Ghana: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Ghana
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International Monetary Fund. African Dept.
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Publication Date:
18 Dec 2019
eISBN:
9781513523347
Language:
English
Keywords:
ISCR; CR; staff projection; staff appraisal; deficit; MPC meeting; private sector; debt management; government support; Ghanaian authorities; central government; Energy sector; Financial sector; Global; Africa
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2019 Article IV Consultation; Press Release; Staff Report; and Statement by the Executive Director for Ghana

Abstract

2019 Article IV Consultation; Press Release; Staff Report; and Statement by the Executive Director for Ghana

Context: Entrenching Macroeconomic Gains

1. In recent years, the Ghanaian authorities have succeeded in achieving macroeconomic stabilization and laying the ground for a favorable economic outlook. Since 2017, the country has enjoyed stronger growth, single-digit inflation, and improved government and external positions thanks to fiscal discipline and monetary tightening, including the end of monetary financing of the deficit. The Bank of Ghana (BoG) has undertaken a sweeping (albeit expensive) clean-up of the financial sector that included resolving nine banks and shutting down insolvent specialized deposit-taking institutions (SDI) and distressed fund managers; strengthening the supervisory regulatory framework; adopting a strategy for addressing nonperforming loans (NPL); and rolling out the new deposit protection scheme.1 The government has made considerable progress in PFM and debt management.

Text Table 1.

Ghana: Selected Macroeconomic Indicators

(in percent of GDP, unless otherwise indicated)

article image

Preliminary staff estimates using the rebased CPI.

The figure for 2019 reflects values up to 6 November, 2019.

M2, excluding foreign deposits.

As of August 2019. NPLs are net of loan-loss provision to capital.

2. The country has embarked on an ambitious plan of economic transformation. Following impressive development gains in recent decades, poverty reduction has slowed down since 2012 while inequality widened, with economic growth increasingly relying on extractive industries. To accelerate diversification and address poverty and inequality, the authorities have launched the “Ghana beyond Aid” reform agenda based on expanding agriculture and manufacturing, fostering human capital accumulation, and improving efficiency through digitalization.2 This growth agenda could be leveraged by the benefits of the African Continental Free Trade Area (AfCFTA).

3. Challenges remain following the end of the Fund-supported program in March 2019. Longstanding losses in the energy sector have spilled over to government financing needs. The financial sector clean-up continues to create fiscal costs, while credit to the private sector is yet to fully recover. With domestic revenue mobilization still low compared to peers, the government’s large borrowing needs are crowding out credit to the private sector and leave Ghana exposed to investor sentiment. Net international reserves remain relatively low and dependent on external government borrowing.

4. The 2019 Article IV consultation focused on strengthening institutions and policies to preserve macroeconomic stability and foster inclusive growth. The 2017 Article IV recommendations have been largely implemented or are in progress but, as indicated above, work remains to contain risks to macroeconomic stability (Annex I). Given its outstanding exposure to the Poverty Reduction and Growth Trust (PRGT) fund, Ghana is now under Post-Program Monitoring.

Recent Economic Developments

5. Macroeconomic conditions remain favorable with strong growth, low inflation and an improved external position, although public debt continues to increase (Figure 1).

  • Growth slowed to 6.3 percent in 2018 but is expected to pick up to 7 percent in 2019, on the back of strong performance in gold production and oil and gas which should partially offset a smaller cocoa crop due to tree disease.

  • Inflation is projected at 7.8 percent by year-end based on the rebased CPI series, with Cedi depreciation and increases in utility tariffs causing an uptick in non-food inflation and food inflation expected to slow down.

  • The fiscal deficit is projected to reach 7 percent of GDP in 2019, or 4.7 percent of GDP when excluding energy and financial sector costs, owing to lower than expected revenues, frontloaded spending on government flagship programs, and unexpected security outlays reflecting emerging security challenges from the Sahel region.

  • Central government debt is expected to increase from 59 percent of GDP at end-2018 to 63.1 percent of GDP this year, driven partly by the cumulative financial sector costs of 4.6 percentage points of GDP in 2018–2019 and energy sector costs of about 1.5 percentage points of GDP in 2019. Eurobond spreads have remained stable, although large financing needs have sustained persistently high yields on the domestic market.

  • The current account is expected to remain broadly unchanged compared to 2018 at -3.1 percent of GDP, with increasing gold and oil exports offsetting higher payments to energy companies. The external position in 2018 was moderately weaker than implied by fundamentals and medium-term desirable policies (Annex III).

  • The Cedi stabilized after experiencing a volatile first quarter but has overall depreciated by 9.7 percent between end-2018 and end-October.

  • Net international reserves are projected to remain stable at about US$3.9 billion thanks in part to the US$3 billion Eurobond issued in March and other commercial and multilateral borrowing.

Figure 1.
Figure 1.

Ghana: Recent Economic Developments

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

uA01fig01

Spreads vs US 10-yr bond

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

Outlook and Risks

6. Medium-term prospects are favorable. New oil field production is expected to support medium-term growth around 5 percent. At current policies, the overall government deficit is projected to stabilize over time at about 5 percent of GDP. Inflation is expected to decline over time to 6 percent. International reserves would remain at about two months of imports but would strengthen in later years as oil and gas exports pick up. This relatively stable outcome is predicated on continued access to markets and refinancing of the large domestic and foreign public debt.

Ghana: Key Macroeconomic Indicators

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

7. The risk of debt distress rating in the Debt Sustainability Analysis (DSA) remains high. The medium-term debt path is now higher than in the March DSA, reflecting lower GDP growth in 2019 and a higher government deficit (largely due to energy sector costs) and debt service over the medium term. Public and publicly-guaranteed debt (DSA measure), including Sinohydro-related debt obligations and debt of key energy sector SOEs, is projected at 66.5 percent of GDP at end-2019 and is expected to peak at about 68 percent of GDP in 2020, gradually declining to 64 percent by 2024. The DSA rating is mainly driven by debt service to revenue exceeding the threshold throughout the forecast horizon, though all other indicators also exceed their thresholds at some point over that horizon.

8. The baseline scenario has upside and downside risks (Annex II). New oil discoveries or rapid diversification driven by the industrialization efforts could increase medium-term growth while bold reform efforts after the election, especially on domestic revenue mobilization, would improve the fiscal position. In addition, Ghana and Côte d’Ivoire, the largest cocoa producers in the world, may be successful in implementing their joint initiative to increase cocoa sale prices. Downside risks include election-related spending pressures and debt rollover difficulties, possibly driven by loss of investor confidence or a tightening of global financial conditions. Commodity prices may weaken, possibly because of a global slowdown or trade disruptions. Energy and financial sector costs could be higher than projected, e.g. due to energy sector reform delays, higher-than-expected reimbursement of depositors and/or investors, and increased costs of recapitalization of state-owned banks. Medium-term policies may weaken, undermining further macroeconomic improvements.

9. An alternative scenario considers weaker fiscal policies starting in 2020 (Figure 2). The scenario assumes that the fiscal deficit increases in 2020 in line with average fiscal slippages in the last two elections and remains above 8 percent of GDP over the medium term. A more accommodative monetary policy allows inflation to rise to double digits in 2020 and to remain thereafter above the upper bound of the inflation target. Growth is temporarily higher in 2020 due to the fiscal impulse but then falls below the baseline level due to lower investor confidence. In the scenario, the debt rises to 75 percent of GDP in 2022 and remains above 73 percent of GDP over the medium term, while gross reserves fall to one month of import coverage in 2022 before stabilizing.

Figure 2.
Figure 2.

Ghana: Alternative Policy Scenario

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

Authorities’ views

10. The authorities broadly agreed with the outlook and risks, but they were confident about Ghana’s medium-term growth potential. They were confident that the commitment to macroeconomic stability demonstrated in the last three years, as well as the institutional changes to entrench discipline and irreversibility of robust government policies including the implementation of the Fiscal Responsibility Act and the establishment of the Fiscal Responsibility and Financial Stability Councils, will allow Ghana to maintain sound policies in 2020 and beyond. They recognized that Ghana, as a major commodity exporter, is vulnerable to global market conditions, but they anticipated that the diversification brought about by the “Ghana Beyond Aid” agenda may lower these risks over the medium term. In addition, they underscored the upside risk from the ongoing reforms including the agricultural modernization and industrialization drive. They expect ongoing efforts to promote digitalization to increase the size of the formal economy, boost economic growth, reduce corruption, and expand the tax base over the coming years. The authorities felt that projections for Ghana’s international reserves should include assets held in the oil fund (about US$850 million), following the central bank’s own measure.

Policy Discussions: Delivering Macro Economic Stability and Inclusive Growth

Discussions focused on entrenching macroeconomic stability and laying the ground for the strong, sustained, and inclusive growth envisaged by the authorities’ “Ghana Beyond Aid” strategy. Staying the course on fiscal policy would confirm the authorities’ commitment to fiscal discipline and debt sustainability break the cycle of past electoral slippages, and help contain rollover risks. The BoG’s accumulation of external buffers and readiness to increase policy rates can protect the economy from shocks, while the completion of the financial sector clean-up, together with lower government borrowing needs, would allow strengthening credit to the private sector.

A. Preserving Fiscal Sustainability

Fiscal Policy

11. The authorities remain firmly committed to fiscal discipline and breaking with the pattern of high fiscal deficits observed in previous electoral cycles. The fiscal deficit increased by over 3 percent of GDP on average during the last three electoral cycles. The adoption of the 2018 Fiscal Responsibility Act, which imposes a deficit ceiling of 5 percent of GDP and requires a positive primary balance, is a strong signal of the authorities’ intention to break with the past.

12. The authorities have passed a 2020 budget that meets the fiscal rules thanks to revenue and spending measures. The 2020 budget targets a headline fiscal deficit (excluding financial and energy sector costs) of 4.7 percent of GDP and a positive primary balance. Key revenue measures include the extension of the National Fiscal stabilization levy to all firms (about 0.1 percent of GDP), the sale of telecommunication licenses (about 0.15 percent of GDP), and improvements in compliance including in the oil sector (0.2 percent of GDP). On the spending side, the budget accommodates a wage bill increase of 15 percent following negotiations with labor unions while keeping goods and services spending, including flagship program implementation, to the projected 2019 level. Based on baseline macroeconomic assumptions for 2020 and more conservative estimates of government revenues, staff projects the headline deficit at 4.9 percent of GDP, equivalent to an overall deficit of 6.4 percent of GDP. This implies a tightening of 0.6 percent of GDP compared to the projected 2019 outcome.

13. A tighter fiscal path would limit risks and improve domestic and external balances. At current policies, the overall balance is projected to stabilize around 5 percent of GDP over the medium-term, including energy sector costs. However, a more ambitious stance targeting smaller medium-term budget deficits than the baseline would place the government in a stronger position, with lower government borrowing and rollover risks, and raise buffers to accommodate contingent liabilities. A tighter policy mix would also contain domestic demand and improve the external position, resulting in a higher international reserve cover.

14. Stronger domestic revenue mobilization is key to improving the fiscal position (Annex IV). Ghana’s tax revenue to GDP remains low relative to peers (Figure 3). The “Ghana Beyond Aid” strategy envisages an increase in the tax ratio to 18 percent of GDP by 2023. While this target may be ambitious given current levels, it underscores the authorities’ focus on increasing tax revenues to create fiscal space and ensure public debt sustainability. Staff discussed possible short-term measures such as indirect taxes on financial and communication services (Annex IV). Elements of a tax revenue strategy could include: (i) extension of property taxes; (ii) development of comprehensive framework for taxation of extractive industries; (iii) reduction of exemptions through adoption of the Exemptions Bill currently in Parliament and revision of remaining exemptions; and (iv) leveraging technology to improve the taxpayer registry, interconnect the tax payment platform, and enhance the risk-based compliance system.

Figure 3.
Figure 3.

Ghana: Recent Fiscal Developments

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

Authorities’ views

15. The authorities reiterated their resolve to break the political budget cycle and to maintain the hard-earned macroeconomic gains achieved since 2017. They underlined the exceptional and strategic nature of some key spending items in 2019 such as financial sector restructuring, energy, and security, and contended that expenditure controls remained effective. For 2020, the authorities reiterated that the budget law will deliver a headline budget deficit that respects the fiscal rules, despite the increasing fiscal pressures typical of an election year. They count on the prioritization of spending programs and gains in revenue administration from the recent leadership overhaul at the Ghana Revenue Authority and automated and paperless processes at Tema port. They remain committed to improving revenue mobilization in line with their medium-term revenue mobilization strategies to create fiscal space for the implementation of the “Ghana beyond Aid” strategy, while keeping taxation at a level conducive to private sector development and robust economic growth.

Public Financial Management

16. The fiscal rules could be further strengthened (Box 1). About 2.8 percentage points of GDP in financial and energy sector costs (financed in part through ESLA bond issuance) were recorded below the line in the 2019 budget because the government considers the financial sector costs as one-off and energy costs as debt amortization. Best international practice would include these transactions above the line, as they reflect either direct government obligations or government transfers to SOEs. In addition, spending on roads (Cocobod) and potentially infrastructure collateralized on bauxite exports (Sinohydro) should be recorded in the central government budget. Finally, a formal debt anchor targeting a sustainable debt-to-GDP ratio over the medium term could effectively guide fiscal policy and reduce uncertainty about the debt trajectory.

Fiscal Rules

Ghana introduced fiscal rules in the 2018 Fiscal Responsibility Act. The Act envisages two fiscal rules: (i) the overall fiscal balance on cash basis shall not exceed a deficit of 5 percent of GDP; and (ii) an annual positive primary balance shall be maintained. Covered entities included the central and local governments, autonomous agencies, and statutory bodies. The law contains escape clauses that allow for suspension of the rules for circumstances of force majeure, severe economic shocks (including commodity price shocks), and periods when the GDP growth rate is one percent or below. If the fiscal rules are missed by more than one percentage point, parliament may pass a vote of censure on the Minister of Finance.

The President also established a Presidential Fiscal Responsibility Advisory Council. Among other functions, the council advises on how to ensure that the fiscal rules are met and that the debt to GDP ratio does not exceed the informal guideline of 65 percent of GDP. The council is composed of seven members appointed by the president and whose terms lapse with the president’s term.

National fiscal rules in African countries, 2015

(Percent of GDP; coverage is central government unless otherwise noted)

article image
Source: IMF Fiscal Rules Database.

The debt limit refers to short- and medium-term debt only. It is not binding. The limit on domestic borrowing applies to net domestic financing.

As of 2018. Applies to general government;

Annual ceiling.

While the fiscal rules are important tools to support fiscal discipline, consideration could be given possible modifications:

  • Anchor: The framework could define an additional fiscal anchor in terms of a specific debt ceiling path. About 70 percent of the countries in the IMF’s Fiscal Rules database have a debt rule, including most African countries with fiscal rules.

  • Simplification: Two operational fiscal rules could lead to confusion over the binding rule. For example, if interest expense is more than 5 percent of GDP, one rule could be met while the other is missed. Setting one formal rule and keeping other measures as indicative targets would establish a hierarchy to avoid perception of internal conflicts.

  • Flexibility: Escape clauses need to be better-specified. For instance, it is not clear if the 1 percent growth threshold applies to one quarter or one year. Furthermore, independent scrutiny is required, perhaps through parliament, before the rule is suspended.

  • Enforcement: When rules are breached, corrective measures could be required.

  • Reporting: The requirement for the Minister of Finance to provide quarterly reports to the cabinet on rule compliance is good practice, but the reports should also be published.

  • Fiscal council: As experience is gained with the fiscal rules, it may be beneficial for the advisory council to evolve into an entity with legal and operational independence from the executive branch.

17. The PFM law and guidelines have established a framework for sound public financial management. The ongoing roll-out of the regulations implementing the 2016 PFM law, developed with Fund assistance, has required important reforms, including deploying revamped systems for financial management (GIFMIS), audit management (AMIS), human resources management (HRMIS), and establishing the Treasury Single Account (TSA). However, project investment management (PIM) is not fully effective yet, including GIFMIS only reflecting the current year expenditure allotment for multiyear projects.

18. The State Interests and Governance Authority Act (SIGA) has created an entity to oversee corporate governance in public corporations. Effective oversight will require financial reporting from SOEs as determined under the PFM regulations, developing a Code of Corporate Governance and operational guidelines, and implementing a robust enforcement mechanism. These efforts would enhance governance and complement the authorities’ efforts to further improve the flagship SOE report.

19. A public sector balance sheet (PSBS) could improve management of government assets and risks.3 Developing a PSBS could draw attention to the substantial financial and non-financial wealth held by the public sector and encourage more efficient and effective use of public resources, including natural resources. A PSBS can also facilitate management of fiscal risks emanating from all public sector entities, including SOEs.

Public Debt Management

20. Public debt is increasingly market-based (Figure 4). In 2019, almost 80 percent of the gross financing needs estimated at 16 percent of GDP will be financed on the domestic and international markets. Nine outstanding Eurobonds make up for about 26 percent of external debt. The share of outstanding domestic debt held by foreign investors has declined in 2019 but remains at about one-third. Off-budget operations, including ESLA, Sinohydro, and GETFund, contribute to public debt but their decentralized and not always transparent nature complicates oversight and management of public financing, raising the scope for corruption.

Figure 4.
Figure 4.

Ghana: Recent Debt Developments

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

Ghana: Central Government Debt Structure

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Source: Ministry of Finance

21. Debt management in 2020 should remain flexible in light of the uncertain global environment. The authorities have succeeded in lengthening the debt maturity, deepening the domestic debt market, and tapping international capital markets. The coming year will likely test Ghana’s debt management skills. The Ministry of Finance (MOF) may want to consider international issuances in advance of maturity dates to distribute financing pressures, lower the average effective interest rate, and support international reserves. Liability management operations should aim to smoothen the domestic redemption profile going towards the elections, to limit refinancing risks and increasing buffers. Transparent, regular, and consistent market communication, including improved coordination and visibility of debt issuance across government entities, would also facilitate the management of possible turbulence.

Authorities’ views

22. The authorities are confident that the new fiscal framework will ensure “irreversibility” of reforms to sustain fiscal discipline, though there is room for improvement. They pointed to predictability introduced by the PFM Act in the budget process and to the improved accountability along the expenditure chain with the use of GIFMIS, including budget execution units in MDAs and MMDAs. The authorities also highlighted that the Fiscal Responsibility Law has crystalized discussion around a fiscal deficit below 5 percent of GDP as opposed to much higher targets in the past. In their view, the new fiscal framework, supported by Cabinet, has changed both expectations and behaviors of the main stakeholders in the PFM space. They underlined the significant progress in debt management, including efforts to extend maturities and develop the yield curve. They agreed on the urgency of coordinating debt issuance across government entities to contain fiscal risks and ensure fiscal sustainability.

B. Strengthening Monetary and Exchange Rate Policies

23. With inflation close to target and inflation expectations anchored, the monetary policy stance seems appropriate (Figure 5). The end of monetary financing, supported by a Memorandum of Understanding (MoU) between the MOF and the BoG (which remains in effect through 2020), contributed to a significant reduction in inflation. This allowed a normalization of monetary policy, with the MPC lowering the policy rate to 16 percent in January and keeping the rate unchanged since then. In September, the authorities released a rebased CPI that points to substantially lower inflation, partly due to the expanded coverage of the CPI basket and smaller price increases in discretionary non-food categories. In addition, inflation expectations remain aligned with the central bank’s target, and short-term real rates are above the historical average. This context suggests that the current policy rate is appropriate. The MPC should remain cautious as inflationary pressures could re-emerge, and a relatively tight stance may help stabilize the exchange rate and reduce FX interventions.

Figure 5.
Figure 5.

Ghana: Recent Monetary Developments

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

24. Over the medium term, the authorities could revisit the current inflation target. Ghana’s current inflation target range of 8±2 percent is relatively high compared to SSA peers such as Kenya (5±2.5 percent), South Africa (3–6 percent) and Uganda (5 percent), and also relative to its trade partners. If inflation remains below or close to target, it may be appropriate to adopt a lower target over the medium term, provided that this change is carefully implemented and communicated. Coordination with fiscal policy would also be key, including to ensure that a lower target and related tightening of money supply would not crowd out private-sector credit.

25. The authorities are taking steps to strengthen the IT framework and the FX market, which continues to be dominated by BoG transactions. With international reserves stable in 2019 largely thanks to foreign borrowing, it remains crucial to reduce FX interventions by applying the new rule-based FX intervention policy, which could help build stronger external buffers. The authorities are promoting more market-based FX transactions, including by conducting their first forward auctions in October. These auctions may help mitigate exchange rate volatility, although they create a net open position for the central bank that must be carefully managed.4 The BoG has also introduced new repo guidelines, which will help develop the interbank market.

Authorities’ views

26. The authorities agreed with the need to maintain price stability and build external buffers. While they shared staff’s outlook for inflation and monetary policy stance, they also felt that a lower policy rate could have been warranted if the fiscal position had been stronger and less dependent on non-resident domestic financing. In their view, the inflation target could be lowered over the medium-term to maintain competitiveness against trading partners and in line with ECOWAS criteria, but always in coordination with government’s medium-term macroeconomic framework. The authorities also believe that stronger FX buffers compared to previous years leave them better positioned to address potential adverse shocks going forward. The authorities considered that their limited FX interventions were consistent with inflation targeting and building international reserves and did not impede the development of the FX interbank market.

C. Delivering Sustained and Inclusive Growth

Growth Strategy

27. The Ghana beyond Aid strategy aims to accelerate growth through an agricultural modernization and industrialization drive (Box 2 and SIP). While Ghana has experienced strong growth in recent decades, this has been increasingly driven by the extractive sector, with the effect that growth has become less inclusive (Figure 6). In response, the authorities are promoting a development strategy based on expanding manufacturing and agriculture productivity, exploiting Ghana’s perceived comparative advantages in agro-processing and heavy industries like aluminum, steel and petrochemicals. Economic diversification will also help mitigate risks of Dutch disease linked to a growing reliance on commodity exports and broaden the tax base.

Figure 6.
Figure 6.

Ghana: Economic Growth and Living Standards 1990–2018

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

28. The authorities are also addressing supply-side constraints through structural reforms that encourage formalization and digitalization. These include the ongoing digitalization of tax and judicial procedures, the introduction of unique digital addresses for every location across the country, and an increasing role of mobile money operators and microfinance lending. Streamlined customs procedures at the revamped Tema port create opportunities to attract additional trade flows, especially given the recently established AfCFTA.

29. Progress in social outcomes has also relied on flagship government programs, which will have to become more targeted as Ghana develops. Public programs such as the National Insurance Health Scheme, the Free and Compulsory Universal Education, and the Free Senior High School have contributed to major improvements in health and education, especially among women. However, income and regional inequality remain a concern with weaker access to basic services and higher unemployment and poverty in the northern regions compared to more urban regions near the Accra-Kumasi-Takoradi triangle. Addressing these inequalities requires more targeted and means-tested social interventions that can deliver improvements while minimizing budget costs.

Diversification Through Industrial Policy

Ghana aims to diversify its economy away from exports of raw material—cocoa, gold, and, increasingly, oil and gas. To boost local value-addition, the government has deployed the One District One Factory (1D1F) program, which seeks to facilitate the establishment of at least one factory in each district, and the One Region One Industrial Park (1R1P) program, targeting one industrial park in each of the 13 regions (including six new regions). These programs seek to attract private investment through tax breaks and subsidized credit.

Ghana’s export-led approach could benefit from the AfCFTA, though overcoming nontariff barriers is crucial. Unlike Africa’s exports to the rest of the world, intraregional trade flows in Africa are relatively more diversified and contain higher value-added goods. At only 12–14 percent of total imports, and around 10 percent for Ghana (2018), intraregional trade has ample room to expand. Initiative such as the PPP-financed port expansion in Tema, featuring paperless clearance system, stand to tackle nontariff barriers by improving turnaround time of cargo, transparency, and ease of doing business.

The authorities’ approach relies on tax incentives and strategic collaboration in targeted industries. The package of incentives available to investors typically includes duty-free imports of equipment and raw material, tax holidays of between 5 to 10 years (including corporate income tax), and subsidized rents. The government is relying on the G20 Compact with Africa and bilateral relations to build collaboration with the private sector. In the 1R1P, the collaboration aims at aligning infrastructure provision and agglomeration economies to spur industrial growth, especially outside of the dominant coastal belt of Ghana. The government also facilitates access to credit through subsidized loans under the 1D1F program.

Ghana’s industrial policy can complement efforts to “level the playing field” across firms, but it should carefully balance domestic revenue mobilization needs. Cross-country experience suggests that industrial policies that foster competition in a sector can improve productivity growth. This would involve eliminating excessive regulations and distortions, such as barriers to entry or access to credit. More generally, efforts to improve the business environment, physical connectivity, and reduce electricity costs would also complement Ghana’s diversification agenda. Given the limited fiscal space and debt vulnerabilities, it is important to carefully manage spending and tax expenditures to promote industrialization, especially if perspectives of profitable ventures are limited. Empirical evidence shows that there is often ample room for more effective and efficient use of investment tax incentives in low-income countries, including through good governance. Their fiscal costs should be reviewed annually as part of a tax-expenditure review.

Authorities’ views

30. The authorities agreed with staff on the need to sustain inclusive growth. They see “Ghana beyond Aid” as an ambitious but achievable national transformation strategy to provide opportunities, jobs, and prosperity to all Ghanaians. They believe their ongoing reform agenda, especially digitalization, can turn Ghana into one of the most business-friendly countries in Africa as well as dramatically improve public service efficiency and delivery. They underlined that diversification through export competitiveness, productivity increases, and technological upgrading will result in a competitive and more resilient economy. They noted the importance of modernizing agriculture to continue improving livelihoods, especially in rural areas, and reduce food imports through import substitution.

Reforming the Energy Sector

31. Fiscal risks from the energy sector have started to materialize. Power sector arrears were about US$2.7 billion in late 2018, of which US$800 million was owed to private fuel suppliers and independent power plants (IPPs). For 2019, the authorities project the financing shortfall for the sector to be at least US$1 billion (1.5 percent of GDP), which they plan to partially finance off budget. Partial payment arrangements may be insufficient to stave off more formal approaches by IPPs to collect amounts due. Absent measures to address the sector’s financial problems, the accumulated cost to the government, including current arrears, could reach US$12.5 billion by 2023, driven by a power sector structural deficit and costly LNG contracts set to become effective in 2020. Moreover, the termination of a concession to run the southern electricity distribution network to private operator PDS over fraud allegations is a setback to reducing distribution losses.

32. The authorities are taking steps to move the energy sector toward financial health. In addition to recent increases in electricity tariffs, the authorities have developed a multiyear Energy Sector Recovery Program (ESRP) with assistance from the World Bank (Box 3). The ESRP contains a series of measures to be implemented over the next five years which would bring greater balance between Ghana’s power and gas supply and demand. With these measures, staff estimates that annual energy sector payments in the budget would average about 1 percent of GDP.

Authorities’ views

33. The authorities expressed their commitment to implement the ESRP. As part of this plan, they have already: (i) adjusted utility tariffs upwards; (ii) relocated a mobile power plant to exploit existing gas; (iii) deferred or cancelled some imminent power projects; and (iv) commenced a collaborative consultation process with IPPs and gas producers to modify the contract terms to address an unwarranted liability for the government and excess capacity structured on a take or pays basis. In their view, the status quo is not sustainable and threatens Ghana’s fiscal sustainability.

Energy Sector Challenges

The energy sector financial problems are rooted in excess power capacity and gas supply. Dependable power generation capacity of about 4,600 MW exceeds peak demand load by 70 percent. Under take-or-pay contracts with IPPs, Ghana pays about US$500 million annually for power generation capacity that it does not use. This oversupply stems from the response to the 2014 energy crisis, when the government contracted emergency power generation to keep the lights on. Limited coordination across government agencies led to further contracting of generation capacity well beyond existing demand. Ghana has also contracted for the supply of 750 mmscf of gas per day by 2023 including the importation of large quantities of LNG, while demand is projected to reach about 450 mmscf per day.

Other structural factors also contribute to the sector financial woes. These include nonpayment of utility bills by government entities, which comprise 40 percent of outstanding arrears in late 2018, technical and commercial electricity losses, and the large reduction in regulated electricity tariffs in 2018. To date, the main power sector SOEs—VRA (power generation), Gridco (transmission), and ECG (distribution)—have borne the brunt of the sector’s financial difficulties in the form of arrears, underinvestment, and financial losses.

Cabinet has approved a comprehensive plan to restore the energy sector to financial health. The launch of an Energy Sector Recovery Program (ESRP) in May was an important first step to improve the situation. Steps taken to implement the ESRP include: (i) reducing the domestic gas price; (ii) relocating the Karpower generation plant and establishing reverse gas flow through the West African Gas Pipeline to absorb domestic gas production in the west; and (iii) starting the renegotiation of expensive power generation contracts. The MoF has also began paying directly some energy bills and netting these payments against the amounts owed by the public electricity distributor ECG. Moreover, the regulator raised regulated electricity tariffs 11 percent in July 2019 and another 5 percent in October. Other pressing measures include: (i) establishment of a competitive process for energy supply and service contracts and a moratorium on unsolicited proposals; (ii) addressing the oversupply of gas (e.g. LNG contracts); and (iii) government payment for street lighting.

Implementation hurdles will need to be overcome. The ESRP complements other efforts of the authorities to improve the energy sector’s finances and operations. The authorities have issued bonds through a special purpose vehicle (ESLA plc) to clear some of the SOE legacy debts to banks and suppliers. In March, PDS, a private company, took over ECG’s distribution operations under a concession arrangement. Key objectives were to improve collections and reduce losses. However, the government terminated the concession in October over allegations of fraud.

Completing the Financial Sector Clean-Up

34. Banking sector performance is improving as the supervisory and regulatory framework is tightened (SIP). Banking sector capitalization has increased steadily since the previous Article IV Consultation and profitability is trending upwards, supported by interest income from government securities. However, the decline in the stock of nonperforming loans (NPL) during 2017–2018 did not continue in 2019, with the NPL overhang still hovering around 2 percent of GDP as implementation of the BoG’s strategy for reducing NPLs remains in train.5 Performance of non-banking institutions is mixed, with persistent underwriting losses for the insurance industry and signs of distress for fund managers. More rigorous licensing and ongoing supervision, proactive early intervention and ongoing regulatory enhancements—more advanced for the banking sector than for non-banks— remain critical to prevent recurrence of financial sector problems.

35. The authorities are forging ahead with the financial sector restructuring, but additional risks are materializing. Following license revocation for more than 400 SDIs between May and August 2019, upfront reimbursement of small depositors (up to a cap of GHc 20,000) is ongoing. However, preliminary data suggests that the deposit base may be larger than expected, posing additional risks to the budget. Staff estimates SDI reimbursement costs at 0.6 percent of GDP, on top of 3.3 percent of GDP for the banking sector clean-up. Additional costs may stem from the possible compensation of investors of distressed fund managers following the license revocations by the Securities and Exchange Commission (the budget portion of which is estimated by staff at 0.5 percent of GDP for 2020); ongoing litigation linked to the clean-up; contagion risks stemming from cross-sectoral exposures (e.g., banking sector exposures to failed SDIs and distressed fund managers); and the recapitalization of a state-owned bank. The substantial increase of estimated capital needs for this bank underscores the urgency of finding a solution that minimizes taxpayer costs.

36. The BoG’s balance sheet will need to be shielded from further losses and strengthened over time. Operating losses in 2017 and 2018—mainly due to the impairment of uncollateralized loans to commercial banks—have weakened the BoG equity position6 and recoveries from the various receivership operations are only slowly materializing. Retaining earnings, strengthening the ELA framework, and translating the provisions of the MOF-BoG MOU provisions into legislation would be key steps to improve the BoG’s balance sheet.

37. Access to credit remains a bottleneck to sustained economic growth (Figure 7). Private-sector credit has remained around 12 percent of GDP since 2015, which is low compared to the SSA median of 16 percent of GDP, suggesting potential for financial deepening. However, credit growth is still hampered by high NPLs that continue to burden banks’ balance sheets. At the same time, banks find it safer and lucrative to buy T-bills or place excess liquidity at the central bank. High operating costs are also a drag to financial intermediation. As a result, bank lending rates have not fully responded to the sizeable reduction in funding costs, contributing to tepid private-sector credit growth.

Figure 7.
Figure 7.

Ghana: Private-Sector Credit Developments

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

38. Tighter supervision can help ensure durable improvements in financial sector governance. The introduction of new regulatory standards on corporate governance can help counteract potential insider abuse and create a stronger risk culture in the financial sector. Still, effectiveness will depend on enhanced supervisory scrutiny of banks’ internal governance and risk management; assessment of shareholder suitability and fitness and propriety of directors and key management personnel; and review of banks’ frameworks to manage related-party transactions.

Authorities’ views

39. The authorities felt that the financial sector was well on its way to recovery. They believe that the reforms over the past years have been successful in improving banking sector resilience, as evidenced by improved financial soundness indicators, and will contribute—together with further innovation in nonbank credit channels—to lower lending rates and a rebound in credit to key sectors. However, they remain committed to complete the ongoing reimbursement of depositors of defunct SDI as quickly as possible and address residual pockets of vulnerability in the securities industry, with the aim to buttress confidence and transform Ghana into a financial hub in West Africa.

Business Environment, Governance, and Corruption

40. Rapid economic growth has been accompanied by an improving business environment, though Ghana still faces governance challenges. Ghana compares favorably to other Sub-Saharan Africa economies in the latest Doing Business report, scoring well in dimensions like starting a business, access to credit and electricity and protecting minority investors, but having room to improve on other categories such as resolving insolvency, trading across borders, and paying taxes. The country also fares well in the region in terms of control of corruption and anti-corruption institutions, according to Transparency International, but needs more effort on reducing bribery.

uA01fig02

Ghana: Doing Business 2020

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

41. Ghana has the basic legal and institutional architecture in place to combat corruption, but important gaps exist. A National Anti-Corruption Action Plan was developed in 2014 to improve corruption prevention and enforcement. Implementation of the Action Plan is monitored by the Commission on Human Rights and Administrative Justice (CHRAJ), which receives yearly reports from relevant stakeholders; however, the last report was published in 2017. Ghana also has in place a system of asset declarations for public officials, although declarations are sealed and not opened outside of an investigation or verified. Some gaps remain in Ghana’s legal framework criminalizing corruption, e.g., illicit enrichment and various elements of the bribery offence. Several bodies are involved in corruption enforcement, including the Economic and Organized Crime Office (EOCO), the CHRAJ, the Office of the Special Prosecutor, and the Attorney General’s Office. Inconsistent coordination among these bodies may be one cause for delays in court cases and difficulties in securing convictions.

42. Ghana has been a member of the Extractive Industries Transparency Initiative (EITI) since 2007. Ghana’s gold and diamond industries are vulnerable to corruption, but Ghana has taken steps to improve transparency in the management of its natural resources. The latest validation of Ghana efforts to comply with the EITI standard occurred in August 2017.

43. The authorities are taking steps to exit the Financial Action Task Force’s (FATF) designation as a jurisdiction with strategic anti-money laundering and terrorism financing (AML/CFT) deficiencies. Recent progress has been aimed at improving the AML/CFT legal and supervisory frameworks. The government has developed draft legislation on non-profit organizations and the real estate sector and launched efforts to develop a risk based supervisory framework for dealers in precious metals and stones and real estate intermediaries. Amendments to the AML Act would need to be in line with FATF standards, including appointment of supervisors with adequate powers for the designated non-financial businesses and professions, in addition to development of capacity, which remains low across regulatory authorities. A beneficial ownership register is under development and is expected to be operational by June 2020, although funding challenges have resulted in delays. Effective monitoring of correspondent banking relationships (CBRs) would be important, although CBRs in Ghana have not been affected so far.

Authorities’ views

44. The authorities pointed to the ongoing efforts to improve governance and anti-corruption practices and framework. They underscored the bold decisions made to improve good governance, including the appointment of an opposition party member as the head of the Office of the Special Prosecutor and the independence given to anti-corruption institutions. They fully agree with the importance of well-funded anti-corruption agencies and stressed the 25 percent increase in allocation to these agencies in 2017 and 34 percent in 2018. The authorities also underlined their collaboration with FATF and GIABA to strengthen the AML/CFT regime and expressed confidence that the requirements of the Action Plan to exit the “grey list” will be met.

Staff Appraisal

45. Since 2017, the authorities have made remarkable progress in macroeconomic stabilization and have advanced structural reform. The authorities managed to enforce fiscal discipline after large slippages and bring inflation under control through stronger central bank credibility, while improving the external position. The BoG has pushed ahead with the comprehensive restructuring of the financial sector and with regulations designed to prevent the build-up of future problems. The government strengthened public financial management and debt management, tightened monitoring and controls over the public sector, and reinforced anti-corruption institutions. These policies have supported continued high growth.

46. The authorities have also launched an ambitious vision of a self-reliant Ghana that would achieve upper middle-income status over the next decade. The “Ghana beyond Aid” agenda aims at developing industries with export potential that can capture a larger portion of the value chain, thereby spreading sources and benefits of growth. Realization of its upside potential will depend on maintaining a stable government strategy over the political cycle and prioritizing government support given existing fiscal constraints.

47. However, downside risks remain. Macroeconomic stability needs to be fully entrenched, also in the face of possible external shocks. The 2020 elections could create fiscal pressures, which may be heightened by contingent liabilities in the financial sector restructuring and the energy sector. As highlighted by the DSA’s high risk rating, still-rising public debt continues to represent a key challenge, as it crowds out private sector credit, compresses fiscal space, and generates rollover risks. However, these risks can be managed through policy action.

48. Fiscal performance and public debt. The government has made a strong commitment to maintaining fiscal discipline. Next year presents an opportunity to break the political budget cycle observed in the past by leveraging the provisions of the Fiscal Responsibility Act. A strong, credible budget combined with consistent debt management would contain rollover risk. Stronger fiscal consolidation compared to the baseline, centered on a comprehensive revenue mobilization strategy, would be critical to better anchor debt dynamics, contain large financing needs, create buffers for contingent liabilities, and support the external position through domestic demand management. Phasing out off-budget operations and avoiding new collateralized borrowing would help reduce public debt and improve fiscal transparency.

49. Energy sector. Implementing the ESRP in coordination with the World Bank and key stakeholders, including by implementing the automatic pricing formula for electricity tariffs and reinstituting private sector participation, is crucial to limit costs to the government and to the public. Clarity in government support to the sector, e.g., through direct, non-offsetting, government transfers to ECG, is needed to improve transparency and accounting of financial flows.

50. Financial sector. Completing the clean-up is the main priority, paying attention to the financial implications for the government budget, e.g., through strict observance of upfront reimbursement caps. Other priorities include pursuing options to address protracted weaknesses of a state-owned bank, based on robust analyses of “least cost” options; accelerating measures to reduce the NPL overhang; completing regulatory reforms, and stepping up recovery of funds from complicit directors and shareholders of failed institutions.

51. Monetary policy is appropriately focused on maintaining price stability. It is important to tighten policy if signs of inflationary pressures materialize. Over the medium term, the authorities may consider lowering the inflation target band in line with other IT countries in the region, in coordination with fiscal policy. Given the risks, the BoG would be well advised to increase external buffers, relying on its FX intervention strategy to find a balance between reserve accumulation and FX intervention. Amendments to the BoG Act aimed at entrenching the monetary financing limits put in place by the MOF-BoG MoU, due to expire at end-2020, are needed as part of an effort to protect and strengthen the BoG balance sheet and support the inflation targeting framework.

52. An anti-corruption framework is in place, but its implementation could be improved. The authorities are encouraged to bring the legal framework in line with the United Nations Convention Against Corruption (UNCAC) and improve its ability to pursue criminal cases of corruption and recover proceeds. Enhancing the capacity of law enforcement and prosecutorial bodies and ensuring clarity in their roles and responsibilities would also increase the effectiveness of the anti-corruption regime.

53. The Fund stands ready to assist Ghana to implement its ambitious structural reform program through Capacity Development (CD) (Annex V). Thanks to intensive CD, Ghana has made gains on public financial management and banking supervision, although support on revenue and customs administration has yet to translate into higher tax revenues. In the post-program environment, CD will continue to play a central role in Fund engagement.

54. It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2017–24

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

The CPI was rebased in September 2019. The historical figures reflect assumptions by IMF staff, and will be revised once an official historical linked series is available.

Including public enterprises.

Excludes discrepancy.

Includes Energy Sector Levy Act bond.

Table 2a.

Ghana: Summary of Budgetary Central Government Operations, 2017–24

(GFS 2001, Cash Basis, Percent of GDP)

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

Revenues in staff’s presentation differ from those of the authorities as staff reports revenues net of retentions of the revenue agency.

Payments of cash arrears and promissory notes to statutory funds.

Includes change in overdraft (negative balances).

Includes onlending to SoEs using the proceeds from issuance of the Energy Sector Levy Act bond.

Table 2b.

Ghana: Summary of Budgetary Central Government Operations, 2017–24

(GFS 2001, Cash Basis, Millions of GHc)

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

Revenues in staff’s presentation differs from those of the authorities as staff reports revenues net of retentions of the revenue agency.

Payments of cash arrears and promissory notes to statutory funds.

Includes onlending to SoEs using the proceeds from issuance of the Energy Sector Levy Act bond.

Table 2c.

Ghana: Summary of Budgetary Central Government Operations, 2017–24

(GFS 2001, Commitment Basis, Percent of GDP)

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

Revenues in staff’s presentation differs from those of the authorities as staff reports revenues net of retentions of the revenue agency.

Includes deferred wage payments.

Includes onlending to SoEs using the proceeds from issuance of the Energy Sector Levy Act bond.

Reflects net change in stock of arrears and unpaid commitments.

Table 2d.

Ghana: Summary of Budgetary Central Government Operations, 2017–24

(GFS 2001, Commitment Basis, Millions of GHc)

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

Revenues in staff’s presentation differs from those of the authorities as staff reports revenues net of retentions of the revenue agency.

Includes deferred wage payments.

Includes onlending to SoEs using the proceeds from issuance of the Energy Sector Levy Act bond.

Reflects net change in stock of arrears and unpaid commitments.

Table 3.

Ghana: Monetary Survey, 2017–24

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

Include public enterprises and local governments.

Including valuation and Open Market Operations (OMO),

Excludes foreign currency deposits.

Includes foreign currency deposits.

Table 4.

Ghana: Balance of Payments, 2017–24

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

The Fund’s disbursements to be used for budget support are included after 2017.

Includes foreign encumbered assets and oil funds.

Excludes foreign encumbered assets and oil funds.

Table 5.

Ghana: Financial Soundness Indicators

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Source: Ghanaian authorities.
Table 6.

Ghana: Monitoring Progress towards the Sustainable Development Goals

(Percent, unless otherwise indicated)

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Sources: UN SDG Indicators Global Database; World Development Indicators, and national authorities. Sub-Saharan Africa includes Sudan. Latest values are for 2015 or later.

Annex I. Recommendations of the 2017 Article IV Consultation

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Annex II. Risk Assessment Matrix (RAM)1

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Annex III. External Sector Assessment

The external position in 2018 was moderately weaker than implied by medium-term fundamentals and desirable policies reflecting low FX reserves and persistent exchange rate pressure.

article image
uA01fig03

Current Account (%GDP): Actual, Fitted, and Norm

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

1. Ghana’s external assessment presents a complex picture. While the EBA-lite model assesses the current account and the exchange rate as broadly in line with macroeconomic fundamentals and macro policies, downward pressure on the exchange rate and international reserves point to an external imbalance.

  • According to the EBA-lite model, the REER was broadly in equilibrium in 2018. The current account deficit of 3.1 percent of GDP was lower than the deficit norm of 4.1 percent of GDP (CA-Norm in Box Figure 1) estimated by the model on the basis of macro-economic fundamentals and desirable policies.1 This implies an undervaluation of the REER of about 3 percent, based on an elasticity of -0.25 percent used in the model.

  • The nature of Ghana’s economy and the persistent pressure on the exchange rate and international reserves however point to a weaker external position than the one predicted by the EBA-lite mode. The model results should be taken cautiously given Ghana’s natural-resource export intensity and the poor potential for import substitution, in the absence of a substantial domestic manufacturing sector, which limit the responsiveness of the CA to exchange rate movements. Furthermore, net international reserves declined by one percentage point of GDP in 2018 despite large external borrowing, as the authorities intervened to prevent a sharp depreciation of the national currency. The pressures continued in 2019 with reserves remaining broadly stable despite a US$3 billion Eurobond issues. Despite regular BoG interventions the national currency depreciated by 13 percent since the beginning of 2019.

  • Expansionary fiscal policies and FX interventions are contributing to the CA deficit. The model estimates the drag from deviation of government budget deficit (compared to the 5-year deficit target) and FX intervention (compared to zero intervention) at 3.25 percentage points of GDP (CA-Norm in Box Figure 1).

  • The foreign exchange reserve level remains relatively low. Gross international reserves stood at 2.7 months of imports in 2018, lower than the 3-month rule-of-thumb benchmark and the norm of 3.6 months estimated by the model for resource-rich LICs with a flexible exchange rate (Box Figure 2). The authorities’ definition of reserves is higher as it includes additional assets such as oil funds that may not meet the requirement of being readily available used in staff’s definition. Reserves are projected to remain below both benchmarks over the medium term. This low level of reserves would seem to point to an overvaluation of the exchange rate given the central bank’s FX intervention policy.

uA01fig04

Ghana: Real Exchange Rate

(June 2012 = 100)

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

uA01fig05

Reserve Adequacy

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

Annex IV. Improving Domestic Revenue Mobilization

Tax revenues have been structurally low in Ghana. In recent years, the government has focused on tax administration. Launching a comprehensive strategy to ramp up tax collection through a revision of both tax policy and administration should be a priority over the medium term.

1. Growth in total government revenues as a percent of GDP has slowed down from 2008 to 2018. Government revenues have stagnated since 2015 because of lower grants and weak tax collection. With Ghana experiencing rising income and achieving frontier market status, grants have dropped from 2 percent of GDP in 2008 to 0.3 percent of GDP in 2018. Non-tax revenue increase driven by oil related revenues mitigated the fall in grants and weak tax collection.

uA01fig06

Government revenue compostion over the last decade

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

2. Tax-to-GDP ratio in Ghana has persistently been low compared to its peers in SSA. On average over the last two decades, the tax ratio in Ghana has remained around 12.8 percent of GDP below the SSA average of 15 percent. In 2018, Ghana ‘s tax revenue was around 7 percentage point of GDP below the tax frontier (see May 2018 SSA REO, Chapter 2). Ghana ranks only in the second lowest quartile in SSA region and in the lowest quartile among its middle-low-income peers in SSA, which averaged 16.9 percent of GDP in 2018.

uA01fig07

Low middle income SSA countries--Taxation ratio (Percent of GDP)

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

3. The low tax ratio has been driven by declining personal income taxes and VAT. Personal income tax increased from 1.3 percent of GDP in 2008 to 2.2 percent of GDP in 2012, before falling to 2 percent of GDP in 2018. Similarly, VAT rose from 2.6 percent of GDP in 2008 to 3.1 percent of GDP in 2015 before dropping to 2.3 percent of GDP in 2018. Sustained rise in the corporate tax, which more than doubled from 1.3 percent of GDP in 2008 to 2.8 percent of GDP in 2018, helped to mitigate the underperformance of VAT and personal income tax. Trade taxes slightly increased by 0.1 percent point of GDP to 1.9 percent of GDP in 2015 from 2008 and have stagnated at 2 percent of GDP since 2015.

uA01fig08

Trends in main taxes

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001

4. Since 2016, the government has tried to tackle revenue performance mainly through tax administration reforms. The Ghana Revenue Authority (GRA) has made progress in reestablishing a governance framework through changes and training in the top and middle management, and a shift from a pure paper-based system to an integrated tax administration system (ITAS). The GRA also fully deployed the TRIPS system in all domestic tax offices across the country. Other efforts remain work in progress. In April, the government submitted to the parliament an Exemptions Bill that seeks to rationalize and improve the management of tax exemptions of about GHc 500 million. With technical assistance from the Fund, the GRA also aims to develop and implement a risk-based compliance strategy to improve revenue administration of the extractive industries. Moreover, the government prepared a draft revenue administration bill that expands the requirement of contracts to produce tax clearance certificates as part of the tendering process.

5. The government has also removed many existing taxes. The high-income tax bracket and the luxury vehicle tax, two of the four taxes introduced to meet fiscal targets under the IMF program in 2018, were removed in 2019. From 2016 to 2017, with the objective to attract private investment, the government has removed more than a dozen taxes, namely: special import levy on raw material and machinery, VAT on financial services, on domestic tickets, on imported medicines, on sale of real estate, lotto stakes, tax on securities gains, on corporate income for private medical universities, on minimum wage, on young entrepreneurs, levy on electrification scheme and public lighting, and a special ad valorem tax on petroleum products. Recently, the government has cut the import benchmark tariffs by 50 percent in 2019.

6. In the short term, the government can consider a menu of revenue measures that could immediately yield up to 0.8 percent of GDP. New taxes could yield 0.25 percent of GDP, while compliance could bring around 0.5 percent of GDP. New taxes that can expand the taxable base include: a VAT of 17.5 percent on financial services; a tax increase on communication services from 9 percent to 12 percent; the expansion of the national fiscal stabilization levy on all firms; the minimum chargeable income; and the reintroduction of the high-income tax rate of 35 percent. Urgent tax revenue administration measures could focus on reviewing the import duty benchmark— which has not generated the expected increase in imports through trade diversion to Ghana ports— and collect around half of the tax liability of around $800 million in the oil sector in 2020. Achieving the latter would require fostering the auditing capacity of the tax authority.

7. In the longer run, domestic revenue mobilization could yield more than 2 percent of GDP, focusing in the following areas. Tax policy reform could focus on mining taxation and exemptions. Measures in mining and petroleum should mainly consider a comprehensive review of the mining legislation and fiscal regime applicable to all future contracts; unifying various laws into a single extractive industry legislation. The exemption bill, submitted in Parliament, does not address several tax expenditures which could be considered for further streamlining. Specifically, efforts should target non-standard VAT, custom duty exemptions on imported supplies and domestic sales, particularly on cereals, vehicles, cocoa, sugar, wood, and oil. Tax administration should focus on the adoption of the draft Compliance Risk Management Strategy (CRMS) regarding filing, arrears; the payments and reporting with focus on large taxpayers; the cleanup of the registry for Taxpayer Identification Number (TIN) through the use of technology; interconnecting the tax payment platforms; information sharing and data cooperation between GRA and other government agencies to undertake risk and compliance analysis and identify discrepancies; address delays and back-log of unassessed returns.

8. Increasing tax revenues would require continued technical assistance. The IMF has provided extensive assistance by FAD to Ghana over the last five years. Yet, the needs for further technical assistance remain, particularly in the areas of GRA management, compliance, firms’ auditing, post audit debt recovery, strengthening legal framework for contract in the mining and petroleum sector, and assessing potential revenues from existing mining and oil contracts.

Annex V. Capacity Development Strategy

With the end of the ECF program, Capacity Development (CD) stands to play a central role in the policy dialogue with Ghana. Consolidating gains made under the program remains a priority for the authorities. CD will target the most critical areas to the risk and vulnerabilities identified in surveillance, but also balance emerging demands with the backlog of TA recommendations.

Background

1. CD has been an integral part of the successes achieved under the ECF-supported program with Ghana. The authorities have achieved significant macroeconomic gains under the program from a challenging start in 2015. Along the way, Fund policy advice was backed by an extensive TA program, among the largest in AFR. Specifically:

  • To entrench fiscal discipline, the government has passed the Public Financial Management Act in 2016 and its regulations in 2019 and lay a Tax Exemption Bill in Parliament in 2019. It also created and operationalized a fiscal risk unit. FAD TA supported all these efforts.

  • Better debt management has succeeded in lengthening the debt profile and reducing rollover risks. Debt management capacity has been supported by extensive MCM TA focused on deepening the domestic debt market and strengthening the medium-term debt strategy.

  • The authorities have addressed weaknesses in the banking sector with the resolution of nine banks and the approval of three bank mergers, and the issuance of new regulatory directives on governance. MCM TA on bank resolution was instrumental in preparing the restructuring and helped prepare the Bank of Ghana for subsequent resolutions. In addition, input from a resident advisor and supplementary peripatetic short-term expert missions have buoyed efforts to align the regulatory framework with (pillar 1 of) the Basel II/III framework.

2. However, progress in CD has been uneven. For example, progress in revenue administration has been particularly slow despite extensive support. Also, TA recommendations remain largely outstanding for risk-based supervision and financial stability.

Priorities

3. With the end of the ECF, Capacity Development (CD) stands to play a central role in Fund engagement. Ghana is an intensive user of IMF CD and a leading recipient of Fund training among Fund members since 2014. With the help of Fund CD, the country made important gains on public financial management and banking supervision over the last few years, but CD support on revenue and customs administration has yet to translate into improved domestic revenue mobilization. Going forward, consolidating gains made under the program remains a priority, while also accommodating emerging needs.

4. With regard to fiscal CD, developing a holistic training strategy and taking stock of the backlog of Technical Assistance (TA) recommendations are priorities. In recent years, both training and TA have occurred in an uncoordinated and sometime ad hoc way. The absence of strategy has led to a shortage of analytical capacity in several units, also due to staff turnover. As a result, the institutional memory on past TA missions is lacking, especially in revenue administration and tax policy. For treasury and debt management, the increasing reliance on market-based borrowing to cover financing needs requires specific skills.

5. Global trends towards digitalization and financial integrity and support to the Financial Stability Council create new CD needs. For example, developing an adequate framework to strengthen oversight and management of cyber risks has become crucial. The operationalization of the Financial Stability Council brings new needs to equip both its secretariat (hosted by the Financial Stability unit of BoG) and the technical committee of the Council. Other functions of BoG need CD, including bank supervision and resolution, and monetary policy through modeling and operation.

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Figure 1.
Figure 1.

FY20 CD Plans by Topics

(number of missions)

Citation: IMF Staff Country Reports 2019, 367; 10.5089/9781513523347.002.A001
1

See Selected Issues Paper on “Financial Stability on the Road to Recovery” accompanying this Staff Report.

2

See Selected Issues Paper on “Growth Strategy for Ghana” accompanying this Staff Report.

3

See Selected Issues Paper on “A Public Sector Balance Sheet for Ghana” accompanying this Staff Report.

4

A limit of US$10,000 withdrawal per trip and per annual transfer without documentation—a capital flow management measure (CFM)—remains in place. Removal of this restriction would be consistent with the Fund’s Institutional View on CFMs.

5

The strategy is organized around three pillars, i.e., supervisory actions to address the stock and flow of NPLs; insolvency and debt enforcement reforms to facilitate debt workouts; and improvements of the credit architecture to mitigate credit risks. Further details can be found in the Selected Issues Paper that accompanies this report.

6

Progress has been slow in implementing the 2018 safeguards recommendations related to the BoG’s framework for the provision of liquidity support. The BoG has benefited from technical assistance on its liquidity support framework in Q2 2019 and is currently implementing its recommendations.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

1

Desirable policies include, among others, achieving the fiscal target within a three-year period, no change in reserves and credit growth to achieve desired credit to GDP ratio in three years.

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Cover IMF Staff Country Reports
Ghana: 2019 Article IV Consultation; Press Release; Staff Report; and Statement by the Executive Director for Ghana
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 367
Publisher:
International Monetary Fund
ISBN:
9781513523347
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781513523347.002
Figure 1.

Ghana: Recent Economic Developments

Spreads vs US 10-yr bond
Figure 2.

Ghana: Alternative Policy Scenario
Figure 3.

Ghana: Recent Fiscal Developments
Figure 4.

Ghana: Recent Debt Developments
Figure 5.

Ghana: Recent Monetary Developments
Figure 6.

Ghana: Economic Growth and Living Standards 1990–2018
Figure 7.

Ghana: Private-Sector Credit Developments

Ghana: Doing Business 2020

Current Account (%GDP): Actual, Fitted, and Norm

Ghana: Real Exchange Rate

(June 2012 = 100)

Reserve Adequacy

Government revenue compostion over the last decade

Low middle income SSA countries--Taxation ratio (Percent of GDP)

Trends in main taxes
Figure 1.

FY20 CD Plans by Topics

(number of missions)