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Public Information Notice (PIN) No. 03/62
May 16, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Ghana

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On May 9, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1

Background

Overall economic performance in Ghana during 2002 was mixed. Twelve-month inflation continued to fall, from 21 percent at end-2001 (down from a peak of 42 percent in March 2001), to 15.2 percent at end-2002. Larger-than-normal inflows of foreign exchange from the pre-financing of the cocoa crop contributed to a further improvement in gross international reserves to nearly 2 months of imports, despite a shortfall in external donor support. The stimulus from an improved terms of trade (relating to higher cocoa and gold prices, only partly offset by higher unit costs for imported petroleum), and a pick up in credit to the private sector, suggest that the targeted 4½ percent real growth rate for the economy may have been achieved. Good progress was also made on certain parts of the structural reform agenda, including in the areas of tax administration, financial sector reform, the move to full cost recovery for electricity and water, and governance.

Budget execution, however, was adversely affected by a large overrun on the civil service wage bill, non-implementation of the budget's key revenue measure, delays in moving forward with the divestiture program, and a shortfall in donor financing (partly policy-related). These were only partly offset by gains from improved tax administration and cutbacks in the capital spending, with the result that recourse to net domestic financing was 3.3 percent of GDP higher than the budgeted target of 0.3 percent of GDP, even after full application of an adjustment for shortfalls in external support.

Non-implementation of Ghana's petroleum pricing formula during 2002 led to substantial losses (estimated at 2 percent of GDP) by the state-owned Tema Oil Refinery. In mid-January 2003 the authorities raised petroleum prices by 95 percent on average, following an assumption by the government of almost 3 percent of GDP in debts of the refinery. Altogether, the slippages increased the stock of domestic government debt to nearly 29 percent of GDP at end-2002, or 8½ percent of GDP higher than envisaged at the time of the 2002 budget.

Driven by higher-than-expected government borrowing and, late in 2002, by a surge in cocoa revenues, broad money growth reached 50 percent by year's end. In response, the central bank stepped up open market operations in the fourth quarter and raised its prime interest rate by 3 percentage point (to 27.5 percent) in early 2003. The cedi depreciated against the U.S. dollar by 14.7 percent in the twelve months ended December 2002, and the real effective exchange rate remained broadly stable during the year.

In February 2003, the Government of Ghana finalized and published the Ghana Poverty Reduction Strategy (GPRS), which sets out the country's broad policy agenda for 2003-2005. The authorities are generating support for this strategy from the IMF, in the form of a new three-year arrangement under the Poverty Reduction and Growth Facility (see Press Release No. 03/66), as well as from Ghana's other development partners.

Executive Board Assessment

Directors noted that, following an initial strong consolidation effort, Ghana's macroeconomic performance in 2002 had been mixed. Progress was made in rebuilding foreign reserves and implementing structural reforms, particularly in the areas of tax administration, financial sector reform, and governance. Weaknesses in budget execution and parastatal finances—compounded by a shortfall in donor financing—had, however, resulted in a further substantial rise in the stock of domestic debt, and had complicated the implementation of monetary policy.

Against this background, Directors welcomed the authorities' program for 2003-05 and recent actions to strengthen public finances as an appropriate response to restore the strong reform momentum that will continue to be needed to deliver on the ambitious goals of Ghana's Poverty Reduction Strategy. The GPRS has benefited from extensive consultation with civil society, and provides a sound framework for achieving the government's objectives of raising private sector-led growth and further reducing poverty. Directors stressed that, to attain these objectives, the authorities will need to make a sustained effort to achieve and maintain macroeconomic stability, in particular through effective budget implementation, and press ahead with their structural reform agenda, including in the areas of financial sector reform and public enterprise restructuring.

Directors observed that the resurgence in inflation in early 2003 was most likely the result of a one-time realignment of prices in response to larger-than-anticipated adjustments in petroleum prices. The achievement of single-digit inflation will nevertheless require strong action in the period ahead. Directors welcomed, in this regard, the tightening of monetary policy by the Bank of Ghana, and urged continued readiness to take additional measures as necessary. They also underscored the important role that strict fiscal discipline will have to play in supporting the disinflation effort.

As regards fiscal policy, Directors commended the government's efforts to boost the country's budgetary resources through lasting tax measures. Together with continued external support and further improvements in tax administration, the enhanced revenue base should make it possible to achieve the spending priorities set out in the GPRS. Directors welcomed the attention paid by the authorities to the social impact of the recent tax measures, but a few Directors cautioned that they will further increase the complexity of Ghana's tax structure and might fuel inflationary pressures.

Directors were encouraged by the authorities' renewed commitment to strengthening expenditure discipline, but viewed with concern the continued rise in the civil service wage bill. Given the need to contain future increases in the wage bill, Directors urged the authorities to embark on a fundamental reform of the civil service, in collaboration with the World Bank and other donors. In the immediate period ahead, they stressed that effective public expenditure management will be key to ensuring that the fiscal aggregates and the composition of spending, with a clear focus on investment and poverty related expenditures, are realized as programmed. This will require careful and timely monitoring of budget execution and prompt corrective actions if necessary while, going forward, further continued efforts to strengthen public expenditure management will be needed.

Directors welcomed the steps taken to strengthen the finances of the major public enterprises, including the adjustments to petroleum, electricity, and water pricing to bring them toward full cost recovery. They urged full implementation of the pricing formulae and encouraged the authorities to liberalize petroleum pricing at the appropriate time. Directors also looked forward to rapid progress on the divestiture of the largest state-owned bank to reinforce the operation of the petroleum sector on a commercial basis, and help improve the overall soundness of the banking system.

Directors supported the authorities' structural reform priorities in the agriculture and energy sectors. They encouraged continued strong efforts to promote transparency, good governance, and fight corruption by further strengthening the audit and legal systems. To enhance the contribution of the financial sector to private sector development, Directors looked forward to early approval of comprehensive financial sector legislation, which will also include a new law to strengthen the fight against money laundering and terrorist financing. They underscored the importance of full implementation of relevant UN resolutions. Directors encouraged the authorities to adopt timebound action plans for their reforms, including to secure timely technical and financial assistance over the medium term. They also highlighted the importance of carefully assessing the poverty and social impact of the reform process.

Directors acknowledged the progress, with technical assistance from the Fund, on improving Ghana's fiscal and monetary data. To allow effective surveillance and monitoring of GPRS outcomes, they encouraged the authorities to continue to improve the quality and timeliness of Ghana's economic statistics, in particular data on prices, national accounts, and trade.


Ghana: Selected Economic and Financial Indicators, 1999-2003


 

1999

2000

2001

2002


2003

       

Prog. 1/

Est.

 

 

(Annual Percentage change, unless otherwise specified)

National income and prices

           

Real GDP

4.4

3.7

4.2

4.5

4.5

4.7

Real GDP per capita

1.8

1.2

1.6

1.9

1.9

2.1

Nominal GDP

19.0

31.9

40.2

23.3

28.3

33.6

GDP deflator

13.9

27.2

34.6

18.0

22.8

27.6

Consumer price index (annual average)

12.4

25.2

32.9

15.9

14.8

26.9

Consumer price index (end of period)

11.8

40.5

21.3

13.0

15.2

22.0

             

External sector

           

Exports, f.o.b.

-4.1

-3.5

-3.6

7.6

10.6

12.1

Imports, f.o.b.

11.4

-15.2

2.6

7.8

-4.1

16.8

Export volume

8.9

1.0

-1.3

3.7

-1.5

2.7

Import volume

9.6

-26.0

10.0

11.1

-6.8

7.6

Terms of trade

-13.4

-16.6

4.8

6.9

9.1

0.7

Nominal effective exchange rate (avg.)

-9.3

-46.3

-24.0

...

-11.7

...

Real effective exchange rate (avg.)

0.5

-35.5

0.7

...

-0.6

...

Cedis per U.S. dollar (avg.)

2,669

5,431

7,179

...

7,947

...

             

Government budget

           

Domestic revenue (excluding grants)

6.0

42.9

43.5

38.1

27.5

60.3

Total expenditure

9.0

39.6

65.5

34.0

2.4

50.0

Current expenditure

13.1

48.9

50.5

22.8

28.8

33.5

Capital expenditure and net lending

4.1

24.1

95.7

39.4

-38.7

104.1

             

Money and credit

           

Net domestic assets 2/

46.0

49.1

13.5

6.6

14.0

-1.7

Credit to government 2/

38.2

57.7

0.0

1.8

32.6

0.0

Credit to pubic enterprises 2/ 3/

9.0

19.2

9.7

1.9

-9.0

1.5

Credit to the private sector 2/ 3/

24.9

34.4

12.0

17.1

17.7

18.8

Broad money (excluding foreign currency deposits)

19.8

33.4

48.4

25.2

50.0

25.0

Reserve money (excluding foreign currency deposits)

35.8

52.6

31.3

18.7

42.6

24.5

Velocity (GDP/end-of-period broad money)

5.2

5.1

4.8

4.9

4.1

4.4

Treasury bill yield (in percent; end of period)

34.2

42.0

28.9

...

28.2

...

   
 

(In percent of GDP, unless otherwise specified)

             

Investment and saving

           

Gross investment

21.5

24.0

26.6

22.3

19.7

23.0

Private

11.7

14.8

13.8

13.1

13.6

13.6

Public

9.8

9.2

12.8

9.2

6.1

9.4

Gross national saving

9.9

15.6

21.3

16.3

20.3

21.2

Private

8.3

14.3

16.1

11.6

19.2

14.9

Public

1.6

1.3

5.1

4.7

1.2

6.3

             

Government budget

           

Total revenue

16.4

17.7

18.1

18.7

18.0

21.6

Grants

1.7

2.1

6.9

4.2

3.1

4.6

Total expenditure

26.2

27.7

32.7

28.4

26.1

29.3

Overall balance (excluding grants) 4/

-9.8

-10.0

-14.6

-9.7

-8.1

-7.7

Overall balance (including grants) 5/

-8.0

-9.7

-9.0

-7.0

-6.8

-3.9

Domestic primary balance

0.4

2.6

3.8

3.1

2.0

2.9

Divestiture receipts

0.3

1.2

0.0

0.8

0.0

0.7

Net Domestic Financing

6.3

8.5

2.3

0.3

4.8

0.0

             

External sector

           

Current account balance 6/

-11.6

-8.4

-5.3

-6.4

0.6

-1.8

External debt outstanding

109.9

169.7

131.5

124.0

112.3

96.4

External debt service, including to the Fund

6.8

11.2

8.5

6.8

7.8

6.3

(in percent of exports of goods and nonfactor services)

21.1

23.0

18.9

15.9

18.4

15.6

(in percent of government revenue)

37.5

56.5

34.1

29.4

37.1

24.2

             
 

(In millions of U.S. dollars, unless otherwise specified)

             

Current account balance 6/

-895

-419

-283

-393

38

-131

Overall balance of payments

-266

-123

-2

-146

39

-77

Change in external arrears (decrease -)

62

27

61

0

-61

0

Gross international reserves (end of period)

317

264

344

629

631

811

(in months of imports of goods and services)

1.0

0.9

1.2

2.0

1.9

2.3

             

Nominal GDP (in billions of cedis)

20,580

27,153

38,071

46,875

48,862

65,262

             

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

             

1/ Based on MEFP of 1/31/02 (EBS/02/16)

           

2/ In percent of broad money at the beginning of the period.

3/ Credit from deposit money banks to public enterprises and the private sector respectively.

4/ Before domestic arrears clearance.

           

5/ After domestic arrears clearance.

           

6/ Including official grants.

           

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




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