## Ghana’s Fiscal Indiscipline and Debt Dynamics ## Source details **Canonical URL:** [Ghana’s Fiscal Indiscipline and Debt Dynamics](https://www.imf.org/-/media/files/publications/cr/2017/cr17262.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17262.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17262.pdf.json) --- ### Context - NPP won elections in December 2016 and took office in January 2017 with mandate to pursue macroeconomic stability and “create prosperity and opportunity for all.” - IMF-supported program aims to restore stability; past implementation has been disappointing. - Key policy focus: - Anchor macroeconomic stability, secure debt sustainability, build buffers. - Immediate actions to put IMF-supported program back on track. ### Key trends and recent developments - Growth and poverty - Average real growth 2000–2013: 6.6 percent. - Poverty rate fell from 53 percent in 1991 to 21 percent in 2012. - Growth decelerated to 3.5 percent in 2016 (lowest since 1990). - Fiscal and debt outcomes - Cash-basis fiscal deficit in 2016: 9.3 percent of GDP (Third Review target: 5.2 percent of GDP). - Outstanding claims incurred in 2016: 3 percent of GDP; 2 percent of GDP were outside GIFMIS. - Commitment-basis deficit 2016: 8.9 percent of GDP (repayment of previous arrears 1.4 percent; new outstanding payments 1 percent); if all unpaid claims factored in, commitment-basis deficit would be 10.9 percent of GDP. - Public debt rose from roughly 30 percent of GDP at end-2006 to 73.4 percent of GDP at end-2016 (other figures: Total public debt in 2016: 73.9 percent of GDP). - External sector and reserves - Current account deficit narrowed to 6.7 percent of GDP in 2016. - Gross reserves coverage: 2.6 months of imports (below 3–3.6 months adequacy). - EBA-lite: REER gap around 8 percent; current account norm ~4.2 percent of GDP. - Financial sector and SOEs - Asset Quality Review (AQR) revealed deterioration; non-performing loans rose (e.g., Nonperforming loans to total gross loans: 17.3 percent Dec 2016; 21.2 percent June 2017). - Energy sector SOE stresses: sector debt estimated at 13 percent of GDP at end-June 2016; net income position -1 percent of GDP in 2016; sector net payables 2.3 percent of GDP at end-2016. ### Outlook and risks (baseline and vulnerabilities) - Growth and inflation projections - 2017: oil sector growth projected to rise by over 40 percent; overall GDP growth projected at 5.9 percent. - Non-oil growth: 2017 projected 4 percent, rebound to 6 percent by 2019, long-run potential 5 percent. - Inflation projected to fall within BoG band (8 ± 2 percent) by early 2018; converge to around 6 percent over projection period. - Current account deficit projected to decline to around 4 percent of GDP in the medium term. - Debt sustainability - DSA indicates high risk of debt distress; three indicators breach thresholds. - Total public debt-to-GDP expected to remain above threshold until 2021; trajectory slightly more elevated than previously assessed. - Selected risks (Risk Assessment Matrix) - Strengthening of the US dollar and/or higher global rates: Relative Likelihood: High; Expected Impact: High; Mitigations: credible medium-term fiscal strategy; build buffers; contingency measures. - Delayed or insufficient fiscal adjustment: Relative Likelihood: High; Expected Impact: High; Mitigations: frontloaded fiscal adjustment; audit unpaid commitments; strengthen PFM. - Lower energy and commodity prices: Relative Likelihood: Low; Expected Impact: High; Mitigations: diversify exports; improve business environment; invest in capital. - Continued SOE utility sector weaknesses: Relative Likelihood: Medium; Expected Impact: Medium; Mitigations: energy reforms; strengthen SOE monitoring. - Financial stability problems from rising NPLs: Relative Likelihood: Medium; Expected Impact: Medium; Mitigations: implement BoG Financial Sector Roadmap remedial actions. ### Box 1 — Fiscal slippages and adjustment strategy - Historical slippages - In the last three elections (2008, 2012, 2016) the deficit was on average 6.4 percent of GDP higher than budgeted; in non-election years average overrun 1.5 percent of GDP. - Slippages accounted for 25 percentage points out of 41 percentage points increase in debt-to-GDP over the last decade; exchange rate depreciation (2014 nominal depreciation by 45 percent) contributed almost 8 percentage points in that year. - Pre-determined expenditure through earmarking accounted for about 30 percent of revenues and 20 percent of expenditure before new legislation capping transfers to statutory funds. - Staff fiscal adjustment projections and strategy - Primary adjustment of 4½ percent of GDP over 2017–18 needed to lock in favorable debt dynamics. - 2017 strategy: frontloaded primary adjustment of 2½ percent of GDP based on expenditure containment, improved tax compliance, and mobilization of non-tax revenues (subject to implementation risk). - Further adjustment of 2 percent of GDP to bring primary surplus to 2.2 percent of GDP in 2018. - Post-2018 aim: gradually build buffers; as interest payments decline, primary surplus would gradually decline to 1½ percent of GDP while keeping debt on downward trajectory and allowing infrastructure spending increases. - Short-term needs and medium-term reforms - Authorities should be ready with contingency measures if revenues fall or spending pressures emerge. - PFM reforms, broader coverage of extra-budgetary funds and SOEs, and revenue mobilization through improved compliance and reduced untargeted tax expenditures are critical. - Debt management recommendations - Improvements in debt management welcome but not substitute for fiscal adjustment. - Recommendations: improve cash management; careful planning to mitigate external refinancing risks; liability management should not detract from fiscal adjustment. ### Box 3 — Energy sector SOEs: findings and policy responses - EY audit key findings - Sector debt estimated 13 percent of GDP at end-June 2016: over 50 percent to banks, 30 percent arrears to suppliers, 17 percent inter-sectoral debt. - Poor quality/missing financial data; EY finalizing financial reporting template for SOEs. - Financial indicators - Net income position: -1 percent of GDP in 2016. - Sector net payables: 2.3 percent of GDP at end-2016. - VRA: estimated 32 percent upward tariff revision needed to break even. - Policy recommendations / program responses - Strengthen SOE financial oversight; implement EY reporting template. - Include indicative targets on overall balance and gross payables of ECG and VRA. - Re-institute clearinghouse to settle cross-arrears (structural benchmark). - Publish aggregate SOE performance report. - Consider issuing an energy bond to unlock cash for restructuring (authorities’ view). - Monitoring and support - EY template being finalized; additional measures considered with support from World Bank and Millennium Challenge Corporation. ### Program financing, debt limits, and capacity to repay Fund - Debt limits and project financing - Debt limits for debt management purposes set to zero (no Eurobond planned). - Debt limits for key projects raised by around US$500 million relative to end-June IT; key project cumulative limit set at US$2,250 million from beginning of 2015 (increase of US$520 million vs end-June 2017 IT). - Separate GNPC limit re-established to accommodate delayed US$350 million loan. - Indicative target for concessional external loans set at US$700 million, covering World Bank loans including US$200 million budget support. - Program financing and Fund capacity - Program is fully financed and Ghana’s capacity to repay the Fund is adequate. - Maximum outstanding liabilities to the Fund: 2.3 percent of GDP and 5.3 percent of exports. - Fund disbursements to be used for budget support to address BOP needs; disbursements made directly to government consistent with BoG zero financing to government; MoU signed between government and BoG to safeguard Fund resources. - BoG set to add $800 million to net reserves in 2017. ### Fiscal policy stance, targets, and monitoring - Short-term fiscal targets and adjustments - Authorities submitted mid-year budget review with revised spending limits to achieve deficit target of 6.3 percent of GDP agreed under program. - New spending programs (e.g., free secondary education, one million per constituency) should be phased to ease spending pressures. - Government should adopt contingency measures (spending rationalization or phased tax cuts) if needed. - Fiscal structural reforms and PFM - Actions encouraged: audit unpaid expenditure claims; modernize MOF functions; fully implement PFM Act; strengthen cash management; monitor fiscal risk. - Earmarked funds capping law: transfers to Earmarked Funds capped at 25 percent of tax revenues; reduced allocations to statutory funds close to 0.9 percent of GDP relative to baseline. - GIFMIS rollout and TSA implementation planned; TSA operational target: by end-August 2017 (phased implementation). - Indicative and performance targets (selected central government aggregates, percent of GDP series 2014–2022) - Revenue (cash basis): 18.4, 19.6, 19.4, 17.3, 19.2, 18.9, 18.6, 19.0, 19.1, 18.9, 18.7. - Expenditure (cash basis): 28.5, 26.6, 24.6, 26.6, 22.7, 25.2, 22.4, 22.2, 22.1, 21.8, 21.6. - Overall balance (cash basis): -10.1, -7.0, -5.2, -9.3, -3.5, -6.3, -3.8, -3.2, -3.1, -2.9, -2.8. - Primary balance: 0.0, -0.4, 1.1, -2.4, 2.2, 0.2, 2.2, 2.2, 2.0, 1.8, 1.6. - Commitment-basis indicators (percent of GDP) - Net lending / borrowing: -10.9, -5.2, -3.7, -8.9, -2.0, -4.5, -3.7, -3.2, -3.1, -2.9, -2.8. ### Debt, financing and external borrowing (tables and projections) - Central government gross debt (percent of GDP series 2014–2022): 70.2, 72.2, 67.7, 73.4, 63.6, 70.5, 66.1, 62.8, 60.1, 57.6, 55.1. - Domestic debt (percent of GDP): 31.0, 28.5, 27.9, 32.1, 26.0, 32.5, 30.8, 29.8, 29.1, 28.4, 27.2. - External debt (percent of GDP): 39.1, 43.7, 39.8, 41.3, 37.7, 38.0, 35.3, 33.0, 30.9, 27.7, 28.8. - External financing requirements and gaps (Table 6, US$ millions) - Total financing requirements: -6,323 (2016), -6,631 (2017 proj.), -5,564 (2018), -4,948 (2019). - Financing gap: -167 (2016), -449 (2017), -388 (2018), -92 (2019). - Residual gap: -141 (2016), -184 (2017), -184 (2018), -92 (2019). - ECF program contribution: 229 (2016), 184 (2017), 184 (2018), 92 (2019). - Schedule of ECF disbursements (Table 10): series of purchases totaling 664.2 (90.00 percent of quota) with specific tranche amounts and dates as listed in program tables. ### Monetary policy, banking sector and financial stability - Monetary stance and inflation - CPI annual average series (2014–2022): 15.5, 17.2, 17.1, 17.5, 10.0, 11.8, 9.0, 7.0, 6.0, 6.0, 6.0. - July inflation fell to 11.9 percent; end-2016 inflation 15.4 percent. - BoG’s IT framework target band: 8 ± 2 percent; inflation expected inside band by early 2018. - Banking sector indicators (selected) - Return on assets: 4.5, 4.7, 3.1, 2.5, 2.4 (series). - Regulatory capital to RWA: 18.5 (Dec 2013), 17.9 (Dec 2014), 17.7 (Dec 2015), 17.8 (Dec 2016), 14.8 (June 2017). - Nonperforming loans to total gross loans: 12.0 (Dec 2013), 11.3 (Dec 2014), 14.9 (Dec 2015), 17.3 (Dec 2016), 21.2 (June 2017). - Bank provisions to NPLs: 78.3, 69.5, 69.9, 72.5, 75.1. - AQR and remedial actions - AQR final results distributed March 2017; BoG engaging undercapitalized banks on recapitalization plans. - Recapitalization, resolution of insolvent banks and stricter ELA guidelines are priorities. - On August 14, 2017, BoG intervened in two insolvent banks; assets and deposits assumed by Ghana Commercial Bank (GCB); assuming bank to receive government bonds around GHS 1.6 billion (0.8 percent of GDP) (final numbers pending). - Financial sector reforms - Implement Banks and SDI Act amendments, Basel II/III adoption, strengthen AML/CFT framework, develop effective deposit insurance implementation plan. - Microfinance sector reforms: raise capital requirements, improve supervision and governance. ### PFM Act implementation, MOF operations and SOE reform - PFM Act implementation - Draft supporting regulations to be submitted to Parliament by December 2017; focus on budget execution and commitment controls. - Audit underway to validate unpaid commitments (~GHc5.0 billion excess unpaid commitments during 2017 budget preparation). - MOF modernization actions - Technical assistance reviewed MOF functions; planned hire of long-term consultant. - Proposed measures: establish cash management unit; centralize forecasting; set up fiscal risk unit by October 2017. - GIFMIS expansion and payroll interfaces (universities, pilot GRA interface) planned; HRMIS roll-out. - Treasury Single Account (TSA) - Plan to make TSA operational by end-August 2017; phased to minimize liquidity impacts; transfer of commercial bank government balances assessed as not adverse to banking system. - SOE restructuring and monitoring - E&Y debt validation: end-June 2016 stock GHc23.78 billion (14 percent of GDP); GHc22 billion (13 percent of GDP) validated. - Validated loans: GHc10.8 billion (6.4 percent of GDP). - Government-contracted/guaranteed loans: GHc6.25 billion (3.7 percent of GDP). - Stock of arrears to creditors/suppliers: GHc6.7 billion (4 percent of GDP). - Inter-SOE arrears: GHc3.2 billion (1.9 percent of GDP). - Three-pronged approach: (i) restructure SOE debt via SPV/ESLA; (ii) strengthen payment discipline (clearhouse); (iii) introduce private sector participation (ECG concession by end-2018). - E&Y reporting template to be enforced; standing technical committee to monitor VRA and ECG “overall balance” and gross payables (zero ceiling on accumulation). ### External sector assessment (Annex I) — exchange rate, reserves, and norms - Exchange rate developments - NEER relatively stable last three years after sharp 2014 depreciation. - REER gradual appreciation in 2016; seasonal patterns with year-end appreciation. - Current account norms and gaps - EBA-lite current account norm: 4.2 percent of GDP; current account gap: 2.5 percent of GDP largely due to fiscal slippages. - External sustainability norm: 4.1 percent of GDP; medium-term net international investment position target: 60 percent of GDP. - Reserves adequacy and intervention - Optimal reserve level around 3.3 months of imports; benchmark range 3.0–3.6 months. - Cocobod prepayment loans around US$2 billion annually (fourth quarter). - Recommendation: transparent intervention strategy to build reserves sustainably. - External liabilities and FDI - External liabilities rose from 23 percent of GDP in 2006 to 70 percent in 2015. - FDI near 8 percent of GDP in 2016 (hydrocarbon-driven); FDI projected to slow as oil peaks (peak expected 2019). ### Debt sustainability analysis (DSA) and stress tests — key findings - Public and external debt - Public sector debt (percent of GDP series): 2014 66.6; 2015 72.9; 2016 73.9; 2017 73.0; 2018 68.2; 2019 64.6; 2020 61.7; 2021 59.2; 2022 55.6. - PV of public sector debt (percent of GDP): 2017 70.6; 2018 71.0; 2019 65.8; 2020 62.0; 2021 58.9; 2022 56.3; 2027 52.7; 2037 43.7. - Gross financing need (percent of GDP): 2014 22.6; 2015 22.5; 2016 24.0; 2017 22.5; 2018 14.8. - DSA conclusions - High risk of debt distress; several indicators breach thresholds under baseline and stress scenarios. - Even with front-loaded adjustment, public debt declines below the benchmark of 56 percent only by 2022. - Debt dynamics highly vulnerable to exchange rate shocks and export shocks. - Selected stress-test outcomes - One-time 30 percent nominal depreciation in 2018 (B6/B4) substantially raises PV debt ratios (e.g., PV of public debt-to-GDP rises from baseline 71 to around 90 in 2018 under large depreciation scenarios). - Export value shock (B2) dramatically increases PV of debt-to-exports (e.g., 164 in 2019 under shock). - Policy implication: credible and sustained fiscal consolidation, prudent financing mix, and strong debt and cash management are essential to restore debt sustainability. ### Monitoring, performance criteria and reporting - Program monitoring framework - Monitored via periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets; test dates end‑August 2017 and end‑December 2017 (fifth and sixth review timing). - TMU specifies definitions, reporting requirements, scope, and frequency. - Selected quantitative performance criteria and indicative target outcomes (examples) - Primary fiscal balance (floor, GHc millions): 2016 actual -2,344; End‑Aug 2017 adjusted target 652; End‑Sep 2017 actual 609; End‑Dec 2017 target 831; End‑Dec 2017 adjusted target 1,186; End‑Dec 2017 actual 1,144. - Wage bill (ceiling, GHc millions): 2016 actual 12,110; End‑Aug 2017 adjusted target 3,424; End‑Sep 2017 actual 3,190; End‑Dec 2017 target 9,345; End‑Dec 2017 adjusted target 10,520; End‑Dec 2017 actual 14,047. - Net international reserves of BoG (floor, US$ millions): 2016 actual 329; End‑Aug 2017 adjusted target -420; End‑Sep 2017 actual -469; End‑Dec 2017 target 731; End‑Dec 2017 adjusted target 1,188; End‑Dec 2017 actual 805. - Net change in stock of arrears (ceiling, GHc millions): 2016 actual -2,438; End‑Aug 2017 adjusted target -518; End‑Sep 2017 actual -92; End‑Dec 2017 target -1,000; End‑Dec 2017 adjusted target -1,555; End‑Dec 2017 actual -3,220. - TMU exchange rate assumptions: GH¢4.00 per US$1 for 2016; GH¢4.40 per US$1 for 2017. - Data reporting - Monthly reporting to Fund staff with lag no more than eight weeks; specified items with varied lags (e.g., BoG NIR monthly within two weeks; weekly BoG balance sheet within one week). ### Staff assessment, recommendation and program extension - Given 2016 slippages and transition delays, staff recommends one-year extension of ECF program. - Extension aims to bring budget deficit to 3.8 percent of GDP and put debt on clearly declining trajectory. - Staff supports completion of fourth review, waivers for non-observance of performance criteria, request for program extension by one year, and rephasing of remaining access. - Operational support - Fund and development partners (including World Bank) stand ready to help, including under Compact with Africa. ### Authorities’ views - Authorities broadly concurred with staff on outlook, risks, and ESA but more optimistic about quicker turnaround. - They highlighted upside factors: realignment of expenditures to productive areas and removal of nuisance taxes to boost productivity and private activity. - Authorities affirmed commitment to fiscal consolidation, appropriate financing mix, proactive debt and cash management, and requested net debt measures be considered alongside gross debt. *International Monetary Fund — Article IV consultation chapter and IMF staff report excerpts from cr17262.* ### 1. Ghana’s Fiscal Indiscipline and Debt Dynamics ________________________________________________ 12 ### 1. Ghana’s Fiscal Indiscipline and Debt Dynamics ### Context - The National Patriotic Party (NPP) won elections in December 2016 and took office in January 2017 with a mandate to pursue macroeconomic stability and “create prosperity and opportunity for all.” - Policy implementation has ebbed and waned; large fiscal slippages—especially in election years—have contributed to macroeconomic instability. - The IMF-supported program aims to restore stability, though past implementation has been disappointing. - Key policy discussion focus: - Policy measures to anchor macroeconomic stability, secure debt sustainability, and build buffers. - Immediate actions to put the IMF-supported program back on track. ### Key Trends and Recent Developments - Long-standing outcomes and recent deterioration - Between 2000 and 2013, the average real growth rate was 6.6 percent. - Poverty rate fell from 53 percent in 1991 to 21 percent in 2012 (last data available). - Growth decelerated after the 2010–13 boom, dropping to 3.5 percent in 2016 (the lowest since 1990). - Fiscal and macro-financial dynamics - Fiscal deficit rose to 9.3 percent of GDP in 2016 (cash basis; Third Review target was 5.2 percent of GDP). - Outstanding claims incurred in 2016 amounted to 3 percent of GDP; 2 percent of GDP were outside GIFMIS. - On a commitment basis the deficit was 8.9 percent of GDP, reflecting repayment of previous arrears of 1.4 percent and new outstanding payments of 1 percent of GDP; if all unpaid claims were factored in, the commitment-basis deficit would be 10.9 percent of GDP. - Public debt rose from roughly 30 percent of GDP at end-2006 to 73.4 percent of GDP at end-2016. - Financial sector and SOE stresses - Asset quality deterioration in the banking system as shown by the 2016 Asset Quality Review. - Non-performing loans increased (charted as percent of total loans). - SOE sector weaknesses: lack of timely utility tariff adjustments, accumulation of cross-arrears, and management inefficiencies led to severe power shortages. - External position and reserves - Current account deficit narrowed to 6.7 percent of GDP in 2016 due to a sharp increase in gold exports and import compression. - Net international reserves (NIR) were rebuilt for the first time in six years, but gross reserves coverage remained 2.6 months of imports (below the 3–3.6 months suggested by a reserve adequacy assessment). - Fund’s EBA-lite indicated a REER gap of around 8 percent, largely explained by large fiscal slippages. - Recent positive signs (post new government) - Q1 2017 preliminary overall growth was 6.6 percent, with non-oil growth at 3.9 percent. - Headline inflation declined, reaching 12.1 percent in June 2017. - MPC reduced the MPR to 21 percent in July 2017. - Record government bond issuance of over GHc 9 billion (net basis) in April 2017; over two thirds of the net domestic financing target for the year met; domestic debt maturity lengthened to almost two years as of May 2017. - Real interest rates and yields at primary issuance showed declines following disinflation and fiscal developments. ### Outlook and Risks - Baseline projections - 2017: oil sector growth projected to rise by over 40 percent due to stepped-up production in a new field; overall GDP growth projected at 5.9 percent. - Non-oil growth projected to decline to 4 percent in 2017, rebound to 6 percent by 2019, and converge to a potential level of 5 percent in the long run. - Inflation projected to fall within the BoG’s band (8 ± 2 percent) by early 2018 and remain inside it over the medium term. - Current account deficit projected to decline to around 4 percent of GDP in the medium term (in line with the current account norm estimated by the External Sector Assessment). - Credit growth to the private sector expected to remain initially subdued while banks repair balance sheets. - Debt sustainability and vulnerabilities - DSA indicates high risk of debt distress with three indicators breaching thresholds. - Total public debt-to-GDP ratio expected to remain above the threshold until 2021, with a slightly more elevated trajectory than previously assessed. - Risks that could jeopardize sustainability include fiscal slippages and adverse investor reactions. - Risk Assessment Matrix (selected risks, likelihood, impact, and mitigation) - Strengthening of the US dollar and/or higher global rates - Relative Likelihood: High - Expected Impact: High - Mitigations: Implement credible medium-term fiscal strategy; build buffers; formulate contingency measures. - Delayed or insufficient fiscal adjustment - Relative Likelihood: High - Expected Impact: High - Mitigations: Implement credible medium-term fiscal adjustment with balanced revenue and expenditure measures; complete audit of unpaid commitments and claims; strengthen PFM. - Lower energy and commodity prices - Relative Likelihood: Low - Expected Impact: High - Mitigations: Diversify economy and export base; improve business environment; invest in physical and human capital. - Continued SOE utility sector weaknesses - Relative Likelihood: Medium - Expected Impact: Medium - Mitigations: Implement credible strategy to tackle energy inefficiencies; strengthen monitoring and oversight of SOEs. - Financial stability problems from rising NPLs and banking sector uncertainty - Relative Likelihood: Medium - Expected Impact: Medium - Mitigations: Fully implement and monitor remedial actions for distressed banks per BoG’s Financial Sector Roadmap. ### Authorities’ Views - Authorities broadly concurred with staff’s outlook, risks and ESA but were more optimistic about a quicker turnaround. - They highlighted potential upside factors, including realignment of government expenditures to productive areas and removal of nuisance taxes, which they argued would boost productivity and private sector activity. ### Article IV Policy Discussions: Anchoring Macroeconomic Stability - Achieving irreversible growth and prosperity requires locking in macroeconomic stability and reversing the 2016 fiscal deterioration. - A comprehensive policy package is needed: upfront fiscal adjustment plus reforms across policy areas to restore credibility, reduce refinancing risks, rebuild fiscal buffers, and allow monetary policy to ease over time to support investment and growth. ### Adopting a Credible Fiscal Strategy - Reversing debt dynamics requires credible and sustained fiscal consolidation and strong structural fiscal reforms. - Key facts on fiscal structure and weaknesses - Debt increased from roughly 30 percent of GDP at end-2006 to 73.4 percent of GDP at end-2016. - Non-discretionary spending on wages, interest payments, and earmarked transfers to statutory funds together represented over 110 percent of revenue in 2016. - Structural weaknesses undermining fiscal discipline - Revenue side: revenue-to-GDP compares favorably regionally but tax effort is weaker due to widespread exemptions and revenue administration weaknesses (tax evasion); revenue projections have tended to be over-optimistic. - Spending side: lax commitment controls led to frequent large spending overruns and arrears accumulation. - Increasing use of off-budget activities (revenue earmarking) and proliferation of quasi-fiscal operations of SOEs complicate overall budget management and hamper comprehensive fiscal assessment. *International Monetary Fund — Article IV consultation chapter: “Ghana’s Fiscal Indiscipline and Debt Dynamics.”* ### Box 1. Ghana’s Fiscal Indiscipline and Debt Dynamics ### Box 1. Ghana’s Fiscal Indiscipline and Debt Dynamics ### Fiscal slippages and drivers of debt - In the last three elections (2008, 2012, and 2016) the deficit was on average 6.4 percent of GDP higher than originally budgeted; but even in non-election years, deficits have been larger than budgeted, on average by 1.5 percent of GDP. - Slippages in both revenue and expenditure, mostly in election years, have been the single largest driver of government debt: 25 percentage points out of the 41 percentage points increase in the debt to GDP ratio over the last decade. - Larger contribution from revenue shortfalls in the last three years—suggesting a proclivity toward optimistic revenue projections. - Exchange rate depreciation has been the second most important factor, especially in 2014 when the exchange rate depreciated rapidly (by 45 percent in nominal terms, from GHc 2.2 to GHc 3.2 per $1), contributing to almost 8 percentage points increase in the debt-to-GDP ratio in that year. - Before the new legislation capping transfers to statutory funds (see Box 4), the level of pre-determined expenditure through earmarking accounted for about 30 percent of revenues and 20 percent of expenditure. ### Fiscal adjustment strategy and debt dynamics - Staff’s projections: a primary adjustment of 4½ percent of GDP over 2017-18 will be needed to lock in favorable debt dynamics. - Strategy for 2017 targets a frontloaded primary adjustment of 2½ percent of GDP based on: - expenditure containment, - improved tax compliance, and - mobilization of non-tax revenues (see Box 4); - but is subject to implementation risk. - A further adjustment of 2 percent of GDP will bring the primary surplus to 2.2 percent of GDP in 2018 (see Program Issues). - After 2018 fiscal policy should aim to gradually build policy buffers while striking a balance between growth and adjustment. - As interest payments come down, the primary surplus would gradually decline to 1½ percent of GDP—still above the debt stabilizing level and thus keeping debt on a downward trajectory—allowing for needed increases in infrastructure spending. ### Short-term needs and medium-term reforms - Strong and sustained fiscal adjustment is needed to achieve the medium-term fiscal objectives. - In the short term, the authorities need to stand ready to implement contingency measures to preserve the fiscal targets if revenues fall below projections or spending pressures emerge. - A steady focus on the primacy of the debt reduction objective will anchor fiscal policy over the medium term. - Wide-ranging fiscal reforms are critical to sustain fiscal adjustment in the medium term: - Public financial management (PFM) reforms to further improve budget execution and reduce budgetary rigidities would help bolster overall budget management. - Going beyond central government operations to encompass extra-budgetary funds and increase focus on SOEs would help strengthen transparency and accountability, while limiting fiscal risks. - A revenue mobilization strategy that targets improving tax compliance along with addressing untargeted tax expenditures can have a lasting impact and increase fiscal space. - Ongoing reforms should be completed before launching new initiatives (such as the planned Fiscal Council) to keep the momentum and not spread limited resources too thin. ### Debt management - Ongoing and planned improvements in debt management are welcome, but they are neither quick wins nor a substitute to fiscal adjustment. - Authorities are making efforts to lengthen domestic debt’s maturity and maintain adequate cash buffers to reduce refinancing risks, mindful of Ghana’s heavy reliance on short-term T-bill issuance. - Given the recent steepening of the yield curve, trade-offs have emerged between increasing tenor and reducing debt service costs. - Recommendations: - Improve cash management to better align primary market operations with cash flow needs. - Careful planning to mitigate external refinancing risks is needed. - The authorities’ increasing focus on liability management operations should not detract from achieving fiscal adjustment (see Program Issues). ### Authorities’ views on fiscal consolidation - The authorities agreed with staff on the need for sustained fiscal consolidation backed by wide-ranging structural reforms. - They stressed that the new Economic Management Team was willing to take difficult decisions, as demonstrated by the swift adoption of a law to tackle revenue earmarking for statutory funds. - They view the establishment of a Fiscal Council as a tangible sign of reform to increase accountability and transparency. - They were more optimistic than staff on the ability of the GRA to meet the ambitious revenue targets set in the budget. - Given intensified efforts to build cash buffers to mitigate rollover risk, they underlined the importance of monitoring net debt positions going forward (see DSA). *Source: IMF staff summary as presented in the provided content.* ### Box 3. The Precarious Finances of the Energy Sector SOEs ### Box 3. The Precarious Finances of the Energy Sector SOEs ### Key findings from the Ernst and Young (EY) audit - The sector’s debt was estimated at 13 percent of GDP at end-June 2016. - Composition of the 13 percent of GDP debt: over 50 percent SOEs’ debt to banks, 30 percent arrears to suppliers, and 17 percent inter-sectoral debt. - Poor quality of financial data and missing data undermined debt validation. - EY is finalizing a financial reporting template to help monitor SOEs’ financial situations. ### Financial performance and indicators - Overall net income position amounted to -1 percent of GDP in 2016 (marginally improved reflecting the tariff increase at end-2015 and the restructuring of VRA and TOR debt via the introduction of the ESLA). - Sector net payables increased again since 2014, to 2.3 percent of GDP at end-2016. - For the VRA, an estimated 32 percent upward tariff revision would be needed to break even. - For the ECG, the end-2015 tariff increase helped (profit posted in 2016), but receivables have continued to accumulate, leading to cascading payables across the utility value chain. - Other energy companies, including GRIDCO, Ghana Gas, and individual power producers, depend on the VRA’s financial viability. - Footnote: This bond will also cover previously restructured bank loans, thus releasing ESLA revenues. ### Viability issues and transmission across the sector - The inability to collect billed amounts (ECG receivables) and the subsequent accumulation of payables has cascading effects across the whole utility value chain, especially on the VRA. - Sectoral interdependence means weaker financials at VRA affect GRIDCo, Ghana Gas, and individual power producers. ### Policy recommendations and program responses - Strengthen SOE financial oversight to improve financial viability (EY reporting template; additional measures being considered with support from the World Bank and the Millennium Challenge Corporation). - Include an indicative target on the overall balance and gross payables of the two main SOEs, ECG and VRA, to enhance transparency on their operational performance and start improving their cash position. - Re-institute a clearinghouse system to settle cross-arrears between and across the government and SOEs to ensure timely payments and improve SOEs’ liquidity (structural benchmark). - Publication of the first aggregate report on SOEs performance as a signal of the government’s intention to strengthen oversight. - Consider issuing an energy bond as a way to unlock cash for the sector and pave the way for its restructuring (authorities’ view). ### Monitoring, support, and implementation - EY’s financial reporting template to monitor SOEs’ financial situations is being finalized. - Additional measures to address SOE weaknesses are being considered and supported by the World Bank and the Millennium Challenge Corporation. - The government agreed to include indicative targets and to strengthen oversight and transparency, including the clearinghouse for cross-arrears. *Source: Box 3. The Precarious Finances of the Energy Sector SOEs (cr17262).* ### 48. The non-concessional debt limits for 2017 have been adjusted (MEFP ¶39). Debt limits ### 48. The non-concessional debt limits for 2017 have been adjusted (MEFP ¶39). Debt limits ### Debt limits and project financing - Debt limits for debt management purposes will be set to zero as no Eurobond issuance is planned. - Debt limits for key projects will be raised by around US$500 million relative to the end-June IT established under the Third Review to respond to the authorities’ aspiration to accelerate Ghana’s economic growth and promote poverty reduction. - The key project list remains unchanged except for three new World Bank’s project loans; the list will be revised in the context of the fifth review, reflecting the government’s development projects currently under preparation. - A separate limit for the oil company (GNPC) will be re-established to accommodate its delayed US$350 million loan. - The indicative target for concessional external loans will be set at US$700 million, covering World Bank’s loans including budget support of US$200 million. - Starting in July 2017, the World Bank is supposed to provide credits to Ghana on concessional terms under the new 3-year financing program (IDA18). ### Program financing and capacity to repay the Fund - The program is fully financed and Ghana’s capacity to repay the Fund is adequate. - Both multilateral and bilateral donors reaffirmed their financial support—with firm commitments for the next 12 months—as the new government assured its commitments to restoring macroeconomic stability under a Fund-supported program. - Fund disbursements would contribute to closing the remaining external financing gaps over the program period while bringing international reserves up to comfortable levels, with the remaining access under the ECF arrangement rephased evenly over the remaining five reviews. - Staff supports the authorities’ request to make the use of Fund’s disbursements associated with the fourth and fifth reviews for budget support to support BOP needs and minimize the cost of budget financing. - Disbursements will be made directly to the government consistent with BoG’s zero financing to the latter. A Memorandum of Understanding has been signed between the government of Ghana and Bank of Ghana to safeguard Fund’s resources. - Capacity to repay the Fund is adequate, with maximum outstanding liabilities to the Fund at 2.3 percent of GDP and 5.3 percent of exports. ### Macroeconomic outlook and risks - Growth is projected to increase in 2017, on the back of a significant increase in oil production. - Investors have shown strong appetite for Ghana’s debt; inflation has been declining and projected to fall to the upper band of the inflation target by year-end. - The exchange rate has stabilized after a period of volatility during the first quarter. - The BoG is set to add $800 million to its net reserves in 2017, the largest increase since 2011. - Despite improvements, Ghana still faces large financing needs and external imbalances largely due to past fiscal slippages; the external position remains vulnerable and limited buffers could be severely tested in case of adverse market reactions or deteriorating macroeconomic conditions. ### Fiscal policy and adjustment priorities - Credible and sustained fiscal adjustment is critical to reverse the debt dynamics and reduce financing needs. - The government has started capping revenue earmarking and limiting exemption abuses. - Submission to Parliament of a mid-year budget review with revised spending limits signals commitment to achieve the deficit target of 6.3 percent of GDP agreed under the program. - New spending programs—such as free secondary education and the one million per constituency initiative—should be carefully phased in to ease spending pressures and ensure best value for money and proper targeting. - The government should be ready to adopt contingency measures, such as further spending rationalization or phased implementation of budgeted tax cuts, if needed to safeguard the targeted budget deficit. ### Fiscal structural reforms and public financial management - Fiscal structural reforms need to underpin adjustment and help create fiscal space. - Authorities are strongly encouraged to take corrective actions based on the ongoing audit of unpaid expenditure claims. - Critical actions include modernizing MOF functions, fully implementing the PFM Act, pursuing stronger cash management, and monitoring fiscal risk. - Stronger revenue administration is needed to combat abuses and corruption and create fiscal space for investment and social programs. - Improvements in revenue mobilization will have more lasting impact once accompanied by policy changes aimed at reducing untargeted and regressive tax expenditures. ### Energy sector risks and SOE management - The inefficient energy sector poses increasing risks: a financial audit of the energy sector SOEs confirmed continued losses, cross-arrears, cashflow shortages, and rising debts with spillovers to the financial system and growth. - Ongoing debt restructuring efforts can help disentangle liabilities but are no substitute for improving SOE management. - Any issuance of an energy sector bond should be preceded by the adoption of concrete measures to ensure the SOEs’ financial viability, including stronger monitoring and oversight. ### Debt management - Improved debt management can help but is no panacea. - Reprofiling domestic debt toward longer maturities is welcome, but there is a limit to these operations’ impact on debt dynamics and they may be costly given the recent steepening of the yield curve. - There is no substitute for plain-vanilla above-the-line fiscal adjustment to lower public debt in a sustainable way, despite benefits of well-targeted below-the-line operations. ### Monetary policy and inflation targeting - Monetary policy has a key role in steering the economy back to stability; the recent decline in inflation is encouraging but not guaranteed. - The BoG must remain steadfast in pursuing price stability, and the MPC needs to remain vigilant regarding upside risks to inflation and cautious in its easing cycle. - The IT framework needs to be strengthened further through elimination of fiscal dominance and development of the FX market to help entrench price stability once achieved. ### Financial sector reform and stability - The BoG has an opportunity to build a more robust financial sector to support growth and greater financial inclusion. - Prompt implementation of remedial actions in response to the AQR is a near-term priority, including recapitalization of undercapitalized banks and resolution of banks that cannot be rehabilitated. - Medium-term steps should focus on strengthening BoG’s supervisory and regulatory framework, including adoption of additional amendments of the Banks and SDI Act, implementation of the Basel II/III capital accord, and addressing deficiencies in the AML/CFT framework. - Addressing the NPL overhang is a key priority for spurring sustainable growth. *IMF staff appraisal excerpt (CR17262).* ### 58. While risks to program implementation remain, Ghana’s reform efforts deserve ### 58. While risks to program implementation remain, Ghana’s reform efforts deserve ### Assessment and Staff Recommendation - Given the slippages in 2016 and the inevitable delays associated with the change in government, achieving the ECF original program objectives now warrants an extension of the program by one year. - The additional year will allow an ambitious yet feasible adjustment path to: - bring the budget deficit to 3.8 percent of GDP, and - put debt on a clearly declining trajectory. - The Fund, in collaboration with the WB and other development partners, stands ready to help, also in the context of the recently launched Compact with Africa. - Staff supports: - completion of the fourth review, - waivers for the non-observance of performance criteria, and - the request for program extension by one year, with even rephasing of the remaining access. - Staff proposes that the next Article IV consultation take place in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747(10/96), as amended). ### Fiscal outlook, targets, and budgetary projections - Central government (cash basis) headline aggregates (percent of GDP unless otherwise noted): - Revenue: 18.4, 19.6, 19.4, 17.3, 19.2, 18.9, 18.6, 19.0, 19.1, 18.9, 18.7 (2014–2022 series as shown). - Expenditure: 28.5, 26.6, 24.6, 26.6, 22.7, 25.2, 22.4, 22.2, 22.1, 21.8, 21.6. - Overall balance (cash basis): -10.1, -7.0, -5.2, -9.3, -3.5, -6.3, -3.8, -3.2, -3.1, -2.9, -2.8. - Primary balance: 0.0, -0.4, 1.1, -2.4, 2.2, 0.2, 2.2, 2.2, 2.0, 1.8, 1.6. - Commitment-basis fiscal indicators (percent of GDP): - Revenue: 18.4, 19.6, 19.4, 17.3, 19.2, 18.9, 18.6, 19.0, 19.1, 18.9, 18.7. - Expenditure: 29.4, 24.8, 23.1, 26.1, 21.3, 23.3, 22.4, 22.2, 22.1, 21.8, 21.6. - Net lending / borrowing (overall balance): -10.9, -5.2, -3.7, -8.9, -2.0, -4.5, -3.7, -3.2, -3.1, -2.9, -2.8. - Budget composition highlights (percent of GDP): - Taxes: 15.8, 15.7, 16.4, 15.5, 16.6, 16.0, 16.0, 16.3, 16.5, 16.5, 16.4. - Interest: 6.2, 6.6, 6.4, 6.9, 5.7, 6.5, 5.9, 5.4, 5.1, 4.7, 4.4. - Compensation of employees: 10.9, 8.8, 8.3, 8.7, 8.2, 7.9, 7.8, 7.8, 7.8, 7.8, 7.8. - Net acquisition of nonfinancial assets: 5.7, 5.2, 3.1, 4.9, 2.9, 3.2, 3.3, 3.5, 3.7, 3.8, 3.9. ### Debt, financing, and external borrowing - Central government gross debt (percent of GDP): 70.2, 72.2, 67.7, 73.4, 63.6, 70.5, 66.1, 62.8, 60.1, 57.6, 55.1 (2014–2022 series). - Domestic debt: 31.0, 28.5, 27.9, 32.1, 26.0, 32.5, 30.8, 29.8, 29.1, 28.4, 27.2. - External debt: 39.1, 43.7, 39.8, 41.3, 37.7, 38.0, 35.3, 33.0, 30.9, 27.7, 28.8. - External borrowing monitor / program projections (summaries): - 2016 actual and 2017 projected financing mixes show major reliance on non-concessional financing (e.g., commercial terms and semi-concessional), with significant uses including budget financing (e.g., Budget Financing: 750.0 USD million in tables). - Table 6 (External Financing Requirements and Sources, millions of US$): - I. Total financing requirements: -6,323 (2016), -6,631 (2017 proj.), -5,564 (2018), -4,948 (2019). - III. Financing gap: -167 (2016), -449 (2017), -388 (2018), -92 (2019). - V. Residual gap: -141 (2016), -184 (2017), -184 (2018), -92 (2019). - ECF program contribution to financing gap: 229 (2016), 184 (2017), 184 (2018), 92 (2019). - Schedule of ECF disbursements (Table 10): - Series of purchases: 83.025 (11.25 percent of quota) on April 3, 2015; 83.025 (11.25) on August 31, 2015; 83.025 (11.25) on January 13, 2016; 83.025 (11.25) on September 28, 2016; 66.429 (9.00) on April 15, 2017; subsequent tranches of 66.429 (9.00) on September 15, 2017; February 15, 2018; August 15, 2018; February 15, 2019. Total under the ECF arrangement: 664.2 (90.00 percent of quota). ### Macro projections and key indicators - GDP and inflation (annual percentage change): - GDP at constant prices: 4.0, 3.8, 3.3, 3.5, 7.4, 5.9, 8.9, 5.9, 5.1, 5.2, 5.4 (2014–2022). - Non-oil GDP: 4.0, 4.0, 3.7, 4.8, 4.5, 4.0, 5.0, 6.0, 6.0, 6.0, 6.0. - Oil and gas GDP: 4.5, 0.9, -2.4, -16.9, 57.0, 42.5, 64.9, 5.5, -3.1, -2.7, -1.7. - Real GDP per capita: 1.4, 1.2, 0.8, 0.9, 4.7, 3.3, 6.1, 3.3, 2.5, 2.6, 2.7. - GDP deflator: 16.7, 16.4, 15.3, 18.1, 10.1, 14.2, 9.6, 9.1, 7.4, 6.3, 6.3. - Consumer price index (annual average): 15.5, 17.2, 17.1, 17.5, 10.0, 11.8, 9.0, 7.0, 6.0, 6.0, 6.0. - External sector (Table 4 highlights): - Current account (in percent of GDP): -9.5 (2014), -7.7 (2015), -6.7 (2016), -6.1 (2017), -5.8 (2018), -5.4 (2019), -5.0 (2020), -4.7 (2021), -4.5 (2022), -4.3 (2023 memorandum). - Exports, f.o.b. (millions of US$): 13,213 (2014), 10,358 (2015), 11,137 (2016), 12,528 (2017), 12,045 (2018), 13,485 (2019), 14,494 (2020), 15,347 (2021), 16,413 (2022), 17,702 (2023). - Imports, f.o.b. (millions of US$): -14,600 (2014), -13,465 (2015), -12,910 (2016), -15,237 (2017), -13,494 (2018), -13,993 (2019), -14,693 (2020), -15,337 (2021), -16,252 (2022), -17,675 (2023). - Gross international reserves (millions of US$): 4,349 (2014), 4,403 (2015), 4,862 (2016), 5,976 (2017), 5,783 (2018), 6,319 (2019), 6,797 (2020), 7,483 (2021), 8,145 (2022), 8,765 (2023). - Reserves in months of imports (prospective): 2.5, 2.6, 2.7, 2.6, 2.9, 3.0, 3.1, 3.2, 3.3, 3.4. ### Monetary and financial sector - Monetary aggregates and banking sector indicators (Table 3 and Table 5): - Money and quasi-money (M3, end of period, millions of GHc): 36,843 (2014), 45,432 (2015), 56,692 (2016), 59,812 (2017), 69,561 (2018), 80,604 (2019), 96,057 (2020), 116,192 (2021), 135,303 (2022), 157,621 (2023). - Broad money (M2, end of period, millions of GHc): 27,530 (2014), 33,871 (2015), 43,452 (2016), 45,427 (2017), 53,914 (2018), 62,836 (2019), 73,858 (2020), 88,940 (2021), 102,156 (2022), 117,336 (2023). - Base money (end of period, percent change or levels shown in tables): Base money growth rates include 30.2, 24.2, 29.6, 15.7, 26.3, 19.2, 17.5, 18.3, 16.9, 14.9 (memorandum). - Credit to the private sector (12-month percentage change): 41.8, 31.7, 9.1, 14.2, 11.0, 14.5, 19.9, 20.5, 17.3, 20.2. - Financial soundness indicators (selected, December/June series): - Regulatory capital to risk weighted assets: 18.5 (Dec 2013), 17.9 (Dec 2014), 17.7 (Dec 2015), 17.8 (Dec 2016), 14.8 (June 2017). - Nonperforming loans to total gross loans: 12.0 (Dec 2013), 11.3 (Dec 2014), 14.9 (Dec 2015), 17.3 (Dec 2016), 21.2 (June 2017). - Bank provisions to nonperforming loans: 78.3, 69.5, 69.9, 72.5, 75.1. - Return on assets: 4.5, 4.7, 3.1, 2.5, 2.4. - Note: Indicators do not fully reflect the results of the recent Asset Quality Review. ### External financing needs and sources (Table 6 and Table 8/9 highlights) - External financing requirements (millions of US$): - I. Total financing requirements: -6,323 (2016), -6,631 (2017 proj.), -5,564 (2018), -4,948 (2019). - II. Total available financing: 6,157 (2016), 6,182 (2017), 5,176 (2018), 4,856 (2019). - III. Financing gap: -167 (2016), -449 (2017), -388 (2018), -92 (2019). - V. Residual gap after other program support: -141 (2016), -184 (2017), -184 (2018), -92 (2019). - External borrowing composition examples (2016–2017 program tables): - By sources of debt financing (sample): Concessional debt around 8 percent (108.6 USD million in one table), non-concessional 92 percent (1,225.9 USD million), with commercial terms representing large shares (e.g., 935.8 USD million). - Uses of debt financing in given tables: Infrastructure, Social Spending, Budget Financing (e.g., Budget Financing: 750.0 USD million). ### Policy implications and operational support - The proposed one-year extension aims to: - accommodate political transition-related implementation delays, and - preserve program objectives consistent with fiscal consolidation to reach a 3.8 percent of GDP deficit and place public debt on a declining path. - The Fund and development partners (including the World Bank) stand ready to provide support, including under the Compact with Africa. - Operational steps supported by staff: - completion of the fourth review, - granting waivers for non-observance of performance criteria, and - rephasing of remaining Fund access as part of the one-year program extension. *Source: IMF staff report text and tables as provided in the content unit.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Exchange rate developments - The Nominal Effective Exchange Rate (NEER) has been relatively stable over the last three years following a sharp depreciation in 2014. - The Real Effective Exchange Rate (REER) showed gradual appreciation in 2016. - Nominal depreciation was smaller than suggested by inflation differentials, presumably reflecting active FX intervention by the Bank of Ghana (BoG), leading to some real appreciation in 2016. This trend continued in early 2017. - Both the NEER and REER have a seasonal pattern, with a tendency to appreciate towards year-end owing to large capital inflows (associated with the lump-sum disbursement of a large cocoa-related syndicated loan) and larger cocoa exports. ### Current account assessment and norms - The Fund’s model-based exchange rate assessment tool (EBA-lite) projects the current account norm at 4.2 percent of GDP, with a current account gap of 2.5 percent of GDP largely explained by the policy gap mainly due to large fiscal slippages, suggesting a REER gap of around 8 percent. - The external sustainability approach points to a current account norm of 4.1 percent of GDP with a medium-term target of net international investment position of 60 percent of GDP. - Staff projects the current account deficit to decline towards the norm over the projection period, supported by frontloaded fiscal consolidation and an improvement in the oil trade balance. Box 1 — Ghana’s current account adjustment - Following a significant widening in recent years, the current account deficit started reversing in 2014. - The cumulative current account adjustment over 2015-16, covered under the current Fund-supported program, was 2.9 percent of GDP, in line with the original program projections. - Hydrocarbon (both oil and gas) production is expected to increase going forward; Oil production is expected to reach its peak in 2019. - Authorities should tackle structural impediments, such as unstable power supply and wide-spreading of a cocoa tree disease, to further increase production capacity in gold and cocoa. - Diversification of non-commodity exports, including in agro- and fishery industries, is essential. ### Reserves, adequacy, and intervention strategy - Cost-benefit reserve assessment suggests Ghana’s optimal reserve level is around 3.3 month of imports, with a benchmark range between 3.0 and 3.6 months of imports depending on costs of holding reserves. - Robust capital inflows enabled the BoG to accumulate net international reserves in 2016 for the first time in six years. - Reserves remain below comfortable levels relative to the Fund’s reserves adequacy metrics and as measured by the expanded Greenspan-Guidotti rule. - The reserves to broad money ratio has shown a somewhat declining trend but remains over the frequently-used comfort level of 20 percent. - The BoG has been selling reserves to meet market FX demands in a discretionary manner, using mainly proceeds of annual Cocobod prepayment loans and Eurobonds—which typically materialize in the fourth quarter. - The BoG abolished surrender requirements and introduced one-way FX auction (for selling foreign currencies) in November 2016, which was subsequently suspended in early 2017. - Recommendation: A more transparent and articulately-planned intervention strategy is needed to build up reserves in a sustained way, especially after abolishment of surrender requirements. - Note on Cocobod loans: Ghana has annually received cocoa prepayment loans of around US$2 billion in the fourth quarter, collateralized by cocoa export receipts. ### Capital inflows, external liabilities, and external debt dynamics - Capital inflows have been robust in the post HIPC-MDRI era. - External liabilities increased from 23 percent of GDP in 2006 to 70 percent of GDP in 2015. - External debt-to-GDP levels have steadily grown since Ghana gained access to international capital markets in 2007, and external debt-to-GDP ratio soared rapidly due to repeated fiscal slippages and large depreciation from 2014 onwards. - Impressive inward FDI was driven by the oil sector after discovery of a large oil field; with oil production expected to peak in 2019, FDI is projected to slow down in the medium term, though pro-business policies might mitigate the decline. - Further fiscal correction and reserves build-up would increase sustainability of Ghana’s international investment position. ### Staff assessment and policy implications - Ghana’s overall external position appears weaker than warranted by fundamentals and external stability hinges upon securing fiscal sustainability. - Staff’s EBA-lite assessment attributes current account weakness primarily to sizable fiscal deficits in recent years. - Even after a moderate build-up, reserve levels remain below optimal levels, possibly driven by the BoG’s one-way intervention strategy. - The current account deficit has been narrowing in line with initial program projections but is projected to stay above the norm in the medium term. - External sustainability rests on continued robust capital and FDI inflows; a softening of nonresident demand for domestic debt could reverse recent improvements. - Policy recommendation: Anchor investor confidence with ambitious and front-loaded fiscal adjustments to strengthen Ghana’s external position. ### Key statistics and figures (as reported) - Current account norm (EBA-lite): 4.2 percent of GDP. - Current account gap: 2.5 percent of GDP. - REER gap: around 8 percent. - External sustainability current account norm: 4.1 percent of GDP. - Medium-term target for net international investment position: 60 percent of GDP. - Optimal reserve level: around 3.3 month of imports. - Benchmark reserves range: between 3.0 and 3.6 months of imports. - Cocobod annual prepayment loans: around US$2 billion. - External liabilities: 23 percent of GDP in 2006 to 70 percent of GDP in 2015. - Oil production peak expected: 2019. *Annex I. External Sector Assessment (cr17262).* ### 10. The overall banking sector remains profitable, despite some weaknesses. The sector ### 10. The overall banking sector remains profitable, despite some weaknesses. The sector ### Banking sector performance and vulnerabilities - Return on assets: 2.4 percent (end-June 2017). - Return on equity: 17.7 percent (end-June 2017). - Asset Quality Review (AQR) highlighted provisioning and capital shortfalls. - Some banks exceeded single obligor limits; capital erosion following the AQR generated further pressures. - Waivers of single obligor exposures granted under the previous Banking Act—mainly to the energy sector—are being phased out because the new Banks and SDI Act does not provide for waivers. - Some banks have accessed the Bank of Ghana’s (BoG) emergency liquidity facility for more than the three month-maximum stipulated in regulations. - Nonperforming loans reached 21.2 percent of total gross loans in June 2017. - Weak economy and problems in the power sector adversely affected the banking system. ### Program performance under the IMF-supported ECF - Ghana signed a three-year IMF-supported ECF Program in April 2015. - Three Program reviews have culminated in disbursements totaling US$464 million. - The fourth review assesses program performance criteria up to end-June 2016. - End-June 2016 quantitative performance criteria were mostly missed. - Several PCs not achieved: primary fiscal balance, net international reserves, net change in the stock of arrears. - Continuous PC on non-accumulation of domestic arrears was breached in the first quarter of 2017. - Zero central bank financing of the government observed at end-June 2016 and for the rest of the year. - End-December 2016 inflation: 15.4 percent (within the inner band of the MPCC). - Inflation exceeded the inner band of the MPCC in June 2016 and a consultation was held with IMF staff. - Arrears’ clearance picked up and was brought in line with the program target by end-December 2016. - Structural benchmarks (SB): out of eleven SBs with test dates passed at the time of the third review, only one—rolling out GIFMIS to twenty-five central government MDAs generating IGFs—was met; two others implemented with delay. - Structural reforms slowed in the run-up to the elections. ### Key structural implementation shortfalls (selected) - Strengthening control of net hiring and the wage bill: - Interface development between the payroll of subvented agencies and the centralized mechanized payroll was stalled due to objections, particularly by the Police. - Reducing borrowing costs: - Central budgetary government Treasury Single Account (TSA) was not completed because of weak coordination between the Controller’s and Accountant General’s Office and MDAs. - Strengthening financial stability: - Completion of the AQR took longer than anticipated due to the need for further information on restructuring BDC obligations. - Final AQR results distributed in March 2017, prompting the BoG to engage with undercapitalized banks on corrective actions. - Two SBs relating to amendments of (i) the Banks and SDI Act and (ii) the Deposit Protection Act not met, mainly because of Parliament’s reconstitution in January 2017. ### Government macroeconomic outlook and objectives - 2017 GDP growth expected to pick up to about 6 percent, with a major contribution from the petroleum sector. - Petroleum production expected to increase by 39 percent, driven by the TEN Field; first gas realized in May 2017. - Growth in the non-oil sector expected to be constrained by ongoing fiscal consolidation and weak commodity prices, but likely offset by improved power supply and easing of domestic private sector bank credit conditions. - Medium-term outlook: economy expected to grow at an average rate of about 7 percent per annum from 2017 to 2019, with the major contribution from the non-oil sector. - Government objective: become the most business-friendly country and fastest growing economy in SSA region by 2019. ### Fiscal policy stance and measures - 2017 budget aims at restoring fiscal discipline and mobilizing revenue, tackling budget rigidities, and reducing corruption and high wage bill. - Non-oil tax revenue estimated at 16 percent of GDP in 2017. - Capping and realignment of earmarked funds to twenty-five percent of tax revenue in 2017 enacted into law (Minister may top up priority funds). - Reduced allocations to statutory funds close to 0.9 percent of GDP relative to baseline. - Larger share of internally generated funds of agencies channeled through the central government budget expected to generate 0.6 percent of GDP in non-tax revenue (Structural Benchmark under the Third Review). - Budget includes provision for raising 1.2 percent of GDP from the sale of thermal power plants and shares in publicly listed companies. - Expenditure controls aimed to meet deficit target of 6.3 percent of GDP in 2017. - Mid-year budget review presented to Parliament on July 31 adjusted expenditures downwards in goods and services and capital expenditure by 0.8 percent of GDP relative to the budget. - Deficit target: 6.3 percent of GDP (compared with budget target of 6.5 percent of GDP and IMF presentation 6.8 percent of GDP due to treatment differences). - If revenues underperform, further adjustments (curtailment of discretionary spending and/or revenue measures) will be considered. - Planned deficit reduction: from 6.3 percent in 2017 to 3.8 percent in 2018; over the medium term aim to generate primary surpluses sufficient to eliminate a potential risk of debt distress. - Arrears: - Government aims to eliminate all government arrears by end -2019. - Government will refrain from accumulating new arrears in 2017 and will repay all outstanding arrears by end-2019 following an audit of outstanding commitments generated as at end-2016. - The audit is expected to be completed by October. - Government has made provision to clear arrears worth 1.8 percent of GDP in 2017, which will eliminate all arrears recognized under the program (including the GHC 1,048 million of new arrears accumulated in 2016). - Any further arrears verified by the audit will be settled in 2018 and 2019. ### Monetary policy and Bank of Ghana reforms - Monetary policy guided by the Bank of Ghana’s inflation targeting (IT) framework. - Inflation projected to fall inside the target band of 8±2 percent in 2018. - MPC will monitor developments and take necessary action toward attainment of the inflation target. - 2016 Amendments to the BoG Act reduced fiscal dominance and strengthened central bank governance and autonomy. - Amended BoG Act passed in August 2016. - New Act stipulates central bank financing of government should not exceed 5 percent of the previous fiscal year’s total revenue. - BoG and MOF signed an MOU committing to the central bank’s zero-financing of government; a zero limit will be considered for future amendments. - FX auctions: - BoG started an auction of FX in November 2016 to intermediate proceeds from the syndicated cocoa loan. - After six auctions, the process was stopped as the BoG perceived undesirable impact on the exchange rate (cedi depreciation spiked on auction days). - BoG reverted to bilateral interventions to smoothen volatilities; this contributed positively to relative stability of the cedi. ### Financial sector reforms and supervision - BoG implementing the Roadmap for Financial Stability to address banking sector weaknesses. - AQR Update launched in September 2016; BoG implementing follow-up actions to protect depositors and ensure soundness and stability. - BoG requested recapitalization plans from all solvent but undercapitalized banks; implementation monitored closely. - Banks expected to meet minimum capital adequacy ratio within timeframes prescribed by the Banks and SDI Act. - BoG started daily and bi-monthly liquidity monitoring in September 2016. - BoG approved a Guide for Financial Publication and a Guideline for Emergency Liquidity Assistance in September 2016. - Going forward: strict compliance with new guidelines on emergency liquidity assistance, including strict collateralization requirements, continuous monitoring of repayment plans, and punitive interest rates. - Elevated non-performing loans to be addressed via stepped-up recoveries and write-offs; more timely enforcement of collaterals; and more stringent oversight of banks’ credit risk management frameworks and lending policies. - Legal framework strengthened: - New Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930) enacted and became operational in February 2017. - BoG reviewing the Act and will submit additional enhancements to Parliament, in consultation with IMF staff. - Authorities developing an implementation plan for the new deposit insurance scheme to ensure scheme does not enter into force before conditions for effective functioning are met and vulnerabilities substantially ameliorated. - Microfinance sector supervision: - Serious weaknesses: undercapitalization, unlicensed operations, large numbers of licensed MFIs vis-à-vis limited staffing, lack of good corporate governance and sound risk management, lack of regular and accurate prudential reporting. - BoG preparing a comprehensive action plan for sector reform: improve supervision and regulation, enforce prudential rules, strengthen financial soundness of institutions. - Measures taken: improvements in returns submission, risk-based supervision, tougher sanctions against non-compliance, capacity building of supervision staff. - Future plans: regular publication of licensed MFIs in good standing and establishment of an Apex body to assist BoG in regulating and supervising the sector. ### Structural reform agenda — Tax policy and revenue administration - Review and reform of exemptions regime to eliminate abuses and improve efficiency. - Beneficiaries of import exemptions asked to pay duties upfront and later apply for a refund; escrow account opened to process refunds. - Refund processing target: within 3 weeks instead of initial 30 days. - Total exemptions as at May 2017: GH¢825.37 million (compared to GH¢1,154.13 million for same period in 2016). - Some beneficiaries have complained about cash flow challenges; after assurance of timely refunds, beneficiaries generally accepted the policy. - Initial indications show some beneficiaries who paid taxes are not able to prove justification for the refund. - GRA audits and information matching: - GRA to undertake warehousing and re-performance audits, and audits of free zones. - Data-matching exercises comparing customs and VAT filings to identify tax leakages; preliminary findings suggest large discrepancies between sources of tax declarations. - Companies identified as non-compliant receive notice and are requested to provide explanations or make payments within 30 days, beyond which penalties apply. - Revenue administration modernization: - New nine-member board of the GRA inaugurated in May to revamp revenue collection. - GRA received Technical assistance to use TADAT; further technical assistance requested. - Measures to broaden the tax base (selected): - Pass an Act to support the Common Reporting Standards and Automatic Exchange of Information (AEOI) protocols to ensure local financial institutions collate and report financial information of non-resident account holders to the GRA and vice-versa. - Commence implementation of the Excise Tax Stamp Act, 2013 (Act 873) to boost revenue collection and curtail under-invoicing and smuggling; implementation to begin in the fourth quarter of the year in a phased-in basis. - Complete roll-out of the Geographic Positioning System Project (pilot deployment underway) to identify potential taxpayers and register them. - Roll-out the National Identification Scheme to broaden the tax base and accelerate financial inclusion; scheme will establish a national database linkable to Police, NHIS, Passport Office, Immigration, Courts, GRA, and DVLA. - Use third party information such as GIFMIS data on payments and data from regulatory bodies (Financial Intelligence Centre, Economic and Organized Crime Office) to identify new taxpayers and for further assessment. - Systematically implement the TIN system under the Revenue Administration Act: - Since passage of the Act in 2016, several fora held; teams sent to all MDAs for on-site registration. - Employers mandated to collect and submit forms on behalf of employees. - Approximately 200,000 forms received and processed since the exercise commenced in November 2016. - Complete roll-out of TRIPSTM: - TRIPSTM rolled out in 33 GRA offices with 31 offices outstanding as at end-June. - Remaining offices to be included by the end of 2017. - Main risk: timeliness of relocation of some offices to new locations. *Source: cr17262 - 10. The overall banking sector remains profitable, despite some weaknesses. The sector* ### 33. We have started to implement the Public Financial Management (PFM) Act ### 33. We have started to implement the Public Financial Management (PFM) Act ### PFM Act implementation and supporting regulations - Draft regulations in support of the new Act are urgently needed, with planned submission to Parliament by December 2017. - An important area to cover is budget execution and commitment controls. - During preparation of the 2017 budget, MDAs had unpaid commitments in excess of budgetary allocations, by roughly GHc5.0 billion. - An audit is underway to: - validate these unpaid commitments; - ascertain whether financial rules and regulations were adhered to; - review the system of controls and provide recommendations on remedial actions where weaknesses and abuses existed in the awarding process. ### Improving Ministry of Finance (MOF) operations - Current organizational arrangements and existing functions at the MOF have not kept abreast with the pace of PFM reforms. - A technical assistance mission has reviewed MOF functions to ensure they: - take full advantage of automation introduced with GIFMIS; - adequately reflect the thrust of the PFM Act. - The government intends to hire a long-term consultant to implement the mission recommendations, which include: - establishing a cash management unit to better link commitment approvals to cash availability; - centralizing forecasting functions to help develop a Medium-Term Fiscal Framework, with more credible revenue projections and realistic medium-term aggregate expenditure ceilings; - improving capacity to enhance fiscal risks management and control of SOEs, including setting up a fiscal risk unit in the MOF by October 2017. - Fiscal transparency initiatives: - Published for the first time an aggregate report on the performance of SOEs. - Will publish the budget of statutory funds. ### Earmarked funds cap and statutory funds review - A legal cap on revenue earmarking was introduced to address budget rigidities and improve management of public funds. - In 2016, three budget items—wages and salaries, interest payments and statutory payments—accounted for more than 100 percent of government revenues. - The Earmarked Funds Capping and Realignment Bill was passed into law under a certificate of urgency in March 2017. - The new Act introduces a cap on transfers to Earmarked Funds to 25 percent of tax revenues in any year (these funds have represented more than one third of government revenue). - Over time, the government plans to review statutory funds to reduce spending inefficiencies and improve transparency and accountability, as their spending occurs outside the budget. - A provision allows the Minister to commence a review of the legislative basis of statutory funds to determine whether the funds have outlived their usefulness and, if so, proceed with their elimination. ### Strengthening expenditure controls and payroll management - Continued efforts to tighten controls of the government payroll. - As of April 2017: - salaries of 26,589 workers were suspended for not being biometrically registered with SSNIT; - salaries of 24,609 workers have been activated following submissions from SSNIT; - 1,980 employees remain suspended. - Ongoing measures: - continue payroll clean-up and rationalization, including completing a study on subvented agencies; - revamp the civil service reform strategy; - finalize roll-out of the HRMIS to all MDAs. - GIFMIS processes are being reinforced to strengthen expenditure controls. - The interface of payroll for selected public universities to GIFMIS will be completed by end December 2017. - Interface to GRA on a pilot basis has been completed. - A consultant has been engaged to complete the interface with the three Universities. ### Treasury Single Account (TSA) implementation - Plan to make the TSA operational by end-August (2017). - The Controller and Accountant General's Department (CAGD), together with the BoG and technical assistance, evaluated the impact of transferring government bank balances from commercial banks to the TSA and concluded no adverse impact is expected on the banking system. - Implementation will be phased to minimize unintended liquidity impacts. - A work plan to complete the TSA by August 2017 involves continuous consultations between the MOF, BoG, CAGD, individual banks and MDAs to identify specific bank accounts to be transferred or closed. ### Debt management strategy and ceilings - Strategy focuses on bringing down the cost of debt and minimizing refinancing risks. - Re-profiling operations have been conducted, including debut issuance of a 15-year callable bond, to alleviate refinancing risk, in line with the Medium-Term Debt Management Strategy. - Plans include lengthening the maturity profile, reducing refinancing risks through buy-backs and exchanges, and maintaining adequate cash buffers. - Increased transparency: publication of an improved quarterly auction calendar and plans to publish an Annual Borrowing Plan. - To develop the secondary market, plans to create a limited number of benchmark securities and operationalize securities lending, short-selling and repurchase agreements. - For 2017 non-concessional external debt will continue to be subject to two ceilings: - (i) for debt management purposes; - (ii) for projects critical for national development where concessional financing is not available. - The debt ceiling for debt management will be set to zero, reflecting no planned Eurobond issuance. - The debt ceiling for priority infrastructure projects would be set at US$ 2,250 million on a cumulative basis from the beginning of 2015—an increase of US$520 million, compared with the end-June 2017 indicative target in the Third Review. - A separate limit on GNPC’s non-concessional borrowing to accommodate the delayed GNPC loan of US$ 350 million will be maintained. - Use of non-concessional external loans will be restricted to projects in the priority project list (¶31 of the TMU), aligned with the GSGDA II and the 2017 Budget. - An indicative target on concessional external borrowing would be raised by US$300 million to accommodate World Bank budget support and project loans under IDA18. ### Strengthening debt service processes - Working on recommendations, especially on the processes for debt payments with IMF technical assistance. - Effort aligns with provisions in the PFM law on debt payments. ### Restructuring energy sector SOEs - MOF and MOE reviewed the final draft of the Debt Validation and Viability Analysis of SOEs prepared by Ernst and Young (in process of finalization), covering ECG, VRA, GRIDCO, Ghana Gas (GNGC), and TOR. - Report estimated end-June 2016 stock of debt at GHc23.78 billion (14 percent of GDP), of which GHc 22 billion (13 percent of GDP) was validated. - Validated stock of loans: GHc 10.8 billion (6.4 percent of GDP); - Loans contracted or guaranteed by the government: GHc 6.25 billion (3.7 percent of GDP); - Stock of arrears to creditors and suppliers: GHc 6.7 billion (4 percent of GDP); - Inter-SOE arrears: GHc 3.2 billion (1.9 percent of GDP). - Three-pronged approach to address SOE financial viability concerns: (i) Restructure SOE debt: - Intention for current indebtedness in VRA, ECG, GRIDCO and arrears relating to validated foreign exchange under-recoveries in downstream petroleum sector to be paid off under an ESLA receivable backed instrument via incorporation of an SPV. - Under the SPV arrangement, a debt service Escrow Account will be created to which all future receivables will be assigned. (ii) Strengthen payment discipline: - Reactivate a clearinghouse mechanism to manage inter-utility and utility-government liabilities to improve collection rates; mechanism would include all SOEs and the government. (iii) Introduce private sector participation: - Work with MCC on concessioning the ECG by end-2018. - Out of six companies that expressed interest in concession, five remain interested following the May 2017 bidding conference. - Completing work on the new Tariff Methodology to be presented to development partners and bidders by end-June 2018. ### Monitoring financial performance of SOEs - E&Y developed a financial reporting template for all energy sector SOEs; government will rigorously enforce its operation. - Establishing a standing technical committee to oversee implementation and monitoring of the proposed plan (funding solution, greater efficiency mechanisms and corporate governance solutions). - Example monitoring metric: monitor financial situation of VRA and ECG on regular (monthly, quarterly) basis using an “overall balance” defined as the sum of net after tax profits, excluding government subsidy on an accrual basis, with a zero ceiling on the accumulation of gross payables. ### Policies to support growth and poverty reduction - Despite macroeconomic and structural challenges, policy initiatives are designed to create jobs, ease hardships, and support businesses and industries; initiatives focus on improving business environment, instilling fiscal discipline, and promoting investment in critical infrastructure, especially in rural and deprived communities. Supporting Private Sector Development - National Industrial Revitalization Program (NIRP): - Provides technical and financial support to existing companies distressed or facing operational challenges but deemed viable to benefit from a stimulus package. - National Entrepreneurship and Innovation Plan (NEIP): - Flagship initiative to provide integrated support for early stage (start-ups and small) businesses. - Focus areas: business development services, business incubators, funding for youth-owned businesses. - Aims to enable qualified new businesses to emerge, attract financing, and provide business development support services. Supporting Economic Growth Across the Board - Inclusive development strategy aimed at improving basic infrastructure at constituency level, especially rural and deprived communities. - Infrastructure for Poverty Eradication Program (IPEP): - Directs capital expenditure towards local, constituency-level infrastructure and economic development priorities. - Every one of 275 constituencies will be allocated the equivalent of US$1 million annually. - Expected project categories: (a) One-District-One-Factory; (b) One-Village-One-Dam; (c) Small Business Development; (d) Agricultural Inputs (including equipment); (e) “Water for All” Projects; and (f) Sanitation Projects. - Agriculture focus: promote Fertilizer Subsidy program and Agricultural Mechanization Service Centers, among others. Supporting the Poor and Vulnerable - Regional development and social assistance through improved social protection policy implementation and systems. - Ghana Social Opportunities Project (GSOP) worked to: - improve targeting in social protection spending; - increase access to conditional cash transfers nationwide; - increase access to employment and cash earning opportunities for the rural poor during agricultural off-season; - improve economic and social infrastructure in target districts. - In 2016, Ministry of Gender, Children and Social Protection, together with Ministry of Local Government and Rural Development and development partners implemented programs such as Labour Intensive Public Works (LIPW) and Livelihood Empowerment Against Poverty (LEAP). - Poverty-related expenditures by MDAs and MMDAs support basic education, primary health care, poverty-focused agriculture, rural water, feeder roads and rural electrification. - Education policy: implement comprehensive free public Senior High School (SHS) programme starting with the 2017/18 academic year, including technical and vocational institutes; 58 percent of the total allocation to the sector will be used to improve basic education. - Health care policy: devote about 56.7 percent of the total sector allocation to primary health care programmes. *International Monetary Fund. Ghana — Selected chapter: implementation of the PFM Act, public financial management reforms, debt management, SOE restructuring and growth and poverty reduction policies.* ### 49. The program will continue to be monitored based on periodic performance criteria, ### cr17262 - 49. The program will continue to be monitored based on periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets as of end‑August 2017 and end‑December 2017 ### Monitoring framework and timing - Program monitored based on: - periodic performance criteria, - continuous performance criteria, - Monetary Policy Consultation Clause, - indicative targets. - Test dates and review timing: - Completion of the fifth review expected on or after September 15, 2017 with end‑August 2017 as test date. - Completion of the sixth review expected on or after February 15, 2018 with end‑December 2017 as test date. - Definitions, reporting requirements, scope, and frequency of data for monitoring are defined in the Technical Memorandum of Understanding (TMU) attached to the memorandum. - During the program period, the government will not, without the IMF’s prior approval: - introduce or intensify restrictions on payments and transfers for current international transactions; - introduce or modify any multiple currency practice; - conclude bilateral payments agreements incompatible with Article VIII of the IMF’s Articles of Agreement; - introduce or intensify import restrictions for balance of payments reasons. ### Quantitative performance criteria and indicative targets (selected items and specifications) - Targets are cumulative from the beginning of the calendar year, unless otherwise indicated. - End‑dates with program targets: end‑August 2017 and end‑December 2017; indicative targets for end‑September 2017. - Key performance criteria (examples drawn from Table 1 and Table 2): - Primary fiscal balance of the government (floor in millions of cedis): - 2016 actual: -2,344 - End‑Aug 2017 adjusted target: 652 - End‑Sep 2017 actual: 609 - End‑Dec 2017 target: 831 - End‑Dec 2017 adjusted target: 1,186 - End‑Dec 2017 actual: 1,144 - End‑Dec 2017 memorandum value: 361 - Wage bill (ceiling; in millions of cedis): - 2016 actual: 12,110 - End‑Aug 2017 adjusted target: 3,424 - End‑Sep 2017 actual: 3,190 - End‑Dec 2017 target: 9,345 - End‑Dec 2017 adjusted target: 10,520 - End‑Dec 2017 actual: 14,047 - Net international reserves of the Bank of Ghana (floor; millions of U.S. dollars): - 2016 actual: 329 - End‑Aug 2017 adjusted target: -420 - End‑Sep 2017 actual: -469 - End‑Dec 2017 target: 731 - End‑Dec 2017 adjusted target: 1,188 - End‑Dec 2017 actual: 805 - Net change in stock of arrears (ceiling, millions of cedis): - 2016 actual: -2,438 - End‑Aug 2017 adjusted target: -518 - End‑Sep 2017 actual: -92 - End‑Dec 2017 target: -1,000 - End‑Dec 2017 adjusted target: -1,555 - End‑Dec 2017 actual: -3,220 - Continuous performance criteria (examples): - Gross financing of BoG to the Government and SOEs (ceiling; in millions of cedis): - End‑Dec 2016 actual: 15,394 - End‑Aug 2017 target: 15,814 - End‑Sep 2017 actual: 15,356 - End‑Dec 2017 target: 15,394 - End‑Dec 2017 adjusted target: 15,394 - Contracting or guaranteeing of new external nonconcessional debt (ceiling; millions of U.S. Dollars): - Debt for a debt management purpose: - 2016 actual: 919 - End‑Aug 2017 adjusted target: 1,150 - End‑Sep 2017 actual: 0 - End‑Dec 2017 target: 0 - Debt for projects (cumulative from the beginning of 2015): - 2016 actual: 1,006 - End‑Aug 2017 adjusted target: 1,730 - End‑Sep 2017 actual: 1,534 - End‑Dec 2017 target: 2,250 - Non‑accumulation of new domestic arrears (ceiling; millions of cedis): - End‑Aug 2017 adjusted target: 0 - End‑Sep 2017 actual: 1,048 - End‑Dec 2017 target: 0 ### Monetary Policy Consultation Clause (inflation bands and central target) - Twelve‑month consumer price inflation (percent) bands and targets (Table 1 and Table 2): - Outer band (upper limit): 14.5 / 14.4 / 14.0 / 13.0 (as listed across columns) - Inner band (upper limit): 13.5 / 13.4 / 13.0 / 12.0 - Central target rate of inflation: 15.4 / 11.5 / 12.8 / 11.4 / 11.0 / 10.0 (central target values appear across tables) - Inner band (lower limit): 9.5 / 9.4 / 9.0 / 8.0 - Outer band (lower limit): 8.5 / 8.4 / 8.0 / 7.0 - If inflation is outside the target bands, discussions with the Fund are to be held. ### Indicative targets and other program metrics (selected) - Net Domestic Assets of Bank of Ghana (ceiling; millions of cedis): - 2016 actual: 7,654 - End‑Aug 2017 adjusted target: 7,694 - End‑Sep 2017 actual: 6,792 - End‑Dec 2017 target: 3,615 - End‑Dec 2017 adjusted target: 5,910 - End‑Dec 2017 actual: 5,653 - Contracting or guaranteeing of new external concessional debt (ceiling; millions U.S. Dollars): - 2016 actual: 101 - End‑Aug 2017 adjusted target: 400 - End‑Sep 2017 actual: 0 - End‑Dec 2017 target: 700 - Social Protection (floor, in million of cedis): - 2016 actual: 1,641 - End‑Aug 2017 adjusted target: 1,627 - End‑Sep 2017 actual: 1,835 - End‑Dec 2017 target: 2,425 - Memorandum item: Primary fiscal balance of the government (excluding discrepancy) values shown in Table 1, including -511, 13, 151, 723, 939, -540. ### Structural benchmarks, prior actions, and implementation status - Structural benchmarks used for monitoring progress on structural reforms (Table 3 and Table 5). Selected entries and statuses: - Non‑Tax Revenue: Adopt and implement legal and regulatory changes to improve management of Internally Generated Funds (IGFs) and channel a larger share of revenues through the central government budget. - Indicative timeframe: December 2016. Status: Not met. Later implemented with the adoption of the Earmarked Funds Capping and Realignment Act in April 2017. - Roll‑out GIFMIS to 25 central government MDAs generating IGFs, including the 20 highest generating IGFs, and close all related bank accounts in commercial banks. - Indicative timeframe: December 2016. Status: Met. - Complete the central budgetary government TSA. - Indicative timeframe: December 2016. Status: Not met. Proposed to be reset to August 2017. - Finalize roll‑out of the HRMIS to remaining MDAs. - Indicative timeframe: December 2016. Status: Not met. Proposed to be reset to December 2017. - Completion of an updated Asset Quality Review of the banking system by BoG (Terms of Reference agreed with IMF staff). - Indicative timeframe: November 2016. Status: Not met. Partly due to delays in the completion of the third‑party review. Measure implemented in March 2017. - Prior actions for the fourth review (Table 4): - Complete the audit and financial viability analysis of SOEs conducted by external auditors and share report with IMF staff. - Economic rationale: Strengthen oversight of SOEs. Status: Met. - Approval by the BoG, in consultation with IMF staff, of credible and time‑bound recapitalization plans for undercapitalized banks, and initiation of resolution proceedings for insolvent banks that cannot demonstrate credible recapitalization measures. - Economic rationale: Strengthen resilience and stability of the banking system. Status: Not yet met. - Initiate audit of unpaid commitments. - Economic rationale: Ascertain fiscal costs from commitments outside PFM system. Status: Met. - Submit to Parliament, in consultation with IMF staff, legislation to reduce existing revenue earmarking and strengthen oversight of statutory funds by integrating them into the budgetary process. - Economic rationale: Reduce budget rigidities and increase fiscal transparency. Status: Met. - Submission to Parliament of mid‑year budget review in line with program objective and recording of revised spending limits in GIFMIS. - Economic rationale: Restore fiscal discipline. Status: Not yet met. ### Technical Memorandum of Understanding (TMU) key definitions and exchange rate - TMU specifies variables subject to targets, methods to assess performance, and information requirements. - Authorities will consult the Fund before modifying TMU measures or adopting measures that deviate from program goals. - Program exchange rate (TMU): - GH¢4.00 per US$1 for 2016. - GH¢4.40 per US$1 for 2017. - Exchange rates to other currencies calculated as the average of buying and selling exchange rates against the U.S. dollar. - Performance criteria under the arrangement (selected list from TMU): - a floor on the primary fiscal balance of the government on a cash basis, measured in terms of financing (below the line); - a continuous ceiling on gross credit to government by the Bank of Ghana (level); - a floor on the net international reserves of the Bank of Ghana (level); - a ceiling on wages and salaries; - a ceiling on the net change in the stock of domestic arrears; - a ceiling on non‑accumulation of new domestic arrears; - a continuous ceiling on non‑accumulation of new external arrears; - a ceiling on contracting or guaranteeing of new external non‑concessional debt, with two sub‑ceilings on (i) debt for debt management purposes and (ii) debt for projects integral to the development program for which concessional financing is not available; - a monetary policy consultation clause set for the twelve‑month rate of consumer price inflation, with discussions with the Fund to be held if inflation is outside the target bands. *Source: Technical Memorandum of Understanding and program Tables as presented in the attached memorandum.* ### 5. Indicative targets are established as: ### cr17262 - 5. Indicative targets are established as: ### Indicative targets (overview) - A floor on poverty-reducing government expenditures. - A ceiling on the contracting or guaranteeing of new external concessional debt. - A ceiling on net domestic assets of Bank of Ghana (level). - A ceiling on the change in accounts payable of Electricity Company of Ghana (ECG) and Volta River Authority (VRA). - A floor on the net after tax profit (excluding government subsidies) of ECG and VRA. ### A. Government — scope and fiscal definitions - Definition of government: - Comprises the central government, all special funds (including the Ghana Education Trust Fund, the Road Fund, the District Assemblies Common Fund, and the National Health Insurance Fund), and all subvented and other government agencies classified as government in the Bank of Ghana (BoG) Statement of Accounts (SOA). - Excludes the Social Security and National Insurance Trust (SSNIT) and public enterprises, including Cocobod. - Central government total tax revenue: - All revenue collected by the Ghana Revenue Authority (GRA), whether they result from past, current, or future obligations. - Includes Direct Taxes, Indirect Taxes (excises, VAT, National Health Insurance Levy (NHIL), Communication Service Tax (CST)), and Trade Taxes. - Total tax receipts are recorded on a cash basis. - Oil revenue: - Defined as the central government’s tax and non-tax net proceeds from the sale of oil, excluding any revenue allocated to Ghana National Petroleum Corporation (GNPC). - Central government wage bill: - Sum of basic wages allowances paid to public servants on the mechanized payroll and in subvented agencies. - Program primary fiscal balance: - Cumulative from the beginning of the fiscal year and measured from the financing side. - Primary deficit = sum of net financial transactions of the government (per paragraph 6) — comprising net foreign borrowing (paragraph 14), net domestic financing (paragraph 13), receipts from net divestitures and net drawing out of oil funds, minus domestic and external interest payments. - Domestic payments arrears (measured as sum of five components): 1. Arrears to the government’s statutory funds: any delay of more than one month in revenue transfers to statutory funds relative to normal payment schedule (typically monthly or quarterly, defined as a specific percentage of the previous month or quarter’s revenue collections). - Note on schedule: (i) District Assemblies Common Fund—quarterly, with a one-quarter lag; (ii) Social Security Fund, National Health Fund, Ghana Education Trust Fund, Road Fund, Petroleum-related Fund—monthly, with a one-month lag. 2. Employees compensation arrears: wages and salaries, pensions, gratuities, and social security arrears outstanding after the agreed payment date. 3. Debt service arrears: domestic and external interest, amortization, promissory notes due and not settled within the contract-specified grace period. 4. MDAs expenditure arrears: approved invoices on the GIFMIS system unpaid three months after the quarter in which invoices were approved by the MDA. 5. Arrears to SOEs: payments for debt owed to SOEs due and not settled within 30 days after the end of the quarter. - Social protection spending (budgeted and actual): - Budgeted expenditures taken from each year’s final appropriations bill; include only spending financed by the government or from internally generated funds. - Actual spending on social protection programs, including LEAP, supplemented with transfers to the National Health Fund (NHF); actual poverty spending excludes all donor-supported expenditure. - Overview list of social protection programs included (enumerated as in source): National Health Fund (NHF); Provision of free school uniforms; Livelihood Empowerment Against Poverty (LEAP); Provision of government's subsidy for Senior High Schools; Fertilizer Subsidy; Progressive implementation of free Senior High School Program; Basic Education Certificate Examination; Feeding grant for special schools for the handicapped; Capitation grant for Public Basic Schools across the country; Printing and Distribution of Exercise Books to Basic School Pupils under the Social Intervention Program; Provide 10million free exercise books to Public Basic Schools across the country; First Phase of Maths and Science Reforms for 13,000 KGS, 14,000 Primary School and 8,000 JHS; Provide core textbooks; Capitation Grant; Establishment supplies for all Public Basic Schools across the country; Feeding fee for levels 100 & 200 students of colleges of education across the country. - Net domestic financing of government: - Defined as the change in net credit to government by the banking system (BoG plus deposit money banks) plus the net change in holdings of treasury bills and other government securities by the nonbank sector, excluding divestiture receipts. - Net foreign financing of government: - Sum of project and program loans by official creditors and commercial external borrowing, minus amortization due. - Outstanding net credit to the government by the Bank of Ghana: - Sum of claims on government including overdrafts with the BoG, and claims resulting from accrued interest on government securities less government deposits as defined in the monetary template. - Outstanding net credit by deposit money banks: - DMB holdings of government securities at cost of purchase value (reported by BoG Treasury Debt Registry), direct loans less government deposits (revised BSD2 report forms), plus deferred accrued interest on holdings of inflation-indexed bonds. - Nonbank financing: - Difference between total net cash receipts to the treasury main cash account from sale/repurchase of government securities, less corresponding net cash value received from BoG and DMBs as indicated on the Debt Registry by holder at discount value, plus deferred accrued interest on holdings of inflation-indexed bonds. ### B. Bank of Ghana — monetary aggregates and reserve definitions - Net foreign assets (monetary survey definition): - Short- and long-term foreign assets minus liabilities of the BoG contracted with nonresidents. - Short-term foreign assets include: monetary gold (valued at spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserve position in the IMF, foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, encumbered external assets and other positive short-term or time deposits. - Short-term foreign liabilities include foreign currency liabilities contracted at original maturities of one year or less (including overdrafts), outstanding liabilities to the IMF, deposits of international institutions at the BoG and swaps with non-resident commercial banks. - Long-term foreign assets and liabilities comprise other foreign assets, investments abroad, other long-term liabilities to nonresidents, and bilateral payment agreements. - All values not in U.S. dollars are converted to U.S. dollars at the program exchange rate defined in paragraph 2. - A more detailed listing of accounts is contained in the monetary template provided to the IMF on January 21, 2015. - Net international reserves (NIR) of the BoG (program monitoring definition): - Short-term foreign assets of the BoG, minus short-term external liabilities. - Excludes short-term foreign assets that are not fully convertible external assets readily available to and controlled by the BoG (pledged or otherwise encumbered external assets, including assets encumbered by BoG guarantees). - All values not in U.S. dollars are converted to U.S. dollars at the average of buying and selling exchange rates against the U.S. dollar as defined in paragraph 2. - Net international reserves are defined as: - Short-term assets: composed of Gold, Holdings of SDR, Foreign Notes and Coins, Foreign Securities/Short-term Deposits, Disposal Balances with Correspondent Banks, Fixed Deposits (excludes encumbered assets), any other short-term foreign assets, - Minus foreign short-term liabilities: composed of Deposits of International Institutions, Liabilities to International Commercial Banks, Swap Deal Payable with non-resident banks (short-term liabilities should exclude liabilities with an asset counterpart that is encumbered), - Minus all liabilities to the IMF, - Minus MoF’s liabilities to the IMF used for budget support, - Minus all positive foreign currency deposits at the BoG held by resident deposit money banks (which includes the stock of swaps deal payable with resident banks), public institutions, nonfinancial public enterprises, other financial institutions, and the private sector, - Minus all Bank of Ghana deposits with Ghana International Bank London (GIB). - Net domestic assets of the Bank of Ghana: - Defined as reserve money minus net foreign assets of the BoG, converted from U.S. dollars to cedis at the program exchange rate. - Government deposits at the BoG from disbursements of Fund resources for budget financing are subtracted in accordance with NIR treatment. - Outstanding gross credit to government and public enterprises by the BoG (program monitoring): - Total amount of (i) all BoG loans and advances to government and public enterprises, (ii) all government overdrafts, (iii) absolute value of government deposits reflected as negative values in the monetary survey, (iv) face value for all outstanding Government of Ghana treasury bills, notes and bonds purchased by BoG in primary and secondary market. - Includes all called guarantees given by BoG for operations between the central government or state owned enterprises and a third party. - Excludes BoG holdings of government T-bills as collateral from commercial banks and BoG reversible market transactions that do not result in change of security ownership. ### C. Monetary Policy Consultation Clause - Consultation bands: - Consultation bands around the projected 12-month rate of inflation in consumer prices (headline CPI published by Ghana Statistical Service) are specified in the Performance Criteria table in the MEFP. - Triggering consultations: - If the observed 12-month CPI inflation falls outside the lower or upper outer bands specified for end-August 2017 and end-December 2017 test dates, authorities will complete a consultation with the IMF Executive Board focusing on: 1. the stance of monetary policy and whether the Fund-supported program remains on track; 2. reasons for program deviations, taking into account compensating factors; 3. proposed remedial actions if necessary. - When such consultation is triggered, access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed. - Authorities will conduct discussions with Fund staff should observed year-on-year CPI inflation fall outside the inner bands specified for the end of each test date in the Performance Criteria table. ### D. Non-Accumulation of New External Arrears - Definition for monitoring: - External payment arrears accrue when undisputed payments such as interest or amortization on debts of the government (paragraph 6) to non-residents are not made within the terms of the contract. - This performance criterion is monitored on a continuous basis. ### E. Ceiling on the Contracting or Guaranteeing of New Non-Concessional External Debt - Definition of debt (per Guidelines on Public Debt Conditionality, Executive Board Decision No.15688-(14/107)): - Debt = current liability under contractual arrangement created through provision of value (financial or nonfinancial assets or services) requiring obligor to make future payments in assets or services to discharge principal and/or interest. - Primary forms include: (i) loans (advances of money, deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements), (ii) suppliers’ credits (deferral of payments after delivery of goods/services), (iii) leases (present value at inception of all lease payments expected during agreement, excluding operation/repair/maintenance payments). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - External debt for ceiling purposes: - Any debt as defined above denominated in foreign currency other than Ghanaian cedis (GH¢). - Exclusions: use of Fund resources, rollover of BOG’s existing liabilities, normal import-related credits, pre-export financing credits of public enterprises, cocoa loans collateralized by cocoa contracts, individual leases with value of less than US$100,000. - Concessionality and coverage: - Nonconcessional external debt = external debt contracted or guaranteed by the government (paragraph 6), the BoG, and specific public enterprises (paragraph 27) on non-concessional terms (paragraph 28). - External debt and its concessionality reported by Debt Management Division of Ministry of Finance and Economic Planning, measured in U.S. dollars at current exchange rates. - Public enterprises covered by the ceilings (new debt ceilings apply to government, BoG, and following public enterprises): - (i) Tema Oil Refinery; (ii) Ghana National Petroleum Company; (iii) Ghana National Gas Company; (iv) Volta River Authority; (v) Electricity Company of Ghana; (vi) GRIDCO; (vii) Ghana Water Company Limited; (viii) GIIF. - Ceilings apply to debt and commitments contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. - Concessionality threshold and PV calculation: - A debt is concessional if it includes a grant element of at least 35 percent. - Grant element = difference between net present value (NPV) of debt and its nominal value, expressed as percentage of nominal value. - NPV at loan signing date is calculated by discounting future debt service payments using discount rate of 5 percent. - Variable-rate loans PV treatment and reference rates: - For loans with variable interest as benchmark rate plus fixed spread, PV calculated using a program reference rate plus the fixed spread (in basis points) specified in loan contract. - Program reference rate for the six-month USD LIBOR is 3.34 percent and will remain fixed for the duration of the program. - Spreads of six-month LIBORs over six-month USD LIBOR: - Euro: -250 basis points. - JPY: -300 basis points. - GBP: -100 basis points. - For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is -200 basis points. - Where variable rate is linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and the six-month USD LIBOR (rounded to the nearest 50 bps) will be added. *IMF staff report: cr17262 - 5. Indicative targets are established as:* ### 30. Starting from the completion of the second review, the performance criterion on new non- ### 30. Starting from the completion of the second review, the performance criterion on new non-concessional external debt includes two sub-ceilings ### Non-concessional external debt: sub-ceilings and scope - Two sub-ceilings apply from completion of the second review: - (i) debt for debt management purposes (non-concessional debt used to improve the overall public debt profile); this debt management sub-ceiling is cumulative from the beginning of each calendar year. - (ii) debt for projects integral to the development program for which concessional financing is not available; contracting or guaranteeing non-concessional external debt for projects other than those listed results in nonobservance of the performance criterion (PC). - Only debt signed since the beginning of 2015 will be counted against this performance criterion. - For program monitoring purposes, debt is considered as contracted or guaranteed when all conditions precedent for effectiveness of the underlying loan agreement are satisfied. ### Sub-ceiling for development-program projects: quantitative limit and eligible projects - Total amount of contracting of non-concessional external debt for projects on the approved list is strictly limited to US$ 2,250 million on a cumulative basis from the beginning of 2015. - Amounts applied toward this US$ 2,250 million limit do not count toward the sub-ceiling on non-concessional borrowing for debt management purposes. - Approved projects (debt for these projects may be contracted or guaranteed without breaching the PC): - Takoradi Port Expansion 2 - Supply Agricultural equipment under Food for Africa programme - Electricity Company Ghana Limited Prepaid meter distribution - Construction and Equipping of Ten (10) Polyclinics in the Central Region - Self-help electrification project (SHEP) - 4 -Hunan - 4 District Hospitals and accident and emergency center in Bamboi, Somanya, Tolong, Weta, and Buipe - Kumasi market phase 2 - SHEP five regions-CWE - Strengthening of Lots 1,2& 4 Central Corridor - Eastern Corridor Road Project Refinancing for Section I: Asikuma Junction - Have and Section II: Nkwanta - Oti Damanko - Obetsebi Lamptey Drainage network and Interchange - Bekwai Hospital Rehabilitation - Sugarcane Development and Irrigation Project - KARPOWER PROJECT B - Takoradi 4 Thermal Power Project (T4) - Renovation of Ghana Missions Abroad - Works at Kumasi Airport - Development of Tamale Airport- terminal building and related infrastructure phase - Eastern University - Damango Yendi Water project - Tema to Akosombo - Western Railway Line Construction Project in Ghana - Transport Sector Project (World Bank) - Rural Water and Sanitation (World Bank) - Secondary Education Improvement (World Bank) ### Temporary additional sub-ceiling for 2017 (third review context) - An additional sub-ceiling of US$ 350 million for a project is established for 2017 in the context of the third review to accommodate GNPC’s non-concessional borrowing that was counted against debt limits for 2016 but did not materialize due to unforeseen delays in its loan negotiation with the creditor. --- ### State-owned enterprises (SOEs): definitions of net after tax profit and payables ceiling - ECG net after tax profit definition: - Net after tax profit of ECG = total operating revenues − total costs as reported in the unaudited income statement. - Total operating revenues = (i) sales of electricity; and (ii) all other operating income, excluding proceeds from central government transfers or payments of ECG’s obligations on ECG’s behalf. - Total costs = (i) power purchases and all operating costs related to electricity distribution to be borne by ECG; (ii) administrative expenses, including on wages and remuneration of the board of directors, and provisions; (iii) depreciation; (iv) interest expense and any other financial costs. - VRA net after tax profit definition: - Net after tax profit of VRA = total operating revenues − total costs as reported in the unaudited income statement. - Total operating revenues = (i) sales of electricity; and (ii) all other operating income, excluding proceeds from central government transfers or payments of VRA’s obligations on VRA’s behalf. - Total costs = (i) generation of electric power and all operating costs related to electricity generation to be borne by VRA; (ii) administrative expenses, including on wages and remuneration of the board of directors, and provisions; (iii) depreciation; (iv) financial expenses and any other financial costs, including foreign exchange gain/losses from foreign currency denominated transactions and exchange fluctuation gains/losses on foreign currency denominated loans. - Payables ceiling: - A zero ceiling on change in gross payables of VRA and ECG applies to the total stock of payables, current and non-current, due to trade creditors, related parties and other creditors. --- ### Adjustors to the program quantitative targets - Primary fiscal deficit of the government: deficit ceilings for 2015–17 will be adjusted for excesses and shortfalls in oil revenue and program loans and grants relative to program assumptions as follows: - i) Downward (upward) by 50 percent of any excess (shortfall) in oil revenue. - ii) Downward by 50 percent of any shortfall in concessional program loans. - iii) Upward for the full amount of any excess in concessional program loans, where these are used to repay outstanding domestic arrears at a more rapid pace than programmed. - iv) Downward by the full amount of any excess of program grants less any use of program grants used to repay outstanding domestic arrears at a more rapid pace than programmed. - v) Upward by 50 percent of any shortfall in program grants. - Net international reserves (NIR) of the Bank of Ghana: NIR floors will be adjusted as follows: - NIR floors will be adjusted upward for any excess of budget grants and loans relative to the program baseline excluding the IMF’s budget support, except where this financing is used to repay outstanding domestic arrears at a more rapid pace than programmed. - NIR floors will be lowered by 50 percent of any shortfall in budget grants and loans relative to the program baseline excluding the IMF’s budget support. *International Monetary Fund — CR17262 (excerpt).* ### 38. Data with respect to the variables subject to performance criteria and indicative targets will ### cr17262 - 38. Data with respect to the variables subject to performance criteria and indicative targets will ### Reporting frequency and general requirements - Data with respect to the variables subject to performance criteria and indicative targets will be provided to Fund staff on a monthly basis with a lag of no more than eight weeks (except for select data for which the reporting lag is explicitly specified in Table 1). - The authorities will transmit promptly to Fund staff any data revisions. - For any information (and data) that is (are) relevant for assessing performance against program objectives but is (are) not specifically defined in this memorandum, the authorities will consult with Fund staff. - The authorities will share any prospective external loan agreements with Fund staff before they are submitted to cabinet and before they are contracted. ### Budget financing and oil revenues (selected cumulative figures from start of calendar year) - 2016 (GH¢ millions, cumulative from the start of the calendar year) - March: Program grants 0; Program loans 0; Oil revenues, net of transfers to GNPC 325 - June: Program grants 0; Program loans 600; Oil revenues, net of transfers to GNPC 460 - September: Program grants 112; Program loans 844; Oil revenues, net of transfers to GNPC 785 - December: Program grants 133; Program loans 844; Oil revenues, net of transfers to GNPC 1,640 - Note: 1/ Used to compute adjustors for performance criteria for end-March, end-June, end-September, and end-December. - 2017 (GH¢ millions, cumulative from the start of the calendar year) - March: Program grants 0; Program loans 0; Oil revenues, net of transfers to GNPC 391 - August: Program grants 0; Program loans 211; Oil revenues, net of transfers to GNPC 800 - September: Program grants 73; Program loans 617 (o/w: IMF Program loan for budget support 406); Oil revenues, net of transfers to GNPC 800 - December: Program grants 73; Program loans 1,902 (o/w: IMF Program loan for budget support 811); Oil revenues, net of transfers to GNPC 1,138 - Note: 1/ Used to compute adjustors for performance criteria and indicative targets for end-March, end-August, end September, and end December. ### Table 1 — Key data to be reported to the IMF (selected items and periodicity) - Fiscal data (to be provided by the MoF) - Central budget operations for revenues, expenditures and financing, including clearance of arrears: Monthly, within six weeks of the end of each month. - Divestiture receipts received by the budget (in cedis and foreign exchange, net of divestiture transactions costs): Monthly, within six weeks of the end of each month. - The stock of domestic payments arrears by sub-category (as defined in para. 11 of the TMU): Quarterly, within six weeks of the end of each quarter. - Updated list of (prioritized) projects to be financed by non-concessional loans and concessional loans: Monthly, within six weeks of the end of each month. - Cash flow of the central government and cash flow projections: Monthly, within six weeks of the end of each month. - Income, cash flow, and debt service projections for the state-owned energy utilities: Monthly, within six weeks of the end of each month. - Itemized data on the proceeds from the energy sector levies: Monthly, within six weeks of the end of each month. - Expenditures committed but not paid and within the legal period before they become arrears (float): Monthly, within six weeks of the end of each month. - Wage bill monthly reports including breakdown of developments per MDAs: Monthly, within six weeks of the end of each month. - Monetary data (to be provided by the BoG) - Net domestic assets and net international reserves of the BoG: Monthly, within two weeks of the end of each month. - Detailed balance sheet of the monetary authorities: Monthly, within four weeks of the end of each month. - Monetary survey detailing the consolidated balance sheet of commercial banks: Monthly, within six weeks of the end of each month. - Weekly balance sheet of the central bank, including gross international reserves, net international reserves: Weekly, within a week of the end of each week. - Stock of BoG swaps and encumbered and non-encumbered loans with resident and non-resident commercial banks: Monthly, within two weeks of the end of each month. - Daily computations for the BoG benchmark exchange rate, including all transactions used to derive it: Monthly, within two weeks of the end of each month. - Summary position of government committed and uncommitted accounts at BoG, and total financing from BoG: Monthly, within four weeks of the end of each month. - Composition of banking system and nonbanking system net claims on government: Monthly, within four weeks of the end of each month. - Financial soundness indicators: Monthly, within four weeks of the end of each month. - Itemized overview of outstanding liquidity support granted to financial institutions: Monthly, within four weeks from the end of each month. - Balance of payments (to be provided by the BoG) - Export and import data on value, volume, and unit values, by major categories and other major balance of payments variables: Quarterly, with a maximum lag of two months. - Foreign exchange cash flow: Monthly, within four weeks of the end of the month. - Monthly foreign exchange cash flow projections (with actual historical figures updated): Monthly update, with a maximum lag of two weeks of the end of the month. - External debt and foreign assistance data (to be provided by MoF) - Information on the concessionality of all new external loans contracted by the government or with a government guarantee: Quarterly, within four weeks of the end of each quarter. - For the coming quarter: (i) total debt service due by creditor, and (ii) debt service paid — report should cover government and government-guaranteed debt: Quarterly within four weeks of the end of each quarter. - External debt and external debt service incurred by enterprises with government ownership above 50 percent, even if loans have not been explicitly guaranteed by the government: Quarterly, within three weeks of the end of each quarter. - Short-term liabilities to nonresidents (maturity in one year or less), including overdraft positions and debt owed or guaranteed by the government or the BoG: Quarterly, within three weeks of the end of each quarter. - Disbursements of grants and loans by creditor: Quarterly, within four weeks of the end of each quarter. - Other data (to be provided by GSS and other agencies) - Overall consumer price index: Monthly, within two weeks of the end of each month. - National accounts by sector of production, in nominal and real terms: Annual, within three months of the end of each year (switching to quarterly when they become available). - Quarterly financial statements of main state-owned enterprises (listed entities): Quarterly, within three months of end of quarter. - Annual financial statements of main state-owned enterprises (listed entities): Annual, within six months of end of year. - Electricity pricing data on tariff structure and the cost of producing electricity: Quarterly, within four weeks of the end of each quarter. - Petroleum pricing: (i) a breakdown of costs for each product and (ii) the indicative maximum price approved in the bi-weekly review: Bi-weekly, within two days of the completion of the pricing review. ### Data adequacy, quality issues, and recommended actions (statistical issues) - General: Data provision is broadly adequate for standard surveillance, though shortcomings remain in quality and timeliness of certain data. More timely provision of critical high-frequency data is warranted. Notable deficiencies exist in dissemination of statistical information to the public, particularly fiscal data released with delays. - National accounts: Compiles annual and quarterly GDP by production at current and constant (2006) prices; latest annual GDP by expenditure available for 2016. Compilation needs further strengthening, including methodology and source data improvements. - Price statistics: CPI weights are based on household expenditures in 2005-06; GSS plans to update CPI weights to 2012-13 during 2017. GSS plans to update PPI weights to 2014 from 2003 in 2018. - Labor statistics: Scarcity of labor statistics is a concern despite the 2015 Labor Force Survey; wage and employment statistics are almost nonexistent. - Government finance statistics: Quality and timeliness need improvement. Monthly government accounts are published irregularly and with delays; fiscal discrepancy remains significant. Problems include differences in coverage between above-the-line and below-the-line entries, inconsistent use of cash and accrual basis, timing of transactions, and use of various source data sets. - Recommended actions / ongoing measures: - Joint Ministry of Finance-Bank of Ghana working group to reach understandings on consistent data coverage and sources. - Implementation of the Treasury Single Account slated for August 2017. - Strengthening and expanding GIFMIS operations. - IMF TA missions suggested short-term temporary solutions to alleviate current data quality problems. - Strongly encouraged: extend coverage of fiscal data to general government to include statutory funds (SSNIT, GETF, DACF) and local government operations. - Monetary and financial statistics: BoG has progressed in implementing recommendations; further efforts needed to expand institutional coverage and timeliness. March 2017 mission assisted in expanding compilation to rural banks, savings and loans companies, and credit unions and to compile SRF 4SR for other financial corporations. BoG agreed to report expanded SRF 2SR and SRF 4SR to STA by end-December 2017. - Financial sector surveillance: BoG reports 12 core FSIs and 7 of the 13 encouraged FSIs for deposit takers on a quarterly basis with a lag of one quarter for posting on the IMF’s FSI website. - Debt statistics: External debt recording and payment responsibility is divided among MOFEP/ADMU, CAGD, and BoG. Authorities should clearly identify government subsectors reported and prepare a clear classification of financing, outstanding debt, and guarantees to enable systematic comparison of budget, balance of payments, and BoG cash-flow data. - External sector statistics: BPO of the Research Department of BoG compiles BOP and IIP. Ghana participates in external sector module of EDDI and has undertaken enterprise surveys (FALS). Remaining challenges include timeliness; next steps include implementing a small timely sample quarterly survey of cross-border capital. ITRS reporting should be revised and used to its full potential as a broad indicator and as a data source where direct reporting is not feasible. - Trade statistics: GSS not publishing timely monthly trade statistics though data available from CEPS. Recommended: GSS collaborate with CEPS to process customs data within six weeks; coordinate with MOT and BoG to reduce discrepancies and ensure imports into bonded warehouses are not double-counted. Fund staff recommended GSS produce export unit values for major commodities such as gold and cocoa. ### Data standards and dissemination - Participant in the General Data Dissemination System (GDDS) since July 20, 2005. Metadata and improvement plan last updated on September 25, 2014. Data ROSC published on July 7, 2004. - Ghana disseminates 14 of the 15 data categories under the GDDS. - Ghana is in the Baseline of the e-GDDS because authorities do not publish a National Summary Data Page (NSDP). An e-GDDS mission in October 2016 assisted in preparing for implementation and publication of an online NSDP; Ghana is encouraged to finalize this work by publishing an online NSDP. ### Key governance, safeguards, and exchange rate notes - Safeguards Assessment (June 2016): Progress in addressing remaining safeguards recommendations has been slow. BoG has implemented some recommendations (continuation of quality external audits, improved disclosures, procedures to monitor credit to government), but half of 2015 recommendations remain outstanding. Outstanding items include controls over data compilation, a risk-assessment of BOG’s involvement with Ghana International Bank (London-based subsidiary), and lack of standard agreements to mitigate credit risk in domestic swap transactions. - Exchange rate arrangement: Ghana accepted obligations under Article VIII on February 2, 1994. Regime classified as a managed float. Ghana maintains one exchange restriction and a multiple currency practice (MCP) subject to Fund approval. At end-June 2017, the average exchange rate for transactions in the interbank market was GH¢ 4.3629 per U.S. dollar. ### Debt sustainability assessment — headline findings - Ghana continues to face high risk of external debt distress. - Public debt-to-GDP ratio remains elevated; significant fiscal slippages in 2016 contributed to more elevated medium-term debt trajectories compared to the Third Review. - Two external debt indicators still breach thresholds under the baseline scenario, and an additional indicator shows minor breaches. - The assessment of high risk of debt distress is reinforced by more protracted breaches of the public debt benchmark compared to earlier DSAs. - Ghana is well-prepared for the Eurobond coming due in October 2017, but faces high levels of gross fiscal financing needs requiring continued nonresident demand for domestic debt. - Restoring and maintaining debt sustainability will hinge on: - credible and sustained fiscal consolidation to anchor investors’ confidence; - appropriate debt and cash management; - broad structural reform to ensure higher and inclusive growth. - Authorities reaffirmed commitments to fiscal consolidation and plan to seek an appropriate financing mix to balance mitigating rollover risk and reducing debt service costs. *Prepared by the International Monetary Fund (staff report excerpts, August 1, 2017).* ### 1. Large fiscal slippages in 2016 set back consolidation efforts. The cash-based fiscal deficit ### 1. Large fiscal slippages in 2016 set back consolidation efforts. The cash-based fiscal deficit ### Fiscal slippage and public debt stock - Cash-based fiscal deficit in 2016: 9.3 percent of GDP (program target: 5.2 percent of GDP). - Unpaid claims disclosed by the new government: 3 percent of GDP, of which 2 percent of GDP bypassed proper PFM procedures and are being audited. - Total public debt in 2016: 73.9 percent of GDP (increase of 1 percentage point in 2016; around 3.5 percentage points higher than projected in the previous DSA). - Share of external debt: increased by around 7 percentage points since 2011, to 66 percent (taking account of increased nonresidents’ holdings of cedi-denominated domestic debt). ### Gross financing needs and fiscal consolidation - 2017 budget target deficit (authorities’ definition): 6.5 percent of GDP. - Projected GFN (including redemption of T-bills) in 2017: remain elevated above 20 percent of GDP (DSA benchmark for emerging market access countries: 15 percent). - Staff proposal: additional fiscal measures in 2017 to achieve a primary balance sufficient to deliver a sustained reduction in the public debt ratio. - Restoring debt sustainability highlighted as critical given increasing share of nonresidents in the domestic debt market. ### Debt management and market operations - Medium-Term Debt Management Strategy (MTDS) targets lengthening average maturity of domestic debt. - Large domestic bond issuance (April 2017): equivalent to around US$ 2 billion, enabled by robust non-resident demand. - External operations: - US$750 million Eurobond issued in September 2016; proceeds partly used to buy back part of the 2017 Eurobond. - Around US$200 million set aside for remaining 2017 Eurobond redemption. - Pre-repayment: domestically-issued US dollar-denominated debt of US$94 million used to pre-repay part of the expensive Eurobond issued in 2015. - Under the Fund program, 2017 debt limits adjusted vis-à-vis Third Review indicative targets: - Debt limits for debt management purposes set to zero given no planned issuance of a Eurobond (earlier included). - Limits for key projects increased to US$ 2,250 million to accommodate new projects. ### Baseline macroeconomic assumptions (Box 1) — key projections and assumptions - Real GDP growth: - 2016: 3.5 (Current DSA) (Previous DSA: 3.3) - 2017: 5.9 (Current DSA) (Previous DSA: 7.4) - 2018: 8.9 (Current DSA) (Previous DSA: 8.4) - Medium term (first 6 years): 6.1 (Current DSA) (Previous DSA: 6.0) - Long term (last 15 years): 4.7 (Current DSA) (Previous DSA: 5.3) - Inflation and monetary stance: - Inflation (CPI) trended down in 2016 to 15.4 percent (yoy) at end-2016. - Inflation expected to decline to within the BOG’s medium-term target of 8±2 percent by end-2018. - Inflation projected to converge to around 6 percent over the projection period. - Government balances and primary balance: - Primary fiscal balance (Current DSA): 2016: -1.4 (percent of GDP); 2017: 0.2; 2018: 2.2; Medium term: 1.6; Long term: 0.4. - Expected longer-term increase in hydrocarbon revenues to help maintain sustainable overall deficit. - Current account: - 2016 current account deficit: 6.7 percent of GDP. - WEO oil prices assumed to recover to around US$54 per barrel by 2020 from around US$45 in 2016. - Current account deficit projected to improve to below 5 percent of GDP in the medium term; long-run current account deficit around 4 percent of GDP. - Gross international reserves would steadily increase and maintain reserve coverage of above 3-month imports in the long run. - Financing flows: - FDI inflows near 8 percent of GDP in 2016 (mainly driven by hydrocarbon sector). - FDI projected to decline gradually as oil production peaks and to stabilize around 3 percent of GDP over the long run. - Grants projected to decline to less than 1 percent of GDP in the medium- to long term. - Borrowing projected to become increasingly non-concessional, used for key infrastructure projects; a series of Eurobond issues envisaged to roll over maturing Eurobonds, assumed to be repaid in amortization payments rather than bullet payments. ### External Debt Sustainability Analysis — key findings - Medium-term debt trajectories shifted upwards compared to the previous DSA; thresholds for PV of external PPG debt-to-GDP and PV-to-revenue breached for five and two years, respectively. - Debt service-to-revenue ratio projected to stay well above the threshold over the entire projection period, with an upward shift versus previous projections. - Recommendation: continue stronger domestic revenue mobilization and a proper financing mix to improve debt service-to-revenue. ### Public Debt Sustainability Analysis — key findings and risks - Baseline with fiscal adjustment: debt indicators expected to improve and stabilize, but reflecting 2016 slippage the PV of debt-to-GDP ratio for 2017 is projected to be 10 percentage points larger than at the time of the Third Review. - Even with front-loaded fiscal adjustments under the IMF program, public debt expected to decline below the benchmark of 56 percent only by 2022. - Public debt sustainability significantly vulnerable to exchange rate shocks; historical scenario points to unsustainable debt trajectories in adverse paths. - Contingent liabilities represent material risks: - State-owned enterprises (SOEs) and the banking system liabilities are significant. - Power distributor (ECG) facing high systemic loss and poor fee collection, leading to accumulation of cross arrears among ECG, the government (and agencies), and other SOEs. - Asset Quality Review identified substantial under-provisioning and capital shortfalls for some banks; authorities are addressing these. ### Conclusions and policy implications - Fiscal adjustment would bring public debt back to a sustainable path, but meeting larger gross financing needs in the near term hinges on continued investor confidence. - Ghana’s medium-term debt trajectories have worsened compared to the previous DSA; gross financing needs expected to remain elevated in the near term. - Given increasing share of nonresidents in the domestic debt market, macroeconomic stability underpinned by credible fiscal consolidation is key to anchoring investor sentiment. - Additional significant fiscal slippages could seriously jeopardize debt sustainability. - Recommendation: continue engaging with development partners to maximize concessional loans and expedite disbursements under existing commitments from multilateral agencies. *Source: cr17262.* ### 12. The authorities broadly concurred with the staff’s views on Ghana’s debt sustainability. They ### 12. The authorities broadly concurred with the staff’s views on Ghana’s debt sustainability. They ### Authorities' views and policy commitments - The authorities broadly concurred with the staff’s views on Ghana’s debt sustainability and reaffirmed commitments to fiscal consolidation to strengthen debt sustainability. - They emphasized the need to seek an appropriate financing mix along with proactive debt management and proper cash management in close consultation with the Fund and the Bank. - Given increased use of cash buffers as well as external assets in the sinking fund, the authorities asked that net debt measures be given attention alongside gross debt concepts going forward. - Noted operational items: - Disbursements under budget support loans from the World Bank and the African Development Bank did not materialize in 2016 due to a delay in meeting conditions under loan agreements. - A recently initiated World Bank project “Ghana Economic Management Strengthening” (GEMS) contains a dedicated debt management component to build capacity for active operations in this area. ### External debt sustainability — baseline indicators and projections (selected) - External debt (nominal) (In percent of GDP): - 2014: 45.4 - 2015: 53.2 - 2016: 52.9 - 2017: 55.5 - 2018: 52.8 - 2019: 50.7 - 2020: 49.7 - 2021: 48.4 - 2022: 45.7 - 2023-2037 Average: 39.7 - 2027: 33.4 - 2037: 32.? - External debt (of which: public and publicly guaranteed (PPG)) (In percent of GDP): - 2014: 41.1 - 2015: 49.2 - 2016: 48.9 - 2017: 51.5 - 2018: 48.8 - 2019: 46.7 - 2020: 45.7 - 2021: 44.4 - 2022: 41.7 - 2023-2037 Average: 35.7 - 2027: 29.4 - Change in external debt: - 2014: 10.1 - 2015: 7.7 - 2016: -0.2 - 2017: 2.5 - 2018: -2.7 - 2019: -2.0 - 2020: -1.0 - 2021: -1.3 - 2022: -2.7 - 2023-2037 Average: -1.6 - 2027: -0.7 - Identified net debt-creating flows (In percent of GDP): - 2014: 9.1 - 2015: 1.9 - 2016: -8.7 - 2017: -3.4 - 2018: -4.9 - 2019: -2.8 - 2020: -2.1 - 2021: -2.1 - 2022: -2.0 - 2023-2037 Average: 0.0 - 2027: 0.2 - Key ratios (selected): - PV of external debt (In percent of GDP): 2017: 49.7; 2018: 53.5; 2019: 50.4; 2020: 48.1; 2021: 47.0; 2022: 45.5; 2027: 42.7; 2037: 37.1; 2023-2037 Average: 30.7 - PV of PPG external debt (In percent of GDP): 2017: 45.7; 2018: 49.5; 2019: 46.4; 2020: 44.1; 2021: 43.0; 2022: 41.5; 2027: 38.7; 2037: 33.1; 2023-2037 Average: 26.7 - PV of PPG external debt (In percent of exports): 2017: 111.8; 2018: 120.2; 2019: 111.3; 2020: 106.6; 2021: 105.2; 2022: 102.4; 2027: 96.3; 2037: 88.8; 2023-2037 Average: 76.1 - PV of PPG external debt (In percent of government revenues): 2017: 275.6; 2018: 273.2; 2019: 255.3; 2020: 236.8; 2021: 228.5; 2022: 221.8; 2027: 208.2; 2037: 186.6; 2023-2037 Average: 155.0 - Debt service-to-exports ratio (in percent): 2014: 15.7; 2015: 17.2; 2016: 19.7; 2017: 21.0; 2018: 18.5; 2019: 16.0; 2020: 16.8; 2021: 18.8; 2022: 20.6; 2023-2037 Average: 19.2; 2027: 16.2 - Total gross financing need (Millions of U.S. dollars): 2014: 1682.7; 2015: 1504.1; 2016: 1355.2; 2017: 2075.8; 2018: 1907.0; 2019: 1876.7; 2020: 2266.1; 2021: 2953.5; 2022: 3831.3; 2023-2037 Average: 5927.2; 2027: 9334.6 ### Key macroeconomic assumptions used in projections (selected) - Real GDP growth (in percent): - 2014: 4.0 - 2015: 3.8 - 2016: 3.5 - 2017: 6.8 - 2018: 3.4 - 2019: 5.9 - 2020: 8.9 - 2021: 5.9 - 2022: 5.1 - 2017-22 Average: 5.2 - 2023-37 Average: 5.4 - 2027: 6.1 - 2037: 4.5 - Longer-run averages included: 4.6; 4.7 - GDP deflator in US dollar terms (change in percent): - 2014: -22.0 - 2015: -8.4 - 2016: 12.1 - 2017: 1.7 - 2018: 13.2 - 2019: 0.4 - 2020: -0.5 - 2021: 1.4 - 2022: 1.5 - 2017-22 Average: 1.8 - 2023-37 Average: 2.3 - 2027: 1.1 - 2037: 2.3 - Effective interest rate (percent) 5/: - 2014: 6.3 - 2015: 6.8 - 2016: 7.8 - 2017: 5.9 - 2018: 1.1 - 2019: 7.2 - 2020: 6.8 - 2021: 6.5 - 2022: 6.7 - 2017-22 Average: 6.6 - 2023-37 Average: 6.3 - 2027: 6.7 - 2037: 6.4 - Growth of exports of G&S (US dollar terms, in percent): 2017: 14.5; 2018: 17.2; 2019: 7.1; 2020: 9.7; 2021: 6.6; 2022: 5.2; 2017-22 Average: 6.3; 2023-37 Average: 7.0; 2027: 7.0; 2037: 6.0 - Growth of imports of G&S (US dollar terms, in percent): 2017: 10.8; 2018: 17.7; 2019: 7.2; 2020: 6.6; 2021: 5.3; 2022: 4.6; 2017-22 Average: 5.8; 2023-37 Average: 7.7; 2027: 6.2; 2037: 6.0 - Government revenues (excluding grants, in percent of GDP): 2014: 17.7; 2015: 17.6; 2016: 16.6; 2017: 18.1; 2018: 18.2; 2019: 18.6; 2020: 18.8; 2021: 18.7; 2022: 18.6; 2017-22 Average: 17.8; 2023-37 Average: 17.2 - Aid flows (Millions of US dollars) 7/ (of which: Grants): - 2014: 278.5 - 2015: 724.3 - 2016: 291.7 - 2017: 335.5 - 2018: 222.3 - 2019: 174.9 - 2020: 140.0 - 2021: 112.0 - 2022: 89.6 - 2017-22 Average: 29.4 - 2027: 3.2 ### Public sector debt — baseline indicators and projections (selected) - Public sector debt (In percent of GDP): - 2014: 66.6 - 2015: 72.9 - 2016: 73.9 - 2017: 73.0 - 2018: 68.2 - 2019: 64.6 - 2020: 61.7 - 2021: 59.2 - 2022: 55.6 - 2017-22 Average: 46.3 - 2027: 38.8 - 2037: ? (table continues) - Public sector debt (of which: foreign-currency denominated) (In percent of GDP): - 2014: 41.1 - 2015: 49.2 - 2016: 48.9 - 2017: 51.5 - 2018: 48.8 - 2019: 46.7 - 2020: 45.7 - 2021: 44.4 - 2022: 41.7 - 2017-22 Average: 35.7 - 2027: 29.4 - Change in public sector debt: - 2014: 12.4 - 2015: 6.3 - 2016: 0.9 - 2017: -0.9 - 2018: -4.8 - 2019: -3.6 - 2020: -2.9 - 2021: -2.5 - 2022: -3.6 - 2017-22 Average: -2.6 - 2027: -0.8 - Identified debt-creating flows (In percent of GDP): - 2014: 12.0 - 2015: 1.1 - 2016: -0.4 - 2017: -2.6 - 2018: -4.2 - 2019: -3.0 - 2020: -2.2 - 2021: -2.0 - 2022: -1.9 - 2017-22 Average: -0.6 - 2027: -0.3 - Primary deficit (In percent of GDP): - 2014: 3.8 - 2015: -1.0 - 2016: 0.9 - 2017: 3.2 - 2018: 2.4 - 2019: -0.9 - 2020: -2.5 - 2021: -2.4 - 2022: -2.2 - 2017-22 Average: -1.9 - 2027: -0.4 - PV of public sector debt (In percent of GDP): - 2017: 70.6 - 2018: 71.0 - 2019: 65.8 - 2020: 62.0 - 2021: 58.9 - 2022: 56.3 - 2027: 52.7 - 2037: 43.7 - 2023-37 Average: 36.2 - Gross financing need (percent of GDP) 2/: - 2014: 22.6 - 2015: 22.5 - 2016: 24.0 - 2017: 22.5 - 2018: 14.8 - 2019: 12.0 - 2020: 12.1 - 2021: 12.5 - 2022: 12.2 - 2017-22 Average: 10.3 - 2027: 7.0 ### Sensitivity analysis and stress tests — key outcomes (selected) - Table 3: PPG external debt (In percent) — baseline and stress scenarios (PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue): - Baseline PV of debt-to-GDP: 2017: 49; 2018: 46; 2019: 44; 2020: 43; 2021: 41; 2022: 39; 2027: 33; 2037: 27 - A1 (variables at historical averages): 2017: 49; 2018: 50; 2019: 49; 2020: 50; 2021: 50; 2022: 48; 2027: 39; 2037: 22 - B6 (one-time 30 percent nominal depreciation in 2018): 2017: 49; 2018: 64; 2019: 61; 2020: 60; 2021: 58; 2022: 54; 2027: 46; 2037: 37 - Baseline PV of debt-to-exports: 2017: 120; 2018: 111; 2019: 107; 2020: 105; 2021: 102; 2022: 96; 2027: 89; 2037: 76 - B2 (Export value growth shock): 2017: 120; 2018: 133; 2019: 164; 2020: 163; 2021: 160; 2022: 152; 2027: 118; 2037: 92 - Baseline PV of debt-to-revenue: 2017: 273; 2018: 255; 2019: 237; 2020: 229; 2021: 222; 2022: 208; 2027: 187; 2037: 155 - B6 (one-time 30 percent nominal depreciation) on PV of debt-to-revenue: 2017: 273; 2018: 350; 2019: 326; 2020: 317; 2021: 308; 2022: 289; 2027: 259; 2037: 215 - Table 4: Public debt stress scenarios (selected): - Baseline PV of Debt-to-GDP Ratio (projections): 2017: 71; 2018: 66; 2019: 62; 2020: 59; 2021: 56; 2022: 53; 2027: 44; 2037: 36 - B4 (one-time 30 percent real depreciation in 2018) — PV of Debt-to-GDP Ratio: 2017: 71; 2018: 90; 2019: 86; 2020: 83; 2021: 80; 2022: 77; 2027: 72; 2037: 78 - Debt service-to-revenue ratio — baseline and shocks (selected): baseline 2017: 78; 2018: 66; 2019: 62; 2020: 59; 2021: 53; 2022: 44; projections continue through 2037. ### Analytical conclusions and policy implications (as presented) - Fiscal consolidation and appropriate financing mix are core to strengthening debt sustainability. - Proactive debt management and proper cash management, in close consultation with the Fund and the Bank, are emphasized to manage risks. - Net debt measures should be considered alongside gross debt measures given the use of cash buffers and external assets in the sinking fund. - Stress tests highlight vulnerability to large nominal depreciation and export shocks: - One-time 30 percent nominal depreciation in 2018 significantly raises PV and debt-service ratios (e.g., PV of debt-to-revenue rises to 350 in 2018 under that shock). - Export value shocks materially increase PV of debt-to-exports ratios (e.g., PV of debt-to-exports reaches 164 in 2019 under the export shock). - The projections indicate gradual improvement in debt ratios under the baseline, but stress scenarios demonstrate substantial downside risks requiring continued policy vigilance and contingency planning. *Sources: Country authorities; and staff estimates and projections.* ### 1. Macroeconomic performance has remained broadly satisfactory, although ### 1. Macroeconomic performance has remained broadly satisfactory, although ### Macroeconomic performance and outlook - Recent data point to continued disinflation, with July inflation falling to 11.9 percent. - Growth decelerated in 2016 relative to the outturn in 2015, largely due to a substantial decline in oil and gas production from a repair shutdown of the FPSO vessel. - The non-oil sector grew at 4.8 percent relative to the program target of 3.7 percent and an outturn of 4.0 percent in 2015. - The medium-term growth outlook: overall growth picking up to an average of about 7 percent over 2017-19, supported by significant oil and gas production from the Tweneboa Enyenra Ntomme (TEN) oil field and measures in the non-oil sector. - Inflation outlook: expected gradual deceleration towards the medium-term target of 8±2 percent in 2018. - Gross international reserves increased to 3.4 months of import cover as at July 2017. ### Fiscal performance and near-term risks - Preliminary H1 data (still subject to revisions) suggest continued revenue underperformance: - Tax revenues were 0.5 percent of GDP below target compared to the program, largely driven by corporate income taxes, petroleum taxes and import duties. - Non-tax revenues underperformed by 0.3 percent of GDP, reflecting slower disbursement of project grants and lower oil revenues. - Expenditure has been catching up from earlier low levels, though remained below program projections by about 0.4 percent of GDP. - Overall, the budget deficit came in at 2.9 percent of GDP (3.2 percent when measured from the financing side), compared to 2.6 percent of GDP under the program. - Authorities aim to achieve the targeted deficit of 6.3 percent of GDP (mid-year budget review) and stand ready to take contingency measures, including further cuts in discretionary spending, to meet the August and end-December PCs on the primary balance. - The Ghana Revenue Authority has intensified efforts to improve tax compliance, focusing on corporate taxes and import duties. - Lower non-tax revenues had only a small impact on the overall deficit: lower project grants were matched by lower capital expenditures and lower oil revenue resulted in lower transfers to GNPC. ### Program performance and remedial actions - The authorities concur with staff assessment of slippages in program implementation in the run-up to the December 2016 elections; most PCs were missed and structural reform implementation lagged in many respects. - Nonetheless, advances included: - End-June 2016 government wage bill within target (end-December ceiling exceeded by a small margin). - Arrears’ clearance picked up and was brought in line with the program target by end-December 2016. - Zero-central bank financing of the government observed over the whole year. - End-December inflation of 15.4 percent was within the inner band of the MPCC. - Establishment of a treasury single account begun with movement of all government accounts to the BoG; commercial banks to transfer all balances in revenue accounts to BoG by end-September 2017. - Expanded rollout of GIFMIS and strengthened processes to ensure expenditure controls. - Authorities requested Executive Board approval of waivers for non-observance of relevant performance criteria and a modification of the program end date from April 2018 to coincide with the budget cycle ending December 2018 with re-phasing of remaining scheduled disbursements. ### Status of prior actions and recent measures - All pending prior actions were implemented. - Following the mid-year budget review presented on July 31, 2017, the Budget Directorate issued revised cash allotments to spending agencies in line with lower spending limits; the revised expenditure envelope should be sufficient to deliver a budget deficit of 6.3 percent of GDP as agreed under the program. - Bank of Ghana actions following the March AQR: - Recapitalization: undercapitalized banks required to identify measures and provide time-bound recapitalization plans (MEFP ¶26). Management concluded on August 8, 2017 that submitted plans are credible. To date, three undercapitalized banks have restored regulatory capital to minimum levels and four significantly undercapitalized are showing progress. - Bank resolution: On August 14, 2017, BoG intervened two insolvent banks (together accounting at end-2016 for approximately 3 percent of banking system deposits) and resolved them via purchase and assumption transactions that included deposit portfolios, liquid assets and performing loans. - Preliminary estimates suggest the assuming bank (Ghana Commercial Bank, GCB) will receive government bonds of around GHS 1.6 billion (0.8 percent of GDP) to balance assets and liabilities (final numbers pending due diligence). - Residual assets and liabilities placed into receiverships managed by PricewaterhouseCoopers under BoG oversight. - The government will need to issue a bond to GCB (not yet reflected in the program as modalities and exact magnitude are still being defined). ### Fiscal policy and debt management strategy - Authorities committed to restore fiscal discipline, reverse 2016 fiscal deterioration, and put debt on a downward and sustainable path. - 2017 budget measures: - Broadening the tax base. - Legislation of a policy capping transfers to statutory and earmarked funds to 25 percent of tax revenues. - Rationalize use of internally generated funds, improve tax administration and compliance, and realign spending priorities (MEFP ¶18). - Mid-year budget review (July 31, 2017) adjusted expenditure downwards in goods and services and capital outlays to target overall budget deficit of 6.3 percent of GDP (budget target was 6.5 percent of GDP). - Arrears: - Additional domestic arrears accumulated in 2016 are being audited to validate claims before payment. - Government committed to clear arrears equivalent to 1.8 percent of GDP in 2017, which will eliminate all arrears recognized under the program as well as 20 percent of the new arrears following validation. The remaining new arrears expected to be settled by 2019. - Debt management actions: - Re-profiling operations in Q1 2017, including issuance in April 2017 of a 15-year callable bond to alleviate refinancing risk. - Seeking to lengthen debt maturity profile via buy-backs and exchanges while maintaining cash buffers. - Publication of a quarterly auction calendar; plans advanced to begin publishing annual borrowing plans. - Contractual non-concessional external borrowing for 2017 will be subject to ceilings and restricted to priority projects where concessional financing is not available. - Strengthening debt management systems in line with the PFM Act with IMF technical assistance. ### Monetary policy stance - Monetary policy remains tight despite recent easing. - Continued tight monetary policy, exchange rate stability, and renewed fiscal consolidation expected to bring inflation down to single digits by end-2018. - BoG will monitor price developments and stands ready to tighten policy if necessary. - Following suspension of foreign exchange auctions, BoG will continue bilateral interventions to provide FX liquidity to smooth excessive volatility. - Monetary policy guided by BoG’s inflation targeting framework (IT), being enhanced through efforts to reduce fiscal dominance, including commitment to zero-central bank financing of government under an agency agreement between the Ministry of Finance and the central bank. - Authorities indicated they will reopen discussion on amendment to the BoG Act at a higher level, including the legislature, and are reexamining communications aspects of the IT framework for enhancements. ### Financial sector condition and reforms - Banking sector: profitable but faces high NPLs, liquidity problems, and capital erosion in some banks. - AQR (completed March 2017) revealed substantial provisioning shortfalls in nine banks; remedial actions include recapitalization, accelerated recoveries and write-offs, and resolution of insolvent banks. - On August 14, 2017, licenses of two insolvent banks were revoked and good assets and deposit liabilities taken over by a large bank under purchase and assumption agreement—actions consistent with the Banks and SDI Act. - Liquidity management: central bank working to prevent entrenchment of exceptional liquidity support by enforcing ELA repayment plans per new guidelines. - BoG priorities going forward: - Strengthen supervisory and regulatory framework, including amendments to the Banks and SDI Act and implementation of Basel II/III capital accord. - Address deficiencies in the AML/CFT framework. - Microfinance institutions: plans to strengthen supervision, introduce higher capital and liquidity requirements, and impose more stringent governance and risk management standards. ### Structural reforms and energy sector - Authorities committed to wide-ranging structural reforms to achieve higher and more inclusive growth: - Resolve financial difficulties of energy sector SOEs, including legacy debt and viability issues. - Strengthen public financial management and accelerate fiscal reforms. - Improve basic infrastructure and streamline regulations to enhance the business environment. - Strengthen social protection and poverty alleviation. - Improve governance and institutions to attract investment. - Energy sector SOEs: - Government engaged a reputable audit firm to audit and validate debt situation and financial viability of energy sector SOEs (MEFP ¶41). - Based on the audit, a three-pronged approach developed to restructure SOE debt, strengthen payment discipline, and introduce private sector participation in downstream electricity distribution (concession of ECG under the second MCC compact). - Steps to improve management practices, monitor financial performance, and institute mechanisms to strengthen financial oversight. ### Conclusion - After program implementation setbacks in 2016, the new government (inaugurated January 2017) has shown strong commitment to address slippages, reduce imbalances, and pursue reforms. - Authorities have delivered key prior actions, including capping transfers to earmarked funds and revoking licenses of two insolvent banks, and are resolved to continue strong program implementation within the proposed extended time framework. - Authorities look forward to close cooperation and continued policy dialogue with the Fund. *Prepared by the Ghana team. August 25, 2017* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17262.pdf_