IMF Executive Board Concludes 2008 Article IV Consultation with Ghana

Public Information Notice (PIN) No. 08/84
July 16, 2008

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 30, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana .1


The Ghanaian economy maintained strong growth of about 6½ percent in 2007 and the first months of 2008. The private sector has responded positively to macroeconomic stability, structural reforms, and an increasingly business-friendly environment. But fiscal spending also increased, leading to excess demand. Supply-side shocks, especially from international fuel prices, have impacted Ghana negatively, although overall, Ghana's terms of trade continued to improve. As a result, fiscal and external account deficits have widened, and inflation has risen.

Recent economic growth in Ghana has been broad-based, and agricultural production has remained good, although floods in the northern region of the country caused some localized food shortages and sharp price increases. The fiscal deficit (including grants) continued to rise to 9 percent in 2007, reflecting both investments of about 2½ percent of GDP to address energy bottlenecks and policy slippages with regards to utility pricing and the wage bill. Due to delays in passing on the increase in oil prices to utility consumers, and despite the eventual and significant price increases, utility prices have remained well below cost recovery levels, giving rise to large budget subsidies. The wage bill was higher-than-budgeted because of hiring outside the centralized budget process and higher than budgeted wage growth. Revenue performance continued to be robust, except for the gold sector. The fiscal deficit was financed by both domestic and external borrowing, including Ghana's first external sovereign bond issue and purchases of local currency denominated debt by non-residents. As a result, total public debt reached 50 percent of GDP at the end of 2007, up eight percentage points of GDP from the end of 2006.

Headline inflation reached 16.9 percent at the end of May 2008, driven by domestic demand pressures and rising world oil and, to lesser extent, food prices. Inflation had remained stable around 10 percent from early 2006 to October 2007. Since then, both headline and core (excluding energy and utilities) inflation have been rising sharply, despite increases in the Bank of Ghana's policy rate. These pressures also pushed Ghana's current account deficit (including grants) to 11 percent of GDP in 2007, as continued export growth and terms of trade improvements were more than offset by rapidly rising imports. Nevertheless, strong capital inflows enabled Ghana to increase the level of international reserves, but the import coverage fell to 2.6 months of imports due to rapid import growth. The Cedi depreciated vis-à-vis the U.S. dollar by 7 percent from May 2007 to May 2008.

Structural reforms have advanced in many areas but slowed in others. Financial sector reforms have continued, the debt management system is being upgraded to include a medium-term debt management strategy, and advances are being made in fiscal decentralization. Public Financial Management (PFM) reforms have also continued, but expenditure slippages in 2006 and 2007 have exposed remaining weaknesses. On the other hand, civil service reforms have slowed down.

Executive Board Assessment

Executive Directors noted Ghana's continued strong growth performance and particularly the dynamism of the private sector. They noted the earlier gains in macroeconomic stabilization and debt reduction as well as the structural reforms since the early 2000s that have underpinned this favorable economic performance, and built a strong foundation for achieving Ghana's goals of accelerating progress toward achieving the Millennium Development Goals and attaining middle-income status within a decade.

At the same time, Directors noted that since 2007 the fiscal expansion along with strong private sector demand growth, combined with the recent oil and food price shocks, have led to high fiscal and external current account deficits, rising inflation, and a weakening of the international reserve position. Directors noted that the risks associated with these developments could jeopardize Ghana's significant and hard-earned achievements earlier in this decade. Directors accordingly urged the authorities to give priority to the near-term policy challenge of pulling back from the recent expansionary fiscal policies. Limiting the fiscal deficit would also support the further "crowding in" of the private sector. Directors welcomed the authorities' recognition of these challenges, and of the need for policy actions to ensure macroeconomic stability and for macro-critical structural reforms to meet Ghana's continuing development challenges.

Directors agreed that fiscal policy should carry the brunt of the adjustment. They welcomed the adjustment measures announced by the authorities this year as positive steps. These include moving toward cost recovery in utility pricing starting with high-voltage users, containing the rise in the public sector wage bill by temporarily freezing public sector employment (beyond the automatic absorption of trainees in health and education), and enhancing government revenue from the gold sector. Directors stressed the importance of maintaining the public sector wage bill in line with the budget. They encouraged the authorities to take additional measures, including cutting or postponing nonessential expenditure.

Directors stressed that further fiscal adjustment will be needed over the next few years to support macroeconomic stability, to ensure debt sustainability, and to make room for sustained private sector growth. Key to lowering the deficit will be the establishment of cost-recovery utility pricing for all users and the re-introduction of an automatic utility price adjustment mechanism. These steps should be accompanied by well-targeted utility subsidies for poor households. The wage bill will need to be contained through implementing civil service reform that allows for right-sizing and increasing wages for high-skilled personnel. Directors welcomed the authorities' recognition that Ghana's oil production prospects should not weaken the resolve for macroeconomic discipline nor defer essential fiscal reforms.

Directors noted that the recent joint IMF-World Bank external debt sustainability analysis (which excludes the potential impact of the recent oil discovery) points to an increase in the risks of external debt distress, although these risks are still moderate. They underscored the importance of preserving the gains from debt relief. Directors also noted that the oil prospects, once confirmed, can improve the debt dynamics significantly, provided that the resources are used efficiently. A number of Directors encouraged the authorities to adopt a comprehensive debt management framework and to utilize fully Ghana's concessional financing possibilities that still exist. Directors considered that total public debt should be the main focus for debt sustainability, in light of the rapid rise in domestic debt and the decreasing level of debt concessionality.

Directors noted that inflation has risen as a result of both domestic demand pressures and rising oil, and to a lesser extent, food prices. They supported the Bank of Ghana's ongoing monetary tightening and noted its readiness to further tighten monetary policy to bring inflation toward its medium-term target. Directors noted that the monetary policy framework has been enhanced by last year's introduction of an inflation targeting regime. Many Directors recognized the challenges in this early stage of implementation and noted that the experience gained would be important in further strengthening the inflation targeting framework. Directors stressed, however, that monetary policy alone cannot fight inflation, and its effectiveness should be enhanced through fiscal consolidation.

Directors welcomed the recent exchange rate flexibility, which has helped the Ghanaian economy to adjust to shocks and has supported the implementation of the inflation targeting regime. They noted the staff's finding that the exchange rate, in real effective terms, appears broadly in line with fundamentals. Directors noted that the level of reserves remains low, and encouraged the authorities to increase it. Several Directors suggested that the authorities consider steps to phase out foreign exchange surrender requirements.

Directors considered that financial deepening is desirable, but the very rapid credit growth to the private sector in recent years calls for enhanced regulation. They welcomed the increase in banks' minimum capital requirements and the introduction of elements of the more risk-sensitive regulatory framework of Basel II, as well as increased on-site supervision. Additional macro-prudential measures will be required if rapid credit growth were to continue.

Directors supported the authorities' intention to enact a fiscal responsibility law, particularly in light of the need to anchor fiscal policy in anticipation of possible oil revenue. Oil prospects can materially improve Ghana's medium-term outlook for growth, debt sustainability, and poverty reduction, if the resources are well managed and used effectively. Directors commended the authorities for having started a broad-based national consultation on Ghana's oil management regime.

Ghana: Selected Economic and Financial Indicators, 2005-09
  2005 2006 2007 2008 2009
      Est. Proj. Proj.
  (Annual percentage change; unless otherwise specified)

National accounts and prices


Real GDP

5.9 6.4 6.3 6.5 5.8

Real GDP per capita

3.2 3.7 3.6 3.8 3.2

GDP deflator

15.0 12.8 14.4 16.2 10.4

Consumer price index (annual average)

15.1 10.2 10.7 14.3 10.5

Consumer price index (end of period)

14.8 10.9 12.7 13.8 10.5

External sector


Exports, f.o.b. (percentage change, in US$)

0.7 33.3 11.7 34.4 5.6

Imports, f.o.b. (percentage change, in US$)

24.4 26.3 19.4 28.2 7.9

Export volume

-0.9 15.4 -3.6 10.0 6.3

Import volume

14.2 14.4 14.6 10.8 5.6

Terms of trade

-6.8 4.7 11.1 5.6 -2.8

Nominal effective exchange rate (end of period)

7.1 -8.2 -10.8 ... ...

Real effective exchange rate (end of period), (depreciation -)

19.8 -1.0 -2.9 ... ...

Cedis (new) per U.S. dollar (end of period)

0.91 0.92 0.97 ... ...

Money and credit


Net domestic assets1

5.8 13.4 33.3 28.0 18.9

Credit to the private sector (year on year)

50.6 42.7 60.0 38.7 39.1

Broad money (excluding foreign currency deposits)

13.7 39.4 43.5 30.9 22.2

Velocity (GDP/average broad money)

4.3 3.5 3.0 2.8 2.7

Prime rate (Bank of Ghana; percent; end of period) 2

15.5 12.5 13.5 16.0 ...
  (Percent of GDP; unless otherwise specified)

Investment and saving


Gross investment

29.9 30.4 33.7 32.7 32.3

Private 3

17.9 18.0 19.5 18.7 18.5

Central government

12.0 12.4 14.2 14.0 13.8

Gross national saving

22.8 21.4 22.8 19.5 19.7

Private 3

12.0 13.5 15.1 14.8 15.1

Central government

10.8 7.8 7.7 4.7 4.6

Government operations


Total revenue

23.8 21.9 22.5 23.0 23.6


5.2 5.4 6.0 4.9 3.9

Total expenditure

30.7 34.4 37.0 37.7 38.1

Overall balance (including grants)

-3.0 -7.5 -9.1 -10.3 -10.7

Net domestic financing

-1.7 5.0 1.3 5.5 6.9

Total government debt

77.1 41.9 49.8 51.4 56.3

Domestic debt

17.9 24.8 26.1 26.6 29.6

External debt

59.2 17.1 23.7 24.8 26.7

External sector


Current account balance (including official transfers)

-7.0 -9.0 -10.9 -13.2 -12.6

Current account balance (excluding official transfers)

-12.4 -12.8 -15.1 -16.6 -16.3

NPV of external debt outstanding

19.9 17.8 19.6 19.6 21.0

percent of exports of goods and services

55.1 45.4 49.2 44.9 48.2

Gross international reserves (millions of US$)

1,951 2,325 2,738 2,474 2,399

months of imports of goods and services

2.8 2.8 2.6 2.2 2.1

Total donor support (millions of US$)

1,087 979 1,171 1,292 1,283

percent of GDP

10.1 7.7 7.7 7.4 6.8

Memorandum items:


Nominal GDP (billions of GHc)

9.7 11.7 14.2 17.6 20.5

Sources: Data provided by Ghanaian authorities; and IMF staff estimates and projections.
1/ Percent of broad money at the beginning of the period.
2/ As of May 19, 2008
3/Including public enterprises and errors and omissions.

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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