Public Information Notice: IMF Concludes 2001 Article IV Consultation with Ghana

August 9, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 27, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1


Ghana suffered from a major terms of trade shock that began in 1999 and intensified in 2000, with cocoa prices falling and oil prices rising together with a shortfall in donor's assistance. Weak macroeconomic policies, and poor management of the major public enterprises compounded the resulting economic difficulties. Compared with the original program projections made in May 1999, the terms of trade loss for 1999 and 2000 is estimated at US$900 million, or 16 percent of GDP. Although macroeconomic policies were tightened during the first half of 2000 with some stabilizing effects, they were relaxed during the second half, particularly in the last quarter, in advance of the December presidential and parliamentary elections. As a result, macroeconomic conditions deteriorated further.

Real GDP growth slowed in 2000 to an estimated 3.7 percent from 4.4 percent in 1999, reflecting declining growth rates in agriculture and industry. The average inflation rate doubled, and the nominal exchange rate depreciated by 50 percent (measured in U.S. dollars per cedi). Import volumes dropped markedly (25 percent), and the export sector suffered as international cocoa prices hit a 27-year low during the year.

Annual broad money growth accelerated to 40 percent at end-2000 from 16 percent at end-1999, as a result of rapid growth in credit to the private sector, the public enterprises, and the government. The treasury bill yield rose during the middle of the year but subsequently declined despite the rising inflation during the last four months of the year. Net international reserves fell by about US$194 million during 2000.

The state owned Tema Oil Refinery and the electricity company accumulated large losses as a result of delays in adjusting petroleum prices and electricity tariffs to the increase in the dollar price of imported oil and the exchange rate depreciation. Electricity and water tariffs, which are set by the independent Public Utilities Regulatory Commission, were kept unchanged at their 1998 levels.

A new government was installed in January 2001 and is now making strong efforts to break the cycle of increasing budget deficits and rising interest costs. The fiscal strategy for 2001 focuses on taking sufficient domestic measures to obtain a domestic primary surplus of 4 percent of GDP, while limiting domestic financing to the equivalent of 1.8 percent of GDP and seeking debt relief to meet the fiscal and balance of payments financing gaps. The main revenue measures are new taxes on petroleum products, levies on company profits, and a reduction in import tariff exemptions, while the main expenditure savings come from cuts in domestically financed capital expenditure and a freeze on most outlays for goods and services at 2000 levels. Immediate measures are also being taken to restore effective monitoring and control of public expenditure. The effect of the revenue measures for this is estimated to be 2 percent of GDP with a full-year effect of 3.5 percent of GDP. In addition to the fiscal measures, petroleum prices and utilities tariffs were doubled in early 2001 with an impact equivalent to 2 percent of GDP.

A recently completed debt sustainability analysis showed that Ghana's outstanding external debt of US$5.9 billion at end-2000 represents an unsustainable burden, measured against HIPC Initiative thresholds. The net present value of Ghana's external debt at end-2000 was 557 percent of fiscal revenues and 154 percent of exports, compared with the sustainable thresholds of 250 percent and 150 percent, respectively. Ghana has asked for Paris Club debt relief for 2001 and has indicated its intention to request assistance under the enhanced HIPC Initiative later in 2001.

Executive Board Assessment

While acknowledging the substantial impact of adverse terms of trade developments and recent shortfalls in donor assistance, they noted that inconsistent macroeconomic policies and inappropriate management of public finances had compounded Ghana's recent poor performance and external problems. Weak fiscal and monetary policies at end 2000, prior to elections, had led to a rise in inflation, a substantial depreciation in the exchange rate, a decline in foreign exchange reserves, and a significant rise in domestic and foreign debt as a share of GDP.

Directors recognized that the new government, which took office in January 2001, had inherited a difficult economic situation. They commended its actions in raising the prices of petroleum products and the tariffs for electricity and water in order to stem the current losses experienced by the respective public enterprises. Directors urged the authorities to ensure that these enterprises operate in the future at full cost recovery levels, with energy and utility prices being adjusted regularly and automatically.

Directors supported the fiscal tightening in 2001, noting that reducing the domestic borrowing requirement would ease pressure on interest rates and lower budgetary interest expenditure, thereby creating room for increased social and other priority spending. They welcomed the new revenue measures, and encouraged the authorities to consider further revenue increases next year should this be necessary to provide resources for the country's poverty reduction strategy. Some concern was expressed, however, at the introduction of new trade taxes, particularly on exports. Directors emphasized the need for restraint in public sector wage negotiations, both to strengthen the budget and to reduce inflation. They also emphasized the need for appropriate support from the international donor community.

Directors urged the authorities to implement vigorously the systems being put in place to improve expenditure control, particularly at the commitment level, in order to ensure that budget allocations are respected and arrears avoided. They stressed the need to strengthen expenditure monitoring further and to integrate it with the medium-term expenditure framework used in budget planning.

Regarding the recently completed Financial System Stability Assessment, Directors noted that the substantial bank exposure covering losses of the public oil refinery and utility parastatals adds to the urgency of restoring the financial integrity of these entities. They also noted the need to address issues related to the Social Security and National Investment Trust in order to secure the health of the financial system. Directors welcomed the authorities' intent to strengthen the independence and credibility of the central bank as prudential regulator through the submission of revised legislation and the divestiture of the central bank's equity holdings in commercial banks.

Directors supported the current tightening of monetary policy designed to reduce inflation and support the exchange rate. They noted, however, that the segmentation of the foreign exchange market inhibits adjustment in the exchange rate, and encouraged the authorities to move rapidly, with technical assistance from the Fund, to develop an efficient interbank foreign exchange market. Directors also noted that the depreciation of the real exchange rate in 2000 had improved competitiveness, but that it would be important to maintain a tight fiscal policy and achieve a rapid reduction in inflation to ensure that this gain is not eroded.

Directors commended the government's emphasis on mobilizing the private sector as the engine of growth in Ghana. They emphasized that a bold and clearly articulated privatization program will provide concrete support for that strategy, and encouraged the authorities to develop such a program in the coming months.

Directors welcomed the new government's anti-corruption campaign, and looked forward to determined implementation of the authorities' commitment to greater transparency and accountability in public institutions. They attached high importance to the work underway, with Fund technical assistance, to improve the accuracy and timeliness of data provision to the Fund as well as internal controls and reporting on external debt. Looking ahead, some Directors advised the authorities to consider the merits of publishing a monthly report on external debt service operations and of having annual audits of their debt management activities. Directors also encouraged the authorities to improve the quality, timeliness, and availability of other economic statistics.

Ghana: Selected Economic and Financial Indicators, 1996-2001

  1996 1997 1998 1999 2000 2001
          Prelim. Prog.

  (Annual percentage change, unless otherwise specified)
National income and prices            
Real GDP 4.6 4.2 4.7 4.4 3.7 4.0
Nominal GDP 46.3 24.5 22.6 19.0 31.9 40.0
Consumer price index (annual average) 46.6 27.9 19.3 12.4 25.0 33.0
Consumer price index (end of period) 32.7 20.8 15.8 13.8 40.5 25.0
External sector            
Exports, f.o.b. 26.5 0.0 15.5 -4.1 -5.4 0.4
Imports, f.o.b. 36.3 32.5 -4.1 11.4 -15.2 -1.2
Export volume 28.9 4.6 12.3 -2.8 3.5 -1.7
Import volume 36.4 40.6 1.7 10.4 -24.9 1.5
Terms of trade -1.7 1.5 9.0 -8.7 -20.3 4.7
Nominal effective exchange rate (avg.) -24.6 -15.6 -7.8 -9.4 -45.3 ...
Real effective exchange rate (avg.) 9.0 6.1 8.2 0.5 -33.3 ...
Cedis per U.S. dollar (avg.) 1,637 2,050 2,314 2,647 5,456 ...
Government budget            
Domestic revenue (excluding grants) 26.1 22.5 29.8 6.0 42.9 37.3
Total expenditure 42.8 21.3 20.9 9.0 39.6 54.5
Current expenditure 46.5 25.3 28.2 13.1 48.9 46.5
Capital expenditure and net lending 1/ 38.6 16.4 11.4 2.7 24.1 70.8
Money and credit            
Net domestic assets 2/ 32.3 33.5 16.3 31.5 57.0 16.1
Credit to government 2/ 12.8 22.0 10.5 26.7 52.4 10.8
Credit to the rest of the economy 2/ 15.7 20.9 13.8 28.8 58.8 26.3
Broad money (including foreign currency deposits) 43.1 40.8 17.7 16.0 39.8 34.1
Reserve money 44.3 33.8 16.7 12.9 35.8 28.5
Velocity (GDP/average broad money) 5.6 4.9 4.9 5.0 5.0 5.1
Treasury bill yield (in percent; end of period) 47.9 45.7 28.7 34.2 42.0 ...
  (In percent of GDP, unless otherwise specified)
Investment and saving            
Gross investment 21.2 24.8 23.1 21.5 24.0 23.7
Private 7.0 11.4 11.1 11.7 14.8 12.5
Public 13.3 12.4 11.3 9.8 9.2 11.2
Gross national saving 18.1 10.4 18.1 10.0 14.8 17.2
Private 10.6 5.3 12.2 5.5 10.3 11.5
Public 7.5 5.1 5.9 4.4 4.5 5.7
Government budget            
Domestic revenue 17.6 17.3 18.4 16.4 17.7 17.4
Total grants 2.6 1.4 2.2 1.7 2.1 5.0
Total expenditure 1/ 29.7 29.0 28.6 26.2 27.7 30.6
Overall balance (cash basis; after arrears clearance) -9.6 -10.9 -8.7 -8.0 -9.7 -9.6
Domestic primary balance 0.3 3.2 3.6 1.4 2.4 4.0
Divestiture receipts 1.3 0.7 0.6 0.3 1.2 1.0
External sector 3/            
Current account balance 4/ -3.1 -14.4 -5.0 -11.5 -9.2 -6.5
External debt outstanding 75.7 77.9 74.8 75.0 119.0 130.4
External debt service, including to the Fund 7.0 7.6 7.5 6.7 11.3 10.4
(in percent of exports of goods and nonfactor services) 21.7 23.5 22.1 21.1 23.3 20.6
(in percent of government revenue) 34.6 40.7 36.5 37.2 56.8 46.3
  (In millions of U.S. dollars, unless otherwise specified)
Current account balance 4/ -215 -991 -371 -895 -457 -316
Overall balance of payments -14 25 100 -156 -221 -19
Gross international reserves (end of period) 599 522 521 419 224 401
(in months of imports of goods and services) 2.0 1.8 1.6 1.5 0.8 1.4
Nominal GDP (in billions of cedis) 11,339 14,113 17,296 20,580 27,153 38,014

Sources: Ghanaian authorities; and IMF staff estimates and projections.

1/ Including capital outlays financed through external project aid and transfers to the local authorities.
2/ In percent of broad money at the beginning of the period.
3/ The large depreciation of the cedi in 2000 reduced the dollar value of GDP and
created a sharp jump in foreign currency based items when expressed as a share of GDP.
4/ Including official grants.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the June 27, 2001 Executive Board discussion based on the staff report.


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