## GROWTH STRATEGY FOR GHANA

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### Key recent achievements and challenges
- Income and living standards
  - Incomes per capita more than doubled between 1992 and 2018, with average annual per capita growth of 3.2 percent.
  - Ghana’s Human Development Index (HDI) increased from 0.46 to 0.59.
- Poverty and inequality
  - Poverty headcount at US$1.90 a day (2011 PPP) declined from 50 percent in 1991 to 12 percent in 2012, then increased from 12 to 13.3 percent between 2012 and 2016.
  - Income Gini coefficient increased from 38.4 to 43.5 between 1991 and 2016.
  - Ratio of average income of top 10 percent to bottom 10 percent increased from 11.6 to 20.1 between 1991 and 2016.
- Structural challenge
  - Recent growth has become less inclusive and more reliant on extractive industries (gold, oil and gas), which are largely foreign-owned and capital intensive and generate relatively few local jobs.

### Historical drivers of growth
- Growth accounting decomposition (Cobb-Douglas framework; capital share α = 0.4)
  - Expansion in effective labor supply (employment and human capital) explains roughly half of GDP growth since 1990.
  - Increases in total factor productivity (TFP) account for about one third of GDP growth.
  - Remainder of growth attributed to accumulation of physical capital.
- Structural transformation and productivity
  - Aggregate labor productivity increases driven by labor shifting from agriculture into services and large increases in value added per worker in agriculture.
  - Manufacturing remained underdeveloped, accounting for just 11 percent of employment.
  - Labor productivity in manufacturing and services remained stagnant over past decades.

### Role of extractive industries
- Resource endowments and output
  - Ghana holds an estimated 3.1 percent of the world’s gold reserves (EITI).
  - Jubilee Field estimated to hold between 0.6 and 1.5 billion barrels.
  - Pecan field estimated to hold up to 334 million barrels.
- Trade impact
  - Extractive industries now account for about two-thirds of merchandise exports.
  - Prices of Ghana’s three largest commodity exports (cocoa, gold and oil) are somewhat uncorrelated in international markets.

### Strategic orientation and medium-term growth policies
- Ghana’s objective
  - “Ghana beyond Aid” aims to bring the country from lower- to upper-middle income status within the next decade by accelerating productivity.
- Strategic pillars
  - Agricultural modernization.
  - Export-led industrialization with emphasis on sectors that can export, innovate, and achieve economies of scale.
  - Strengthen human capital and technological capacity.
  - Invest in public infrastructure.
  - Consistent and predictable government policies to increase long-term investment and improve public spending effectiveness.
- Challenges and innovation needs
  - Early Asian strategies specialized in narrow labor-intensive manufactures; Sub-Saharan Africa attempts have had mixed success.
  - Competition from established Asian producers and trends such as automation and near-shoring complicate replication.
  - Complement manufacturing focus with productivity increases in agriculture and services; pursue export-oriented manufacturing while raising productivity across other sectors.

### Export-oriented industrialization — measures and considerations
- Authorities’ industrial agenda
  - 10-point plan designates anchor industries: agroprocessing, pharmaceuticals, integrated aluminum and steel industries, vehicle assembly, textiles, petrochemicals, industrial salt, industrial starch and oil palm processing.
  - Stimulus package to support distressed but viable firms: financing, technical assistance, facilitating access to markets.
  - One District, One Factory (1D1F) program: aims to establish at least one factory in each of the 216 districts in Ghana.
- Design principles and fiscal guidance
  - Focus support on sectors with potential to export and innovate and where Ghana has comparative advantage.
  - Limit financial support (including via tax incentives) to select industries.
  - Prioritize structural reforms: access to land; ease of doing business; improving power supply reliability; increasing competition in the banking sector.
  - Support sectors rather than individual firms; use transparent and objective targets, some linked to export performance.

### Modernizing agriculture — role, constraints, and opportunities
- Agriculture’s role and productivity gap
  - Agriculture represents 20 percent of Ghana’s GDP.
  - Agriculture accounts for about 35 percent of total employment.
  - Farm structure: 90 percent of farm holdings are less than 2 Ha in size.
  - Low uptake of fertilizer and improved seed varieties; reliance on rain-fed agriculture; low mechanization; limited access to “patient” long-term capital; low farmer human capital.
- Crop-specific opportunities and programs
  - Cocoa: opportunities to increase yields, first-stage cocoa bean processing, and improve certification; COCOBOD pursuing these steps with the African Development Bank.
  - Other crops with strong potential: rice, cashew nuts, rubber, and palm oil.
  - Horticulture and processed foods: proximity to EU market and favorable seasonality suggest export opportunities.
  - Planting for Food and Jobs (PFJ) program features:
    - Provides inputs (fertilizer and improved seed varieties) through a private sector-led market network at subsidized prices.
    - Payment option: beneficiaries can pay half of input costs upfront and the remaining half at the end of the harvest.
    - Targeting: smallholder farmers only; limit on subsidized fertilizer volume to a maximum of 2 Ha land.
    - Policy guidance: subsidies should be gradually scaled down without affecting input take-up rates; combine subsidies with reforms to reduce input price markups and ensure steady and timely input supply.
- Value-chain and regional market development
  - Required investments: storage, transport, distribution, retail networks, marketing and branding, risk management.
  - Integrate smallholders via farmer cooperatives, contract farming, and facilitate gradual shift to medium-scale farms.

### Human capital and education
- Achievements and gaps
  - Enrollment rates increased across all education levels; gender disparities in access to education greatly reduced.
  - Public spending on education prioritized, including Free SHS flagship program aimed at universal high school enrollment.
  - Learning outcomes remain subpar: 2015 Early Grade Reading Assessment found half of 2nd grade students could not read a single word, regardless of language.
- Policy implications
  - Improving learning outcomes is critical for industrialization and productivity growth.
  - Reforms to education systems and teaching effectiveness are required to produce a skilled workforce and increase entrepreneurial capacity.

### Improving the business environment and financing
- Ease of doing business and digitalization
  - Ghana compares favorably to the Sub-Saharan African average in the 2020 Doing Business Report.
  - Relative strengths: starting a business, access to credit, access to electricity, protecting minority investors.
  - Relative weaknesses: resolving insolvency, trading across borders, paying taxes.
  - National Digital Property Addressing System (NDPAS): launched in 2017 and expected to be completed in 2020; unique digital addresses could increase formal economy size and support online and financial services.
  - Additional digitization plans: tax and judicial procedures, health records; introduction of national ID cards; expansion of mobile banking.
- Financing constraints and crowding out
  - Business surveys identify high cost of capital and limited access to “patient”, long-term credit as main bottlenecks for local manufacturing growth.
  - Large capital inflows have been largely absorbed by the extractive sector and by large fiscal deficits, with limited foreign capital targeting domestic manufacturing.
  - Large domestic financing needs of the public sector crowd out private-sector growth despite financial sector clean-up.
  - Policy recommendation: reducing the public sector’s gross financing needs would help re-orient domestic savings and foreign capital towards local entrepreneurs.

### Regional markets and trade opportunities
- Intraregional trade is relatively low but growing in ECOWAS and Sub-Saharan Africa.
- African Continental Free Trade Area (AfCFTA) and developing regional markets create opportunities to expand trade and support export-oriented industrialization.

### Conclusion — strategic imperatives for inclusive growth
- Demographics and growth imperative
  - Many young Ghanaians are entering or will enter the labor market in coming years; creating enough well-paying jobs is a central challenge and opportunity.
  - Authorities seek to diversify away from commodities to reduce exposure to commodity cycles and make the economy more resilient and inclusive.
- Policy focus and lessons
  - Rapid growth commonly required achieving economies of scale and export success in specific sectors to drive exports and employment expansion.
  - Consistent and predictable government strategy increases investment and fosters efficient use of public resources.
  - Government support should focus on sectors with potential to export and innovate rather than individual firms; encourage competition, reward performance, and set transparent, objective targets (including export-linked indicators) to preserve scarce fiscal resources.

*Source: 1ghaea2019003 - Excerpt from IMF Ghana chapter.*

### References ____________________________________________________________________________ 14

### GROWTH STRATEGY FOR GHANA

### Key recent achievements and challenges
- Income and living standards
  - Incomes per capita more than doubled between 1992 and 2018, with average annual per capita growth of 3.2 percent.
  - Ghana’s Human Development Index (HDI) increased from 0.46 to 0.59.
- Poverty and inequality
  - Poverty headcount at US$1.90 a day (2011 PPP) declined from 50 percent in 1991 to 12 percent in 2012, then increased from 12 to 13.3 percent between 2012 and 2016.
  - Income Gini coefficient increased from 38.4 to 43.5 between 1991 and 2016.
  - Ratio of average income of top 10 percent to bottom 10 percent increased from 11.6 to 20.1 between 1991 and 2016.
- Structural challenge
  - Recent growth has become less inclusive and more reliant on extractive industries (gold, oil and gas), which are largely foreign-owned and capital intensive and generate relatively few local jobs.

### Historical drivers of growth
- Growth accounting decomposition (Cobb-Douglas framework; capital share α = 0.4)
  - Expansion in effective labor supply (employment and human capital) explains roughly half of GDP growth since 1990.
  - Increases in total factor productivity (TFP) account for about one third of GDP growth.
  - Remainder of growth attributed to accumulation of physical capital.
- Structural transformation and productivity
  - Aggregate labor productivity increases driven by labor shifting from agriculture into services and large increases in value added per worker in agriculture.
  - Manufacturing remained underdeveloped, accounting for just 11 percent of employment.
  - Labor productivity in manufacturing and services remained stagnant over past decades.

### Role of extractive industries
- Resource endowments and output
  - Ghana holds an estimated 3.1 percent of the world’s gold reserves (EITI).
  - Jubilee Field estimated to hold between 0.6 and 1.5 billion barrels.
  - Pecan field estimated to hold up to 334 million barrels.
- Trade impact
  - Extractive industries now account for about two-thirds of merchandise exports.
  - Prices of Ghana’s three largest commodity exports (cocoa, gold and oil) are somewhat uncorrelated in international markets.

### Policies to increase medium-term growth — strategic orientation
- Ghana’s objective
  - “Ghana beyond Aid” aims to bring the country from lower- to upper-middle income status within the next decade by accelerating productivity.
- Strategic pillars
  - Agricultural modernization.
  - Export-led industrialization with emphasis on sectors that can export, innovate, and achieve economies of scale.
  - Strengthen human capital and technological capacity.
  - Invest in public infrastructure.
  - Consistent and predictable government policies to increase long-term investment and improve public spending effectiveness.
- Challenges in replication of East/Southeast Asian models
  - Early Asian strategies specialized in narrow labor-intensive manufactures; Sub-Saharan Africa attempts have had mixed success.
  - Competition from established Asian producers and trends such as automation and near-shoring complicate replication.
- Need for innovation
  - Complement manufacturing focus with productivity increases in agriculture and services.
  - Pursue export-oriented manufacturing while simultaneously raising productivity across other sectors.

### Export-oriented industrialization — specific measures and considerations
- Authorities’ industrial agenda
  - 10-point plan designates anchor industries: agroprocessing, pharmaceuticals, integrated aluminum and steel industries, vehicle assembly, textiles, petrochemicals, industrial salt, industrial starch and oil palm processing.
  - Stimulus package to support distressed but viable firms: financing, technical assistance, facilitating access to markets.
  - One District, One Factory (1D1F) program: aims to establish at least one factory in each of the 216 districts in Ghana.
- Rationale for diversification
  - Export diversification is associated with stronger economic growth.
  - Diversifying towards manufactured products could contribute to a more resilient and inclusive economy.
- Regional market opportunities
  - Intraregional trade is relatively low but growing in ECOWAS and Sub-Saharan Africa.
  - African Continental Free Trade Area (AfCFTA) and developing regional markets create opportunities to expand trade.

### Human capital and education
- Achievements and gaps
  - Enrollment rates increased across all education levels; gender disparities in access to education greatly reduced.
  - Public spending on education prioritized, including Free SHS flagship program aimed at universal high school enrollment.
  - Learning outcomes remain subpar: 2015 Early Grade Reading Assessment found half of 2nd grade students could not read a single word, regardless of language.
- Policy implications
  - Improving learning outcomes is critical for industrialization and productivity growth.
  - Reforms to education systems and teaching effectiveness are required to produce a skilled workforce and increase entrepreneurial capacity.

*Source: 1ghaea2019003 - References*

### 16. Countries that experienced growth accelerations also often used industrial policies to

### 16. Countries that experienced growth accelerations also often used industrial policies to

### Rationale for industrial policy and typical instruments
- Industrial policy rationale: protect industries with high growth potential that face externalities (market imperfections or economies of scale) preventing take-off (references: Dornbush and Park, 1987; Greenwald and Stiglitz, 2006; IMF, 2019c).
- Complementary rationale: some activities require government investments to facilitate entry by entrepreneurs because they are excessively risky or require coordinated policy actions across multiple dimensions (Murphy et al., 1989; Rodrik, 1995; Mazzucato, 2015).
- Typical forms of industrial policy (as described in the source):
  - production subsidies
  - tariffs and licensing requirements that create sheltered domestic markets
  - export subsidies
  - tax incentives
  - local-content rules
  - subsidized or targeted credit
  - special investment zones
  - wage repression
  - exchange rate policy

### Prioritization and design principles for Ghana
- Cross-country experience highlights priorities:
  - Focus on sectors with potential to export and innovate and where Ghana has a comparative advantage.
  - Prioritize sectors with most room for continued innovation and expansion, and encourage competition between firms within each sector (IADB, 2014; Aghion et al., 2015; Cherif and Hasanov, 2019).
- Fiscal constraint guidance:
  - Limit financial support (including via tax incentives) to select industries.
  - Focus on structural reforms that eliminate barriers to manufacturing growth: access to land; ease of doing business; improving power supply reliability; increasing competition in the banking sector (e.g., IMF, 2019b).
- Exit and performance rules:
  - Support sectors rather than individual firms to encourage competition.
  - Reward performing firms and wean nonperforming firms off government support to preserve fiscal resources.
  - Use transparent and objective targets, some linked to export performance.

### Modernizing agriculture — role and importance
- Agriculture’s current role:
  - Agriculture represents 20 percent of Ghana’s GDP.
  - Agriculture accounts for about 35 percent of total employment.
  - Rising agricultural productivity contributes to higher agricultural wages and poverty reduction, especially in rural regions.
- Productivity gap and constraints:
  - Agricultural productivity remains low in Ghana (and in SSA in general) compared to non-SSA countries, with large gaps between actual and potential yields (MOFA, 2017).
  - Causes of yield gaps include low uptake of fertilizer and improved seed varieties; reliance on rain-fed agriculture; low mechanization; challenges in access to finance (especially long-term, “patient” capital); low farmer human capital, especially among smallholder farmers.
  - Farm structure: 90 percent of farm holdings are less than 2 Ha in size.
- Potential gains:
  - Catching up to world productivity levels would transform Ghanaian agriculture and significantly boost inclusive growth (World Bank, 2018b).
  - Increasing returns in agriculture sustainably can reduce incentives to shift toward small-scale gold mining, which often harms the environment.

### Agricultural opportunities and targeted government support
- Crop-specific opportunities:
  - Cocoa: remains a major activity; despite Ghana being a large producer, most of the chocolate value chain is located outside the country. Medium-term shifts unlikely, but opportunities exist to increase cocoa yields, first-stage cocoa bean processing, and improve certification (e.g., fair trade, high-quality beans). COCOBOD pursuing these steps with the African Development Bank.
  - Other crops: strong potential in rice, cashew nuts, rubber, and palm oil where yields remain low by international standards and regional/global demand may pick up (World Bank, 2013).
  - Horticulture and processed foods: proximity to EU market and favorable seasonality suggest opportunities to export fruit and vegetable-based products and substitute food imports.
- Planting for Food and Jobs (PFJ) program features:
  - Provides inputs (fertilizer and improved seed varieties) through a private sector-led market network at subsidized prices.
  - Raises awareness among farmers on input use.
  - Payment option: beneficiaries can pay half of input costs upfront and the remaining half at the end of the harvest.
  - Targeting: smallholder farmers only; limit on subsidized fertilizer volume to a maximum of 2 Ha land.
  - Policy guidance: ideally subsidies should be gradually scaled down without affecting input take-up rates; combine subsidies with reforms to reduce input price markups and ensure steady and timely input supply (Houssou et al., 2018; World Bank, 2018).
- Value-chain and regional market development:
  - Rising regional urban middle-class demand will increase demand for higher value-added foods (meat, dairy, fish, processed foods).
  - To compete with foreign brands, develop local food value chain to deliver high food-quality standards.
  - Required investments: storage, transport, distribution, retail networks, marketing and branding, risk management.
  - Integrate smallholders via farmer cooperatives, contract farming, and facilitate gradual shift to medium-scale farms.

### Improving the business environment and financing
- Ease of doing business:
  - Ghana compares favorably to the Sub-Saharan African average in the 2020 Doing Business Report.
  - Relative strengths versus upper-middle income countries: starting a business, access to credit, access to electricity, protecting minority investors.
  - Relative weaknesses: resolving insolvency, trading across borders, paying taxes.
- Digitalization and formalization reforms:
  - Tema port customs streamlining may reduce documentary compliance costs and facilitate cross-border trade.
  - National Digital Property Addressing System (NDPAS): launched in 2017 and expected to be completed in 2020; unique digital addresses could increase formal economy size, support online and financial services, aid linking to property and credit registries, improve land tenure, reduce property title disputes, and increase tax collection by improving business location/registration information.
  - Additional digitization plans: tax and judicial procedures, health records; introduction of national ID cards; expansion of mobile banking.
- Financing constraints and crowding out:
  - Business surveys identify high cost of capital and limited access to “patient”, long-term credit as main bottlenecks for local manufacturing growth.
  - Large capital inflows to Ghana have been largely absorbed by the extractive sector and by large fiscal deficits, with limited foreign capital targeting domestic manufacturing (IMF, 2018).
  - Large domestic financing needs of the public sector crowd out private-sector growth despite financial sector clean-up.
- Policy recommendation:
  - Reducing the public sector’s gross financing needs would help re-orient domestic savings and foreign capital towards local entrepreneurs.

### Conclusion — strategic imperatives for inclusive growth
- Demographics and growth imperative:
  - Many young Ghanaians are entering or will enter the labor market in coming years; creating enough well-paying jobs is a central challenge and opportunity.
  - Authorities seek to diversify away from commodities to reduce exposure to commodity cycles and make the economy more resilient and inclusive.
- Lessons from other countries:
  - Rapid economic growth commonly required achieving economies of scale and export success in specific sectors, enabling competitiveness in world markets and driving exports and employment expansion.
  - Consistent and predictable government strategy increases investment and fosters efficient use of public resources; long-term planning and consistent implementation can increase policy predictability and investment.
- Policy focus:
  - Government support should focus on sectors with potential to export and innovate rather than individual firms.
  - Encourage competition, reward performance, and set transparent, objective targets (including export-linked indicators) to preserve scarce fiscal resources.

*International Monetary Fund — Ghana chapter excerpt*

### 1.      Public sector balance sheets can improve fiscal policies and economic growth. A public

### 1.      Public sector balance sheets can improve fiscal policies and economic growth. A public

### Overview and rationale
- A public sector balance sheet (PSBS) displays in one document the assets and liabilities of public sector institutions and can encourage better management of public sector assets and induce earlier action to address fiscal vulnerabilities and risks, particularly those of public corporations.
- PSBSs can improve fiscal governance and transparency, reduce volatility in fiscal outcomes through preemptive action, lower sovereign interest rates, and raise growth.
- Better management of public sector assets can increase fiscal revenues and provide more resources for investment in schools, roads, and hospitals.

### Ghana’s institutional steps to develop broader fiscal coverage
- The 2016 Public Financial Management (PFM) Act calls for prudent management of public funds, assets, and liabilities (GoG 2016).
- PFM regulations require the Controller and Account General (CAGD) to prepare a balance sheet showing the consolidated assets and liabilities of all public funds for the 2020 fiscal year (GoG 2019a), broadening the current consolidated fund coverage to include internally generated funds, statutory funds, and donor funds.
- PFM regulations require public corporations to submit financial reports to relevant public authorities, including annual audited financial statements.
- The Ministry of Finance has begun compiling and publishing public corporation financial performance in an annual State Ownership report.

### Ghana’s PSBS constructed by IMF staff — scope and headline comparisons
- IMF staff PSBS institutional coverage includes: the consolidated fund, the social security fund, public non-financial and financial corporations (state-owned commercial and development banks and the Bank of Ghana).
- “The public sector is smaller than that of peers (Kenya, Tanzania, Uganda), with total assets of 67 percent of GDP in 2017, on a consolidated basis, compared to an average of 99 percent of GDP for peers.” (paragraph 3)
- On a later presentation: “Public sector assets were about 66 percent of GDP in 2017, lower than those of a select sample of peers.” (paragraph 13)

### Methodology and institutional coverage details
- Core starting point: annual Controller and Accountant General financial statements of the consolidated account for 2017 (GoG 2018a), adjusted using Annual Debt Reports (GoG 2019b), debt of ESLA Plc, equity values reported in select public corporation financial statements, and assets and liabilities of the public pension fund (SSNIT 2017).
- Following GFSM 2014, pension obligations to private sector employees under pay-as-you-go social security schemes are not included in the central government balance sheet.
- Government’s share of oil and gas and gold resources were valued based on the October 2018 Fiscal Monitor methodology and added to the central government balance sheet.
- Institutional expansion: assets and liabilities of nine of the largest non-financial public corporations were incorporated (these nine comprise 74 percent of total unconsolidated assets and 87 percent of total liabilities reported for non-financial public corporations in the 2017 State Ownership Report).
- Financial public corporations included: Bank of Ghana, Ghana Commercial Bank (GCB), National Investment Bank (NIB), and Agriculture Development Bank (ADB) in 2017.
- Cross-holdings netted in consolidation (examples): arrears among non-financial public corporations in the energy sector GHc 6.2 billion netted from both assets and liabilities; arrears claims on central government GHc 5.8 billion netted from central government liabilities and non-financial public corporation assets.

### Key figures from Ghana’s 2017 consolidated PSBS (as presented)
- Public sector assets: about 66 percent of GDP in 2017 (paragraph 13).
- Non-financial assets: 38 percent of GDP (primarily fixed assets such as roads, the electricity grid, and natural resources).
- Central government fixed assets: “very low,” likely reflecting undervaluation of infrastructure (GoG 2018c).
- Financial assets: 29 percent of GDP.
- About half of financial assets were on balance sheets of financial public corporations after netting bank holdings of government securities.
- GFSM convention: unconsolidated net worth of public corporations presented as zero because public corporation equity is reflected in central government assets.
- Natural resources: comprise a fourth of public sector assets (paragraph 14); oil and gas and gold dominate natural resource assets.
  - Oil and gas asset valuation method: “net present value of the government’s take from royalties, fees, dividends, oil entitlement, and other charges is 30 percent of the annual crude oil production discounted at 16 percent annually.” (paragraph 14)
  - Gold: estimated government take is 20 percent of the value of production. (paragraph 14)
- Volatility example: estimated value to the government of Ghana’s oil and gas assets doubled to over 20 percent of GDP from 2012 to 2013, driven mainly by international oil price increases. (paragraph 15)
  - Sensitivity example: a 20 percent increase in commodity prices would boost Ghana’s natural resource assets to 22 percent of GDP from 18 percent in the baseline; a 20 percent reduction would lower natural resource assets to 14.5 percent of GDP. (paragraph 15)

### Consolidated balance table figures (as presented in the text)
- Table extract labeled “Central / Consolidated / Public Sector” (Percent of GDP):
  - Total assets: Central Government 37.6 ; Consolidated 22.0 ; Public Sector 29.5 ; Total 66.6
  - Non-financial: Central Government 21.8 ; Consolidated 15.3 ; Public Corporations 0.6 ; Total 37.7
  - of which: Natural resources: Central Government 17.6 ; Consolidated 0.0 ; Public Corporations 0.0 ; Total 17.6
  - Financial: Central Government 15.9 ; Consolidated 6.7 ; Public Corporations 28.9 ; Total 29.0
  - Total liabilities: Central Government 59.3 ; Consolidated 22.0 ; Public Sector 9.1 ; Total 87.9
  - of which: Debt securities and loans: Central Government 56.7 ; Consolidated 7.6 ; Public Sector 9.1 ; Total 66.2
  - Net financial worth: Central Government ( 43.4) ; Consolidated ( 15.3) ; Public Corporations ( 0.1) ; Total ( 58.9)
  - Net worth: Central Government ( 21.7) ; Consolidated 0.0 ; Public Corporations 0.4 ; Total ( 21.2)

### Benefits of PSBS analysis highlighted for Ghana
- PSBS presents public financial information in one place, allowing more informed decisions and transparency; highlights the value of natural resources which in Ghana’s case are material.
- Large public corporation asset holdings: Ghana’s largest public corporations hold assets equivalent to 50 percent of GDP — raising the question of whether these entities generate adequate returns to the central government via taxes and dividends.
- October 2018 Fiscal Monitor finding cited: better management of public assets could yield up to 3 percent of GDP in additional revenue per year for a group of mostly advanced economies.
- Stronger balance sheet positions are associated with shorter and shallower recessions and lower interest costs on debt (IMF, 2018).
- PSBS improves fiscal risk assessment by revealing borrowing by public corporations and government-controlled off-budget financing vehicles for which the government may ultimately be liable.
- PSBS improves policy assessment of investment projects: borrowing for consumption unequivocally lowers public sector wealth, while debt-financed infrastructure investment tends to have less negative effect since investment adds to fixed assets offsetting increased debt liabilities; long-run net worth improves if returns on public investment (higher government revenue from growth) exceed financing costs plus annual maintenance costs.

### Limitations, caveats, and valuation issues
- Data quality limitations: central and general government data quality depends on PFM regulations, systems, and adherence; public corporation data reliability depends on sound accounting and external audits. (paragraph 8)
- Valuation challenges: particularly for nonfinancial assets that are not traded; asset valuations (e.g., natural resources) can be highly cyclical and may be lowest when financing needs are most pressing. (paragraph 9)
- Recognition of assets does not eliminate vulnerabilities associated with high public debt: illiquidity of assets such as roads and ports limits their usefulness for rollover or deficit financing. (paragraph 9)
- For Ghana specifically, central government fixed assets are likely undervalued, and the valuation methodology for non-petroleum resources assumes the government receives only a portion (20 percent) of estimated gold reserve value, affecting comparability with peers. (footnote and paragraph 13–14 notes)

### Policy implications and areas for improvement
- Developing and publishing a consolidated PSBS can broaden fiscal analysis beyond the consolidated fund and central government budgetary unit to include extrabudgetary accounts, social security funds, local governments, and public corporations.
- Strengthen public corporation reporting: require timely audited financial statements and integrate their data into the PSBS to reduce fiscal uncertainty and contingent liability risks.
- Improve valuation methods and regular updates for natural resource assets while avoiding policy reactions to short-term asset valuation swings (IMF, 2018).
- Use PSBS to inform decisions on public asset management and to assess the fiscal implications of debt-financed investment versus consumption borrowing, ensuring investment returns exceed financing and maintenance costs.

*Prepared by IMF staff based on Ghanaian authorities’ reports and IMF calculations as presented in the source document.*

### 16.      Non-financial public corporations hold 90 percent of the reported public sector fixed

### 16.      Non-financial public corporations hold 90 percent of the reported public sector fixed

### Asset composition and concentration
- Non-financial public corporations hold 90 percent of the reported public sector fixed assets, reflecting dominance in capital-intensive energy and transportation sectors.
- Combined assets of the public electricity distribution corporation (ECG) and the public power generation corporation (VRA) were 12 percent of GDP in 2017 (Table 3).
- Central government recorded fixed assets net of accumulated depreciation: CAGD reported a value of GHc 7.5 billion in 2017 (3 percent of GDP).
- Roads and highways comprised over 40 percent of central government fixed assets.

### Public sector liabilities and debt dynamics
- Debt securities and loans dominate public sector liabilities.
- Central government debt burden:
  - 41 percent of GDP in 2006 (post HIPC low).
  - 57 percent of GDP in 2017 (includes two rounds of GDP rebasing).
- Liabilities of public corporations (gross basis): 50 percent of GDP.
- Deposits at financial public corporations were about a third of the total.
- Consolidated public sector liabilities, netting intra-public sector cross liabilities, equal 88 percent of GDP — similar to Kenya, Tanzania, and Uganda.
- Central government guaranteed about USD 1.2 billion in debt held by public corporations (explicit contingent liabilities).

### Net worth and financial worth
- Public sector net worth (assets less liabilities): negative 21 percent of GDP.
- Net financial worth (financial assets less liabilities): negative 59 percent of GDP.
- Conceptual note: public sector net worth differs from commercial net worth because it ignores the government’s ability to tax in the future.
- Contingent and implicit liabilities:
  - Explicit contingent liabilities in the form of guarantees (some called).
  - Implicit liabilities, particularly energy sector take-or-pay contracts.

### Intertemporal net worth (conceptual)
- Intertemporal net worth includes static balance sheet plus discounted future primary revenue and primary expenditure flows, typically using the implicit interest rate on government debt as the discount rate.
- Negative intertemporal net worth indicates adjustment needs.
- Calculation of the NPV of future primary balances is beyond the scope of the paper.
- Adherence to the Fiscal Responsibility Law, which requires annual primary balance surpluses, implies intertemporal net worth may be less negative than static values.

### Caveats and data limitations
- The presented public sector balance is incomplete:
  - Missing balance sheet data on internally generated funds (e.g., hospitals and universities), statutory funds, and local governments.
  - Missing central government holdings in joint ventures and balance sheet information of smaller public corporations.
  - Analysis is static; annual flows associated with balance sheet items are not presented.
- Central government balance sheet is an acceptable proxy for general government:
  - Statutory funds (except GET Fund and Ghana Infrastructure Investment Fund) cannot borrow and their cash holdings are recorded on the central government balance sheet.
  - Local governments (MMDAs) have aggregate resources and outlays in 2017 less than 1 percent of GDP; central government transfers comprise more than half of MMDA funding.
  - Under PFM Act (921), local governments may only borrow domestically up to a limit determined by the finance minister; actual borrowing reportedly very small.

### Fiscal policy impacts on PSBS and specific policy actions (immediate effects)
- General principle: borrowing to finance primary deficits reduces public sector net worth to the extent the deficit exceeds net acquisition of nonfinancial assets.
- Noted policy actions and immediate balance sheet impacts:
  - MMDAs borrowing for consumption (if permitted under a draft Local Public Finance bill) would reduce public sector net worth and increase fiscal risk.
  - Bridge bank (CBG): central government borrowed 3.3 percent of GDP in 2018 to clean up several large banks; creation of CBG increases public sector assets and liabilities. Staff estimate additional injections of 1.3 percent of GDP into the system in 2019-20 to address SDI weaknesses; immediate and long-run effect will be a decrease in public sector net worth.
  - Higher collections on oil and gas resources:
    - Average effective tax rate (AETR) for petroleum agreements is roughly 55-65 percent.
    - This translates into a percentage of the value of production of 25–35 percent, the basis for calculating natural resource wealth to the government.
    - Historical data suggest government’s share is 20-30 percent of annual crude oil production value (possible causes: tax avoidance or administrative inefficiencies).
    - Increasing government take from natural resource production could increase the NPV of its claim on production value and its net worth.
  - Excess electricity take-or-pay charges:
    - ECG and the central government are counterparties to several take-or-pay contracts with IPPs requiring payment for contracted volumes even if not consumed.
    - When ECG expenses the charge, its equity is reduced and liabilities (accounts payable) increase, lowering the value of government’s investment in ECG.
    - Actual payment of the claim by ECG or the government does not alter the public sector’s net worth.

### Need for entity-level scrutiny
- Independent examination of individual entities’ balance sheets (central/local governments and public corporations) is necessary because consolidated PSBS netting can mask risks:
  - Central government arrears or cross arrears among non-financial public corporations are removed in consolidation but would be visible at entity level.
  - Entity-level analysis can reveal arrears and other vulnerabilities not apparent in the PSBS.

### Recommendations and conclusion
- PSBS can improve fiscal policy, governance, and economic growth by increasing awareness of public assets and obligations and enabling a more holistic policy approach.
- Transparency from PSBS may reduce uncertainty over public sector financial position and potentially reduce spread premium on government borrowing despite negative net worth.
- Implementation priorities to strengthen Ghana’s PSBS:
  - Improve domestic revenue mobilization: reduce exemptions; greater reliance on risk-based compliance systems, including for extractive industries.
  - Improve public investment management: require registration of all existing and potential projects in the investment database to increase marginal contribution of public investment.
  - Reform and return to profitability of non-financial public corporations, particularly in energy sector:
    - Full implementation of the cabinet-approved Energy Sector Recovery Program, including renegotiation or termination of expensive take-or-pay contracts.
    - Improve transparency and governance of non-financial public corporations; better and regular financial reporting as required under PFM regulations.
    - Establish the State Investment Governance Authority (SIGA) to oversee public corporations in accordance with the SIGA Act.
  - Steps to create an official PSBS and build technical capacity:
    - Implement PFM regulations provisions calling for CAGD to produce financial statements for Ghana’s public funds for the 2020 financial year.
    - Complete the rollout of GIFMIS to all public funds (Consolidated Fund, IGFs, Statutory Funds, Donor Funds, and any other fund).
    - Ensure all relevant entities prepare and submit financial statements to CAGD in a timely manner using a standard format.
    - Continue emphasis on improving SOE financial disclosure per the PFM Act for development of a full PSBS and fiscal risk mitigation.

### Appendix I — Key balance sheet figures (percent of GDP, 2017)
- BALANCE SHEET Total assets: 37.6 (Central Government), 22.0 (Non-Financial Public Corps), 28.5 (Financial Public Corps), 65.5 (Consolidated Public Sector), Consolidation: -22.6
- Nonfinancial assets: 21.0 (Central Government), 15.3 (Non-Financial Public Corps), 0.6 (Financial Public Corps), 36.9 (Consolidated Public Sector)
- Fixed assets: 2.9 (Central Government), 14.5 (Non-Financial Public Corps), 0.5 (Financial Public Corps), 17.9 (Consolidated Public Sector)
- Mineral and energy resources: 17.6 (Central Government), 17.6 (Consolidated Public Sector)
- Financial assets: 16.6 (Central Government), 6.7 (Non-Financial Public Corps), 27.9 (Financial Public Corps), 28.6 (Consolidated Public Sector), Consolidation: -22.6
- By instrument (selected):
  - Currency and deposits: 2.5 (Central Government), 1.0 (Non-Financial Public Corps), 4.6 (Financial Public Corps), 5.3 (Consolidated Public Sector), Consolidation: -2.8
  - Debt securities (financial assets): 0.5 (Central Government), 0.0 (Non-Financial Public Corps), 15.3 (Financial Public Corps), 8.9 (Consolidated Public Sector), Consolidation: -6.9
  - Loans (financial assets): 3.1 (Central Government), 0.1 (Non-Financial Public Corps), 4.4 (Financial Public Corps), 7.3 (Consolidated Public Sector), Consolidation: -0.3
  - Equity and investment fund shares (financial assets): 10.4 (Central Government), 0.0 (Non-Financial Public Corps), 0.1 (Financial Public Corps), 2.5 (Consolidated Public Sector), Consolidation: -8.0
- Liabilities total: 59.3 (Central Government), 22.0 (Non-Financial Public Corps), 28.4 (Financial Public Corps), 87.1 (Consolidated Public Sector), Consolidation: -22.6
- By instrument (selected liabilities):
  - Debt securities: 30.1 (Central Government), 0.9 (Non-Financial Public Corps), 3.7 (Financial Public Corps), 27.8 (Consolidated Public Sector), Consolidation: -6.9
  - Loans: 26.5 (Central Government), 6.7 (Non-Financial Public Corps), 3.2 (Financial Public Corps), 36.1 (Consolidated Public Sector), Consolidation: -0.3
  - Currency and deposits (liabilities): 1.9 (Central Government), 0.0 (Non-Financial Public Corps), 16.2 (Financial Public Corps), 15.3 (Consolidated Public Sector), Consolidation: -2.8
  - Equity and investment fund shares (liabilities): 0.0 (Central Government), 6.9 (Non-Financial Public Corps), 1.6 (Financial Public Corps), 0.5 (Consolidated Public Sector), Consolidation: -8.0
- NET FINANCIAL WORTH: -42.7 (Central Government), -15.3 (Non-Financial Public Corps), -0.5 (Financial Public Corps), -58.6 (Consolidated Public Sector)
- NET WORTH: -21.7 (Central Government), 0.0 (Non-Financial Public Corps), 0.1 (Financial Public Corps), -21.6 (Consolidated Public Sector)

### Appendix II — Mineral and energy resources valuation methodology (summary)
- GFSM 2014 valuation guidelines applied; values correspond to expected pre-tax cash flows from commercial exploitation.
- Oil and gas valuation data sources:
  - (1.1) production over lifetime from Rystad database (Rystad Energy 2019);
  - (1.2) prices (in US$) from WEO forecasts available at the end of the reference year;
  - (1.3) costs of production (in US$), from Rystad database;
  - (1.4) exchange rates from WEO forecasts.
- Future US$ cash flows computed over an 85-year horizon, converted to domestic currency using WEO exchange rate forecasts, discounted using a rate equal to projected average (2019–24) long-term (10-year) government bond yields in WEO plus a risk factor of three percent.
- Gold valuation data sources:
  - (2.1) estimates in constant 2014 US$ from World Bank “The Changing Wealth of Nations 2018” (Lange and others 2018);
  - (2.2) USGS data on 2017 reserves and 2014–17 production;
  - (2.3) prices (in US$) from WEO commodity prices for 2000–17;
  - (2.4) exchange rates from current vintage of WEO exchange rates.
- Estimates for 2015-2017 based on changes in reserves (source 2.2), converted from constant 2014 US$ to current US$ using WEO commodity price index, then to domestic currency using WEO exchange rates.

*International Monetary Fund — Ghana: Public Sector Balance Sheet analysis (excerpts).*

### 1. Ghana’s financial system is dominated by the

### 1. Ghana’s financial system is dominated by the banking sector

### Financial system composition and recent trends
- As of June 2019, universal banks account for 70 percent of total financial system assets (38 percent of GDP), followed by securities and exchange sector (14 percent) and the pension sector (13 percent).
- The banking system remains the main pillar, but growth has moderated in recent years as non-banking institutions are becoming increasingly important.
- Banks’ balance sheets largely consist of loans and advances, securities holdings and deposits, with a shift from private-sector lending to government securities (public-sector crowding out).

### Banking sector structure and ownership
- The system is comprised of 24 banks.
- 14 banks (representing almost 60 percent of banking system assets) are at least in part foreign-owned.
- Foreign ownership is largely related to banking groups from Nigeria, the United Kingdom and South Africa.
- The government (excluding equity investments held by the Social Security and National Insurance Trust or SSNIT) owns three banks (Agricultural Development Bank, National Investment Bank and Consolidated Bank Ghana) and holds a minority equity stake in a fourth (GCB Bank).
- Ongoing recapitalizations via Ghana Amalgamated Trust are expected to further increase government ownership in the banking sector.

### Banking sector cleanup and interventions
- The Bank of Ghana (BoG) closed nine banks since August 2017, driven by capital deficiencies and regulatory breaches.
- Interventions fully protected depositors and other creditors to avoid erosion of confidence, with substantial fiscal costs.
- A state-owned bridge bank, Consolidated Bank Ghana, was established in August 2018 to receive good assets and liabilities of resolved banks; government provided special resolution bonds and plans to privatize the bridge in the medium term.

### Box 1 — Banking Sector Restructuring: key facts and costs
- An Asset Quality Review (AQR) completed in March 2017 identified nine undercapitalized banks with an aggregate capital shortfall of about 1.6 percent of GDP.
- BoG intervened and resolved several banks in 2017–2019; PricewaterhouseCoopers was appointed to liquidate failed banks’ remnants.
- Resolution operations included transfers of selected assets and liabilities to assuming banks and issuance of government securities to cover asset shortfalls.
- Resolution costs (2018–2019) presented in GHc billion and percent of GDP (figure referenced in source).

### Institutional enhancements and safety net
- Establishment of the Financial Stability Council (FSC) to improve inter-agency coordination, reinforce identification of financial sector vulnerabilities, and support crisis preparedness.
- New Deposit Protection Scheme (DPS), administered by the Ghana Deposit Protection Corporation, entered into force as of end September 2019—an important step for the financial safety net, though scope for further improvement remains.

### Financial inclusion
- World Bank Findex: share of Ghanaians with access to formal financial services rose from 29 to 58 percent during 2011-2017, partly driven by mobile money accounts.
- Access lags among the poor; the five poorest regions (Upper West, Northern, Volta, Upper East, and Brong-Ahafo) remain the least financially included.
- Rural access doubled to 53 percent in 2017.
- Financial access for men is 62 percent versus 54 percent for women.
- Mobile money contribution supported by increased product offerings and interoperability.

### Banking sector conditions — capitalization and asset composition
- Banking assets more than doubled since 2014, though the relative size declined modestly to 38 percent of GDP in 2019.
- The sharp increase in minimum statutory capital announced by BoG in September 2017 helped raise systemwide capital adequacy ratio (CAR) to almost 22 percent in December 2018 (up from 18 percent in 2014).
- Changes in asset mix (increased investments in government securities) contributed to improved capital metrics; ratio between risk weighted assets and total assets declined from 70 percent (December 2014) to 57 percent (date implied).
- Some banks, including a large state-owned bank, continue to face shortfalls; operationalization of Ghana Amalgamated Trust (GAT) has encountered delays.

### Credit growth and asset quality
- Year-on-year growth in private sector credit reached 17 percent in June 2019, with evidence of easing credit conditions.
- Aggregate nonperforming loans (NPL) ratio plateaued around 18 percent following a sharp decline during the first half of 2018.
- Large share of loans classified as ‘loss’ within NPLs indicates weak recovery capacity and suggests further write-offs may be needed.
- NPLs by sector: agriculture 34 percent; electricity, gas and water 31 percent.
- Two state-owned banks reported NPL ratios of 39 and 47 percent, respectively.

### Liquidity and exposure to BoG support
- Current regulatory framework does not include minimum liquidity requirements beyond the BoG’s cash reserve requirement (as of April 2019 stood at 8.34 percent).
- Liquid assets (broad definition) to short-term liabilities improved to around 76 percent as of June 2019; the banking sector held about 25 percent of all outstanding government securities.
- Aggregate metrics mask institution-specific fragilities; some banks have used largely uncollateralized liquidity support from the BoG.
- More than 1 percent of GDP remains outstanding as claims on receiverships created during 2017–2019, on top of aggregate exposure on ‘going concern’ institutions of about 0.15 percent of GDP.

### Profitability, efficiency, and intermediation costs
- As of June 2019, after-tax profit amounted to GHc 1.67 bn, a year-on-year increase of 36 percent.
- Investment income accounted for almost 45 percent of total income (up from 29.5 percent in December 2015); interest income and fees and commissions declined to about 35 percent and 12 percent, respectively.
- Profitability indicators improved but remain below pre-crisis levels.
- Sector cost-to-income ratio has hovered around 80 percent, reflecting high operational costs (including personnel expenses).
- High operating costs have limited pass-through of lower funding costs into lending rates despite a monetary policy rate reduction of more than 900bp since 2017.

### Box 2 — Credit to Private Sector and Financial Intermediation Costs: findings and policy implications
- Access to credit remains a bottleneck; World Bank Doing Business ranked Ghana 80 over 190 in 2019 for ease of getting credit.
- Credit to private sector had nominal growth rates about 14 percent in 2019-19 (text as in source), recovering from excessive expansion and cleanup.
- Persistently high bank lending rates despite sharp reduction in cost of funds; lending rates reflect costly financial intermediation driven mainly by high profit margins and high operating costs.
- Decomposition analysis (2014–2018 Bankscope data) indicates operating costs are a disproportionate driver of interest rate margins; operating costs are half personnel expenses and associated with many branches and high staff costs.
- Exceptions include banks relying on digital platforms (e.g., UBA) with lower overheads and margins.
- Policy recommendations and avenues:
  - Improve operational efficiency (branch and staff rationalization, digitalization).
  - Address collateral recovery and insolvency framework weaknesses to reduce provisioning needs.
  - Leverage data and digital solutions to support financial intermediation and service provision.
  - Address land tenure, acquisition, and administration issues to improve collateral value and effectiveness of the collateral registry.

*Prepared by Constant Verkoren (MCM); Box and annex contributions credited to source authors as indicated in the document.*

### 10. The various banking failures that materialized during 2017-2019 have raised concerns

### 10. The various banking failures that materialized during 2017-2019 have raised concerns about financial sector governance

### Financial sector governance and banking failures
- Weaknesses in loan origination and credit risk management exposed banks to elevated credit risks, as illustrated by elevated NPL ratios.
- Interventions were prompted by financial fragilities (i.e., balance sheet erosion and/or immediate liquidity concerns) and can consistently be tied to:
  - poor corporate governance;
  - allegations of insider-dealing and fraud (e.g., related-party transactions and/or manipulation of financial records).
- The large number of distressed institutions that had to be intervened raises concerns about the risk culture, including:
  - excessive risk-taking by institutions;
  - senior management and bank owners not acting in the interest of customers, staff and other stakeholders.

### C. Non-Bank Deposit-Taking Institutions (SDI): structure and recent restructuring
- SDI collectively accounted for almost 7 percent of financial sector assets.
- SDI types: microfinance and micro credit companies; rural and community banks (RCBs); savings and loans companies (S&L); finance houses (FH).
- Most SDIs are regulated and supervised by the BoG; supervisory functions for RCBs delegated to ARB Apex Bank (established in 2001).
- Semi-formal providers include susu collectors (operating under the oversight of the Ghana Co-operative Susu Collectors Association) and credit unions (regulated and supervised by the Ghana Co-Operatives Credit Unions Association).
- May 2019 actions:
  - BoG announced license revocation of 386 microfinance and microcredit companies; many had ceased operations without settling deposit balances.
  - BoG official notice attributed fragilities to poor corporate governance, risk management, unsustainable business models, fraud, supervisory challenges, resource constraints, and weaknesses in licensing procedures.
- August 2019 actions:
  - BoG intervened 23 S&L and FH unable to address long-standing shortcomings, including breaches of statutory capital requirements, excessive risk-taking, financing of related-party transactions with depositor funds, underprovisioning, persistent loss-making and weak board oversight and accountability.
- Cost implications:
  - Costs of reimbursing depositors (initially up to GHc 10,000 per account) remain to be determined as validation of deposit balances is ongoing.
  - Initial estimates (excluding potential recoveries) point to at least 0.6 percent of GDP.
- RCBs:
  - Generally fared better than other SDIs; relatively higher compliance with statutory minimum capital requirements and deposit balances continued to grow (though not as fast as the banking sector).
  - Capital and/or liquidity shortfalls persist across the subsector; resource limitations at ARB Apex Bank may undermine supervisory effectiveness.
  - Revised deadline for increasing minimum statutory capital to GHc 1 million moved from December 2017 to February 2020; this may incentivize some RCBs to pursue mergers and calls for careful assessment of combined entities’ financial position, business model and envisaged risk profile.

### D. Non-Bank Financial Institutions: capital markets, fund managers, insurance, pensions
- Capital market (as of end-March 2019):
  - 33 companies listed on the Ghana Stock Exchange (GSE) (36 at end-2017), with another five on the Alternative Exchange.
  - Market capitalization stood around 17 percent of GDP, down from 21 percent year-on-year.
  - Market highly concentrated: the three largest listed companies (mining and telecom sectors) account for more than 70 percent of market capitalization.
  - Bond market grown but remains dominated by government securities.
- Fund management industry:
  - Rapid growth of assets under management halted in 2018 as the industry experienced withdrawals and investment losses.
  - SEC revoked licenses of 53 fund management companies in November (year implied 2018/2019 context).
  - Causes of inability to honor redemptions: inability to unwind investments, greater risk-taking to cover fixed returns promised to clients, exposures to related parties, sectoral concentrations (placements with resolved banks and SDI), governance-related weaknesses.
  - Funds Management Department of the SEC has limited resources and high workload, precluding meeting annual inspection targets.
- Insurance sector (as of December 2018):
  - 29 non-life insurers (predominantly motor), 24 life insurance companies, 82 intermediaries and three reinsurers; five new companies received a license during the year.
  - Insurance penetration rate: 1.15 percent.
  - Insurance coverage: only 30 percent of the Ghanaian population.
  - Gross written premiums: almost GHc 3 bn as of December 2018; growth of 21 percent in 2018 (compared to 27 percent in 2017).
  - Investments largely consist of government securities and deposits.
- Insurance sector profitability and concerns:
  - Declining profitability: GHc 204 million in 2018 vis-à-vis GHc 245 million in 2017.
  - Continued reliance on investment income to cover persistent underwriting losses.
  - Box 3 highlights (2018 developments):
    - Life insurance: capital and surplus growth decelerated (e.g., from 19 percent in 2017 to 7 percent in 2018); nine firms recorded a decline in 2018; industry’s investment yield averaged 15 percent in 2018 (down from 18 percent in 2014); a handful of firms recorded expense ratios between 80-150 percent; policy holder benefit ratio reached 190 percent in 2018 after a 26 percent decline during the past three years.
    - Non-life insurance: gross written premium increased by 10 percent in 2018; capital and surplus continue to increase but slower, with 20 percent of industry reporting a decline; gross insurance risk has gradually reduced since 2014 though six firms have ratios above 200 percent and two above 300 percent; investment returns dropped to 10 percent with about one-third of firms below that; expense ratio of 99 percent (14 firms above 100 percent); combined ratio of 142 percent (all except five companies above 100 percent); one-third of firms have technical reserve cover ratios close to or above 100 percent.
- Market conduct and complaints:
  - Insurance-related complaints: steady decline during 2014–2017 but a substantial spike in 2018, with one life insurance company (placed under enforcement action during 2018) accounting for almost 40 percent of complaints.
  - Securities sector complaints rose from 255 (cumulative) in March 2018 to 1019 in March 2019.
  - Insurance complaints issues: repudiation and delays in settlement and payment, unauthorized premium deductions and delayed refunds, delays in processing matured policies and perceived low surrender values.
  - Securities complaints issues: non-payment of redemption requests, failure to provide account statements, missing shares, delays in executing transactions, failure to honor assignments.
  - Resolution rates: more than 50 percent of insurance-related complaints could be resolved through NIC intervention; for securities firms, 75 percent of the claims remains outstanding.
- Pensions sector:
  - Since 2008 National Pensions Act (Act 766) created a three-pillar system: mandatory defined-benefit first tier (SSNIT), compulsory defined-contribution second tier (private sector), and voluntary third tier.
  - As of end-2015: first and second tiers had about 1.2 million members each; third tier membership slightly below 149.000 individuals.
  - SSNIT’s position has declined to below 40 percent but remains Ghana’s largest institutional investor with extensive equity investments in GSE-listed and unlisted companies, commercial real estate and housing projects.
  - Note: National Pensions Regulatory Authority has not published annual reports since 2015; SSNIT has not published financial statements and/or annual reports since 2016.

### E. Supervisory and Regulatory Framework: reforms and gaps
- Major milestones in overhauling banking regulation and supervision:
  - Adoption of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930) which increased BoG’s supervisory powers, introduced registration requirements for financial holding companies, imposed personal liability for principal officers or directors for non-compliance, and strengthened provisions for dealing with failing institutions.
  - A new Capital Requirements Directive (CRD), prepared with IMF technical assistance, governing definition and composition of regulatory capital and prescribing capital adequacy standards for credit risk, operational risk and market risk.
  - A complementary (draft) Risk Management Directive to specify requirements for institutions’ risk management frameworks.
  - Various directives (on corporate governance, fit and proper criteria, cyber risks and IT security and voluntary winding-up) and consultative documents (on mergers and acquisitions and financial holding companies).
  - Steady improvements in off-site supervision, supported by IMF technical assistance, increasing quality of periodic supervisory analyses and internal discussions of quarterly performance reports.
- Basel Pillar 2 implementation:
  - BoG intends to implement Basel Pillar 2 requirements to enhance the link between institutions’ risk profiles, risk management and capital planning.
  - Pillar 2 would complement the CRD and strengthen banks’ risk management for risks not captured by Pillar 1 (e.g., concentration risk).
  - Rollout of Pillar 2 presents opportunity to deepen analysis of banks’ business model viability within the Supervisory Review and Evaluation Process.
- Liquidity regulation gap:
  - Prudential minimum requirements for bank liquidity have been under consideration for several years but not finalized.
  - Current regulatory reporting requirements provide metrics on bank liquidity but, without clearly prescribed minimum requirements and thresholds, do not provide sufficient assurances that liquidity risks are being effectively managed.
- Corporate governance and fit-and-proper implementation:
  - BoG issued a comprehensive Directive on bank governance for deposit-taking institutions with requirements on board responsibilities and composition (including independent directors), risk management and internal control, and remuneration policies.
  - New standards on fitness and propriety of directors, senior managers and controlling shareholders, and forthcoming detailed guidance on risk management aim to improve management effectiveness and risk control.

### NPLs and BoG NPL resolution strategy
- Outstanding NPL developments:
  - Following an 85 percent growth in outstanding NPLs during 2015-2017 (from GHc 4.42 billion to GHc 8.19), BoG acknowledged importance of reducing outstanding NPLs so banks’ credit channel can support sustained economic growth.
  - Loans classified as ‘loss’ in the stock of outstanding NPL: almost GHc 7 bn as of August 2019; the share of ‘loss’ loans remains high.
- BoG actions:
  - An NPL resolution strategy has been developed (factoring in suggestions from IMF staff).
  - BoG stepped up enforcement of prudential write-off requirements: banks must submit all loans classified as ‘loss’ for over two years (i.e., loans overdue for at least three years) with 100 percent loan loss provisioning to the BoG for write-off.

*Source: 1ghaea2019003 - 10. The various banking failures that materialized during 2017-2019 have raised concerns (IMF).*

### 25. The BoG has provided further guidance to the banking industry on the preparation of

### 25. The BoG has provided further guidance to the banking industry on the preparation of financial statements, in accordance with applicable accounting standards

### IFRS 9 implementation and financial reporting
- As of 2018, Ghanaian banks are required to prepare their financial statements in accordance with IFRS 9.
- IFRS 9 seeks to ensure earlier recognition of impairment losses on loans and receivables through a forward-looking approach to measuring credit losses.
- A first version of the Guide for Financial Publication was issued in November 2016 and a second iteration is currently being finalized.
- The BoG’s write-off requirements currently use a two-year timeframe; the text notes this two-year timeframe "does not provide sufficient incentives to ensure timely loss recognition."

### Nonperforming loans (NPLs) and BoG NPL resolution strategy (Box 4)
- NPLs have steadily increased in recent years, adversely impacting credit supply, loan pricing, bank profitability, and credit demand.
- The BoG’s NPL resolution strategy is organized around three pillars:
  - First pillar: Supervisory leverage to foster NPL resolution addressing both the stock and flow of NPLs, including enforcement of write-off requirements, promoting better risk management and stronger underwriting practices, and requiring establishment of dedicated recovery units of individual banks (detailed guidance on the latter has not been publicly disclosed).
  - Second pillar: Promote improvements in Ghanaian credit infrastructure and support private-sector initiatives to develop a market for distressed debt. Examples include efforts to review the Borrowers and Lenders Act, 2008 (Act 773) and to strengthen the Credit Reporting Act, 2007 (Act 726).
  - Third pillar: Facilitate debt workouts and enforcement of creditor rights through insolvency and debt enforcement reforms, liaising with stakeholders (e.g., Ministry of Justice, Attorney-General’s office, Ghana Association of Restructuring and Insolvency Advisors) and organizing sensitization programs on banking operations for the judiciary.
- Policy observations and recommendations from the Box:
  - Swift finalization of insolvency and debt enforcement reforms would enable more effective recovery of distressed loans and redeployment of resources to sustainable credit operations.
  - Timely write-off of loans deemed unrecoverable as per IFRS 9 remains important.
  - A careful review of the BoG’s write-off requirements is advisable because:
    - The current two-year timeframe does not provide sufficient incentives for timely loss recognition.
    - Required BoG approval for loans that exceed a de minimis threshold blurs accountability and may generate delays in balance sheet clean-up.
  - Implementation of the strategy would benefit from:
    - Specification of timebound actions and clearly assigned responsibilities.
    - Involvement of other agencies (e.g., Ghana Revenue Authority to review potential tax disincentives for write-offs and workouts).
    - Top-down monitoring of the effectiveness of agreed actions by an intra-agency working group.

### Supervisory capacity and resources
- The BoG has taken steps to boost supervisory capacity to support the new regulatory architecture.
- Resourcing allocated to the supervision of banks and SDI has steadily increased during the past years:
  - 2020 budget allowing for 120 and 139 staff, respectively.
  - Up from 83 and 56 in 2015.
- The BoG has increased focus on capacity development, including trainings and workshops on IFRS9, market and liquidity risk, consolidated supervision, cybersecurity, and quality assurance.

### Strengthening regulation and supervision of non-bank financial institutions
- NIC finalized a four-year strategic plan in August 2018 to strengthen the sector and improve insurance penetration. Measures include:
  - Passage of a new Insurance Bill.
  - Steps to improve supervisory effectiveness, including issuance of supervisory risk ratings for all insurance companies and roll-out of a risk-based capital framework.
  - Strengthening capacity of the NIB and the industry in accounting and financial reporting, actuarial practices, governance and risk management.
- Following adoption of the Securities Industry Act, 2016 (Act 929), the SEC aims to strengthen the regulatory framework through adoption of various draft guidelines and regulations (e.g., corporate governance code for listed companies; business conduct regulations; guidelines on licensing and financial resources of securities firms).
- Both agencies are working to improve compliance with international best practices, including aligning draft Insurance Bill contents with the IAIS’ Insurance Core Principles.

### Financial Stability Council (FSC) role and systemic oversight
- The FSC is deepening oversight of cross-sectoral financial stability trends amid increasing financial sector interconnectedness and observed spillovers from banking failures to non-bank financial institutions (e.g., SDI and fund managers).
- Recommendations to strengthen FSC effectiveness:
  - Enhance framework for systemic risk monitoring, including stress testing tools and macroprudential toolkit.
  - Improve communications (e.g., periodic financial stability report and publication of meeting records) to manage public expectations and bolster accountability.
  - Guide development of crisis management plans and test their effectiveness through periodic simulations.

### Concluding assessments and policy priorities
- Key outstanding financial-sector issues and required actions:
  - Address capital shortfall and structural loss-making of a state-owned bank through recapitalization and/or wind-down based on 'least-cost' considerations.
  - Accelerate measures to reduce the overhang of NPLs.
  - Improve banking sector efficiency and boost earnings potential of the bridge bank to aid medium-term privatization prospects.
  - For SDI, reimburse eligible depositors as quickly as possible while respecting the upfront reimbursement cap of GHc 10,000 (with deviations solely motivated by systemic risk considerations, as informed by transparent criteria).
  - Address residual weaknesses in RCB timely and strengthen capitalization of 'going concern' SDI.
  - Continue orderly exits of non-viable non-bank firms and ensure viable institutions boost their financial buffers.
  - Strengthen the framework for market conduct in view of a sharp increase in customer complaints.
- Completing ongoing reforms:
  - Implement a robust Pillar 2 framework so all banks maintain financial buffers commensurate with their risk profile.
  - Implement risk-based capital requirements for the insurance industry.
  - Reforms should coincide with further capacity building, resource augmentation, stronger safeguards for operational independence of supervisory agencies, and more robust accountability frameworks.
- Governance, related-party exposures, and intervention:
  - More intrusive supervision is needed to foster effective board oversight and risk management.
  - Prudential standards and supervisory practices regarding related party exposures require further review; definitions should be sufficiently broad and transparency of ultimate beneficiary owners enhanced.
  - Supervisory diagnostics should be thorough to detect close linkages between financial institutions and counterparties.
  - Reinforce intervention practices to ensure weaknesses are remediated before causing lasting damage.
- Financial safety net improvements (drawn from clean-up experience) recommended:
  - Legal amendments to clarify resolution triggers, strengthen safeguards in line with international guidance, and establish funding mechanisms for resolution purposes.
  - Introduction of recovery planning requirements.
  - Enhancements of the new DPS to enable financial contributions on a least-cost basis to deposit transfers, strengthen backstop funding arrangements (e.g., via a credit line from the Ministry of Finance), and provide guidance on the fund’s minimum target size.
  - Strengthen the BoG’s framework for early detection of liquidity strains and the provision of liquidity support.
  - Full operationalization of the BoG’s resolution office, duly segregated from its supervisory functions.

### Financial inclusion
- Authorities aim to increase access to formal financial services to 85 percent by 2023 through the National Financial Inclusion and Development Strategy (NFIDS).
- NFIDS features a comprehensive governance structure: a council of senior government officials, a steering committee of department and unit heads of stakeholders, and a coordinating secretariat housed at the Ministry of Finance to implement 50+ actions.
- Critical implementation needs: capacity building, mobilization of funding to support actions, and timely data gathering to support progress monitoring.
- Publication of the strategy and periodic communications about achievements will help foster accountability.

*Italic: IMF staff summary of chapter content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ghaea2019003.pdf_