Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for Modification of Performance Criteria-Staff Report; Staff Supplements; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Ghana.

Ghana’s macroeconomic outlook is positive, and the medium-term policy stance is appropriate. On the fiscal side, the government plans to scale up infrastructure investment and further boost revenues. A revised debt sustainability analysis suggests scope for higher nonconcessional borrowing, provided fiscal targets are achieved. The banking sector remains adequately capitalized and liquid, and reform priorities include reducing nonperforming loans and strengthening banks’ risk management practices. Program risks arise from external and domestic sources.


Ghana’s macroeconomic outlook is positive, and the medium-term policy stance is appropriate. On the fiscal side, the government plans to scale up infrastructure investment and further boost revenues. A revised debt sustainability analysis suggests scope for higher nonconcessional borrowing, provided fiscal targets are achieved. The banking sector remains adequately capitalized and liquid, and reform priorities include reducing nonperforming loans and strengthening banks’ risk management practices. Program risks arise from external and domestic sources.

I. Background and Program Performance

A. Strong Growth and Moderating Inflation

1. Important stability gains since 2009. The stability of Ghana’s economy has improved significantly since the beginning of the government’s Fund-supported program in 2009. The then sizeable fiscal and external current account imbalances have been greatly reduced, the inflation rate has declined to single digits, and the stock of international reserves has risen to about US$5 billion, up from only US$2 billion at the end of 2008 (Text Table 1, Table 1, and Figures 12). Moreover, a recent rebasing of Ghana’s national accounts has raised its national income measures by some 65 percent, and it is now classified by the World Bank as a lower middle-income country.

Text Table 1:

Macroeconomic Indicators, 2008-12

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

Ghana: Selected Economic and Financial Indicators, 2008–13 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, including ECF program indicators.

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

Including public enterprises and errors and omissions.

Figure 1.
Figure 1.

Ghana: Real Sector Indicators, 2007–13

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

Source: Ghanaian authorities and IMF staff estimates and projections.1 The CIEA is the Bank of Ghana’s composite index of real economic activity.
Figure 2.
Figure 2.

Ghana: External Indicators, 2007–11

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

Source: Ghanaian authorities and IMF staff estimates.

2. Favorable economic setting in 2011. After a mixed performance in 2010, fiscal consolidation in 2011 has created room for interest rate reductions in support of robust economic performance. The government is now on track to reduce the fiscal deficit (after arrears clearance) by about 2½ percentage points of (non-oil) GDP, and the Bank of Ghana has reduced its policy rate twice this year—last to 12½ percent in July. Boosted by the start of oil production, overall economic growth is projected to reach 13½ percent this year and more than 8 percent in 2012, with average inflation expected to remain broadly unchanged at a rate of 8½-9 percent—well within the Bank of Ghana’s target range (6.5–10.5 percent). The current account deficit is projected to remain broadly unchanged at 8¼ percent of GDP, as high export growth from oil, cocoa, and gold, was matched by a strong rebound in both oil and non-oil imports reflecting buoyant economic activity. Supported by record foreign direct investment (FDI) inflows, official reserves are now projected to rise to $5.4 billion at end-2011, covering just over three months of next year’s imports.

3. Risks to outlook broadly balanced. External demand for Ghana’s exports is expected to remain strong, with considerable upside potential over the medium term from newly discovered oil fields. Positive spillovers on domestic demand are likely to continue to feed into broad-based economic activity, creating possible upward pressure on inflation. The main downside risks on the external side arise from a possible weakening in world commodity prices and foreign investment flows as a result of a prolonged global slowdown—with increased risk aversion already evident in the recent depreciation of the cedi. On the domestic front, the main risk stems from possible public spending pressures ahead of the 2012 elections.

B. Program Performance

4. Program performance has improved substantially in 2011:

  • All quantitative performance criteria and indicative targets for end-June 2011 were met, and preliminary data suggest a similarly favorable outcome for the end-September indicative targets; only the indicative target for arrears clearance was missed by a very small margin (MEFP Appendix Table 1).

  • Structural reforms have been implemented with some unevenness (MEFP Appendix Table 2). Six benchmarks were met—two carried over from previous reviews—but four were missed. The most notable relates to petroleum price subsidies, which have begun to accumulate since August. Delays occurred in the rollout of Ghana’s integrated financial management information system (GIFMIS) to 14 selected pilot ministries, reflecting a number of operational challenges. The reintroduction of quarterly expenditure ceilings was not met, because the authorities prefer to rely on monthly ceilings instead, until spending discipline is more firmly established. Finally, the independent audit of weak banks has been delayed, because the selection of the external consultant to oversee the process took longer than expected.

5. The fiscal deficit target was met in both June and September, despite lower oil revenue and grants and higher wage payments (Figure 3).

  • Revenue. Non-oil tax revenue exceeded the program target through September, reflecting improvements in tax administration, including the segmentation of the taxpayer base to better target large taxpayers and the continued modernization of customs administration to improve the valuation of goods at the border. Figures based on collections show an even stronger improvement, with non-oil tax revenue exceeding the program target by GH¢854 million. In addition, non-tax revenue benefited from gold shares sold in early 2011.

  • Expenditure. A larger wage bill, reflecting a higher-than-budgeted base pay increase and the unexpectedly-high cost of migration to the new single spine salary structure (Box 1), was financed by restraint in other recurrent spending and lower capital expenditure.

  • Balance. The overall deficit target (financing) was met by a large margin, partly because of a sizeable discrepancy (reflecting float transactions), but would have also been met otherwise.

Figure 3.
Figure 3.

Ghana: Fiscal Indicators, 2006–13

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

Source: Ghanaian authorities; and IMF staff estimates.1 Ghana’s GDP was rebased in 2010. Current projection line uses the rebased GDP, while previous reviews are based on the old GDP series.

The Single Spine Salary Structure and the Wage Bill

  • Management of the wage bill remains a major challenge. Cash wage payments are expected to be higher than programmed by 1 percent of non-oil GDP in 2011 and by 2 percent in 2012, reflecting two factors (Table 2A). First, the government awarded a 20 percent increase in base pay in July rather than the budgeted 13.5 percent (an additional 0.5 percent of non-oil GDP). Most of the unbudgeted increase, however, is the result of the migration to the single spine salary structure.

  • In the medium term, the single spine structure should bring considerable benefits. These include more pay equity, easier salary negotiations, better oversight of outlays, and the potential for productivity gains. However, in the short term, it has raised the wage bill significantly.

  • Estimating the cost of migration to the single spine has been difficult. The placement of employees into the new structure required time-intensive evaluations of job requirements, as well as negotiations. This has resulted in delays and the accumulation of sizeable deferred wage payments, retroactive to January 2010. Though 97 percent of public employees have now migrated, the final cost is still uncertain. The government currently estimates the stock of deferred payments to be GH¢ 1.25 billion (2.3 percent of non-oil GDP).

  • The government plans to clear these deferred payments over a period of 10 months, with a first payment made in October 2011. Approximately GH¢ 260 million (0.5 percent of non-oil GDP) will be paid in the fourth quarter of 2011, with the remainder paid by July 2012.

Central Government Wage Bill

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In 2012, includes an increase in pay relativity and net savings from a payroll audit (after base pay increase) of 8 percent of the 2011 wage bill (see ¶13).

Table 2A.

Ghana: Summary of Central Government Budgetary Operations, 2008–13

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

Excludes deferred wage payments

For 2010, excludes payment of outstanding floats. In 2012, includes reserves to cover expected float payments from 2011 commitments. This reserve is included in expenditures (commitment basis) for 2011.

For 2010, excludes payment of outstanding floats. In 2012, excludes reserves to cover expected float payments from 2011 commitments.

Excludes SOEs’ liabilities and deferred wage payments.

Table 2B.

Ghana: Summary of Central Government Budgetary Operations, 2008–13

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

Excludes deferred wage payments

For 2010, excludes payment of outstanding floats. In 2012, includes reserves to cover expected float payments from 2011 commitments. This reserve is included in expenditures (commitment basis) for 2011.

For 2010, excludes payment of outstanding floats. In 2012, excludes reserves to cover expected float payments from 2011 commitments.

Excludes SOEs’ liabilities and deferred wage payments.

6. Based on the performance through September, the 2011 fiscal deficit is likely to be smaller than programmed, by about ½ percent of GDP. This corresponds to a significant adjustment from 2010 of 6 percentage points of non-oil GDP on a commitment basis (Text Table 3). Strong revenue performance in 2011 is largely responsible for the substantial improvement in the commitment-based deficit, but spending has also declined, as a share of non-oil GDP, except for wages. The 2011 projections incorporate seasonally strong tax revenue in the fourth quarter, with corporate taxes likely to receive a further boost from the exhaustion of capital allowances in the mining sector. However, the shift in the composition of spending, with lower foreign-financed capital spending and higher wage payments, will result in larger domestic financing (by 1½ percent of GDP) than initially programmed.

Text Table 2.

Fiscal Performance, January-September 2011

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Source: Ghanaian authorities and IMF Staff
Text Table 3.

Central Government Operations (commitment basis)

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Sources: Ghanaian authorities and IMF staff projections.

Contingency included in 2012 budget to meet float transactions related to 2011 commitments.


Non-oil Tax Revenue

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

1/ The 2011 Q3 revenue number reflects tax collections by the Ghana Revenue Authoritiy rather than budget revenues received by the treasury.

II. Policy Discussions

Discussions focused on policies to preserve macroeconomic and financial stability, while implementing high-priority investments to spur long-run growth and development.

A. Setting the Stage for Scaled-Up Investment

7. Agenda for growth and development. Addressing large infrastructure gaps, is widely seen as a prerequisite for assuring Ghana’s long-term growth and is a focus of the Ghana Shared Growth and Development Agenda (GSGDA) for 2010–13. At the same time, Ghana’s access to concessional financing will be tapering off, given its new middle-income status. Against this background, the government has recently negotiated a US$3 billion (8 percent of GDP) “Master Facility Agreement” (MFA) on nonconcessional terms from the China Development Bank (CDB) to finance a number of critical infrastructure investments, with disbursements expected to be stretched over four years (Box 2, and MEFP ¶7). To accommodate this loan under the program, they requested a modification of the end-December 2011 performance criterion on the contracting of nonconcessional external debt, to raise the limit from $800 million to $3,400 million. This would cover the MFA and all other nonconcessional loans contracted under the existing ceiling.

Master Facility Agreement

Background. The government of Ghana has negotiated a $3 billion (8 percent of 2011 GDP) Master Facility Agreement (MFA) with the China Development Bank (CDB). The agreement, which has not yet been signed, covers various public investment projects, including railways, gas infrastructure, industrial zones in the western region, commercial agriculture, multi-modal transportation in the eastern region, fisheries infrastructure in coastal areas, urban transport in Accra, and nationwide SME incubation. All align with the priorities of the GSGDA. Project implementation will be supervised by the respective ministry, and debt service payments will be from the ABFA (Box 3). Associated capital spending is currently captured in the budget, but the government plans to on-lend these funds to state-owned enterprises, at which point capital expenditure items funded by the MFA will be reclassified as net lending. Subsidiary loan agreements for each project financed under the MFA will require approval by the CDB and Ghana’s parliament before disbursements are made.

Terms and conditions. The loan has two tranches of equivalent amounts, one spanning 15 years (Tranche A) and the other 10 years (Tranche B), with a grace period of 5 years. Both tranches are provided on nonconcessional terms (6-month LIBOR + 295 bps for Tranche A, 6-month LIBOR + 285 bps for Tranche B) and include a 1 percent commitment fee on signing of the MFA and counterpart funding (15 percent). The MFA further stipulates that contractors from the People’s Republic of China must implement a minimum of projects equal to 60 percent of the loan amount.

World Bank assessment:

  • At the government’s request, the World Bank has assessed the financial facility under the MFA and related projects. Its report notes that project documents provide a substantial information base to complete the necessary feasibility studies, which in some cases will need to be updated, because the coverage of projects has changed. In other cases, existing feasibility studies conclude that projects are marginally viable from a financial perspective. In a few cases, data shared with the World Bank do not amount to feasibility studies, but constitute useful preliminary information to initiate them.

  • Among the list of projects, the gas infrastructure project is the one that deserves the highest and most urgent levels of attention. The justification for the gas project retained under the MFA, for about US$1 billion, is sound and economic returns on it would be even larger, if the project included the infrastructure for LPG production. In this case, the much larger returns would alone cover 80 percent of the financial costs to be incurred on the entire US$3 billion amount of the MFA. Beyond covering almost the entire loan, such high returns could be used to cross-subsidize some of the other projects, if expected social returns are deemed to justify this.

  • World Bank staff believes that the MFA provides a significant opportunity for Ghana to advance its Shared Growth and Development Agenda. It recommends that the government take the necessary time to finalize feasibility studies, with priority being given to the completion of the thorough preparation of the gas project. By doing so, risks of macroeconomic disruption would be minimized, and the opportunity would be given to strengthen the institutional framework for public investment decisions.

8. Scope for nonconcessional borrowing. While recognizing the importance of scaling up infrastructure investment, the mission stressed the need to preserve debt sustainability and recommended a careful assessment of the cost and benefits of the underlying projects and the financing arrangements. To inform the decision on modifications to the borrowing ceiling, a new debt sustainability analysis (DSA) was prepared, jointly with the World Bank, incorporating the authorities’ plans for increased nonconcessional borrowing to scale up infrastructure investment. In conclusion, staff supports the requested modification based on:

  1. The DSA. The analysis confirms that risks remain manageable, even under conservative assumptions on growth dividends, but contingent on successful fiscal consolidation, as envisaged under the program.

  2. The World Bank assessment. World Bank staff view the MFA as a significant opportunity for Ghana to advance its development agenda. At the same time, they recommend a gradual implementation of the projects, with the government taking the necessary time to finalize feasibility studies and giving priority to the gas project which promises significant returns.

  3. The urgency of the gas-pipeline project. Gas is produced as a side product in the oil production, but is currently not usable. Apart from the commercial benefits of gas utilization, the pipeline is needed urgently to avoid the significant risks to existing oil wells of gas-reinjection or environmentally damaging flaring.

9. There was agreement that reliance on significant nonconcessional financing called for a stronger institutional framework for public investment decisions. In this context, the authorities agreed to the establishment of certain principles that would guide their drawdown and future contracting of nonconcessional debt (MEFP ¶24):

  • Disbursement profile. The government will ensure that the drawdown of resources does not exceed the planned disbursement schedule incorporated in the program and the DSA. In particular, the drawdown of nonconcessional public or publicly guaranteed debt will be about $1,250 million in 2012, of which $750 million will be direct central government borrowing related to the MFA. The remaining MFA funds are expected to be drawn in the same annual amounts of $750 million over 2013–15.

  • Project assessments. The government will ensure that each project is supported by robust feasibility and financial viability studies, confirmed by reliable third-party assessments.

  • Integrated investment planning and debt management. The authorities will establish policy guidelines, by April 2012 (new structural benchmark, Appendix Table 2 of the MEFP), to improve coordination between the Public Investment Division, the Debt Management Unit, and the Economic Research and Forecasting Division of the Ministry of Finance and Economic Planning (MoFEP). The objective is to strengthen the institutional framework for making public investment decisions—from strategic guidance and formal appraisal, to project selection, budgeting, implementation, and evaluation—and to ensure that the contracting of debt is guided by the medium-term macroeconomic framework.

10. While adherence to these principles should help contain important risks, the mission also stressed the need for caution and fiscal prudence. It will take some time for a robust institutional framework to be effective, and project risks—including delayed implementation, cost overruns, and failure to generate expected returns—should be factored into the planning. On the implementation side, the mission was encouraged by decisions to hire internationally recognized engineering and construction firms to conduct front-end engineering of the gas project, and by plans to employ project management consulting firms to support the public entity in charge of the project. On the macroeconomic and debt sustainability side, however, risks will also depend on the phasing of projects and the ability to contain fiscal deficits.1

B. Fiscal Policy: Preserving Gains to Macroeconomic Stability

Discussions focused on the need to create fiscal space for higher investment spending and maintain spending discipline in the run-up to elections.

11. The 2012 program seeks to balance the need for high-priority investments to close the infrastructure gap with the importance of maintaining fiscal discipline. The program targets a total deficit of 5¼ percent of non-oil GDP for 2012, up by 2¾ percentage points relative to the last review (Table 2). This would still reduce the commitment-based deficit by about ¾ percentage point of non-oil GDP, despite a 2 percent of GDP increase in foreign-financed capital expenditure and poverty-related spending of about 5½ percent of GDP, consistent with GSGDA objectives. The government’s fiscal strategy thus hinges on a further increase in revenue—which are low in relation to the size of the economy—and determined efforts to control nonpriority spending and strengthen public financial management. However, to guard against the risk of fiscal slippages, the authorities noted that they would hold back on appropriations on goods and services and domestically-financed capital spending until uncertainties about the outcome of the payroll audit and implementation of new tax measures are resolved.

Raising revenues

12. Tax administration has improved substantially, and the authorities plan further reforms. As shown by strong tax performance in the first three quarters of 2011, the government’s past administrative reforms—including the establishment of a large taxpayer office, streamlining of tax exemptions, and strengthened customs administration—are paying off. Work is underway to further improve tax administration (MEFP ¶10–16), and a new VAT bill—submitted to parliament in May 2011 (a prior action under the previous review), but not yet passed—is expected to yield some 0.2 percent of non-oil GDP in additional revenue. The mission urged the authorities to seek accelerated approval of the bill, which includes the extension of VAT to fee-based financial services.

13. The mission strongly welcomed the government’s plan for new tax policy measures, with an expected yield of at least 0.8 percent of GDP (MEFP ¶18–22). In line with established practice in the oil and gas industry and in peer resource-rich countries, the corporate tax rate for mining will increase from 25 to 35 percent. For those two mining companies that have stability agreements, the tax increase requires consent, which the government is confident to receive. Furthermore, the government will implement a windfall profit tax in the mining sector of 10 percent on profits above a certain threshold that remains to be determined. The 2012 budget will also establish a uniform tax regime for capital allowances, inaugurate new rules to ensure ring fencing of mining projects, and adopt OECD guidelines for transfer pricing. In addition, the government plans to review the existing legal framework for capital gains taxes, to enhance its ability to collect revenue following the transfer of interest between nonresidents. Increased collections are also expected from the payment of personal income tax on deferred wages to civil servants. Some measures will reduce the tax burden; the national fiscal stability levy will be eliminated, honoring an earlier commitment, and the tax holiday for the Ghana Stock Exchange will be extended by another five years. The projected yield of 0.8 percent of GDP from new tax measures is a conservative estimate. It does not include any revenue gains from the windfall profit tax, uniform tax regime on capital allowances, new rules on transfer pricing, or changes in capital gains taxes, which remain to be quantified.

Managing the public wage bill

14. There was agreement that careful management of the wage bill will be essential to continued success of the program (MEFP ¶25–27). The authorities plan to clear all remaining deferred wage payments in the first seven months of 2012. At the same time, they are determined to keep the wage bill, on a commitment basis, broadly constant in nominal terms. To this end, the authorities expect to offset a first increase in pay relativity since the inception of the single spine with savings from a payroll audit—projected at 8 percent of the 2011 wage bill—to be completed by mid-2012 (structural benchmark). Any base pay raises would then be contingent on savings over and above the 8 percent from the audit. The mission urged a more gradual phasing of deferred payments over a period of two years, in light of limited budgetary flexibility and constraints on domestic financing. The authorities agreed that a phased approach would be preferable on economic grounds, but noted the importance of delivering on their commitment to civil servants during the government’s current term. They also believed that the savings from the payroll audit will likely exceed the assumed 8 percent of the wage bill. Early results from a pension audit showed savings of 25–30 percent.

15. The authorities recognized risks to the fiscal outturn, but felt that the current projections incorporated sufficient buffers. They pointed, in particular, to their conservative revenue estimates, which did not include gains from a number of measures. Nevertheless, in the event of budget overruns in excess of additional revenue, the authorities expressed their commitment to protecting the fiscal targets by tightening appropriations to spending units for both goods and services and delaying domestically financed capital spending. The mission agreed that there was limited room to adjust spending other than through ad hoc cuts. A major difficulty is the earmarked allocation of revenue to specific funds. Although changes to these rules require constitutional amendments, the mission encouraged the authorities to seek ways to address this issue over the medium term.

Strengthening public financial management

16. The government has made substantial progress in reducing its domestic payment arrears, which should be cleared fully by 2013 (MEFP ¶28). The government’s arrears strategy involves the combination of cash payments and the issuance of special purpose bonds and promissory notes. The Budget Department of the MoFEP tracks flow payments in a comprehensive database, with monthly status reports presented to the cabinet. To prevent the emergence of new arrears, a presidential circular has mandated all line ministries to secure commencement certificates before committing the government to any contractual obligation. As a result, the authorities have reported no new arrears in 2011.

17. The government plans to continue monitoring spending through monthly expenditure ceilings (MEFP ¶29–30). Although there was agreement that quarterly ceilings would provide additional flexibility and planning certainty to ministries and departments, the authorities preferred postponing the ceilings’ introduction until spending discipline has been firmly established. The mission accepted the current priority in favor of tighter controls. It also welcomed the communication of indicative spending ceilings ahead of the 2012 budget preparation process, based on the new unified chart of accounts to support the establishment of realistic spending plans.

18. The mission stressed the importance of prudent cash management, noting challenges evidenced by the large float transactions in the first half of 2011 (MEFP ¶31). Although a treasury main account exists, the government’s cash balances are held in numerous accounts at the Bank of Ghana and commercial banks. This has led to situations, as in June, where the treasury main account had insufficient funds to affect payment, creating a discrepancy between the deficit and total financing. The mission suggested stronger efforts to eliminate unnecessary bank accounts and accelerate the migration to a treasury single account (TSA). The authorities agreed to continue the transition to a TSA, but saw a need for many of the existing accounts, including those for donor projects. They expressed confidence that a new operational framework, developed with the Bank of Ghana to match upcoming payments more closely with account balances, would help reduce the occurrence of large discrepancies. They also pointed out that the sizeable June discrepancy was almost halved by September.

C. Energy Policies: Responsible Management of Revenues and Prices

19. The adoption of the Petroleum Revenue Management Act (PRMA) in April 2011 has been a pivotal first step toward transparent and responsible revenue management. The PRMA establishes a strong legal framework for the collection, allocation, and management of petroleum revenue in a transparent and accountable manner (Box 3). The bill benefited from broad consultations with many stakeholders, including civil service organizations, before enactment. The authorities are now drafting supporting regulations, detailing rules, responsibilities, and administrative procedures.

20. Quarterly reviews of power tariffs have continued, but did not always result in adjustments to cost-recovery levels (MEFP ¶33). The Public Utilities Regulatory Commission (PURC) has used its adjustment formula to establish tariff levels. Accordingly, it reduced electricity tariffs in March 2011 and increased them in September 2011. The PURC did not adjust tariffs in June 2011, despite calculations that an increase of about 8½ percent was warranted, because utilities’ service delivery had deteriorated and expected efficiency gains were not achieved. While acknowledging the need to maintain incentives for utilities to improve their operational efficiency, the mission welcomed the subsequent price adjustment to cost-recovery levels in September.

21. Gains from petroleum price hedging operations have provided temporary protection from global price increases, but are now exhausted. Pump prices have not been adjusted since a 30 percent rise to cost-recovery levels in January 2011. The authorities avoided fiscal costs for half of the year by covering the subsidies through hedging gains, as intended. However, failure to adjust prices subsequently (September 2011 benchmark) led to costs of about GH¢ 100 million (0.2 percent of non-oil GDP) by October. Encouraged by the mission to take quick corrective actions, the authorities agreed to repay the outstanding amounts from the budget and to adjust petroleum prices on a monthly basis, to return to full cost-recovery levels (MEFP ¶33).2 The authorities have further agreed to implement more frequent price adjustments going forward, to prevent fiscal costs and depoliticize the pricing process. Additionally, to ensure transparency, the profits (or losses) from the hedging program will be included in the 2012 budget.

Petroleum Revenue Management Act

The Petroleum Revenue Management Act (PRMA) incorporates several provisions to ensure a strong legal basis for the effective and efficient application of petroleum revenue in Ghana, including:

  • Establishment of petroleum funds and allocations: All petroleum revenue is received and disbursed via a dedicated Petroleum Holding Fund (PHF), held at the Bank of Ghana. Revenue from the PHF is disbursed into three separate funds: the Consolidated Fund to support the annual budget; the Stabilization Fund to cushion the budgetary impact of annual volatility in oil revenues,; and the Heritage Fund to provide an endowment for future generations. The latter two receive from the PHF all revenue in excess of the Annual Budget Funding Amount (ABFA).

  • Benchmark revenue: Benchmark revenue is set by September of each year for the budget of the following year. It is determined on the basis of a five-year rolling average of oil prices.

  • Annual Budget Funding Amount (ABFA): This is the amount of petroleum revenue provided to the annual budget. The ABFA cannot be more than 70 percent of benchmark revenue. The exact percentage is determined annually and approved by parliament. The ABFA is considered part of the national budget, and its use is subject to the same budget processes, e.g., guided by medium-term expenditure plans and aligned with the national development plan (the GSGDA). Moreover, a minimum of 70 percent of the ABFA annually must be used for public investment expenditures.

  • Collateralization: The PRMA permits the use of the ABFA as collateral for debts and other liabilities of the government for a period of up to 10 years after its commencement. The PRMA prohibits borrowing against the amounts earmarked for the Stabilization and Heritage Funds.

  • Reporting: The Act provides for reporting on various levels. The reporting authorities include: (i) the Ghana Revenue Authority; (ii) the Ministry of Finance and Economic Planning; (iii) the Bank of Ghana; (iv) the Investment Advisory Committee; (v) the Auditor-General; and (vi) the Public Interest and Accountability Committee. Based on their mandates, reports are due either monthly, quarterly, semi-annually, or annually.

  • Transparency and accountability: Transparency clauses are consistent with the requirements of the Extractive Industry Transparency Initiative. A strong framework for public accountability is ensured through disclosures of public expenditures and the regular scrutiny by the Public Interest and Accountability Committee. The Accountability Committee must publish semi-annual and annual reports in two state-owned newspapers, post the report on its website, and hold meetings twice a year to discuss the reports with the public. The Committee also has to submit a copy of its semi-annual and annual reports to the president and to parliament. The auditor-general provides external audits of the petroleum funds each year, while the Bank of Ghana conducts internal audits, with the governor submitting quarterly reports.

D. Monetary and Financial Policy: Safeguarding Low Inflation and Financial Stability

Discussions focused on the need to guard against inflation risks and the implementation of measures, recommended in the FSAP update, to strengthen the financial sector.

22. Monetary policy implementation has been consistent with objectives of the 2011 program (Figure 4). Despite a larger-than-expected rebound in broad money, mainly owing to higher net foreign assets and growth in credit to the private sector, inflation remained stable, helped by low food inflation. During the fourth quarter, greater reliance will have to be placed on open market operations and foreign exchange interventions to sterilize the seasonal liquidity generated by cocoa board transactions. The mission supported a policy of targeted intervention to smooth excessive exchange rate volatility and manage liquidity, while allowing the exchange rate to adjust to more lasting trends. In light of the high cost of sterilization operations, the mission urged swift adoption of a plan to share the cost of sterilization with the budget, while stressing more generally the importance of effective coordination of fiscal and monetary policy in maintaining low inflation.

Figure 4.
Figure 4.

Ghana: Financial Indicators, January 2008 – October 2011

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

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

23. The authorities are confident about achieving their 9 percent inflation target by the end of 2011 and keeping inflation in single digits in 2012. As the economy and financial services are expanding at a rapid pace, they expect the trend decline in velocity to continue, even without further disinflation (see text chart). Hence, they expect that broad money growth of 35–45 percent will still be consistent with the targeted inflation trajectory, while providing ample room for increased credit to the private sector. The authorities concurred with the mission, however, that tightening monetary policy may be needed in the months ahead, and agreed to adjust policy rates should upside risks to inflation become acute.


With the expansion of the banking services in Ghana, the downward trend in broad money velocity of recent years is projected to continue…

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

Source: Bank of Ghana and IMF staff estimates.

…however, banks’ recent buildup of NFA and excess reserves creates risks of turning liquidity into inflationary pressures.

Citation: IMF Staff Country Reports 2012, 036; 10.5089/9781463941048.002.A001

24. In the banking sector, NPLs are declining, but are still high at 16 percent. Commercial bank lending rates should continue to decline as inflation expectations are lowered, while nonperforming loans are being brought under control and current risk concerns ease. On aggregate, the banking sector remains adequately capitalized, and all banks have met the minimum capital requirement of GH¢25.0 million and are expected to comply with the GH¢ 60 million requirement by end-2012. Banks’ liquidity positions remain satisfactory, while asset quality has improved.

25. Reform priorities include strengthening banks’ risk management capacity, resolving remaining problem banks, and enhancing the BoG’s supervisory capacity. Several specific actions are underway (MEFP ¶36), including (i) improved risk management practices across the banking industry, and in particular at the Ghana Commercial Bank; (ii) selection of a long-term advisor expected to take office in January 2012 to help BoG build capacity in banking supervision and oversee the auditing process for the problem banks, with the planned appointment of firms to conduct the audit by end-March 2012 (structural benchmark); (iii) contracting of legal consultants to amend the Banking Act and other related regulatory acts; and (iv) successive removal of the BoG from ownership in banks to resolve the potential conflict of interest.

26. The mission urged further action to address remaining deficiencies in its AML/CFT regime. An AML office was established within the Banking Supervision Department in February 2011, and resources are being recruited to make it fully operational. The office has been working on guidelines for the banking industry and is receiving technical assistance from the Fund to strengthen the overall legislative and regulatory AML/CFT regime. However, the Financial Action Task Force is not yet satisfied with Ghana’s progress in addressing its AML/CFT deficiencies. To avoid any repercussions of a negative assessment, staff urged the authorities to continue improving its AML/CFT regime, drawing also on Fund technical assistance.

III. Program Monitoring, Modification of Performance Criteria, and Risks

27. The authorities request, with staff support, modification of the quantitative targets for end-December 2011 through end-June 2012. The proposed performance criteria and indicative benchmarks are presented in Appendix Table 1 of the MEFP. In particular, the authorities request a lowering of the floor on GIR for end-December 2011 by US$271 million, to reflect lower concessional official transfers and oil-related inflows. They also request an increase of the 2011 ceiling on the contracting of medium- and long-term external debt on nonconcessional terms from US$ 800 million to US$3,400 million, to provide higher financing for scaled-up infrastructure investment. Staff’s support of this modification reflects the broadly favorable conclusions of an updated debt sustainability analysis and the agreed measures to ensure proper project assessments and appropriately phased disbursements.

28. Program monitoring for the rest of the program will be on a quarterly basis. Appendix Table 2 of the MEFP shows the proposed prior action and structural benchmarks. Three new benchmarks are proposed to be added: on completing a civil service payroll audit; improving coordination in the area of debt management; and conducting independent audits of remaining problem banks. It is further proposed that the introduction of quarterly expenditure ceilings be dropped as a structural benchmark; while the authorities still see merit in this measure, they prefer to rely on monthly ceilings instead, until spending discipline is more firmly established. Finally, it is proposed to reset the benchmark on managing petroleum product prices on a recurrent basis to avoid fiscal subsidies.

29. Risks to the program remain manageable, provided policy commitments are sustained. Program risks arise, on the external side, from the possibility of a weakening in world commodity prices and foreign investment flows, in response to a prolonged global slowdown. On the domestic side, the main risks arise from an overrun in the wage bill, in the event insufficient savings from the payroll audit, as well as to whether the recent progress in revenue collection can be sustained. These remain manageable, in terms of the underlying program objectives, provided the authorities resist pressures to relax the fiscal stance ahead of the 2012 election.

IV. Staff Appraisal

30. Program performance has improved significantly in 2011. Taking advantage of a favorable economic environment, the government has made great strides in boosting domestic tax revenues and repaying arrears. The management of the wage bill, however, has proved challenging, in light of the unexpectedly high cost of moving public sector employees onto a new salary structure, but also larger-than-programmed base pay increases. Thus, while the fiscal deficit target is within reach, current spending will exceed earlier targets, creating risks that inflationary pressures could reemerge.

31. Investments in infrastructure are crucial for Ghana’s sustained growth, but projects and their financing should be planned and monitored carefully. A revised debt sustainability analysis suggests scope for higher nonconcessional borrowing, and some of the planned projects promise significant returns. Staff, therefore, supports a modification of Ghana’s nonconcessional borrowing limit to accommodate the authorities’ borrowing plans. At the same time, it is crucial that all projects are supported by robust feasibility studies and that their implementation and associated disbursements be phased in consistent with program targets to preserve fiscal and debt sustainability. Moreover, Ghana’s increasing reliance on nonconcessional financing will require a stronger process of integrated investment planning and debt management that should be rigorously applied to all future projects and investment decisions.

32. The government’s plans for raising tax revenue are welcome and important for creating fiscal space. Recent success in mobilizing revenue should offer strong encouragement to continue important reforms in tax administration. In addition, the government is right to look for new tax policy measures to raise Ghana’s revenue ratio from a still low level, relative to the size of its economy. In this context, the planned menu of measures is a welcome step, particularly in natural resources, where taxation is low in comparison with peer countries. Prompt parliamentary passage of new legislation to broaden the value added tax (VAT) base will also be important.

33. On the expenditure side, management of the wage bill remains a challenge and risk. Although the adoption of a uniform public sector pay structure promises important benefits over time, it has also been costly. And the plan to clear deferred wage payments by mid-2012 will likely prove challenging, even without any base pay increases, unless expected savings from the payroll audit can be realized quickly. Over the medium term, improvement of the structure, and reduction of the size, of public sector employment will be important to realizing the hoped-for efficiency gains. In the meantime, offsetting savings will have to come from restraint in other spending, supported by ongoing improvements in public financial management—where some reforms have taken longer than expected.

34. While energy pricing has improved, decisive action is needed to tackle the reemergence of subsidies on petroleum products. The PURC’s September decision to raise electricity and water tariffs to cost-recovery levels was a welcome sign that the quarterly review process is working. This is in contrast to the failure to adjust petroleum prices, despite rising international prices and an exhaustion of hedging gains by midyear. While hedging operations offer valuable insurance against excessive price fluctuations, they cannot be relied upon to generate profits. Thus, more frequent price adjustments to cost-recovery levels are essential to avoid costly and poorly targeted subsidies and helpful to depoliticize the process. The authorities’ renewed commitment to such an approach, and their plan to ensure transparency of the hedging program through the budget, are welcome.

35. The Bank of Ghana has earned credibility in meeting its inflation target. With upside risks to inflation dominating, it should now stand ready to raise rates promptly as signs of rising price pressures emerge. In light of considerable volatility in the foreign exchange market, it will also be important for the BoG to further refine, and better communicate, its policies and instruments for foreign exchange market interventions. Moreover, to manage liquidity effectively, the BoG will need the support of the budget to ensure the availability of sufficient resources for conducting sterilization operations.

36. Financial sector reforms should continue with renewed zeal. The BoG should focus its attention on making further progress in areas identified in the FSAP update, including strengthening banks’ risk management, resolving vulnerable institutions, and enhancing its supervisory capacity. Addressing promptly the identified deficiencies in its AML/CFT regime will also be important to avoid reputational risks.

37. In light of Ghana’s strong performance in 2011 and policy intentions for 2012, staff recommends completion of the fifth review under the ECF arrangement.

Table 3.

Ghana: Monetary Survey, 2009–13

(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 1.50 per U.S. for January-September 2011, and GHc 1.5374 for Dec 2011 and 2012.

Deflated by the Consumer Price Index.

Table 4.

Ghana: Balance of Payments, 2008–13