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Public Information Notice (PIN) No. 05/107
August 9, 2005
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Executive Board Concludes 2005 Article IV Consultation with Ghana

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

On June 20, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1

Background

Since 2000, economic performance in Ghana has improved, with the economy growing at its fastest pace in more than a decade. In 2004, real GDP growth reached 5.8 percent, driven by agriculture—in particular, record cocoa production—and a strong pickup in the services and construction sectors—helped by increased bank credit and private inward remittances. The strong growth has helped reduce the poverty rate, which is now estimated at about 35 percent of the population. Inflation declined by half to 11.8 percent at the end of 2004, although it remained above the central bank's single-digit target. Recently, prices have jumped in response to the deregulation of petroleum product prices which were raised by an average of 50 percent in February 2005. Nonetheless, interest rates and the nominal exchange rate for the cedi vis-à-vis the U.S. dollar have remained relatively stable, suggesting that inflation expectations may be well contained.

The external sector experienced further improvement in 2004, with a buildup in gross international reserves to US$1.8 billion (equivalent to 3.7 months of imports) at the end of the year. Private remittances, expanding export receipts from cocoa and gold, and increases in donor support helped in this regard. The external current account (including official transfers) moved from surplus into deficit in 2004, reflecting a significant increase in capital imports tied to donor inflows, and a larger oil import bill as a result of higher world oil prices. The reaching of the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in mid-2004 led to a marked improvement in Ghana's debt service indicators, which are projected to remain at manageable levels over the medium term.

The overall budget deficit narrowed to 3.6 percent of GDP in 2004, but was still 2 percentage points of GDP larger than expected. Total revenue and grants were higher than projected on account of a significant rise in grants, strong economic growth, new tax measures, and more efficient revenue administration. However, the additional resources were more than offset by unanticipated capital outlays, increased subsidy for petroleum products as world oil prices rose, and an overrun in wages. Partly as a consequence of these developments, the envisaged repayment of domestic debt did not transpire; instead there was domestic borrowing and only the faster GDP growth generated the authorities' targeted reduction in the domestic debt-to-GDP ratio, which is the anchor of fiscal policy. Monetary policy remained firm during 2004, and the monetary aggregates were in line with the authorities' targets.

Progress was made with structural reforms. Regulatory and legislative reforms—and the incipient macroeconomic stability—helped strengthen the financial sector, as reflected in the fact that commercial banks are now generally more liquid and profitable. Public expenditure and financial management have been enhanced, and the reform of public enterprises is ongoing with full cost recovery pricing for public utilities and the settlement of all cross-debts between the major state-owned enterprises. The adoption of a new pricing mechanism for petroleum products in February 2005 should help reduce the budget's exposure to world oil prices in the period ahead and the involvement of the government in such pricing.

Ghana's medium-term prospects appear promising, with growth projected to continue at the current relatively high rate, provided that macroeconomic stability becomes further entrenched with fiscal sustainability, inflation declines further, and the government perseveres with structural reform. Continued strong private-sector investment and the concentration of public investment on vital infrastructure should provide a solid basis for growth. After an initial rise in 2005 because of the deregulation of the prices of petroleum products, headline inflation is projected to decline significantly in the medium term (to about 6 percent)—in line with the central bank's inflation target. The main risk to this positive outlook concerns a further increase in world oil prices, which may slow growth, lead to a larger external current account deficit, and delay the achievement of single digit inflation.

Executive Board Assessment

They commended the authorities on the robust economic performance during 2004, which was supported by a further strengthening of macroeconomic policy implementation and favorable external factors. Real GDP growth outpaced earlier projections, and the buildup in international reserves provides a larger cushion against shocks. Inflation declined significantly through 2004, although the recent deregulation of petroleum product prices has led to a jump in consumer prices. Looking ahead, adherence to prudent fiscal and debt management policies, coupled with intensified structural reforms, will be key to promoting private sector-driven growth and diversification of the production base, and to further reduce poverty.

Directors observed that faster GDP growth resulted in a reduction of the ratio of domestic debt to GDP, which is the anchor of the authorities' fiscal policy. The overall fiscal deficit narrowed during 2004, but the outturn was higher than originally envisaged. An increase in total revenue (relative to GDP) to its highest level yet was not sufficient to offset unanticipated capital outlays, increased subsidy for petroleum products as world oil prices rose, and an overrun of government wages. Directors urged the authorities to avoid further fiscal slippages that could slow the realization of the "fiscal dividend" in terms of further declines in short-term interest rates. Directors emphasized, in particular, the importance of establishing the institutional capacity to control wages and salaries. They encouraged the authorities to further improve prioritization of expenditures and to sharpen the links of the budget to the medium-term expenditure framework and the poverty reduction strategy. On the revenue side, Directors saw limited room for further increases in view of the already relatively high tax burden, but stressed that tax administration should continue to be strengthened.

Directors underscored the need to increase the fiscal space to allow room for growth-enhancing and poverty-reducing expenditures aimed at achieving the Millennium Development Goals. In this context, they saw the need to further reduce the ratio of domestic debt to GDP, primarily through cuts in low-priority expenditures and reduction in the government wage bill relative to GDP. With respect to the latter, the proposed civil service reform should prove helpful, even though Directors recognized that the primary objective of this reform is to enhance the delivery of public services.

Directors called for continuing concessional assistance from development partners to Ghana to increase spending on growth- and poverty-related activities. Directors noted that Ghana's debt sustainability remains vulnerable to external shocks and emphasized the importance of relying on financing provided on concessional terms. They also called for strengthening debt management capacity to design and assess loan proposals, and to establish a longer track record of good macroeconomic performance that would result in better financing terms and not jeopardize debt sustainability.

Directors welcomed the adoption of a new pricing mechanism for petroleum products as an important reform that will reduce the vulnerability of the budget to world oil prices, and free up resources for growth-enhancing and poverty-reducing expenditures. They also welcomed the establishment of the National Petroleum Authority to monitor the implementation of the pricing mechanism and thereby safeguard the public's interest against unfair and anti-competitive behavior. Directors stressed the importance of allowing the automatic adjustment of petroleum product prices and avoiding government involvement.

Directors welcomed the decline in inflation during 2004, and encouraged the central bank to maintain a firm stance to avoid an upward shift of inflation in light of high world oil prices and high foreign exchange inflows. They supported the authorities' recent move to reduce banks' secondary reserve requirements as a way of strengthening the efficiency in the transmission of monetary policy. A firmer control over liquidity and low inflation would provide the framework to continue this reform in order to further enhance economic efficiency and allow all banks to take full advantage of market opportunities.

Directors agreed that the managed floating exchange rate has served Ghana well as a buffer against external shocks. They considered the level of the exchange rate as broadly appropriate, but recognized the tension in the inflation and exchange rate policy objectives. Directors also indicated that the functioning of the interbank foreign and exchange market could be enhanced by the introduction of a computerized real-time foreign exchange trading system, which should be implemented as soon as participants have the required capacity.

Directors stressed that further structural reforms would support economic growth. In particular, enhancing financial intermediation will foster private sector activity, while reform of the public enterprises should improve overall economic performance. In this regard, Directors encouraged the authorities to move quickly to develop the necessary capacity to monitor the financial and operating performance of all public enterprises, and ensure that commercially oriented entities maintain or adopt pricing policies that reflect full cost recovery. Directors noted that the Financial Sector Strategic Plan continues to provide the direction for reform, with emphasis on regulatory and judicial reform, institutional capacity building, protection of private property rights, and competition. Several Directors encouraged the authorities to continue efforts to enhance financial intermediation, and to improve access to credit for small- and medium-sized enterprises. They welcomed the implementation of the recommendations of the Financial Sector Assessment Program.

Directors encouraged the authorities to improve the quality and timeliness of economic data by strengthening the operations of the Ghana Statistical Service and participating in the General Data Dissemination System.


Ghana: Selected Economic and Financial Indicators, 2001-05


 

2001

2002

2003

2004

2005


 

(Annual percentage change, unless otherwise specified)

National accounts and prices

         

Real GDP

4.2

4.5

5.2

5.8

5.8

Real GDP per capita

1.6

1.9

2.6

3.2

3.2

Nominal GDP

40.2

28.3

35.4

20.7

21.5

Nominal GDP (in billions of cedis)

38.071

48,862

66,158

79.865

97,018

Nominal GDP (in millions of U.S. dollars)

5,303

6,151

7,621

8,854

10,531

Consumer price index (annual percentage)

32.9

14.8

26.7

12.6

14.3

           

External sector

         

Exports, f.o.b.

-3.6

10.2

20.1

12.7

5.2

Imports, f.o.b.

2.6

-4.1

20.1

31.9

9.3

Export volume

-1.3

-2.1

-6.8

14.5

3.1

Import volume

10.0

-6.8

6.9

13.9

0.6

Current account balance (in percent of GDP) 1/

-5.3

0.5

1.7

-2.7

-4.0

NPV of external debt outstanding

         

(in percent of exports of goods and services) 2/

161.4

157.4

175.7

89.6

92.3

(in percent of government revenue) 2/

452.4

363.6

351.0

148.9

132.5

External debt service due (in percent of GDP)

8.5

7.8

5.9

6.4

4.7

Gross international reserves (in millions of U.S. dollars, end of period)

340

632

1,427

1,816

1,971

(In months of imports of goods and services)

1.2

1.9

3.2

3.7

3.9

Terms of trade

4.8

9.4

14.8

-15.0

-6.1

Nominal effective exchange rate (annual average)

-24.0

-11.7

-17.7

-10.1

...

Real effective exchange rate (annual average)

0.6

-0.6

1.4

-1.0

...

Cedis per U.S. dollar (annual average)

7,179

7,944

8,681

9,021

...

           

Central government budget

         

Total revenue

18.1

18.0

20.8

23.8

24.6

Grants

8.9

3.1

4.7

6.4

5.8

Total expenditure

32.7

26.1

28.8

33.3

31.9

Overall balance (excluding grants) 3/

-14.6

-8.1

-8.0

-9.5

-7.3

Overall balance (including grants) 4/

-9.0

-6.8

-4.4

-3.6

-2.6

Domestic primary balance

4.8

2.4

2.3

0.7

2.6

NPV of total government debt 2/

95.4

88.0

89.8

50.5

43.5

Domestic debt (net) 5/

20.9

23.9

18.3

15.2

11.4

NPV of external debt outstanding 2/

74.5

64.1

71.5

35.3

32.1

           

Money and credit

         

Net domestic assets 6/

13.5

-15.6

7.2

1.1

15.9

Credit to central government 6/

0.0

30.7

-8.2

29.9

-0.1

Credit to public enterprises 6/ 7/

11.0

-9.5

11.2

6.6

1.9

Credit to the private sector 6/ 7/

14.2

18.2

16.4

10.1

22.1

Broad money (excluding foreign currency deposits)

48.4

49.6

40.9

26.6

23.1

Reserve money

31.3

42.6

33.4

18.8

18.0

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

4.8

4.1

4.0

3.8

3.8

Treasury bill yield (in percent; end of period)

28.9

28.1

18.1

16.4

...

           

Sources: Ghanaian authorities; and IMF staff estimates and projections

1/ Including official grants.
2/ Figures for 2003 and onwards are based on an updated debt sustainability analysis, with additional information received from creditors and a reconciliation of external debt to end-2003.
3/ Before domestic arrears clearance.
4/ After domestic arrears clearance.
5/ Excluding non-interest-bearing perpetual BoG revaluation stocks and bonds issued in 2004 for recapitalization of BoG and TOR, and including deferred interest payment (cumulative) on inflation-indexed bonds.
6/ In percent of broad money at the beginning of the period.
7/ Credit from deposit money banks to public enterprises and the private sector, respectively. The historical series have been revised to ensure consistency with the new banking supervision reporting form introduced in July 2003, which uses a residency rather than currency definition of foreign assets and liabilities.

           

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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