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June 11, 2001
Dear Mr. Köhler:
1. On May 3, 1999, the Executive Board of the Fund approved a three-year arrangement
for Ghana under the Poverty Reduction and Growth Facility (PRGF). The
purpose of this letter is to inform you on the progress in implementing
the second year economic program, and to request that the amount of
the arrangement be increased from SDR 191.9 million to SDR 228.8 million,
that the schedule of the remaining disbursements be rephased, and that
the fourth loan under the arrangement be disbursed following the completion
of the third review under the arrangement.
2. The attached Memorandum of Economic and Financial Policies (Attachment I)
sets out the objectives and policies that the Government of Ghana intends
to pursue during 2001. The Technical Memorandum of Understanding (Attachment
II) provides explanatory notes to clarify the MEFP.
3. Ghana has suffered a severe terms of trade shock during 1999-2000
which was compounded by inappropriate policies and delays in donor disbursements.
As a result many of the program targets for 2000 were not achieved.
The new Government of Ghana believes that the policies it intends to
implement in 2001, as described in the MEFP, will
redress these slippages and, by restoring macroeconomic stability, will
create the conditions for sustained economic recovery. On this basis,
it requests completion of the third review under the arrangement and
waivers for nonobservance of : (a) the end-August 2000 quantitative
performance criterion on the net domestic financing of the government; (b) the end-August 2000 quantitative performance criterion on the contracting or guaranteeing by the government of new nonconcessional external loans with a 1-15 year maturity; (c) the end-September 2000 structural performance criterion on the appointment of a sales advisor for the divestiture of the electricity company; and (d) the continuous performance criterion on accumulation of new external
payment arrears by the public sector.
4. In view of Ghana's increased balance of payments need, we also request
an augmentation of access equivalent to 10 percent of quota. On
completion of the third review, the Government of Ghana would request
a disbursement under the PRGF arrangement of SDR 52.58 million. A fourth
review under the PRGF arrangement will be completed by December 15,
5. The Government of Ghana believes that the policies and measures
set forth in the memorandum of economic and financial policies are adequate
to achieve the objectives of the program supported by the PRGF arrangement,
but will take further measures if deemed necessary. During the remaining
period of the arrangement, Ghana will continue to consult with the Managing
Director on the adoption of any measures that may be appropriate, at
the initiative of the government or whenever the Managing Director requests
such a consultation.
6. The Government of Ghana will continue to provide the Fund with such
information as the Fund requires to assess Ghana's progress in implementing
the economic and financial policies described in the attached memorandum.
7. The Government of Ghana intends to make these understandings public
and authorizes the Fund to provide this letter and the attached memorandum
to all interested parties that so request, including through the Fund's
8. We can assure you, Mr. Managing Director, that the Government of
Ghana is determined to fully implement the program and we hope we can
count on the continued support of the Fund in our endeavors.
Hon. Yaw Osafo-Maafo, MP
Ministry of Finance
Acting Governor of the
Bank of Ghana
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
1. In January 2001, a new government took office in Ghana, the first
democratic transfer of power in the nation's history. The incoming administration
inherited a very difficult economic situation resulting from a major
terms of trade shock during 1999/2000—a tripling of crude oil prices
and a sharp reduction in cocoa prices—compounded by a lack of fiscal
discipline and a weak monetary stance, especially during the pre-election
period. The first order of business of the new government is to achieve
macroeconomic stability in 2001 following the volatility of the past
2. The government announced an interim budget in March 2001 that is
being revised based on the policies set forth herein. Given the depth
of the problems, the newness of the administration, and the need to
build public support, the remainder of 2001 will be required to flesh
out the new development and poverty alleviation strategy. Building on
the momentum created by last year's democratic elections, work on the
new strategy is already well underway, most recently in the context
of the National Economic Dialogue which was held in May. It will culminate
in late 2001 with the completion of the Ghana Poverty Reduction Strategy
(GPRS), which will lay out the broad policy agenda for 2002-2004.
II. The Legacy from 2000
3. Ghana was brought to the verge of financial crisis in late 2000,
with a rapidly depreciating currency, sharply rising inflation, burgeoning
public debt, and a substantial depletion of foreign exchange reserves.
4. The primary cause was loss of control over public expenditure and
government borrowing, especially in the second half of the year before
the presidential elections. The fiscal deficit in cash terms reached
9.7 percent of GDP for the year. Given shortfalls in donor disbursements,
the deficit was financed almost entirely by domestic borrowing.
5. The result was a destabilization of the economy: 40 percent growth
in broad money, a 50 percent depreciation of the cedi, and a tripling
of the inflation rate to over 40 percent at end-2000. The domestic government
debt stock rose to almost 29 percent of GDP, and official reserves fell
to only 3 weeks of imports.
6. A breakdown in expenditure management and control systems during
2000 also led to a build-up in new domestic arrears in addition to cash
expenditure overruns. The full extent of these arrears remains to be
verified, but is estimated at 1.4 percent of GDP. Delays in aid inflows
further complicated the payment of government obligations and led to
the creation of external payment arrears on debt service amounting to
US$89 million by end-2000. Ghana's public and publicly guaranteed
external debt stood at US$5.9 billion (about 119 percent of GDP) at
7. The finances of several key parastatals deteriorated along with
those of the central government. Failure to adjust petroleum prices
fully for rising crude oil costs and a depreciating currency left the
Tema Oil Refinery (TOR) with a total short-term debt of 2.5 trillion
(9 percent of GDP) at end-2000. Almost half of this was debt to domestic
banks, in particular to Ghana Commercial Bank (GCB), posing a major
risk to the solvency of this bank. Similarly, electricity and water
rates were kept artificially low throughout 2000, leaving the Electricity
Company of Ghana (ECG), Volta River Authority (VRA, the electricity
generator) and the Ghana Water Company Limited (GWCL) with sizeable
8. Although Ghana has succeeded in privatizing over 200 companies since
the inception of the divestiture program in the late 1980s, progress
in this area was limited in 2000, in part owing to the deteriorating
economic situation and the upcoming elections. The sale of government
shares in Ghana Telecom (GT) was only partially completed owing to a
request by the potential purchaser for a revaluation of GT following
the currency crisis. The privatization bid for National Investment Bank
was withdrawn by the bidder, and that for Ghana Oil was halted by the
government after the merger of Total and Elf raised concerns about competition.
The appointment of financial advisors for the sale of ECG and Ghana
Railways was delayed, as was progress on the privatization of GCB.
III. Medium Term Strategy
9. The thrust of the government's medium-term macroeconomic strategy
will be to take Ghana's economy out of the current debt trap and into
a virtuous circle of reduced domestic debt as a ratio to GDP, a declining
debt service burden, and lower inflation and interest rates. Once underway,
this strategy, together with increased external official support, will
help the government reconcile its dual ambitions to increase expenditures
on priority public services while providing the stable macroeconomic
environment needed for private sector-led growth and sustainable poverty
10. To this end, the government intends by 2002 to achieve domestic
primary surpluses sufficient to cover all domestic debt service and
to halve the ratio of domestic public debt to GDP by the end of 2003,
from its end-2000 level. In making the targeted adjustment, the government
will give emphasis to strengthening revenue mobilization, while protecting
priority expenditures. Reduced reliance on the banking system for budget
financing, combined with a return to positive real interest rates, will
curtail monetary growth and bring inflation down into the single-digit
range within three years. The government's current macroeconomic framework,
which will be revisited and may be modified in the course of developing
the GPRS, allows for a recovery in real GDP growth to 5 percent by 2002.
11. Notwithstanding the government's ambitious adjustment targets,
Ghana's external financing needs will remain substantial. Since external
debt service obligations over the next three years threaten to absorb
35-45 percent of domestic revenues, the government will be seeking a
good part of the needed assistance in the form of debt relief, including
under the enhanced HIPC Initiative. In addition to funding net imports
and debt service, the country will need resources to rebuild official
reserves from their current level of only 3 weeks of imports to at least
2 months of imports by the end of 2002 and to at least 3 months' cover
over the medium term.
12. A key element in the restoration of macroeconomic stability will
be reform in the public enterprise sector. This will involve, among
other things, a review of the country's energy policies and modifications
to the tariff structure of the public utilities, together with the formulation
of a new divestiture strategy, all of which will need to be addressed
with urgency, based on appropriate public consultation. The government
will be working on these issues over the coming months, and will lay
out its intentions in the GPRS.
13. Finally, the development of a vibrant and expanding private sector
in Ghana will require further reform of the nation's financial system,
including measures to ensure a strong and competitive banking sector
and a well-functioning foreign exchange market.
IV. The Program for 2001
A. Macroeconomic Objectives
14. In line with its medium-term strategy, the government's economic
program for 2001 is designed to achieve the following core objectives:
- Improve the standard of living of ordinary Ghanaians by raising
growth to at least 4 percent and increasing social spending as
a share of domestic primary expenditures;
- Reduce inflation from 41 percent at end-2000 to 25 percent by end-2001;
- Rebuild gross official reserve holdings to 1.5 months of imports
Key policies needed to deliver these outcomes and lay the foundations
for further gains in subsequent years include:
- Reducing the government's domestic debt as a share of GDP by increasing
the domestic primary budget surplus to 4 percent of GDP, from 2.4
percent in 2000, as well as through the use of additional (unprogrammed)
receipts from divestiture, program aid, or external debt relief;
- Regaining effective control and monitoring of public expenditures;
- Containing, and beginning to reduce, the indebtedness of the main
parastatals through price adjustments and debt restructuring;
- Closely monitoring and protecting the health of the banking system;
- Developing an effective interbank foreign exchange market to improve
the allocation of external resources.
B. Financial Policies for 2001
15. The targeted increase in the domestic primary surplus will be achieved
through a combination of revenue measures and expenditure savings. On
the revenue side, some measures were introduced in the March 2001 budget,
while others will be submitted to Parliament in June, as part of the
government's plan to close the fiscal financing gap for 2001. These
measures, which are conservatively estimated to yield 2 percent of GDP
in 2001 and 3½ percent of GDP in a full year, are as follows:
- A 15 percent excise duty and specific duties averaging 199 per
liter on petroleum products, with effect from September 1, 2001, to
recover petroleum taxation removed in the February 2001 price increase.
- A 2-year National Reconstruction Levy, at rates of 10 percent or
7.5 percent on financial institutions and 2.5 percent on all
- A $30 per person increase in the airport tax.
- A 5 percent import duty on certain items on the mining list and
on materials for processing timber; a 1 percent customs processing
fee on tariff-exempt imports; and a 10 percent levy on exports of
- A limitation of tariff exemptions on imports by NGOs.
- An increase in the withholding tax on suppliers of goods and services
from 5 to 7.5 percent.
- Collection of arrears on company taxes, import duties, and cocoa
- Increases in a number of user fees, licences, and other charges
that have not kept pace with inflation in recent years.
16. In addition, the government has taken a range of measures to strengthen
revenue administration. These include: pursuit of dividend collection
and loan recovery from companies in which the government has an interest;
automation of customs systems and improved control of CEPS warehouses;
and creation of a National Tax Audit Team to assist the revenue collecting
agencies. The government is confident these measures will generate additional
receipts over time but, for reasons of prudence, no allowance for such
receipts has been made in the revenue projections for 2001.
17. Domestic non-interest expenditure will be reduced from 15.3 percent
of GDP in 2000 to 13.4 percent in 2001. The main savings arise from:
- freezing expenditure on goods and services at 2000 levels (except
for the cost of higher government utility bills); and
- cutbacks in domestically-financed capital expenditures, owing in
part to the willingness of some donors to forego the domestic counterpart
for donor-funded projects.
The wage and salary bill will be held at 5.2 percent of GDP (as in
2000). To ensure achievement of this target, the government will keep
any public sector wage increase in 2001 within the appropriation approved
by Parliament, including by tapering the wage increases at the higher
end of the salary scale. In addition, steps will be taken to eliminate
undue wage payments, using employment audits. The allocations for health
and education, by contrast, imply real per capita increases in spending
on these priority public services (see below).
18. The government is undertaking comprehensive audits of the stock
of domestic payment arrears by ministries, departments, government
agencies, and district assemblies. These audits will be completed by
end-August 2001, at which point a timetable for their liquidation will
be announced. The stock of road arrears will also be audited by end-August
2001, and will be reduced to 190 billion by end-August 2001 and to 70
billion by end-December 2001, while a minimum of 200 billion in other
domestic arrears will be paid in 2001. In addition, financial and management
audits of at least 9 major public enterprises are being undertaken.
These audits are expected to be completed by end-September 2001, at
which time action will be taken to begin restructuring the management
of the enterprises.
19. Net domestic financing of the government will not exceed 686 billion
(1.8 percent of GDP) in 2001. The program assumes divestiture receipts
of 391 billion (1 percent of GDP) this year from the sale of the government-held
shares and incorporates committed program loans and grants totaling
2,436 billion. On this basis, there remains a projected financing gap
of 1,881 billion (4.9 percent of GDP). The government expects this financing
to be covered by the concessional rescheduling of external debt service,
which it is requesting from bilateral and commercial creditors to fill
Ghana's balance of payments gap.
20. To the extent that the sum of divestiture receipts, program loans
and grants, and debt relief exceed the amounts assumed in the fiscal
program, the additional inflows will be used to accelerate the process
of domestic debt reduction, thereby making room for additional priority
expenditures in the 2002 budget. If the aggregate receipts from program
loans, program grants, and debt relief fall short of the program assumptions,
the ceiling on net domestic financing will be increased to protect expenditures,
up to the limit specified in the Technical Memorandum of Understanding
(TMU). A number of other technical adjustments may be made to the fiscal
ceilings, as defined in the TMU.
Public Expenditure Management
21. The government attaches high priority to the effective control
and monitoring of public expenditure. Under the current system, there
is insufficient capacity either to track how resources are being spent
month by month, or to manage expenditures properly at the commitment
stage. The result is potential misallocation of resources, arrears,
and ultimately loss of control over aggregate cash spending. With technical
advice from the Fund, the government has developed an immediate action
plan to remedy the main weaknesses in the public expenditure management
system over the next six months. The key elements are as follows:
- An Economic Policy Coordinating Committee (EPCC) has been established
to oversee the forecasting and monitoring of expenditure commitments
and cash transactions month by month. To ensure effective coordination,
the Committee comprises officials of the Ministry of Finance, the
Controller and Accountant General's Department (CAGD) and the Bank
of Ghana (BOG) and the main revenue agencies.
- . Based on the cash flow forecasts prepared for the EPCC, a recommended
set of quarterly expenditure ceilings for each Ministry, Department
and Agency (MDAs) will be agreed by the Cabinet for the second half
of 2001. A circular will be issued by the Ministry of Finance to each
MDA informing them of the cash ceilings agreed by Ministers and notifying
them that commitments are to be constrained within the cash ceilings.
The ceilings will be managed flexibly--with monthly targets (which
allow for small over- or under-shooting) and use of contingent reserves
to finance unexpected shortfalls in revenue or emergency expenditure
needs--in order to ensure that the government's aggregate net borrowing
ceilings are respected.
- Performance against the ceilings will be monitored by the EPCC
through specially developed reports prepared by the CAGD on budget
outcomes, including cash expenditures and commitments. Two sets of
monthly reports will be provided with a lag of four weeks after the
end of the reporting period. First, there will be a report on aggregate
budget cash revenue and expenditure outcomes and commitments within
a broad economic classification. Second, there will be a report on
cash expenditures and commitments by MDAs classified by function.
Once these reports achieve a satisfactory quality, they will be published
in the government gazette.
- The CAGD and the BOG will put in train action to reconcile the
aggregate monthly budget reports with banking data by the end of 2001.
22. The government will also work over the coming months, with assistance
from Fund and World Bank staff, on further enhancements to the expenditure
management system that will enable closer tracking of the functional
allocation of poverty-related expenditures, including those that are
now funded by donors and those additional expenditures that may in future
be funded by possible debt relief under the enhanced HIPC Initiative.
These enhancements will commence during the second half of the year,
and a firm timetable for development of comprehensive tracking of expenditures
will be prepared by end-November 2001.
23. In addition, improved procedures have been put in place to ensure
full and timely settlement of external debt service obligations. These
new procedures are described in the TMU.
Monetary, Exchange Rate and Financial Sector Policies
24. To achieve the target rate of inflation for end-2001, the Bank
of Ghana will use appropriate monetary instruments to control the growth
of reserve money, which is not expected to exceed 29 percent for the
year. Broad money is expected to grow by about 34 percent during
the year, sufficient to accommodate a rebuilding of net international
reserves (NIR) by at least US$132 million as well as the target level
for credit to the government.
25. Given the low level of NIR and the need to keep a tight rein on
domestic credit, the BOG intends to focus control on the net domestic
assets in its balance sheet, particularly net credit to government and
liquidity support to banks and/or public enterprises. Thus, the BOG
has established ceilings on net domestic assets and floors on net international
reserves, and will cease providing liquidity support to public enterprises,
either directly or through banks, effective September this year (following
the restructuring of TOR's debt in August).1
26. In line with this strategy, real interest rates will remain positive
to increase cedi savings, strengthen the foreign reserve position, and
mobilize funding for the government. Accordingly, the BOG has brought
about an increase in nominal treasury bill rates of almost 4 percentage
points since the beginning of the year, and it will reduce them only
as the inflation rate falls.
27. The BOG plans to create a functioning interbank foreign exchange
market in 2001, with IMF technical assistance. The preparatory work
will be carried out in the coming months with technical assistance from
the Fund. Once TOR's debt is restructured so that the company can restore
normal relations with commercial banks, foreign exchange transactions
for oil, which are now undertaken by the BOG, can then be shifted in
stages to the commercial banks. The BOG will eliminate direct sales
to TOR beginning not later than November 1, 2001. The exchange rate
will be allowed to move freely in response to market conditions, supported
by strong macroeconomic policies.
28. The government remains concerned about the vulnerability of the
banking system to nonperforming loans, particularly those of TOR and
the public utilities. In parallel with government efforts to put TOR
and other parastatals on a sound financial footing, the BOG has therefore
entered into discussions with the banks on asset quality, risk monitoring
and contingency measures for recapitalization. The outcome of these
discussions, including any necessary remedial actions, will be discussed
with IMF staff in the context of the next review under the PRGF arrangement.
29. The government will review the draft Bank of Ghana Law with a view
to strengthening the independence of the BOG, and will submit the revised
draft law to Parliament by end-August 2001. In addition, to remove any
potential conflict of interest and thereby to strengthen its role as
prudential regulator, the BOG will divest its shareholdings in all financial
institutions that it supervises by end-2001.
External Sector Policies
30. Based on the debt sustainability analysis (DSA) carried out by
IMF and World Bank staff in February 2001, the government has decided
to request debt relief under the enhanced HIPC Initiative. On current
estimates, Ghana could receive debt relief equivalent to over 50 percent
of the value of its external debt at end-2000 owing to the high ratio
of the net present value of debt to fiscal revenues. The government
hopes that Ghana can reach a decision point in late 2001. It believes
this will allow sufficient time to prepare the necessary documents,
notably the poverty reduction strategy paper (the GPRS), and put in
place an expenditure monitoring system that will permit effective tracking
of anti-poverty expenditures.
31. Owing to the severe foreign exchange shortage in 2001, the government
will request an interim rescheduling agreement from the Paris Club under
Naples Terms, sufficient to fill the balance of payments financing gap
for the year, taking into account donor pledges of aid received or confirmed
during the mini-CG meeting in Accra on May 23.
C. Structural Policies for 2001
32. The government regards restoring the financial health of the public
energy and utility companies as one of its highest priorities, and it
will be working closely with the World Bank to achieve this goal. In
order to halt the ongoing losses at TOR, the government raised ex-refinery
gasoline prices by an average 91 percent in February 2001, with immediate
effect. In April, the Public Utilities Regulatory Commission (PURC)
allowed the Electricity Company of Ghana (ECG) to raise the retail price
of electricity by 96 percent and Volta River Authority (VRA) to raise
its wholesale electricity price by 100 percent. The Ghana Water Company
(GWCL) was authorized to raise water prices by 95 percent. These increases
took effect May 1, 2001.
33. Although the February 2001 increases in ex-refinery petroleum product
prices now cover TOR's running expenses, they were insufficient to cover
the financial costs of the company's 2.5 trillion stock of outstanding
short-term debts. An estimated 2 trillion of this debt was accumulated
as a result of below-market pricing during 1999-2000. This portion of
TOR's debt will be restructured by mid-August 2001 and converted to
a government obligation, on which the first debt service payment would
be expected to fall due in early 2002. TOR will not contract any new
medium- or long-term external debt in 2001. The government has also
developed an automatic adjustment mechanism for regular future adjustment
of petroleum product prices that will ensure full cost recovery for
TOR, including finance charges. The mechanism will take effect on June
20, 2001, and will incorporate the new excise tax and specific duties
from September 1, 2001.
34. Despite the increase in the tariffs for electricity and water,
these utility rates still remain at about 65 percent of full cost recovery
levels. In the wake of the recent increases, PURC is developing a revised
plan to institute automatic tariff adjustment mechanisms, with phased
attainment of full cost recovery, and expects to complete and begin
implementing this plan by end-September 2001. Until cost recovery prices
can be achieved, the government will assume responsibility for the losses
of ECG, VRA and GWCL, and will develop a plan to restructure the utilities'
debts to domestic creditors; meanwhile it will suspend any major new
investment scheduled in those companies. The government is working closely
with the World Bank to recast the nation's energy sector strategy. The
new strategy will address, among other things, the future of TOR, ECG
and VRA, and the development of the West African Pipeline project.
35. The government will relaunch the divestiture program this year
after appointment of the new head of the Divestiture Implementation
Committee's (DIC) governing board and the completion in September 2001
of a financial and managerial audit of recent and pending asset sales.
During 2001, privatization efforts will focus on raising a minimum of
US$50 million by divesting government-held shares in a number of companies
for which ready buyers are believed to be available. The offer for sale
of Ghana Commercial Bank was issued in May 2001, and preparations for
several larger divestitures (including the Electricity Company of Ghana
and Ghana Railways) are also continuing with World Bank assistance.
A detailed progress report will be published at the time of the budget
review in September.
36. The government intends to replace the special import tax that was
put in place last year and replace it with anti-dumping measures that
are consistent with WTO rules. As a first step, the top rate for this
tax was reduced from 20 percent to 10 percent in the 2001 Budget, and
the tax was removed for a number of products. The special import tax
will be eliminated altogether in the 2002 Budget. By the end of 2001,
the government will formulate its plans for broader tariff reform, so
that implementation can begin with the 2002 Budget.
D. Social Policies for 2001
37. In line with the government's strategy to reduce poverty, the 2001
budget reallocates budgetary resources to priority social sectors. To
improve access by the poor to social services, budgetary allocations
for education and health have been increased to 36 percent of domestic
primary expenditure from almost 32 percent in 2000. Although below 1999
levels, this represents a real increase from 2000 of almost 5 ½
percent, or 2 percent per capita. About 60 percent of budgeted social
spending is earmarked for basic education, primary health care, and
rural water programs.
38. The budget gives priority to a number of programs in the primary
health sector to help increase child immunization rates and to reduce
substantially infant mortality rates. Some 33 new health centers are
to be built in rural areas to improve access to health care facilities,
and free medical care is now provided for pregnant women, the elderly
and other vulnerable social groups. With these targeted priority programs,
the government seeks by end-2001 to increase child immunization rates
to 68 percent, and to reduce infant mortality rates to 50 per 1000 live
births by end-2001.
39. The government has also sought to alleviate the impact of the recent
increases in petroleum and utility prices on poorer consumers through
cross-subsidies and targeted tax relief. While average ex-refinery petroleum
prices rose by 91 percent in February 2001, increases for kerosene and
gas oil, which are used more intensively by lower income groups, were
limited to 82 percent and 75 percent, respectively. Likewise, the increase
in electricity and water tariffs for domestic consumers with usage below
a prescribed minimum was about two-thirds of that for large industrial
users, and this minimum usage continues to be VAT exempt.
40. The government's incomes policy is also designed to ensure that,
within the limited resources available for pay increases this year,
the lower paid benefit the most. In particular, the civil service wage
settlement for 2001 will be skewed towards workers at the bottom end
of the pay scale.
E. Governance and Transparency
41. The government came to office with a pledge of zero-tolerance for
all acts of corruption. A new anti-corruption strategy is now
being put in place, including development of Codes of Conduct, establishment
of an Office of Accountability in the President's office and the Parliament,
reform of the procurement system, and strengthening of anti-corruption
agencies. Already the government has begun prosecuting a number of senior
and mid-level officials for improprieties or abuse of office.
42. The government has made a commitment to increased transparency
and accountability in public policy. The audits of district assemblies
and public enterprises (see above) are a key element in this regard.
In addition, the government has effected changes in the top management
of all revenue collection agencies, a new Controller and Accountant
General has been appointed, and a National Tax Audit Team has been created
to improve compliance with the tax laws. At the same time, to protect
the taxpayer, the government has established an office of complaints
on tax malfeasance and related problems.
43. The government recognizes the importance of improving Ghana's statistical
base and publishing official statistics from the Ministry of Finance,
Bank of Ghana and the Ghana Statistical Service on a more timely basis.
To this end, public data will begin to be made available using various
media, including official internet websites, by March 2002. To enhance
the statistical data base, steps will be taken to improve the quality
and timeliness of the national accounts and balance of payments data.
From June 2001, the Bank of Ghana will begin reporting the new accounting
for gross foreign reserves, net international reserves and net foreign
assets, based on IMF technical assistance recommendations.
F. Program Monitoring for 2001
44. Prior Actions. The government will undertake a number of
actions prior to the IMF Board meeting on the third review under the
PRGF in order to underscore its commitment to the economic strategy
described in this memorandum (Table 2).
45. Performance criteria. Table 1
shows the quantitative performance criteria and benchmarks set for August
2001, with indicative benchmarks for December 2001 and March 2002; the
latter will be converted to performance criteria at the next review
under the arrangement. Structural performance criteria and benchmarks
with corresponding dates are identified in Table 2.
In addition, the nonaccumulation of external payments arrears (as defined
in the TMU) will constitute a continuous performance
criterion, as will the standard injunctions against imposing or intensifying
restrictions on current payments, introducing or modifying multiple
currency practices, concluding bilateral payments agreements that are
inconsistent with Article VIII, or imposing or intensifying import restrictions
for balance of payments reasons.
46. Provision of information. In order to ensure effective
monitoring of the program, the government will make available to Fund
staff all core data on a timely basis, as specified in the TMU.
47. Program review. A fourth review under the PRGF arrangement
will be completed by December 15, 2001. This review will focus on (a)
progress in restoring the financial viability of TOR and the major public
utilities; (b) progress in developing a privatization strategy for ECG
and GCB; and (c) implementation of the strengthened public expenditure
monitoring and control system. The timing and focus of a fifth and final
review under the arrangement will be established at the fourth review.
Technical Memorandum of Understanding
1. This technical note contains definitions and adjustor mechanisms
that are intended to clarify the measurement of items in Table 1,
Quantitative Performance Criteria, PRGF Arrangement, attached to the
Memorandum of Economic and Financial Policies. Unless otherwise specified,
all quantitative performance criteria and benchmarks will be evaluated
in terms of cumulative flows from January 1, 2001.
Provision of Data to the Fund
2. Data with respect to all variables subject to performance criteria
and indicative benchmarks will be provided to Fund staff on a monthly
basis with a lag of no more than eight weeks (two weeks for data on
the net domestic assets and net international reserves of the Bank of
Ghana). The authorities will transmit promptly to Fund staff any data
revisions. For variables that are relevant for assessing performance
against program objectives but are not specifically defined in this
memorandum, the authorities will consult with Fund staff as needed on
appropriate measurement and reporting.
3. Government is defined for the purposes of this memorandum
to comprise the central government, special funds (the Education Trust
Fund, the Road Fund, the District Assembly Common Fund) and includes
the various accounts of subvented and other government agencies that
are classified as part of government in the Bank of Ghana Monetary Survey,
as published in the Bank's Monthly Statistical Bulletin of December
2000. Public enterprises are excluded from the definition of government.
4. Government revenue comprises all tax and non-tax revenues
of government, excluding foreign grants and divestiture receipts.
5. Net domestic financing of government is defined as the change
in net credit to government by the banking system plus the net change
in holdings of treasury bills and other government securities by the
nonbank sector, but excluding divestiture receipts and government liabilities
assumed in the restructuring of the domestic debts of the Tema Oil Refinery,
the Electricity Company of Ghana, the Volta River Authority, and the
Ghana Water Company Limited.
6. The domestic primary balance is defined as the difference
between government revenue and noninterest government expenditure (excluding
foreign-financed capital expenditure, for which data are reported by
the Aid and Debt Management Unit), measured on a cash basis.
7. The program exchange rate for the purposes of this memorandum
will be the end-March exchange rate of 7205 cedis per dollar.
8. Reserve money is defined as the sum of currency in circulation,
commercial banks' deposits at the Bank of Ghana in cedis and private
sector demand deposits at the Bank of Ghana in cedis. It will be measured
by the indicated stock at end of month. If any bank fails to meet its
legal reserve requirement, currently 9 percent of bank deposits, then
reserve money will be adjusted upward to the extent of any shortfall
in compliance with that reserve requirement.
9. Net international reserves of the Bank of Ghana are defined
for program monitoring purposes as reserve assets of the Bank of Ghana
net of its short-term external liabilities. Reserve assets are defined
as convertible external assets readily available to and controlled by
the Bank of Ghana and exclude pledged or otherwise encumbered external
assets, including, but not limited to, assets used as collateral or
guarantees for third party liabilities. Reserve assets include: gold,
holdings of SDRs, reserves in IMF, foreign notes and coins, foreign
securities, disposable balances with correspondent banks, and time deposits.
Data are reported by Bank of Ghana, Treasurer's Department (Table 3).
Short-term external liabilities are defined as foreign currency liabilities
to residents and nonresidents contracted by the Bank of Ghana at
original maturities of one year or less plus outstanding liabilities
to the IMF. All values are to be converted to U.S. dollars at actual
exchange rates prevailing at the test date.
10. Net domestic assets of the Bank of Ghana are defined as
the difference between reserve money and the net foreign assets of the
Bank of Ghana, converted from U.S. dollars to cedis at the program exchange
rate. Net foreign assets comprise the reserve assets of the Bank of
Ghana, as defined above, plus other Bank of Ghana claims on nonresidents,
minus the Bank of Ghana's liabilities to nonresidents, including outstanding
liabilities to the IMF.
11.The performance criterion on short-term external debt refers
to the outstanding stock of external debt with original maturity of
one year or less owed or guaranteed by the government or the Bank of
Ghana.2 Data are reported by the
Treasurer's Department in the Cash Flow and Foreign Assets and Liabilities
tables and should be converted into U.S. dollars at current exchange
12. The performance criterion on nonconcessional medium- and long-term
external debt refers to the contracting or guaranteeing of external
debt with original maturity of more than one year by the government,
Bank of Ghana, or the Tema Oil Refinery.3
Medium- and long-term debt will be reported by the Aid and Debt Management
Unit of the Ministry of Finance and (as appropriate) the Bank of Ghana,
measured in U.S. dollars at current exchange rates.
13. The stock of payment arrears in the road sector at the end
of March 2001 is recognized to be 234 billion and is expected to be
paid down according to the schedule in Table 1.
Performance will be measured by the outstanding stock measured in cedis
at the end of each quarter. Data on the stock of road arrears will be
reported to the IMF staff monthly (with a lag of no more than 4 weeks)
by the monitoring and evaluation department of the Ministry of Roads
and Highways. An arrear is a duly certified expenditure commitment that
was not paid during a period of 90 days after the date the bill was
issued. Any conversion of amounts from U.S. dollars into cedis will
be made at the program exchange rate. Conversion from other currencies
into U.S. dollars will be made at the actual exchange rates at each
14. External payment arrears occur when undisputed payments
are not made within the terms of the debt contract. Debt service payments
that may be subject to rescheduling agreements and are thus not paid
are not considered arrears for program purposes. This is a continuous
15. Official external program support is defined as grants
and loans provided by foreign official entities that are received by
the budget, excluding project grants and loans. The amounts assumed
in the program consistent with this definition are shown in Table 1.
16. Divestiture receipts are payments received by the government
in connection with the sale of state assets. The programmed amounts
consistent with this definition are shown in Table 1.
Divestiture receipts in foreign exchange are those recorded as such
in the Bank of
Ghana's Cash Flow.
17. The automatic adjustment formula for petroleum prices, which
was implemented in June 2001 and will operate continuously during the
pogram period, is defined to pass through to ex-refinery prices the
net cedi cost of refined petroleum product imports to ensure full cost
recovery at the Tema Oil Refinery (including financial charges, except
charges on debt subject to assumption by the government in 2001).
18. Deviations in official external program support, external debt
service payments, and divestiture receipts from the amounts programmed
in Table 1 will trigger adjusters for domestic
financing of government, net domestic assets of the Bank of Ghana and
net international reserves as indicated below.
19. Ceilings on net domestic financing (NDF) of the government
and net domestic assets (NDA) of the Bank of Ghana. Monthly differences
between projected and actual official external program support, external
debt service payments, and divestiture receipts in foreign exchange
will be converted to cedis at the actual monthly exchange rate and cumulated
to the test date. The ceilings on net domestic financing of government
and NDA will be reduced by the sum of (i) excess official external program
support; (ii) excess divestiture receipts; and (iii) the shortfall in
external debt service payments; all measured cumulatively. The adjustment
to the ceiling on the NDA of the Bank of Ghana with respect to deviations
in divestiture receipts will apply only to foreign exchange receipts.
The ceilings will be increased by 100 percent of any cumulative
shortfall in official external program support or excess in external
debt service, but will not be adjusted for a shortfall in divestiture
receipts. The upward adjustment is capped at the equivalent of US$50
million, converted to cedis at actual exchange rates.
20. Floor on net international reserves (NIR) of the Bank of Ghana.
Quarterly differences between projected and actual official external
program support, external debt service payments, and divestiture receipts
in foreign exchange will be converted to U.S. dollars at the actual
exchange rates prevailing at the test date. The floor on NIR will be
raised by the sum of (i) excess official external program support; (ii)
excess divestiture receipts in foreign exchange; and (iii) any shortfall
in external debt service payments. The floor will be lowered by 100 percent
of any shortfall in official external program support or excess in external
debt service payments, but will not be adjusted for any shortfall in
divestiture receipts. The downward adjustment is capped at the equivalent
of US$50 million.
External Debt and Debt Service
21. To improve the transparency and accountability of external debt
management, the Minister of Finance has written to the Controller
Accountant General (CAGD) and the Governor of the Bank of Ghana setting
down the formal procedures for settlement of debt and specifying the
functions that the CAGD and the Bank of Ghana are expected to fulfill
in carrying out those procedures. In addition, the following measures
have been initiated and will be maintained:
a) All Ministries, Departments and Agencies (MDA) have been informed
that the Aid and Debt Management Unit (ADMU) in the Ministry of Finance
is the only entity authorized to contract or guarantee external debt,
and all leases with a total value above US$ 100,000 should be submitted
to ADMU for authorization.
b) The Minister of Finance has sent a circular to all donor desks officers
in the Minister of Finance requesting that arrangements be put in place
to ensure that the ADMU is informed of all correspondence with creditors,
including the latest information on disbursements and project financing
developments and any notices of payment due. All new loan documents
should also state clearly that the ADMU is the main initial point of
contact for settlement of all debt obligations.
c) Formal procedures have been established requesting donors and creditors
to confirm with ADMU debt payment obligations - including for government
guaranteed obligations - in advance of payment due dates.
d) Formal delegations have been put in place in the Ministry of Finance
and at the CAGD to ensure that an absence of sufficient signing authority
does not delay payment requests. In addition, a register will be kept
of the timing of formal debt payment actions. This register should be
signed by the various institutions involved in the payment of external
e) In the event that a shortage of foreign exchange results in a queuing
of debt service obligations at the Bank of Ghana, delaying payments
beyond their due dates, the Ministry of Finance is responsible for issuing
any instructions needed to revise payment priorities and for maintaining
a record of payment arrears. Formal reporting and follow-up procedures
have been established for the Bank of Ghana to confirm the transactions
to CAGD and the ADMU in the MOF on a daily basis. These reports contain
information on the transactions completed as requested, transactions
previously queued and paid and transactions added to the queue. These
reports are copied to both the governor of the Bank of Ghana and the
Minister of Finance and his senior officials.
f) The procedures for verifying data to the Fund have been formalized,
so that a senior officer from the Bank of Ghana has been formally delegated
with the responsibility for the compilation and verification of data
on program conditionality to be reported to the Fund. Formal reconciliation
procedures to verify both the derivation of data reported to the Fund
and the Bank of Ghana internal audit procedures have been amended to
include a periodic check that procedures are followed.
The conversion of TOR's overdraft with GCB to a long-term government bond
will be treated as an asset swap and will be incremental to the programmed
level of net credit to government.
2 (A) The term "debt" has
the meaning set forth in point No. 9 of the Guidelines on Performance
Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August
24, 2000). (B) Excluded from this performance criterion are normal import-related
credits, pre-export financing credits of public enterprises, cocoa loans
collateralized by cocoa contracts, and individual leases with a value
of less than US$100,000.
3 (A) This performance criterion applies
not only to debt as defined in point No. 9 of the Guidelines on Performance
Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August
24, 2000) but also to commitments contracted or guaranteed for which value
has not been received. (B) Excluded from this performance criterion are
individual leases with a value of less than US$100,000, debts with a grant
element equivalent to 35 percent or more, calculated using currency-specific
discount rates based on OECD commercial interest reference rates and loans
or purchases from the IMF. The grant element of each loan will be assessed
only with regard to (i) the interest rate and repayment schedule of the
loan and (ii) any grants or other concessional loans provided by a foreign
official entity in connection with the loan in question.