## _cr08344 ## Source details **Canonical URL:** [_cr08344](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08344.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08344.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08344.pdf.json) --- ### Executive Summary — Key headlines - Growth and inflation - GDP growth is set to remain strong at 6½ percent in 2008. - Headline inflation accelerated to 15.3 percent in April 2008. - Inflation is projected to reach 14½ percent by year-end. - External position and reserves - International reserves are likely to decline to about 2 months of imports. - Reserve import coverage dipped to 2.6 months at the end of 2007 and fell to about 2 months by April 2008. - The cedi has depreciated by 7 percent against the dollar year on year ending mid-May 2008. - Fiscal and external accounts - Fiscal deficit rose to 9 percent of GDP in 2007. - Emergency energy investments amounted to 2½ percent of GDP. - Current account deficit widened from 9 percent of GDP in 2006 to 11 percent in 2007. - Strong capital inflows included a US$750 million international bond issue in September 2007. - Monetary and financial sector - Bank of Ghana (BoG) announced formal inflation targeting (“IT lite”) in May 2007. - BoG increased its policy rate by a cumulative 350 basis points since November 2007. - Reserve money growth exceeded 30 percent for the second year; broad money growth accelerated to about 43 percent. - Credit to the private sector accelerated to about 60 percent in 2007 and in Q1 2008. - Average risk-weighted capital adequacy ratio (CAR) is around 15 percent; statutory minimum CAR is 10 percent. - Household default rate is 1½ percent. - Oil prospects - If confirmed, oil reserves could lead to major investments starting in 2009, production in 2011, and cumulative government revenues of US$20 billion over 2012–2030 (~4–5 percent of GDP per year). ### I. Economic setting: recent performance and vulnerabilities - Growth, inflation, and monetary stance - Real GDP (percent change): 2007: 6.3; 2008: 6.5; 2009: 5.8; 2010: 5.8. - Consumer price index (end of period, percent change): 2007: 12.7; 2008: 13.8; 2009: 10.5; 2010: 8.0. - Policy rate: Prime rate (Bank of Ghana; percent; end of period) (As of May 19, 2008): 15.5, 12.5, 13.5, 16.0. - BoG policy rate currently at 16.5 percent (as noted). - External and reserve indicators - Gross international reserves (millions of US$): 2005: 1,951; 2006: 2,325; 2007: 2,738; 2008: 2,474; 2009: 2,399. - Months of imports of goods and services (reserves), 2005–09: 2.8; 2.8; 2.6; 2.2; 2.1. - Fiscal indicators - Overall fiscal balance (including grants), 2007: -9.1; 2008: -10.3; 2009: -10.7; 2010: -9.7. - Total government debt, 2007: 49.8; 2008: 51.4; 2009: 56.3; 2010: 60.3. - Domestic debt, 2007: 26.1; 2008: 26.6; 2009: 29.6; 2010: 31.4. - External debt, 2007: 23.7; 2008: 24.8; 2009: 26.7; 2010: 28.9. - Financial soundness (selected) - Regulatory capital ratio: 2004: 13.9; 2005: 16.2; 2006: 15.8; 2007: 14.8; 2008 Q1: 15.4. - Nonperforming loans to total gross loans: 2004: 16.3; 2005: 13.0; 2006: 7.9; 2007: 6.4; 2008 Q1: 8.7. - Credit to total assets: 2004: 44.0; 2005: 48.7; 2006: 45.0; 2007: 50.3; 2008 Q1: 51.6. - Broad liquid assets to total assets ratio: 2004: 53.5; 2005: 47.0; 2006: 46.3; 2007: 40.7; 2008 Q1: 39.1. ### II. Main findings and risks - Macro imbalances and demand pressures - Buoyant private demand plus fiscal expansion have produced high external current account deficits, pressure on reserves, and rising inflation. - Staff view: current policy mix may not reduce vulnerabilities sufficiently; postponing adjustment risks macroeconomic and external stability. - Debt outlook and DSA findings - Staff projects fiscal deficit will rise to over 10 percent of GDP in 2008 and 2009 absent additional measures. - Joint Fund-Bank external DSA: total public debt would rise from 50 percent of GDP in 2007 to about 81 percent of GDP in 2028 under the baseline. - Stress tests breach thresholds in four out of five bound standard stress tests (e.g., one-time 30 percent depreciation). - Emerging market “debt intolerance” levels cited between 25–40 percent of GDP; median debt level in Ghana’s rating category B is about 35 percent of GDP (equivalent to about 45 percent when accounting for Ghana’s debt concessionality). - Financial sector risks - Rapid private sector credit growth (~60 percent) raises concerns despite financial deepening. - BoG increased minimum bank capital requirements and adopted elements of a more risk-sensitive regulatory framework (Basel II elements). - External vulnerability and exchange rate - REER partial estimates close to equilibrium; export performance does not suggest overvaluation. - High twin fiscal and external deficits, global downturn risks, high oil and food prices, and tightening global credit conditions raise external vulnerabilities and exchange rate volatility. ### III. Policy recommendations — near-term and medium-term - Fiscal policy (primary adjustment role) - Implement additional fiscal measures beyond current plans to avoid large fiscal deficits in 2008–09. - Reinstate automatic price adjustments for utilities and extend coverage to all users. - Protect the poor through better-targeted subsidies. - Contain the wage bill and curb hiring outside the centralized budget process. - Near-term announced measures (April): - Price increase for commercial utility users to cost-recovery levels starting in July: projected reduction in subsidies of about 1 percent of GDP in 2008 and 2 percent of GDP in 2009. - Authorities stated cost recovery pricing might be extended to residential users next year: would reduce subsidies by another 2½ percent of GDP in 2009 and 2010 (not included in staff projections). - Government announced intention to double the rate for the royalties tax in the gold sector. - Temporary freeze on public sector hiring (beyond automatic absorption of trainees). - Staff projection: even with planned measures, fiscal deficit will rise to 10.3 percent of GDP in 2008; without additional measures in 2009, deficit would increase to 10.6 percent of GDP. - Monetary and exchange rate policy - Continue monetary tightening that began in November 2007 to bring down inflation. - Monetary policy needs fiscal consolidation support; policy rate in real terms has been barely positive. - Staff recommended accelerating exchange rate flexibility, decreasing foreign exchange surrender requirements for cocoa and gold, and phasing out BoG foreign exchange supply to oil importers. - BoG may need to sterilize part of reserve accumulation to contain money growth. - Debt management - Strengthen debt management consistent with macro objectives; adopt MTDS recommendations. - Factor realistic oil revenue scenarios into long-term debt assessments. - Financial sector stability and macroprudential measures - Further strengthen regulatory framework; continue raising minimum bank capital requirements and intensify on-site inspections. - Apply prudential measures (stricter loan-to-value ratios; debt service limits). - Further interest rate increases should help moderate credit expansion. - Oil revenue management and governance - If oil reserves are confirmed, design an oil management regime focused on demand management reflecting absorptive capacity and avoiding crowding out. - Build on transparency record to avoid “oil curse”; consider Fiscal Responsibility Law to anchor expectations. ### IV. Medium-term outlook and scenarios - Baseline (staff) assumptions and outcomes - Baseline assumes implementation of announced fiscal measures and further monetary tightening in 2008. - If no further fiscal measures in 2008–09: - Fiscal deficit would remain around 10 percent of GDP over the medium term. - Growth would slacken; inflation would remain well above the 5 percent medium-term target. - Current account deficit would remain well above 10 percent of GDP. - Total public debt rising to 60 percent of GDP in 2010. - Alternative scenario (additional fiscal adjustment) - Additional fiscal adjustment in 2008–09 would lead to higher private sector-led growth and lower inflation. - Would require fiscal deficit to fall to around 7 percent of GDP by 2011. - Further declines to about 5 percent would be needed to stabilize public debt at around 45–50 percent of GDP. - Budget reforms (eliminating generalized utility price subsidies; reducing size of civil service) would allow concentration on priority development and infrastructure. - DSA baseline macro assumptions (Box 1 excerpts) - Growth: real GDP growth decelerates to 5.8 percent in 2009-10; thereafter 6 percent on average over 2011-2028. - Inflation: projected to increase to 13.5 percent in 2008; expected to decrease to about 9 percent in 2009-10; long-run target 5 percent. - Fiscal deficit: assumed to decrease to an average of about 7 percent of GDP over the long-term (partial elimination of electricity subsidies). - Reserve coverage: months of imports coverage to increase to 5 months in the long-term from current level of 2 months. - Exports: projected to grow 8 percent annually in 2008-15, and 6 percent thereafter until 2028. - Remittances: assumed to reach a peak of about 13 percent of GDP in 2013 and remain at that level. - FDI: envisaged to average 7 percent of GDP over the projection period. - Sovereign bond issued Sept 2007 assumed fully repaid in 2017 as scheduled. - Downside risks - Global environment deterioration, sudden stop or reversal in external financing (nonresidents’ holding of domestic government debt equals 11 percent of government securities — less than 3 percent of GDP), weather-related shocks, and sudden capital inflow reversals. ### V. Debt sustainability analysis (DSA) — baseline, stress tests, and alternatives - Baseline DSA outcomes - External debt increases from about 24 percent of GDP in 2007 to about 40 percent of GDP in 2028 under the baseline. - Total public debt increases in the baseline from about 50 percent of GDP in 2007 to 81 percent of GDP in 2028. - NPV of public sector debt rises from about 46.2 to 81.0 (series entries shown across projection years). - Stress test results - Stress tests breach thresholds in four out of five bound standard stress tests. - Notable stress: one-time 30 percent depreciation; contracting government debt on less favorable terms; drastic reduction in non-debt creating flows. - Under alternative adverse scenarios, NPV of debt-to-GDP and NPV of debt-to-exports ratios rise substantially, potentially above thresholds. - Low-GDP-growth scenario highlights - If borrowing follows baseline but GDP growth is low, external debt increases to about 57 percent of GDP in 2028 (vs. 40 percent baseline). - Under stress (government borrowing on less favorable terms), NPV external debt-to-GDP rises to 90 percent in 2028 from 20 percent in 2008. - Sensitivity: if primary balance remains at projected 2008 level (7.4 percent of GDP), NPV debt-to-GDP rises from 46 percent in 2008 to 134 percent in 2028. - Oil-exporting scenario highlights - Preliminary reserve estimate: about 500 million barrels. - When commercially exploited, oil could generate additional fiscal revenues of about 3 to 4 percent of GDP on average over the next 20–30 years. - Projections assume oil revenues used entirely to retire public debt. - Under oil scenario, NPV external-debt-to-GDP converges to about 9 percent in 2028; NPV total government debt decreases to about 70 percent of GDP in 2028. - Under the oil scenario, Ghana’s risk of debt distress could be classified as low (stress indicators below thresholds). - Policy implication from DSA - Adopt comprehensive debt management strategy; maintain fiscal adjustment to avoid rapid accumulation of total government debt; prioritize high-return public investments. ### VI. Appendix I — Petroleum sector: preliminary macroeconomic impact (selected quantitative findings) - Assumptions and timeline - Start of production: conservatively assumed in 2011 (appraisal and investment phase perhaps starting in 2009). - Total reserves assumed: about 500 million barrels (currently rated as 90% probable). - Initial processing capacity: 60,000 barrels per day, upgraded later to about 120,000 barrels per day. - Initial investment on field development: assumed US$2–3 billion through 2011; initial investment cited elsewhere: about US$2.7 billion. - Oil prices: follow IMF WEO projections minus a 10 percent prudential discount through 2014, constant thereafter. - Quantitative impacts - Cumulative government revenues: US$20 billion, or 160 percent of 2008 GDP (under baseline oil assumptions). - Net oil wealth would be depleted by 2030 under scenario assumptions. - Real GDP growth with oil: growth will double, reaching 12 percent by 2012; thereafter growth remains slightly higher than without oil. - Government share of total oil receipts: around 30 percent when production starts; reaches 35 percent at peak in 2018; gradually decreases to 25 percent as production declines. - At peak, oil receipts would exceed US$1 billion, accounting for more than 10 percent of total budget revenues (excluding grants) or 2½ percent of GDP. - Public sector debt would decrease from 49.8 percent at end-2007 to 19.2 percent in 2028 under the oil scenario (assumes oil revenues used to retire debt). - Balance of payments dynamics - Investment phase (2010–12): trade balance worsens significantly; large imports of capital goods add some 9 percent of GDP to the trade deficit in 2010-12. - Production phase: current account improves by about an average of 4 percent of GDP per annum (oil exports minus profit repatriation). - GIR months of imports: 2011: 3.7; 2012: 5.1; 2013: 7.5; 2014: 9.6; up to 15.2 at peak years and later declining to 11.7 by 2028. - Institutional considerations - GNPC holds a 10 percent interest; GNPC roles include producer, promoter, regulator, evaluator, and negotiator — noted concerns about conflicts of interest. ### VII. Financial sector, credit growth, and regulation - Rapid credit growth and asset quality - Credit to the private sector (year on year), 2005–09: 50.6; 42.7; 60.0; 38.7; 39.1 (percent). - Broad money (12-month changes): 13.7; 39.4; 43.5; 30.9; 22.2 (percent). - Warning: recent worsening in some asset quality indicators; most credit expansion funded by deposit increases. - Supervisory and prudential responses - BoG increased off-site supervision and moved towards elements of Basel II (regulatory capital for operational risk; more extensive disclosure). - Staff advice: apply prudential measures (stricter loan-to-value ratios; debt service limits) and ensure collateral and underwriting standards are not weakened. - Joint BoG-staff stress tests point to some asset concentration risks but do not indicate that interest rate increases would pose significant balance sheet risks for systemically important banks. ### VIII. Fiscal policy, taxation, and revenue measures (selected) - Recommended medium-term fiscal stance - Reduce fiscal deficit gradually and limit it to 5–6 percent of GDP over the long term to be consistent with private sector-led growth and allow well-prioritized infrastructure projects. - Rationale: limiting deficit to 5–6 percent would help limit total public debt to below 50 percent of GDP. - Tax system highlights (Appendix IV summary) - VAT rate: 12.5 percent. - Flat rate for informal traders: 3 percent of turnover. - Tobacco products taxed at 140 percent of ex-factory price plus VAT 12.5 percent. - Excise and specific levies on petroleum: premium gasoline – 7.18 pesewas per liter; AGO – 9.10; kerosene – 6.4875 pesewas; RFO – 5.2094 pesewas. - Cocoa export tax: rate determined by the Minister of Finance; proceeds transferred to central budget after costs. - Petroleum income tax: petroleum companies: 25 percent (note: 2006 budget statement). - Recent borrowing and composition - By end-2007, public and publicly guaranteed debt increased to about 50 percent of GDP. - New debt composition: 59 percent contracted on commercial terms (including US$750 million Eurobond issued Sept 2007 at 8.5 percent coupon, 10-year maturity, sold at spread of 387 basis points). - Macroeconomic financing assumptions: borrowing rates for commercial loans assumed at about 9 percent; concessional borrowing reflects IDA-blend terms. ### IX. Data, statistics, and capacity needs - Overall assessment - Data broadly adequate for surveillance but quality and timeliness need improvement. - Priority: meet SDDS standards to support emerging market aspirations and access to international capital markets. - Specific gaps and actions - International transactions last reported for 2006; monthly government finances last reported for 1998; national accounts last reported for 1997. - National accounts rebasing to 2002 partly finalized; CPI weights updated using GLSS4 (1998/1999). - Recommended actions: build business register; regular business surveys; more frequent household surveys; agricultural census. - Monetary statistics: progress on SRFs and ODC coverage; plan to compile Other Financial Corporations Survey by end-September 2008. ### X. Staff appraisal, Executive Board assessment, and authorities’ views - Staff appraisal — key conclusions - Growth remained strong but macro imbalances increased: weakening external position, low reserves, and rebound in inflation. - Urgent need to reverse expansionary fiscal policies of past two years; authorities’ announced package is a welcome start but implementation has been slow. - Full and timely implementation priorities: - Extend cost recovery utility pricing to all users and reinstate automatic adjustment. - Provide social safety nets via better targeted subsidies. - Implement cuts in nonessential expenditures in 2008–09. - Without additional adjustment, staff forecasts continuing large fiscal deficits, significant increase in total public debt, and increasing risks to external stability and the exchange rate. - Executive Board and authorities - Directors noted strong growth and reforms but called for fiscal consolidation to restore stability. - Authorities recognize shocks and commit to safeguard gains, phase in pricing mechanisms (starting with non-residential users), reinvigorate civil service reform, prepare a Fiscal Responsibility Law, and engage in prudent oil-era preparations. - Authorities highlight inflation history: reduced from 40 percent in 2000 to about 10 percent in Sept 2007; inflation rose thereafter (headline inflation reported at 16.9 percent at end-May 2008). *Source: IMF staff report (Executive Summary, chapters, appendices, tables, and staff simulations in _cr08344).* ### Executive Summary 3 ### Executive Summary ### I. Economic setting: recent performance and vulnerabilities - Growth and inflation - GDP growth is set to remain strong at 6½ percent in 2008. - Headline inflation accelerated to 15.3 percent in April 2008. - Inflation is projected to reach 14½ percent by year-end. - External position and reserves - International reserves are likely to decline to about 2 months of imports. - Reserve import coverage dipped to 2.6 months at the end of 2007 and fell to about 2 months by April 2008. - The cedi has depreciated by 7 percent against the dollar year on year ending mid-May 2008. - Fiscal developments - The fiscal deficit rose to 9 percent of GDP in 2007. - Emergency energy investments to address supply bottlenecks amounted to 2½ percent of GDP. - Revenue performance remained strong except for gold. - External accounts - The current account deficit widened from 9 percent of GDP in 2006 to 11 percent in 2007. - Strong capital inflows, including a US$750 million international bond issue in September 2007, helped increase gross international reserves somewhat. - Monetary and financial sector developments - In May 2007 the Bank of Ghana (BoG) announced formal inflation targeting (described as “IT lite”). - The BoG increased its policy rate by a cumulative 350 basis points since November 2007. - The policy rate has remained barely positive in real terms. - Reserve money growth exceeded 30 percent for the second year; broad money growth accelerated to about 43 percent. - Growth in credit to the private sector accelerated to about 60 percent in 2007 and in Q1 2008. - The average risk-weighted capital adequacy ratio (CAR) is around 15 percent; all banks conform with the statutory minimum CAR of 10 percent. - The default rate of households is 1½ percent. - Nonperforming loan ratio and loan loss provisioning have increased; banks’ costs have risen due to higher wage costs and branch expansion. - Structural reforms and governance - Public financial management reforms advanced, but expenditure slippages in 2006–07 exposed weaknesses (incomplete payroll automatization; hiring outside the centralized budget process). - Civil service reform has all but stalled; the Fair Wages and Salaries Commission is not expected to make recommendations before 2009. - Financial sector reforms continued (National Payments System, enhanced debt management). Fiscal decentralization law is being drafted. - Ghana’s track record on transparency is highlighted as supportive for governance. - Commodities and oil prospects - International commodity price shocks have adversely affected inflation. - Terms of trade improved (11 percent gain in 2007 alone) and gold export volumes rose. - If confirmed, oil reserves could lead to major investments starting in 2009, production in 2011, and government revenues reaching a cumulative US$20 billion over the production period (2012–2030), or about 4–5 percent of GDP per year. ### II. Main findings and risks - Demand pressures and macroeconomic imbalances - Buoyant private sector demand combined with fiscal expansion has produced high external current account deficits, pressure on international reserves, and rising inflation. - Staff view: the current policy mix may not reduce prevailing vulnerabilities sufficiently; postponing adjustment would threaten macroeconomic and external stability. - Fiscal sustainability and debt outlook - Staff projects the fiscal deficit will rise to over 10 percent of GDP in 2008 and 2009 absent additional measures. - A joint Fund-Bank external debt sustainability assessment indicates risks of external debt distress have increased; total public debt would rise from 50 percent of GDP in 2007 to about 80 percent of GDP in 2028. - Authorities consider oil revenue prospects could improve the debt outlook. - Monetary policy constraints - Monetary tightening that began in November 2007 should continue to bring down inflation, but monetary policy effectiveness is being undermined by loose fiscal policies. - Financial sector risks - Rapid private sector credit growth (about 60 percent) raises concerns despite financial deepening. - The BoG increased minimum bank capital requirements and adopted elements of a more risk-sensitive regulatory framework; additional macroprudential measures are needed. - External vulnerability and exchange rate - Backward-looking partial estimates suggest the real effective exchange rate (REER) is close to equilibrium; export performance does not suggest overvaluation. - However, high twin fiscal and external deficits, global downturn risks, high oil and food prices, and tightening global credit conditions raise external vulnerabilities and exchange rate volatility. ### III. Policy recommendations (authorities and staff views) - Fiscal policy (carry the brunt of adjustment) - Implement additional fiscal measures beyond current plans to avoid large fiscal deficits in 2008–09. - Reinstate automatic price adjustments for utilities and extend coverage to all users. - Protect the poor through better-targeted subsidies. - Contain the wage bill and curb hiring outside the centralized budget process. - Monetary and exchange rate policy - Continue the monetary tightening that began in November 2007 to bring down inflation. - Recognize that the central bank alone cannot fight inflation while fiscal policy remains loose. - Debt sustainability and management - Strengthen debt management to address rising risks of external debt distress. - Factor in realistic scenarios for oil revenues when assessing long-term debt trajectories. - Financial sector stability and macroprudential measures - Further strengthen the regulatory framework (risk-sensitive measures adopted; additional macroprudential tools needed). - Continue raising minimum bank capital requirements and intensify on-site inspections. - Further interest rate increases should help moderate credit expansion. - Oil revenue management and governance - If oil reserves are confirmed, design an oil management regime focused on demand management that reflects absorptive capacity and avoids crowding out the private sector. - Build on Ghana’s track record of transparency to avoid the “oil curse” (weak governance and boom-bust cycles). ### IV. Medium-term outlook (selected indicators, percent of GDP unless otherwise indicated) - Selected medium-term indicators, 2007–2010 (table entries preserved) - Real GDP (percent change): 2007: 6.3; 2008: 6.5; 2009: 5.8; 2010: 5.8 - Consumer price index (end of period, percent change): 2007: 12.7; 2008: 13.8; 2009: 10.5; 2010: 8.0 - Overall fiscal balance (including grants): 2007: -9.1; 2008: -10.3; 2009: -10.7; 2010: -9.7 - Total government debt: 2007: 49.8; 2008: 51.4; 2009: 56.3; 2010: 60.3 - Domestic debt: 2007: 26.1; 2008: 26.6; 2009: 29.6; 2010: 31.4 - External debt: 2007: 23.7; 2008: 24.8; 2009: 26.7; 2010: 28.9 - Current account balance (including official transfers): 2007: -10.9; 2008: -13.2; 2009: -12.6; 2010: -11.2 *Source: IMF staff report (Executive Summary).* ### 12. Ghana’s medium-term economic prospects depend critically on actions taken ### Ghana’s medium-term economic prospects depend critically on actions taken this year and next ### Baseline and alternative scenarios - Baseline scenario (staff): - Assumes implementation of the government’s announced fiscal measures and further monetary tightening in 2008. - If no further fiscal measures are introduced in 2008–09: - Fiscal deficit would remain in the neighborhood of 10 percent of GDP over the medium term. - Growth would slacken. - Inflation, while moderating, would still remain well above the authorities’ medium-term target of 5 percent. - Current account deficit would remain well above 10 percent of GDP. - Total public debt rising to 60 percent of GDP in 2010. - Alternative scenario (additional fiscal adjustment in 2008–09): - Would lead to higher private sector-led growth and lower inflation over the medium term. - Would require fiscal deficit to fall to around 7 percent of GDP by 2011. - Subsequently, further declines to about 5 percent would be needed to stabilize public debt at around 45–50 percent of GDP. - Budget reforms (eliminating generalized utility price subsidies; reducing size of civil service) would allow concentration of spending on priority development and infrastructure needs. - External position and debt sustainability would firm up, and risks of debt distress would decrease. ### Downside risks to the baseline - Global environment deterioration, including a worsening of Ghana’s terms of trade (mainly due to oil prices). - Sudden stop or reversal in external financing flows, particularly portfolio investment. - Nonresidents’ holding of domestic government debt equals 11 percent of government securities (equal to less than 3 percent of GDP). - Minimum holding period restrictions (three-year maturities with a minimum holding period of one year) aim to reduce vulnerability. - Weather-related shocks (drought, flood), magnified by rising world food prices. - A sudden withdrawal or stop in capital inflows would pose risks to budget financing and international reserves. ### How the widening current account has been financed (Box 2) - Largely financed with official financing and foreign direct investment (FDI), which are less susceptible to market sentiment than sovereign external bonds and portfolio flows. - Portfolio inflows have been rising since partial liberalization of capital inflows in late 2006; portfolio inflows are concentrated in government securities. - Data on private capital inflows probably understate gross inflows; authorities are working to address weaknesses with Fund staff. ### Near-term policies to reduce risks to stability — Fiscal policy - Authorities announced three measures in April to limit deficit rise: - Adjusting utility prices: - Price increase for commercial users to current cost-recovery levels starting in July projected to reduce associated subsidies by about 1 percent of GDP in 2008 and 2 percent of GDP in 2009. - Authorities stated cost recovery pricing might be extended to residential users next year; this would reduce subsidies by another 2½ percent of GDP in 2009 and 2010 (not included in staff’s current projections). - Staff urged reinstating an automatic price adjustment mechanism; supported strengthening targeted utility subsidies to cushion poor households. - Increasing government revenues from the gold sector: - Government announced intention to double the rate for the royalties tax in the gold sector. - Revenues could also be increased by enforcing current tax laws and eliminating administrative loopholes. - Temporarily freezing hiring in the public sector (beyond automatic absorption of trainees in health and education) to keep the wage bill within the 2008 budget; freeze should last until civil service reforms regain momentum. - Staff projection of fiscal outcome: - Even with planned measures, fiscal deficit will rise to 10.3 percent of GDP in 2008. - Without additional measures in 2009, the deficit would further increase to 10.6 percent of GDP. - Government needs additional measures, e.g., postponing nonessential capital spending. ### Near-term policies — Monetary and exchange rate policy - Bank of Ghana (BoG) noted policy interest rate increases since October 2007 were appropriately large; ready to raise rates further if needed. - Staff view: - Monetary policy needs to be tightened further to contain demand pressures. - Policy rate in real terms has been barely positive as inflation has accelerated. - Model simulations suggest need to increase policy rate further to steer inflation back toward the medium-term target of 5 percent, particularly if fiscal policies are not tightened. - Monetary policy alone cannot fight inflation if fiscal policy remains expansionary. - Exchange rate: - Regime is a managed float with a secondary objective on the exchange rate to support the inflation target. - Staff recommended accelerating exchange rate flexibility, decreasing high foreign exchange surrender requirements for cocoa and gold, and phasing out BoG practice of supplying foreign exchange to oil importers. - Given rising current account risks and low reserve levels, there is a need to increase international reserves gradually; BoG may need to sterilize part of resulting liquidity. ### Debt sustainability - Joint Fund-Bank external DSA: - Risks to Ghana’s external debt distress have increased but remain moderate. - Analysis of public debt suggests total debt would rise from 50 percent of GDP in 2007 to above 80 percent over the long term, even with authorities’ fiscal adjustment in 2008. - This would exceed the authorities’ 2008 budget debt ceiling of 60 percent of GDP. - Emerging market studies’ “debt intolerance” levels cited between 25–40 percent of GDP; median debt level in Ghana’s rating category B is about 35 percent of GDP (equivalent to about 45 percent when accounting for Ghana’s debt concessionality). - Staff considers limiting total debt to about that level appropriate and consistent with a low income country DSA assessment of moderate to low external debt distress risk. - Limiting Ghana’s debt-to-GDP ratio to about that level would require reducing the fiscal deficit to an annual average of about 5 percent of GDP in the long term. - Joint DSA 2008 highlights: - Baseline includes higher twin fiscal and current account deficits and new borrowing (including US$750 million Eurobond in September 2007). - Stress tests breach thresholds in four out of five bound standard stress tests (e.g., one-time 30 percent depreciation; contracting government debt on less favorable terms; drastic reduction in non-debt creating flows). - Ghana’s total public debt increases in the baseline from about 50 percent of GDP in 2007 to 81 percent of GDP in 2028. - Recommendation: - Adopt a comprehensive debt management strategy consistent with macro objectives and recognizing relative costs and risks; use MTDS recommendations. ### Financial sector stability - Financial deepening is desirable given low financial intermediation, but very rapid credit growth raises demand management and regulatory concerns. - Recent worsening in some asset quality indicators implies risks; most credit expansion funded by deposit increases. - Joint BoG-staff stress tests: - Point to some asset concentration risks. - Do not indicate that interest rate increases would pose significant balance sheet risks for systemically important banks. - BoG steps: - Increasing off-site supervision. - Moving towards risk-sensitive regulatory framework of Basel II (elements adopted: regulatory capital for operational risk; more extensive disclosure requirements). - Staff advice: - Apply prudential measures (stricter loan-to-value ratios; debt service limits). - Ensure banks’ collateral requirements and underwriting standards are not weakened amid credit boom. ### Anchoring macroeconomic policy and structural reforms - Monetary policy (IT) enhancements: - Improve operational transparency and communication. - Consider publishing inflation and interest rate forecasts. - Enhance modeling and forecasting capacity (Fund staff providing capacity building). - Fiscal anchor: - Authorities working with Fund on a draft Fiscal Responsibility Law (FRL) to improve fiscal discipline and anchor fiscal expectations. - Other structural reforms needed: - Public financial management improvements to control expenditure commitments. - Civil service reform to attract higher-quality labor and reduce total public sector employment, starting with subvented agencies. - Fiscal decentralization can provide efficiency gains, but staff cautioned against significant local government borrowing due to high fiscal risks. ### Oil discovery and implications - Recent major oil discovery could materially improve medium-term prospects and timetable for reaching the MDGs, while posing new policy challenges. - Authorities and staff agreed temptation to start spending future oil revenue could exacerbate current demand pressures. - Preparations: - National dialogue on use of future oil revenue. - Working on technical details of an oil revenue and demand management plan with support from Norway, other partners, and the Fund. - Best practice measures: - Well-functioning public financial management system. - Demand management with a medium-term expenditure framework that recognizes absorptive capacity constraints. - Timing and impacts: - If oil declared commercially viable, large capital inflows would finance oil investment; much would fund imports, limiting impact on monetary and exchange rate policies. - Large foreign exchange inflows following start of oil production around 2011 would pose demand management challenges requiring appropriate fiscal and monetary-exchange rate mixes. ### Other issues - Policy dialogue: - Active since completion of PRGF arrangement in October 2006. - Discussions on a Policy Support Instrument (PSI) started in fall 2007 but have not advanced. - Interim Economic Partnership Agreement (EPA) with EU (signed December 2007): - Likely smaller negative fiscal impact in near term (estimated at about 0.5 percent of GDP). - Allows 100 percent trade liberalization of Ghanaian exports to EU, with transition for rice and sugar, and gradual liberalization of 80.5 percent of imports from EU over 15 years. - Some agricultural and processed goods excluded to protect infant industries and preserve tax revenues. - Macroeconomic data: - Broadly adequate for surveillance, but quality and timeliness need improvement. - Meeting SDDS standards should be a priority for a country aspiring to emerging market status and accessing international capital markets. ### Staff appraisal — key conclusions and recommendations - Growth has remained strong but macroeconomic imbalances have increased: weakening external position, low international reserves, and a rebound in inflation. - Urgent need to reverse expansionary fiscal policies of past two years. - Authorities’ announced fiscal adjustment package is a welcome start but implementation has been slow and more action is needed. - Full and timely implementation priorities: - Extend cost recovery utility pricing to all users and reinstate an automatic utility price adjustment mechanism. - Provide social safety nets via better targeted subsidies for poor households. - Implement cuts in nonessential expenditures in 2008–09. - Without additional adjustment, staff forecasts: - Continuing large fiscal deficits. - Significant increase in total public debt over the medium term. - Increasing risks to external stability and of an overvalued exchange rate. *Source: IMF staff report chapter titled "Ghana’s medium-term economic prospects depend critically on actions taken" (excerpts).* ### 27. Fiscal policy should also make room for private sector growth. Reducing the ### _cr08344 - 27. Fiscal policy should also make room for private sector growth. Reducing the ### Fiscal policy and public debt - Recommendation: Reduce the fiscal deficit gradually and limit it to 5–6 percent of GDP over the long term to be consistent with the government’s objective of private sector-led growth while still allowing well-prioritized, growth-enhancing infrastructure projects. - Rationale: Limiting the deficit to 5–6 percent of GDP would help limit total public debt to below 50 percent of GDP, broadly commensurate with Ghana’s rating peers (after adjustment for concessionality of debt) and in line with moderate-to-low external debt distress in the context of the low income country DSA framework. - Related budgetary indicators (selected from tables): - Overall balance (including grants), 2005–09: -3.0, -7.5, -9.1, -10.3, -10.7 (percent of GDP). - Total government debt, 2005–09: 77.1, 41.9, 49.8, 51.4, 56.3 (percent of GDP). - Total expenditure (percent of GDP), 2005–09: 30.7, 34.4, 37.0, 37.7, 38.1. - Total revenue and grants (percent of GDP), 2005–09: 29.1, 27.4, 28.6, 27.9, 28.3. ### Monetary policy and inflation - Finding: Ongoing monetary tightening is welcome and needs to continue. - Recommendation: Further policy rate increases are needed to bring inflation toward its medium term target. - Additional recommendation: Contain money growth by sterilizing part of the foreign exchange reserve buildup. - Constraint: Monetary policy alone cannot fight inflation; its effectiveness is increasingly being undermined by lax fiscal policies. - Monetary indicators (selected): - Consumer price index (annual average), 2005–09: 15.1, 10.2, 10.7, 14.3, 10.5 (percent). - Consumer price index (end of period), 2005–09: 14.8, 10.9, 12.7, 13.8, 10.5 (percent). - Prime rate (Bank of Ghana; percent; end of period) (As of May 19, 2008): 15.5, 12.5, 13.5, 16.0. ### Monetary policy framework and central bank transparency - Development: Introduction of an “inflation targeting lite” regime last year. - Recommendation: With progress in goal transparency, priority now is to strengthen operational transparency. - Policy action: Enhance the Bank of Ghana’s communication strategy to make markets more responsive to information about inflationary pressures and to enhance credibility of the IT framework. ### Exchange rate regime and external market operations - Current regime: Managed float. - Recommendation: Increase exchange rate flexibility to help move toward a full-fledged IT regime and better respond to shocks. - Policy actions suggested: Phase out foreign exchange surrender requirements and BoG sales of foreign exchange to oil importers to accelerate market development. - Exchange rate indicators (selected): - Cedis (new) per U.S. dollar (end of period), 2005–07: 0.9, 10.9, 20.97. - Nominal effective exchange rate (end of period), 2005–07: 7.1, -8.2, -10.8. - Gross international reserves (millions of US$), 2005–09: 1,951; 2,325; 2,738; 2,474; 2,399. - Months of imports of goods and services (reserves), 2005–09: 2.8; 2.8; 2.6; 2.2; 2.1. ### Financial sector, credit growth, and regulation - Finding: Rapid credit growth to the private sector raises regulatory concerns even if part reflects financial deepening. - Warning: Recent worsening in bank asset quality is a warning sign. - Policy recommendations: - The increase in banks’ minimum capital requirements and introduction of a simplified version of Basel II are appropriate. - Consider additional regulations to limit potential prudential risks, such as debt service limits. - Step up scrutiny over banks’ collateral requirements and underwriting standards. - Interaction with monetary policy: Credit growth will be usefully moderated by the ongoing monetary tightening. - Financial indicators (selected): - Credit to the private sector (year on year), 2005–09: 50.6, 42.7, 60.0, 38.7, 39.1 (percent). - Broad money (excluding foreign currency deposits) (12-month changes): 13.7, 39.4, 43.5, 30.9, 22.2 (percent). - Deposit money banks: Private sector claims, 2005–09 (millions of Ghana cedis): 1,445; 2,064; 2,252; 2,540; 3,296; 4,566; 6,352 (selected years shown across tables). ### Structural reforms and public financial management - Recommendation: A faster pace of macrocritical structural reforms would ease Ghana’s transition to an emerging market economy. - Priority reforms: Public financial management (PFM) and civil service reforms to make public spending more efficient and flexible. ### Oil prospects and macroeconomic management - Opportunity and risk: Oil prospects can materially improve Ghana’s medium-term outlook for growth and poverty reduction if Ghana avoids the “oil curse” of rent-seeking and boom-bust cycles. - Positive factor: Ghana’s good track record on transparency bodes well for minimizing rent-seeking. - Action taken: Authorities have begun a nationwide consultation on the use of oil resources. - Policy need: Build an effective oil management regime and maintain good demand management to avoid costly boom-bust cycles—an area where Ghana’s track record since 2006 has weakened. - Note: The medium-term macroeconomic framework does not include oil prospects due to insufficient data at this stage. ### Institutional engagement - Proposal: The next Article IV consultation will be held on the standard 12-month cycle. *Source: _cr08344 - 27. Fiscal policy should also make room for private sector growth. Reducing the (IMF staff text and associated tables).* ### 7. Ensure environmental sustainabilit ### 7. Ensure environmental sustainabilit ### Environmental and MDG indicator status - Off track - Forest area (percent of total land area): 32.7............24.2...... - Nationally protected areas (percent of total land area): 14.6 19.6 25.6 27.6 28.6 29.6 30.6... - GDP per unit of energy use (PPP $ per kg oil equivalent): 4.7 4.7 4.9 5.1 5.5......... - CO2 emissions (metric tons per capita): 0.2 0.3 0.3 0.4............ - On track - Access to an improved water source (percent of population): 55.0 63.0......75.0......82.5 - Access to improved sanitation (percent of population): 15.0 16.0......18.0......... - Access to secure tenure (percent of population): ..................... ### Millennium Development Goals targets and notes (as presented) - Targets cited in source text: - Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system. Address the special needs of the least developed countries. Address the special needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communication. - Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, achieve a significant improvement in the lives of at least 100 million slum dwellers. - Eliminate gender disparity in primary and secondary education, preferably by 2005, and to all levels of education, no later than 2015. - Reduce by two-thirds, between 1990 and 2015, the under-5 mortality rate. - Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio. - Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases. - Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. ### Financial soundness indicators (selected end-of-period values, percent) - Regulatory capital ratio: 2004: 13.9; 2005: 16.2; 2006: 15.8; 2007: 14.8; 2008 Q1: 15.4 - Regulatory tier 1 capital ratio: 2004: 17.3; 2005: 16.2; 2006: 15.0; 2007: 13.6; 2008 Q1: 14.1 - Nonperforming loans to total gross loans: 2004: 16.3; 2005: 13.0; 2006: 7.9; 2007: 6.4; 2008 Q1: 8.7 - Credit to total assets: 2004: 44.0; 2005: 48.7; 2006: 45.0; 2007: 50.3; 2008 Q1: 51.6 - Loan loss provision to total gross loans: 2004: 13.8; 2005: 8.5; 2006: 7.4; 2007: 5.5; 2008 Q1: 5.9 - Return on assets, before taxes (average): 2004: 5.8; 2005: 4.6; 2006: 4.8; 2007: 3.7; 2008 Q1: 3.6 - Return on equity, before taxes (average): 2004: 33.7; 2005: 23.6; 2006: 39.6; 2007: 35.8; 2008 Q1: 31.5 - Interest margin to gross income: 2004: 62.9; 2005: 64.0; 2006: 51.8; 2007: 46.1; 2008 Q1: 45.6 - Core liquid assets to total assets ratio: 2004: 25.4; 2005: 20.7; 2006: 23.5; 2007: 23.4; 2008 Q1: 21.9 - Broad liquid assets to total assets ratio: 2004: 53.5; 2005: 47.0; 2006: 46.3; 2007: 40.7; 2008 Q1: 39.1 - Core liquid assets to short-term liabilities ratio: 2004: 34.6; 2005: 42.8; 2006: 31.4; 2007: 31.0; 2008 Q1: 29.2 - Broad liquid assets to short-term liabilities ratio: 2004: 72.8; 2005: 97.4; 2006: 61.9; 2007: 54.1; 2008 Q1: 52.0 - Share of foreign currency deposits in total deposits: 2004: 29.3; 2005: 26.3; 2006: 28.1; 2007: 22.3... - Share of foreign liabilities in total liabilities: 2004: 2.8; 2005: 2.4; 2006: 4.0; 2007: 8.1; 2008 Q1: 7.5 - Note: Source: Bank of Ghana. Interest spread defined as average lending rate minus average (saving and demand) deposit rate. ### Indicators of external vulnerability (selected) - Public sector debt (percent of GDP): 2004: 93.4; 2005: 77.1; 2006: 41.9; 2007: 49.8; 2008 Proj.: 51.4 - Broad money (percent change, 12-month basis): 2004: 26.4; 2005: 13.7; 2006: 39.4; 2007: 43.5; 2008 Proj.: 30.9 - Private sector credit (percent change, 12-month basis): 2004: 21.0; 2005: 50.6; 2006: 42.7; 2007: 60.0; 2008 Proj.: 38.7 - Current account balance (including official transfers, percent of GDP): 2004: -2.8; 2005: -7.0; 2006: -9.0; 2007: -10.9; 2008 Proj.: -13.2 - Current account balance (excluding official transfers, percent of GDP): 2004: -8.8; 2005: -12.4; 2006: -12.8; 2007: -15.1; 2008 Proj.: -16.6 - Gross official reserves (millions of US$): 2004: 1,816; 2005: 1,951; 2006: 2,325; 2007: 2,738; 2008 Proj.: 2,474 - Short-term foreign liabilities of BOG (millions of US$): 2004: 542; 2005: 471; 2006: 226; 2007: 262... - Exchange rate (per US dollar; period average): 2004: 0.9000; 2005: 0.907; 2006: 0.917; 2007: 0.935... - Real effective exchange rate appreciation (end of period; percent): 2004: -0.6; 2005: 19.8; 2006: -1.0; 2007: -2.9... - Stock market $ index (end of period): 2004: 60.0; 2005: 39.6; 2006: 43.5; 2007: 52.8; 2008: 61.3 (for 2008, as of June 6th) - Stock market percent change: 2004: 40.6; 2005: -33.9; 2006: 9.7; 2007: 21.6; 2008: 15.9 - Fitch foreign currency rating: B B+ B+ B+... - Standard and Poor's foreign currency rating: B+ B+ B+ B+... - Sources: Datastream, Bank of Ghana; and IMF staff estimates. Notes: For 2008, some series as of end-May or June 6th; outlook notes provided for ratings. ### Joint IMF–World Bank Debt Sustainability Analysis: key findings and risks - Main finding: The external debt sustainability analysis indicates that Ghana’s external debt dynamics is subject to moderate risk of debt distress, and when taken together with domestic debt developments, the overall assessment suggests that Ghana’s debt distress has increased compared to the 2007 DSA. - Drivers of increased risk: - Recent rapid accumulation of external and domestic public debt contracted on commercial terms. - High current account and fiscal deficits that expose the country to structural vulnerabilities in the event of a reversal of favorable terms of trade. - Historical debt change (selected values): - Total public debt reduced to about 42 percent of GDP in 2006 from 78 percent of GDP in 2005. - Public external debt declined to US$2,177 million at end-2006 (17 percent of GDP) from US$6,348 million in 2005 (59 percent of GDP). - Domestic debt increased to US$3,133 million (25 percent of GDP) in 2006 from US$1,997 million in 2005 (19 percent of GDP). - 2003–2007 government debt table (selected, in millions of US dollars) - EXTERNAL DEBT (2003,2004,2005,2006,2007): 7,549; 6,448; 6,348; 2,177; 3,587 - DOMESTIC DEBT (2003–2007): 1,540; 1,868; 1,997; 3,133; 3,969 - TOTAL GOVERNMENT DEBT (1 + 2) (2003–2007): 9,089; 8,315; 8,345; 5,311; 7,556 - Memorandum items: Government Debt (percent of GDP): 2003: 119.1; 2004: 93.7; 2005: 77.8; 2006: 41.7; 2007: 49.8. External debt percent of GDP: 99.0; 72.6; 59.2; 17.1; 23.7. Domestic debt percent of GDP: 20.2; 21.0; 18.6; 24.4; 26.2 - Source: Ministry of Finance. ### Recent borrowing and composition - By end-2007, public and publicly guaranteed debt increased to about 50 percent of GDP to finance higher public investment (electricity generation capacity expansion, road network). - New debt composition: 59 percent contracted on commercial terms in the international capital market, export credit agencies, and local-currency denominated government bonds; remaining part contracted on concessional terms with multilateral institutions and bilateral official creditors. - Notable issuance: September 2007 authorities placed US$750 million in Eurobonds with a coupon of 8.5 percent at 10-year maturity, sold at a spread of 387 basis points over U.S. Treasuries for the equivalent period. ### Macroeconomic and financing assumptions (baseline and Box 1) - Fiscal and financing framework assumptions: - Fiscal deficit decreases to 7 percent of GDP while access to external financing averages 6 percent of GDP. - Gross concessional flows assumed to remain between 6 and 7 percent of GDP through 2013. - Nonconcessional borrowing expected to gradually increase to 3 percent of GDP over the same period. - Borrowing rates for commercial loans assumed at about 9 percent; concessional borrowing reflects current IDA-blend terms. - Box 1: Baseline Scenario Macroeconomic Assumptions - Growth: Real GDP growth decelerates to 5.8 percent in 2009-10; thereafter real GDP grows at an average of 6 percent over 2011-2028. - Inflation: Projected to increase to 13.5 percent in 2008; expected to decrease gradually to an average of about 9 percent in 2009-10; medium-term projection to long-term central bank target of 5 percent. - Fiscal deficit: Assumed to decrease to an average of about 7 percent of GDP over the long-term; partial elimination of electricity subsidies would help reduce fiscal deficit to 7 percent from 10.3 percent of GDP in 2008; tax revenue performance assumed at about 25 percent of GDP. - External current account: Current account deficit will gradually decrease from 13.2 percent of GDP to about 9 percent of GDP over the medium term. - Reserve coverage: Months of imports of goods and services coverage to increase to 5 months in the long-term from current level of 2 months. - Exports: Projected to grow at 8 percent annually in 2008-15, and 6 percent thereafter until 2028; mineral products and cocoa assumed to remain main exports. - Remittances: Assumed to reach a peak of about 13 percent of GDP in 2013 and remain at that level over the long term. - Foreign direct investment: Envisaged to average 7 percent of GDP over the projection period. - Official external grants: Assumed to remain constant at about 3 percent of GDP over the long-term. - Concessional loan financing: Projected to decrease to about 1 percent of GDP over the long-term. - Sovereign bond: Assumed that the sovereign bond issued in September 2007 would be fully repaid in 2017, as originally scheduled. ### Baseline DSA outcomes and stress-test results - External baseline: Ghana is at moderate risk of debt distress; external debt burden indicators below thresholds in baseline but steadily increase over the long term. - External debt increases from about 24 percent of GDP in 2007 to about 40 percent of GDP in 2028 reflecting increasing commercial financing. - Stress tests: - Debt burden indicators breach thresholds in four out of five bound standard stress tests. - Shocks that breach thresholds include a one-time 30 percent depreciation and contracting government debt in less favorable terms. - A stress test reducing non-debt creating flows (current transfers and FDI) to historical average minus one standard deviation increases the NPV of debt-to-GDP ratio close to or above thresholds for 2012-2020 and increases debt service-to-exports ratio above the indicative threshold of 25 percent. - Findings highlight the relevance of FDI and remittances to external stability and the urgency of structural reforms to sustain higher economic growth. ### Public debt sustainability and sensitivity - Baseline public debt path: - Total public debt increases from about 50 percent of GDP in 2007 to 81 percent of GDP in 2028. - NPV of debt-to-revenue and grants ratio increases from about 166 percent in 2008 to 281 percent in 2028. - Sensitivity to fiscal stance: - If the primary balance remains at projected 2008 level (7.4 percent of GDP), the NPV of debt-to-GDP ratio would rise from 46 percent in 2008 to 134 percent in 2028. - NPV of debt-to-revenue ratio would increase to 464 percent from 166 percent over the same period. - Debt service-to-revenue ratio would increase up to 69 percent in 2028 from 26 percent in 2008. - Policy implication: Fiscal adjustment and a prudent debt management and debt policy strategy need to be implemented to preserve debt sustainability in the long-term. ### Alternative scenarios (overview) - Two alternative scenarios examined: 1. Low-GDP-growth with baseline borrowing: Illustrates impact of lower real GDP growth if planned public investment are not adequately selected or implemented. 2. Oil-export scenario: Simulates impact of recent oil discoveries on exports and economic growth; indicates that if oil-related fiscal revenues are used efficiently, the risk of debt distress could become low. - Additional scenario note: First alternative combining lower GDP growth but the same level of external borrowing indicates the risk of debt distress could become high if higher economic growth does not materialize. *Prepared by the staffs of the International Monetary Fund and the International Development Association; approved June 16, 2008.* ### 9. If the actual GDP growth rate is lower than in the baseline scenario, the risk of ### _cr08344 - 9. If the actual GDP growth rate is lower than in the baseline scenario, the risk of ### Low-GDP-growth scenario: key findings - If borrowing follows the baseline projections but GDP growth remains low because low-return projects were selected, external debt increases to about 57 percent of GDP in 2028 (compare to 40 percent of GDP in the baseline). - Under a stress test where government borrowing is contracted under less favorable financial terms, the NPV of external debt-to-GDP ratio increases to 90 percent in 2028 from 20 percent in 2008, breaching the 50 percent threshold for strong performers. - Under the same type of stress test, the NPV of debt-to-exports ratio increases to about 222 percent in 2028 from 45 percent in 2008. - Sensitivity analysis under the low-GDP-growth scenario indicates strong vulnerability to a fiscal shock: - If the primary balance remains at its projected 2008 level, the NPV of debt-to-GDP ratio would increase to 131 percent in 2028 from 33 percent in 2008. - The NPV of debt-to-revenue and grants ratio would increase to 447 percent from about 116 percent under the same type of shock. - The debt service-to-revenue ratio would increase up to 107 percent in 2028 from 26 percent in 2008. - Overall conclusion: stress tests in the low-growth scenario show that fiscal efforts and sound debt management are required to avoid a fast accumulation of total government debt. ### Oil scenario: key findings and assumptions - Preliminary estimates indicate oil reserves could be at about 500 million of barrels. - When commercially exploited, oil could generate additional fiscal revenues (including taxes, royalties, and direct participation on production) of about 3 to 4 percent of GDP on average for the next 20- to 30-year period. - Projections assume oil revenues are used entirely to retire public debt rather than to finance additional public spending. - The oil-exporting scenario results: - The NPV of external-debt-to-GDP ratio converges to about 9 percent of GDP in 2028. - The NPV of external-debt-to-export ratio decreases to 34 percent in 2028. - The NPV of total government debt would decrease to about 70 percent of GDP in 2028. - Under the oil scenario, Ghana’s risk of debt distress could be classified as low, as all stress test indicators remain below the indicative debt burden thresholds. - Caveats: - At present, oil reserves have not yet been declared commercially viable. - The IMF and the World Bank are working with a prudent size of oil reserve projection, which, according to oil experts, has a 90 percent confidence of being declared commercially viable. - Appendix I describes the methodology used to incorporate the oil sector into the macroeconomic framework, oil production assumptions, and its related fiscal impact on revenues and financing needs. ### Comparative indicators (as presented in the source) - Raw table lines as presented in the source: - Thresholds200820182028 - NPV of Debt to GDP ratio50203540 - NPV of debt to exports ratio20045109150 - Debt service to exports ratio2531123 - NPV of Debt to GDP ratio203856 - NPV of debt to exports ratio45122185 - Debt service to exports ratio31229 - NPV of Debt to GDP ratio20229 - NPV of debt to exports ratio456934 - Debt service to exports ratio397 - Source: DSA estimates. - Oil-exporting Scenario - Baseline Scenario - Low-GDP-growth Scenario ### Policy implications and recommendations - Implement a debt management strategy complemented by an institutional framework that elicits the selection of high return public projects with significant impact on productivity and economic growth. - Maintain fiscal efforts to avoid rapid accumulation of total government debt, especially under low-growth outcomes. - Ensure sound debt management to limit vulnerability to changes in financing terms for the government. - In the event of oil production, use additional oil-related fiscal revenues efficiently (the scenario assumes revenues used entirely to retire public debt). *Source: DSA estimates and accompanying text in the provided content unit.* ### 15. Stress tests applied to total public debt underscore the need of maintaining a ### Stress tests applied to total public debt underscore the need of maintaining a sound fiscal policy and the urgency of implementing structural reforms aimed at achieving higher growth and diversification of exports. ### Main policy message - Diversifying exports and implementing structural reforms would contribute toward reducing Ghana’s external vulnerabilities. - These measures should be complemented by: - Implementation of prudent debt management and debt strategy policies. - Developing a sound institutional framework for selecting high-return public investment projects. - Implementing these policies is critical to help preserve debt sustainability. ### Key historical and baseline indicators (selected exact figures) - External debt (nominal), o/w public and publicly guaranteed (PPG): 59.2; 17.1; 23.7; 24.8; 26.7; 28.9; 30.4; 31.7; 33.2; 38.6; 39.6 (series shown across years). - Change in external debt (series): -13.5; -42.1; 6.5; 1.1; 1.9; 2.2; 1.5; 1.3; 1.5; 1.2; 0.1. - Identified net debt-creating flows (series): -10.7; -8.3; 1.1; 5.3; 3.7; 2.1; 0.9; 0.0; -0.4; -0.5; -0.7. - Non-interest current account deficit (series): 4.8; 5.9; 9.7; 6.8; 4.9; 12.3; 11.9; 10.4; 9.0; 8.4; 7.9; 10.0; 7.2; 5.9; 6.8. - Exports (selected series): 36.1; 40.2; 39.8; 43.7; 43.5; 43.0; 42.0; 40.2; 38.2; 32.0; 26.4. - Imports (selected series): 61.7; 65.0; 66.3; 71.8; 71.1; 68.2; 65.4; 62.9; 60.5; 54.4; 48.6. - Net current transfers (negative = inflow) (series): -19.8; -16.7; -16.3; -17.6; 3.9; -15.7; -16.9; -16.9; -16.9; -16.9; -16.8; -16.7; -16.6; -16.1; -16.5. - Net FDI (negative = inflow) (series): -5.2; -8.0; -7.0; -6.7; 2.9; -6.6; -7.6; -7.7; -7.4; -7.4; -7.4; -7.3; -7.3; -7.2; -7.3. ### Endogenous dynamics and debt ratios (selected exact figures) - Endogenous debt dynamics (series): -10.3; -6.1; -1.6; -0.4; -0.6; -0.6; -0.7; -1.0; -0.9; -0.3; 0.5. - Contribution from nominal interest rate (series): 2.3; 3.2; 1.2; 0.9; 0.7; 0.8; 0.9; 0.9; 1.0; 1.7; 2.5. - Contribution from real GDP growth (series): -3.5; -3.2; -0.9; -1.3; -1.3; -1.4; -1.6; -1.9; -2.0; -2.1; -1.9. - Residual (3-4) (series): -2.8; -33.8; 5.4; -4.2; -1.8; 0.2; 0.6; 1.3; 1.9; 1.6; 0.8. - NPV of external debt (selected series): 19.6; 19.6; 21.0; 22.6; 23.8; 25.2; 27.1; 34.9; 39.7 (series shown for projection years). - NPV of external debt in percent of exports (selected entries): 49.2; 44.9; 48.2; 52.5; 56.6; 62.7; 70.9; 109.1; 150.3. - NPV of PPG external debt (selected series): 19.6; 19.6; 21.0; 22.6; 23.8; 25.2; 27.1; 34.9; 38.3. - NPV of PPG external debt in percent of exports (selected entries): 49.2; 44.9; 48.2; 52.5; 56.6; 62.7; 70.9; 56.0; 109.1; 150.3; 121.5 (series includes these values). - NPV of PPG external debt in percent of government revenues (selected entries): 86.9; 85.2; 88.7; 94.1; 96.2; 100.1; 106.2; 136.7; 153.9; 142.0. - Debt service-to-exports ratio (in percent) (selected series): 17.0; 17.5; 5.2; 3.2; 2.5; 2.6; 2.9; 3.8; 4.4; 3.2; 11.2; 22.9; 15.6. - PPG debt service-to-exports ratio (in percent) (selected series mirrors above): 17.0; 17.5; 5.2; 3.2; 2.5; 2.6; 2.9; 3.8; 4.4; 3.2; 11.2; 22.9; 15.6. - Total gross financing need (billions of U.S. dollars) (series): 0.6; 0.6; 0.7; 1.2; 1.0; 0.8; 0.6; 0.6; 0.6; 1.5; 4.5. - Non-interest current account deficit that stabilizes debt ratio (series): 18.2; 47.9; 3.2; 11.2; 10.0; 8.2; 7.5; 7.1; 6.4; 6.0; 5.9. ### Key macroeconomic assumptions (selected exact figures) - Real GDP growth (in percent) (series): 5.9; 6.4; 6.3; 5.1; 0.9; 6.5; 5.8; 5.8; 6.0; 6.8; 6.8; 6.3; 6.0; 5.3; 5.7. - GDP deflator in US dollar terms (change in percent) (series): 14.1; 11.5; 12.1; 4.4; 15.9; 8.1; 2.2; 1.9; 2.6; 3.0; 3.3; 3.5; 2.7; 2.7; 2.8. - Effective interest rate (percent) (series): 3.8; 6.3; 8.1; 6.1; 2.9; 4.4; 3.1; 3.2; 3.2; 3.3; 3.6; 3.5; 5.0; 6.8; 5.6. - Growth of exports of G&S (US dollar terms, in percent) (series): 11.0; 32.3; 17.9; 10.9; 10.9; 26.3; 7.7; 6.6; 6.2; 5.2; 4.7; 9.5; 6.0; 6.4; 6.1. - Growth of imports of G&S (US dollar terms, in percent) (series): 23.6; 24.8; 21.6; 11.6; 15.0; 24.7; 7.0; 3.4; 4.2; 5.8; 6.2; 8.5; 7.3; 7.2; 7.2. - Grant element of new public sector borrowing (in percent) (selected series): 36.0; 27.5; 26.8; 24.0; 13.7; 7.3; 22.5; -6.1; -15.1; -8.5. - Aid flows (in billions of US dollars) (series): 0.6; 0.7; 0.9; 0.9; 0.9; 1.0; 1.2; 1.3; 1.4; 2.3; 5.3. - o/w Grants (series): 0.6; 0.7; 0.9; 0.8; 0.7; 0.8; 0.9; 1.0; 1.1; 1.6; 2.9. - o/w Concessional loans (series): 0.00; 0.00; 0.00; 0.00; 0.00; 0.00; 0.00; 0.00; 0.00; 0.00; 0.0. - Grant-equivalent financing (in percent of GDP) (selected series): 6.6; 5.1; 5.3; 5.1; 4.6; 4.3; 5.2; 3.3; 2.1; 3.0. - Grant-equivalent financing (in percent of external financing) (selected series): 68.5; 62.8; 61.6; 61.4; 53.6; 47.5; 59.3; 33.7; 21.5; 31.2. - Nominal GDP (billions of US dollars) (selected entries): 10.7; 12.7; 15.2; 17.4; 18.9; 20.3; 22.1; 24.3; 26.8; 42.6?; 94.5? (table shows series, preserve exactly as in source if needed). ### Public sector debt (Table 3 selected exact figures) - Public sector debt (levels, selected series): 77.1; 41.9; 49.8; 51.4; 56.2; 60.1; 63.1; 65.5; 67.1; 73.9; 81.0. - o/w foreign-currency denominated (series): 59.2; 17.1; 23.7; 24.8; 26.7; 28.9; 30.4; 31.7; 33.2; 38.6; 39.6. - Change in public sector debt (selected entries): -35.2; 7.9; 1.5; 4.9; 3.8; 3.0; 2.4; 1.6; 1.1; 0.1. - Identified debt-creating flows (selected entries): -5.5; 0.5; 0.9; 4.3; 3.3; 2.5; 2.0; 1.3; 0.9; 0.1. - Primary deficit (series): -0.7; 4.2; 6.0; 1.9; 2.1; 7.4; 8.2; 6.8; 6.2; 5.9; 5.1; 6.6; 3.3; 1.5; 2.9. - Revenue and grants (series): 29.1; 27.4; 28.6; 27.9; 27.6; 28.1; 28.8; 29.2; 29.4; 29.1; 28.9. - o/w grants (series): 5.2; 5.4; 6.0; 4.9; 3.9; 4.1; 4.1; 4.0; 3.9; 3.6; 3.1. - Primary (noninterest) expenditure (series): 28.4; 31.5; 34.6; 35.2; 35.7; 34.9; 35.0; 35.1; 34.5; 32.4; 30.4. - Automatic debt dynamics (series): -8.9; -4.0; -5.1; -3.2; -3.2; -3.2; -3.5; -3.5; -2.4; -1.4. - Contribution from interest rate/growth differential (series): -4.8; -2.6; -3.8; -3.1; -3.2; -3.1; -3.2; -3.1; -2.1; -1.1. - Contribution from average real interest rate (series): -0.2; -0.2; -0.8; -0.3; -0.1; 0.3; 0.8; 1.1; 2.0; 3.0. - Contribution from real GDP growth (series): -4.6; -2.5; -3.0; -2.8; -3.1; -3.4; -4.0; -4.2; -4.1; -4.1. - Contribution from real exchange rate depreciation (series): -4.1; -1.4; -1.3; -0.1; 0.0; -0.2; -0.3; -0.4. - Debt relief (HIPC and other) (series): -1.2; -0.8; -0.6; -0.4; -0.4; -0.3; -0.4; -0.4; -0.3; 0.0; 0.0. - Residual, including asset changes (series): -29.7; 7.4; 0.7; 0.6; 0.5; 0.5; 0.4; 0.4; 0.2; 0.0. - NPV of public sector debt (series): 37.8; 42.6; 45.7; 46.2; 50.5; 53.8; 56.4; 59.0; 61.0; 70.2; 81.0. - o/w foreign-currency denominated (series): 19.9; 17.8; 19.6; 19.6; 21.0; 22.6; 23.8; 25.2; 27.1; 34.9; 39.7. - NPV of public sector debt-to-revenue and grants ratio (in percent) (series): 130.1; 155.6; 160.1; 165.8; 183.1; 191.4; 195.6; 201.9; 207.2; 240.9; 280.7. - Debt service-to-revenue and grants ratio (in percent) (series): 12.5; 12.3; 10.9; 25.7; 23.3; 25.2; 25.8; 27.5; 28.6; 36.1; 48.8. - Debt service-to-revenue ratio (in percent) (series): 15.3; 15.4; 13.8; 31.1; 27.2; 29.4; 30.1; 31.9; 33.0; 41.3; 54.6. ### Stress tests and sensitivity analyses (exact labels and key outcomes) - Scenarios and tests applied include: - A. Alternative Scenarios: - A1. Key variables at their historical averages in 2008-27. - A2. New public sector loans on less favorable terms in 2008-27 (footnote: assumes interest rate on new borrowing is by 2 percentage points higher than in the baseline). - B. Bound Tests: - B1. Real GDP growth at historical average minus one standard deviation in 2008-09. - B2. Export value growth at historical average minus one standard deviation in 2008-09 (exports assumed permanently at lower level; current account share of GDP returns to baseline after shock). - B3. US dollar GDP deflator at historical average minus one standard deviation in 2008-09. - B4. Net non-debt creating flows at historical average minus one standard deviation in 2008-09. - B5. Combination of B1-B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2008 (depreciation defined as percentage decline in dollar/local currency rate). - Stress-test outcomes (selected exact figures from sensitivity tables and figures): - Under baseline and scenarios, NPV of debt-to-GDP and NPV of debt-to-exports ratios rise substantially under adverse scenarios and bound tests (figures show trajectories; most extreme stress test is the test that yields highest ratio in 2018). - Example projections for NPV of PPG external debt in percent of exports include values up to 150.3 (in the series shown) and higher under stress (figures show large increases under historical and most extreme shock lines). - Table 2 and Table 4 show alternative outcomes for NPV of debt-to-GDP ratio, NPV of debt-to-revenue ratio, and debt service ratios under A1, A2, B1–B6; specific scenario series are provided in the tables and figures in the source. ### Scenario-specific highlights (selected scenario labels and implications) - Low GDP and export growth scenario: - Figures indicate that the NPV of debt-to-GDP ratio, NPV of debt-to-exports ratio, NPV of debt-to-revenue ratio, debt-service-to-exports ratio, and debt-service-to-revenue ratio rise toward or above historical and threshold lines under the low-growth scenario. - Oil-exporting scenario: - Figures indicate improved debt dynamics relative to baseline in some years in the oil scenario, but stress-test comparisons still show vulnerability under certain shocks. - Combination and extreme shocks: - The most extreme stress tests (including large depreciation and simultaneous negative shocks to growth, exports, and non-debt flows) produce the highest debt ratios in projection years (notably around 2018 in chart summaries). ### Operational implications for policy and debt management - Maintain a sound fiscal policy to limit debt-creating flows (primary deficits and new borrowing). - Implement structural reforms to raise real GDP growth and diversify exports to reduce vulnerability to export shocks. - Pursue prudent debt management and debt strategy policies, including attention to: - Grant-equivalent financing and the grant element of new borrowing (series shows significant variability, including values such as 36.0; 27.5; 26.8; 24.0; 13.7; 7.3; 22.5; -6.1; -15.1; -8.5). - Composition of financing (grants versus concessional loans; aid flows series provided). - Develop institutional framework for selecting high-return public investment projects to improve debt sustainability. *Source: Staff simulations, projections, and tables and figures in the IMF document.* ### APPENDIX I. GHANA’S PETROLEUM SECTOR: PRELIMINARY MACROECONOMIC IMPACT ### APPENDIX I. GHANA’S PETROLEUM SECTOR: PRELIMINARY MACROECONOMIC IMPACT ### Introduction and context - Significant offshore oil discovery announced by Tullow Oil on June 18, 2007; second discovery announced May 6, 2008. - Discovery made by an Anglo-American consortium (Tullow Oil operates with Kosmos Energy and Anadarko Petroleum) in which Ghana’s National Petroleum Corporation (GNPC) holds a 10 percent interest. - Current Ghana oil production: about 700 barrels a day. - Preliminary upgrade of proven reserves from 170 million barrels to the 500–600 million barrel mark is likely; so far no substantial discovery of an associated gas cap. - Commercial viability not yet designated; production may not begin for three to five years after appraisal. ### Main assumptions used in projections - Start of production: conservatively assumed in 2011 (appraisal and investment phase perhaps starting in 2009). - Total reserves assumed: about 500 million barrels (currently rated as 90% probable). - Initial processing capacity: 60,000 barrels per day, upgraded later to about 120,000 barrels per day. - Initial investment on field development: assumed US$2–3 billion through 2011. - Production costs: about US$200 million a year. - Oil prices: follow the IMF’s WEO projections minus a 10 percent prudential discount through 2014, and assumed constant thereafter. - Fiscal and contractual parameters: - Royalty rate for blocks operated by Kosmos and Tullow: 5 percent. - GNPC carried interest: 10 percent. - GNPC holds 10 percent interest in the consortium. - Petroleum income tax law sets income tax rate at 50 percent; for current discoveries a 35 percent rate is applied. - Additional oil entitlement (additional profits tax) may be stipulated in petroleum agreements. - Revenue treatment in the baseline exercise: all production exported; all after-tax profits of contractors repatriated offshore; direct investment assumed to have 95 percent import and 5 percent local content; oil revenues assumed to be used for debt reduction (no additional spending). - Use of oil revenue (box summary): royalties levied on gross production; carried interest levied after royalty and operating costs; petroleum income tax applied after deductions and linear depreciation over five years; revenues can be spent, saved, or used to retire debt — for simplicity here assumed used to retire debt. ### Key quantitative timelines and totals - Initial investment cited elsewhere: about US$2.7 billion. - Production start: 2011; peak production: 2013; depletion of reserves by 2030. - Cumulative government revenues: US$20 billion, or 160 percent of 2008 GDP. - Net oil wealth would be depleted by 2030 under the scenario assumptions. - Per capita cumulative real GDP over the period would be US$1,695 higher than without oil. ### Main findings: growth, fiscal take, and timing - Real GDP growth: - With oil, real GDP growth will double, reaching 12 percent by 2012. - Thereafter, growth remains slightly higher than real GDP growth without oil. - Large investment with 95 percent import content in investment phase explains initial dynamics; production and exports rise rapidly, plateau after two years, and begin to decline in 2022. - Government revenue take: - Government’s share of total oil receipts would be around 30 percent when production starts. - Government share reaches 35 percent at the peak of production in 2018. - Government share gradually decreases to 25 percent as production declines. - At peak, oil receipts would exceed US$1 billion, accounting for more than 10 percent of total budget revenues (excluding grants) or 2 ½ percent of GDP. - Public sector debt and fiscal impact: - Assumed oil revenues fully used to retire debt (no additional spending). - Total public sector debt would decrease from 49.8 percent at end-2007 to 19.2 percent in 2028 under the oil scenario. - Under the baseline without oil, total public sector debt would be 55.6 percent in 2028. - External sector / current account: - Investment phase (2010–12): trade balance worsens significantly because of large imports of capital goods, adding some 9 percent of GDP to the trade deficit in 2010-12. - Production and export phase: net improvement (oil exports minus profit repatriation) of the current account would reach about an average of 4 percent of GDP per annum. - During the peak of production (2013-22) reserves would improve on average by 2.6 months of imports of goods and services. ### Selected table highlights (government revenue and shares, 2011–2029) - Value of oil production (US$ millions): 2011: 2,136; 2012: 2,131; 2013–2022: generally 3,544 (with later declines to 2,835, 2,268, 1,814, 1,452, 1,161, 929, 743 in subsequent years). - Total government oil revenue (US$ millions): 2011: 752; 2012: 723; 2013: 1,324; 2014: 1,326; 2015: 1,352; 2016: 1,428; 2017: 1,457; 2018: 1,485; later declining to 1,176, 925, 723, 562, 433, 330, 247 over 2023–2029. - Implied government share (in percent) by selected years: 2011: 35.2; 2012: 33.9; 2013: 37.3; 2014: 37.4; 2015: 38.1; 2018: 41.1; 2029: 33.3. - Revenues in percent of GDP (selected years): 2011: 3.1; 2012: 2.7; 2013: 4.4; 2014: 4.0; 2018: 3.4; 2029: 0.2. ### Balance of payments and related numbers (selected) - Current account balance (US$ thousands or as reported): 2008: -2,410; 2009: -2,753; 2010: -2,512; 2011: 97; 2012: -218; 2013: 1,243; 2014: 1,039; later path shows increasing deficits after peak production decline. - Trade balance (including oil): 2008: -4,832; 2009: -5,607; 2010: -5,582; 2011: -3,250; 2012: -3,650; 2013: -2,593; then more negative in later years up to -21,437 by 2028. - Exports (US$ millions): 2008: 5,609; 2009: 5,924; 2010: 6,256; 2011: 9,016; 2012: 9,408; 2013 onward rising to around 19,996–20,002 in later years (table values). - Imports (US$ millions): 2008: -10,441; 2009: -11,531; 2010: -11,839; 2011: -12,266; later rising to -41,440 by 2028. - Capital and financial account: 2008: 2,043; 2009: 2,300; 2010: 2,716; 2011: 2,603; later generally rising with sizable inflows labeled as FDI in oil industry in investment years. - Memorandum: Current account incl. official transfers (%GDP): 2008: -13.8; 2009: -14.6; 2010: -12.4; 2011: 0.4; 2012: -0.9; 2013: 4.6; later worsening to -8.4 by 2028. - GIR, in months of imports of G&S (selected): 2008: 2.1; 2009: 1.7; 2010: 1.8; 2011: 3.7; 2012: 5.1; 2013: 7.5; 2014: 9.6; up to 15.2 and later declining to 11.7 by 2028. ### Institutional and governance considerations highlighted - GNPC plays multiple roles: producer, promoter of exploration and development, regulator of investors, evaluator of potential investors, and participant in negotiations for petroleum agreements. - Monitoring of oil company operations is done through a Joint Management Committee (JMC) which applies sanctions through the Minister for Energy. - Concerns noted about conflict of interest given GNPC acting both as regulator and operator; government is reviewing the appropriateness of GNPC being both a regulator and one of the regulated bodies. ### Sensitivities, caveats, and risks emphasized - Outcomes are sensitive to key assumptions: - No other wells come into production beyond the assumed fields. - Net oil wealth depletion by 2030. - Oil prices are assumed constant after 2014 despite historical volatility. - Fiscal framework remains unchanged and oil revenues are used for debt reduction in the baseline. - The discovery still needs designation as commercially viable; firmer reserve estimates and commercial designation could materially change projections. - Spillovers to the broader economy are assumed modest given the specialized nature of the oil business. *Prepared by Julien Hartley (IMF); APPENDIX I. GHANA’S PETROLEUM SECTOR: PRELIMINARY MACROECONOMIC IMPACT (IMF staff report).* ### APPENDIX II. IMF-WORLD BANK RELATIONS ### APPENDIX II. IMF-WORLD BANK RELATIONS (As of February 15, 2008) ### Partnership in Ghana’s Development Strategy - Ghana’s development objectives are stated in the Ghana Growth and Poverty Reduction Strategy (GPRS II) presented to parliament in October 2005. - Overarching objective of GPRS II: Ghana to attain middle-income status by 2015, which entails maintaining annual real GDP growth rates of at least 6 percent. - GPRS objectives: create an environment favorable to private sector–led growth and sustainable poverty reduction; create room within the Government’s budget for increased expenditures on education, health, and other priority services. - Bank and Fund coordination: - Joint assessments such as the 2006 Joint Staff Advisory Note (JSAN) of the GPRS II. - Multi-Donor Budgetary Support (MDBS) alignment of development partners (nine bilaterals and four multilaterals, including the World Bank). - “Harmonization and Alignment in Ghana for Aid Effectiveness: a Common Approach for Ghana and its Development Partners” agreed February 25, 2005; operationalized in November 2005 Harmonization and Aid Effectiveness Action Plan. - Ghana Joint Assistance Strategy (G-JAS) signed on March 1, 2007, prepared in consultation with Government and civil society; provided partnership context for the Bank’s CAS discussed June 20, 2007. ### The World Bank Group Country Assistance Strategy and Portfolio - Bank Group overarching objectives: increasing growth, reducing poverty and reducing inequality. - Partnerships and sector programs: Health, Education, Energy, Environmental Governance and Natural Resource Management, Private Sector Development, Public Sector Reform, Public Financial Management, and Water and Sanitation. - As of February 15, 2008: - The World Bank has approved 133 loans, credits and grants for a total of $5.617 billion. - Current portfolio: 24 operations (including Regional IDA and GEF support). - Active projects total about $1.178 billion with an undisbursed amount of $754 million. - Proposed lending program for Bank FY2008 and FY2009 supports CAS objectives with: - Three development policy operations in (i) agriculture, (ii) environmental governance; (iii) decentralization; (iv) social protection; and (v) the ongoing PRSC series. - Investment operations in transport sector, ICT, and results-based management. - Analytic work: recently-completed country economic memorandum, a forthcoming poverty assessment, and an annual external review of public financial management. - Operations subject to discussions with the Government and the availability of IDA resources. ### IMF–World Bank Collaboration in Specific Areas - General: Bank and Fund teams closely coordinate policy advice with a common objective of supporting GPRS implementation. - Areas where the Fund leads: - Policy dialogue on macroeconomic policies (fiscal and monetary). - Support through Poverty Reduction and Growth Facility (PRGF) arrangements. - PRGF reforms: substantially raise revenue to make room for increased poverty-related spending and development needs, strengthen public expenditure management, and use monetary policy to achieve single-digit inflation. - Sixth and final review under the PRGF completed on October 27, 2006. - Areas where the Bank leads: - Policy dialogue on economic reforms in infrastructure (energy, roads, telecommunications), water and sanitation; urban and local government; agriculture and rural development; human development; private sector development and public sector reform. - Areas of shared responsibility: - Structural reforms in budgeting, expenditure and financial management, public sector reform and privatization, and financial sector. - Bank support to governance and public sector management via Economic Management Capacity Building project and the PRSC series. ### Financial Relations with the World Bank Group (Active Portfolio as of February 15, 2008, in millions of U.S. Dollars) - Summary totals: - Total commitments of active projects: 1,177.9 - Total undisbursed amount of active projects: 753.7 - Selected active projects (Approval Date — IDA/GEF Commitments — Undisbursed Amount): - Trade Gateway and Investment — 07/09/1998 — 50.5 — 13.0 - Road Sector Development — 07/26/2001 — 220.0 — 9.4 - GEF Northern Savanna — 03/12/2002 — 7.6 — 0.2 - Land Administration — 07/31/2003 — 20.5 — 12.9 - Education Sector Project — 03/09/2004 — 78.0 — 46.3 - 2nd Urban Environment and Sanitation — 04/29/2004 — 62.0 — 56.9 - Urban Water (IDA Grant) — 07/27/2004 — 103.0 — 86.5 - Small Towns Water Supply — 07/27/2004 — 36.0 — 20.7 - Community-Based Rural Development — 07/29/2004 — 60.0 — 16.5 - Multisectoral HIV/AIDS program — 11/15/2005 — 20.0 — 15.5 - Economic Management Capacity Building — 11/15/2005 — 35.0 — 32.1 - Micro, Small, and Medium Enterprise Dev’t. — 01/05/2006 — 45.0 — 45.9 - e-Ghana — 08/01/2006 — 40.0 — 40.8 - Urban Transport Project — 06/21/2007 — 45.0 — 44.9 - GEF Urban Transport Project — 06/21/2007 — 7.0 — 6.0 - Energy Development and Access — 07/26/2007 — 90.0 — 94.0 - GEF Rural Energy Access — 07/26/2007 — 5.5 — 5.5 - Health Insurance Project — 07/03/2007 — 15.0 — 15.9 - Nutrition and Malaria Control for Child Survival — 07/03/2007 — 25.0 — 23.4 - West Africa Gas Pipeline (IDA partial risk guarantee up to US$50.0 million of which 25 percent is IDA commitment) — 11/23/2004 — 8.0 — 0.0 - Regional HIVAIDS Treatment Project — 06/17/2004 — 59.8 — 18.3 - West Africa Power Pool APL-1 Phase 1 — 06/30/2005 — 40.0 — 36.8 - West Africa Power Pool APL-1 Phase 2 — 06/29/2006 — 60.0 — 64.2 - West Africa Agricultural Productivity Program — 03/29/2007 — 45.0 — 48.0 - For additional information contact persons listed in the source document. ### Appendix III — Ghana: Statistical Issues (Key findings and needs) - Overall: - Data provided to the Fund are broadly adequate for surveillance, but quality and timeliness of certain data need improvement. - Deficiencies in dissemination of statistical information to the public and in reporting for Fund publications. - Improvements: publication on the Bank of Ghana Web site of the Monetary Policy Committee Statement, Statistical Releases, and monthly monetary series for 2001–06. - Data reporting gaps for IFS and GFSY: - International transactions last reported for 2006. - Monthly government finances last reported for 1998. - National accounts last reported for 1997. - Latest data for Government Finance Statistics Yearbook are for 2004, covering only cash revenue and expense transactions of the budgetary central government. - Authorities participating in Fund’s GDDS and GDDS Project for Anglophone African Countries; GDDS metadata posted on the DSBB since July 2005 but need updating. - National accounts and prices: - IMF Statistics Department provided TA on national accounts over 2001 to March 2008; a “bundled” TA mission visited March 12–26, 2008. - Mission objectives: (a) adopt the System of National Accounts 1993 (1993 SNA); (b) rebase national accounts (current base year 1993); (c) plan comprehensive data collection. - CPI issues: methodological change in 1999 may have led to underestimated CPI and inflation for 1999–2001. - CPI weights updated using the fourth Ghana Living Standard Survey (1998/1999) completed mid-2006. - Producer price index (PPI) developed with STA assistance and released on March 15, 2007. - Rebasing findings: - Project to rebase national accounts to 2002 partly finalized; estimates for 2002 often volume-extrapolated from 1993 base. - 2004 Supply and Use Table (SUT) includes more updated and comprehensive sources; mission recommended using 2004 SUT to benchmark national accounts. - Some concepts and methods still require work to ensure compliance with 1993 SNA. - Priority actions for source data improvement: - (i) Design and build a business register with minimum information on output values, input values if possible, and number of employees; use 2003 National Industrial Census as starting point and extend to services. - (ii) Create a national statistical system containing regular business surveys for manufacturing, construction, transport and communication, and other services (surveys on retail trade and NPISH urgently needed). - (iii) Create a system for annual household surveys less comprehensive than GLSS round 5 (2005/06) to be done more frequently. - (iv) Carry out an agricultural census. - Labor statistics: - Labor statistics are scarce; almost nonexistent. - Some wage indicators available from Social Security National Insurance Trust (SSNIT). - Ministry of Employment receiving TA from UNDP and ILO in design and compilation of labor statistics. - Public finance: - Steps taken to improve fiscal data: Controller Accountant General Department (CAGD) compiles monthly budget implementation reports available within six weeks, though reliability concerns exist. - Discrepancies between CAGD and BOG data; above-the-line CAGD coverage narrower than below-the-line BOG data. - Need for comprehensive and timely reconciliation of monthly treasury data with bank accounts. - Government actions: - Formed a committee to define “broad” and “narrow” government. - Moved to immediate booking for “direct debits” and more frequent reporting of government account balances. - Implementing a new automated Budget and Public Expenditure Management System (BPEMS) covering ministries, departments and agencies. - BPEMS economic classification not sufficiently detailed for GFSM 2001; June 2006 STA mission proposed classification in line with international guidelines. - Transactional coverage problems: - CAGD and BOG have missed substantial central government spending (donor flows disbursed directly to ministries; internally generated funds). - Difficulties accounting for expenses paid by extrabudgetary funds. - Operations of SSNIT, Ghana Education Trust Fund (GETF), and District Assemblies Common Fund (DACF) not yet covered in fiscal accounts. - Revenue and spending financed from DACF and some local government transactions not yet covered. - Recommendation: extend coverage to general government; at minimum expand to consolidated central government. - Monitoring practices: - Central government fiscal developments primarily monitored from below-the-line BOG data. - Above-the-line aggregates monitored by cash-flow data from BOG and identifiable components from MOFEP and CAGD. - BOG produces revenue, debt service, and domestic financing data; MOFEP Aid and Debt Management Unit provides external debt and project disbursement information; CAGD provides noninterest recurrent and domestically financed capital expenditure data. - Technical assistance and initiatives: - Long-term FAD advisor on public expenditure and debt management in MOF since August 2001. - Joint Bank-Fund mission in 2004 on HIPC Assessments and Action Plans. - Fiscal Transparency ROSC undertaken in July 2004. - STA technical assistance in March 2005. - Participation in DFID Phase 2 GDDS Project for Anglophone Africa (project ends April 2009); expected two or three missions to complete GFS module. - STA mission recommended enhancing chart of accounts to include financing transactions and additional revenue and expense classifications; recommended interagency working group to delineate general government sector. - Monetary statistics and international reserves: - 2007 monetary and financial statistics mission: BOG made significant progress but further work needed on methodological soundness. - Problems identified: residency criterion application in BOG accounting data; sectorization of government accounts with Other Depository Corporations (ODCs); misclassification of central government deposits as public enterprise deposits and vice versa. - Mission assisted BOG to automate Standard Report Forms (SRFs) for central bank (SRF 1SR) and ODCs (SRF 2SR) to STA per Monetary and Financial Statistics Manual. - Reporting lags: BOG reports monthly data with a lag of four to six weeks; ODCs with a lag of eight to ten weeks. - March 2008 follow-up mission findings: - Significant progress implementing 2007 MFS recommendations, notably data improvements for ODCs. - Monetary data for September 2007 onward, based on new classification of general government units, indicate central government deposits at commercial banks were nearly twice as large as shown in unrevised data. - Introduction of a new financial management information system hampered progress on central bank data quality. - Agreed plan to expand ODC coverage to include savings and loans companies, rural banks, money market mutual funds, and credit unions. - Compiled comprehensive list of financial corporations operating in Ghana, including timing and frequency of data reported to regulatory agencies. - Mission proposed BOG start compiling the Other Financial Corporations Survey covering finance houses and leasing companies by end-September 2008. *APPENDIX II and APPENDIX III content as provided in the source document (As of February 15, 2008).* ### 14. The responsibility for external debt recording and payment is divided among ### 14. The responsibility for external debt recording and payment is divided among ### External debt recording, payment, and institutional roles - The Ministry of Finance and Economic Planning (MOFEP), through its Aid and Debt Management Unit (ADMU), maintains the external debt database. - Responsible for recording debt-payment obligations, issuing payment requests, and tracking HIPC debt relief. - The Controller and Accountant General’s Department (CAGD) confirms the legality of the payment and authorizes the release of public funds. - Responsible for accounting for debt payments and rendering reports to parliament. - The Bank of Ghana (BOG), as the payment agent for the government, verifies payments made to ADMU and CAGD. ### Assessment of transparency and accountability (FAD TA mission, 2001) - Key conclusion: - The three institutions needed to improve the transparency and accountability of external debt management. - Recommended actions by authorities: - (i) develop a single computerized database that is available to all three institutions; - (ii) formalize procedures used for settling debt payments, including: - obtaining debt notification from donors, - delegating signing authorities of officials within the relevant organizations, - creating registers tracing the movement of the documents required to effect external debt payment; - (iii) improve the analytical content and timeliness of data, which are not currently reported at regular intervals. ### Fiscal and statistical integration recommendation - To enable systematic comparison of the budget, the balance of payments, and the BOG cash-flow data, authorities should: - clearly identify the government subsectors for which data are reported; and - prepare a clear classification of financing, outstanding debt, and guarantees issued. ### Trade and balance of payments statistics — institutional responsibilities and data sources - Since 1982 the BOG Research Department has had primary responsibility for the compilation and presentation of the annual and quarterly balance of payments statistics. - Main data sources: - Customs Excise and Preventive Service (CEPS), - administrative data (government ministries and departments within BOG), - commercial banks, - the Ghana Statistical Service (GSS). - Additional activities: - BOG carries out simple financial surveys on other corporate entities involved in transactions with nonresidents. - Methodology: - Data are compiled based on the Balance of Payments Manual, Fifth Edition (BPM5). ### Current data issues and staff recommendations - GSS and CEPS cooperation: - The GSS is not publishing timely monthly trade statistics, although the data are available from the CEPS. - Recommendation: GSS should collaborate with CEPS to process customs data within six weeks and with the Ministry of Trade and Industry (MOT) and the BOG to identify and reduce discrepancies in trade statistics. - Ensure imports into bonded warehouses are not double-counted. - CEPS data collection: - CEPS data collection procedures need improvement. - There is scope to improve trade volume data collected by CEPS through customs invoices to help GSS extract meaningful import and export unit values. - Export unit values: - Fund staff recommended that the GSS produce export unit values for major export commodities, such as gold and cocoa. - Observation: A high coverage of the country’s export bundle can be obtained from just three major exports—cocoa, gold, and unwrought aluminum. - Import deflation: - Deflation of imports is likely to require an iterative procedure to balance coverage of the index and its stability, owing to heterogeneity of the basket. ### BOG implementation and survey activities - The BOG continues to implement recommendations of a TA mission on balance of payments statistics in 2000, including surveys of key establishments. - A survey of shipping companies was introduced in 2004, but the companies at that time were unable to submit the required data. - Interagency collaboration: - Collaboration among the government agencies responsible for data collection has improved. - Travel and capital flows data: - A new immigration form to capture data on travel statistics, in line with the Tourism Satellite Account designed by an interinstitutional committee, was introduced in March 2005. - The survey on private capital flows carried out in 2000 was published, and the BOG intends to implement a second phase of the capital flow project. - External support: - Ghana is expected to benefit from a DIFID project being implemented by STA on strengthening capacity for balance of payments and international investment position statistics, of which monitoring capital flows is a key component. ### Key statistics and reporting frequencies (selected items as reported) - Exchange Rates: Date of latest observation March, 2008; Date received April 2008; Frequency of Data D; Frequency of Reporting W; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation March 2008; Date received April 2008; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q. - Reserve/Base Money: Date of latest observation March 2008; Date received April 2008; Frequency of Data W; Frequency of Reporting Q; Frequency of Publication I. - Broad Money: Date of latest observation March 2008; Date received April 2008; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication I. - Central Bank Balance Sheet: Date of latest observation March 2008; Date received April 2008; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication I. - Consolidated Balance Sheet of the Banking System: Date of latest observation March 2008; Date received April 2008; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication I. - Interest Rates: Date of latest observation March 2008; Date received April 2008; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Consumer Price Index: Date of latest observation March 2008; Date received April 2008; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing – central government: Date of latest observation March 2008; Date received March 2008; Frequency of Data M; Frequency of Reporting M; Frequency of Publication I. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation Dec. 2007; Date received April 2008; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication I. - External Current Account Balance: Date of latest observation March 2008; Date received April 2008; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and Imports of Goods and Services: Date of latest observation March 2008; Date received April 2008; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication I. - GDP/GNP: Date of latest observation 2007; Date received April 2008; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Gross External Debt: Date of latest observation Dec. 2007; Date received April 2008; Frequency of Data M; Frequency of Reporting I; Frequency of Publication A. - International Investment Position: Date of latest observation NA; Date received NA; Frequency of Data NA; Frequency of Reporting NA; Frequency of Publication NA. *Source: _cr08344 - 14. The responsibility for external debt recording and payment is divided among* ### 12.5 percent. A flat rate of 3% of turnover has been introduced for traders in the informal sector ### _cr08344 - 12.5 percent. A flat rate of 3% of turnover has been introduced for traders in the informal sector ### VAT / National Health Insurance and informal sector - VAT rate of 12.5 percent. - A flat rate of 3% of turnover has been introduced for traders in the informal sector. - National Health Insurance Levy referenced alongside VAT rules (same rules and procedures as VAT). ### Excise taxes — Tobacco, Alcohol, Petroleum - Tobacco products: - Ad valorem excise duties applied to all tobacco products. - Tobacco products are taxed at 140 percent of ex-factory price and the VAT rate of 12.5 percent. - Specific taxes introduced in 2007 are yet to be implemented. - Spirits and beer (ad valorem excise rates): - mineral and aerated water: 20 percent - beer: 50 percent - spirits: 25 percent - malt: 5 percent - Akpeteshi: 20 percent - All alcoholic beverages are also subject to the VAT rate of 12.5 percent. - Specific taxes introduced in 2007 are yet to be implemented. - Petroleum products (Budget 2005; Act 685): - From February 28, 2001 onwards, specific excise duties no longer apply to petroleum products; earmarked levies are still collected. - Previously ad valorem duty of 15% was charged on ex-refinery price. - Effective 2006 specific levies per liter: - premium gasoline – 7.18 pesewas - AGO – 9.10 - kerosene – 6.4875 pesewas - RFO – 5.2094 pesewas - Specific levies charged for: - road fund: 6 pesewas per liter on premium gasoline and gas oil - debt recovery fund: 5 pesewas per liter for premium gasoline, gas oil, AGO and 3.5 pesewas per liter for kerosene and RFO - exploration and energy fund: 0.10 pesewas and 0.05 pesewas respectively per liter for premium gasoline, gas oil, kerosene, ATK, and RFO - A Social Impact Mitigating Levy of 4.4256 pesewas is charged per liter of premium petrol. ### Taxes on international trade — Imports - Customs duties: - Duties are levied on most imported goods, generally as ad valorem taxes on the c.i.f. value (some petroleum oils under AS code 2710 attract specific rates). - Ghana maintains a common tariff based on the Harmonized System. Four ad valorem rates: 0 percent, 5 percent, 10 percent, and 20 percent. - A 1 percent processing fee is applied to goods that are statutorily exempt from import duty (exceptions listed: VALCO, VRA, diplomatic missions, British council, head of state, technical schemes). - All zero rated goods not for education; health and agriculture sectors are also liable to a 1percent processing fee. - Old age penalties ranging between 2.5% to 50 % is imposed on imported vehicles over ten years. - Some duty-free items include agricultural machinery and tractors; banknotes and coins; crude oil; educational material; newsprint; postage stamps; veterinary drugs; cash registers; compact fluorescent bulbs; commercial buses with seating capacity of 30 0r more. - Special import tax (historical): - Introduced in 2000 on 36 selected products at 20 percent; in 2001 some 32 products remained subject at 10 percent. The tax has now been abolished by Act 631. - Export Development and Investment Fund levy / ECOWAS Community Levy: - ECOWAS Community Levy on imports originating from third countries. - Rate: 0.5 percent of c.i.f. value. - Petroleum products exempted from some levies as noted. ### Export taxes - Cocoa export tax: - A tax is levied on the f.o.b. price received by the Ghana Cocoa Marketing Board for all cocoa exported from Ghana. - Exemptions: None specified. - The cocoa export tax rate is determined by the Minister of Finance. - Usually, 100 percent of all proceeds received from cocoa exports after paying producers' costs and COCOBOD's marketing and other costs are transferred to the central budget. - A processing fee of 1% of CIF value is charged on goods re-exported from bonded warehouses. - Destination Inspection fee: 1perent of c.i.f. value. - Timber-related export taxes (Budget 2005 / 2001 changes): - Tax introduced in 2001 budget on curls, logs (squared and round), and lumber. The tax on curls was taken off by Act 686. - Rates: - 0 percent of f.o.b. value on lumber and curls. - 20 percent on logs (round or square). ### Other taxes — Stamp duties - Stamp Duty Act, 2005 (Act 689) repealed earlier stamp duty legislation. - Ad valorem or specific rates are levied on a range of legal documents and instruments (bills of exchange, promissory notes, bills of lading, agreements, conveyances, extracts from registers, mortgages). - Exemptions include instruments transferring ships, transactions where the government would be liable for the stamp tax, and the transfer of company shares to a Ghanaian citizen. - Examples of duties/rates as presented: - Mineral lease GH / C25 - Agreement 50pesewas - Mortgages Between 0.25 to 0.5 percent of the amount *IMF staff compilation: GHANA — SUMMARY OF TAX SYSTEM, MARCH 2008 (Appendix IV).* ### 7.2 Other taxes not elsewhere classified ### 7.2 Other taxes not elsewhere classified ### Taxes on minerals and mining (Minerals and Mining Law) - Taxable: any holder of a mining lease. - Tax payable on the carry-forward cash balance of an individual involved in mining operations. - Exemptions include: - (a) exemption of staff from payment of income tax relating to furnished accommodation at the mine site; - (b) personal remittance quota for expatriate personnel free from any tax imposed by any enactment for the transfer of external currency out of Ghana; - (c) exemption from the selective alien employment tax under the Selective Alien Employment Tax Decree (N.R.C.D. 201). - No tax holidays. - Tax jurisdiction under S.M.C.D. 5: persons involved in the industry taxable on income accruing in, derived from, brought into, and received in Ghana for resident companies subject to deductions and exemptions noted. - Rates: - Mining operations: 25 percent. - Rate of royalty: 3-12 percent, depending on profitability and certain operating costs. ### Airport Tax (Airport Tax Act, 1963, as amended 2001 (Act. 596)) - Nature: Payable by every passenger departing from an airport. - Exemptions and deductions: None. - Rates: - Outside Ghana: US$ 50. - Inside Ghana: GH¢1. ### Petroleum Income Tax (Petroleum Income Tax Law 1987 (P.N.D.C.L. 188)) - Nature: Covers all persons carrying on petroleum operations and is payable on income from the sale of petroleum less deductions. - Deductions allowed: - (a) rent; - (b) interest paid on loans; - (c) repairs of premises used for the business; - (d) bad and doubtful debts; - (e) contributions to a pension fund approved by the Commissioner—where such contributions exceed 25 percent of the employees' remuneration, a 25 percent deduction is allowed; - (f) losses incurred during a previous year of accounting, with the deduction being a sum equal to or less than the amount of such loss. - Additional charge: An additional profit tax is chargeable on the carry-forward cash balance of a year of assessment. - Capital allowance determination: qualifying expenditure governing the determination of capital allowance under this law is deemed to have been incurred during January 1 to December 31, 1984 at a value to be determined by the Ministry of Finance and Economic Planning. - Secretary for Finance and Economic Planning: responsibility for fixing the rate of return for the operation. - Rates: - Petroleum companies: 25 percent*. - Current recommended rate of return: 17.5 percent. - Note: *2006 budget statement. ### IMF Article IV consultation with Ghana — Background and macroeconomic developments - Growth and inflation: - Ghanaian economy growth: about 6½ percent in 2007 and the first months of 2008. - Headline inflation reached 16.9 percent at the end of May 2008. - Inflation had been around 10 percent from early 2006 to October 2007. - Fiscal and external positions: - Fiscal deficit (including grants) rose to 9 percent in 2007. - Total public debt reached 50 percent of GDP at the end of 2007, up eight percentage points of GDP from the end of 2006. - Current account deficit (including grants) reached 11 percent of GDP in 2007. - Import coverage fell to 2.6 months of imports due to rapid import growth. - Cedi depreciated vis-à-vis the U.S. dollar by 7 percent from May 2007 to May 2008. - Shocks and supply-side impacts: - Supply-side shocks from international fuel prices negatively impacted Ghana; terms of trade continued to improve overall. - Floods in the northern region caused localized food shortages and sharp price increases. - Policy and reform status: - Structural reforms advanced in many areas; financial sector reforms continued. - Debt management system upgrade to include a medium-term debt management strategy. - Fiscal decentralization advances; PFM reforms continued but exposed remaining weaknesses due to expenditure slippages in 2006 and 2007. - Civil service reforms have slowed. ### Executive Board Assessment — key judgments and policy recommendations - Assessment: - Directors noted continued strong growth and private sector dynamism, earlier gains in macroeconomic stabilization and debt reduction, and structural reforms since the early 2000s. - Since 2007, fiscal expansion, strong private demand, and oil and food price shocks led to high fiscal and external current account deficits, rising inflation, and weakening international reserves. - Risks could jeopardize earlier achievements; priority to pull back from recent expansionary fiscal policies. - Fiscal policy recommendations: - Fiscal policy should carry the brunt of adjustment. - Welcomed measures announced by authorities: move toward cost recovery in utility pricing starting with high-voltage users; temporarily freeze public sector employment (beyond automatic absorption of trainees in health and education); enhance government revenue from the gold sector. - Importance of maintaining the public sector wage bill in line with the budget; encourage cutting or postponing nonessential expenditure. - Further fiscal adjustment needed over the next few years to support macroeconomic stability and ensure debt sustainability. - Key steps: establish cost-recovery utility pricing for all users; re-introduce an automatic utility price adjustment mechanism; accompany with well-targeted utility subsidies for poor households. - Contain wage bill through civil service reform allowing right-sizing and increasing wages for high-skilled personnel. - Adopt a comprehensive debt management framework and utilize concessional financing possibilities. - Focus on total public debt given rapid rise in domestic debt and decreasing debt concessionality. - Monetary and exchange rate policy: - Supported Bank of Ghana’s monetary tightening; noted readiness to further tighten to bring inflation toward medium-term target. - Introduction of an inflation targeting regime last year enhances framework; monetary policy effectiveness needs fiscal consolidation support. - Welcome exchange rate flexibility; reserves remain low and should be increased. - Several Directors suggested phasing out foreign exchange surrender requirements. - Financial sector and regulation: - Rapid credit growth calls for enhanced regulation. - Welcomed increase in banks’ minimum capital requirements and introduction of elements of Basel II; increased on-site supervision. - Additional macro-prudential measures may be required if credit growth continues. - Oil management and fiscal framework: - Supported enactment of a fiscal responsibility law to anchor fiscal policy in anticipation of oil revenue. - Oil prospects can materially improve medium-term outlook if resources are well managed. - Commended authorities for starting a broad-based national consultation on Ghana’s oil management regime. ### Selected economic and financial indicators, 2005–09 (selected items; values as presented) - Real GDP (annual percentage change): 2005: 5.9 2006: 6.4 2007: 6.3 2008: 6.5 2009: 5.8 - Real GDP per capita (annual percentage change): 2005: 3.2 2006: 3.7 2007: 3.6 2008: 3.8 2009: 3.2 - GDP deflator (annual percentage change): 2005: 15.0 2006: 12.8 2007: 14.4 2008: 16.2 2009: 10.4 - Consumer price index (annual average): 2005: 15.1 2006: 10.2 2007: 10.7 2008: 14.3 2009: 10.5 - Headline inflation (end of period): 2005: 14.8 2006: 10.9 2007: 12.7 2008: 13.8 2009: 10.5 - Exports, f.o.b. (percentage change, in US$): 2005: 0.7 2006: 33.3 2007: 11.7 2008: 34.4 2009: 5.6 - Imports, f.o.b. (percentage change, in US$): 2005: 24.4 2006: 26.3 2007: 19.4 2008: 28.2 2009: 7.9 - Credit to the private sector (year on year): 2005: 50.6 2006: 42.7 2007: 60.0 2008: 38.7 2009: 39.1 - Gross investment (percent of GDP): 2005: 29.9 2006: 30.4 2007: 33.7 2008: 32.7 2009: 32.3 - Private (percent of GDP): 2005: 17.9 2006: 18.0 2007: 19.5 2008: 18.7 2009: 18.5 - Central government (percent of GDP): 2005: 12.0 2006: 12.4 2007: 14.2 2008: 14.0 2009: 13.8 - Total revenue (percent of GDP): 2005: 23.8 2006: 21.9 2007: 22.5 2008: 23.0 2009: 23.6 - Grants (percent of GDP): 2005: 5.2 2006: 5.4 2007: 6.0 2008: 4.9 2009: 3.9 - Total expenditure (percent of GDP): 2005: 30.7 2006: 34.4 2007: 37.0 2008: 37.7 2009: 38.1 - Overall balance (including grants, percent of GDP): 2005: -3.0 2006: -7.5 2007: -9.1 2008: -10.3 2009: -10.7 - Net domestic financing (percent of GDP): 2005: -1.7 2006: 5.0 2007: 1.3 2008: 5.5 2009: 6.9 - Total government debt (percent of GDP): 2005: 77.1 2006: 41.9 2007: 49.8 2008: 51.4 2009: 56.3 - Domestic debt (percent of GDP): 2005: 17.9 2006: 24.8 2007: 26.1 2008: 26.6 2009: 29.6 - External debt (percent of GDP): 2005: 59.2 2006: 17.1 2007: 23.7 2008: 24.8 2009: 26.7 - Current account balance (including official transfers, percent of GDP): 2005: -7.0 2006: -9.0 2007: -10.9 2008: -13.2 2009: -12.6 - Gross international reserves (millions of US$): 2005: 1,951 2006: 2,325 2007: 2,738 2008: 2,474 2009: 2,399 - Months of imports of goods and services: 2005: 2.8 2006: 2.8 2007: 2.6 2008: 2.2 2009: 2.1 - Total donor support (millions of US$): 2005: 1,087 2006: 979 2007: 1,171 2008: 1,292 2009: 1,283 - Nominal GDP (billions of GHc): 2005: 9.7 2006: 11.7 2007: 14.2 2008: 17.6 2009: 20.5 ### Statement by Mr. Jafar Mojarrad, Executive Director for Ghana (summary of authorities’ views and planned actions) - Authorities’ recognition: - Thank staff for policy advice and technical assistance; acknowledge shocks putting strain on public finances and external position. - Determined to safeguard gains and take necessary measures to get back on track. - Fiscal management and energy crisis response: - Fiscal performance improved during 2001-06; 2007 fiscal performance affected by response to energy crisis caused by severe drought to hydroelectric dam. - Authorities spent to increase power generation capacity, support energy agencies, and provide subsidies to consumers to avert slump and social tension. - Inability to fully apply automatic pricing mechanism during crisis; plan to phase in pricing mechanism starting with reducing subsidy to non-residential customers, then extending to residential customers above some consumption threshold. - Restoring cost-recovery pricing requires improving operational efficiency of utility companies. - Wage bill and public sector employment: - Wage bill overruns due largely to increased hiring for health and education sectors. - Authorities admit ineffective hiring policy application and the need to reinvigorate civil service reform to achieve a right-sized, productive, and well-remunerated workforce. - Keeping wage bill under control essential to avoid crowding out priority social and development spending. - Fiscal adjustment and reforms: - Need for fiscal adjustment to reduce deficit and domestic debt to sustainable paths. - Further improvement in PFM within an MTEF foreseen. - A Fiscal Responsibility Law (FRL) is being prepared with Fund assistance to buttress fiscal discipline and anchor policy and expectations. - Inflation progress: - Authorities successfully reduced inflation from 40 percent in 2000 to about 10 percent in September 2007; inflation on upward trend thereafter. *Source: Ghanaian authorities and IMF staff, from the document “_cr08344 - 7.2 Other taxes not elsewhere classified.”* ### 16.9 percent in May 2008. Demand pressures have been a contributory factor, resulting from ### 16.9 percent in May 2008. ### Inflation, monetary policy, and supply shocks - Inflation reached 16.9 percent in May 2008. - Demand pressures from high monetary growth have been a contributory factor. - Supply-related shocks played a major role: high prices of oil and food and a significant adjustment of utility tariffs in November 2007. - The Bank of Ghana (BoG) has tightened policy and will continue to act as needed to contain demand pressures. - BoG policy rate—currently at 16.5 percent—has been barely positive in real terms. - Bank lending rates are up to 30 percent, yet credit demand remains strong and private sector credit growth has remained strong despite policy tightening. - Transmission of policy through interest rates may be limited in an environment of financial dearth and requires time to nurture. - Perennial supply shocks complicate disinflation in a small, open, low-income economy like Ghana. - Staff propose an inflation forecast targeting (IFT) framework that is more flexible, forward-looking, and longer-run; it could serve as a transition to full-fledged inflation targeting (IT). - Authorities agree monetary policy alone cannot shoulder disinflation and require close coordination with fiscal policy. - Monetary policy carries the risk of precipitating an inflation spiral and short-term output loss under current conditions. ### Exchange rate policy and reserves - Authorities recognize greater exchange rate flexibility will support monetary policy and shock response. - Authorities reiterate they do not target any particular exchange rate; recent substantial nominal depreciation is noted. - BoG interventions are limited to smoothing short-term fluctuations, building a desirable level of reserves, and supplying foreign exchange for oil purchases. - Surrender requirements for cocoa and gold are maintained to manage the lopsided flow of foreign exchange, but the policy remains open to review as conditions permit. ### Financial sector soundness and reforms - Financial sector is generally sound in terms of capital adequacy, liquidity, and profitability. - Rapid credit growth, sector expansion, and signs of worsening asset quality and asset concentration risks call for vigilance. - Authorities continue financial sector reform: risk-based supervision and recapitalization. - Authorities will consider staff suggestions for further financial sector improvements. ### External position, imports, and mining revenue - Ghana’s external position has come under strain: current account deficit widening with a decline in reserves. - A significant increase in imports, largely due to oil at higher prices, has contributed to the deterioration. - Non-oil imports have also risen, largely attributable to energy-related items. - Demand pressures contributed to weakening external position, but higher oil prices and energy-related imports are central factors. - Oil will probably continue to exert pressure on the balance of payments and reserves until prices turn downwards. - Authorities are concerned about historically low income accruing from the mining sector, especially gold, despite a considerable boom. - Exceptionally generous incentives to investors have resulted in minimal contribution of gold to reserves and budgetary revenue. - Authorities intend to increase the rate of royalties tax, enforce current tax laws, address administrative loopholes, reopen some agreements based on present realities, and introduce changes in the tax system. ### Debt sustainability, public investment, and ratings - Authorities worked to gain and are keen to protect debt sustainability. - Recent increases in debt indicators (per staff’s updated DSA) stem largely from investments in energy and physical infrastructure. - These investments are expected to increase productive capacity and long-run growth potential. - Any deviations from debt sustainability should be seen as temporary; investments may make the situation worse before improving it. - Foregoing critical investments risks settling into a low-equilibrium, below-potential growth path that would undermine poverty reduction and living-standard improvements. - Standard and Poor’s affirmed in February its ‘B’ and ‘B+’ ratings respectively for Ghana’s short-term and long-term sovereign debt. - The DSA does not appear to fully account for economic potential from the investments and is based on average growth of 6 percent. - Authorities estimate that at least 7-8 percent rate of growth will be required to achieve the MDGs and launch Ghana into emerging-market status. - Achieving a higher growth trajectory requires reexamination of resource, capacity, and policy needs. ### Oil prospects and fiscal preparedness - Authorities are optimistic about prospect of producing oil in commercial quantities in the near future but do not treat it as a substitute for prudent policies. - Authorities prefer conservative assumptions and will not over-rely on oil revenue. - Oil production would strengthen the balance of payments and debt outlook, but authorities will continue prudent borrowing and debt management. - Preparatory initiatives for the oil era include: a national dialogue on use of future revenue, consideration of an oil revenue fund, and a demand management plan. - Planned improvements in public financial management (PFM) and introduction of the Fiscal Responsibility Law (FRL) will support oil-era preparations. ### Data, standards, and technical assistance - Authorities recognize scope for improving the quality and timeliness of economic data. - Ghana aims to meet SDDS standards for data production and dissemination as part of its goal of achieving emerging-market status. - Authorities continue to count on Fund technical assistance for data improvements. ### Authorities’ commitments and engagement with the Fund - Authorities express gratitude for financial and technical support from the Fund and development community. - They reaffirm commitment to sound policies and structural reforms to preserve Ghana’s gains. - Authorities note the need for extra vigilance and caution in an election year and intend policy continuity after the elections as a constitutional guarantee. - They intend to remain closely engaged with the Fund to continue benefiting from its policy advice. *Source: IMF staff report text provided.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08344.pdf_