Public Information Notice: IMF Concludes Article IV Consultation with Ghana

December 7, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 19, 1999, the Executive Board concluded the Article IV consultation with Ghana.1


Ghana suffered a major external shock in 1999. World prices for cocoa and gold, Ghana's main exports, plummeted, and oil prices doubled. These problems were aggravated by a shortfall in foreign assistance. Although the terms of trade impact was cushioned by the use of forward contracts and hedges, its effects began to be felt in the second half of 1999 and will continue in 2000.

In the first half of 1999, macroeconomic performance was broadly in line with the program; however, because of lower than expected nontax revenues and divestiture receipts, two performance criteria for June_domestic primary surplus and net domestic financing for the government_as well as the benchmark on domestic revenue, were missed. A structural performance criterion, the offer for sale of the Produce Buying Company (PBC), was delayed, but in November government completed preparations to float shares of PBC. Also a structural performance criterion for September, the withdrawal of banking licenses from three banks not complying with the capital adequacy ratio, was not carried out as planned. The authorities are liquidating two of the banks, but were advised by consultants to withdraw the banking licenses at a later stage. Program implementation weakened in the third quarter, owing to external factors and policy slippages. The government tightened its policies in late September, putting in place remedial actions for 1999. The government is also asking for parliamentary approval for measures to strengthen the economy in 2000.

Real GDP growth for 1999 is forecast to reach 4.5 percent, 1 percentage point below the original program forecast. Although economic activity was sustained in the first six months, growth is expected to slow down in the fourth quarter owing to tighter policies and external factors. Inflation has continued its downward trend from the average rate of 19.3 percent attained last year, dropping below 10 percent on an annual basis in May 1999 for the first time since 1992. In July, upward adjustments of petroleum product prices and tariffs, as well as the retroactive payment of public sector wages, caused the consumer price index to increase. Inflation resumed its downward trend in August, reaching 11.8 percent in September.

From September onward, the central bank has focused primarily on meeting its net foreign assets target, and the cedi depreciated by 28 percent in the 12-month period ended in October 1999, as compared to 4 percent in October 1998. Since October 15, 1999, the central bank rate is being compiled from the average transactions rate of commercial banks, instead of from indicative quotes. The Bank of Ghana will take steps in 2000 to make the interbank market in foreign exchange more active.

The domestic primary surplus for the first half of 1999 was below its target by 0.1 percent of GDP, as higher than expected tax collections did not fully make up for lower nontax revenue, resulting primarily from lower-than-expected central bank profits. Domestic recurrent noninterest spending was about as projected but the overall deficit was 0.3 percent lower than projected, mainly because of the postponement of externally financed capital expenditures. Shortfalls in domestic revenue and external assistance also caused net domestic financing to exceed its program ceiling by 1.1 percent of GDP. However, when adjusting for the shortfall in foreign financing, this excess was reduced to 0.2 percent of GDP. The VAT has been in effect since the beginning of the year and is operating relatively well.

Monetary policy remained on course through midyear as both reserve money and broad money met their targets, increasing by 14.9 percent and 15.6 percent respectively. However, reserve money, particularly in the third quarter, was controlled in great part through central bank sales of foreign exchange instead of through open market policies. As a result, the exchange rate did not adjust promptly to the external shock, delaying its corrective effects on imports and exports. Net credit to the government by the banking system exceeded its program target by 2.3 percent of GDP, mostly because of the shortfall in foreign program assistance but also because fewer treasury bills were placed with nonbanks.

The current account deficit is projected to be 4.5 percent of GDP, about 1.5 percentage points higher than originally projected, as a result of the adverse shocks in the external sector.

Structural reforms have progressed broadly in line with the program with the exception of the divestiture program. In April 1999 the cabinet approved, after extensive consultation with stakeholders, a medium-term cocoa sector strategy designed to improve incentives for producers, foster competition, and end the monopoly in exports. In June the producer price of cocoa for the year 1999/2000 was announced at the same level as in the 1998/99 season. This decision, given the decline in world prices, is expected to raise the producer share in the f.o.b. export price substantially above the minimum target under the program. In October, the divestiture of two large enterprises, the State Transport Company and GHACEM, a cement factory, were completed. The government implemented a financial restructuring of Tema Oil refinery, which is expected to be offered for sale by the end of the year. A new public sector wage structure was put in place. A Fiscal Decentralization Subcommittee was set up in April 1999 to oversee decentralization efforts and ensure that fiscal transparency and accountability are enhanced in the process. The cabinet approved the legal framework for reform of subvented agencies and established committees to address the reform of the central management agencies.

Ghana's poverty reduction strategy emphasizes economic growth in a stable environment, rural development, expansion of employment opportunities for the urban poor, and improved access of the rural and urban poor to basic public services. The government has just issued a report on its poverty reduction program which shows progress in reducing the incidence of poverty and in improving health and education indicators; the gender gap in primary education has also declined. Nevertheless, poverty has increased in the rural coastal and rural savannah regions, and there is still much to be accomplished for Ghana to meet internationally agreed standards on poverty reduction.

Executive Board Assessment

Executive Directors noted that Ghana's strong macroeconomic performance in the first half of the year had weakened in the third quarter, owing to a combination of major terms of trade shocks and policy slippages. Directors were encouraged by the corrective measures taken by the authorities to address the fiscal situation and strengthen the economy. In view of Ghana's continued vulnerability to external shocks, Directors urged the authorities to consolidate the macroeconomic stability while forging ahead with structural reforms aimed at making the economy more efficient and diversified.

Directors were encouraged by the authorities' commitment to implement the corrective fiscal measures. They observed that the proposed increase in the VAT, along with ongoing efforts to broaden the VAT tax base and enhance compliance, should help strengthen revenue performance in 2000 and over the medium term. Directors emphasized the need to be selective in cutting domestic capital spending to avoid harmful cuts, and they encouraged the authorities to curtail low priority expenditures in 2000 by closely following the procedures in their medium-term expenditure framework. Directors welcomed the authorities' intention to safeguard budgetary allocations for social sectors and poverty reduction. They also encouraged the authorities to maintain strict fiscal discipline, especially in the run up to next year's elections. In the light of Ghana's vulnerability to adverse external developments, Directors recommended that contingency measures be identified for the 2000 budget.

Directors noted the importance of allowing the exchange rate to play a role in cushioning large terms-of-trade shocks, such as the one associated with the decline in cocoa and gold prices in 1999. In this connection, they underscored the need for the authorities to ensure that the exchange rate reflects underlying economic trends and policies, and that Ghana's international reserves return to adequate levels. Directors also urged the central bank to rely primarily on open market operations for controlling reserve money. They supported the authorities' intention to seek technical assistance to improve the functioning of the interbank foreign exchange market.

Directors supported the authorities' efforts to ensure that all commercial banks comply with all prudential requirements, and in particular with minimum capital adequacy ratios. They urged the government to find qualified strategic investors for the remaining state-owned banks.

Directors regretted the slow pace of the divestiture program, but were encouraged by recent indications of a pickup in divestiture activity. They stressed the need to accelerate this process and show tangible results.

Directors considered that the authorities' decision to keep the cocoa producer price unchanged in the wake of the decline in world cocoa prices may be untenable. They suggested that the authorities keep the cocoa producer price under close review and consider the feasibility of a price structure that rewards quality and generates fiscal revenue.

Directors acknowledged the need for exceptional foreign assistance next year to help cushion the adverse effects of the external shock on the poorest segments of the population. They emphasized the need to maintain the program on track for the rest of the year and to ensure that the appropriate policies are adopted for 2000 when the brunt of the external shock is expected to take place.

Directors welcomed the authorities' plan to finalize their poverty alleviation strategy and expressed the hope that the necessary external financial support will be forthcoming to enable Ghana to address poverty issues more effectively. They also encouraged the authorities, in cooperation with donors, to pursue ongoing efforts to address the problem of high domestic debt, within their macroeconomic strategy for 2000.

While welcoming the government's efforts to improve transparency and governance, Directors expressed concern about the frequency of incidents of alleged corruption and encouraged the authorities to speed up legal actions against those involved.

Directors expressed concern about the quality of statistical reporting in Ghana, and welcomed the commitment by the authorities to address this problem as soon as possible.

Ghana: Selected Economic Indicators

1996 1997 1998 1999

(Percentage change)
Domestic economy  
Real GDP 4.6 4.2 4.7 4.5
Consumer prices (annual average) 46.6 27.9 19.3 11.9
(In millions of U.S. dollars)
External economy  
Exports, f.o.b. 1,810 1,810 2,091 2,096
Imports, f.o.b. -2,295 -3,041 -2,897 -2,924
Current account balance -214.1 -990.7 -381.2 -349.7
Capital account balance 420.7 555.2 243.5 255.4
Gross official reserves 598.8 508.5 507.7 542.7
Debt service (including to the Fund) 2/ 21.7 23.5 22.0 19.4
Change in the real effective exchange rate (in percent) 3/ 12.2 7.2 7.8 ...
(In percent of GDP 1/)
Financial variables  
General government balance -9.5 -10.3 -8.1 -6.2
Domestic primary balance 0.3 3.2 3.6 3.4
Change in broad money (in percent) 5/ 39.7 40.8 17.7 17.0
Interest rate 6/ 42.8 42.5 26.8 ...

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

1/ Unless otherwise noted.  
2/ In percent of exports of goods and nonfactor services.
3/ (+) = appreciation.  
4/ Including external aid.  
5/ Including foreign currency deposits.
6/ Treasury bill rate (in percent; end of period).

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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