Press Release No. 06/190

Press Release No. 06/190

An International Monetary Fund (IMF) staff mission led by Mr. Samuel Itam, Senior Advisor in the IMF African Department, issued the following statement on September 4, 2006 in Accra:

"An IMF mission team visited Accra during August 21—September 4 to hold discussions for the sixth and final review under the Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF that supports Ghana's economic and financial program.¹ The mission held discussions with the Minister of Finance and Economic Planning, Kwadwo Baah-Wiredu; Governor of the Bank of Ghana, Paul Acquah; and senior officials of other government ministries and agencies. The team also met with representatives of the business and donor communities. At their request, the mission paid courtesy calls on His Excellency President Kufuor and His Majesty, the Asantehene, Otumfuo Osei Tutu II. The Ghana economic team was led by the Deputy Finance Minister for Budget, Anthony Akoto Osei.

"A three-year PRGF arrangement in support of Ghana's poverty reduction strategy was approved in May 2003 in the amount of SDR 184.50 million (US$274.20 million). The arrangement was later extended until October 31, 2006. So far, disbursements under the arrangement total SDR 158.10 million (US$235 million), with the last disbursement amounting to SDR 52.70 million (US$78.32 million) in June 2006.

"Since 2000, Ghana's economic performance has been very satisfactory. Real GDP growth has increased from 3.7 percent in 2000 to 5.9 percent in 2005. This has led to more than a doubling of the growth of real GDP per capita—from 1.2 percent in 2000 to 3.2 percent in 2005. Therefore, at the current pace, the Millennium Development Goal (MDG) of halving income poverty by 2015 should be achieved ahead of schedule. Over the past few years, economic "activity has broadened and, while agriculture continues to be a key sector, manufacturing and construction are emerging as important contributors to overall growth.

"Even though the process of disinflation has not been smooth, 12-month inflation declined from 40.5 percent in 2000 to 14.8 percent in 2005. Inflation has been well contained more recently—apart from the impact of oil price increases (in the context of high world prices and the recent adoption of a full-cost pass-through regime). Noticeably, headline inflation declined to single digit levels in March-April 2006 for the first time in more than 20 years.

"Satisfactory policy implementation has underpinned the remarkably good economic performance throughout the program period of 2003-06. The overall fiscal deficit has been reduced from 6.7 percent of GDP in 2002 to 3.0 percent of GDP in 2005. Total public debt declined substantially as a result of both fiscal prudence and debt relief under the enhanced Heavily-Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI)—from about 24 percent of GDP in 2002 to about 11 percent of GDP in 2005. The fiscal consolidation resulted in a significant reduction in domestic debt service and allowed the "crowding-in" of private sector investment through a sharp drop in interest rates, while increasing poverty-related spending from 4.7 percent of GDP in 2001 to 8.5 percent of GDP in 2005. Increased public spending on education and health, together with better management, led to: (i) an increase in the net enrollment ratio in primary education from 60.7 percent in 2000 to 65 percent in 2005; (ii) improvement in the ratio of girls to boys in primary education from 0.93 in 2000 to 0.96 in 2005; and (iii) stabilization in infant and under-5 child mortality rates. By 2005, 75 percent of the total population in Ghana had access to improved water sources. All of these are important achievements in the context of a challenging environment that required steadfastness in the pursuit of difficult economic reforms. In this regard, the IMF team welcomed the government's continued commitment to maintaining macroeconomic stability, which is key to achieving high and sustained growth.

"In assessing performance under the PRGF-supported program, the mission found that program implementation was satisfactory through end-June 2006, with all but one of the quantitative performance criteria being met. The ceiling on the net domestic assets of the Bank of Ghana for end-June 2006 was exceeded for technical reasons. Therefore, the IMF mission will support the government's request for a waiver. Also, there has been progress in implementing structural reforms, with the structural performance target being observed. Accordingly, the mission will recommend to the IMF management that the seventh installment under the PRGF arrangement of about US$17.7 million be disbursed as scheduled in October 2006.

"Ghana would like to accelerate economic growth to 8.5 percent a year over the medium term in order to put the country on a steady path toward achieving middle-income status. In the government's view, a substantial increase in investment would be required to attain the higher growth path for achieving the targets of the poverty reduction strategy (GPRS II) and the MDGs. This said, the mission emphasized that ongoing expansion in the infrastructure and social sectors should be complemented with further reforms to foster private sector development, including steps to deepen the financial sector, and measures to improve income distribution.

"Therefore, looking ahead, the main challenge for Ghana is to find the necessary resources to undertake the investment program outlined in the government's development strategy while preserving debt sustainability. In this light, reassessing the expenditure pattern and the relative contribution of all investment projects is a necessary condition that the government has established. Recognizing the importance of maintaining debt sustainability, the government has expressed its determination to exhaust all avenues for grants and concessional loans to finance its investment program before considering other sources of financing. It is in this regard that the mission notes that Ghana has established a solid foundation for debt sustainability, which the authorities are determined to maintain, particularly in the aftermath of the recent debt relief under the enhanced HIPC Initiative, MDRI, and bilateral efforts.

"The IMF team welcomed the government's intention of maintaining a close policy dialogue with all development partners and the IMF. In this regard, the government of Ghana has expressed an interest in developing an economic and financial program that could provide the basis for a policy support instrument (PSI) arrangement when the current PRGF arrangement expires. Preliminary indications are that such a program would aim at:

• Enhancing growth-critical policies, while maintaining the hard-earned macroeconomic stability;

• Further strengthening of debt management;

• Deepening of the domestic capital markets; and

• Creating the environment to access international capital markets in the appropriate circumstances.

"The IMF's Executive Board is expected to discuss the staff's report on this mission in October 2006. With the consent of the government, the report would be published on the IMF's website after the Board's consideration. If the Board gives its approval, a final disbursement of SDR 26.40 million (US$39.23 million) will be made to Ghana.

"The mission would like take this opportunity to thank the authorities and the donor community for their excellent cooperation."

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¹ The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in the country's Poverty Reduction Strategy Paper. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.