Overview

The Ghanaian economy has continued along a high growth path in recent years, supported by the favorable prospects for its oil and gas resources, which have attracted large foreign direct investment inflows, as well as by the strong performance of the non-oil sector. Ghana’s stellar achievements in raising per capita income, reducing poverty, and making decisive progress toward a more inclusive growth are well rendered in the interesting Appendix II. While the country has moved to low-middle income status, its economy is also undergoing a major transformation, reflecting not only the large investments in oil extraction and future prospects in this area, but also the growth momentum of the non-oil private sector, which needs to be supported through public investment in infrastructure, prudent macroeconomic policies, and further improvement of the business environment. As seen in similar cases, this kind of transition can generate temporary large imbalances that must be managed in a manner that facilitates the economic transformation. From this perspective, the newly elected government believes that macroeconomic policies and structural reforms must also focus on helping meet the transformation challenges.

Recent economic developments and outlook

In 2012, real GDP grew by 8 percent and was mainly driven by the non-oil sectors, namely agriculture, industry, and services. Inflation stabilized at 8.8 percent following measures put in place by the monetary authorities to contain the rapid depreciation of the currency in the first half of 2012. However, fiscal policy implementation suffered some setbacks as the deficit widened to 12 percent on account of a variety of exceptional factors, as explained below. The current account deficit deteriorated further to 12 percent of GDP and gross international reserves remained low at 2.8 months of import cover. It is important to note, however, that the large current account deficit is closely associated with sizable foreign direct investment, mainly in the extractive industry, with imports of capital equipments, machinery, and intermediate goods representing about 70 percent of total imports.

Looking ahead, the outlook for 2013 and for the medium term is favorable. The growth momentum is expected to be sustained, albeit with some deceleration in the outer years, until production in new oil fields comes on stream with the non-oil sectors expected to continue to grow strongly. Inflation is likely to stay around 10 percent in 2013 on account of adjustment of petroleum prices and expected utility tariff increases, but would stabilize at single digit levels thereafter. The risks posed to the economy from continued imbalances in the fiscal and current accounts are well understood, and the authorities are committed to addressing them in the current fiscal year and beyond, as outlined below.

Fiscal Policy

Fiscal policy implementation in 2012 was expansionary and fell short of expectations in an election year. While the authorities own up to this slippage, they are carefully reviewing all the factors that led to this outcome. These include: (i) implementation problems associated with the single-spine wage policy initiated in 2009 to correct distortions in the public sector wage structure, notably the clearance of 2010-2011 arrears in 2012; (ii) shift from cash to accrual basis (iii) significant shortfall in grants from donors; (iv) over-estimation of revenues from the oil companies; (v) larger-than expected petroleum and utility subsidies, and (vi) higher interest cost burden arising from the steep rise in short term domestic interest rates. Under the circumstances, the authorities agree that the current stance is unsustainable, and require corrective measures to ensure fiscal sustainability. A number of short and medium term policies have been initiated to ensure that the deficit target of 9 percent for 2013 will be reached.

On the revenue side, the main measures being proposed include the re-introduction of the National Fiscal Stabilization Levy; imposition of a levy on imports; increase in some excise taxes; and review of fees and charges. Implementation of these measures would generate additional revenue equivalent to 0.5 percent of GDP. The cabinet has cleared these measures to be submitted for parliamentary approval.

On the expenditure side, the focus will be to regain control over the wage bill. The cause of the significant rise in the wage bill in 2012 is still being assessed to provide a better understanding of the inherent dynamics with the objective of preventing its reoccurrence. Preliminary findings point to the automatic admission of a large number of health and educational workers onto the pay structure. As part of the Government’s policy to improve social indicators and achieve the Millennium Development Goals, a policy of automatic absorption of eligible health and educational trainees was implemented. Hence, the arrears paid in 2012 relate to both single spine and non-single spine wage policies. The wage-setting process will be reviewed with a possible shift towards multi-year agreements that would be negotiated before the budget is finalized. In addition, plans to streamline, discontinue, or commercialize the activities of subvented agencies are being developed and implemented, while the biometric registration of their staff and migration to the mechanized payroll system are being expedited.

Eliminating the fuel subsidy has been a major policy achievement. Ghana’s track record in the area of energy price reform is well documented in the recent Fund paper on energy price subsidy reform (SM/13/29, Supplement 1). The authorities have taken further actions since the beginning of the year to eliminate the subsidy in order to free resources for social and public investment. On February 17, 2013, prices of petroleum products were adjusted by between 15 and 50 percent, and on June 1, 2013, further adjustments of between 3 and 5 percent were announced, resulting in a total elimination of subsidies on petroleum products. With the full phasing out of these subsidies—while retaining the targeted cross-subsidy—the stage is set for implementation of an automatic price adjustment mechanism beginning July 2013.

The authorities are committed to address the constraints in the energy supply situation and bring prices to cost recovery levels. While our authorities agree that substantial adjustments are required, they believe that careful prioritization and timely sequencing of the subsidy elimination program will be essential. The Public Utilities Regulatory Commission (PURC) has consistently made the granting of tariff increases conditional on improved services to consumers. With some improvements in the electricity supply situation, the PURC has begun discussions with the utility companies with the view to adjust utility prices. Here too, the objective is to institute an automatic pricing formula once cost recovery is fully achieved.

Further steps are contemplated in the area of public finance management and institutional fiscal reforms. These include strengthening project selection and prioritization, reviewing rigid budget allocation rules of statutory funds, monitoring commitments of Ministries, Departments and Agencies as they arise, and ensuring that existing pipelines of signed contracts are cleared before new contracts are awarded. As highlighted in the report, the authorities are open to renew the dialogue over the adoption of a comprehensive fiscal rule, once progress is made in fiscal consolidation.

The updated debt sustainability analysis shows moderate risk of debt distress. The authorities are determined to take necessary steps to safeguard long-term debt sustainability. To this end, new non-concessional borrowing will be only for critical projects that comply with clearly established appraisal guidelines. The Ghanaian authorities plan to implement a self-financing scheme for commercial loans for projects. Strengthening the Public Private Partnership (PPP) framework for development will also limit borrowing and reduce debt service costs. In addition, the authorities will seek to improve the public debt maturity and cost profile by replacing costly short-term borrowing in the illiquid domestic market by medium-term external borrowing. A planned Eurobond with the size of up to $1 billion aims at achieving this objective while strengthening the external reserve buffer.

Monetary and Financial Sector Policies

Monetary policy was tightened in the first half of 2012 in connection with rapid exchange rate depreciation. The Central Bank raised the policy rate three times in 2012 by 250 basis points; together with additional quantitative measures to mop up excess liquidity and stabilize the cedi, as highlighted in the report. These measures helped restore stability in the foreign exchange market.

Data for April 2013 show a rise in headline inflation to 10.6 percent, driven in part by the pass-through of petroleum price increases in February 2013 and aggregate demand pressures. With the second round of increase in petroleum prices in June 2013, and planned increase in electricity tariffs, scheduled for the second half of the year, the Central Bank has indicated its readiness to ensure that inflationary pressures remain contained. At its recent Monetary Policy Committee (MPC) meeting held on May 22, 2013, the Central Bank further increased its policy rate by 100 basis points after having assessed that the risks to inflation remained high. In addition, the policy interest rate corridor was widened at the upper bound by 200 basis points to make it expensive for banks to borrow from the Central Bank and a standing facility was introduced to manage interbank liquidity more effectively and improve upon the transmission mechanism. The authorities believe that their experience with inflation targeting has been positive as outlined in Box 3, and will seek to further strengthen the IT framework in the area of liquidity management and forecasting capabilities. The authorities have requested Fund Technical Assistance and a joint collaborative effort between the Fund and the Central Bank is already underway.

On financial sector stability, capital adequacy levels, non-performing loan ratios, and liquidity buffers have improved, and credit is growing strongly. Despite the sound position of the banks, challenges remain that would have to be addressed. First, our authorities and staff are in agreement regarding the risks of crowding out profitable private investment through high lending rates, with possible adverse effect on NPLs. Further enhancing competition in the banking system and reducing upward pressure on interest rates through government borrowing will help address this issue. Second, efforts are underway to update financial laws and regulations and the Central Bank is working to address existing gaps in this area with Fund assistance. Regarding guidelines for microfinance institutions issued by the Central Bank in July 2011, the slow pace of granting licenses was intended to ensure that supervision capacity can meet the increased demand. The Central Bank is currently expanding and restructuring its supervision department with assistance of a Fund resident advisor. The expectations are that by the end of the third quarter, the new supervision department would be created and become fully operational to effectively handle supervision demands of the microfinance institutions.

Structural Reforms

The authorities remain steadfast in addressing the constraints in the energy sector to keep up with demand and ensure reliability of energy supply. A hydroelectric dam project initiated in April 2008 to augment the supply of electricity is on track for completion. The project, estimated at US$800 million, and designed to have 4 generating power units, is expected, upon completion, to generate 404 megawatts of electricity, one of which has been completed and commissioned in May 2013. The other three units are scheduled to come on stream by November 2013. The completion of the hydroelectric dam projects in November 2013 and restoration of natural gas to power a key thermal plant would elevate the total power supply by 560 megawatts and improve overall reliability of energy supply.

Commendable progress has been made in improving Ghana’s business environment, as evidenced by the World Bank “Doing Business” and governance indicators. Further efforts will seek to streamline procedures, improve access to credit, and remove infrastructure and energy related impediments to investment and growth.

On social issues, our authorities welcome the report’s findings, which attest to Ghana’s progress on improving per capita income and living standards, reducing poverty and income inequality, and building strong foundations for higher and more inclusive growth. The authorities are determined to work further to improve job prospects, strengthen social safety nets, and improve the quality of social spending, particularly in health and education.

Conclusion

The Ghanaian economy is undergoing a critical phase of its transition to full-middle income status, with important future changes in its economic structure and drivers of growth. The authorities are aware of the challenges involved in this kind of transition and intend to manage them in a way that would sustain the investment and growth momentum while achieving macroeconomic stability. The authorities are appreciative of their engagement with the Fund and continue to attach high value to its policy advice and technical assistance.