationary pressures, the Bank of Ghana (BoG) policy rate has been held at 13.5 percent since July 2010, following an easing from 18.5 percent in late-2009. Liquidity growth picked up strongly in 2010, as the strong balance of payments boosted central bank NFA, despite partial sterilization. Reserve money expanded 35 percent in 2010, while broad money rose 46 percent, both well above year-ago outturns. Private sector credit also picked up towards end-2010 (Figure 5).

Figure 5.
Figure 5.

Ghana: Financial Indicators,2005-11

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Source: Ghanaian authorities; and IMF staff estimates.

10. The 2010 FSAP Update found that financial stability risks have heightened since the 2003 FSAP. While, in the aggregate, the banking system is profitable and liquid with high capital levels, NPL ratios are elevated, in part due to government payment arrears. The 2010 FSAP Update highlighted risks from extensive state involvement in the banking sector and deficiencies in commercial banks’ risk management and accounting practices, shortfalls in BoG supervision and systemic risk analysis, and weak enforcement of creditor rights.

11. Significant progress has been made in implementing the recommendations of the 2010 FSAP Update. Immediate stability risks have been reduced since mid-2010 by the issue of government bonds to retire TOR exposure to GCB and by payments to partially settle government arrears to contractors. At the same time, the incidence of bank undercapitalization has been addressed, with banks raising capital or merging with stronger banks to comply with the increased statutory minimum capital requirement that became effective at end December 2010. Management of state owned banks has been strengthened to improve corporate governance, and some progress has been made in strengthening micro and macro prudential regulation and supervision. In addition, the Financial Sector Strategic Plan is being updated to integrate the recommendations of the FSAP into a comprehensive reform program. Nevertheless, key sources of vulnerabilities remain and a sustained and comprehensive reform effort is needed to achieve long term financial stability.

12. Seven of twelve structural benchmarks for the pending ECF reviews were fully implemented (MEFP, Appendix Table 3). These covered VAT administration and oil and gas revenue management, debt management, power pricing, and public sector reform (subvented agencies and the state oil refinery). A remaining five benchmarks were delayed or partially implemented, covering computerization of payrolls and the broader budget, revenue authority modernization, strengthening of GCB’s balance sheet, and a review of tax exemptions and waivers.

III. Policy Discussions and the 2011 Program

A. Growth Prospects

External and growth prospects are favorable, driven by high commodity export prices and the start of oil production. Spillovers from regional conflicts have been manageable, so far.

13. The medium-term outlook is generally good, assuming that fiscal vulnerabilities are addressed. Ghana emerged as a new oil producer in late-2010, and yields from the current Jubilee field are projected to stabilize at about 110,000 bpd during 2011-15 (implying annual export earnings of about $4 billion, at current oil prices). If two other fields prove commercially viable, oil production could rise further after 2015, which, together with the commercial exploitation of gas reserves, could imply stronger growth and exports than in the baseline for this report. With non-oil growth in the 6—7 percent range, the start of oil production is projected to boost growth temporarily to the 13 percent range in 2011. Inflation is projected to edge lower over the medium term, supported by the Bank of Ghana’s inflation targeting regime (Text Table 1).

Text Table 1.

Medium-Term Economic Prospects, 2010-15

article image

Assuming no further accumulation of new arrears from 2011 and clearance of existing arrears by 2014.

Net debt declines more significantly than gross debt during 2011-2015 due to the accumulation of savings in an oil stabilization fund and future generations fund.

14. Continued external strength is anticipated. Current account deficits are projected to narrow over the medium term reflecting the projected fiscal consolidation, rising oil production, and high global commodity prices for gold and cocoa. Gross reserve cover could rise to 6 months of imports by end-2015, providing an increased cushion to manage growing transactions on the capital account.

15. Risks to growth largely stem from the budget. Unless arrears are successfully regularized, they would pose risks to corporate liquidity and banking portfolios. Equally, if fiscal imbalances are not addressed, large financing needs could fuel inflation and currency instability; these, in turn, would undermine the business climate and prospects for attracting new investments to diversify Ghana’s economic base.

16. The government has adopted a new growth and development strategy for 2010-13. The Ghana Shared Growth and Development Agenda (GSGDA) focuses on support for agriculture, private sector development, infrastructure, human development, and natural resource management. The potential 4-year implementation of the GSGDA has been costed at 67 percent of GDP, with about one-half of this amount unfunded under the medium-term budget. It will be difficult to fill the resource gap from external sources, and even if this were achieved, it would have significant implications for macroeconomic stability and inflation.5

Therefore, prioritization of the GSGDA program will be needed to ensure that the poverty strategy is consistent with sound macroeconomic policies.

B. Fiscal Strategy and Risks

Discussions focused on how to re-launch Ghana’s fiscal consolidation program, after a setback in 2010.

17. The program seeks a substantial fiscal correction in 2011. The program targets a fiscal correction of 5 percentage points of GDP on a commitment basis in 2011, up from the 3 percentage points envisaged in the last review (Text Figure 1 and Text Table 2). Despite this, both the cash and commitment basis deficits in 2011 would be 2 percentage points of GDP higher than anticipated earlier, owing to the 2010 fiscal slippage (Text Table 1). Box 2 describes how arrears payments are incorporated in the fiscal projections.

Text Figure 1.
Text Figure 1.

Deficit Projections, 2009-12

(Commitment-based, including arrears)

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Text Table 2.

Sources of Fiscal Adjustment in 2011

(Changes from year earlier, in percentages points of GDP)

article image

Extension of national stabilization levy through 2011

Extension of VAT to financial services, and increased taxation of the self-employed.

Savings achieved by avoiding arrears-financed capital spending.

Arrears Regularization in 2010-2013

Payments in 2010-11. Arrears payments are projected to increase from 2.4 percent of GDP in 2010 to 3.6 percent of GDP in 2011, of which 2.3 percent of GDP was paid in the first quarter.

Payments in 2012-13. Pending agreement on the nature and timing of the planned comprehensive arrears regularization, the fiscal framework includes cash payments in 2012-13 totaling about 2 percent of GDP. This is equivalent to the payment needed to clear all projected remaining government arrears—either in cash or by a bond issue redeemed over a two-year period.

General Resources Account

article image

Recorded as fiscal expenditure.

Checks issued but not paid in 2010 (recorded as fiscal discrepancy).

Issue of bonds to GCB to clear TOR overdue loans (recorded as negative financing item).

Other potential liabilities. No provision has currently been made for SOE liabilities tentatively estimated at 2.3 percent of GDP in 2011. This amount is an upside risk to the baseline fiscal deficit and debt projections, though these liabilities could be substantially reduced as a result of audits, or by payments by the SOEs themselves.

18. The government’s fiscal adjustment strategy hinges on relatively strong gains from improved tax administration and much more effective spending control. On the revenue side, oil revenues have been revised down for 2011 since the last review (Text Table 2), but only a small part will be reflected in additional spending, contributing importantly to the 2011 fiscal adjustment. The program also seeks to boost non-oil incomes through new tax measures and a reinforced emphasis on revenue administration (see Section III.C). Non-tax revenues also benefit from gold shares sold in early-2011. Based on much tighter expenditure management (Section III.D), the program seeks sizeable savings in investment outlays, focused on those projects that have previously given rise to expenditure arrears. With an end to arrears-based financing of investment programs in 2011, spending is reduced by a projected two percentage points of GDP on a commitment basis. Savings in recurrent spending are no longer in prospect for 2011, because of an upward revision in transfers due to the social security system.

19. For 2012-13, the program targets primary surpluses. With further increases in oil incomes, tight expenditure control, and declining arrears payments, the program aims to reduce the cash basis deficit from 4½ percent of GDP in 2011 to the 2-2½ percent of GDP range in 2012-13, consistent with primary surpluses of about 1 percent of GDP. This would steadily reduce both net and gross public debt levels in relation to GDP (Text Table 1).

20. Staff highlighted the risks of basing fiscal adjustment plans in large part on strengthened revenue administration and spending control. The latter, in particular, has underperformed in the past, and reforms are at an early stage. During discussions, the mission urged, instead, a stronger reliance on tax increases, where the fiscal impact was more predictable. In particular, staff saw merit in higher taxation of petroleum products (where taxes are lower than in neighboring countries, and where Ghanaian collections have fallen by 1.5 percentage points of GDP between 2006 and 2010); alternatively, consideration could be given to raising the VAT rate from 15 to 18 percent, in line with many African countries.

21. The authorities noted that the March 2011 fiscal outturns are consistent with full-year goals for fiscal consolidation. Accordingly, they did not see a need for substantial new taxes at this stage. Non-oil tax revenues surged 40 percent in the year to the first quarter of 2011, substantially exceeding the 24 percent program target for 2011 as a whole. The strong growth mainly reflected higher customs collections of VAT and trade taxes after tax administration was strengthened. Over the same period, non-interest current expenditure rose by 8.5 percent, well below the provision for 18 percent growth for 2011 as a whole. As a result, the cash basis deficit stood at 1.1 percent of GDP in the first quarter of 2011 (4½ percent annual rate), down from 2.1 percent of GDP in the first quarter of 2010 (8½ percent annual rate).

22. The government also warned that substantially higher taxes could undermine social cohesion. The government noted the domestic political realities (the 2008 election results were close, primary elections are held this summer, and national elections in 2012). Moreover, although Ghana has not been severely affected by rising global food prices, social tensions have been inflamed by higher oil prices, with protests after a 30 percent step increase in petroleum pump prices in January 2011 (from the equivalent of $2.90 to $3.80/gallon). Moreover, conflict in neighboring countries and North Africa has influenced the political and economic debate—though economic spillovers have been limited so far (Box 3).

Spillovers from Conflict in Côte d’Ivoire and Libya and Global Developments

Cote d’Ivoire. As of mid-April, more than 11 thousand Ivorian refugees had sought refuge in Ghana, and Ghana is working with the UNHCR to identify funding. Broader economic spillovers from the conflict have been limited. Côte d’Ivoire represents less than one percent of Ghana’s total export market, and financial ties are weak. Ghanaian banks have no correspondent relationships with Ivorian banks, and have been largely unaffected by their closure.

Libya. By late-March, more than 16 thousand Ghanaians had been evacuated from Libya. The repatriation could reduce Ghana’s remittance earnings, which exceeded 6 percent of GDP in 2010. Support for reintegrating expatriate workers into the Ghanaian economy is being sought from development partners, including humanitarian agencies.

Global developments. Favorable harvests have sheltered Ghana from rising global food prices so far. Ghana’s cocoa sector is benefiting from the surge in global cocoa prices, with the increase between December 2010 and February 2011 boosting projected 2011 exports by more than $250 million (0.7 percent of GDP).

23. The risks to the fiscal program require more quick-acting contingency plans than were in place in 2010. Accordingly, the government has established an unallocated reserve equivalent to 1 percent of GDP within the expenditure program; this will be the first source of savings, if cuts are needed (MEFP ¶37). The government underlined that further savings could be achieved, as necessary, by delaying or scaling back investment projects. On the revenue front, the government is well advanced in discussions on mining operations that could yield non-tax revenues of 0.3 percent of GDP or more, and anticipates substantial incomes from the transfer of mining and drilling rights during 2011. These revenues have not been included in the baseline fiscal framework, and will be saved as they accrue, to create a further cushion against fiscal shocks.

C. Steps to Improve Tax Collections

Discussions focused on how tax policy and revenue administration could help close the gap between tax collections in Ghana (14 percent of GDP) and peer countries (around 20 percent of GDP).

24. The government is redoubling efforts to boost Ghana’s low tax yields in 2011 (MEFP, ¶20-24). A number of steps were taken in the 2011 budget. The national stabilization levy (a temporary profit tax) was extended through 2011 and the coverage of the communication service tax was extended (combined yield of 0.2 percent of GDP). As supplementary measures, the government will seek parliamentary approval to extend the VAT to fee-based financial services effective from July 2011, based on legislation submitted to parliament in May 2011 (submission is a prior action for the completion of the third and fourth ECF reviews). It is also tightening tax enforcement and raising the presumptive taxation of the self-employed. The VAT extension and enhanced taxation of the self-employed have a combined full-year yield of 0.2 percent of GDP).

25. Oil windfall earnings in 2011 will largely be saved. The 2011 budget oil price assumption of $70/bbl for 2011 has been increased to $100/bbl, in line with global trends; this generates a revenue windfall of 1.3 percent of GDP. Consistent with the new Petroleum Revenue Management Bill adopted by Parliament in March 2011, this windfall will largely be saved.6

26. Tax administration is also being reinforced (MEFP, ¶21-23). Tax exemptions were streamlined in the 2011 budget,7 customs procedures have been tightened in the wake of reported governance abuses at the port, and a task force has been established to tackle weak tax filing by the self-employed. The 2011 fiscal framework projects that improved tax administration and streamlined exemptions will raise collections by 0.8 percent of GDP in 2011; the authorities are confident that they can exceed this goal. Direct tax collections have risen steadily relative to GDP in recent years, partly reflecting initial computerization, and further gains are projected for 2011 and beyond. Strong growth in customs collections boosted overall tax receipts through March 2011 (para. 21).

27. Consistent with the government’s strategy, staff urged faster progress in modernizing the Ghana Revenue Authority (GRA). The authorities noted that the pending deputy commissioner appointments were provisionally assigned in March 2011 (June 2010 benchmark) and had been forwarded for public service ratification (MEFP, ¶20). Establishment of criteria for corporate coverage by the Large Taxpayer Unit (LTU) (June 2010 benchmark) will be completed following the relocation of the LTU in May 2011 (MEFP, ¶22).

D. Steps to Manage Public Spending

The government is reinforcing expenditure controls to support fiscal consolidation and avoid further domestic arrears.

Expenditure management systems

28. Spending targets were missed in 2010. Discussions focused on the need to better manage non-interest spending, which rose 13 percent faster than programmed in 2010, notably in the area of goods and services and investment programs.8 The government emphasized that much of this pressure (and the associated arrears) related to spending on projects that were launched in the final year of the preceding administration. Moreover, while underlining their determination to reinforce spending discipline, the government noted the widespread view that public spending had helped Ghana weather and subsequently recover from the global financial crisis. Staff noted the importance of a clear message that fiscal stimulus cannot deliver sustained improvements in growth and living standards.

29. The government sought Fund advice on institutional reforms to ensure effective spending restraint. A February 2011 TA mission identified systemic weaknesses in spending controls dating back to the mid-1990s, including weak PFM systems and processes, ineffective warrant and release mechanisms, and patchy compliance with commitment controls. The authorities indicated their resolve to adopt the key recommendations of this mission.

30. The government has already taken steps to better control spending discipline. After spending pressures were identified as a continuing obstacle to fiscal consolidation in the administration’s second year, the president issued in October 2010 a directive to spending units to strictly comply with Ghana’s commitment control regime; this was reiterated in the January 2011 budget instructions (MEFP ¶30). The authorities report that this is having an important impact on spending levels. Cash domestic and foreign financed capital spending was up 8 percent on a year earlier in the first quarter of 2011, compared to budgeted spending growth of 11 percent for the full year. The effectiveness of spending discipline will be more clearly established with the first quarterly report on arrears for June 2011 (MEFP ¶34), where the authorities aim at no new arrears, in contrast to the accumulation of arrears to contractors of 1.8 percent of GDP in 2010.

31. Consistent with the February 2011 TA recommendations, the planning and monitoring of spending is being strengthened. This involves developing more strategic and realistic expenditure budgets, and reinstating quarterly ceilings for managing spending, and warrant and expenditure control mechanisms for adoption within Ghana’s Integrated Financial Management Information System (GIFMIS) (MEFP ¶26-28). The GIFMIS roll out to 14 pilot ministries (March 2011 benchmark) was not possible due to financial and technical issues; instead, the system will be rolled out comprehensively to all spending units from January 2012 (MEFP ¶27).

Managing the public wage bill

32. Ghana’s public wage bill has been a source of expenditure pressure. Between 2007 and 2010, the wage bill rose from 6 to more than 7 percent of GDP, a level higher than in many peer countries. A further rise in the wage bill to 7½ percent of GDP is projected for 2011, as a result of the new “single spine” pay structure. The precise cost of the new pay regime will depend on a service-by-service pay mapping exercise. To prevent any budget overruns, the migration to the new system will be phased to fit within the pay envelope (MEFP, ¶38-40). To ease budget planning, staff urged that public sector pay negotiations be conducted before the start of the budget year, rather than mid-year, as at present.

33. Better staffing oversight is needed.9 The ongoing migration of public agencies to a central payroll database is beginning to provide better oversight of outlays. Comprehensive migration has been delayed by some groups seeking to protect contested allowances, but with renewed high level support the migration is targeted for completion by mid-2011 (MEFP, ¶39). Control of the pension payroll will be strengthened through the introduction of biometric identification technology, to be extended later to the wage payroll subsequent to the audits conducted on the Health and Education Services (MEFP, ¶40). Subvented agencies to be commercialized or liquidated have been identified with independent consultant support, with the list submitted to Cabinet for decision in March 2011 (delayed from the December 2010 benchmark).

Other spending rigidities

34. A large part of revenues is allocated inflexibly. In 2010, about 20 percent of tax revenues accrued to statutory funds based on mandatory revenue-sharing rules, while departments retained internally-generated funds for their own use equivalent to a further 11 percent of tax revenues. These procedures can result in resource misallocations. The government took an initial step toward greater flexibility by agreeing with the statutory funds that, starting in 2011, 30 percent of their earmarked revenues would finance social programs that would otherwise have required funding from the budget. Staff recommended that internally generated funds be transferred to the consolidated fund, and departmental operations be financed instead with appropriated resources.

E. Tighter Control Over Expenditure Arrears and Debt

Arrears and debt need to move center-stage as key issues of fiscal management.

Arrears management

35. Staff urged stepped-up efforts toward regularizing expenditure arrears. Progress has been hampered by a lack of comprehensive data on arrears and clear responsibilities for arrears monitoring and policies within the Ministry of Finance. Following TA advice, responsibility for monitoring the arrears position is being better defined, and a stocktaking exercise and audits (where necessary) will be conducted. This will provide the required information to design later in 2011 a comprehensive strategy for regularizing arrears using a mix of bonds and cash (MEFP ¶36). With a number of priority projects jeopardized by nonpayment, cash payments to settle arrears equivalent to 1.1 percent of GDP were made in early 2011, while a second tranche of public bonds amounting to 1.1 percent of GDP was issued to clear TOR’s debts to the Ghana Commercial Bank (GCB).10

Debt management

36. Good progress has been achieved in deepening debt management skills and policies in 2010. Both 2010 structural benchmarks were met, and commercial borrowing has been tightly managed, with a large loan renegotiated before signature when updated calculations showed that it fell short of the required grant element. Further advances in debt management are planned for the year ahead, including through issuing a second annual debt management strategy (MEFP ¶49).

37. The updated debt sustainability assessment (DSA) shows lower risks of debt distress than in the scenarios developed a year ago. External debt indicators are projected to remain well below relevant thresholds, even under adverse shock scenarios (Debt Sustainability Analysis, Supplement 1).11 This outcome reflects the upward revision to GDP (which affects debt- and debt service to GDP ratios) and lower projections for commercial financing, consistent with the recent cautious pace of such borrowing. The favorable DSA depends critically on sustained fiscal consolidation and continuing robust economic growth.

38. Rising rollover risks should be monitored closely. Fiscal financing was eased in 2010 by resumed nonresident purchases of 3-year treasury bonds, in an amount equivalent to nearly 2½ percent of GDP. As a result, the share of domestic debt held by nonresidents rose to 19 percent at end-2010, up from 8 percent a year earlier. Continued reliance on financing at this level carries risks, and consistent with goals to reduce reliance on such short-term external funding, the adjustment program is designed to be sustainable with nonresident inflows at half this level or less (Table 2B). This would be broadly offset by increased commercial borrowing, albeit at generally longer maturities. Based on Ghana’s improved debt management performance and the more favorable DSA, the program provides for an increase in the untied commercial borrowing ceiling for projects outside the oil and gas sectors from $300 million in 2010 to $500 million annually for 2011-12 (MEFP ¶52).

F. Energy Sector Issues

Progress in adjusting energy prices to market conditions should continue.

39. The cost-recovery power tariffs established in 2010 are being protected by quarterly tariff reviews. In the first review, effective March 2011, the regulatory commission authorized a 17 percent average tariff reduction based on cheaper natural gas imports from Nigeria and stepped up hydro production. Staff noted the importance of keeping costs closely under review, and being ready to raise tariffs, as needed.

40. Petroleum pump prices were raised 30 percent in January 2011 to cost recovery levels after a rise in global prices in late-2010. Hedging operations conducted since October 2010 have provided protection from global price increases since January. With the benefits of hedging, pump prices can be maintained at current levels through mid-2011. If global prices remain at current levels, a pump price increase of 15 percent or more would be required at that time. The government is determined to ensure that petroleum pricing does not result in a new fiscal burden, and the need for pricing adjustments will be revisited ahead of the next review (MEFP ¶45). Staff recommended smaller and more frequent petroleum pricing adjustments, to avoid large adjustment shocks.

41. The bulk of TOR’s bank liabilities were cleared through public debt issues (paragraph 35). As a result, it has regained operational independence.12 Plans to modernize the refinery and strengthen its longer-term commercial viability have been developed and will be shared with the World Bank for its assessment (MEFP ¶46).

G. Monetary, Exchange Rate and Financial Policies

Upside inflation risks will require close attention, and actions to address banking sector vulnerability need to continue.

Monetary and exchange rate policy

42. Discussions focused on how to manage the monetary implications of Ghana’s strong balance of payments. Although inflationary pressures from rising petroleum prices and strong domestic growth have been offset, so far, by the beneficial impact of broad currency stability, risks are on the upside. Strong capital inflows could also pose a challenge for liquidity and exchange rate management, with implications for price stability. The BoG indicated that policies would continue to aim at keeping inflation within a narrow band around the target rate. Staff recommended that the BoG stand ready to tighten policies, if needed, to counter emerging pricing pressures.

43. The authorities remain committed to exchange rate flexibility in support of their inflation targeting regime. In practice, the BoG has taken advantage of balance of payments surpluses to strengthen reserve cover, while maintaining broad currency stability against the dollar. Staff supported the buildup of Ghana’s reserve cover, which remains modest, particularly in light of growing portfolio capital flows. The authorities were alert to the liquidity consequences of the projected reserve accumulation, and arrangements to share the cost of sterilization operations with the budget have been developed. Staff recommended that the BoG’s systems and tools for exchange market monitoring and intervention be further developed, to reflect the BoG’s evolving role at the center of the currency market as portfolio and other capital flows increase. The BoG intends to request TA in these areas.

44. The staff’s analysis suggests that the valuation of Ghana’s currency is broadly in line with fundamentals (Appendix I). This is consistent with the continuing strong growth of non-traditional exports (albeit from a low base). The authorities indicated their commitment to a floating exchange rate policy supportive of the inflation targeting regime. They concurred that currency valuation is not a pressing issue, while underlining the need to keep competitiveness under close review, given tensions between Ghana’s recent broad currency stability and its inflation premium over trading partners. Non-price factors were identified as a core challenge for competitiveness. Ghana’s business climate out-performs many regional commodity exporting peers, but is not competitive with more successful manufacturing exporters like South Africa.

Financial Sector Issues

45. The FSAP update and Article IV consultation missions discussed weaknesses in credit intermediation by Ghanaian banks. Banks’ interest rate spreads are wide (as much as 20 percentage points between deposit and lending rates), reflecting high overhead and staffing costs and the current burden of high NPLs. The expansion from 16 to 26 banks between 2000 and 2010 has bid up funding costs rather than reducing loan rates. There are wide variances in credit terms between high and low-tier borrowers, owing to differences in the pricing of credit risk and intense competition for top tier borrowers. Reforms to strengthen institutional and legislative frameworks for insolvency and creditor protection have been implemented in recent years, including the establishment of a credit reference bureau, but these reforms need to take hold. Due to a weak legal framework and enforcement, banks’ accounting practices do not comply with best international standards. Majority state ownership in some banks has also contributed to weak risk management practices, as well as overexposure to certain sectors and borrowers.13 The authorities see prospects for improved industry performance, as higher minimum capital requirements encourage consolidation.

46. The BoG is addressing banking sector vulnerabilities drawing on the recommendations of the 2010 FSAP Update mission. The BoG is strengthening banking supervision, including through coordination on cross-border supervision of banks with other regional central banks, and is taking steps to promote stronger risk management practices in the industry and addressing corporate governance in state banks. A strategy for weak banks is being developed, which would comprise audits of some of the banks to establish their true financial position. The BoG is reviewing the banking laws to enhance its ability to address troubled institutions, and plans to relinquish its ownership interest in two domestic banks where there is a potential conflict of interest with its role as supervisor (MEFP ¶56).14

47. An unresolved issue is the role of the social security trust (SSNIT) within the financial system. Being a majority shareholder in several banks and a large depositor with others conflicts with its role as a manager of pensions and distorts the operations of the financial system. The authorities recognized the importance of the issue and intend to explore options for an exit strategy for SSNIT as a majority shareholder in financial institutions.

48. The BoG is strengthening its AML/CFT supervisory framework and capacity. The recent IMF technical assistance mission identified several areas where further progress is needed, in particular related to the capacity of the Banking Supervision Department and the recently established Anti-money Laundering Office.

IV. Program Design and Financing

A. Program Design

49. Quantitative targets through end-June 2012 are presented in Appendix Table 2 of the MEFP. Given the priority of expanding Ghana’s tax base, the program includes a new indicative target for non-oil tax revenue collections. Reflecting Ghana’s more open capital account and financial market integration, and its strengthened debt management capacity, a change from residency to currency criterion (where any borrowing denominated in foreign currency is considered external) has been introduced to better monitor borrowing in foreign currencies under the program (TMU ¶27).

50. Structural benchmarks through June 2012 focus on strengthening revenue administration, reinforcing the management of public expenditures, arrears, and debt, establishing pay comparability data, pricing of energy products, and addressing banking sector vulnerability (MEFP; Appendix Table 3).

B. Program Financing

51. Financing for the 2011 adjustment program includes $215 million of World Bank support. The World Bank credit was approved in January 2011, informed by an IMF assessment letter. While the government continues to seek concessional resources to accelerate its arrears repayments, the program does not give rise to any fiscal financing gap beyond the disbursed World Bank resources and other funding already included in the fiscal baseline.

52. Balance of payments financing of about $187 million is provided by the ECF arrangement in 2011, with a further $186 million in 2012. A proposed change to the phasing of ECF disbursements would back-load resources from the third and fourth reviews to the remaining program period, consistent with Ghana’s stronger-than-programmed external performance and revised policy commitments.15

V. Staff Appraisal

53. Although some important gains were achieved in 2010, a valuable opportunity for fiscal adjustment was missed. Ghana experienced an unusually favorable external environment, including strong terms of trade, good rainfalls, and a recovery of nonresident demand for domestic bonds. This underpinned important achievements: rising growth, increased reserve cover, a currency that held its value, and lower inflation. But a failure to maintain the momentum of fiscal adjustment was a significant setback under the program. Although electricity tariffs were substantially increased to eliminate subsidy burdens and tax revenues met budget goals, the budget proved to be over-reliant on non-tax revenues and the government did not adequately rein in spending pressures. Weak institutions and insufficiently robust policy implementation both played a role.

54. More robust fiscal management is needed in 2011. The environment remains supportive, reinforced by the launch of oil production at very favorable prices. This provides a window of opportunity to strengthen non-oil tax collections and expenditure control. A welcome start was made by adjusting petroleum pump prices to avoid new subsidy burdens, and by deciding to save a large part of Ghana’s initial oil incomes. Continued decisive implementation of the fiscal program will be needed to restore budget space over the medium term to fund development programs and infrastructure modernization.

55. Structural reforms should be accelerated. Fiscal imbalances reflect, in part, institutional weaknesses: inefficient and leaky tax administration; opaque payroll management; an overly large public service; and patchy compliance with commitment controls by spending ministries. Good progress has been made in strengthening debt management practices, and it will be important to move forward more robustly with other elements of the reform agenda.

56. Clear and transparent management of oil revenues is a priority. With the petroleum revenue management bill only recently approved by parliament, procedures are still being refined for how to treat oil-related operations in the fiscal accounts and BoG balance sheets. It will be important that incomes, expenditures, and savings associated with oil wealth be transparently and comprehensively recorded for dissemination, analysis, and audit purposes.

57. Energy pricing remains an area of risk. With public institutions playing an important role in power production and sourcing petroleum products, pressures to limit pricing pass-through remain strong. The adoption of quarterly power tariff reviews is welcome. For petroleum products, more frequent, smaller pricing adjustments in line with market trends would help depoliticize the pricing process.

58. Monetary policy implementation will need to remain vigilant. Rising global commodity prices and strong domestic liquidity expansion present upside risks to inflation, and the BoG should stand ready to tighten policies in support of the inflation target, if needed.

59. Ghana’s flexible exchange rate policy remains appropriate, and the currency’s valuation is estimated to be broadly in line with fundamentals. Sterilized intervention has helped limit the liquidity impact of the strong balance of payments, and the associated reserve buildup provides a cushion to manage the potential risks from portfolio financing flows. The BoG is encouraged to give a high priority to developing its capacity to monitor balance of payments developments and its policies and tools for currency market intervention.

60. The authorities have made good progress in reducing immediate stability risks in the banking sector, but long term financial stability will require a sustained and comprehensive reform effort. Priority should be given to updating Ghana’s financial sector strategy and to reviewing the current extent of state involvement in the banking industry. A concerted effort is needed to resolve vulnerable institutions, strengthen risk management in banks, enhance supervisory capacity and enforcement of prudential regulations, as well as strengthen corporate governance, accounting standards, and creditor rights.

61. Based on Ghana’s performance and the strength of the program for 2011-12, staff recommends completion of the third and fourth reviews under the ECF arrangement. Given steps to strengthen fiscal performance drawing on the lessons from 2010, including new fiscal measures for 2011, reforms to tax administration and expenditure and arrears management, staff supports the requested waiver on the nonobservance of the performance criteria on the net change in domestic arrears and on the overall fiscal balance at end-December 2010. At the same time, there are substantial risks under the program and, to mitigate these risks, the authorities will need to implement the program with much greater determination than in the past.

62. Staff proposes that the next Article IV consultation take place within 24 months, in accordance with the decision on consultation cycles in program countries.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2007-13 1

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

Based on new national accounts rebased to 2006, with the 2nd ECF review ratios adjusted to reflect the new GDP data.

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

Including public enterprises and errors and omissions.

Table 2A.

Ghana: Summary of Central Government Budgetary Operations, 2007-13

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

Excludes SOEs’ liabilities.

Table 2B.

Ghana: Summary of Central Government Budgetary Operations, 2007-13

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

Excludes SOEs’ liabilities.

Table 3.

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 for 2009-10 and GHc 1.50 per U.S. for 2011-12.

Deflated by the Consumer Price Index.

Table 4.

Ghana: Balance of Payments, 2007-13

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

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

SDR allocation of US$453 million in 2009.

After including SDR allocation in 2009

Table 5.

Ghana: Financial Soundness Indicators, 2003-10

(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, 2007-15

(Millions of U.S. dollars)

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Sources: Ghanaian authorities and IMF staff estimates and projections.

Includes all other net financial flows and errors and omissions.

Table 7.

Ghana: Indicators of Capacity to Repay the Fund, 2011-22 1,2

(In millions of SDRs)

article image

The current basic rate of charge in the GRA is 1.43% plus 0.00% for burden sharing.

Effective January 7, 2010 interest charges on concessional loans are waived through 12/31/11.

Appendix I. Ghana: Exchange Rate Assessment and Non-Price Competitiveness

1. This note is an updated assessment of Ghana’s currency valuation and non-price competitiveness. The exchange rate of the Ghanaian cedi was broadly in line with the country’s macroeconomic fundamentals in 2010, an assessment shared by the authorities. Broader measures of business competitiveness based on Ghana’s business climate point to the importance of strengthening macroeconomic management and addressing infrastructure bottlenecks.

I. Exchange Rate Assessment

A. Developments since the 2009 Article IV Assessment

2. Two years ago, the 2009 Article IV report pointed to “signs of possible modest overvaluation”. This guarded assessment of the cedi’s value reflected divergent analytical results: the macroeconomic balance (MB) and external sustainability (ES) approaches pointed to an overvaluation in the 7—12 percent range, whereas the equilibrium real effective exchange rate (EREER) approach, based on econometric estimates that were unstable and potentially unreliable, suggested an undervaluation of 30—40 percent.

3. The real exchange rate is back at 2009 levels. The real effective exchange rate depreciated by some 8 percent in 2009, subsequently appreciating in 2010, returning to close to the level examined in the 2009 Article IV (see Appendix Figure A.1). The real appreciation during 2010 has been driven by a combination of higher inflation than in partner countries and broad stability in the nominal effective exchange rate.

B. Approaches used for the 2011 Currency Analysis
Current account-based measures

4. The macroeconomic balance and external sustainability estimates have been updated. As in the 2009 Article IV, the MB and ES approaches point to a modest overvaluation, though the scale is smaller on current data (about 2—5 percent). The current account norm using the MB approach is estimated at a deficit of 3 percent of GDP, while the computed NFA-stabilizing current account deficit under the ES approach is calculated at 2 percent of GDP. As the underlying current account deficit is projected at around 6 percent of GDP, this implies the need for a modest depreciation to close the gap. The estimated overvaluation is slightly smaller than in the 2009 exercise due to a stronger medium-term current account deficit than earlier projected, and due to a stronger real exchange rate elasticity of the trade balance than in the 2009 exercise.1

Econometric approaches

5. An alternative econometric approach was considered for this exercise. Efforts to develop econometric results that are statistically stable and convincing using the EREER approach have not been successful. As an alternative, the Capital-Enhanced Equilibrium Exchange Rate (CHEER) approach was explored. The CHEER approach is grounded on the idea that current account imbalances must be financed through the capital account (see Juselius (1995); Juselius and McDonald (2004)). It nests the Purchasing Power Parity (PPP) theory (long run equilibrium in the goods market), and the Uncovered Interest parity (UIP) condition (short run equilibrium in the financial market).

6. The CHEER approach seems appropriate in the case of Ghana for three reasons: (i) Ghana has witnessed considerable capital inflows over the past few years (see Appendix Figure A.2), reflecting an increasingly open capital account; (ii) the CHEER approach is convenient where country circumstances and policies are changing rapidly, as the use of high frequency data allows estimates to be developed with relatively short data sets;2 and most importantly (iii) the approach seems to be supported by data, as departures from PPP in Ghana tend to be correlated with real interest rate differentials (see Appendix Figure A.3).

7. The CHEER specification is estimated by applying a Vector Error Correction (VEC) model to monthly data from January 1995 to December 2010. Using the Johansen cointegration method, we find a significant and asymmetric influence of domestic and foreign prices on the cedi exchange rate, with the latter playing a stronger role. The exchange rate is also significantly influenced by foreign interest rates, which represent the return on investing abroad; a lower foreign interest rate tends to strengthen the cedi.

8. The CHEER method suggests an overvaluation of less than 5 percent in 2010 (see Appendix Figure A.4). This result points to the same direction as the MB and ES estimates. It suggests that the cedi was slightly more appreciated in 2010 than would have been expected given interest rate differentials and inflation trends.3 Restricting estimations to historical data up to 2009, the CHEER approach suggests that the cedi was undervalued by some 12 percent in 2008. This is in the same direction, but significantly smaller in magnitude than the standard equilibrium exchange rate approach which was used in the 2009 Article IV report.

Conclusions

9. Given the analytical margin of uncertainty, the cedi is assessed to be broadly appropriately valued in 2010. More weight is given (as in the 2009 assessment) to the results from the MB and ES approaches. The small size of the estimated overvaluation on these approaches (2—5 percent) is within the range typically seen as consistent with economic fundamentals. This conclusion was shared by Ghanaian authorities.

II. Non-Price Competitiveness

10. Ghana’s favorable economic outlook is attracting new investments. With the start of oil production and a generally attractive business climate, Ghana is attracting increasing foreign investment inflows (see Appendix Figure A.2). These developments, while welcome, risk creating inflationary pressures contributing to Dutch disease effects, in which appreciation of the real exchange rate leaves domestic producers uncompetitive. Risks of this nature to competitiveness can be addressed by structural reforms that seek to strengthen the business climate.

Survey-based competitiveness assessments

11. Ghana compares well to “factor-driven economies”. According to the Global Competitiveness Report (GCR) 2010—11, Ghana matches or out-performs the average “factor-driven economies” on a range of measures, including education, training, labor markets, and infrastructure. The main shortcoming is in terms of its macroeconomic environment. This comparison is not very demanding, however, since the GCR sees factor-driven economies as in the first of three stages of economic development.

12. Ghana’s performance is more mixed by the standards of “efficiency-driven economies”. These countries are viewed by the GCR as in the second stage of economic development. Following Ghana’s reclassification as a lower-middle income country, this peer group, which includes Namibia, Mauritius, and South-Africa, appears relevant. Ghana matches the peer group average in terms of market efficiency and size, higher education and training, financial development, and technology readiness, but lags behind in the supply of infrastructure, institutional quality, and, again, macroeconomic management.

13. A further perspective is provided by the World Bank’s Doing Business report. In a comparison with South Africa (appropriately relatively ambitious peer comparison), Ghana lags in seven out of ten categories (Appendix Figure A.6). Areas in which Ghana lags by large margins include relatively burdensome procedures for starting and shutting down businesses, obtaining construction permits, and filing taxes; access to credit is also more limited. On a positive note, Ghana is cited in Doing Business 2010—11 as the country most improved in terms of access to credit during 2009—10.

Conclusions

14. Macroeconomic management, access to financing, and infrastructure quality are seen as leading impediments to business in Ghana. To some extent, these factors are interrelated. For example, stronger macroeconomic policies that address the problem of expenditure arrears and SOE debts will help reduce non-performing loans in the banking industry and improve access to and the cost of credit. Stronger public expenditure management can also play an important role in better prioritizing infrastructure projects and achieving value for money in these investments. These areas, rather than currency valuation, appear to be the most productive approaches to boosting Ghana’s international competitiveness.

A01app01ufig01

Figure A. Ghana: Exchange Rate Assessment and Non-price Competitiveness

Citation: IMF Staff Country Reports 2011, 128; 10.5089/9781455281596.002.A001

Source: World EconomicForum, Global Competitiveness Report 2010-2011, pp. 166.Source: The World Bank, Doing Business2011 database.1The closer to the edge the more competitive.2 The closer to the edge the less competitive.

Selected References

  • ‘Doing Business (2011) “Making a Difference for entrepreneurs” IFC, The World Bank, Washington D.C.

  • Regional Economic Outlook (2011) “Capital Inflows to Frontier Markets in Sub-Saharan Africa”,African Department, International Monetary Fund, Washington D.C.Juselius, K. (1995)

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  • Juselius, K(1995) “Do Purchasing Power Parity and Uncovered Interest Rate Parity Hold in the Long Run? An Example of Likelihood Inference in a Multivariate Time-Series Model”,Journal of Econometrics, Vol. 69,Issue 1, pp. 211-240.

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  • Juselius, K. and MacDonald, R. (2004) “International Parity Relationships between Germany and the United States: A joint Modeling Approach”, No. 2004/08,Finance Research Unit, Institute of Economics, University of Copenhagen.

    • Search Google Scholar
    • Export Citation

  • “The Global Competitiveness Report 2010-2011”,The World Economic Forum, Geneva, Switzerland,2010.

  • Tokarick, Stephen, 2010, “A Method for Calculating Export Supply and Import Demand Elasticities,” IMF Working Paper No. 10/180.

Appendix II—Letter of Intent

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. Strauss-Kahn:

May 12, 2011

After a temporary slowdown, buoyant exports and increased construction and service sector activities have helped the economy to recover. Growth is estimated at 6.6 percent this year, up from 4.7 percent in 2009. Fiscal and monetary policy tightening and currency stability have eased inflationary pressures and inflation has remained in single digit level since mid-2010. Medium-term prospects look promising and will be boosted by rising oil production.

Despite good progress in stabilizing the economy, policy implementation faced important challenges. In particular, adjustments to electricity and fuel tariffs to cost-recovery levels were implemented despite strong public resistance. Furthermore, the conflicts in Côte d’Ivoire and Libya are impacting the economy as people have sought refuge in Ghana and more than 16 thousand Ghanaian migrant workers have been evacuated from Libya. Consequently, we anticipate a reduction in Ghana’s remittance earnings, an important source of foreign exchange, and an increased burden on public service deliveries.

The attached Memorandum of Economic and Financial Policies (MEFP) reports on Ghana’s recent economic developments and implementation of Ghana’s economic program under the three-year Extended Credit Facility (ECF), which was approved by the IMF Executive Board on July 15, 2009.

All quantitative performance criteria for end-June 2010 and end-December 2010 were met except those for the net change in the stock of domestic arrears and the overall deficit of the government (missed in end-December). The fiscal deficit target at end-December 2010 was only narrowly missed, and the shortfall would have been just 0.1 percent of GDP if a measure involving the sale of gold company shares received in lieu of royalties had been completed in December 2010, rather than slipping to January 2011. The government views the accumulation of domestic arrears as the central challenge to its fiscal adjustment program. To address the issue, it is improving the monitoring of arrears and conducting a stock-taking exercise to determine the actual size of outstanding arrears. With a number of priority projects being jeopardized by non-payment, the government has settled arrears totaling 2½ percent of GDP in 2010 and further arrears of a similar magnitude in relation to GDP in the first quarter of 2011.

Progress in implementing the program’s structural benchmarks was mixed. Debt management policies and performance was strengthened, which contributed to meeting the performance criterion on external borrowing. However, the implementation of several benchmarks was delayed and the government gives importance to implementing them as soon as possible. The ongoing modernization of Ghana’s revenue administration that started in 2009 has improved tax collections. Expenditure management is being strengthened with support from Ghana’s development partners and efforts are underway to better monitor the public sector wage bill and pension payments.

These and other components of the government’s economic stabilization and reform program are described in the MEFP. Based on these policies, the government requests that the IMF’s Executive Board grant a waiver for the missed performance criteria on the overall fiscal deficit of the government and on the net change in the stock of domestic arrears for end-December 2010. The government also requests approval of proposed new structural benchmarks for the period through June 2012 and adjustments to June 2011 performance criteria and the establishment of performance criteria through March 2012.

In support of its policies, the government requests that the IMF’s Executive Board complete the third and fourth reviews of Ghana’s ECF arrangement and approve disbursement of the fourth and fifth tranches of the loan, based on proposed rephasing of disbursements as set forth in the attached schedule to the MEFP. The fifth review is expected to be completed before end-December 2011, and the sixth and seventh reviews are expected to be completed by end-April and end-June, 2012, respectively.

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 this letter 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. We have no objection to publication of the staff report for the third and fourth reviews under the ECF arrangement, this letter of intent, and the attached memorandum of economic and financial policies and technical memorandum of understanding.

/s/

Dr. Kwabena Duffuor

Minister of Finance and

Economic Planning

/s/

Mr. K. B. Amissah-Arthur

Governor

Bank of Ghana

Appendix II—Attachment I Memorandum of Economic and Financial Policies, 2011-13

I. Recent Developments and 2010 Program Performance1
A. Growth and Inflation in 2010

1. The economy is recovering from a temporary slowdown in 2009. After growth of 4.7 percent in 2009, the Government Statistical Service is projecting a 6.6 percent expansion in 2010, underpinned by buoyant commodity exports, construction, and services. Business and consumer confidence have improved with greater macroeconomic stability in Ghana, the global recovery, and Ghana’s transition to oil producer status.

2. Rebased national accounts show Ghana as richer and growing faster than earlier perceived. In the rebased accounts, income levels and income per capita are almost 70 percent higher than earlier estimates, lifting Ghana into lower-middle income status. The latest growth estimates for 2007-09 are also about 1 percent higher than earlier estimates. Recent growth has been particularly rapid in the service sector, which now accounts for close to half of the overall economy.

3. Inflation rates have declined. Annual consumer price inflation has been in single digits since mid-2010, with a year-on-year outturn of 8.6 percent in December 2010, down from 16.0 percent a year earlier. The slower pace of inflation reflects earlier monetary policy tightening, broad exchange rate stability, and favorable crop yields. Inflation is currently at the middle of the inflation target range.

B. Fiscal Performance Through end-2010

4. The fiscal deficit target was only narrowly missed in 2010. While revenue collections were broadly as programmed, grant receipts fell short and spending overruns were recorded, notably for recurrent goods and services where the program allocation was very tight. The fiscal deficit (cash basis, measured from financing side) was 6.7 percent of GDP in 2010, compared to 5.6 percent of GDP in 2009, and an adjusted 2010 program target of 5.9 percent of GDP. The government adopted corrective actions as deficit pressures emerged in 2010 to bring the deficit back on track, but the sale of gold company shares received by the government in lieu of royalties slipped into the early days of January 2011, rather than being finalized in 2010, as planned. If this revenue (equivalent to 0.7 percent of GDP) had been collected in 2010, the slippage relative to the program target would have been less than 0.2 percent of GDP.

5. Fiscal pressures continued in respect of domestic arrears. Arrears were accumulated in 2010 to contractors for investment projects, where spending ran above appropriated levels, and to statutory funds, where fiscal resources were not adequate to make earmarked revenue transfers. As a result, while the program had sought a net reduction in arrears equivalent to 0.2 percent of GDP in 2010, arrears increased, in net terms, by 1.9 percent of GDP. A review of these arrears indicates that the large majority relate to a surge in spending commitments in 2007-08 for projects which are now being completed and invoices submitted. The combined fiscal slippage, taking into account both cash transactions (the cash deficit) and unpaid bills (arrears), was equivalent to 2.6 percent of GDP, and would have been less than 2 percent of GDP, had the additional revenue measure noted above been completed in 2010, as planned.

6. The domestic financing ceiling was narrowly missed due to delays in revenue and loan financing. Although foreign credits performed well, net domestic financing of the cash deficit was 0.8 percent of GDP higher than the adjusted program target for end-2010. A substantial portion of this financing was raised by selling Treasury bonds to nonresident investors, which ensured that financing from the domestic banking system was kept below programmed levels. Had the additional revenue effort been completed in 2010, the slippage relative to the adjusted domestic financing ceiling would have been less than 0.2 percent of GDP. Moreover, a World Bank loan disbursement of $215 million had been long-planned for 2010, but was approved only in January 2011. If the Bank financing had been on the original timetable, the NDF targets would have been met. Although public debt rose to an estimated 41½ percent of GDP at end-2010, nonconcessional external borrowing was managed tightly, and remained within program limits.

C. Monetary and Financial Sector Developments

7. Falling inflation allowed an easing of monetary policy in 2010. The Bank of Ghana (BoG) has held its policy rate at 13½ percent since July 2010, down from a peak of 18½ percent in mid-2009. Market interest rates responded more than one-to-one to the BoG easing, with interbank rates at end-2010 reduced by 11 percentage points from their 2009 peak, and Treasury bill rates down by 13-16 percentage points on the same basis. Bank lending rates have adjusted by less, remaining well above 25 percent, reflecting a historic pattern of slow adjustment to policy rates as well as the adverse impact of high non-performing loans.

8. Liquidity conditions also reflect strong reserve accumulation. With a large rise in net international reserves (exceeding program targets), the BoG’s net foreign asset position boosted reserve money growth by 45 percent during 2010; broad money growth was equally strong. After sluggish private sector credit growth in the first half of 2010 (with declines in real terms), the pace of lending recovered briskly toward year-end.

9. While nonperforming loans declined by year-end, some banks are still burdened by them. Banks remain profitable on average, and the industry is generally well capitalized (due, in part, to higher minimum statutory capital requirements). Nonperforming loans were high at 17.6 percent in December 2010, but fell from a peak of 20.0 percent in February.

D. External Sector

10. External performance was strong in 2010. Exports rose by $2 billion in 2010, with cocoa and gold exports benefiting from high global commodity prices. This broadly offset a strong recovery in imports after a decline in 2009, leaving the current account deficit broadly unchanged at 6 percent of GDP. This was more than financed by strong capital inflows, including foreign direct investments in the oil sector and bond purchases by nonresident investors. Gross international reserves totaled more than $4.7 billion at end-2010 (3.3 months of import cover).

11. Currency stability was maintained through 2010. The cedi traded through the year at a little under GH¢ 1.45 per dollar, with the real effective exchange rate remaining its range over recent years.

II. Macroeconomic Framework

12. The government’s economic program aims at sustained robust growth. Real GDP growth is projected to exceed 13 percent in 2011, reflecting the start of oil production. Beyond 2011, growth would be 6-7 percent or higher, reflecting strong expansion in the non-oil economy and steady rates of oil extraction. The growth forecast assumes that Ghana’s favorable business climate will be preserved and strengthened, while infrastructure bottlenecks will be addressed through targeted public investments and public-private partnerships. Steps to address the problem of government arrears will also strengthen bank balance sheets, contributing to improved credit conditions.

13. Financial policies will be geared at single-digit inflation. Under the inflation targeting regime, the target band for inflation is centered on 9 percent at end-2011. A gradual further reduction is assumed for the medium term.

14. Fiscal deficits will be reduced to levels that can be prudently financed. The government’s goal is to reduce the fiscal deficit to levels that can be comfortably financed without crowding out private sector credit, and with the goal of progressively reducing debt-GDP ratios over the medium term.

15. With better control over the budget deficit and the start of oil production, current account deficits are projected to narrow over the medium term. Gross reserve cover is projected to rise to 3½ months of import cover at end-2011, supporting Ghana’s flexible exchange rate regime in the context of an increasing openness to portfolio capital flows.

III. Accelerating Fiscal Consolidation

16. The key budget priority for 2011 is to accelerate the fiscal consolidation program. Policies will be informed by experience in 2010. For 2011, the government is resolved to limit the fiscal deficit to 5.7 percent of GDP (cash basis, financing measure). Within this deficit, the government is designing an arrears payment strategy, which would include cash payments to clear arrears of about 2.5 percent of GDP in 2011, while seeking to avoid any new arrears accumulation. Revenue measures have been incorporated in the 2011 budget to strengthen fiscal performance in that year. The debt-to-GDP ratio would reach 46 percent of GDP at end-2011, partly due to the issue of Treasury bonds to settle public enterprise debts to the banking system.

17. In 2012-13, continued fiscal consolidation would reduce the fiscal deficit to 2½-3 percent of GDP. This further fiscal adjustment will be driven by rising oil revenues, strengthened revenue administration, and tight expenditure control. Deficits in this range would allow a steady, albeit gradual reduction in the debt-GDP ratio.

18. As discussed below, the government’s fiscal strategy has three pillars:

  • Strengthened revenue mobilization;

  • Reinforced expenditure control; and

  • A program to regularize arrears and other unmet claims.

A. Strengthened Revenue Mobilization
Background

19. Ghana’s tax revenue base needs to expand. When the government’s adjustment program was launched in mid-2009, tax revenues were estimated as equivalent to 20 percent of GDP. Under the rebased and revised national accounts, Ghana’s tax yield is now calculated as 13-14 percent of GDP.

20. This elevates the priority to be given to strengthening Ghana’s tax performance. The government’s economic program sought to combine an increase in tax yields from more efficient revenue administration, new tax measures, and cuts in tax exemptions. Progress is continuing on each front:

  • Modernizing revenue administration is continuing. A good start was made in establishing the integrated Ghana Revenue Administration (GRA) by end-2009, bringing together the separate customs, VAT, and direct tax services. External support for GRA reforms was put in place by development partners and the World Bank, while the IMF has provided TA and a resident advisor. After appointing the GRA’s Commissioner General in March 2010, the process of appointing commissioners and their deputies by end-June 2010 (structural benchmark) lagged; all commissioners were appointed by end-December, while deputies were appointed in early-March 2011 subject to Public Service Commission approval. These delays unfortunately slowed the broader reform effort. The effectiveness of the Large Taxpayer Unit (LTU), including filing compliance, remains to be fully established. The process of developing criteria for coverage of the LTU (June 2010 structural benchmark) and reassigning companies to the LTU is now expected to be completed by June 2011. More broadly, further progress is needed in integrating VAT and direct taxation within the domestic tax department. As a result, tax administration has not yet fully benefited from the modernization that was envisaged with the launch of the GRA.

  • Tax exemptions remain a burden. Despite efforts to tighten procedures for granting tax exemptions in early-2010, foregone revenues on account of exemptions amounted to 10.8 percent of indirect tax collections in 2010, little different from the 11.8 percent figure for 2009. Due to the heavy work load on revenue administration and tax reform, plans for a comprehensive review of the scope of tax exemptions and discretionary waivers were delayed from September 2009 to September 2010 (revised structural benchmark). This project was partly achieved through completion of a consultant report on import tariff exemptions prepared by end-2010. The review of the status of other exemptions and waivers will be conducted by June 2011 (structural benchmark).

Policy measures

21. The pace of tax administration reform will be accelerated. To ensure strong leadership of the GRA’s reform program, the confirmation of the appointed deputy commissioners remains a priority. In the year ahead, the focus in GRA will be on effectively integrating VAT and income taxation in a single domestic tax department, and adopting an organizational structure based on taxpayer size. Eleven pilot offices in the Greater Accra area will integrate VAT and direct taxation under single office heads and with common audit processes; this pilot will be launched by end-2011(structural benchmark). With the roll-out of the E-Gov computerization process scheduled for 2011-12, these offices will also move to unified IT systems for VAT and direct tax administration.

22. As a first step toward its modernization, the large taxpayer unit will be moved to new premises. The relocation, expected to be completed by end-May 2011, would provide a more transparent, user-friendly tax environment, and will be followed by an update of the criteria for corporate coverage by the LTU. In the next phase of reforms, medium- and small taxpayer offices will be established. Initially, one medium taxpayer office will be established in Accra to assess business processes. The process of self-assessment for tax purposes will be extended to all medium- and large taxpayers by mid-2012 (structural benchmark).

23. To focus VAT administration, the turnover threshold for VAT reporting was increased in the 2011 budget from GH¢ 10,000 to GH¢ 90,000 (from about $6,500 to $60,000). Over time, this will focus VAT administration on the 3,000 VAT filers (out of 23,000) who account for over 95 percent of VAT collections. As an interim approach, the 20,000 taxpayers excluded from the core VAT regime are now subject to a new VAT regime with a 3 percent rate (for which refunds cannot be claimed) in addition to a 2 percent income tax rate. GRA plans to develop by mid-2011 plans for a successor small taxpayer regime (structural benchmark), to be adopted in the 2012 budget. This will be based on options identified by a February 2011 Fund TA mission, with taxpayers moving to the income tax regime, and paying taxes based on imputed profits calculated using 2 or 3 rates applied to reported turnover.

24. Given budget pressures, the government intends to boost non-oil tax collections to GH¢ 7.7 billion in 2011 (14.9 percent of GDP). The government is confident that this goal (a new indicative target under the program) can be exceeded through the following components of an intensified focus on revenue mobilization:

  • Revenue measures in the 2011 budget. Collections will benefit from extension through 2011 of the temporary national stabilization levy (corporate profit tax) as well as the extended coverage of the communications service tax;

  • Extension of VAT to fee-based financial services. As a supplementary budget measure, the government is seeking early parliamentary approval of an extension of VAT to the fee-based incomes of banks and other financial institutions. The required legislation will be submitted to parliament in May 2011 ahead of the completion of the third and fourth ECF reviews (see Appendix Table 3). Based on projected implementation by mid-2011, the yield is estimated at GH¢ 53.6 million in 2011, with a full-year yield of GH¢ 107 million;

  • Taxation of the self employed. The government has established a task force staffed from the GRA and Ministry of Finance’s Tax Policy Unit to tackle a long-standing problem of weak filing compliance by Ghana’s self-employed taxpayers. A unique desk for the self-employed will be created, and filing compliance will be checked against professional organizations’ registers of accountants, lawyers, consultants, etc. Consideration is being given to establishing a list of professionals in ‘good standing” with regard to tax filing; evidence of good standing would then be required for participation in government contract work. The presumptive tax levied on lower-income self-employed (taxi operators, stallholders, etc) is also being reviewed. The current fiscal yield from taxation of the self-employed is GH¢ 60-70 million, and a more dedicated focus and a revised presumptive tax is projected to yield at least an additional GH¢ 30 million in 2011;

  • Streamlined tax exemptions. In the 2011 budget, the government eliminated the authority of the Ghana Investment Promotion Council (GIPC) to grant tax exemptions, except with the approval of the Minister of Finance. The budget also limited tax exemptions for real estate developers to projects which provide affordable housing in partnership with the Ministry of Water Resources, Works and Housing. The goal is to reduce tax exemptions from the 2010 figure of 11 percent of tax collections.

  • Strengthened revenue administration. Oversight over tax collections at the Tema port and other key customs locations has been strengthened. This oversight is being reinforced by the required use of computerized valuation systems and other automated procedures that limit administrative discretion. The use of bonded warehouses is also being more closely monitored, following indications that goods admitted duty free for re-export were being released into the domestic market. Following initial steps to strengthen oversight and enforcement, tax yields have already risen sharply. For example, customs collections in the first quarter of 2011 were 65 percent higher than a year earlier. Positive trends are also seen in the area of direct taxation, through the use of technology to improve PAYE compliance.

B. Reinforced Expenditure Control
Background

25. Further progress is needed in strengthening public expenditure control. Notwithstanding the launch of a broad-based Public Financial Management Reform Program (PUFMARP) in the mid-1990s, recent experience has highlighted the limited extent of the progress achieved. Weaknesses in procedures for tracking and controlling commitments and associated spending continue to give rise to overruns in the fiscal deficit and to payments arrears. Issues that remain to be addressed include the credibility of budget appropriations, expenditure rigidities, and procedures for within-year expenditure control and cash release. Partly reflecting these problems, Ghana’s outlays on recurrent goods and services in 2010 were 50 percent higher than budgeted, while the sum of paid and unpaid bills (arrears) relating to the discretionary domestic investment budget were almost three times higher than the 2010 budget appropriation.

Status of structural reforms launched in 2009-10

26. Initial efforts to strengthen public financial management focused on computerizing Ghana’s budget systems. The former Budget and Public Expenditure Management System (BPEMS) had effectively stalled after being rolled out to 8 pilot ministries. An implementation strategy for a successor Ghana Integrated Financial Management Information System (GIFMIS) was developed with IMF technical assistance based on a review of existing public financial management processes and guided by the systemic weaknesses identified in the Public Expenditure and Financial Assessment (PEFA) process. The project is being managed under the Steering Committee chaired by a Deputy Minister of Finance, and development partner financing has been identified.

27. The timetable for rolling out GIFMIS to 14 pilot ministries, departments, and agencies (MDAs) has been updated. The pilot roll out was scheduled to be completed by March 2011 (structural benchmark), but was delayed pending resolution of conflicts between planned software and existing hardware, and by delays in securing external funding. The revised plan is now to pilot the GIFMIS within the CAGD from July 2011, with a roll out to ministries in January 2012.

28. In the run up to GIFMIS, parallel efforts have been underway to strengthen cash management and commitment forecasting and control. Since May 2009, cash management committee meetings have been held on a weekly basis, involving the Ministry of Finance, Controller and Accountant General’s Department (CAGD), and BoG. This intensified monitoring of revenues, cash balances, and expenditures has helped in setting quarterly expenditure ceilings and monthly cash limits for spending units. The effectiveness of this cash planning was undermined, however, by weak information about the commitment pipeline and prospective spending claims. To address this gap, the cash management committee, using a module in the existing budget preparation software, has been strengthening data collection on past commitments and contracts for capital expenditure. The requirement for ministries to obtain commencement certificates was also tightened in mid-2010 by removing exemptions from the system extended to a few ministries managing priority programs.

29. Cash management within the banking system is also being tackled. To address delays in transferring revenue collections by commercial banks to the government’s accounts at the BoG, tax and other payments to government are now credited directly to BoG accounts rather than to commercial banks, except in rural areas. This measure has led to a significant improvement in government cash flows. Steps are also being taken to better utilize the government’s cash balances, which extend to 2,500 accounts at the Bank of Ghana with some further accounts in commercial banks. A number of ministerial, departmental, and agency accounts at the BoG have been closed, and remaining accounts are now monitored daily by the BoG to inform the work of the cash management committee. Idle cash balances will be reallocated to finance expenditures, reducing the need for new domestic debt issuance. Over time, the Ministry of Finance and CAGD will gain computer access to monitor these accounts directly.

Steps to further enhance expenditure control

30. Following discussions with staff during the September 2010 mission on emerging fiscal slippages, the government’s commitment to strict expenditure control was reinforced at the highest level. A presidential memo was sent in October 2010 to all MDAs requiring them to seek authorization from the Ministry of Finance and Economic Planning (MoFEP), through Commencement Certificates, before undertaking any capital spending. This message was reiterated by MoFEP in its Budget Implementation Instruction in January 2011. Indications in the opening months of 2011 are that this is having an important impact on the pace of spending.

31. The government’s commitment to expenditure control will be supported by reforms to the budget process. As highlighted in a recent review by IMF experts, stronger expenditure control requires a range of short and medium-term measures, and spans a number of topics. Within a broadened program to strengthen PEM, the government intends to give the following priority:

  • More strategic and realistic expenditure budgeting. Under past budgets, ministries submitted unconstrained spending proposals in August, and were required to develop constrained budgets only in October (one month ahead of the budget’s submission to parliament). This process provides little incentive or opportunity for ministries to develop realistic, prioritized spending plans. For the 2012 budget, the Cabinet will identify program priorities in April/May 2011. These priorities will be communicated to MDAs with indicative spending ceilings in the July budget preparation guidelines. This process is identified as a structural benchmark under the program.

  • Quarterly expenditure ceilings. The adoption of monthly cash limits for MDAs (above) has helped cash management by MoFEP at the expense of operational flexibility for MDAs. Given the time required to obtain funds releases (warrants), the monthly cash ceiling provides MDAs with very limited scope to plan and manage their spending and commitments. A return to quarterly expenditure ceilings which will be used as a ceiling for approving commitments will restore this flexibility, and will be backed by high-level political commitment to ensuring that all MDAs respect appropriation ceilings.

  • GIFMIS design. It is critical that GIFMIS support the strengthened expenditure control targeted above. In this regard, the GIFMIS team will review the warrant (funds release) and expenditure control mechanism, and simplify it for adoption within GIFMIS. The new computerized regime will allow MDAs to record commitments when issued and invoices when received, and not just as funds are available.

C. Regularizing Arrears and Other Claims
Background

32. The budget continues to experience payments arrears following the intensification of budget imbalances in the run up to the 2008 elections. As noted above, the stock of budgetary arrears continued to increase in 2010. As a result, outstanding claims in respect of budget arrears and public liabilities for SOE debts were estimated at 9.4 percent of GDP at end-2010. The government gives a high priority to regularizing these claims. A holistic approach is being adopted to tackle the arrears situation, drawing on technical assistance provided by the IMF in early 2011.

Policy measures

33. Avoiding new arrears. A first step will be to stem the emergence of new arrears. This will require strengthened expenditure control, as described above.

34. Monitoring arrears. Currently, the monitoring of expenditure arrears and other claims is the responsibility of different MoFEP departments. Data tracking is limited (in terms of stocks, payments, and new liabilities) and it is not straightforward to monitor the extent of the arrears situation, or to track new trends. To address this situation, the MoFEP Budget Department has been assigned overall responsibility for building and maintaining a comprehensive database to track the full breadth of stocks and flows of arrears and other claims on a monthly basis (program structural benchmark). Monthly reports will be prepared to facilitate close monitoring, and quarterly reports will be provided to the cabinet, starting in June 2011.

35. Stock take and audits. To ensure that the above database is comprehensive and accurate, the recent instruction to MDAs to report all claims as of end-2010 will be reiterated, and MoFEP will instruct MDAs to report potential liabilities of state owned enterprises. Where claims cannot be verified using normal budget validation procedures, an independent audit will be sought; this is expected to be particularly important for the reported liabilities of state-owned enterprises.

36. Strategy to regularize arrears. A strategy for regularizing arrears will be developed in the coming months, based on the enhanced claims database discussed in paragraph 34 above. Cash payments will need to be consistent with available fiscal space, and a large part of the existing stock of liabilities will need to be regularized through the issue of special purpose bonds or promissory notes that will spread the payment profile over 2012 and the medium term. The macroeconomic framework is currently consistent with cash payments of no more than GH¢ 1,290 million in 2011, and payments will not exceed this amount, unless an updated fiscal framework based on strengthened fiscal performance is developed with the IMF showing enhanced payment capacity. Priority in making 2011 cash payments is being given to road contractors (to restart critical highway projects), the health and education funds (where social projects have suffered), and to the district assembly common fund (critical for rural development).

D. Managing the 2011 Budget

37. The government is determined to strictly enforce its budget plans for 2011. The budget continues to be subject to important risks. As a result, the government is taking steps to ensure that its fiscal plans are achieved in 2011.

  • Fiscal monitoring is being strengthened. The government will monitor monthly fiscal developments closely, with a particular focus on areas subject to slippages in 2010, such as recurrent expenditure on goods and services and discretionary domestic investment spending. Adverse deviations from monthly budget projections will be assessed to establish whether additional fiscal adjustment measures need to be adopted. A new indicative target under the program has been established for non-oil revenue collections. The planned monthly monitoring of the arrears situation will also help with expenditure control.

  • New expenditure commitments will be strictly limited. Additional obligations will be considered only where they are consistent with the government’s goals for fiscal consolidation described in this memorandum and letter of intent.

  • Fiscal contingency plans have been identified. The fiscal framework for 2011 has been designed to ensure that program targets for fiscal correction are achieved. A contingency element equivalent to 1 percent of GDP within the expenditure budget has not been appropriated to spending units. This will be a first source of savings, in the event of fiscal slippages. If these savings are not sufficient, investment programs will be downsized or deferred, where possible. In addition, a number of anticipated revenues have not been included in the budget framework. These include receipts from a gold mining company in lieu of royalty payments currently under negotiation, which is expected to yield at least 0.2 percent of GDP, as well as tax receipts that would accrue in the event of a transfer of oil production rights between Jubilee field investors (which could significantly exceed 1 percent of GDP). Based on trends through March, the government also intends to exceed the program’s tax collection targets. As these additional revenues are realized, they will be set aside as a fiscal contingency fund.

IV. Other Structural Fiscal Reforms
A. Public Sector Reform and Payroll Management

38. Ghana has started to migrate its public workforce onto a new public pay structure, a process that will ensure pay equity and simplify future pay negotiations. Some previously low-wage employees have seen large pay increases; for others, the impact on salaries will be more limited. The cost of the new pay regime will be determined once the 520,000 public sector employees have been mapped from the old to the new pay structure and after determining the treatment of some former allowances, which will be integrated into base pay. The government has estimated that the cost of completing the migration to the new pay structure at GH¢ 420 million per annum (about 0.8 percent of GDP). The migration of the Education Service has been completed in March 2011, with an estimated full-year cost of GH¢ 300 million. The government will manage the remaining 2011 migration to the single spine within the allocated budget.

39. The process of migrating all remaining non-security subvented agencies to the Integrated Personnel and Payroll Database (IPPD) remains to be completed (structural benchmark for September 2009, extended to July 2010). The slippage relative to earlier migration plans was partly due to a push-back from some agencies, difficulties in harmonizing allowance rates within some subvented agencies, and the need to review some agency-specific allowances. As of February 2011, 97 out of 137 subvented agencies have been migrated onto the IPPD. The priority of completing the IPPD migration has been enhanced by the use of this platform for the payroll audit being conducted by an external consultant. Given this, the government plans to complete the migration of all non-security subvented agencies by June 2011. The current stand-alone IPPD database will be integrated and upgraded into the GIFMIS once roll-out of the latter has been completed. Pending this integration, for agencies already on the payroll database, new recruitments are verified by the CAGD on a continuous basis to ensure appropriate budget authorization. As part of the reforms to contain the wage bill, independent consultants were contracted to review which subvented agencies should stay on government subvention, liquidated, partially or fully commercialized. The report recommended that 12 out of the 132 subvented agencies assessed should be closed, 71 should remain on government subvention, while 16 could be partially or fully commercialized. The lack of adequate information prevented the report to make a recommendation on the remaining subvented agencies. The list was submitted to Cabinet for decision in March 2011 (structural benchmark for December 2010).

40. Efforts are underway to better monitor public wage and pension payments. The government conducted its own payroll audits of the two largest public employers, the Health Services in 2007, and the Education Services in 2010, eliminating about 2,000 ghost workers in the first and 10,000 in the second. The process of migrating staff to the new computerized single spine pay structure is also helping to confirm staffing numbers. To strengthen controls over payrolls and public pensions, a pilot program will introduce biometric identification technology. A pilot program covering more than 100,000 public pension recipients is planned for completion by August-September 2011. An initial review of the pension records for this exercise has revealed an implausible number of recipients, confirming scope for savings from cleaning the system. This process will subsequently be extended to all public sector employees.

B. Energy Sector Reforms

41. The government is committed to cost-recovery pricing of energy products. Earlier efforts to shelter consumers from increases in global energy costs resulted in large losses to public utility companies that remain a drain on the budget.

Electricity sector

42. Electricity tariffs were raised to cost-recovery levels in June 2010. World Bank has reviewed this new tariff structure, including the impact of an August 2010 downward revision in some tariffs. In its assessment, the new tariff structure is consistent with a return to financial viability in the power sector. Quarterly reviews of the tariff structure will be conducted to ensure continuing cost-recovery pricing. Based on access to relatively cheap natural gas as a result of the reopening of the West Africa Gas Pipeline (WAGP) power generation costs are calculated to have fallen; as result, the Public Utilities Regulatory Commission, has calculated that the tariff structure should be reduced by a weighted average of 17 percent, effective March 1, 2011. The cost structure will be reassessed with a view to setting a new tariff effective June 1, 2011.

Refined petroleum products

43. Petroleum product prices were adjusted in early-January 2011. Petroleum pump prices were increased by 30 percent to full cost-recovery levels; gasoline prices rose to the equivalent of $3.81/gallon, up from a preceding $2.93/gallon. This increase was sustained notwithstanding widespread protests.

44. A hedging scheme using call options adopted from October 2010 provides temporary protection against further upward movements in oil prices. The government has purchased monthly call options that generate revenues in the event of upside shocks to global oil prices; under these conditions, the revenues will be used to cover temporary delays in adjusting domestic petroleum product prices to higher cost-recovery levels. The hedging operations are calculated to cost around GH¢140 million (0.3 percent of GDP) on an annual basis; this cost is included in the budget, and will not be exceeded.

45. Hedging incomes will provide temporary relief from the global rise in petroleum product prices during 2011. Following further increases in global oil prices, the prices established for petroleum products in January are no longer at cost recovery level. As envisaged under the hedging scheme, the accumulated and anticipated revenues accruing from call options will be used to provide temporary relief from higher market prices. Hedging revenues, together with a small windfall income from Ghana’s oil export activities, are estimated at 0.3-0.4 percent of GDP. With this support, it is anticipated that petroleum pump prices can be maintained at current levels through at least mid-2011 without the need for a price increase. Closer to that date, the need for an adjustment in pump prices will be assessed, based on trends in global prices, the operations of the hedging scheme, and the broader fiscal situation. The continued appropriateness of petroleum pump prices within this context will be a focus for the next ECF review.

46. Past under-pricing of petroleum products saddled the Tema Oil Refinery (TOR) with large losses. As a result of its weak balance sheet, the refinery was idled for a portion of 2010, and a strategy for financial and commercial viability was needed (December 2010 structural benchmark). This was partly achieved by clearing TOR’s large overdraft liabilities to GCB through cash payments from the budget and, more importantly, issuance of government bonds to GCB in exchange for its TOR claims. Following these steps, TOR has regained the financial viability to operate in the petroleum market without ongoing government support. Looking further ahead, TOR still has issues of efficiency and competitiveness as well as some long term debt obligations that may need to be refinanced. TOR has developed its own proposals for this commercial modernization. A task force established by the Ministry of Energy is reviewing these plans, and they will be provided to the World Bank for its assessment.

C. Oil Revenue Management

47. The government remains committed to establishing a transparent framework for managing petroleum and gas revenues. Drawing on international experience, a draft Petroleum Revenue Management Bill was submitted to parliament in 2010 (structural benchmark) and approved in March 2011. Receipts will be managed through a dedicated Petroleum Account, to be established at the Bank of Ghana, with full fiscal reporting to Parliament and the public, subject to stringent requirements for auditing of account transactions. Quarterly audits of petroleum accounts will be conducted by the BoG, and annual external audits will be carried out by the Auditor General or an auditor contracted by him. Portions of oil revenues will be used to finance budget expenditure; the remainder will be saved in two funds—one for “future generations” and the other for smoothing expenditures in the face of commodity price or production shocks. Consistent with the bill, funds allocated to GNPC for its investments will be incorporated in the budget. The creation of these funds would improve medium term budgetary framework of the country.

D. Public Debt Management

48. Good progress is being achieved in strengthening the government’s debt management framework. The debt management division is being reorganized with units specialized by functional areas. A head of unit will be identified for each of the four units: domestic debt unit, external debt unit, on-lending and guaranteed unit, risk management and policy analysis unit. With the support of the World Bank, a functional review of the debt management division will be conducted with the objective of identifying skill needs, and ensuring effective coordination of the various units. Monitoring of SOEs’ borrowing has been intensified. Quarterly meetings are held with major SOEs to review their operational activity and balance sheets, in order to identify risks of delayed payments or defaults.

49. Debt management reforms. A debt management strategy was developed with technical support from the IMF and World Bank, and published on the MoFEP website in December 2010 (structural benchmark). This strategy will help the government better analyze the implications of alternative borrowing options within a coherent framework taking into account the cost and risk implications of various borrowing options. The next version of the strategy, to be developed by end-2011, will take stock of emerging debt management risks and policies to address them. Guidelines have been developed and published for the appraisal and selection of projects financed by nonconcessional external financing (structural benchmark).

50. In 2010, the government contracted new external loans totaling about $2.8 billion. These focused on its sectoral priorities in health, agriculture, rural development, highways, and communication. The new loans included a $1.5 billion lending arrangement with a Korean company, providing financing on concessional terms for the construction over five-year period of housing for public sector employees. Commercial external borrowing in 2010 amounted to $329.2 million and was below the ceiling under the ECF arrangement.

51. Borrowing plans will be tailored to debt sustainability. Based on the latest debt service indicators calculated using Ghana’s rebased national accounts, Ghana’s risks of debt distress have declined. Public debt at end-2010 was equivalent to 43 percent of GDP, and new borrowing will be carefully calibrated to levels that can be serviced over the medium term.

52. In 2011, commercial borrowing will not exceed $800 million. GNPC envisages a commercial borrowing need of $300 million, in large part to cover its share of investments in the oil and gas sectors. Outside the oil and gas sectors, the government plans to limit new commercial borrowing to $500 million. The process of prioritizing projects is continuing; goals include ensuring that public services have up-to-date equipment, and financing machinery for rural development.

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

53. Monetary policy will continue to be guided by the Bank of Ghana’s inflation targeting regime. The successful convergence of inflation in 2010 to the BoG target reflected the lagged impact of earlier policy tightening, exchange rate stability, and the impact of favorable crop yields on food prices. Looking forward, the BoG intends to seek a modest further reduction in inflation, with the centre point of the target band reduced from 9½ percent in December 2010 to 9 percent in December 2011.

54. Policies will be alert to upside inflation risks. Over the coming year, further disinflation will be complicated by possible domestic spillovers from higher global commodity prices and a gathering momentum of domestic activity. Domestic liquidity also rose strongly in 2010, driven by a balance of payments surplus and reserve build-up. The Bank of Ghana is monitoring conditions closely, and stands ready to tighten monetary policies, as needed, to head off any resurgence in inflationary pressures.

55. The Bank of Ghana will continue to maintain a flexible exchange rate regime. Exchange rate policy is designed to support Ghana’s inflation target. Over the year ahead, the balance of payments is projected to remain in surplus, reflecting high commodity export prices, the start of oil production, and continuing portfolio capital inflows. Under these circumstances, the Bank of Ghana expects to build further its reserve cover to provide a larger cushion to manage potential external volatility, including in nonresident portfolio investments. Inflationary risks arising from the liquidity impact of reserve accumulation will be mitigated by sterilization actions using domestic paper.

B. Financial Sector Policies

56. In the financial sector, the priority is to continue with efforts to strengthen banks. Several specific areas of action are underway or envisaged:

  • TOR debts and Ghana Commercial Bank. In early 2011, the government provided Ghana Commercial Bank (GCB) with interest-bearing government securities equivalent to GH¢ 570 million (1 percent of GDP) to clear virtually all of TOR’s remaining liabilities to GCB. Outstanding is a US$ 50 million (equivalent to GH¢ 75 million) loan to BOG that was extended to GCB and the on-lent to TOR. In the coming months, GCB will submit to the Bank of Ghana an updated business model, covering among other topics its plans for further broadening its customer base and strengthening risk management.

  • Audit of banks. A group of banks will be selected for independent external audit, including banks considered most at risk from impaired portfolios. External consultants are being selected to help draft the terms of references for these audits, and the audits should be completed by November 2011. The outcome of the audits will inform the strategy for addressing problem institutions.

  • Bank supervision. Efforts would focus on developing new supervisory guidelines and strengthening the technical capacity of supervisors. The recent hiring of over 40 new staff in the supervision department is aimed to address the imminent succession problem due to retirements. A training program is being developed for these and existing staff, aimed at bringing BoG’s supervisory approaches into line with the financial reforms and structural changes in Ghana’s banking industry.

  • Central bank resolution powers. The recent FSAP update identified some gaps in the Bank of Ghana’s legal arsenal for resolving troubled institutions. Legal language is being developed, with a view to parliamentary submission by end-March 2012.

  • Bank of Ghana ownership of banks. As an interim measure to address the potential conflict of interest as supervisor and part-owner of the two banks and to pave way for the disposal of BoG’s shareholdings in these two banks, the ownership interests were transferred by a Deed of Transfer to an independent Financial Investment Trust. The Trust is registered with the Registrar of Companies and has an independent Board of Trustees and the returns accruing on the investments are to be used for social projects. A full exit strategy from BoG shareholding in these two banks is being considered, drawing on Fund technical advice.

VI. Other Program Issues

57. Ghana’s Shared Growth and Development Agenda (GSGDA) has been published as an updated poverty reduction strategy for 2010-13. It emphasizes structural transformation of the Ghanaian economy, based in part on industrialization in the agricultural and natural resource sectors. The cost of meeting the GSGDA’s objectives was calculated in close collaboration with affected spending units. The aggregate cost significantly exceeds Ghana’s projected fiscal space, and the financing gap will guide efforts to identify additional funding and use public private partnerships to meet infrastructure needs.

VII. Program Design and Monitoring

58. Program targets and benchmarks. Quantitative program targets are documented in Appendix Table 2. Structural benchmarks are documented in Appendix Table 3. A few minor modifications have been made to the program design, as described further in the Technical Memorandum of Understanding (TMU):

  • Indicative target on revenue mobilization. To monitor progress toward the government’s goal for boosting tax collections, the ECF arrangement will include a new indicative target for quarterly non-oil tax collections.

  • External nonconcessional borrowing limits. For greater clarity, the limits on contracting or guaranteeing external nonconcessional debts have been redefined on an annual basis, rather than as before on a cumulative basis from the beginning of the program.

  • Definition of external debt/borrowing. This covers now any debt/borrowing that is denominated in foreign currency, as oppose to the earlier residency criterion.

  • External arrears have been more precisely defined in the TMU to clarify coverage and simplify monitoring.

59. Phasing of disbursements under ECF arrangement. Total disbursements under the ECF arrangement would be unchanged (Appendix Table 4), though some financing would be deferred from 2010-11 to 2012. This is consistent with Ghana’s stronger-than-expected international reserve position.

Appendix Table 1.

Ghana: Quantitative Program Targets, March 2010-December 2010

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

All variables and adjustors to the targets are defined in the Technical Memorandum of Understanding (TMU).

Performance criterion.

Indicative target.

December 2009 target after adjustment for SDR allocation. March 2010 indicative ceiling from the original July 2009 ECF program.

Includes net payments of arrears to statutory fund and contractors as defined in the TMU attached to the Letter of Intent of May 2010.

For the GNPC to finance oil and gas exploration and production projects in Ghana and to acquire equity stakes in companies undertaking oil and gas exploration and production in Ghana.

The non-observance of the March 2010 ceiling for “any sector” was waived at the first/second ECF reviews in June 2010.

Appendix Table 2.

Ghana: Quantitative Program Targets, March 2011-June 2012

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

All variables and adjustors to the targets are defined in the Technical Memorandum of Understanding (TMU).

Performance criterion.

Indicative target except for the inflation consultation mechanism.

Measured on an annual basis.

For the GNPC to finance oil and gas exploration and production projects in Ghana and to acquire equity stakes in companies undertaking oil and gas exploration and production in Ghana.

Performance is measured on a continuous basis. The outer and inner bands shown for the last month of each quarter apply throughout the respective quarter.

Appendix Table 3.

Ghana: Prior Actions and Structural Benchmarks under the ECF Arrangement, 2010-121

(Shaded benchmarks are covered by the third and fourth ECF reviews)

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Includes 2009 benchmarks that have not been implemented.

Appendix Table 4.

Ghana: Proposed Schedule of Disbursements under the ECF Arrangement, 2009-12 1

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In addition to the generally applicable conditions under the Extended Credit Facility arrangement.

About $93.3 million for the combined third and fourth ECF reviews, at a projected exchange rate of SDR1 = $1.566.

About $93.3 million each loan disbursement, at a projected exchange rate of SDR1 = $1.566.

Appendix II—Attachment II Technical Memorandum of Understanding

Arrangement Under the Extended Credit Facility 2011-12

1. This technical memorandum of understanding (TMU) defines the variables subject to quantitative targets (performance criteria and indicative targets), as specified in the authorities’ Letter of Intent (LOI) [date]. 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¢ 1.5 per US$1, which is calculated as the average of buying and selling exchange rates reported by banks to the Bank of Ghana. The exchange rates to other currencies will be calculated as the average of buying and selling exchange rates against the U.S. dollar.

I. Quantitative Program Indicators

3. For program monitoring purposes, the performance criteria are set for end-June 2011, end-December 2011, and end-March 2012, while indicative targets are set for end-March 2011, end-September 2011, and end-June 2012. Performance criteria, indicative targets, and adjusters are calculated as cumulative flows from the beginning of the calendar year.

4. The performance criteria under the arrangement are:

  • a ceiling on the overall fiscal deficit of the government, measured in terms of financing;

  • a floor on the net international reserves of the Bank of Ghana;

  • a ceiling on the net change in the stock of domestic arrears;

  • a continuous zero ceiling for the accumulation of new external arrears; and

  • a ceiling on the contracting or guaranteeing of new external nonconcessional debt

5. Indicative targets are established as:

  • a ceiling on the net domestic financing of the government;

  • a floor on non-oil tax revenue collection

  • a ceiling on the net domestic assets of the Bank of Ghana; and

  • a floor on poverty-reducing government expenditures.

6. A target is set for the twelve-month rate of consumer price inflation, with triggers on discussions or consultations with the Fund if inflation moves outside specified inner and outer bands.

A. Government

7. Definition: The government is defined as comprising the central government, all special funds (including 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

8. The government’s total tax revenue includes all revenue collected by the Ghana Revenue Authority (GRA) (direct taxes, indirect taxes, trade taxes) whether they result from past, current, or future obligations. Receipts are recorded on a cash basis.

9. Oil tax revenue is defined as the government’s net proceeds from the sale of oil, including corporate tax and royalties paid by oil companies, excluding any revenue associated with GNPC’s carried interests in oil fields.

10. Non-oil tax revenue will be measured as total government tax revenue less oil tax revenue (as defined in paragraph 9).

11. The fiscal deficit is measured as total financing extended to the government (as defined in paragraph 7 above), comprising the sum of net foreign borrowing (as defined in paragraph 15 below), net domestic financing (defined in paragraph 14 below), exceptional financing (including HIPC and MDRI relief against loan repayments falling due), and receipts from net divestitures.

12. Domestic payments arrears will be measured as the sum of three components. The first component, arrears to the government’s statutory funds, represents any delay of more than one month in revenue transfers to these statutory fund, relative to the normal payment schedule (typically monthly or quarterly, and defined as a specific percentage of the previous month or quarter’s revenue collections).1 The second component, arrears to contractors, is defined as payments in local and foreign currencies that are due and not settled within 30 days after the end of the fiscal year. The third component, wages and pensions arrears, is defined as payments outstanding after the agreed date for payment to staff or the social security fund. In the case of pay awards, arrears are calculated as the amount outstanding at the date at which the award specifies the first payments should be made. Net changes in the stock of arrears to contractors at end-March 2011 are as defined in the TMU attached to the Letter of Intent of May 13, 2010. Starting at end-June 2011, the net change in the stock of arrears to contractors will be measured at each end-quarter as the accumulation of arrears within the current fiscal year, less amounts settled in the current fiscal year in respect of the claims accumulated in previous fiscal years.

13. 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 the government considers as poverty-related. Accordingly, actual poverty spending will exclude some donor-supported expenditure not currently captured by the CAGD.

14. 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).

15. Net foreign financing of government is defined as the sum of project and program loans by official donors, commercial external borrowing, minus amortization due.

16. 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.

17. 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 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.

18. 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

19. A consultation mechanism adopted for the twelve-month rate of inflation. Inflation is measured by the headline consumer price index (CPI) published by the Ghana Statistical Services. Quarterly consultation bands are specified in Appendix Tables 1 and 2 attached to the memorandum of economic and financial policies. The bands are defined for each quarter and apply to the three month inflation outturns in each quarter. Appendix Table 1 and Appendix Table 2 attached to the memorandum of economic and financial policies show the relevant bands for each quarter. Whenever the twelve-month rate of CPI inflation moves outside a specific band, this would trigger a consultation/discussion with the Fund.

20. Breach of the outer band. The authorities will complete consultations with the Executive Board of the Fund on the proposed policy response before requesting further disbursements under the program when the observed twelve-month rate of CPI inflation moves outside the outer band as specified for each quarter in Appendix Tables 1 and 2 of the memorandum of economic and financial policies. The authorities will not be able to request any further disbursements under the ECF arrangement if the observed twelve-month rate of CPI inflation moves outside of the outer band until the consultation with the Executive Board has taken place. 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.

21. Breach of the inner band. The authorities will conduct discussions with the Fund staff when the observed twelve-month rate of CPI inflation falls outside the inner band as specified for each quarter in Appendix Tables 1 and 2 of the memorandum of economic and financial policies.

C. Bank of Ghana

22. 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 program exchange rate defined in paragraph 2. 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 14 above.

23. 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 program exchange rate defined in paragraph 2. 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 14 above.

24. 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

25. For the purposes of this technical memorandum of understanding, the definition of debt is set out in point 9 of the Guidelines on Performance Criteria with Respect to External Debt (see below). It not only refers to debt, but also to commitments contracted or guaranteed for which value has not been received. The definition of debt is as follows:

  • 9 (a) For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of financial and nonfinancial assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and

    • (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property.

  • (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

26. For the purposes of the ceiling on the contracting or guaranteeing of new non-concessional external debt, external debt is any debt as defined in paragraph 27, which is denominated in foreign currency, i.e., currency other than Ghanaian cedis (GH¢). Similarly, external borrowing is borrowing denominated in foreign currency.2

27. Nonconcessional medium- and long-term external debt is defined as external debt contracted or guaranteed by the government (defined in paragraph 7), the BoG, and specific public enterprises (defined in paragraph 31) on nonconcessional terms (see paragraph 34) and denominated in foreign currencies, with an original maturity of more than one year, provided that debt maturing within one year which has been extended beyond one year from its original date, pursuant to the contract which allows for maturity extension, would be considered medium to long term. Medium- and long-term external 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.

28. For the purpose of the ceiling on the accumulation of external payment arrears, external payment arrears will accrue when undisputed payments such as interest or amortization on debts of the government (as defined in paragraph 7) to non-residents are not made within the terms of the contract.

E. Ceiling on the Contracting or Guaranteeing of New Nonconcessional External Debt

29. A ceiling applies to the contracting and guaranteeing of new medium-to-long term nonconcessional external debt by the government and the BoG, and the following public enterprises: (i) Tema Oil Refinery; (ii) Ghana National Petroleum Corporation; (iii) Bulk Oil Storage and Transport Corporation; (iv) Volta River Authority; and (v) Electricity Company of Ghana. The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received.

30. The ceiling on the contracting or guaranteeing of new nonconcessional external debt (US$800 million) comprises the following two subceilings: (i) A subceiling for the maximum amount of nonconcessional external debt in the oil and gas sector that can be contracted or guaranteed for oil and gas exploration and production projects in Ghana and to acquire equity stakes in companies undertaking oil and gas exploration and production in Ghana (US$300 million); and (ii) A subceiling for the maximum amount of nonconcessional external debt that can be contracted or guaranteed in any sector other than the oil and gas sector (US$500 million).

31. Excluded from the ceiling are (i) the use of Fund resources; and (ii) lending from the World Bank, the African Development Bank, and the International Fund for Agricultural Development.

32. For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the NPV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD would continue to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more). 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.

F. Adjustors to the Program Targets

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

Overall fiscal deficit of the government

34. The deficit ceilings for 2011-12 will be adjusted for excesses and shortfalls in loans and grants as defined below, relative to the program assumptions in the table below. The fiscal deficit will be adjusted:

(i) Upward (or downward) for the full amount of any excess (or shortfall) in concessional project loans. Thus, foreign-financed investment projects, which are not under the short-term control of the government, would be unconstrained, varying in line with project loan financing.3

(ii) Downward by 50 percent of any shortfall in concessional program loans4 of GH¢150 million or less, and downward by the full amount of any shortfall beyond this amount. Thus, for shortfalls of up to GH¢150 million in external loans, the government would have the option of balancing cuts in expenditures with resort to additional domestic financing. The possible resort to additional domestic financing from this adjuster is effectively capped at GH¢75 million, limiting potential crowding-out of private sector credit;

(iii) Upward for the full amount of any excess in concessional program loans, where these are used to repay outstanding domestic arrears at a more rapid pace than programmed.5

(iv) Upward by 50 percent of any shortfall in program grants of GH¢150 million or less, with no adjustment for any shortfall beyond this amount. As with adjuster (ii), this gives the option of balancing cuts in spending with additional resort to domestic financing. The latter is capped, again, at GH¢75 million;6

(v) Downward by the full amount of any excess of program grants, less any use of program grants to repay outstanding domestic arrears at a more rapid pace than programmed; and

Budget Financing Assumptions, 2011-12

(GH¢ millions, cumulative from the start of the calendar year)

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Concessional financing.

Preliminary estimates.

Net international reserves of the Bank of Ghana

35. For the net international reserve (NIR) floors will be adjusted upward for any excess of budget grants and loans relative to the program baseline (see paragraph 25), except where this financing is used to repay outstanding domestic arrears at a more rapid pace than programmed.

Net domestic financing of the government

36. The ceiling on net domestic financing (NDF) will be adjusted upward by 50 percent of any shortfall in concessional program loans and grants relative to the program (see paragraph 37), up to a maximum adjustment of GH¢75 million for shortfalls in each of program loans and grants (and a maximum combined adjustment of GH¢150 million). For higher than programmed loans and grants, the ceiling will be adjusted downward by the full amount, except where these loans or grants are used to repay outstanding domestic arrears at a more rapid pace than programmed. The ceiling will also be adjusted upward by the full amount for a reduction in net arrears paid through bond issuance.

F. Provision of Data to the Fund

37. 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

See statistical appendix for details.

2

The government sold shares in a gold mining company received in lieu of royalty payments for an amount equivalent to 0.7 percent of GDP.

3

Settlements of past arrears in 2010 (1.4 percent of GDP) were considerably exceeded by an additional accumulation of arrears (3.3 percent of GDP).

4

The commitment basis deficit was almost 4 percentage points higher than the unadjusted 2010 target, i.e., before adjusting for higher-than-programmed foreign financed capital spending (see TMU adjusters).

5

In the context of a scaling-up exercise for Ghana that was conducted in 2009, a 4½ percent of GDP per year increase in foreign aid inflows was assumed, roughly half of what is envisioned in the GSGDA. In the analysis the impact of the higher aid inflows was considered manageable.

6

The bill approved by parliament is not yet available; it is being redrafted to include amendments, ahead of presidential signature and publication.

7

The budget repealed the power of the Ghana Investment Promotion Council (GIPC) to extend tax exemptions and took steps to streamline tax exemptions for real estate developers.

8

Measured including expenditure arrears, but excluding higher than programmed foreign financed capital investments.

9

World Bank analysis suggests that the large real wage increases in recent years were a response to earlier under-compensation, and that the priority is to tackle the size of Ghana’s public sector workforce.

10

Debt service on these bonds is covered by a levy on petroleum products.

11

See IMF Country Report No. 10/178, Appendix II.

12

TOR’s financial viability will depend on its future investment needs, and how these would be financed. This will be addressed in the modernization plan.

13

The state has a controlling interest in five banks accounting for 30 percent of the banking system assets. See the Financial System Stability Assessment (FSSA) report for further details.

14

In the interim, these banks have been placed in an independent trust.

15

Gross reserve cover at end-2010 was $4.7 billion (3.2 months of import cover), compared to a programmed $3.7 billion (2.9 months of import cover).

1

The 2009 assessment used a trade elasticity of -0.23 from the CGER whereas this note uses Ghana-specific estimate of -0.68 from Tokarick (2010).

2

In fact the standard equilibrium approach might have failed to be conclusive because Ghana went through several structural changes over the past few decades that estimations of the standard equilibrium method usually cover.

3

The extent of overvaluation is larger when the domestic interest rate is included among the regressors. This is because the Ghanaian T-bill rate has a depreciating impact on the equilibrium exchange rate. There are two potential reasons behind this puzzling result: (i) we use 90 days T-bill rates instead of 3-5 years bond rates— due to data availability—which is likely to distort the UIP condition as foreign investors are not allowed to invest in Ghanaian T-bills, but in bonds of 3-years maturity and beyond; (ii) the coefficient on the domestic T-bill rate may be capturing the Ghanaian risk premium which is missing in the model’s specification. The CHEER approach appears promising and will be explored further, particularly as a longer time series on Ghana’s sovereign bond yields provides more data on trends in Ghana’s risk premium.

1

2010 program Performance is summarized in Appendix Table 1

1

Transfers to the statutory funds are scheduled as follows: (i) District Assemblies Common Fund—quarterly, with a one-quarter lag; (ii) Social Security Fund, National Health Fund, Ghana Education Trust Fund, Road Fund, Petroleum-related Fund,—monthly, with a one-month lag.

2

(A) The term “debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (see paragraph 25). 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.

3

No adjuster is needed for project grants, as shortfalls/excesses in project grants are precisely offset by shortfalls/excesses in foreign-financed capital spending, leaving the fiscal deficit unaffected.

4

Program grants and loans are also referred to as budget grants and loans.

5

Adjusters (iv) and (v) ensure that higher than programmed budget support (grants or loans) are used to repay domestic expenditure arrears as a first priority.

6

The combined scope for additional domestic financing from adjusters (ii) and (iii) is thus GHe150 million.

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Cover IMF Staff Country Reports
Ghana: 2011 Article IV Consultation and Third and Fourth Reviews Under the Arrangement Under the Extended Credit Facility, Requests for Waiver of Nonobservance of Performance Criteria and Modification of Performance Criteria, and Rephasing of Disbursements-Staff Report; Staff Supplement; 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 2011: Issue 128
Publisher:
International Monetary Fund
ISBN:
9781455281596
ISSN:
1934-7685
Pages:
128
DOI:
https://doi.org/10.5089/9781455281596.002
Figure 1.

Ghana: Rebased National Accounts
Figure 2.

Ghana: Real Sector Indicators, 2001-13
Figure 3.

Ghana: External Indicators, 2000-10
Figure 4.

Ghana: Fiscal Indicators, 2006-12
Figure 5.

Ghana: Financial Indicators,2005-11
Text Figure 1.

Deficit Projections, 2009-12

(Commitment-based, including arrears)

Figure A. Ghana: Exchange Rate Assessment and Non-price Competitiveness