Ghana and the IMF

News Brief: IMF Completes Fourth Review Under the PRGF Arrangement for Ghana and Approves US$65 Million Disbursement

Country's Policy Intentions Documents

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile

GhanaLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

January 31, 2002

The following item is a Letter of Intent of the government of Ghana, which describes the policies that Ghana intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Ghana, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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 of the progress made in implementing the third year of the economic program, and to request an extension of the arrangement and disbursement of the fifth loan under the arrangement following completion of the fourth review.

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 2002. The Technical Memorandum of Understanding (Attachment II) provides explanatory notes to clarify the MEFP.

3. The recently elected Government of Ghana made considerable progress in stabilizing the economy in 2001, as evidenced by sharply lower inflation and a stabilization of the exchange rate. The Government of Ghana believes that the policies it intends to implement in 2002, as described in the MEFP, will further cement macroeconomic stability and create the conditions for sustained economic growth. On this basis, it requests completion of the fourth review under the arrangement, and waivers for the nonobservance of the end-August 2001 performance criteria on: (a) the stock of outstanding short-term external debt contracted or guaranteed by the government or the Bank of Ghana; (b) the stock of government road arrears; (c) the restructuring of the bank debt of the Tema Oil Refinery; and (d) completion of the audit of 2000 domestic arrears and plan for their liquidation.

4. The Government made every effort to implement its program on schedule under very difficult circumstances. In assessing compliance with performance criteria for August 31, 2001, it may be noted that, with regard to the short-term external debt, in the course of the recent review of the data with Fund staff, the technical coverage of this item was revised to include outstanding overdraft positions of the Bank of Ghana with correspondent banks as reflected in the Statement of Accounts (on a gross basis) and not the previously reported Treasury Data (which was on a net basis). Second, the TOR debt restructuring agreement with the major commercial bank creditor was reached in August while the other bank signed off on September 13, 2001, barely two weeks after the August 31 deadline. The two agreements became effective in July and August 2001 respectively, and the Government has made the first semi-annual payments on these bonds.

5. On completion of the fourth review, the government of Ghana requests disbursement under the PRGF arrangement of SDR 52.58 million. A fifth review under the PRGF arrangement will be completed by November 15, 2002. In order to allow time for this final review to be completed, we request an extension of the arrangement to November 30, 2002.

6. 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.

7. 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.

8. 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 external website.

9. 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
Minister of Finance



Hon. Paul A. Acquah
Governor of the Bank of Ghana

Memorandum of Economic and Financial Policies

of the Government of Ghana for 2002

January 31, 2002

I. Introduction

1. Following the severe terms of trade shock and financial crisis in 2000, the newly-elected government of Ghana adopted an economic program for its first year in office with the paramount objectives of curtailing inflation and putting the public finances back on a sustainable path. This program, which was set out in our Memorandum of Economic and Financial Policies dated June 11, 2001, was the initial phase of a medium-term strategy aimed at reducing domestic indebtedness and freeing up scarce resources for investment and growth in the Ghanaian economy. At the same time, the government worked to elaborate and expand that strategy, with the broad-based participation of civil society and the international community, into a comprehensive plan for accelerated development and sustained poverty reduction. These efforts are expected to culminate with the completion of the Ghana Poverty Reduction Strategy (GPRS) in early 2002, which will lay out the broad policy agenda for 2002-2004.

2. In support of its poverty reduction strategy, and its own efforts to reduce the burden of domestic public debt, the government decided to seek relief on its external debt obligations, including under the enhanced HIPC Initiative. Current estimates suggest that Ghana could in due course receive debt relief equivalent to 56 percent of the value of its external debt at end-2000 under the enhanced HIPC Initiative, and that external debt payments would be reduced in 2002 by US$249 million.

3. This memorandum reports on implementation of the government's economic program in 2001, and sets out key elements of the 2002 program, in line with the draft GPRS. The program for the coming year will seek to build on progress achieved thus far in achieving financial stability, while intensifying efforts to strengthen public sector management and lay the foundations for sustained economic growth.

II. Program Performance During 2001

4. During 2001, considerable progress was made in achieving stabilization of the Ghanaian economy. From a peak of 42 percent in March 2001, consumer price inflation declined to 21 percent by December, compared to the program target of 25 percent. Following a sharp depreciation in 2000, the cedi stabilized at around 7,200 per U.S. dollar during 2001. Gross international reserves continued to recover, from US$264 million at end-2000 to a projected US$352 million (1.2 months of imports) by December 2001. The objective of 4 percent real growth in the economy is expected to be realized, aided in part by stability in the terms of trade, following sharp losses in the previous two years.

5. These positive results were achieved by firm financial discipline. Aided by government's strict control of cash expenditures, the Bank of Ghana succeeded in reducing the stock of reserve money by 5 percent during the first eight months of 2001, reversing a good part of the excessive monetary expansion that occurred in 2000. The end-August 2001 targets for the government's domestic primary surplus and net domestic financing, and for increases in the net domestic assets and net international reserves of the Bank of Ghana, were all met. The program limit on nonconcessional external borrowing was also observed, but the ceiling on short-term external debt was exceeded, due to the inclusion in the data of the Bank of Ghana's overdraft positions with foreign banks. These overdraft positions had previously been netted from gross reserves rather than recorded as short-term debt.

6. While cash expenditures of the government were kept within budget, control of spending commitments remained weak. The new system for cash flow forecasting and ceilings on expenditure commitments was not fully implemented during the third quarter of 2001, as had been hoped. As a result, new non-road arrears of some 176 billion are estimated to have accumulated during the first eight months of the year. The stock of road arrears, which was targeted to decline to 190 billion by end-August 2001, instead continued to rise to 278 billion by that date. In addition, a total of 393 billion in outstanding payments due to the District Assemblies Common Fund (DACF), Ghana Education Trust Fund (GETF), and Social Security and National Insurance Trust (SSNIT) were accumulated in the year to end-August 2001. At the same time, however, the government cleared 442 billion in pre-2001 non-road arrears, more than double the amount originally budgeted for arrears clearance in 2001.

7. The government attaches great importance to its objective of reducing the domestic debt burden, and hence was determined to achieve its original program target for the domestic primary balance of 1,515 billion for 2001 as a whole. Tax revenues are expected to fall some 3½ percent below target in 2001, due in part to delays in implementing some of the 2001 Budget measures, while the wage settlement finally negotiated with public service workers was higher than planned. To offset these losses to the budget, the government set reduced ceilings on expenditures for goods and services and capital projects for the last quarter of 2001, which were rigorously enforced by the CAGD and Ministry of Finance. At the same time, the government decided that it was unwise to transfer during the remainder of 2001 the full amount of statutory payments accruing to the DACF and GETF, given the funds' limited capacity to spend these resources in 2001. Instead, the government transferred approximately 35 percent of its 2001 obligations to these funds before the end of 2001, and the balance will be transferred in tranches during 2002-2004.

8. The program envisaged that a full audit of the stock of expenditure arrears accumulated in 2000 would be completed by end-August 2001, and a plan adopted for their liquidation. In the event, the work needed to carry out this audit, which was conducted by donor-funded consultants, was considerably more extensive than expected, and the full audit will now be completed by end-March 2002. However, the auditors have provided an interim report with a preliminary estimate for pre-2001 non-road, non-statutory arrears of 420 billion. In addition, the government has supplemented this work with its own audit of non-road government expenditure arrears accumulated during January-August 2001 and of the stock of outstanding road arrears, to provide a more complete assessment of the scale of arrears that would need to be addressed in the 2002 Budget. Meanwhile, for the remainder of 2001, sufficient funds were allocated to clear all but 35 billion of the new non-road arrears accumulated in 2001, and to limit the increase in the stock of road arrears during the year to 81 billion.

9. Progress was made on the implementation of structural measures affecting public enterprises in the energy sector, although with some delays. Agreements were reached in August and September with creditor banks to restructure a portion of the domestic debt of Tema Oil Refinery (TOR) that had resulted from a failure to adjust petroleum prices in line with world prices in 1999 and 2000. The agreements reached with the commercial bank creditors on TOR debt were effective in July and August and the government effected the first semi-annual interest payments due to the banks on the bonds in December 2001 and January 2002 respectively. In exchange for short-term claims on TOR, banks received longer-maturity government bonds. On August 17, 2001, a 15 percent excise tax was imposed on petroleum products, followed on October 31 by specific duties averaging 200 per liter. In addition, in order to defray further TOR's accumulated debts resulting from previous petroleum price controls, Parliament has approved the principle that part of any potential savings which may accrue from future reductions in world oil prices would be used to service the TOR debt. Accordingly, the petroleum price adjustment formula will be modified from end-March 2002 to incorporate a petroleum debt service surcharge (PDSS), where the PDSS will be set at 95 percent of any decline in oil import costs from the average level prevailing during November 27-December 26, 2001. The petroleum price adjustment formula, as modified, will be applied throughout 2002.

10. The Public Utilities Regulatory Commission held extensive public hearings during the summer of 2001 on plans for a phased transition to full cost recovery in the electricity sector and implementation of an automatic tariff adjustment formula for electricity tariffs. The plan was finalized in November 2001, and implementation will begin by end-April 2002. A similar consultative process is underway on a transitional plan for cost recovery in water tariffs. In this case, however, complications related to the authorities' intention to seek a private capital injection for the upgrading and expansion of the water infrastructure will delay conclusion and implementation of the water tariff adjustment plan to June 2002.

11. The government had intended to raise not less than US$50 million from divestiture proceeds in 2001. However, a new Board for the Divestiture Implementation Committee (DIC), which would oversee and ensure the transparency of these asset sales, was not approved by the Council of State until late August 2001. Work then began in earnest on the necessary asset valuations, but the delays mean that the proceeds from divestiture in 2001 will be no more than US$14 million. Financial and management audits of 11 major public enterprises, including ECG, GWCL, and TOR, were initiated in August 2001 and final reports were submitted on December 15, 2001. Consideration is being given to launching similar audits for Cocobod, VRA, and GPHA, which would be completed by mid-2002.

12. As part of its strategy to ease the burden of domestic debt on Ghana's economy, the government began in September 2001 to extend the maturity of its domestic debt by issuing three-year inflation-indexed bonds. By end-2001, it was expected that approximately one fifth of the stock of 90-day treasury bills would have been replaced with the new indexed instruments.

13. As planned, a revised Bank of Ghana Law was submitted to Parliament in August 2001, and passed into law in December. The new law clarifies the objectives and strengthens the independence of the central bank. Progress in this respect was reinforced by the Bank of Ghana's divestiture in December 2001 of all remaining shareholdings in financial institutions that it supervises.

III. The Program for 2002

A. Macroeconomic Objectives

14. In line with the medium-term objectives laid out in the GPRS, the government's economic program for 2002 is designed to:

  • Improve the standard of living of ordinary Ghanaians by raising real growth to at least 4.5 percent;

  • Increase spending on poverty, financed in part through the start-up of interim debt relief under the HIPC Initiative;

  • Reduce inflation from 21 percent at end-2001 to 13 percent by end-2002; and

  • Rebuild gross official reserve holdings to 2 months of imports of goods and services.

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 maintaining a domestic primary budget surplus of 4.1 percent of GDP (excluding expenditures financed by HIPC relief), and by using any unprogrammed receipts from divestiture and program aid, as well as a portion of HIPC relief, to retire domestic debt;

  • Regaining effective control and monitoring of public expenditures;

  • Containing the indebtedness of the main parastatals through price adjustments and explicitly allocated subsidies from the budget, until full cost recovery can reasonably be obtained;

  • Continued monitoring and protection of the health of the banking system; and

  • Developing an effective interbank foreign exchange market to improve the allocation of external resources.

B. Financial Policies for 2002

Fiscal Policy

15. The government's detailed expenditure plans for 2002 have been drawn up in line with the programs and priorities identified in the draft GPRS. In formulating these plans, the government has made provision for a 20 percent full-year increase in civil service wages, which together with the 2001 pay increase will more than fully correct the erosion in real wages of government workers that occurred during 1999 and 2000. The budget will also incorporate real increases in allocations for domestic capital expenditure, by comparison with the necessarily tight limits imposed in 2001, to give effect to the development goals outlined in the GPRS. Overall capital expenditures could be increased further if additional foreign assistance were to become available. The statutory transfers due to the DACF, GETF, and SSNIT in 2002 will be budgeted and paid in full, in addition to 337 billion of unpaid obligations from 2001. For the first time, the 2002 Budget will also contain an explicit allocation to cover the cost of price subsidies in the electricity and water sectors (see below).

16. To fund these spending needs while maintaining a firm downward trend in the ratio of domestic debt to GDP, the government will introduce revenue measures with a total yield of 1 percent of GDP in 2002. These measures will be designed to place government finances on a sounder long-term footing by emphasizing efficient, broad-based taxation. The total package will include some initial measures to be introduced with the 2002 Budget, with a combined yield of 0.3 percent of GDP. These will include the elimination of a range of tax and tariff exemptions, the application of a 5 percent import duty rate to a set of major product lines that are currently zero-rated, the application of a 1 percent processing fee on all remaining zero-rated items and on items attracting a 10 percent concessionary rate, the introduction of a 10 percent withholding tax on rental income, and a restructuring of the lottery sector to increase the proceeds flowing to the budget. Further broad-based measures with a 2002 yield of not less than 330 billion (equivalent to 0.7 percent of GDP) will be formulated and submitted to Parliament, for intended passage before the summer parliamentary recess in August 2002.

17. The government has already taken a range of measures designed to strengthen revenue collection and administration, including the creation of a National Tax Audit Team and appointment of a head of the Revenue Agencies Governing Board (RAGB) to enhance coordination among the separate agencies. One task of the RAGB will be to ensure full implementation by CEPS and IRS of the common Taxpayer Identification Number (TIN) by June 2002. In addition, government intends to announce in the 2002 Budget plans to create a fully integrated Large Taxpayers Unit (LTU), with the purpose of amalgamating the assessment, processing, and auditing functions for all the tax liabilities of each large taxpayer. A timetable for creation of the LTU will be adopted by end-June 2002. While these measures will generate additional receipts over time, for reasons of prudence, no allowance for additional receipts has been made in the revenue projections for 2002.

18. The government will request that Ghana's increased revenue effort be supplemented by external debt relief under the enhanced HIPC Initiative. The total relief that Ghana could receive in 2002 is estimated at US$249 million (net of debt service on the deferral of 2001 payments), which is equivalent to about 4 percent of GDP. Of this, the portion ascribed to traditional debt relief mechanisms (US$153 million) has already been incorporated in the fiscal program for 2002. From the additional component (US$96 million) attributable to enhanced HIPC relief, 80 percent will be used to fund further poverty-related expenditures, as specified in the GPRS, and 20 percent to reduce domestic debt.

19. Net domestic financing of the government will not exceed 139 billion (0.3 percent of GDP) in 2002. This assumes program loans and grants of 1,313 billion and divestiture proceeds of 377 billion, in addition to the budgetary savings from projected debt relief. A financing gap of 427 billion remains, for which the government intends to seek additional concessional program support. To the extent that the realized sum of divestiture receipts and program loans and grants exceeds the amounts assumed in the fiscal program, the additional resources will be used to accelerate the process of domestic debt reduction, thereby making room for additional priority expenditures in subsequent years. If the aggregate receipts from program loans and grants 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

20. The government attaches the highest priority to the effective control and monitoring of public expenditure. The establishment of effective expenditure control, particularly at the commitment stage, is a central plank of the program for 2002, and is a prerequisite for ensuring the appropriate use of interim relief under the enhanced HIPC Initiative. The government will therefore implement, throughout 2002, the following procedures:

  • The issuance, no later than 15 days before the start of each quarter, of rolling disaggregated quarterly expenditure ceilings for each MDA, consistent with the budget and updated cash flow forecasts;

  • The production by CAGD of monthly reports on aggregate budget outcomes and MDAs' expenditure cash outlays and commitments, showing deviations from the established quarterly ceilings and accumulated arrears (if any), with a maximum six-week delay.

To verify that these procedures are in place, the Ministry of Finance has issued to MDAs the disaggregated expenditure ceilings for the first quarter of 2002, and the CAGD has produced the reports specified above for the months of January-October 2001.

21. The stock of expenditure arrears on road projects continued to mount during 2001, contrary to the government's specified objective that this stock be sharply reduced. As a result, and pending the completion of ongoing audits of road arrears, the target date for their full clearance has been pushed back from March to June 2002. In support of this goal, the government will take steps to improve the control over expenditure commitments in the road sector by limiting certificates of continuation on ongoing projects and new certificates of commencement to the quarterly 2002 budget allocations for the Ministry of Roads, while ensuring that the stock of road arrears is cleared on schedule. The government will also seek to rescind those contracts for road construction that allow contractors willing to prefinance new projects to initiate work without prior authorization, since such contracts inhibit the government's ability to control its financial obligations.

22. The enhanced external debt monitoring practices adopted in 2001 (as described in the TMU) are in place and being followed. These include tighter control over the contracting of new government debt to ensure a grant element of at least 35 percent in all new borrowing, closer monitoring of external debt service obligations and payments, and a more systematic exchange of external debt information between the Ministry of Finance aid and debt management unit and the Bank of Ghana.

Monetary, Exchange Rate and Financial Sector Policies

23. To achieve the target rate of inflation for end-2002, the Bank of Ghana will use appropriate monetary instruments to control growth in its net domestic assets, and hence in reserve money growth. The quarterly targets, consistent with reserve money growth during 2002 of 18.7 percent, are shown in Table 1. This should be sufficient to accommodate the target level for credit to the government and a rebuilding of net international reserves (NIR) by at least US$156 million.

24. The government and the Bank of Ghana have agreed that it is important, for the purposes of safeguarding the financial system as well as the public purse, that the finances of public enterprises and the impact of their operations on the banking system be more closely monitored. For this purpose, the Portfolio Management Unit in the Ministry of Finance will prepare quarterly reports for the Minister of Finance and the Governor of the Bank of Ghana on the financial positions of Cocobod, ECG, SSNIT, TOR, and VRA.

25. The functioning of the foreign exchange market has improved markedly in 2001, as monetary discipline has been restored and macroeconomic performance strengthened. The Bank of Ghana has maintained a policy of non-intervention in the exchange market, and has made no foreign exchange sales to the market other than those for oil imports, allowing the exchange rate to be determined by market forces.

26. Looking ahead, the Bank of Ghana intends to build on this progress and foster the development of an effective interbank foreign exchange market. It is important, however, to proceed cautiously and prepare the ground well. In particular, a viable market-based arrangement for financing oil imports must be secured before steps are taken to redirect cocoa proceeds, which are currently surrendered to the Bank of Ghana in large and discrete amounts, into the commercial banking system. A plan to this effect will be developed following consultations with commercial banks, during the first quarter of 2002, on the appropriate market structures and technical reforms needed to facilitate interbank trading in foreign exchange.

C. Structural Policies for 2002

27. The government regards restoring the financial health of the public energy and utility companies as one of its highest priorities over the next 1-2 years. To prevent a recurrence of the huge parastatal losses built up in 1999 and 2000, which will be a burden on consumers and taxpayers for many years to come, the government intends to:

  • urge the Public Utilities Regulatory Commission to finalize its transitional pricing policy for electricity and water—including automatic adjustment formulae to reflect changes in cedi costs of imported inputs and a timetable for movement to full cost recovery—with a view to beginning implementation by end-April 2002.

  • monitor, with assistance from the World Bank, the impact of PURC's plan on the finances of ECG, VRA, and GWCL, to ensure that the provision in the 2002 budget for transfers to these companies to cover the implied subsidies to consumers associated with price controls is adequate.

  • complete financial and management audits of these companies, and develop a plan whereby government would take over the debts caused by previous consumer price subsidies that arose from suppression of utility prices below cost recovery.

  • give special consideration to targeted subsidies to "buy down" water rates for the poor, in recognition that water is a staple with a significant bearing on the living standards of the poor.

So as not to further aggravate the finances of the parastatals, the government will remain current on its own payments for utilities and on the budget transfers needed to cover the implicit consumer subsidies.

28. A preliminary assessment indicates that the impact of the TOR debt restructuring has worked to lift pressure from the balance sheets of commercial banks and begin stabilizing TOR's own financial position. TOR's cash flow is expected to improve substantially when secondary distillation facilities come on line in the second half of 2002. Meanwhile the authorities are in discussions with private sector firms on a comprehensive agreement to assume full management of the refinery. The government also intends to consult with oil companies and other stakeholders with a view to the possible dismantling of TOR's monopoly of the import of petroleum products. This would enhance competition in the petroleum sector, as well as aiding development of the interbank foreign exchange market.

29. The government regards divestiture of state holdings in commercial enterprises as a core component of its strategy to promote private sector development. The agenda for 2002 includes:

  • The planned "fast track" sale of state holdings in 12 companies, including Ghana Telecom. Valuations for these assets will be completed and potential buyers identified during the first quarter of 2002, and sales are expected to begin in the second quarter, with a projected yield of at least US$33 million (½ percent of GDP) in 2002.

  • Privatization of the National Investment Bank and Ghana Commercial Bank.

  • The sale on the stock market of government shares in the Cocoa Processing Company, expected by mid-2002.

  • The offer for sale of the Electricity Company of Ghana, for which a transactions adviser has already been appointed and valuations completed.

30. To further its goal of improving the country's investment climate, the government is in the process of establishing an Investors' Advisory Council, the inaugural meeting of which is planned for April 2002. This body will be chaired by the President of Ghana, and will include top-level executives from the Ghanaian business community, multinational companies invested in Ghana, and other major international companies. Its broad objective is to provide a local and international investors' perspective on Ghana's strategy to stimulate growth and private investment, and recommend concrete measures to enhance the policy environment for business investment in Ghana.

31. In this same vein, the government intends to reduce progressively the distortions inherent in Ghana's import tariff regime, which are an impediment to efficient private sector activity. A key step will be the elimination of the special import tax in the 2002 Budget, to be replaced later with anti-dumping measures that are consistent with WTO rules.

D. The PRSP and HIPC Processes

32. The Ghana Poverty Reduction Strategy is now expected to be completed in early 2002. This extension of the original timetable was made in order to allow sufficient time for the completion of public consultations and development of a costed, prioritized policy program. The work on the strategy had already advanced sufficiently, however, to provide a framework for expenditure allocations in the 2002 Budget. A progress report on development of the GPRS to date and the remaining steps to completion has been prepared by the government and will be provided for consideration along with the HIPC decision point document and request for the PRGF disbursement.

E. Good Governance and Fiscal Transparency

33. The government came into office with a pledge of zero-tolerance for all acts of corruption. A new anti-corruption strategy has been put in place, including Codes of Conduct for state officials, 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. As part of these efforts, the BOG has instituted new procedures to counter money laundering , whereby suspicious transactions are reviewed, and third-party transfers are checked against a list of suspected organizations. A new anti-money laundering bill is also under preparation.

34. The government notes that the Bank of Ghana has published new monetary data, correcting the underrecording of reserve money in the old series. It welcomes the request by the new Governor that this year's external audit of the central bank be conducted by auditors of international standing and experience, as a signal of the new management's determination to ensure full and accurate data for policymaking purposes. The auditors were appointed in December 2001, and the financial audit is expected to be completed by end-March 2002. In addition, the Bank of Ghana has been implementing a series of measures to improve the quality and reliability of monetary statistics, with technical assistance from the IMF, and this work will continue during 2002. The government is also committed to improving progressively the quality and coverage of Ghana's fiscal data, as a means to strengthen policymaking and accountability. In pursuit of this objective, the government will draw upon a Report on Standards and Codes in Fiscal Transparency planned for Ghana during the first half of 2002 to define an agenda for action, not only on fiscal data but also on budget processes and reporting. As an initial step, all MDAs will be required, from the beginning of 2002, to report to the Ministry of Finance expenditures financed from internally generated funds (such as user fees) and from direct donor funding. In addition, the government will seek the agreement of donors to channel all donor resources through government accounts (including committed donor accounts) at the Bank of Ghana, as well as all internally generated funds, where permitted by law. This will be particularly important for the effective tracking of poverty-related expenditure, to which Ghana is committed as a prospective recipient of HIPC relief.

35. For transparency reasons, the government has also made provision in the 2002 budget for transfers to the electricity and water companies to cover estimated price subsidies implied by the phased transition to full cost recovery in these sectors. This ensures that the cost of the subsidies and their financing are made explicit, rather than accumulating as ever-larger debts in the public utilities, and will also facilitate better targeting of subsidies in favor of the poor. The transfers will be made to ECG and GWCL on a quarterly basis, one month after the end of the quarter. The conversion of part of TOR's bank debt into government bonds, which will be serviced in 2002 from the budget, similarly serves to improve the transparency of the public finances, and to increase TOR's accountability for its future financial performance.

F. Program Monitoring for 2002

36. Technical Memorandum of Understanding. The program will be monitored using the definitions, data sources, and frequency of monitoring set out in the accompanying Technical Memorandum of Understanding (TMU). The government will make available to Fund staff all core data on a timely basis, as specified in the TMU.

37. Prior Actions. The government will undertake a number of actions prior to the IMF Board meetings on the fourth and fifth reviews under the PRGF in order to ensure effective implementation of the economic strategy described in this memorandum (Table I.2).

38. Performance criteria. Table I.1 shows the quantitative performance criteria and benchmarks set for June 2002, with indicative benchmarks for March, September, and December 2002. Structural performance criteria and benchmarks with corresponding dates are identified in
Table I.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.

39. Program review. A fifth review under the PRGF arrangement will be completed by November 30, 2002. In addition to the specified prior actions, this review will focus on implementation of (i) the public expenditure management and control system, (ii) the steps to develop a functioning interbank foreign exchange market, and (iii) measures to further strengthen monetary and fiscal data systems.

Table I.1 (Use the free Adobe Acrobat Reader to view this file, 348 Kb PDF file)

Table I.2. Prior Actions, Structural Performance Criteria and Benchmarks

Prior Actions for Fourth Review

    1. Full implementation of the specific duties on petroleum (averaging 200 per liter).

    2. Issuance to MDAs of disaggregated expenditure ceilings for the first quarter of 2002, consistent with the fiscal targets for 2002.

    3. Provision of CAGD reports for the months of January-October 2001 on aggregate budget outcomes and MDAs' expenditure commitments and cash outlays, showing deviations from the established quarterly ceilings and any accumulated arrears.

    4. Completion of audits at the MDA level of the full stock of domestic expenditure arrears for January-August 2001, and adoption of a strategy for their liquidation.

    5. Cabinet approval of revenue measures with a combined yield in 2002 of not less than 115 billion, for implementation with the 2002 Budget.

    6. Commencement of the external financial audit of the Bank of Ghana.

Structural Performance Criteria

    7. Elimination of the special import tax in the 2002 Budget, effective immediately (end-March 2002).

    8. Announcement in the 2002 Budget of intent to create a full-service Large Taxpayers' Unit (LTU) for the 500 largest taxpayers, covering filing and payment, collection enforcement, and audit for all domestic tax liabilities, and adoption of a timetable for its establishment (end-June 2002).

Structural Benchmarks

    9. Issuance of disaggregated expenditure ceilings for each MDA for the second, third, and fourth quarters of 2002, consistent with the budget and cash flow forecasts (end-April 2002).

    10. Production by CAGD of monthly reports for November 2001-March 2002 on aggregate budget outcomes and MDAs expenditure commitments and cash outlays, by function, with a maximum 6-week delay (end-May 2002).

    11. Completion and publication of audit of 2000 non-road expenditure arrears (end-June 2002).

Prior Actions for Fifth Review

    12. Passage of a Budget for 2002 in line with the program framework described in this memorandum, and of revenue measures consistent with that Budget.

    13. Publication by the PURC of its strategy for achieving full cost recovery in the public utilities, and implementation of automatic tariff adjustment formulae for electricity and water.

    14. Completion of an external audit of the Bank of Ghana's financial accounts for 2001.

Technical Memorandum of Understanding

1. This technical note contains definitions and adjuster mechanisms that are intended to clarify the measurement of items in Table I.1, Quantitative Performance Criteria, PRGF Arrangement, 2002, 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, 2002.

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 as well as all special funds (the Education Trust Fund, the Road Fund, the District Assembly Common Fund) and various subvented and other government agencies that are classified as government in the Bank of Ghana (BOG) Statement of Accounts. Public enterprises, including Cocoabod, are excluded from the definition of government.

4. Government domestic revenue comprises all tax and non-tax revenues of government (in domestic and foreign currency), excluding foreign grants and divestiture receipts. Revenue will be measured on a cash basis as the inflows to government uncommitted treasury collections accounts, plus positive balances on committed accounts of the government at the BOG.

5. Poverty-related expenditures refer to those expenditures identified in Table 6 of the Decision Point Document for the Enhanced Heavily Indebted Poor Countries Initiative. The last three digits of the chart of accounts are to identify budget expenditures that are poverty-related and the sub-component which is financed by HIPC relief.

6. Net domestic financing of government is defined as the change in net credit to government by the banking system (i.e., the Bank of Ghana plus deposit money banks) plus the net change in holdings of treasury bills and other government securities by the nonbank sector, but excluding divestiture receipts, 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, and/or recapitalization of the Bank of Ghana. Outstanding net credit to the government by the Bank of Ghana is comprised of the sum of claims on government (codes 401 and 50101-4) less government deposits (1101 and 1202 and the BOG open market operations account; as defined in the Template of the BOG Statement of Accounts provided to the IMF on January 24, 2002), including the HIPC account. Outstanding net credit by deposit money banks is comprised of DMB holdings of government securities at cash value, as reported by the BOG Treasury Department's Debt Registry, less government deposits reported by DMBs in their BSD2 report form (as defined in the template for reporting of DMBs provided to the IMF on January 24, 2002). For each test date, any adjustment by the BOG to the data reported by individual DMBs, on account of their misclassification of government or for other reasons, will be reported to the Fund.

7. The domestic primary balance is defined as the difference between government domestic revenue and noninterest government expenditure as reported by the CAGD (i.e., payment vouchers issued for expenditures on items 1-4), but excluding foreign-financed capital expenditure, for which data are reported by the Aid and Debt Management Unit and expenditures to be financed by HIPC relief (i.e., those paid out of the HIPC Account of the CAGD; see below). The measurement will be on a cash basis, with any positive (negative) discrepancy between the above- and below-the-line measure of the overall balance being added to (subtracted from) the measure of the domestic primary balance.

8. The program exchange rate for the purposes of this memorandum will be 7205 cedis per dollar.

9. Reserve money is defined as the sum of currency in circulation (BOG statement of accounts codes 901 plus 902), commercial banks' deposits at the Bank of Ghana in cedis (code 110201 excluding overdrafts, banks in liquidation, and blocked accounts) and private and other non-government demand deposits at the Bank of Ghana in cedis (excluding blocked accounts). 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.

10. Net foreign assets are defined for program monitoring purposes and in the monetary survey as short and long term foreign assets minus liabilities of the Bank of Ghana which are contracted with non-residents. Short-term foreign assets include: gold (valued at the spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserves and investments in the IMF, foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, and other positive short-term or time deposits. Short-term foreign liabilities include foreign currency liabilities contracted by the Bank of Ghana at original maturities of one year or less (including overdrafts), plus outstanding liabilities to the IMF. Long-term foreign assets and liabilities are comprised of assets (303), investments abroad (a subset of 60101), liabilities (1204), and bilateral agreements (305), all excluding swap deals receivable and payable with resident commercial banks. All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date.

11. Net international reserves of the Bank of Ghana are defined for program monitoring purposes and in the balance of payments as short-term foreign assets of the Bank of Ghana, net of its short-term external liabilities. To the extent that short-term foreign assets are not fully convertible external assets readily available to and controlled by the Bank of Ghana (i.e., they are pledged or otherwise encumbered external assets, including, but not limited to, assets used as collateral or guarantees for third party liabilities) these will be excluded from the definition of NIR. Net international reserves are also defined to include net swap transactions (receivable less payable), minus positive foreign currency deposits by domestic non-government entities at the BOG (120501 and 120502). All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date.

12. Net domestic assets of the Bank of Ghana are defined as the difference between reserve money and net foreign assets of the Bank of Ghana, converted from U.S. dollars to cedis at the program exchange rate.

13. The performance criterion on short-term external debt refers to the outstanding stock of external debt with original maturity of one year or less, including overdraft positions, owed or guaranteed by the government or the Bank of Ghana. 1 Data on the Bank of Ghana's short-term external debt are those reported from the statement of accounts template as short-term liabilities to non-resident commercial banks (1201 plus 301 overdrafts plus Crown Agent). The limit on short-term external debt will exclude US$23 million in overdrafts with correspondent banks which are in dispute, until such time as these assets are re-classified.

14. 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 or Bank of Ghana. 2 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.

15. The stock of payment arrears in the road sector at the end of August 2001 is recognized to be 279.8 billion and is expected to be paid down according to the schedule in Table I.1. Performance will be measured by the outstanding stock measured in cedis at the end of each quarter. Any arrears in foreign currency will be converted into cedi at the actual exchange rate prevailing at the test date. 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 other currencies into cedis will be made at the actual exchange rates at each test date.

16. External payment arrears occur when undisputed interest or amortization payments are not made within the terms of the debt contract. Bilateral and commercial debt service payments that are subject to the deferral agreed with the Paris Club on December 10, 2001, or the rescheduling associated with the provision of interim HIPC relief, are not considered external arrears for program purposes. This is a continuous criterion.

17. 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, and other exceptional financing. Amounts assumed in the program consistent with this definition are shown in the memorandum item entitled "external program support" of Table I.1.

18. Divestiture receipts are payments received by the government (in domestic and foreign currency) in connection with the sale of state assets. The programmed amounts consistent with this definition are shown in Table I.1. Divestiture receipts in foreign exchange are those recorded as such in the Bank of Ghana's Cash Flow.

19. The automatic adjustment formula for petroleum prices, which was implemented in June 2001 and will operate continuously during the program 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). From March 2002, the formula will include a petroleum debt service charge, equal to 95 percent of any decline in oil import costs from the average level prevailing during November 27-December 26, 2001.


20. Deviations in official external program support, external debt service payments, and divestiture receipts from the amounts programmed in Table I.1 will trigger adjusters for domestic financing of government, net domestic assets of the Bank of Ghana and net international reserves as indicated below. These and other adjusters as set out below will be measured cumulatively from the beginning of 2002.

21. 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. 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. Both 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$75 million, converted to cedis at actual exchange rates.

22. 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$75 million.

Reporting of Fiscal Data

21. The Ministry of Finance will provide to IMF staff:

a) Monthly data on central budget operations for revenues, expenditure and financing with a lag of no more than 6 weeks after the end of the month.

b) Monthly reports showing the functional breakdown by Ministry, Department, and Agency of expenditure authorizations, payments vouchers issued, payment vouchers liquidated, and arrears with a lag of no more than 6 weeks after end of the month. These reports will also identify poverty-related and HIPC financed expenditures, as well as the inflows and disbursements from the HIPC account at the BOG.

c) CAGD monthly reports on the profile of central government revenues and expenditure (payment voucher issued) with a lag of no more than 6 weeks after end of the month.

d) Monthly reports prepared by the Ministry of Road and Highways on the stock of road arrears with a lag of no more than 4 weeks after the end of the month.

e) Quarterly reports (from the Portfolio Management Unit) on the financial positions of Cocoabod, ECG, SSNIT, TOR and VRA, with a lag of no more than 8 weeks after end of the month.

22. The BOG will provide the IMF staff:

a) Monthly summary tables reporting the government's position on BOG committed and uncommitted accounts as well as financing within 4 weeks of the end of the month. This table should be accompanied by the table showing the composition of other receipts and other expenditure.

b) Monthly tables showing the composition of banking system and non-banking system net claims on government, within 4 weeks of the end of the month.

c) Monthly tables showing the structure and holders of domestic government debt, within 4 weeks of the end-of the month.

External Debt and Debt Service and HIPC Relief

23. 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 debt.

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, and to the IMF staff on a monthly basis.

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.

g) A HIPC account has been established at the BOG for the receipt and disbursement of HIPC relief. When each debt service payment falls due, the Government of Ghana (or the BOG for IMF repurchases) will transfer to the HIPC account that proportion of the amount due which, under the terms of the HIPC Initiative, does not have to be paid to the creditor. For debt owed by public enterprises under the HIPC Initiative, the Government of Ghana will transfer to the HIPC account the debt-relieved portion of the debt service payment if the enterprise fails to do so on the due date. ADMU will issue, in advance of the due date, a request for payment to the CAGD indicating the portions due to the creditor and the HIPC account. ADMU will prepare a monthly report indicating for the coming month (i) the total debt service due by creditor, (ii) the amount of HIPC relief on each transaction, as well as (iii) the debt service paid and the transfers to the HIPC account by creditor for the previous month. This report will be provided within 2 weeks of end-month to the CAGD and to the IMF.

1 (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). This includes overdrafts on accounts with correspondent banks. (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.
2 (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.