IMF Executive Board Approves US$602.6 Million

PRGF Arrangement for Ghana

Press Release No. 09/263
July 16, 2009

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Ghana in an amount equivalent to SDR 387.45 million (about US$602.6 million) to support the government's economic program to tackle macroeconomic instability. The approval will enable an initial disbursement of SDR 67.65 million (about US$105.2 million) immediately.

At the conclusion of the Executive Board's discussion on Ghana's request for a PRGF arrangement, which was held on July 15, 2009, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

“Ghana’s macroeconomic conditions deteriorated substantially during 2008, reflecting global shocks to food and fuel prices and highly expansionary fiscal policies, in particular in the run-up to the elections. Inflation rose to about 20 percent and the current account deficit widened appreciably, putting pressure on Ghana’s international reserves and the exchange rate. Growth is projected to moderate in 2009, with potential additional downside risks stemming from the global recession.

“The authorities’ economic adjustment program appropriately centers on efforts to re-establish macroeconomic stability. The budget deficit target of 9.4 percent of GDP in 2009, down from 14.5 percent in 2008, is appropriately ambitious. In light of the limited scope for countercyclical fiscal policy in Ghana, the authorities stand ready to take additional measures to achieve their deficit targets in the event of revenue shortfalls.

“The authorities’ planned reduction of the budget deficit to 4½ percent of GDP in 2011, and below this level in subsequent years, will be critical to restoring public debt sustainability. To help achieve this fiscal goal, the authorities should ensure that petroleum pricing and utility tariffs allow for full cost recovery to avoid large subsidy costs. More effective control will also be needed over the public sector wage bill, and steps should be taken to modernize the tax regime and strengthen collection.

“Oil revenues that are expected to start in 2011 will create important new fiscal space and potentially bring Ghana close to middle-income status. While these revenues can help to support Ghana’s fiscal consolidation, the authorities should not be complacent about the fiscal outlook in 2011 and beyond. The horizon for oil production could prove relatively short, and it will be important that the new revenues be used wisely. Accordingly, high priority should be given to strengthening public financial management under the authorities’ program.

“Monetary policy implementation under the authorities’ inflation targeting framework aims to reduce inflation to single-digit levels by 2010. While the disinflation process will be supported by the planned fiscal consolidation, rising global oil prices and continuing depreciation of the Ghanaian cedi pose risks to inflation. The Bank of Ghana should be ready to tighten monetary conditions further should conditions warrant. Looking forward, the Bank of Ghana should also strengthen its communications strategy and the transparency of the inflation targeting framework.

“Ghana’s financial system has so far been relatively resilient in the face of global developments, but vulnerabilities have emerged following rapid banking sector expansion in recent years, and loan portfolios have deteriorated. The authorities should ensure close supervision and encourage commercial banks to reinforce risk management and corporate governance practices. Gaps in cross border supervision will also require stronger regional collaboration.

“The depreciation of the cedi since the second half of 2008 has helped the process of balance of payments adjustment, and continued flexibility will be important. Efforts should continue to rebuild foreign exchange reserves in order to enhance Ghana’s ability to weather future external shocks.

ANNEX

Recent Economic Developments

Ghana’s growth remained strong in 2008 at 7.3 percent, up from 5.7 percent of GDP in 2007. Since 2000, growth has been supported by significant debt relief, which provided the country with fiscal space to invest in infrastructure, and the social sectors. Thanks to the combination of higher growth, declining inflation and improved social spending, poverty levels have significantly declined. Ghana is poised to achieve the Millennium Development Goal of halving extreme poverty ahead of 2015.

Fiscal performance deteriorated sharply during 2007-08, partly due to a severe energy crisis in 2006-2007 and the global food and fuel crisis in 2008, but also importantly due to highly expansionary fiscal policies ahead of the end-2008 presidential elections. As a consequence, the fiscal deficit jumped from 9.2 percent of GDP in 2007 to 14.5 percent in 2008.

The strong public spending combined with rapid credit expansion contributed to a large increase in inflation and a deterioration of the external current account. Year-on-year inflation rose to the 20 percent range in early-2009 from 12.7 percent in 2007, while the current account deficit widened to 19.3 percent of GDP in 2008, compared with a 12.0 percent of GDP in 2007. The overall balance of payment recorded a deficit of US$941 million in 2008, compared with a surplus of US$413 million in 2007, with the former financed by a drawdown of international reserves.

Program Summary

The government’s medium-term macroeconomic program builds on Ghana’s second Poverty Reduction Strategy Paper. It aims to substantially reduce Ghana’s large fiscal imbalances by 2011 and put in place strengthened institutions for public financial management.

The macroeconomic framework for 2009-11 aims to achieve:

• A real non-oil GDP growth of about 5½ percent on average.

• A medium-term inflation to 7-9 percent per year.

• An overall budget deficit of 4.5 percent of GDP in 2011.

• International reserves coverage equal to about 3 months of imports.

To achieve these objectives, medium-term policies include:

• Reducing the deficit, including through revenue mobilization, cuts in low-priority spending, and flexible pricing of energy products to avoid costly subsidies.

• Implementing a comprehensive program to improve public financial management.

• Implementing a comprehensive public sector reform program.

•Further strengthening the recently-adopted inflation targeting regime, including by a revamped central bank communications strategy



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