## Response to Fund Advice (_cr09256) ## Source details **Canonical URL:** [Response to Fund Advice (_cr09256)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09256.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09256.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09256.pdf.json) --- ### Executive summary and macro outlook - 2008 macro outcomes and immediate effects: - Fiscal deficit rose to 14.5 percent of GDP. - Inflation rose to 20 percent (stabilized in the 20 percent range in early-2009). - Currency depreciated by 50 percent against the dollar (about 38 percent in 2008 interbank market and further 16 percent through end-May 2009). - Official reserves fell to about 2 months’ import cover (gross international reserves declined from US$2.8 billion to US$2.0 billion). - 2009 budget and staff forecasts: - 2009 budget targets a 9.4 percent of GDP deficit through expenditure restraint and higher grants. - IMF staff forecast: expansion of 4½ percent in 2009, rising to 5 percent in 2010. - Authorities more optimistic; they envisaged growth a little under 6 percent in 2009 but agreed to use staff forecast for fiscal planning. - Program support: - Authorities requested a PRGF with access of 105 percent of quota (SDR 387.45 million). - Staff supports the request to underpin multi-year fiscal consolidation and public debt stabilization. ### Growth prospects, risks, and projections - Key projections (selected annual percentage changes / levels from Text Table 2 and Table 1): - Real GDP: 2007: 5.7; 2008: 7.3; 2009: 4.5; 2010: 5.0; 2011: 24.2; 2012: 7.1; 2013: 5.3; 2014: 5.0. - Nonoil real GDP: 2007: 5.7; 2008: 7.3; 2009: 4.5; 2010: 5.0; 2011: 6.2; 2012: 6.2; 2013: 6.2; 2014: 5.9. - Inflation, end-of-period: 2007: 12.7; 2008: 18.1; 2009: 14.6; 2010: 9.2; 2011: 8.0; 2012–2014: 5.0. - Overall fiscal balance (percent of GDP): 2007: -9.2; 2008: -14.5; 2009: -9.4; 2010: -6.0; 2011: -4.5; 2012: -2.8; 2013: -2.1; 2014: -2.1. - Net public debt (percent of GDP): 2007: 51.2; 2008: 58.2; 2009: 66.4; 2010: 66.6; 2011: 66.0; 2012: 63.7; 2013: 60.8; 2014: 58.1. - External current account balance (percent of GDP): 2007: -12.0; 2008: -19.3; 2009: -13.0; 2010: -15.9; 2011: -9.5; 2012: -8.3; 2013: -9.5; 2014: -6.0. - Downside risks to growth: - Intensified decline in remittances (net private remittances projected to decline 30 percent in 2009). - Deterioration in gold or cocoa prices. - Domestic banks shifting to cautious lending amid rising NPLs could trigger larger slowdown. - Oil-related growth implications: - Jubilee field proven reserves estimated at 490 million barrels; potential up to 1.5 billion barrels or more pending discoveries. - Jubilee production planned to start in 2011 with initial production projected at about 17 percent of non-oil GDP; more than one third accrues to government revenues (~6-7 percent of GDP in 2011–12). ### Fiscal consolidation strategy and budget measures - Immediate objectives: - Reduce fiscal deficit from 14.5 percent of GDP in 2008 to 9.4 percent in 2009, 6.0 percent in 2010, and 4½ percent in 2011. - 2009 measures and identified savings (totaling 1.0 percent of GDP / GH¢ 209 million): - Eliminate GH¢ 50 million provision for wage structure reform (postponed). - Savings of GH¢ 34 million from lower-than-budgeted medical workers’ salary increase. - Reduce domestic investment allocation by GH¢ 31 million. - Reduce tax exemptions projected to yield GH¢ 40 million; special permits and concessions no longer discretionary from June 17, 2009. - Customs and excise revenue collections increased projected by GH¢ 43 million. - National Stabilization Levy: additional 5 percent profit tax through end-2010 on selected sectors; projected yield in 2009 GH¢ 11 million; full-year yield in 2010 GH¢ 22 million or more. - 2010 budget needs and constraints: - Further fiscal measures of about 3½ percent of GDP will be needed in the 2010 budget to reach a 6 percent deficit target. - Measures expected to come largely from expenditure restraint (including public wage bill) and higher utility prices; need to explore revenue mobilization options. - Risks: compression of the wage bill may be infeasible given planned salary structure reform; squeeze on capital spending may be unsustainable given infrastructure needs; fiscal gap possibly larger due to arrears clearance (provision in 2009 budget: GH¢534 million to settle domestic arrears). - Mandatory and inflexible spending pressures (Text Table 4): - Wages and salaries (percent of GDP): 2006 9.7; 2007 9.9; 2008 10.1; 2009 10.7. - Mandatory and inflexible spending (percent of revenue and grants): 2006 92.0; 2007 96.2; 2008 103.1; 2009 107.0. ### Monetary policy, inflation targeting, and exchange rate stance - Monetary stance and tools: - Bank of Ghana raised benchmark lending rate by 6 percentage points between October 2007 and February 2009; prime rate increased a cumulative 350 basis points in 2008 ending at 17 percent and further by 150 basis points to 18.5 percent in February 2009. - Real prime rate negative since early-2008 (based on backward-looking inflation); real interbank rate in the 0-2 percent range. - Case for further monetary tightening if inflation expectations remain high and domestic petroleum prices rise. - Inflation-targeting framework: - BoG launched IT regime in 2007; central inflation target path (selected central target and bands): - Central inflation target: 19.7 (Jun. 2009), 16.5 (Sep. 2009), 14.6 (Dec. 2009), 12.2 (Mar. 2010), 9.7 (Jun. 2010). - Inner and outer bands provided with consultation/Board consultation triggers for breaches. - BoG committed to strengthen forecasting, communications, and clarity on preferred core inflation measure. - Exchange rate policy: - Maintain exchange rate flexibility consistent with IT. - Staff saw signs of modest overvaluation and possible need for further real depreciation; BoG to refrain from FX intervention except regular weekly sales to meet priority demands. - Program exchange rate for monitoring: GH¢ 1.45 per US$1 (average as of June 19, 2009). ### Financial sector vulnerabilities and policy responses - Financial soundness indicators and risks: - Non-performing assets: 9.6 percent in March 2009 (rising trend; sectoral concentrations in forestry, mining, construction). - Private sector credit growth: up 56 percent in the year to April 2009; broad money up 28 percent. - Banking system liquid with capital above statutory levels but profitability declining; some banks financially strained; one bank experienced apparent high-level fraud. - Regulatory responses: - Bank of Ghana required banks to raise minimum capital to GH¢60 million (about $40 million); majority foreign-owned banks deadline end-2009, domestic banks end-2012; alternative phase-in: domestic banks to GH¢25 million by end-2010 then to GH¢60 million by end-2012. - BoG established off-site monitoring, stress testing, Lender of Last Resort facility, legal authority for prompt corrective actions; operational limits in liquidity support, no deposit insurance. - Structural financial reforms: - Implement risk-based supervision and Basel II adoption (Standardized Approach for credit and operational risk) aimed for 2010 implementation. - Deepen domestic debt market: rationalize primary dealer system; publish annual issue calendar; investor relations program. - Authorities welcome an FSAP update. ### Oil sector management and Debt Sustainability Analysis (DSA) - Oil assumptions and fiscal impact: - Jubilee I production assumed to average 120 thousand barrels per day during 2012-15. - Oil revenues projected to peak at about 6 percent of GDP during 2011-2017. - DSA baseline assumes one-third of tax and royalty revenues saved, two-thirds spent on investment; additional oil entitlement assumed half saved. - Oil savings projected to reach cumulative 6 percent of GDP by 2017; oil savings account depleted by 2028 in baseline. - DSA outlook and risks: - Public sector net debt projected to decline by about 35 percentage points of GDP during 2010-2029 to about 37 percent of GDP under successful fiscal consolidation and sustained non-mineral growth. - Ghana placed at moderate risk of debt distress; baseline sensitive to near-term primary fiscal performance and exchange rate moves (e.g., a 30 percent depreciation raises PV debt-to-GDP by 25 percentage points by end of projection period). - Stress tests: debt indicators generally resilient; debt service-to-revenue ratio could modestly exceed thresholds under adverse shocks. - Policy guidance on oil: - Front-loaded investment acceptable given infrastructure needs but spending should be based on cautious oil revenue assumptions and absorptive capacity. - Strong control over recurrent spending required to avoid filling new fiscal space. - Oil receipts should not replace strengthened non-oil revenue mobilization. - Fiscal rule for managing oil revenues recommended; ensure oil accounts fully and transparently integrated into fiscal accounts and extend EITI to oil sector (and forestry and fishing). ### Program design, financing, and conditionality - PRGF arrangement: - Duration: three-year period from Board approval. - Proposed access: 105 percent of quota (SDR 387.45 million). - Disbursement schedule (selected): - SDR 67.65 million — July 15, 2009 (Executive Board approval). - SDR 67.65 million — December 15, 2009 (observance of Sep 30, 2009 performance criteria). - Subsequent disbursements conditional on performance reviews; total SDR 387.45 million. - Financing gaps and external support: - Balance of payments financing gaps: US$450 million in 2009 and $325 million in 2010. - Fiscal financing gap: projected US$250 million in 2009, declining to half that in 2010. - Majority of 2009 fiscal gap expected to be closed by a World Bank Development Policy Loan augmenting 2009 funding pipeline by US$200 million; potential European Commission vulnerability facility and bilateral donors to fill remaining gap. - PRGF to provide further financing of $200 million in 2009 and 2010 under the arrangement to stabilize gross reserves at 2 months import cover, rising to 2½ months with a new SDR allocation. - Conditionality and structural reforms: - Focus areas: tax policy and revenue administration; public expenditure management and IFMIS review; public sector payroll control and payroll database migration; energy sector reforms with cost-recovery pricing and electricity tariff adjustment to cover operating costs from end-2009; modernize debt management; adopt cash management framework and Treasury Single Account. - Quantitative performance criteria: ceiling on overall fiscal deficit (including grants); floor on net international reserves of BoG; continuous zero ceiling for accumulation of new external arrears; ceiling on new external nonconcessional debt. Indicative targets: ceiling on net domestic financing of government; ceiling on net domestic assets of BoG. ### Data, statistics, and program monitoring - National accounts and rebasing: - Fund review suggests national accounts rebasing to 2004 may upwardly revise GDP estimates by as much as 50 percent; updated accounts to be available in late-2009 or early-2010. - GSS plans to publish new numbers by end-December 2009 and produce quarterly national accounts thereafter. - Reporting commitments and data provision (selected): - Fiscal central budget operations: Monthly, within six weeks of month-end. - Net domestic assets and net international reserves of BoG: Monthly, within two weeks of month-end. - CPI: Monthly, within two weeks of month-end. - National accounts by sector: Annual within three months (switching to quarterly when available). - Authorities commit to timely transmission of revisions and to publish monthly fiscal outturns (ministry website) with maximum lag of eight weeks. - Monitoring cadence: - Quarterly reviews in 2009 (test dates end-September and end-December 2009); semi-annual reviews starting in 2010 (test dates end-June and end-December through 2011); final review test date end-March 2012. ### Staff appraisal, recommendations, and priorities - Central conclusions: - Highly expansionary fiscal policy in 2008 was the primary cause of macro instability; fiscal consolidation is central to restoring stability. - 2009 deficit target of 9.4 percent of GDP described as appropriately ambitious; further measures needed to reach 6 percent in 2010. - Key policy recommendations: - Fiscal: maintain expenditure restraint, intensify cash management, reduce tax exemptions, control public wage growth, adjust utility tariffs to achieve cost recovery, strengthen revenue mobilization. - Monetary and exchange rate: maintain and strengthen the IT framework, tighten monetary stance if warranted, preserve exchange rate flexibility, use SDR allocation to rebuild reserves. - Financial sector: strengthen supervision, corporate governance, creditor rights, credit reference bureau, and regional cross-border supervision; welcome FSAP update. - Oil management: adopt cautious assumptions, save part of oil revenues, design fiscal rule, integrate oil accounts transparently, extend EITI. - Data: further strengthen national accounts and other statistics for surveillance. - Communication and political economy: - Strong communications and public outreach critical for implementing tariff increases and broader reforms. - Political economy risk: sustain reform momentum after start of oil production in 2011 to prevent diversion of oil revenues to recurrent spending. *Source: IMF staff report — "Response to Fund Advice" (content unit _cr09256).* ### 1. Response to Fund Advice ............................................................................................. ### 1. Response to Fund Advice ### Executive Summary - Highly expansionary fiscal policy destabilized the economy in 2008: - Fiscal deficit rose to 14.5 percent of GDP. - Inflation rose to 20 percent. - Currency depreciated by 50 percent against the dollar. - Official reserves fell to 2 months’ import cover. - The 2009 budget targets fiscal consolidation: - Budget targets a 9.4 percent of GDP deficit through expenditure restraint and higher grants. - Cash management and expenditure monitoring have been strengthened. - Priorities identified for tax policy and revenue management. - Growth and outlook: - IMF staff forecast: expansion of 4½ percent in 2009, rising to 5 percent in 2010. - Authorities more optimistic than staff. - Ghana likely to fare better than many countries during the 2009 global recession due to improved terms of trade and limited exposures. - 2009 budget outlook and risks: - Staff projected a fiscal deficit of 10.4 percent of GDP on unchanged policies (projected deficit over-run). - Government measures: cut tax exemptions, identified wage savings, adopting a temporary profit tax surcharge; ready to tighten spending if necessary. - Additional fiscal needs: - Further fiscal measures of about 3½ percent of GDP will be needed in the 2010 budget. - Utility prices likely need to rise to offset rising power generation costs; explore revenue mobilization options. - Monetary policy and inflation targeting: - Inflation targeting framework must be robust in 2009-10. - Despite tighter fiscal stance, inflation expectations are high and currency depreciation continues. - Case for further monetary policy tightening given moderately positive real interest rates and resumed strength in global oil prices. - Exchange rate policy: - Maintain exchange rate flexibility. - Large nominal depreciation has produced only modest real exchange rate correction. - Authorities view currency as appropriately valued; staff see risks of modest overvaluation and possible need for further correction. - Tight monetary policy can help limit inflation pass-through. - Financial sector: - Resilient to initial impact of global financial crisis but risks have accumulated amid rapid banking expansion and increased risk taking. - Deterioration in loan books could continue due to rising funding costs and currency depreciation. - Mitigating step: Bank of Ghana required banks to raise minimum capital to GHȼ60 million (about $40 million). - PRGF request: - Authorities have requested a PRGF with access of 105 percent of quota to support multi-year fiscal consolidation and public debt stabilization. - Key fiscal institutions would be strengthened ahead of start of oil production in 2011. - Staff supports the request. ### Introduction - Context: - Ghana completed a PRGF arrangement in October 2006 with achievements: strong growth, single-digit inflation, major debt reduction, and poverty rate decline from 39 percent (1998–99) to 28 percent (2005–06). - Fiscal stability became elusive with the deficit rising sharply by end-2006. - 2007–08 engagement: - PSI discussions did not advance; limited responsiveness to Fund’s 2008 surveillance advice on fiscal management. - Productive collaboration: Fund advice on building access to global financial markets and developing an inflation targeting framework. - Recent dialogue: - Macroeconomic dialogue strengthened under new government. - Fund staff visited Accra in February 2009 to support 2009 budget preparation. - Technical assistance requested and missions completed on tax policy, revenue administration, and natural resource taxation. - New program request: - Authorities requested a new PRGF arrangement to underpin fiscal consolidation and structural fiscal reforms ahead of oil-producer status starting in 2011. ### Background - Growth and inflation: - Economic growth rose to 7.3 percent in 2008—a two-decade high—driven by expansionary fiscal policies, strong credit expansion, buoyant remittances, and strong agricultural yields. - For 2009, growth projected to slow due to policy tightening and global recession spillovers. - Inflation rose through 2007–08 due to global food and fuel shocks, strong domestic demand, and pass-through from currency depreciation; stabilized in the 20 percent range in early-2009. - Inflation projected to decline to 14½ percent by end-2009 with easing demand pressures. - Fiscal developments in 2008: - Fiscal deficit surged to 14.5 percent of GDP due to rapid public spending growth. - Contributors: capital spending, energy subsidies, and wage and salaries each rose by more than 1 percentage point of GDP. - Electricity tariffs were not adjusted despite rising power generation costs; public sector salaries increased on average by more than 30 percent (15 percent in real terms). - Exceptional foreign financing in 2008: 7.3 percent of GDP from late-2007 Eurobond issue and proceeds from sale of Ghana Telecom; central bank financing equivalent to more than 3 percent of GDP. - 2009 budget: - Targets a deficit of 9.4 percent of GDP with spending cuts and higher grant receipts. - Capital spending cut by 3 percent of GDP following completion of investments. - Energy subsidies projected to decline by more than 1 percent of GDP in line with global oil prices. - Savings offset by higher interest costs and a larger provision for clearing domestic arrears. - Updated fiscal projections in May suggested a potential deficit overrun of 1 percent of GDP. - Measures to maintain the 2009 deficit target: cut tax exemptions, wage bill and investment savings, temporary profit tax increase for selected industries. - Monetary policy and financial indicators: - Bank of Ghana raised benchmark lending rate by 6 percentage points between October 2007 and February 2009; policy rate left unchanged in May 2009. - Despite rate increases, real prime rate has been negative since early-2008 (based on backward-looking inflation); real interbank rate remains in the 0-2 percent range. - Private sector credit up 56 percent in the year to April 2009; broad money up 28 percent. - Financial soundness: banking system liquid with capital above statutory levels, but non-performing assets at 9.6 percent in March 2009; profitability declining; some banks financially strained. - Bank of Ghana required banks to raise minimum capital to GHȼ60 million (about $40 million); majority foreign-owned banks deadline end-2009, domestic banks end-2012. - External sector: - Current account deficit widened to 19 percent of GDP in 2008 from 12 percent in 2007, largely due to a 33 percent increase in non-oil import values. - Financing: increased external capital account surplus, Ghana Telecom privatization proceeds (5½ percent of GDP), and draw-down of gross international reserves from US$2.8 billion to US$2.0 billion. - Gross reserve cover declined from 2.7 to 2.2 months of projected import cover. - Exchange rate: about 50 percent depreciation against the dollar during 2008 and first half of 2009; real effective exchange rate in April 2009 was just 8 percent more depreciated than in 2007. - Foreign currency market illiquidity associated with decline in interbank trading and widening spreads. ### Policy Discussions — Growth Prospects and Risks - Divergent factors affecting 2009–10 growth: - Positive influences: - Terms of trade improvement projected at 20 percent in 2009 as cocoa and gold prices remain buoyant and oil import costs decline. - Continued strong credit growth and favorable rainfall benefiting hydroelectricity and agricultural production. - Authorities envisage growth a little under 6 percent in 2009. - Negative influences: - Mission expects fiscal tightening to be a significant drag in 2009. - Credit growth projected to slow. - Global recession impacting remittances: first quarter inflows down 18 percent year-on-year. - Mission projects growth of 4½ percent in 2009 and 5 percent in 2010; authorities agreed to use staff forecast for fiscal planning. - Oil production implications (post-2011): - Proven reserves: Jubilee field estimated at 490 million barrels. - Potential reserves could rise to 1.5 billion barrels or more pending further discoveries. - Jubilee production planned to start in 2011 with peak production over an initial 5-6 years. - Initial production projected at about 17 percent of non-oil GDP, with more than one third accruing to government revenues (6-7 percent of GDP in 2011–12). - Oil production would largely substitute for oil imports, except in 2011-15 when an exportable surplus is projected. - Macroeconomic management challenges with oil: - Oil sector and related spending will boost demand pressures starting in 2011. - Under prudent demand management, medium-term framework projects: - Return to non-oil growth in the 5-6 percent range. - Decline in inflation to about 5 percent. - Projected fiscal deficit averaging 4 percent over the medium-term, resulting in a small decline in net debt-GDP ratio. - External current account deficit to increase in 2010 due to oil-related infrastructure imports, then decline as oil exports come on stream. - Text Table 2: Macroeconomic Outlook (selected figures drawn from official data and Fund staff projections) - Real GDP: 2007: 5.7; 2008: 7.3; 2009: 4.5; 2010: 5.0; 2011: 24.2; 2012: 7.1; 2013: 5.3; 2014: 5.0 (annual percentage change) - Nonoil real GDP: 2007: 5.7; 2008: 7.3; 2009: 4.5; 2010: 5.0; 2011: 6.2; 2012: 6.2; 2013: 6.2; 2014: 5.9 (annual percentage change) - Inflation, end-of-period: 2007: 12.7; 2008: 18.1; 2009: 14.6; 2010: 9.2; 2011: 8.0; 2012: 5.0; 2013: 5.0; 2014: 5.0 (percent) - Overall fiscal balance (percent of GDP): 2007: -9.2; 2008: -14.5; 2009: -9.4; 2010: -6.0; 2011: -4.5; 2012: -2.8; 2013: -2.1; 2014: -2.1 - Net public debt (percent of GDP): 2007: 51.2; 2008: 58.2; 2009: 66.4; 2010: 66.6; 2011: 66.0; 2012: 63.7; 2013: 60.8; 2014: 58.1 - External current account balance (percent of GDP): 2007: -12.0; 2008: -19.3; 2009: -13.0; 2010: -15.9; 2011: -9.5; 2012: -8.3; 2013: -9.5; 2014: -6.0 - Foreign direct investment (percent of GDP): 2007: 7.1; 2008: 14.3; 2009: 7.7; 2010: 13.1; 2011: 11.3; 2012: 9.9; 2013: 10.8; 2014: 7.5 - Divesture-related FDI: 2007: 0.8; 2008: 5.6; 2009–2014: 0.0 - FDI in offshore oil fields: 2007: 0.0; 2008: 0.0; 2009: 2.8; 2010: 7.4; 2011: 6.0; 2012: 3.4; 2013: 3.9; 2014: 0.0 *Source: IMF staff report — "Response to Fund Advice" (content unit _cr09256).* ### 16. Risks to growth are on the downside. Although Ghana is projected to achieve a ### _cr09256 - 16. Risks to growth are on the downside. Although Ghana is projected to achieve a ### Risks to growth - Downside risk from global recession spillovers, including: - Intensified decline in remittances. - Deterioration in gold or cocoa prices. - Domestic banks shifting to more cautious lending standards amid rising non-performing loans could trigger a larger than expected slowdown in private sector investment. ### Policy mix in 2009 and 2010 - Objective: reduce inflation while rebuilding the external reserve position. - Reserve and broad money growth are projected to slow to reduce inflation to single-digit rates by end-2010. - Decline in domestic credit growth is more marked than for overall liquidity, releasing resources to rebuild foreign currency reserves. - For 2009, the financial program aims to avoid further losses in net international reserves from end-March levels; the 2010 program targets modest reserve accumulation. - Authorities and staff would have preferred a larger near-term reserve build-up, but additional fiscal adjustment and reduction in net domestic financing needed was not seen as realistic. ### Monetary framework (Text Table 3: In percentage changes) - Reserve money: 2007 30.5; 2008 27.1; 2009 16.5; 2010 14.9; 2011 24.3; 2012 17.0; 2013 13.2; 2014 13.8 - Of which: Net foreign assets1: 2007 42.9; 2008 -30.9; 2009 10.0; 2010 20.9; 2011 60.0; 2012 54.8; 2013 45.2; 2014 39.9 - Broad money: 2007 35.9; 2008 40.2; 2009 21.7; 2010 14.5; 2011 21.8; 2012 18.7; 2013 15.9; 2014 15.1 - Of which: Claims on government (net)2: 2007 -9.1; 2008 22.5; 2009 5.6; 2010 -3.8; 2011 0.2; 2012 -0.7; 2013 -0.7; 2014 0.3 - Memorandum items: - Credit to government (percent of GDP): 2007 7.9; 2008 13.6; 2009 13.7; 2010 10.0; 2011 7.6; 2012 6.6; 2013 5.6; 2014 5.2 - Real credit to private sector: 2007 41.6; 2008 25.5; 2009 9.0; 2010 15.0; 2011 10.0; 2012 10.0; 2013 10.0; 2014 10.0 - Increase in Bank of Ghana NFA (US$ million): 2007 566.9; 2008 -800.4; 2009 -404.0; 2010 200.0; 2011 862.0; 2012 1007.0; 2013 903.7; 2014 851.8 - Source: Bank of Ghana and Fund staff estimates. - Notes: - 1/ Contributions to reserve money growth. - 2/ Contribution to broad money growth. ### Strategy for fiscal consolidation - Context: A highly expansionary fiscal stance contributed to macroeconomic instability; 2008 outturn comparable to levels in 1992–99 when inflation peaked at over 70 percent and public debt rose from under 50 percent to more than 110 percent of GDP. - Immediate priority: deficit reduction. - Planned deficit reduction to 4½ percent of GDP in 2011, and subsequently lower, intended to address inflationary pressures and stem renewed upturn in public debt. - 2009 measures: - Emphasis on spending restraint to partially reverse upward trend that contributed to 2008 deficit. - Prompt adoption of measures in June to avoid over-runs in the fiscal deficit (MEFP, ¶24). - Intensified cash management; readiness to maintain deficit target through cuts in discretionary spending if growth and revenue collections slow further. - 2010 budget: - Estimated fiscal measures of about 3½ percent of GDP will be needed to achieve the 6 percent deficit target for 2010 (see Table 2A). - On current estimates, target could largely be achieved by expenditure restraint, including in the public wage bill, combined with higher utility prices to address a projected power sector shortfall. - Need to explore options to strengthen revenue mobilization. - Fiscal gap likely larger than currently estimated, reflecting potential need to clear remaining arrears from 2008 (MEFP, ¶53). - Projected compression of the wage bill in 2010 may not be feasible given planned salary structure reform. - Squeeze on capital spending may not be sustainable given emerging infrastructure needs. - Social protection and budget flexibility: - Ghana maintains a broad social safety net: subsidized electricity tariffs (up to a maximum monthly usage), cash transfers to qualifying households, school feeding, free maternal health care, grants and subsidies for basic education, and a national youth employment program. - Authorities plan to expand cash transfers, provide free school uniforms to children in deprived communities, and free books for pupils in basic public schools. - Growth of mandatory and similarly-protected spending commitments limits fiscal maneuver space: inflexible element of annual budget rose from 92 percent of revenues and grants in 2006 to 107 percent in 2009 (Text Table 4). - Staff recognized case for reviewing funding arrangements for capital spending, provided poverty-reducing programs retain appropriate protection. ### Text Table 4. Mandatory and Inflexible Public Expenditures (Percent of GDP, unless otherwise indicated) - Wages and salaries1/: 2006 9.7; 2007 9.9; 2008 10.1; 2009 10.7 - Pension, social security, health transfers: 2006 2.2; 2007 2.5; 2008 3.8; 2009 3.2 - Interest payments: 2006 3.4; 2007 10.1; 2008 3.1; 2009 3.9 - Capital expenditures: 2006 12.4; 2007 14.4; 2008 11.3; 2009 15.7 - Foreign-financed and trust funds2/: 2006 9.9; 2007 10.7; 2008 10.0; 2009 10.0 - Discretionary: 2006 2.5; 2007 3.6; 2008 5.7; 2009 5.7 - Memorandum items (% of revenue and grants): - Mandatory and inflexible spending3/: 2006 92.0; 2007 96.2; 2008 103.1; 2009 107.0 - Notes: - 1/ 2009 wage figure includes “Category I” employment allowances. - 2/ Education Fund, Road Fund, District Assembly Fund, Petroleum Fund, and HIPC/MDRI outlays. - 3/ Wages and salaries, transfers, interest, and foreign-financed and trust fund capital spending. ### Strategy for oil revenues and medium-term fiscal policy - Authorities plan to use oil incomes in 2011-12 to finance infrastructure projects; investments would be scaled back subsequently to save part of oil revenues in a “heritage fund” to support public programs as oil revenues decline. - Mission view: - Supported front-loaded investment strategy given infrastructure needs, but cautioned spending should be based on cautious oil revenue assumptions and take into account absorptive capacity. - Firm control needed over recurrent spending to prevent expansion that fills new fiscal space. - Oil receipts should not replace strengthened non-oil revenue mobilization, which will be needed if donor support declines following oil producer status. - These considerations should be reflected in a fiscal rule for managing oil revenues; topic to be revisited after June 2009 technical assistance mission on resource sector taxation. - Welcomed authorities’ intention to ensure oil accounts are fully and transparently integrated into fiscal accounts and plan to extend Ghana’s EITI participation to the oil sector (MEFP, ¶38). - EITI would also be extended to forestry and fishing. ### External debt and sustainability - Joint Bank-Fund external DSA: Ghana’s external debt dynamics remain subject to moderate risk of debt distress. - Assessment broadly unchanged from 2008 DSA, though baseline debt trajectory more favorable reflecting projected move to oil producer status in 2011. - Assuming successful fiscal consolidation and sustained robust growth in the non-mineral economy: - Net public debt projected to decline by about 35 percentage points of GDP during 2010-2029, to about 37 percent of GDP (or slightly below post-HIPC/MDRI debt-GDP ratio in 2006). - Stress tests suggest external debt indicators remain generally resilient to less favorable outcomes, while sustainability of overall net debt depends critically on maintaining a strong primary fiscal position. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - To stem inflationary impact of currency depreciation and higher fuel prices, monetary policy may need further tightening. - IT regime in place; required elements present (Box 2). - Staff noted IT peer countries were typically more aggressive in monetary tightening than Ghana during 2007-08. - Central bank projects decline in inflation to 14½ percent at end-2009, reaching single-digits in 2010. - Mission noted limited scope for near-term easing; further tightening might be needed to achieve disinflation goal. - Subsequent 30 percent rise in domestic petroleum product prices in early-June reinforced case for tighter policy to resist second-round inflationary pressures. - Authorities indicated readiness to consider tighter monetary stance at July MPC meeting if warranted. - Inflation-targeting framework (Box 2) highlights: - BoG launched IT regime in 2007; targets 12-month headline CPI change and monitors core inflation measures. - Institutional arrangements: central bank policy independence, instrument independence, bi-monthly MPC meetings, generally good transparency. - BoG staff produce a range of inflation forecasts using multiple macro models; limitations in real sector data (no monthly production or quarterly GDP data) addressed via a quarterly composite indicator that tracks GDP trends moderately well. - Operational tools: commercial bank lending rate closely tracks BoG prime rate; interbank and t-bill market influence via open market operations. - Next developmental phase: greater comfort in basing policies on available analytical tools and enhancing communications and clarity on monetary transmission and preferred core inflation measure. - Exchange rate policy: - Authorities intend to maintain a flexible exchange rate consistent with IT framework (MEFP, ¶59). - Policy tightening combined with new external funding expected to stabilize the currency. - Agreed that BoG should refrain from FX intervention except regular weekly sales to meet priority demands. - Possible new SDR allocation intended to rebuild foreign exchange reserves (MEFP, ¶28). - Mission suggested developing private sector role in FX market ahead of oil production. - Staff analysis suggested real effective exchange rate in Q1 2009 may have remained modestly overvalued (Box 3); a real effective depreciation of 7–12 percent would be needed to reduce the external deficit to the implied norm in one approach, while other approaches suggested potential undervaluation of 31–39 percent; staff gave more weight to signs of modest overvaluation from current account analysis. - Financial sector issues: - Impact of global crisis on Ghana’s financial system relatively limited due to limited integration with global markets and reliance on domestic funding, but banking risks rising. - Supervisory capacity generally positive but risks include: - Rapid banking sector expansion creating vulnerabilities: concentrated loan portfolios, some foreign currency loans to unhedged borrowers, stretched internal controls and risk management. - Ratio of non-performing loans rose to a year high of 9.6 percent at end-March 2009, with above-average NPLs in forestry, mining, and construction sectors. - Weaknesses in corporate governance and board oversight in some state-owned banks; one bank experienced apparent high-level fraud. - Some home supervisors of parent banks do not undertake consolidated supervision; gaps in cross-border supervision. - Operational constraints: difficulties foreclosing on collateral, weaknesses in accounting and auditing in SMEs, nascent credit registry. - BoG framework: established off-site monitoring, well-developed stress testing, Lender of Last Resort facility, legal authority for prompt corrective actions. - Operational framework for liquidity support limited in scope (tenors and acceptable securities), no deposit insurance or contingency cross-border crisis arrangements. - Banks have begun tightening lending standards, which could further slow private sector credit and investment. *Source: IMF staff report (excerpts).* ### 31. National accounts statistics. The mi ### _cr09256 - 31. National accounts statistics. The mi ### National accounts statistics - A Fund review of Ghana’s national accounts rebasing exercise suggests economic activity has been significantly under-estimated. - Upward revisions could be as large as 50 percent, paralleling revisions observed in other countries’ rebasing exercises. ### The new PRGF arrangement — Objectives and design - Arrangement duration: three-year period from Board approval. - Proposed access: 105 percent of quota (SDR 387.45 million). - Comparison: somewhat above the norm for a fifth-time PRGF-user (70 percent of quota). - Disbursements: eight disbursements, with some front loading into 2009–10. - Main goal: eliminate Ghana’s large fiscal imbalances by 2011 and strengthen institutions for public financial management (PFM). - Monetary framework: inflation targeting (IT) regime to be further strengthened, with emphasis on communications and transparency. - Transparency measures: extend the Extractive Industry Transparency Initiative (EITI) to the oil sector and expand publication of fiscal data. ### Program monitoring - Initial frequency: quarterly monitoring given near-term global recession risks. - First two reviews: assess performance criteria for end-September and end-December 2009. - Subsequent monitoring: semi-annual with test dates end-June and end-December through 2011; final review test date end-March 2012. - Fiscal performance assessment: overall balance including grants; adjusters to limit scope for new spending commitments in response to higher-than-programmed grant or loan funding. - Financing shortfalls response: partially covered by spending cuts and partly by higher resort to domestic financing, up to a ceiling (TMU, ¶22). - Debt sustainability: limit nonconcessional financing to high-return infrastructure and energy projects; guarantees for Ghana National Petroleum Company borrowing for oil and gas investments of up to US$300 million during 2009–10 (MEFP, ¶54). - Monetary policy monitoring: review clauses linked to inflation ranges around the target disinflation path; net domestic assets of the Bank of Ghana will be an indicative target. ### Structural conditionality — focus areas - Strengthen fiscal institutions: tax policy, revenue administration, public expenditure management, public sector reform, energy sector reforms (MEFP, Table 2). - Tax policy measures: - Intensify steps taken in June 2009 to rein in exemptions in the 2010 budget (MEFP, ¶24, ¶32). - Conduct a review to reduce the number of zero-rated VAT items and convert domestic zero-rating to standard rate taxation (MEFP, ¶32). - Revisit VAT thresholds and small business taxation (MEFP, ¶33). - Revenue administration: - Launch a modernization strategy by end-2009 to move toward a single integrated domestic tax agency within the intended revenue authority (MEFP, ¶35). - Public expenditure management: - Review shortcomings of the existing IFMIS by end-2009 and develop a plan for wider adoption or an alternative system (MEFP, ¶42). - Intensified monitoring and strengthened inter-agency coordination to manage the budget through 2009 (MEFP, ¶40–41). - Authorities to take stock of outstanding claims from 2008 and adopt policies to avoid new arrears (MEFP, ¶53). - Public sector reform: - Strengthen monitoring and control of payroll through computerization of staffing data, centralized hiring procedures, payroll audits, and launch a rationalization process for public agencies (MEFP, ¶45-49). World Bank support anticipated. - Energy sector reforms: - PRGF to ensure adoption and maintenance of cost-recovery pricing (MEFP, ¶52). - Key condition: adjustment of electricity tariffs to cover operating costs from end-2009, with cost-recovery maintained through subsequent quarterly reviews. ### Program financing - Balance of payments financing gaps: US$450 million in 2009 and $325 million in 2010. - Fiscal financing gap: - Projected at US$250 million in 2009, declining to half that size in 2010. - Majority of the 2009 fiscal gap expected to be closed through a new World Bank Development Policy Loan augmenting its 2009 funding pipeline by US$200 million. - Ghana is a candidate for a new vulnerability facility by the European Commission, which could close up to half of the remaining gap. - Authorities have approached other bilateral donors, including the African Development Bank, and expect to close most, if not all, of any remaining gap for 2009. - Any residual financing shortfall to be met through a combination of further spending restraint and some limited additional use of domestic financing (TMU, ¶22). - PRGF balance of payments financing: - Further financing of $200 million in 2009 and 2010 would be provided under the PRGF arrangement. - This would stabilize gross reserve levels at 2 months import cover, rising to 2½ months’ cover with the proposed new SDR allocation. - Assumptions and projections: - Private capital inflows remain low through 2009-10, except for oil sector investments in imported rig equipment. - Net private remittances are projected to decline 30 percent in 2009, with limited recovery before 2011. ### Program risks and mitigation - Vigilant monitoring of activity and revenue collections to allow activation of contingency spending restraint plans (paragraph 42). - Strong communications and public outreach are essential for adjustments to utility pricing required to achieve the fiscal deficit target for 2010 (paragraph 43). - Political economy risk: need to sustain reform momentum after the start of oil production in 2011 to prevent oil revenues being diverted to unproductive recurrent spending. - Capacity and debt outlook: - Ghana has adequate capacity to meet its financial obligations to the Fund. - DSA places Ghana at a moderate risk of debt distress (paragraph 24). - Debt service to the Fund would remain modest in absolute terms, and below 1 percent of exports of goods and services by the end of the program period (paragraph 44). ### Staff appraisal — assessment and recommendations - Causes of current challenges: economic mismanagement compounded by global factors, notably highly expansionary fiscal policies through 2008 leading to high inflation, rising interest rates, and currency pressures (paragraph 45). - External environment: - Ghana’s terms of trade strengthened during the global recession, supporting incomes and growth; domestic financial system relatively insulated (paragraph 46). - Growth projected to exceed the global average through 2009–10, though risks exist to remittances and foreign direct investment. - Fiscal policy recommendations: - Fiscal consolidation central to restoring macroeconomic stability; deficit target for 2009 described as appropriately ambitious (paragraph 47). - Contingency plans for further expenditure tightening important in case of revenue shortfalls. - Further measures needed to reduce the deficit to 6 percent of GDP in 2010. - Increase in utility tariffs needed to cover rising power generation costs. - Control public wage growth and strengthen revenue mobilization; reduce public sector debt to sustainable levels. - Oil revenue guidance: - Revenues from oil production starting in 2011 should be partly used to further reduce the fiscal deficit and accumulate assets for the post-oil period, and partly for infrastructure after 2009–10. - Oil revenues will be modest and the production period expected to be relatively short; avoid complacency about the fiscal outlook from 2011 (paragraph 48). - Continue strengthening domestic revenue mobilization and seek improved value for money in public services. - Monetary and exchange rate policy: - With tighter fiscal policies, inflation control responsibility rests on the IT framework; further monetary tightening is warranted if global oil prices and domestic petroleum prices rise (paragraph 49). - Continued exchange rate flexibility important given some risk of slight overvaluation of the currency (paragraph 50). - Financial sector surveillance: - Risks in the banking system require careful monitoring; strengthen surveillance, encourage improved risk management and corporate governance, and step up regional collaboration on cross-border supervision (paragraph 51). - Enforce creditor rights and accelerate operations of the credit reference bureau; staff welcomes authorities’ interest in an FSAP update. - Data and statistics: - Statistical data should be further strengthened for surveillance; improved national accounts data are a priority (paragraph 52). - Overall endorsement: - Staff supports the authorities’ request for a new PRGF arrangement focused on fiscal consolidation and structural fiscal reforms; an active communication strategy will be critical to sustain reform momentum (paragraph 53). * _cr09256 - 31. National accounts statistics. The mi_* ### 54. It is proposed that the next Article IV consultation with Ghana take place within ### _cr09256 - 54. It is proposed that the next Article IV consultation with Ghana take place within ### Timing of IMF Consultation - It is proposed that the next Article IV consultation with Ghana take place within 24 months, in accordance with the decision on consultation cycles in program countries. ### Possible Impact of National Accounts Revisions (Figure 1) - Scenario assumption: a 50 percent upward revision to real and nominal GDP, consistent with preliminary back-of-the-envelope calculations based on news source data; update accounts will be available in late-2009 or early-2010. - Key implications under the assumed 50 percent upward revision: - Annual average real GDP growth (1993–2008) comparisons show Ghana (rev.) aligning with higher-growth peers (graphical ordering: Ghana (rev.), Uganda, Tanzania, Ghana, SSA, Cameroon, Kenya, Zambia, Cote d'Ivoire). (Percent values shown on figure axis from 0.0 to 10.0.) - Gross National Income per capita, 2007 (World Bank data) places Ghana (rev.) close to middle-income threshold in US dollars (graph axis from 0 to 1,200 US dollars). - Government revenues in percent of GDP, 2007: with revision, Ghana (rev.) would appear lower relative to peers (graph axis from 0 to 25 percent). - Broad money in percent of GDP, 2008: Ghana (rev.) would be lower compared with several peers (graph axis from 0.0 to 50.0 percent). - Public sector wage bill, 2008: remains high; Ghana (rev.) listed among top peers (graph axis 0.0 to 12.0 percent of GDP). - Overall fiscal balance, including grants (2008 or 2007/08): Ghana and Ghana (rev.) show large fiscal deficits (graph axis from -16.0 to 4.0 percent of GDP). ### Business and Financial Indicators (Figure 2) - Business climate and governance: - World Bank Doing Business Ranking (SSA), 2009: Ghana ranked favorably relative to peers (scale 0–50 shown). - Combined World Bank Governance Scores, 2008: Ghana shows strong governance across Voice & account, Pol. stability, Gov. effectiveness, Regul. quality, Rule of law, Corrupt. control (graphical bars). - Oil outlook: - Proven oil reserves (billions of barrels) place Ghana among SSA producers (graph lists Nigeria, Angola, Gabon, DRC, Chad, Eq. Guinea, Ghana, etc.). - Oil production from 2011 expected to boost incomes (graphical implication). - Public sector affordability: - Civil service wage bill, 2008 (percent of revenues and grants): Ghana high relative to peers (graphical list includes Ghana, Mozambique, Mali, Tanzania, Nigeria, Chad). - Time series of civil service wage bill percent (2003–2009) with Ghana and Chad shown. - Banking and inflation: - Non-performing loans: Ghana shows deterioration (percent scale 0–20). - End-2008 CPI inflation (bar) and IT ceiling (line): inflation control remains a problem (graphical depiction). ### Macro Projections and Key Indicators (Table 1 & summary figures) - National accounts and prices (annual percent changes and levels, selected entries): - Real GDP: 6.4, 5.7, 7.3, 4.5, 5.0, 24.2, 7.1, 5.3, 5.0 (years shown in table header context). - Real GDP (nonoil): 6.4, 5.7, 7.3, 4.5, 5.0, 6.2, 6.2, 6.2, 5.9. - Real GDP per capita: 3.8, 3.0, 4.6, 1.9, 2.4, 21.1, 4.5, 2.6, 2.4. - GDP deflator: 12.8, 13.9, 16.9, 17.2, 11.0, 6.7, 3.1, 4.6, 5.5. - Consumer price index (annual average): 10.2, 10.7, 16.5, 18.2, 10.5, 8.4, 4.5, 5.0, 5.0. - Consumer price index (end of period): 10.9, 12.7, 18.1, 14.6, 9.2, 8.0, 5.0, 5.0, 5.0. - External sector (selected entries): - Exports, f.o.b. (percentage change, in US$): 33.0, 11.9, 26.3, 9.8, 5.9, 51.1, 7.6, 4.9, 5.6. - Imports, f.o.b. (percentage change, in US$): 26.3, 19.4, 27.3, -9.4, 8.5, 14.0, 4.9, 8.0, 1.7. - Gross international reserves (millions of US$): 2,270; 2,837; 2,036; 1,950; 2,350; 3,300; 4,395; 5,299; 6,110. - Months of imports of goods and services (reserves): 2.7; 2.7; 2.2; 1.9; 2.0; 2.7; 3.4; 4.0; 4.3. - Money and credit (selected entries): - Real private sector credit (% annual changes): 28.6, 41.9, 27.3, 9.0, 15.0, 10.0, 10.0, 10.0, 10.0. - Broad money (including foreign currency deposits): 38.8, 35.9, 40.2, 21.7, 16.9, 27.9, 18.6, 14.8, 15.4. - Government operations (percent of GDP, selected entries): - Total revenue: 21.9, 22.7, 22.8, 23.9, 24.3, 30.5, 31.1, 30.7, 30.0. - Grants: 5.4, 6.1, 4.7, 6.0, 5.0, 3.9, 4.0, 3.8, 3.8. - Total expenditure: 34.4, 37.3, 41.0, 36.7, 37.9, 41.0, 40.3, 39.0, 38.5. - Overall balance (including grants): -7.5, -9.2, -14.5, -9.4, -6.0, -4.5, -2.8, -2.1, -2.1. - Gross government debt: 42.0, 51.2, 58.2, 66.4, 66.6, 66.0, 63.7, 64.7, 64.9. - Net government debt (net of oil fund): 42.0, 51.2, 58.2, 66.4, 66.6, 66.0, 60.8, 58.1 (table shows additional values). - Memorandum: - Nominal GDP (billions of GHc): 11.672; 14.046; 17.618; 21.404; 21.577; 25.146; 28.532; 31.046; 34.541; 38.656 (table context). ### Fiscal Budgetary Details (Table 2A / 2B highlights) - Revenue composition (percent of nonoil GDP, selected entries): - Tax revenue: 19.9, 20.1, 19.9, 20.5, 20.7, 21.0, 24.2, 24.5, 24.2, 23.7. - Direct taxes: 6.2, 6.7, 7.1, 7.3, 7.3, 7.4, 10.8, 11.2, 10.9, 10.3. - Indirect taxes: 9.1, 9.3, 8.7, 9.0, 9.0, 9.1, 8.8, 8.8, 8.8, 8.8. - Expenditure composition (percent of nonoil GDP, selected entries): - Recurrent expenditure: 21.9, 23.0, 25.4, 23.7, 24.1, 25.9, 25.9, 25.5, 24.0, 23.6. - Wages and salaries: 9.7, 10.1, 11.3, 11.8, 11.8, 11.7, 11.3, 11.2, 10.8, 10.3. - Capital expenditure (total): 12.4, 14.4, 15.7, 12.9, 12.6, 12.0, 15.1, 14.8, 15.0, 14.9. - Financing and debt: - Total financing (percent of nonoil GDP): 7.7, 8.9, 15.3, 9.4, 9.4, 6.0, 4.5, 2.8, 2.1, 2.1. - Domestic (net) financing (percent of nonoil GDP): 5.0, 1.3, 9.8, 6.5, 4.8, 0.8, -0.8, -0.8, 0.3. - Foreign (net) financing (percent of nonoil GDP): 1.9, 6.1, 1.0, 2.3, 4.0, 4.7, 3.8, 3.2, 2.5, 1.8. ### Balance of Payments and External Sector (Table 4 summary) - Balance on Current Account (including grants) (millions of US$): -885; -1,265; -1,805; -3,110; -1,869; -2,362; -1,732; -1,616; -1,986; -1,359 (2005–2014 context). - Trade balance (millions of US$): -2,544; -3,025; -3,894; -4,999; -3,513; -3,964; -2,251; -2,110; -2,594; -2,234. - Exports f.o.b. (millions of US$): 2,803; 3,728; 4,172; 5,270; 5,786; 6,125; 9,254; 9,960; 10,445; 11,027. - Cocoa and Gold series provided in table (e.g., Cocoa: 908; 1,187; 1,133; 1,487; 1,976; 1,978; 1,916; 1,827; 1,859; 1,976). - Petroleum shows zero through earlier years then nonzero from projection years (table shows petroleum entries as 0s then 2,918; 3,374; 3,427; 3,479 in later columns). - Gross international reserves (millions of US$): 1,895; 2,270; 2,837; 2,036; 1,950; 2,350; 3,300; 4,395; 5,299; 6,110. - Current account balance (% of GDP, memorandum): -8.3; -9.9; -12.0; -19.3; -13.0; -15.9; -9.5; -8.3; -9.5; -6.0. - External debt (percent of GDP): 59.2; 17.1; 23.9; 25.1; 35.1; 40.0; 36.4; 36.8; 37.0; 36.5. ### Financial Soundness Indicators (Table 5) - Capital adequacy (percent, end-of-period): - Regulatory capital ratio: 13.9; 16.2; 15.8; 14.8; 13.8; 14.6 (years indicated). - Regulatory tier 1 capital ratio: 64.2; 71.6; 15.0; 13.6; 12.8; 13.3 (table entries). - Asset quality: - Nonperforming loans to total gross loans: 16.3; 13.0; 7.9; 6.4; 7.7; 9.6. - Loan loss provision to total gross loans: 13.8; 8.5; 7.4; 5.5; 6.3; 7.6. - Earnings and profitability: - Return on assets, before taxes (average): 5.8; 4.6; 4.8; 3.7; 3.2; 3.4. - Return on equity, before taxes (average): 33.7; 23.6; 39.6; 35.8; 23.7; 21.6. - Liquidity: - Core liquid assets to total assets ratio: 25.4; 20.7; 23.5; 23.4; 25.2; 22.6. - Exposure to foreign exchange risk: - Share of foreign currency deposits in total deposits: 29.3; 26.3; 28.1; 22.3; 28.4; 30.3. - Share of foreign liabilities in total liabilities: 2.8; 2.4; 4.0; 8.1; 7.0; 6.5. ### External Financing Requirements, Fund Obligations, and Capacity to Repay (Tables 6–7) - External financing requirements and sources (millions of US$) show: - Total requirements (selected years): -5,006; -3,552; -3,178; -2,697; -3,538; -3,356; -3,330; -3,541; -2,958. - Total sources (selected years): 5,006; 3,552; 3,178; 2,697; 3,538; 3,356; 3,330; 3,541; 2,958. - Foreign direct investment (net): 636; 855; 1,212; 1,084; 1,900; 1,983; 1,832; 2,166; 1,580. - Disbursement from official creditors (millions US$): 894; 1,840; 1,406; 1,405; 1,288; 1,205; 1,260; 1,224; 1,266. - Fund obligations and outstanding Fund credit (Table 7 excerpts, projections 2009–2022): - Total obligations based on existing and prospective credit (in millions of US$), selected years: 1.3; 2.8; 19.5; 35.9; 36.0; 35.9; 87.1; 105.9; 111.6; 119.9; 119.3; 67.3; 31.7; 9.4. - Outstanding Fund credit (in millions of US$), selected years: 365.3; 570.5; 642.1; 699.7; 669.3; 638.4; 554.7; 451.8; 342.6; 224.6; 106.6; 40.0; 8.9; 0.0. - Outstanding Fund credit (in percent of gross international reserves), selected years: 18.7; 24.3; 19.5; 15.9; 12.6; 10.4; 7.9; 6.1; 4.9; 3.1; 1.5; 0.6; 0.1; 0.0. ### Proposed Schedule of Disbursements Under the PRGF Arrangement (Table 8) - Proposed disbursements and conditions: - SDR 67.65 million — July 15, 2009 — Executive Board approval of the three-year PRGF arrangement. - SDR 67.65 million — December 15, 2009 — Observance of the performance criteria for September 30, 2009, and completion of the first review under the arrangement. - SDR 67.65 million — March 15, 2010 — Observance of the performance criteria for December 31, 2009, and completion of the second review under the arrangement. - SDR 67.65 million — September 15, 2010 — Observance of the performance criteria for June 30, 2010, and completion of the third review under the arrangement. - SDR 29.22 million — March 15, 2011 — Observance of the performance criteria for December 31, 2010, and completion of the fourth review under the arrangement. - SDR 29.21 million — September 15, 2011 — Observance of the performance criteria for June 30, 2011, and completion of the fifth review under the arrangement. - SDR 29.21 million — March 15, 2012 — Observance of the performance criteria for December 31, 2011, and completion of the sixth review under the arrangement. - SDR 29.21 million — June 15, 2012 — Observance of the performance criteria for March 31, 2012, and completion of the seventh review under the arrangement. - Total for the PRGF arrangement: SDR 387.45 million. - Note: Conditions are in addition to the generally applicable conditions under the Poverty Reduction and Growth Facility arrangement. ### Social and Millennium Development Indicators (Table 9 excerpts) - Selected MDG and social indicators (1990–2007, assorted years shown): - Poverty headcount ratio at $1.25 a day (PPP) (% of population): 49; ..; 39; 30 (table shows progression). - Malnutrition prevalence, weight for age (% of children under 5): 24.1; 25.1; 20.3; .. - Literacy rate, youth female (% ages 15–24): ..; ..; 65; 76. - Immunization, measles (% of children ages 12–23 months): 61; 70; 84; 95. - Mortality rate, infant (per 1,000 live births): 76; 71; 71; 73. - Maternal mortality ratio (modeled estimate, per 100,000 live births): ..; ..; ..; 560. - GNI per capita, Atlas method (current US$): 380; 350; 320; 590. - Population, total (millions): 15.6; 17.9; 20.1; 23.5. - Mobile cellular subscriptions (per 100 people): 0; 0; 13; 32. *Source: IMF staff report content as provided in the supplied document.* ### 2009. The Government sees its political mandate as an opportunity to manage the economy ### 2009. The Government sees its political mandate as an opportunity to manage the economy to achieve prosperity for all Ghanaians. ### Introduction and objectives - The Memorandum of Economic and Financial Policies (MEFP) covers July 2009–June 2012 and requests IMF approval for a three-year PRGF arrangement with access of SDR 387.45 million (105 percent of quota). - Government commitment: - Address economic imbalances, re-stabilize the economy, and place it on a path of sustained high growth to accelerate progress toward the Millennium Development Goals and middle income status. - Provide the Fund with requested information on implementation progress and consult the Fund in advance of revisions to MEFP policies. ### Recent economic and social achievements (findings) - Real GDP growth: - Increased from 3.7 percent in 2000 to 7.3 percent in 2008. - Real GDP growth for 2008 estimated at 7.3 percent, up from 5.7 percent in 2007. - Poverty: - National incidence of poverty declined from 39.5 percent in 1998/99 to 28.5 percent in 2005/06. - At this rate, Ghana is poised to achieve the MDG of halving extreme poverty ahead of 2015. - Education: - Gross enrolment ratios increased; abolition of mandatory school fees for basic education and introduction of capitation grants in 2005–06. - Gross enrolment ratios recently higher for girls than for boys; on track to achieve MDG 3. - Health sector improvements: - Life expectancy increased from 55 years in 2003 to 57.9 in 2006. - Introduction of a pre-paid National Health Insurance Scheme in 2004; introduction of free maternal care for expectant mothers. - External financing and capital markets: - Debut on international capital markets in October 2007, raising US$750 million for infrastructure (energy). - Financial sector reforms: - Comprehensive legal and regulatory framework and strengthened risk-based prudential supervision in place. - Banking system: - Remains sound, well capitalized and fairly liquid; 2008 saw reduced concentration, intensified competition, and branch expansion. ### Macroeconomic stress during 2006–08 (findings and key statistics) - Shocks and policy drivers: - Severe energy crisis in 2006–07 due to drought and shift from hydro to thermal generation amid rising crude oil prices. - Global food and fuel price increases in 2007–08 and expansionary public spending around the 2008 elections. - Fiscal outcomes: - Fiscal deficit increased from 7.5 percent of GDP in 2006 to 14.5 percent of GDP in 2008. - Fiscal expansion drivers: energy-related subsidies, increased infrastructure investment, higher wages and salaries, and social mitigation expenditures. - External account and reserves: - External current account deficit widened from 9.9 percent of GDP in 2006 to 19.3 percent of GDP in 2008. - Overall balance of payments: deficit of US$941 million in 2008 versus surplus of US$413 million in 2007 (inclusive of sovereign bond proceeds). - Gross international reserves declined by US$800 million to US$2,036 million at end-2008, equivalent to 2.2 months of import cover. - Inflation and monetary response: - Headline inflation rose from 12.7 percent in December 2007 to 18.1 per cent by end-2008. - Bank of Ghana increased the prime rate by a cumulative 350 basis points in 2008, ending the year at 17 percent. - Inflationary pressures remained strong in Jan–Apr 2009 with 12-month inflation in the 20 percent range; prime rate increased another 150 basis points to 18.5 percent in February 2009. - Exchange rate: - Cedi depreciated by 38 percent against the US dollar in the interbank market in 2008; further 16 percent depreciation through end-May 2009. - Balance-of-payments pressures from global financial crisis: - Private remittances slowing, some portfolio outflows, weaker outlook for foreign direct investment, and limited official access to global market financing. ### Government macroeconomic program and 2009 policies - Medium-term fiscal targets (deficit excluding divestiture receipts): - 14.9 percent of GDP in 2008 to 9.4 percent in 2009, 6.0 percent in 2010, and 4.5 percent in 2011; further reduction planned beyond 2011. - Medium-term macro goals for 2011: - Real non-oil GDP growth of a little over 6 per cent. - Gross international reserves close to three months of import cover. - Stabilization of total public debt relative to GDP with subsequent reduction to reduce debt distress risks. - Monetary policy: - Maintain inflation targeting (IT) framework with medium-term inflation target of 7–9 percent within an 18–24 month forward looking horizon. - 2009 budget and growth assumptions: - 2009 budget approved in March 2009 based on growth projection of 5.9 percent. - Fund staff growth forecast of 4.5 percent; government retained earlier revenue projections while updating nominal GDP estimates and GDP deflator. - Contingency plans: if growth/revenues under-perform, deficit target maintained via cuts in discretionary spending and delaying non-critical investment projects. - Identified additional fiscal savings to reach 9.4 percent of GDP target in 2009 totaling 1.0 percent of GDP (GH¢ 209 million): - Eliminate GH¢ 50 million provision for wage structure reform (postponed to 2010). - Savings of GH¢ 34 million from a lower-than-budgeted medical workers’ salary increase. - Reduce domestic investment allocation by GHc31 million (delay purchases; preserve social protection spending). - Reduce tax exemptions projected to yield GH¢ 40 million; from June 17, 2009 special permits and general concessions no longer available on discretionary basis and future exemptions require parliamentary approval through the Ministry of Finance. - Customs and excise revenue collections increased projected by GH¢ 43 million. - National Stabilization Levy: additional 5 percent profit tax through end-2010 on banks, insurance, other financial services, communications, mining, and brewing. Projected yield in 2009 GH¢11 million; full-year yield in 2010 GH¢ 22 million or more. - Confidence in combined yield: - Government expects these measures to yield at least 1 percent of GDP. - Expenditure control measures: - Temporary pause on issuance of commencement certificates for new investment projects; review and prioritization of ongoing projects. - Review cash management of earmarked funds to identify unused resources without jeopardizing poverty-reducing expenditures. - Financing gap and external support in 2009: - Financing gap of $250 million based on potential domestic financing of 4.8 percent of GDP and updated external disbursement projections. - Coverage plan: Development Policy Loan from the World Bank augmenting planned World Bank support by $200 million in 2009, and exceptional budget support from development partners. - If foreign program grant and loan financing shortfall occurs, offset by spending cuts and increased domestic financing up to GH¢ 75 million (details in the Technical Memorandum of Understanding). - Reserves and SDR allocation: - With exceptional budget support and projected Fund financing, gross international reserves projected at slightly below two months of import cover at end-2009. - Authorities do not intend to draw on the proposed new SDR allocation. - Inflation projection for 2009: - Bank of Ghana aims for progressive convergence on medium-term target; inflation projected to decline to a 12-month rate of 14½ percent by end–2009. ### Structural reform agenda (policy actions and timelines) - Fiscal institutions and public expenditure management: - Strengthen fiscal institutions, enhance revenue mobilization, and implement a strong public expenditure management agenda. - Tax policy and administration (findings and commitments): - Corporate tax reduced historically from 35% to 25%. - Challenges from ad hoc changes to parent acts and discretionary exemptions; IMF technical assistance provided in April–May 2009 to inform reforms. - Commitments by September to conduct reviews to inform the 2010 Budget: - Review the nature and scope of tax exemptions and discretionary waivers by sectors, beneficiaries, and rationale, including firm-level customs tariff exemptions, with objective of phasing out unneeded tax holidays and curtailing discretionary waivers. - Review the number of zero-rated items (excluding exports) with goal of eliminating zero-rating or, if necessary, converting some to VAT exemptions. *Source: Memorandum of Economic and Financial Policies, 2009–12 (attachment to _cr09256 — 2009).* ### 33. Over the medium-term, to broaden the tax base and minimize distortions, reviews will ### 33. Over the medium-term, to broaden the tax base and minimize distortions, reviews will ### Tax base broadening and VAT reform - Reviews will be conducted on: - the VAT regime, especially the threshold and refunds regime to strengthen the effectiveness of the VAT; - options to simplify the taxation of small businesses below the VAT threshold; - the coverage of the VAT to the service sector; and - the taxation of all investment income and the final taxation of dividends. - The base of the income tax will be broadened to cover large potential taxpayers in the private and informal sectors who currently are not paying any income tax. - The retention of internally generated funds by MDAs will undergo serious review. ### Revenue administration modernization - Current situation: - Ghana’s three tax revenue agencies operate independently, share no activities and have very little exchange of information at the operational level, resulting in high compliance costs for taxpayers, high administrative costs for government, and high opportunities for tax evasion. - Government intent and deadlines: - Consolidate and centralize management of the three agencies, with a specific objective to merge the VAT and income tax services into a single, integrated tax administration. - A modernization strategy for these and other aspects of revenue administration is to be developed and approved by Cabinet before end-2009. - Leakages and enforcement actions: - Leakages associated with customs valuation and invoicing, transit goods, free zone exemptions and bonded warehousing facility; VAT collection and payment to the VAT office; and management of the withholding tax by the Internal Revenue Service (IRS). - Preventive services of the Customs, Excise and Preventive Service will be strengthened to reduce smuggling and the abuse of the transit goods arrangement. ### Oil revenue management and transparency - Timing and challenges: - Revenues from oil production activities are expected to come on board by 2011. - Challenges include how much to save, insulating fiscal policy from oil price fluctuations, and protecting the economy from possible exchange rate appreciation (the so-called Dutch Disease). - Goal: ensure a cautious phasing of petroleum revenues into the economy guided by absorptive capacity, balance between spending to accelerate growth/reduce poverty, and saving for the future. - Institutional and legislative steps: - Continue national dialogue on the use of oil revenues; ongoing work on a petroleum regulatory bill and an oil revenue management bill. - IMF technical assistance mission scheduled for June 2009 to assist technical details. - Public consultations on allocation and guidelines will be held prior to legislation. - Ensure oil revenues are fully and transparently included within the budget. - Extend Ghana’s participation in the Extractive Industry Transparency Initiative (EITI) to cover oil and gas sector, as well as fishing. - Specific contingent item noted: - Potential need for debt guarantees during 2009-10 of up to US$300 million to the Ghana National Petroleum Company (GNPC) to facilitate participation in first phase of a program to exploit offshore gas deposits starting in 2011. ### Enhancing fiscal responsibility - Near-term action: - Lay out fiscal rules in the short-term as a first step to instituting fiscal responsibility laws to strengthen fiscal discipline and provide institutional foundation for managing projected oil revenues. ### Expenditure management and cash management - System weaknesses: - Continued expenditure slippages and budget over-runs due to lack of adequate institutional and human capacity to track expenditures at the budget implementation stage and to effectively manage commitments from MDAs, leading to risk of over-run in commitments and domestic arrears. - Strengthening measures: - Strengthen Public Expenditure Monitoring Unit (PEMU) in human resources and monitoring/reporting processes. - Establish a cash management framework providing an early warning system. - Adopted strengthened cash management system involving the Ministry of Finance and Economic Planning, the Bank of Ghana, and the Controller and Accountant General. - Initiated development of a Treasury Single Account (TSA) to bring all government accounts under a single composite account structure to allow better cash flow management and planning of financing the public sector borrowing requirement. - Revenue Management and Expenditure Management Committees established to support cash management framework and EPCC. ### Budget management systems and other expenditure reforms - IFMIS: - Plans for comprehensive adoption of an integrated financial management information system (IFMIS). - Existing system underperformed and rolled out to limited ministries; system will be reviewed with a view to address shortcomings or move to an alternative system. - The review will be conducted by end–December 2009. - Other reforms: - Re-introduce public expenditure tracking surveys. - Improve evaluation of investments and projects; identify programs that do not work and reduce or stop spending on them. - Strengthen performance orientation via effective implementation of performance management and development system (PMDS). - Strengthen legal framework for public/private partnerships (PPPs). ### Public sector reform and payroll management - Wage bill concerns and targets: - Wages absorbed an average of 44.5 percent of total tax revenue between 2002 and 2008. - This number is expected to rise to 49.5 percent in 2009. - Objective: strengthen link between public sector pay and productivity; maintain competitiveness of public sector incomes relative to the private sector; determine optimal number of employees to efficiently deliver public services. - Government intends to adopt a comprehensive program of public sector reform with World Bank support. - Payroll database and migration: - Strengthen existing database management system for personnel and payroll data of all public sector institutions. - Sixty-five of the 114 agencies have migrated to the new payroll database as at end of April 2009, though this accounts for just 4 percent of the total staff strength of the subvented agencies. - Government intends to migrate all subvented agencies by end-September 2009. - A committee would be established to monitor progress of the migration exercise. - Hiring controls: - Adopted a selective hiring freeze; new recruitment principally in education and health services. - Validation of personnel into the centralized personnel database strengthened to ensure new recruits are consistent with budgetary provisions. - Comprehensive coverage across the public sector including all subvented agencies by end-September 2009. - Payroll audits and headcount: - Annual audit of the personnel database by a joint team of the Auditor General and the Internal Audit Agency. - Initial headcount of all staff of the Ghana Education Service to be completed by end-September 2009. - Subvented agency restructuring and pay reform: - Functional review of the public service over the medium-term to provide basis for right-sizing. - Restructuring of subvented agencies will be stepped up; those no longer relevant will be liquidated; those to be commercialized will do so within agreed time frame. - Institutional responsibilities for the reform effort will be established by end-2009. - Discussions on a simplified “single spine” public sector salary structure will take account of affordability within the medium-term wage and salary budget. - Government intends to complete public pay negotiations by September before the budget is finalized and submitted to Parliament in November. ### Statutory funds and budget rigidities - Rigidities: - Excluding wages and salaries, total of statutory funds and committed expenditure items was 48.5 per cent of total payments in provisional budget outturn for 2008, and the estimate for 2009 is about 60 per cent. - Reform intent: - Review legal provisions and management of some statutory funds to introduce flexibilities and efficiencies in overall fiscal management. ### Energy sector reform - Financial restructuring: - State-owned enterprises’ balance sheets under serious financial distress. - Complete the Power Sector Financial Restructuring and Recovery Study commissioned in May 2008 to review financial status of all three power sector utilities and propose a financial restructuring and recovery program. - Study expected to produce comprehensive financial recovery plan to improve financial operating ratios, reduce short-term indebtedness and reduce arrears of each power utility to suppliers and creditors. - Plan will mark out VRA’s core and non-core assets, effect full transfer of national transmission grid assets from VRA to GRIDCO and ring-fence assets and liabilities associated with GoG-sponsored gas-turbine power projects. - Energy subsidies and pricing: - Retain bi-weekly price adjustments for petroleum pricing to ensure cost recovery for the oil refinery and bulk importers. - Adjust electricity pricing by end-2009 to bring the average tariff to cost-recovery levels (allow VRA to cover, at a minimum, its operating costs without resort to government subsidies, other than the lifeline subsidy). - Lifeline subsidy cost: GH¢ 46 million in 2008 (0.3 percent of GDP). - Electricity tariff structure subject to quarterly reviews starting in 2010 to ensure continuing cost recovery. ### Management of domestic arrears - Budget provision and process: - Provision made within the budget to settle in 2009 GH¢534 million of domestic arrears carried over from 2008. - MDAs required to report any other potential domestic arrears from 2008 by end-September 2009; due diligence process launched to validate reported liabilities. - If arrears from 2008 exceed amounts provided in the budget, MDAs required to settle them within their 2009 budget ceilings where possible; remaining amounts addressed as a priority in the 2010 budget. - All MDAs instructed to take steps to avoid over-commitments. ### Debt management - Strategy and principles: - Adopt a comprehensive public debt management strategy providing a clear framework for borrowing; establish principles guiding currency composition, maturity, interest rates and other risks of the debt portfolio. - Explore all avenues for concessional financing; seek to avoid nonconcessional borrowing in foreign currency wherever possible. - Market-related financing may be considered for high-return infrastructure projects and PPPs on a case-by-case basis, based on economic rate of return, impact on debt sustainability, and alternatives. - Reporting and program limits: - Government will provide to the Fund a semi-annual listing of projects being considered for market-related foreign financing, with a first report provided at the time of the first program review. - On this basis, government would request that limits under the PRGF arrangement on contracting or guaranteeing new external nonconcessional debt be set so as to accommodate such projects. ### Poverty reduction and social protection - Current and expanded support measures: - Strengthen and expand social protection and safety nets to mitigate risks associated with slower growth for low income and vulnerable groups. - Current protection includes “lifeline” scheme for utility costs, Livelihood Empowerment Against Poverty (LEAP) cash transfer program, school feeding program, and free maternal care for almost 500,000 women. - Other measures: grants and subsidies for basic education, national youth employment program. - New initiatives and education support: - Provision of school uniforms to about 1.6 million pupils in public basic schools in deprived communities. - Free exercise books for every pupil in all public basic schools. - Increase capitation grant by 50 percent. - In context of move to full cost recovery utility pricing, review possible need to expand support provided to poor households. - GPRS: - Current Ghana Poverty Reduction Strategy (GPRS) covers period through end-2009. - Government will shortly develop a strategy to extend the GPRS to 2010 and beyond to underpin the program of adjustment and reform. ### Monetary policy, exchange rate policy, and financial sector issues - Monetary policy stance and inflation targeting: - BOG committed to disinflation within IT framework; 2007–08 crisis temporarily dislodged expectations. - BOG recently increased the prime rate by 150 basis points, to 18.5 percent. - Projected that inflationary pressures will begin to ease by the second half of 2009, paving the way for reduction in the policy rate. - Policies aim to reduce inflation below 10 percent during 2010. - Capacity building and transparency: - BOG will build forecasting and analytical capacity to support monetary policy implementation, liaising with Fund staff. - Communication strategy includes a press conference after each MPC; website restructuring by end-year to consolidate and give greater prominence to inflation targeting policies, MPC press releases, inflation reports, and other IT materials. - Exchange rate policy: - Maintain a flexible exchange rate regime with foreign exchange market interventions limited to smoothing short-term fluctuations. ### Financial supervision and regulation - Risk-based supervision and BASEL II: - Multi-year program for risk-based supervision of banks launched in 2007, supported by Canadian OSFI. - Set 2010 as implementation year for BASEL II; in collaboration with banking industry agreed to adopt Standardized Approach for credit risk and operational risk, and Standardized Measurement Method for market risk. - Updated Financial Sector Strategic Plan (FINSSPII) to be completed during 2009, with implementation targeted to start in 2010. - Governance and supervisory measures: - Banks required to appoint compliance officers. - Committee overseeing BASEL II process meets quarterly to discuss risk management policies. - Bank of Ghana liaises more closely with external auditors to supplement information for supervision. - Early Bank of Ghana intervention has occurred in some cases of problems inconsistent with prudential regulations. *Source: _cr09256 - 33. Over the medium-term, to broaden the tax base and minimize distortions, reviews will* ### 62. To further extend the capacity of the banking system to play a key role in a rapidly ### _cr09256 - 62. To further extend the capacity of the banking system to play a key role in a rapidly ### Banking system capital requirements - The Bank of Ghana set the new minimum capital requirement at GH¢60 million to be met by end of 2009. - Banks with majority domestic shareholders are required to increase minimum capital to GH¢25 million by end 2010, and then to GH¢60 million by end 2012. ### Financial sector reforms (initiated or to be completed during program period) - Major measures to be brought to full implementation include: - National Pensions Act, 2008, establishing a regulatory framework for a three-tier pension system. - Financial Services Bill, to provide legal and regulatory framework for providing nonbank financial services to non-residents. - Full establishment of the Financial Intelligence Centre under the Anti Money Laundering Act, 2008. - Borrowers and Lenders Act. - Home Mortgage Finance Act. - Given extensive changes since the last FSAP update, the government would welcome a new FSAP update at the earliest possible opportunity. ### Domestic debt market reform - Medium-term measures to deepen financial markets and improve government debt operations: - Rationalization of the primary dealer system. - Annual publication of an issue calendar to guide portfolio managers for orderly rebalancing. - Implementation of a comprehensive investor relations program targeted at domestic and international participants in the government debt market. ### Risks and contingencies - Key downside risks identified: - Lower-than-expected remittances and private capital inflows. - A more rapid than expected increase in global oil prices. - A greater than anticipated economic slowdown in trading partner countries. - Contingency: If risks materialize, the government will adjust policies in close consultation with IMF staff to ensure achievement of a sustainable external position by the end of the program period. ### Data provision and public dissemination commitments - National accounts: - Revised and rebased to 2004 with IMF technical assistance. - Ghana Statistical Service plans to publish the new numbers by end December 2009. - GSS plans to produce quarterly national accounts after publication of the new series. - Inflation and price indices: - Inflation (CPI) data will be announced by the 10th of the month following the outturn month. - Prime Building Cost Index (PBCI) will be produced and disseminated quarterly. - Producer Price Index (PPI) will be produced and disseminated with a month’s lag. - Population and housing census: - A census will be undertaken in 2010. - Preparatory work has started; census report expected to be produced and disseminated starting May 2011. - Public finance data: - Controller and Accountant General will release monthly statement of the Final Accounts of government with a maximum of six weeks lag. - Ministry of Finance will publish monthly fiscal outturns on its website with a maximum lag of eight weeks, starting with the January to March 2009 accounts and historic monthly data for 2008, which will be published by end-June 2009. - Annual data on the breakdown of public sector staff strength by MDA in 2008, together with corresponding data on the aggregate wage bill by MDA, will be published on the Ministry’s website by end-September 2009, with estimates for 2009 and subsequent years published within three months of end-year. - Nonconcessional financing: - Ministry of Finance will provide a listing and status report for projects being considered for nonconcessional financing for end-June and end-December of each year. ### Program monitoring and review schedule - Coordination and oversight: - Economic Policy Coordinating Committee (EPCC) including Ministry of Finance, Bank of Ghana, and other MDAs will meet regularly to track progress; EPCC together with Ministry of Finance’s Public Expenditure Monitoring Unit will oversee public spending to ensure compliance with budget limits. - Ministry of Finance will post a broad range of macroeconomic data timely on its website, including quarterly fiscal estimates with lag no more than 8 weeks, CAGD monthly statement with maximum lag 6 weeks, and annual staff strength and aggregate wage bill by MDAs. - Review cadence: - Quarterly reviews for 2009, semi-annual reviews starting in 2010. - First review of the program expected to be completed by end-December 2009; end-September 2009 is the test date for quantitative performance criteria. - Second and third reviews expected to be completed by end-April and end-October 2010, with test dates of end-December 2009 and end-June 2010 respectively. - Request to IMF: - Government requests Board approval of policies set forth in the MEFP and disbursement of the first loan installment, totaling SDR 387.45 million. ### Quantitative program targets and TMU highlights - Program exchange rate: - GH¢ 1.45 per US$ 1, calculated as the average of buying and selling exchange rates reported by banks to the Bank of Ghana as of June 19, 2009. - Performance criteria timing: - Set for end-September 2009, end-December 2009, and end-June 2010; an indicative target set for end-March 2010. - Performance criteria under the arrangement include: - Ceiling on the overall fiscal deficit (including grants) of the government. - Floor on the net international reserves of the Bank of Ghana. - Continuous zero ceiling for the accumulation of new external arrears. - Ceiling on contracting or guaranteeing of new external nonconcessional debt. - Indicative targets include: - Ceiling on net domestic financing of the government. - Ceiling on net domestic assets of the Bank of Ghana. - Inflation target and consultation: - A target is set for the twelve-month rate of consumer price inflation with inner and outer bands triggering consultations with the Fund if breached. - Definitions provided for program monitoring (selected): - Government: central government, all special funds (Education Trust Fund, Road Fund, District Assembly Common Fund, National Health Insurance Fund), and all subvented and other government agencies classified as government in the Bank of Ghana Statement of Accounts; SSNIT and public enterprises, including Cocobod, are excluded. - Fiscal deficit: difference between total expenditures and the sum of total revenues and total grants. - Revenues: all tax and nontax revenues of the government (both in cedi and in foreign currencies), excluding foreign grants and divestiture receipts; measured on a cash basis as gross inflows to the government’s uncommitted treasury collections accounts as reported by the BOG. - Expenditures: all spending from uncommitted accounts for Items 1-4 as captured by CAGD accounts, transfers, payments to statutory funds, HIPC-financed expenditure, and VAT refunds; reporting based on NETS accounting system and reconciled with BOG bank statements; also to be verified against BPEMS until fully operational. - Net domestic financing of government: change in net credit to government by the banking system (BOG plus deposit money banks) plus net change in holdings of treasury bills and other government securities by the nonbank sector, excluding divestiture receipts; excludes treasury bills issued for open market operation purposes from January 1, 2003 onward. - Outstanding net credit to government by the Bank of Ghana: sum of claims on government (SOA codes 0401 and 050101-4), including overdrafts, less government deposits (1101 including the main HIPC receiving account, and 1202) as defined in the monetary template. - Outstanding net credit by deposit money banks: DMB holdings of government securities at cost of purchase value as reported by BOG Treasury Department’s Debt Registry, plus overdrafts less government deposits as reported by DMBs in revised BSD2 report forms, plus deferred accrued interest on holdings of inflation-indexed bonds. *Source: IMF staff summary of government MEFP and attached Technical Memorandum of Understanding (excerpts).* ### 12. Nonbank financing is the difference between total net cash receipts to the treasury ### 12. Nonbank financing is the difference between total net cash receipts to the treasury ### Definition of nonbank financing - Nonbank financing is the difference between total net cash receipts to the treasury main cash account (issues/redemptions account when it becomes operational) from the sale/repurchase of government securities, less the corresponding net cash value received from the BOG and DMBs as indicated on the Debt Registry by holder at discount value, plus deferred accrued interest on their holdings of inflation-indexed bonds. - For each test date, any adjustment by the BOG to the data reported by individual DMBs, on account of their misclassification of government or for other reasons, will be reported to the Fund. ### Consultation Mechanism on Inflation - Quarterly consultation band applies to the twelve-month rate of consumer price inflation as measured by the headline consumer price index (CPI) published by the Ghana Statistical Services. - Projected CPI for end-September 2009, end-December 2009, and end-June 2010 are subject to the consultation mechanism; end-June 2009 and end-March 2010 are indicative targets. - Inflation Targets (as shown in the text table) - Central inflation target: 19.7 (Jun. 2009), 16.5 (Sep. 2009), 14.6 (Dec. 2009), 12.2 (Mar. 2010), 9.7 (Jun. 2010) - Inner band (upper limit): 18.5 (Sep. 2009), 16.6 (Dec. 2009), 14.2 (Mar. 2010), 11.7 (Jun. 2010) - Outer band (upper limit): 19.5 (Sep. 2009), 17.6 (Dec. 2009), 15.2 (Mar. 2010), 12.7 (Jun. 2010) - Inner band (lower limit): 14.5 (Sep. 2009), 12.6 (Dec. 2009), 10.2 (Mar. 2010), 7.7 (Jun. 2010) - Outer band (lower limit): 13.5 (Sep. 2009), 11.6 (Dec. 2009), 9.2 (Mar. 2010), 6.7 (Jun. 2010) - Triggered actions - If observed year-on-year CPI inflation falls outside a specific band, this triggers consultation with the Fund. - If inflation moves outside the outer band for the end of a quarter: - The authorities will complete consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases under the program. - The authorities will not be able to request any further disbursements under the PRGF arrangement if inflation moves outside of the outer band until the consultation with the Executive Board has taken place. - If inflation falls outside the inner band for the end of a quarter: - The authorities will conduct discussions with the Fund staff. - Accountability: authorities commit to report to the public the reasons for any breach of the outer bands, and their policy response. ### Bank of Ghana: definitions and monetary aggregates - Net foreign assets (NFA) in the monetary survey: - Defined as short- and long-term foreign assets minus liabilities of the BOG that are contracted with nonresidents. - Short-term foreign assets include: monetary gold (valued at the spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserve position and HIPC Initiative trust investment in the IMF, the HIPC Initiative Umbrella SDR account (all as reported by the IMF), foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, and other positive short-term or time deposits. - Short-term foreign liabilities include: foreign currency liabilities contracted by the BOG at original maturities of one year or less (including overdrafts), outstanding liabilities to the IMF, and deposits of international institutions at the BOG. - Long-term foreign assets and liabilities comprise: other foreign assets (BOG statement of accounts code 303), investments abroad (a subset of 60201), other long-term liabilities to nonresidents (a subset of 1103), and bilateral payment agreements (305). - All values not in U.S. dollars are to be converted to U.S. dollars at the exchange rates prevailing at end-June 2009 and then into cedis at the program exchange rate. - A more detailed listing of accounts is contained in the monetary template referred to in paragraph 7. - Net international reserves (NIR) of the BOG (program monitoring definition and balance of payments): - Defined as short-term foreign assets of the BOG, minus short-term external liabilities. - Excludes short-term foreign assets that are not fully convertible external assets readily available to and controlled by the BOG (including pledged or encumbered external assets, such as the HIPC umbrella SDR account). - Net international reserves include net swap transactions (receivable less payable) and exclude all positive foreign currency deposits at the BOG held by resident DMBs, public institutions, nonfinancial public enterprises, other financial institutions, and the private sector. - Conversion rules: All values not in U.S. dollars are to be converted to U.S. dollars at the exchange rates prevailing at end-June 2009 and then into cedis at the program exchange rate. - More detailed listing in the monetary template. - Net domestic assets (NDA) of the Bank of Ghana: - Defined as the difference between reserve money and net foreign assets of the BOG, excluding the HIPC Umbrella SDR account, converted from U.S. dollars to cedis at the program exchange rate. ### External Debt and Debt Service definitions - Short-term external debt: - Defined as the outstanding stock of external debt with an original maturity of one year or less, including overdraft positions and debt owed or guaranteed by the government or the BOG. - Data on the BOG’s short-term external debt are those reported from the statement of accounts template as short-term liabilities to nonresident commercial banks (BOG statement of accounts code 1201 plus 301 overdrafts plus Crown Agent). - Footnote clarifications: - (A) “Debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000). This includes overdrafts on accounts with correspondent banks. - (B) Excluded from this performance criterion are normal import-related credits, pre-export financing credits of public enterprises, cocoa loans collateralized by cocoa contracts, and individual leases with a value of less than US$100,000. - Nonconcessional medium- and long-term external debt: - Defined as outstanding stock of external debt contracted or guaranteed by the government or Bank of Ghana with an original maturity of more than one year. - Medium- and long-term debt and its concessionality will be reported by the Aid and Debt Management Unit of the Ministry Finance and Economic Planning, and will be measured in U.S. dollars at current exchange rates. - Footnote clarifications: - (A) Applies not only to debt as defined in point No. 9 of the Guidelines but also to commitments contracted or guaranteed for which value has not been received. - (B) Excluded: debts with a grant element equivalent to 35 percent or more (calculated using currency-specific discount rates based on OECD commercial interest reference rates); borrowing for specific high-return public infrastructure investment projects, subject to prior consultation with the Fund. - For 2009/10, the ceiling is set at US$300 million to allow for possible guarantees to the Ghana National Petroleum Company to facilitate its participation in the first phase of a program to exploit offshore gas deposits. - Loans provided by a private entity will not be considered concessional unless accompanied by a grant or grant element provided by a foreign official entity, such that both components constitute an integrated financing package with a combined grant element equal to at least 35 percent. ### Adjustors to the Program Targets - Program quantitative targets are subject to specified adjustors. - Adjustors listed: - Overall fiscal deficit of the government: - The deficit ceiling will be adjusted upward (downward) for higher (lower) than programmed project loans; - Downward (upward) by 50 percent of lower than programmed program loans (grants), up to a maximum adjustment of GHȼ$75 million; and downward for higher than programmed program grants by full amount. - Net international reserves of the Bank of Ghana: - The floor will be adjusted upward for any new SDR allocation. - The NIR floor will also be adjusted upward for any excess of budget grants and loans relative to the program baseline. - Net domestic financing of the government: - The ceiling will be adjusted upward by 50 percent of any shortfall in programmed program loans and grants, up to a maximum adjustment of GH¢75 million. - For higher than programmed loans and grants, the ceiling will be adjusted downward by full amount. - Net domestic assets of the Bank of Ghana: - The ceiling will be adjusted downward for any new SDR allocation. ### Provision of Data to the Fund - Data on variables subject to performance criteria and indicative targets will be provided monthly with a lag of no more than eight weeks, except for select data where reporting lag is explicitly specified in Table 1. - Authorities will promptly transmit any data revisions to Fund staff. - For information relevant for assessing performance but not specifically defined in the memorandum, the authorities will consult with Fund staff. - Selected items from Table 1: Ghana: Data to be Reported to the IMF - Fiscal data (MOFEP): - Central budget operations for revenues, expenditures and financing: Monthly, within six weeks of the end of each month. - Functional breakdown by Ministry, Department, and Agency of expenditure authorizations, payment vouchers issued, payment vouchers liquidated, and arrears: Monthly, within six weeks of the end of each month. - Divestiture receipts received by the budget (in cedis and foreign exchange, net of divestiture transactions costs): Monthly, within six weeks of the end of each month. - Monetary data (BOG): - Net domestic assets and net international reserves of the BOG: Monthly, within two weeks of the end of each month. - Detailed balance sheet of the monetary authorities: Monthly, within four weeks of the end of each month. - Monetary survey detailing the consolidated balance sheet of commercial banks using the new BSD2 Report Form: Monthly, within six weeks of the end of each month. - Summary position of government committed and uncommitted accounts at BOG, and total financing from BOG: Monthly, within four weeks of the end of each month. - Composition of banking system and nonbanking system net claims on government: Monthly, within four weeks of the end of each month. - Debt registry showing structure and holders of domestic government debt, at face value and at discount; similar table for holders of treasury bills for open market operations: Monthly, within four weeks of the end of each month. - Balance of Payments (BOG): - Export and import data on value, volume, and unit values, by major categories and other major balance of payments variables: Quarterly, with a maximum lag of two months. - Foreign exchange cash flow: Monthly, within four weeks of the end of the month. - External debt and foreign assistance data (MOFEP): - Concessionality of all new external loans contracted by the government or with a government guarantee: Monthly, within four weeks of the end of each quarter. - For the coming quarter: (i) total debt service due by creditor, (ii) amount of HIPC Initiative relief on each transaction, and (iii) debt service paid and the transfers to the HIPC Initiative account by creditor for the previous month; covering government and government-guaranteed debt: Quarterly within four weeks of the end of each quarter. - External debt and external debt service incurred by enterprises with government ownership above 50 percent, even if loans have not been explicitly guaranteed by the government: Quarterly, within three weeks of the end of each quarter. - Disbursements of grants and loans by creditor: Quarterly, within four weeks of the end of each quarter. - Other data (GSS and Ministries): - Overall consumer price index: Monthly, within two weeks of the end of each month. - National accounts by sector of production, in nominal and real terms: Annual, within three months of the end of each year (switching to quarterly when they become available). - Electricity pricing (Ministry of Energy): Data on tariff structure and cost of producing electricity: Quarterly, within four weeks of the end of each quarter. - Petroleum pricing (Ministry of Energy): - (i) breakdown of costs, including the ex-refinery price, duties, levies, and margins, for each petroleum product; and - (ii) the indicative maximum price approved in the bi-weekly review of petroleum pricing for each product: Bi-weekly, within two days of the completion of the pricing review. ### Debt Sustainability Analysis: key findings and baseline assumptions - Context and approval: - Joint IMF and World Bank Debt Sustainability Analysis prepared by staffs of the World Bank and the International Monetary Fund. - Approved by Michael Atingi-Ego and Dominique Desruelle (IMF) and Carlos Alberto Braga and Sudhir Shetty (World Bank). - Dated June 29, 2009. - Principal summary findings: - The DSA updates the 2008 Article IV consultation DSA; starting point for the 2009 DSA is less favorable than a year ago due to the rise in the debt-to-GDP ratio between end-2007 and end-2008 from a large fiscal deficit in 2008. - Public sector net debt is projected to fall to less than 40 percent of GDP by the end of the projection period from 60-70 percent of GDP in 2008-2012 under the updated baseline. - The 2008 DSA baseline had projected public debt rising to exceed 80 percent of GDP over a 20-year period. - Stress test analysis suggests that Ghana remains at moderate risk of debt distress, consistent with the 2008 DSA. - Key risks and conditionalities: - Key risks relate to the medium- to long-term fiscal outlook and prospects for growth in a post-oil economy. - The baseline depends on determined fiscal adjustment in the near term and rigorous efforts to limit borrowing needs over the medium- to long-term. - Failure to reduce the primary deficit from 2009 levels would be associated with a near doubling of the public debt-to-GDP ratio over two decades. - The baseline assumes sustained, strong growth in the non-oil, non-mineral economy and a diversified and competitive export base, requiring macroeconomic stability, continued improvements in the business climate, and prudent management of Ghana’s oil revenues. ### Background statistics (selected) - Public debt and composition at end-2008: - Ghana’s public debt at end-2008 was an estimated 58 percent of GDP (compared with a projection of 51 percent of GDP in the 2008 DSA). - The 2008 fiscal deficit was 14½ percent of GDP. - Public sector external and domestic debts were similar in scale at end-2008, both close to US$4 billion (29 percent of GDP each). - External debt developments: - External debt rose from 17 to 29 percent of GDP since 2006, reflecting a $750 million Eurobond issue at end-2007, new concessional bilateral financing, and new borrowing contracted from the IDA since 2006 following the MDRI. - Private sector external debt data are of low quality but appear broadly stable at about 15 percent of GDP between 2007 and 2008. - Selected time series snapshot (Ghana: Total public Debt, 2004-08, in millions of U.S. dollars) - 1. External debt: 2004: 6,448; 2005: 6,348; 2006: 2,177; 2007: 3,586; 2008: 4,035 - Multilateral Institutions: 2004: 5,287; 2005: 5,565; 2006: 1,327; 2007: 1,710; 2008: 2,028 - IMF: 2004: 447; 2005: 424; 2006: 158; 2007: 167; 2008: 163 - IDA: 2004: 4,012; 2005: 4,336; 2006: 803; 2007: 1,137; 2008: 1,320 - AfDB: 2004: 551; 2005: 555; 2006: 141; 2007: 153; 2008: 230 - Other: 2004: 277; 2005: 251; 2006: 225; 2007: 254; 2008: 315 - Official bilateral: 2004: 960; 2005: 636; 2006: 760; 2007: 978; 2008: 1,168 - Non-concessional: 2004: 1; 2005: 201; 2006: 147; 2007: 908; 2008: 898; 2009: 839 (table context) - 2. Domestic debt: 2004: 1,868; 2005: 1,997; 2006: 3,133; 2007: 3,819; 2008: 4,020 - Banking system: 2004: 1,402; 2005: 1,755; 2006: 2,431; 2007: 2,598; 2008: 2,588 - Non-bank sector: 2004: 466; 2005: 242; 2006: 637; 2007: 785; 2008: 920 - Non-residents: 2004: 0; 2005: 0; 2006: 0; 2007: 664; 2008: 373; 2009: 63 (table context) - Other: 2004: 0; 2005: 0; 2006: 0; 2007: 0; 2008: 149 - 3. Total public debt (1 + 2): 2004: 8,315; 2005: 8,345; 2006: 5,310; 2007: 7,405; 2008: 8,055 - Memorandum items (in percent of GDP): Total public debt: 2004: 94.2; 2005: 78.3; 2006: 42.0; 2007: 51.2; 2008: 58.2 - External debt: 2004: 73.1; 2005: 59.6; 2006: 17.2; 2007: 24.8; 2008: 29.2 - Domestic debt: 2004: 21.2; 2005: 18.8; 2006: 24.8; 2007: 26.4; 2008: 29.0 - Source: Ministry of Finance and Bank of Ghana. ### Baseline fiscal and oil sector assumptions - Baseline features early correction of Ghana’s large fiscal deficit: - During 2009-10, budget strengthened by planned cuts in public spending relative to GDP via rationalization of capital spending, efforts to contain wage bill expansion, and elimination of energy subsidies. - Revenue-to-GDP ratio projected to rise due to elimination of customs tariff and other tax exemptions and rationalization of VAT thresholds and coverage. - Government revenues projected to receive a boost from planned implementation of a single revenue authority for income, customs, and VAT tax collections. - Fiscal deficit is projected to decline from 14½ percent of GDP in 2008 to 6 percent in 2010. *Source: _cr09256 - 12. Nonbank financing is the difference between total net cash receipts to the treasury* ### 5. The fiscal accounts also benefit from 2011 onwards from Ghana’s projected ### _cr09256 - 5. The fiscal accounts also benefit from 2011 onwards from Ghana’s projected ### Oil production assumptions and fiscal impact - Jubilee I offshore oil field production assumption: - Oil production is assumed to average 120 thousand barrels per day during 2012-15, with a subsequent steady decline. - Based on the latest WEO projections, the price of Ghana’s oil exports would increase to US$83 per barrel by 2014; prices are assumed to stabilize at this level over the medium term in nominal terms. - Oil revenue projections: - Oil revenues are projected to peak at about 6 percent of GDP during 2011-2017. - The government’s incomes reflect income tax and royalty collections, production sharing agreements, and provision for an additional oil entitlement if favorable oil prices result in a rate of return in excess of specific thresholds. - The additional oil entitlement is tentatively projected to increase from under 1 percent of GDP during 2011-2018 to more than 1½ percent of GDP during 2019-25. - Scope and exclusions: - DSA baseline reflects planned production from the Jubilee I offshore oil field, but does not include possible gas production or production from other oil fields for which exploration is still underway. ### Oil savings, spending rules, and fiscal trajectory - Government framework assumption for utilization of oil resources in the DSA: - One-third of tax and royalty revenues would be saved, while two-thirds would be spent on growth-enhancing investment projects. - For the additional oil entitlement, the DSA assumes that one-half is saved, with the remainder spent on investment projects. - Projected effects of oil savings: - Oil savings are projected to reach a cumulative 6 percent of GDP by 2017, effectively reducing public sector net indebtedness. - The saved oil revenues would support spending over the long-term. When oil revenues begin a projected decline from 2019, spending would be sustained in part by drawing down the accumulated oil savings. - The oil savings account would be depleted by 2028 and thereafter oil-related spending would be limited to about 1 percent of GDP, in line with residual oil revenues. - Alternative scenario note: - A 2008 alternative scenario examined saving oil revenues throughout the DSA period (in contrast to the baseline here where the revenue stream would be fully spent by the end of the DSA), producing a more positive impact than the current baseline. ### Long-Term Fiscal Baseline (2009-2029) — selected figures (In percent of GDP) - Revenues and grants, of which: 29.1 / 29.3 / 29.2 (pre-oil saved consumed 2009-2010 / 2011-2018 / 2019-2029) - Non-oil revenues: 23.6 / 20.7 / 25.0 - Oil revenues: 0.0 / 5.7 / 2.7 - Of which: additional oil entitlement: 0.0 / 0.8 / 1.4 - Grants: 5.5 / 2.9 / 1.5 - Expenditures, of which: 37.2 / 33.0 / 33.3 - Oil-financed projects: 0.0 / 3.8 / 3.4 - Other fiscal items, net: -0.4 / -1.8 / -2.1 - Overall balance: -7.7 / -1.9 / -2.0 - Memorandum items: - Non-oil balance: -7.7 / -3.7 / -1.3 - Primary balance: -3.8 / 0.2 / 0.1 - Net public debt (end-period): 66.6 / 44.2 / 36.1 - Gross public debt: 66.6 / 57.0 / 36.1 - Oil savings balance (-): 0.0 / 12.8 / 0.0 - Footnote: Other fiscal items net include arrears clearance, VAT refunds, and new fiscal measures in 2010 budget. ### Baseline macroeconomic assumptions (Box 1) — key projections - Real GDP growth: - After averaging more than 6 percent annually during 2004-08, output growth is set to slow to below 5 percent during 2009-10 reflecting fiscal tightening and global slowdown. - Real GDP would expand by about 20 percent in 2011 as oil production begins. - In the nonoil sector, growth is projected to average 5-6 percent during 2012-29, reflecting broad-based non-mineral growth. - Inflation: - Consumer price inflation exceeded 20 percent in the first quarter of 2009. - A decline through 2009-2010 reflects slowing economic growth, fiscal tightening, and tight monetary policies. - Over the medium term, inflation is expected to converge to the Bank of Ghana’s target of 5 percent. - Government balances: - The primary deficit is assumed to narrow to less than one percent of GDP over the long-term. - Expenditures would remain broadly stable in relation to the GDP, with a reprioritization toward growth-oriented infrastructure investments financed by oil revenues. - Foreign grant receipts are projected to decline relative to GDP as Ghana benefits from oil incomes, offset by an increase in domestic revenues from non-oil taxation. - Current account balance and external flows: - Over 2009-11, the current account deficit is projected to narrow but remain at double-digit level in relation to GDP. - Beyond that, the current account deficit would narrow to about 4-5 percent of GDP by the end of the forecasting period. - Exports are projected to peak at 62.3 percent of GDP during 2012, boosted by oil production; during 2019-2029 exports are projected at 47.4 percent of GDP in 2029. - Financing flows: trade in goods and services deficit projected to remain in the 14-16 percent of GDP range, financed largely by private and public transfers averaging 14-15 percent of GDP. - Non-debt creating inflows (mainly FDI) projected to average about 10 percent of GDP during 2009-14, declining to 4-5 percent of GDP in the medium-to-long run. ### External debt sustainability and borrowing assumptions - Baseline external debt indicators: - Public sector external debt-to-GDP ratio projected to rise from 29 percent in 2008 to 33 percent in 2029. - NPV of public external debt projected to rise from 18 percent of GDP in 2008 to 31 percent in 2029, reflecting assumed increase in nonconcessional borrowing. - NPV of private external debt projected to decline from 13.7 percent of GDP in 2008 to below 10 percent by 2029. - Non-concessional borrowing assumptions and effects: - DSA assumes average maturity of non-concessional borrowing is 6 years and assumed interest rate is 8 percent. - DSA assumes a high-case level of non-concessional borrowing of US$0.5 billion annually during 2009-14. - A shift to non-concessional funding would leave the debt-to-GDP ratio largely unaffected while increasing debt service ratios. - Threshold context: - Under joint IMF-World Bank framework indicative thresholds: 50 percent for the NPV of debt-to-GDP ratio, 200 percent for NPV of debt-to-exports ratio, and 25 percent for debt-service-to-exports ratio. ### Stress testing and alternative scenarios - Observations on standard stress tests: - Standardized stress tests for growth and export performance assume outturns during 2010-2011 fall short of the historic average by one standard deviation, which effectively eliminates the oil sector benefits from the DSA baseline. - For 2011 the baseline projects a one-off oil-induced rise: Real GDP is projected to rise by 24 percent in 2011, while exports are projected to rise by 51 percent in dollar terms. - Adjusted stress tests: - When standardized shocks are applied to 2009-10 but the oil-induced acceleration in real growth and exports starting in 2011 is retained, all debt indicators remain below respective thresholds except the debt service-to-revenue ratio, which would exceed the threshold level by a modest amount toward the end of the projection period. ### Public debt sustainability and sensitivities - Baseline public debt dynamics: - Net public debt projected to fall from 73 percent of GDP in 2010 to 37 percent by 2029. - Projected decline reflects move to broad primary fiscal balance limiting new debt creation combined with sustained economic expansion. - Role of domestic versus foreign borrowing: - DSA benefits from projected decline in domestic borrowing and rebalancing toward foreign debt with higher concessionality. - A larger reduction in foreign debt would reduce vulnerability to exchange rate changes. - Sensitivity to fiscal performance and exchange rates: - If the primary balance remains at projected 2009 levels (5 percent of GDP) throughout the DSA, the present value of debt would rise from 59 to 109 percent of GDP. - A 30 percent depreciation raises the present value of debt-to-GDP ratio by 25 percentage points by the end of the projection period. - Sensitivity to oil price assumptions: - DSA is relatively insensitive to oil price assumptions overall; alternative oil price scenarios produced little net change in the DSA baseline, though less favorable results are possible depending on assumptions and spending response. - Lower global oil price would deteriorate the trade balance during 2011-15 (when Ghana is a net oil exporter) but strengthen it subsequently when Ghana shifts back to net oil importer status. - If government maintained higher spending despite lower oil revenues and without necessary oil fund savings, the DSA would be less favorable. ### Conclusions and policy implications - Overall DSA outcome: - The 2009 DSA shows improvement from last year under the baseline for key debt indicators, reflecting tighter fiscal stance and incorporation of oil production in the baseline. - Debt ratios are projected to be broadly stable over the DSA period rather than deteriorating as in the 2008 baseline. - Stress test results are generally favorable once adjustments are made for the timing of oil production and exports; the debt service-to-revenue ratio could slightly exceed the 35 percent threshold under extreme shocks. - Remaining risks and required policies: - Ghana remains at moderate risk of debt distress due to short- and medium-term vulnerabilities from two key factors: oil revenues and fiscal performance. - Failure to reduce the large primary fiscal deficit and sustain consolidation would result in a much less favorable DSA outlook. - Ability to sustain fiscal consolidation over the medium to long term and to accelerate non-oil growth while oil revenues increase are key risks to the favorable baseline. *IMF staff DSA chapter content (2009).* ### 19. The DSA depends closely on prudent macroeconomic management of oil wealth. ### 19. The DSA depends closely on prudent macroeconomic management of oil wealth. ### Baseline assumptions - Oil production is combined with strong private sector investment. - Sustained strong growth in the non-mineral sector is assumed. - Continued export diversification is assumed. - Judicious use of oil revenues in terms of the size and nature of additional public expenditure is required to limit Dutch disease effects. - New oil fields currently under exploration could further improve fiscal and growth performance in the baseline, but increase the premium on prudent management of oil revenues. - To minimize risks, it is important to develop a strategy for using oil and gas revenues in a productive manner. ### Risks and vulnerability channels - Emergence of Dutch disease from imprudent use of oil revenues would adversely impact the DSA. - Larger oil revenue inflows increase the fiscal and macroeconomic management challenge: even if the baseline improves, the cost of mismanagement rises. - The DSA outcomes depend on macroeconomic variables (real GDP growth, GDP deflator in U.S. dollar terms, non-interest current account, non-debt-creating flows) and on the terms of new financing. ### Policy recommendations - Exercise judicious fiscal scaling-up: limit the size and alter the composition of additional public expenditure to mitigate Dutch disease. - Develop and implement a strategy for using oil and gas revenues in a productive manner (e.g., investments that support non-mineral private sector growth and export diversification). - Maintain prudent macroeconomic management to preserve the baseline DSA outlook and reduce vulnerability to adverse shocks. ### Key quantitative indicators and macroeconomic assumptions (as presented) - Real GDP growth (in percent): 6.4, 5.7, 7.3, 5.3, 1.1, 4.5, 5.0, 24.2, 7.1, 5.3, 5.0, 8.5, 4.1, 5.4, 4.6 - GDP deflator in US dollar terms (change in percent): 11.5, 11.4, 0.1, 3.9, 15.8, -14.4, -1.5, -0.8, -1.0, 2.1, 2.7, -2.2, 2.9, 4.7, 3.3 - Effective interest rate (percent): 1.1, 1.1, 2.4, 1.7, 0.4, 2.9, 2.2, 2.4, 2.3, 2.3, 2.3, 2.4, 2.3, 4.1, 2.9 - Growth of exports of G&S (US dollar terms, in percent): 30.7, 17.5, 17.8, 11.3, 10.7, 6.2, 7.8, 40.0, 6.9, 4.6, 5.2, 11.8, 4.7, 8.9, 6.5 - Growth of imports of G&S (US dollar terms, in percent): 25.2, 21.5, 24.9, 14.5, 14.1, -10.2, 9.6, 12.0, 4.7, 7.3, 1.7, 4.2, 6.9, 7.5, 7.2 - Government revenues (excluding grants, in percent of GDP): 21.9, 22.7, 22.8, 19.7, 3.5, 24.1, 24.4, 26.1, 26.3, 26.2, 25.8, 25.5, 28.2, 27.4, 27.8 - Oil Fund assets (percent of GDP; end of period): 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 3.9, 6.8, 11.6, 13.4, 0.0, 6.4 - PV of external debt (selected values shown in the DSA tables): 31.7, 31.7, 43.8, 49.6, 45.0, 45.3, 44.4, 42.5, 45.1, 40.4, 38.2, 40.0 - Debt service-to-exports ratio (in percent; selected series): 17.8, 9.8, 10.8, 20.9, 6.4, 9.9, 10.4, 8.7, 9.4, 9.9, 10.7, 9.8, 12.4, 18.4, 15.1 - Total gross financing need (Billions of U.S. dollars; selected series): 1.4, 1.5, 2.5, 1.3, 0.7, 1.5, 1.2, 0.4, 0.7, 0.9, 1.0, 0.9, 2.8, 5.9, 3.6 *Source: Staff simulations and projections contained in the DSA tables and accompanying text.* ### 2008. The staff report (Country Report No. 08/344) was discussed by the Executive Board on ### _cr09256 - 2008. The staff report (Country Report No. 08/344) was discussed by the Executive Board on ### XII. FSAP Participation - Ghana participated in the FSAP in 2000–01. - A Financial System Stability Assessment (FSSA) was issued to the Executive Board in 2001. - An FSAP update was presented to the Board in December 2003. ### XIII. Technical Assistance - Listed technical assistance by subject, department, and date: - Advise on establishing large taxpayers unit — FAD — 2002/03 - Review of public expenditure management reforms — FAD — 2002/03 - Tax policy — FAD — May 2003 - Fiscal ROSC — FAD — Feb. 2004 - Regional advisor on public expenditure management — FAD — 2004/06 - Assessment of petroleum pricing mechanism — FAD — Jan. 2005 - Public financial management — FAD — Mar.-Jun. 2006 - Enhancing fiscal discipline — FAD — May 2008 - Revenue administration — FAD — Jan. 2009 - Tax policy — FAD — Apr. 2009 - Revenue administration — FAD — Apr. 2009 - Fiscal regime for natural resources — FAD — Jun. 2009 - Accounting and internal audit reform — MFD — Jul./Nov. 2002; Mar. 2003 - Foreign exchange market, government securities market, and banking system issues — MFD — Apr. 2003 - Joint FSAP follow-up with World Bank — MFD — Jun. 2003 - Multitopic technical assistance initiation — MFD — Nov. 2004 - Improving monetary operations, banking supervision and payment systems — MFD — Nov. 2004 - Medium-term debt management strategy — MCM — Mar. 2008 - Money and banking statistics — STA — Jul. 2002; Jan.-Feb. 2004; Apr. 2007; Mar. 2008; Apr.-May 2009 - National accounts statistics — STA — Sep./Oct. 2001; Aug.-Dec. 2002; Sep. 2003; Feb. 2009 - National accounts and prices — STA — Mar. 2004; Oct. 2004; Apr.-May 2005; Apr.-May 2006; Sep. 2006 - Government finance statistics — STA — Mar. 2005; May-Jun. 2006; May-Jun. 2009 - Balance of payments statistic — STA — Feb. 2009 - Pilot study of access to private capital markets — ICM — May 2003; Nov. 2004 - The remittance market — LEG — Apr.-May 2006 ### XIII. Resident Representative - Fund Resident Representative office in Accra since June 1985. - Current resident representative: Mr. M. Arnold McIntyre, assumed post in August 2006. ### II. GHANA-JOINT WORLD BANK-IMF WORK PROGRAM, 2009-10 (selected items) - Bank work program items and provisional timing: - Poverty assessment — January 2010 - Public expenditure review — November 2009 - PRSC 7 — June 2010 - Expected delivery dates include April 2010; November 2009; June 2010; April 2010 (as listed) - IMF work program items and provisional timing: - First PRGF review/2010 budget discussions — November 2009 - Second PRGF review/2010 Article IV consultation — February 2010; December 2009; March 2010 - Fund request to Bank: - Assessment of progress with civil service reform — November 2009 - Assessment of energy sector recovery strategy — December 2009 - Bank request to IMF: - Regular updates of performance under Fund-supported program — Continuous - Regular updates of macroeconomic projections — Continuous - Joint products in next 12 months: - DSA — T.B.D. - FSAP — March 2010; April 2010 ### III. GHANA: Statistical Issues — Key findings and recommendations - General assessment: - Data provided to the Fund are broadly adequate for surveillance purposes, but quality and timeliness of certain data need improvement. - Notable deficiencies in dissemination to the public and in reporting for Fund publications. - Publication improvements: Bank of Ghana’s Web site now posts the Monetary Policy Committee Statement, Statistical Releases, and monthly monetary series for 2001–09. - Data reporting gaps: - International transactions for IFS — last reported for 2006. - Monthly government finances for IFS — last reported for 2008. - National accounts for IFS — last reported for 1997. - No quarterly balance of payments data currently reported for IFS. - Latest available data for Government Finance Statistics Yearbook (GFSY) are for 2008 (covering only cash revenue and expense transactions of the budgetary central government). - GDDS participation: - Authorities participating in the Fund’s General Data Dissemination System (GDDS) and external sector and government finance statistics modules of the GDDS Project for Anglophone African Countries. - GDDS metadata posted on the Fund’s Dissemination Standards Bulletin Board (DSBB) since July 2005, but need updating. - National accounts and prices: - STA TA on national accounts provided over 2001 to 2009. - Bundled TA mission visited Accra during March 12–26, 2008; follow-up mission in February 2009. - Main objectives: adopt the System of National Accounts 1993 (1993 SNA); rebase national accounts (currently dating from 1993); ensure plans for comprehensive data collection. - February 2009 mission conclusions: - 2004 Supply and Use Table (SUT) includes more updated and comprehensive sources. - Ghana’s national accounts are considerably understated; recommended using 2004 as benchmark. - Some minor changes to estimates needed; some concepts and methods need addressing for compliance with 1993 SNA. - Incorporation of new data sources and rebasing of national accounts to 2004, planned to be completed by end-2009, are likely to result in a significant upward revision of estimates of GDP. - Recommended priority actions to improve source data: - Design and build a business register with minimum information on output values, if possible input values, and number of employees; use 2003 National Industrial Census 2004/2 (NIC) as starting point and extend to services. - Create a national statistical system containing regular business surveys for manufacturing, construction, transport and communication, and other service industries (urgent surveys on retail trade and NPISH). - Create a system for annual household surveys less comprehensive than GLSS round 5 (2005/06) to be carried out more frequently. - Carry out an agricultural census. - Price statistics: - Peripatetic advisor assigned during 2001–04. - Work under GDDS project for Anglophone Africa. - Updating CPI weights using fourth Ghana Living Standard Survey (1998/1999) completed in mid-2006. - March 2007 STA assisted GSS in developing a producer price index (PPI), which is now published. - Labor statistics: - Labor statistics are almost nonexistent; some wage indicators available from SSNIT. - Ministry of Employment receiving TA from UNDP and ILO for design and compilation of labor statistics. - Fiscal data and government finance statistics: - Controller Accountant General Department (CAGD) compiles monthly budget implementation reports available within six weeks, though reliability is undermined by factors. - 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 new automated Budget and Public Expenditure Management System (BPEMS) covering ministries, departments, and agencies. - Economic classification in BPEMS not sufficiently detailed for GFSM 2001 requirements. - June 2006 STA mission proposed classification of transactions in line with international guidelines. - Transactional coverage problems: - CAGD and BOG missing substantial parts of central government spending (donor flows disbursed directly to ministries; internally generated funds). - Difficulties accounting for expenses paid by extrabudgetary funds. - Operations of special funds (SSNIT, GETF, DACF) not yet covered in fiscal accounts. - Local government revenue and related spending, and transactions financed from the DACF not yet covered. - Recommendation: extend fiscal data coverage to general government; short-term temporary solutions suggested by FAD missions; joint Bank-Fund mission in 2004 assessed progress on monitoring poverty-related spending through HIPC Assessments and Action Plans; Fiscal Transparency ROSC undertaken in July 2004; STA provided further TA in March 2005. - DFID Phase 2 initiative: - Ghana participating under Phase 2 (continuation of DFID GDDS Project for Anglophone Africa). - Project purpose: enhance capacity of statistical systems; rely on GDDS framework to introduce improvements in fiscal reporting based on GFSM 2001 methodology. - Project ends in April 2009; two or three missions expected to complete GFS module. - STA mission recommended enhancing chart of accounts to include financing transactions and additional details on revenue and expense classifications; assistance with bridging data to GFSM 2001 framework. - Recommended establishing interagency working group to delineate general government sector for consistency and initiating compilation of data for extrabudgetary and social security funds; first step to expand coverage at least to consolidated central government. - Monetary statistics and international reserves: - BOG progress noted but further methodological improvements needed; three missions during 2007-09. - 2007 mission focused on residency criterion in BOG accounting data and sectorization of government accounts with ODCs; assisted BOG to automatically derive SRFs for central bank (SRF 1SR) and ODCs (SRF 2SR) to STA per Monetary and Financial Statistics Manual. - Reporting lags: - BOG monthly data reported with a lag of four to six weeks. - ODCs data reported with a lag of eight to ten weeks. - March 2008 mission findings: - Significant progress in implementing STA recommendations, especially for ODCs. - Plan agreed to expand coverage of ODCs 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 reporting. - Proposed BOG start compiling Other Financial Corporations (OFCs) Survey covering finance and leasing companies. - April-May 2009 mission conclusions: - Implementation uneven; substantial progress in strengthening BOG source data and expanding ODC coverage to rural banks and savings and loans companies. - Slow progress in improving data collection and compilation from OFCs. - Authorities agreed to establish an inter-agency committee to enhance coordination and improve OFC data collection. - Mission helped BOG migrate to standardized report forms and an integrated monetary database, and expand institutional coverage. - With wider institutional coverage, authorities need to reconsider definition of broad money, which currently only includes DMBs and may understate the aggregate. - Debt statistics: - External debt recording and payment responsibilities divided among three agencies: - MOFEP through Aid and Debt Management Unit (ADMU) maintains external debt database; records debt-payment obligations, issues payment requests, tracks HIPC debt relief. - CAGD confirms legality of payments, authorizes release of public funds, accounts for debt payments and reports to parliament. - BOG as payment agent verifies payments made to ADMU and CAGD. - FAD TA mission in 2001 recommendations: - Develop a single computerized database available to all three institutions. - Formalize procedures for settling debt payments (including obtaining donor debt notifications, delegating signing authorities, creating registers tracing movement of documents). - Improve analytical content and timeliness of data; data not currently reported at regular intervals. - Recommendation: clearly identify government subsectors for which data are reported and prepare clear classification of financing, outstanding debt, and guarantees to enable systematic comparison of budget, BOP, and BOG cash-flow data. - Trade and balance of payments statistics: - Since 1982 BOG Research Department has primary responsibility for annual and quarterly BOP statistics. - Data compilation based on BPM5 using sources: CEPS, administrative data (government ministries and BOG), commercial banks, and GSS; BOG conducted simple financial surveys on other corporate entities with nonresident transactions. - Participation in external sector module of DFID project starting 2007; three TA missions to undertake comprehensive enterprise survey of cross-border financial flows and stocks to improve BOP and IIP. - February/March 2009 TA mission: - Finalized survey data entry, verified and grossed-up survey results to construct BOP and IIP statements. - Concluded survey findings are of good quality and should be incorporated into BOP compilation program. - Recommended BOG promote improvement of standards and timeliness of reporting of financial statements by enterprises, focusing on non-multinational enterprises; explore partnerships with accounting bodies and auditor general’s office. - Trade statistics issues: - GSS not publishing timely monthly trade statistics though data available from CEPS. - Staff recommended GSS collaborate with CEPS to process customs data within six weeks and with MOT and BOG to identify and reduce discrepancies and ensure imports into bonded warehouses are not double-counted. - Need to improve CEPS data collection procedures and trade volume data through customs invoices to help GSS extract meaningful import and export unit values. *IMF staff report content as provided in the source PDF.* ### 18. Fund staff has recommended that the GSS produce export unit values for major ### _cr09256 - 18. Fund staff has recommended that the GSS produce export unit values for major ### Export unit values recommendation - Fund staff recommended that the GSS produce export unit values for major export commodities, such as gold and cocoa. - A high coverage of the country’s export bundle can be obtained from just three major exports—cocoa, gold, and unwrought aluminum. - Deflation of imports is likely to require an iterative procedure to strike a balance between coverage of the index and its stability, owing to the heterogeneity of the basket. ### Data coverage, frequencies, and recent observations (as of May 31, 2009) - Exchange Rates: Date of latest observation May, 2009; Date received May 2009; 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 May 2009; Date received June 2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q. - Reserve/Base Money: Date of latest observation May 2009; Date received June 2009; Frequency of Data W; Frequency of Reporting M; Frequency of Publication I. - Broad Money: Date of latest observation April 2009; Date received June 2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication I. - Central Bank Balance Sheet: Date of latest observation May 2009; Date received June 2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication I. - Consolidated Balance Sheet of the Banking System: Date of latest observation April 2009; Date received June 2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication I. - Interest Rates: Date of latest observation May 2009; Date received June 2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: Date of latest observation April 2009; Date received May 2009; 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 2009; Date received May 2009; 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. 2008; Date received May 2009; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication I. - External Current Account Balance: Date of latest observation March 2009; Date received May 2009; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and Imports of Goods and Services: Date of latest observation March 2009; Date received May 2009; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication I. - GDP/GNP: Date of latest observation 2008; Date received May 2009; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Gross External Debt: Date of latest observation Dec. 2008; Date received May 2009; Frequency of Data M; Frequency of Reporting I; Frequency of Publication A. - International Investment Position: NA for latest observation, received, frequency of data, reporting, publication. Notes on frequency codes: - Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA). ### Preliminary fiscal and wage developments (January–June 2009; statement dated July 15, 2009) - Preliminary fiscal data for January to April 2009 show a fiscal deficit of GHc 359 million, slightly less than half of the January-June indicative ceiling. - Public sector wage negotiations: Agreement reached with the education service on a 17 percent wage increase for 2009, retroactive to January; consistent with the budget’s wage bill provision. - Projects for non-concessional foreign financing: A listing compiled and provided to staff, projects mostly related to energy and transportation infrastructure; government reiterated intention not to borrow on nonconcessional terms in foreign currency, except for possible guarantees for GNPC oil and gas-related borrowing described in the MEFP. - Consumer price inflation: 12-month CPI inflation rose from 20.1 percent in May to 20.7 percent in June. Excluding the impact of a 30 percent rise in petroleum product prices in early-June, inflation would have fallen to 20.0 percent in June, slightly above the indicative inflation target of 19.7 percent in the government’s program (MEFP, table 1). - Publication authorization: Authorities consented to publish the staff report for the 2009 Article IV Consultation and request for a three-year arrangement under the PRGF and all related documents. ### Economic context and recent developments (summary from PIN No. 09/86, July 17, 2009) - Growth and inflation - Real GDP: 7.3 percent in 2008 (two-decade high). - Inflation: After single-digits in 2006, rose through 2007–08; stabilized in the 20 percent range in January–May 2009. - Fiscal developments - Fiscal deficit: surged to 14.5 percent of GDP in 2008 due to rapid public spending growth. - Exceptional foreign financing in 2008 amounted to 7.3 percent of GDP (late-2007 Eurobond issue and proceeds from sale of Ghana Telecom). - Central bank financing exceeded 3 percent of GDP in 2008. - Monetary and financial sector - Bank of Ghana increased benchmark lending rate by 6 percentage points between October 2007 and February 2009; policy rate left unchanged in May 2009. - Prime rate lower than annual inflation since early-2008; real interbank rates only slightly positive. - Private sector credit up 56 percent in the year to April 2009; broad money up 28 percent on the same basis. - Financial Soundness Indicators: non-performing assets 9.6 percent in March 2009; banks liquid and capital above statutory levels but some profitability decline and strains in a few banks. - Bank of Ghana required banks to raise minimum capital to GHȼ 60 million (about $40 million). - External sector - Overall current account deficit widened to 19 percent of GDP in 2008, up from 12 percent in 2007. - Drivers: 33 percent increase in non-oil import values. - Financing included Ghana Telecom privatization proceeds (5½ percent of GDP) and draw-down of gross international reserves from $2.8 billion to $2.0 billion. - Gross reserve cover declined from 2.7 to 2.2 months of projected import cover. - In Q1 2009 exports remained buoyant; private remittances fell by 18 percent year-on-year. - Exchange rate - Exchange rate depreciated about 50 percent against the dollar during 2008 and first half of 2009. - Real effective exchange rate in April 2009 was just 8 percent more depreciated than in 2007. - Foreign currency market illiquidity associated with decline in interbank trading and widening of spreads. ### Executive Board assessment and policy priorities - Main observations - Macroeconomic weakening due to exogenous shocks and highly expansionary fiscal policies in run-up to elections, contributing to higher inflation and large external imbalances. - Terms of trade projected to strengthen in 2009, but downside risks noted. - Oil production starting in 2011 expected to bolster growth and fiscal revenues, creating new macroeconomic management challenges. - Fiscal policy - Directors endorsed deficit target of 9.4 percent of GDP for 2009 as appropriately ambitious. - Emphasis on further fiscal consolidation over the medium-term; Ghana remains at moderate risk of debt distress. - Stress on prudent debt management, especially regarding nonconcessional borrowing. - Recommendation to reform mandatory and inflexible budgetary outlays to create space for priority development spending. - Support for maintaining broad social safety net program to protect vulnerable groups. - High priority: strengthen public financial management, enhance efficiency of public spending, and strengthen domestic revenue mobilization. - Monetary policy and inflation - Inflation in 2008 substantially exceeded targets; with tighter fiscal stance, opportunity for monetary policy to reduce inflation. - Directors supported further tightening in monetary stance to address negative real interest rates and enhance credibility of the inflation-targeting framework. - Recommendation to enhance communications and transparency of the inflation-targeting framework. - Exchange rate and reserves - Support for maintaining a flexible exchange rate regime consistent with inflation targeting. - Use of possible SDR allocation to rebuild foreign exchange reserves welcomed. - Staff assessment that recent depreciation partly corrected earlier overvaluation. - Financial sector supervision - Ghana’s financial system generally insulated from the global crisis but strains emerged after rapid banking expansion, including deterioration in loan portfolios. - Need to further strengthen supervision, cross-border coordination, risk management, and corporate governance. - Authorities’ request for a Financial Sector Assessment Program update welcomed. - Data and statistics - Directors encouraged authorities to enhance quality and timeliness of data reporting to the Fund. - Welcome for authorities’ plans to improve national accounts estimates following recent IMF technical assistance. ### Key quantitative indicators (2005–09 selected) - Production and prices (Annual change in percent) - Real GDP: 2005 5.9; 2006 6.4; 2007 5.7; 2008 7.3; 2009 Proj. 4.5. - CPI inflation (end of period): 2005 14.8; 2006 10.9; 2007 12.7; 2008 18.1; 2009 Proj. 14.6. - Central government (Percent of GDP) - Total revenue and grants: 2005 27.1; 2006 27.3; 2007 28.8; 2008 27.5; 2009 Proj. 30.0. - Grants: 2005 5.2; 2006 5.4; 2007 6.1; 2008 4.7; 2009 Proj. 6.0. - Expenditure and net lending: 2005 30.7; 2006 34.4; 2007 37.3; 2008 41.0; 2009 Proj. 36.7. - Capital expenditure: 2005 12.0; 2006 12.4; 2007 14.4; 2008 15.7; 2009 Proj. 12.6. - Overall balance: 2005 -4.9; 2006 -7.5; 2007 -9.2; 2008 -14.5; 2009 Proj. -9.4. - Gross government debt: 2005 78.3; 2006 42.0; 2007 51.2; 2008 58.2; 2009 Proj. 66.4. - Monetary sector (Annual change in percent) - Broad money: 2005 13.7; 2006 38.8; 2007 35.9; 2008 40.2; 2009 Proj. 21.7. - Velocity of broad money: 2005 4.3; 2006 3.5; 2007 3.0; 2008 2.8; 2009 Proj. 3.0. - Real private sector credit: 2005 28.7; 2006 28.7; 2007 41.6; 2008 25.5; 2009 Proj. 9.0. - External sector (Millions of U.S. dollars, unless otherwise indicated) - Exports of goods and services: 2005 3,910; 2006 5,111; 2007 6,004; 2008 7,071; 2009 Proj. 7,509. - Imports of goods and services: 2005 6,620; 2006 8,287; 2007 10,065; 2008 12,569; 2009 Proj. 11,285. - Current account balance (levels): 2005 -885; 2006 -1,265; 2007 -1,805; 2008 -3,110; 2009 Proj. -1,869. - Current account balance (Percent of GDP): 2005 -8.3; 2006 -9.9; 2007 -12.0; 2008 -19.3; 2009 Proj. -13.0. - Gross official reserves: 2005 1,895; 2006 2,270; 2007 2,837; 2008 2,036; 2009 Proj. 1,950. - Months of imports of goods and services: 2005 2.7; 2006 2.7; 2007 2.7; 2008 2.2; 2009 Proj. 1.9. ### PRGF arrangement approval (Press Release No. 09/263, July 16, 2009) - Executive Board approved a three-year PRGF arrangement for Ghana equivalent to SDR 387.45 million (about US$602.6 million). - Initial disbursement enabled: SDR 67.65 million (about US$105.2 million) immediately. - Program targets and guidance highlighted by Mr. Takatoshi Kato: - 2009 budget deficit target of 9.4 percent of GDP (down from 14.5 percent in 2008). - Planned reduction of the budget deficit to 4½ percent of GDP in 2011, and below this level in subsequent years. - Policy priorities: ensure petroleum pricing and utility tariffs allow for full cost recovery; more effective control over public sector wage bill; modernize the tax regime and strengthen collection; strengthen public financial management. - Monetary policy objective: reduce inflation to single-digit levels by 2010 under the inflation targeting framework; Bank of Ghana should be ready to tighten further if warranted and strengthen communications and transparency. - Financial sector: ensure close supervision, encourage reinforcement of risk management and corporate governance, and strengthen cross-border supervision. - Exchange rate flexibility and reserve rebuilding: depreciation of the cedi has aided adjustment; continued flexibility and efforts to rebuild foreign exchange reserves recommended. *Italicized source attribution: IMF staff report and related IMF public information notices and press releases (July 2009) contained in the provided content unit.* ### 2007. Since 2000, growth has been supported by significant debt relief, which provided ### _cr09256 - 2007. Since 2000, growth has been supported by significant debt relief, which provided ### Recent developments and macroeconomic outcomes - Since 2000, growth supported by significant debt relief (HIPC Initiative and MDRI) that freed resources for infrastructure and social sectors. - Poverty and social indicators improved: incidence of poverty significantly reduced; improvements in education, health, and gender representation. - Robust performance during 2001-06: robust growth, significant decline in inflation, narrowing fiscal and current account deficits. - Deterioration during 2006-08 due to shocks and policy choices: - Severe energy crisis in 2006-2007 (drought-triggered) requiring large thermo-power investment. - Global food and fuel price hikes in 2008. - Highly expansionary fiscal policies ahead of end-2008 presidential elections. - Fiscal and external outcomes: - Fiscal deficit: 9.2 percent of GDP in 2007 → 14.5 percent of GDP in 2008. - Year-on-year inflation: 12.7 percent in 2007 → rose to the 20 percent range in early-2009. - Current account deficit: 12.0 percent of GDP in 2007 → 19.3 percent of GDP in 2008. - Overall balance of payments: surplus of US$413 million in 2007 → deficit of US$941 million in 2008 (financed by drawdown of international reserves). - Banking system: remained sound, well capitalized, fairly liquid; reduction in credit concentration, intensified competition, expansion in branch networks; not significantly affected by the global crisis to date. - 2008 real GDP growth rose to a record high, supported by buoyant agricultural production and strong domestic demand. ### Program summary and 2009-11 macroeconomic framework - Program objective: substantially reduce Ghana’s large fiscal imbalances by 2011 and strengthen institutions for public financial management. - Macroeconomic framework for 2009-11 aims to achieve: - A real non-oil GDP growth of about 5½ percent on average. - A medium-term inflation to 7-9 percent per year. - An overall budget deficit of 4.5 percent of GDP in 2011. - International reserves coverage equal to about 3 months of imports. - Medium-term projections and expectations: - Non-oil GDP growth expected to reach 6 percent on average during 2010-2014. - Inflation to be brought down gradually to 5 percent. - External current account deficit projected to narrow steadily to 6 percent by 2014. - Gross international reserves should recover to over 4 months of imports. - Public debt will be stabilized and subsequently reduced. - Start of oil production in 2011 expected to benefit growth, fiscal situation, and balance of payments; authorities intend prudent management and cautious phasing of oil resources. ### Policy measures and reforms (2009 and medium term) - Fiscal consolidation and public financial management: - Reduce the deficit through revenue mobilization, cuts in low-priority spending, and flexible pricing of energy products to avoid costly subsidies. - Implement comprehensive program to improve public financial management (PFM). - Implement comprehensive public sector reform program. - Further strengthen inflation targeting regime, including a revamped central bank communications strategy. - 2009 fiscal strategy: - Reduce fiscal deficit by more than 5 percent of GDP to 9.4 percent through expenditure reductions and revenue-enhancing measures. - Expenditure cuts across goods and services, transfers, and non-developmental capital spending. - Revenue measures: increase a range of taxes and fees and improve collection. - Additional fiscal savings of at least 1.0 percent of GDP to offset higher-than-projected interest costs. - Projected financing gap beyond domestic borrowing expected to be covered by World Bank assistance and exceptional budget support from other development partners; shortfalls in grant and loan financing to be offset by spending cuts. - Monetary policy: - Tight monetary policy to complement fiscal consolidation to ease pressure on the balance of payments and exchange rate. - Bank of Ghana increased Prime Rate by a cumulative 350 basis points in 2008 and further by 150 basis points in February 2009. - Use of the inflation targeting (IT) regime to achieve disinflation, with fiscal consolidation support. - Inflation projected to decline to 14½ percent by end-2009. - With exceptional budget support and expected Fund financing, gross international reserves projected at slightly below two months of import cover. - Structural and institutional reforms: - Fiscal reforms: strengthen institutions, enhance revenue mobilization, reinforce public expenditure management. - Tax reforms: streamline exemptions, minimize leakages, broaden base of VAT and income tax, modernize and integrate revenue administration. - Oil revenue management: establish revenue-management legislation and adhere to EITI principles; priority attention to framework for management of oil revenue. - Fiscal responsibility laws under development to lay out rules to achieve desired fiscal outcomes. - PFM focus: address weaknesses in expenditure monitoring, manage commitments and arrears, establish a cash management framework, improve selection and evaluation of investment projects. - Public sector reform: address heavy public sector wage bill with World Bank assistance; focus on pay system and optimum enrollment levels; review statutory funds and committed expenditures to enhance flexibility and efficiency. - State-owned enterprises: address financial difficulties to minimize fiscal risks; accelerate study and restructuring of three power sector utilities to ensure long-term viability. - Energy pricing: maintain cost-recovery price adjustments for petroleum products; adjust electricity tariffs to cost-recovery levels, as needed, by end-2009. - Restructuring agencies that receive government subsidies: liquidate nonviable ones and commercialize others as necessary. - Debt management and financing: - Recognize vulnerabilities to oil revenues and fiscal performance despite improved DSA. - Develop a comprehensive debt management strategy to set framework for borrowing, guide concessional financing decisions, and financing of critical projects that may require state guarantee. - Authorities to inform the Fund on projects considered for nonconcessional financing from the first program review and request limits on nonconcessional borrowing to accommodate those projects. - Financial sector measures: - Bank of Ghana embarked on comprehensive program of risk-based supervision and wide-ranging regulations to strengthen resilience and address weak governance risks. - Recent increase in capital requirements to strengthen banks and extend reach. - Active development of domestic debt market to deepen financial markets and improve government debt operations. - Authorities interested in an early update of the FSAP given extensive sector changes since the last update. ### Key risks, external environment, and financing - External shocks affecting 2006-09 performance: severe drought/energy crisis, global food and fuel price hikes, spillovers from global financial crisis (remittances, portfolio flows, FDI). - Offsetting factors: favorable market conditions for cocoa and gold; decline of oil import prices. - Financing assumptions for 2009: exceptional budget support from development partners and expected Fund financing critical to achieve reserve and deficit targets; any shortfall to be offset by spending cuts. - Risks noted: vulnerabilities associated with oil revenues, fiscal performance, and potential nonconcessional borrowing. ### Conclusion and authorities' stance - New government (assumed power January 2009) committed to restore macroeconomic stability and place the economy on a path of sustained high growth to accelerate MDG progress and reach middle-income status. - Authorities request a PRGF arrangement to support stabilization and reform program for 2009-12. - Authorities express gratitude for Board and management support to catalyze assistance from development partners and attract FDI. - Authorities reiterate commitment to necessary measures to keep the program on track, mobilize external financing consistent with a prudent debt strategy, and stand ready to adjust policies in consultation with Fund staff to mitigate risks. *Statement by Jafar Mojarrad, Executive Director for Ghana and John Kwabena Kwakye, Advisor to Executive Director — July 15, 2009* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09256.pdf_