Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Ghana

June 4, 2007

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.

Public Information Notice (PIN) No. 07/64
June 4, 2007

On May 18, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1


The Ghanaian economy has performed well in recent years with real GDP growing at its fastest pace since the early 1990s. In 2006, real GDP growth reached 6.2 percent, driven by agriculture (an exceptionally good cocoa harvest), mining, construction, and services, and in response to the improved business environment. Large remittance inflows fueled both consumption and private investment in housing. The economy has thus far proved reasonably resilient to the energy shortages that began in September 2006, caused by shortfalls in power supply and surging demand. Inflation declined to 10.5 percent at end-2006, and dipped below 10 percent at end-March 2007. Falling oil prices in the second half of the year helped reduce inflation, but this was partially offset by strong demand pressures from large public sector wage increases and a nominal effective depreciation of the currency. After years of sustained consolidation, the fiscal deficit (including grants) widened to 7.7 percent of GDP in 2006, more than 2.5 percentage points higher than in the mid-year supplementary budget. This outcome reflected shortfalls in revenue from import-related taxes and significant overruns in both wages and subsidies and transfers to state-owned enterprises in the energy sector. Public sector wage overruns stemmed from large wage increases in the health sector in the first half of the year, aimed at retaining skilled labor, which led to demands for additional wage increases in the rest of the public sector later in the year. Higher subsidies and transfers to the energy sector reflected the suspension of pass-through of utility price increases to end users after May 2006. The higher deficit was financed by nonbank borrowing, in part by issuing local currency (cedi) bonds. As a result, the trend decline in the ratio of domestic debt to GDP—the authorities' fiscal anchor—was reversed.

Ghana continued to accumulate international reserves in 2006, despite a widening of the external current account deficit. A significant improvement in the trade deficit as a share of GDP, helped by terms-of-trade gains and strong export growth, was more than offset by a decline in project grants. But strong capital inflows helped raise gross international reserves to slightly over 3 months of imports. Thanks to massive debt relief under the Heavily Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) and good macroeconomic policies, Ghana's external debt dropped to just 22 percent in 2006 from about 120 percent of GDP in 2000.

Progress was made with some structural reforms, though others have been delayed. Public Financial Management (PFM) has been strengthened through improvements in fiscal reporting, treasury reform, and deployment of the new computerized payroll management system. The monthly reviews of petroleum product pricing introduced in April 2006 are proceeding smoothly. On the other hand, progress in public and civil service sector reforms has been slow, although it is now being stepped-up. Tariff increases for electricity and water, which should have been put into effect in May 2006, were gazetted in November but not passed on to consumers. Special energy tariffs for mines and Volta Aluminum Company (VALCO), the aluminum smelter, contributed to below-cost recovery prices for the Volta River Authority (VRA), the main state-owned energy producer. VALCO has recently been closed and as part of the authorities' fiscal package to address the 2006 fiscal slippage, the utility regulation system is being reinstated beginning in May 2007.

Executive Board Assessment

Executive Directors commended the Ghanaian authorities for their continued implementation of sound economic policies and structural reforms, which have contributed to strong economic growth—the highest since the early 1990s—sizable disinflation, and a vibrant and resilient private sector. This favorable policy setting now provides Ghana with a unique opportunity to achieve the Millennium Development Goals, provided the expectations of rapidly rising income are managed skillfully. This will require the authorities to advance their strategy to accelerate growth prudently, while ensuring that macroeconomic stability and debt sustainability are preserved. Directors underscored the importance of selecting projects that would ease energy supply bottlenecks, given the associated risks to the positive outlook.

Directors supported the package of policy measures put in place by the authorities to address the fiscal slippages that developed in 2006, and a few Directors felt that there might even be scope for a stronger fiscal effort. Directors stressed that timely implementation of the package will be critical. In particular, the authorities' plans to reinstate the utility tariff regulation system with a commitment to full cost recovery and to accelerate divesture will be key to easing future burdens on the budget. It will also be important to follow through on the commitment to streamlining the wage-setting process and speeding up civil service reform. Directors supported the authorities' plans to introduce a fiscal responsibility law and their consideration of shifting to a total public debt-to-GDP ratio as fiscal anchor.

Directors welcomed the recent decline in inflation to single digits. Continued close monitoring of possible price pressures along with implementation of the planned fiscal measures will be important going forward. Directors commended the central bank's progress in building capacity for inflation targeting, and encouraged the continued strengthening of the environment for effective inflation targeting. This would involve perseverance with ongoing financial sector reforms, which should enhance the monetary policy transmission mechanism, and the gradual easing of foreign exchange controls, which—as financial sector development deepens—would enhance the operation of the foreign exchange market and support greater exchange rate flexibility over time. A few Directors noted that further enhancing the central bank's communications strategy will also be important.

Directors welcomed the soundness of Ghana's banking system and the authorities' record on compliance with the recommendations of the 2003 Financial Sector Assessment Program update. They underscored that rapid financial deepening, while important to support private sector-led investment and growth, requires continued supervisory vigilance and enhancement of the regulatory framework.

Directors welcomed the authorities' focus on structural reforms critical for higher growth. Public expenditure tracking surveys and the new value-for-money unit to vet public investment projects should help deliver public services more efficiently. Directors supported plans to scale up private sector participation in infrastructure projects through public-private partnerships, which should be underpinned by strong legal and management frameworks.

Directors noted that absent the scaling up of donor assistance in the near future, Ghana has decided to access the international capital market to finance prudently selected infrastructure projects needed for achieving its growth and poverty reduction goals. While recognizing that this strategy could yield a successful outcome, Directors stressed that it will involve challenges for maintaining debt sustainability, and welcomed the authorities' assurance that debt sustainability will remain at the center of their macroeconomic framework. The joint Fund-Bank debt sustainability analysis indicates that the risks to Ghana's external debt distress are moderate—albeit closer to the lower risk category—but the strong economic growth on which this outcome depends will require sustained solid policy performance. Directors urged the authorities to continue to explore avenues for concessional borrowing, and to exercise caution as they implement their borrowing strategy, making sure that any drawings on nonconcessional terms are gradual, and supported by solid institutional capacity for project selection and effective debt management. They also stressed the importance of linking the financing strategy to the medium-term expenditure framework, continuing efforts to free up resources through efficiency gains, and reallocating resources towards their most productive uses.

Directors considered that the ex-post assessment (EPA) provides a balanced analysis of Ghana's program engagement with the Fund since the mid 1990s. They highlighted the role played by the Fund, along with other donors, in helping Ghana to achieve macroeconomic stability and more rapid growth. Directors supported the EPA's message that Ghana's success is largely embedded in the strengthening of Ghana's institutions allowing for effective ownership of the reforms. Directors considered that the Fund should continue to support Ghana's efforts to strengthen the institutions and implement structural reforms crucial for maintaining macroeconomic stability and achieving its development goals. In this regard, they welcomed the consideration being given by the authorities to modalities for future engagement with the Fund, possibly in the context of a Policy Support Instrument.

Ghana: Selected Economic and Financial Indicators, 2003-07

  2003 2004 2005 2006 2007
        Est. Proj.

  (Annual percentage change, unless otherwise specified)

National accounts and prices

  • Real GDP

5.2 5.6 5.9 6.2 6.3
  • Real GDP per capita

2.6 3.0 3.2 3.6 3.7
  • GDP deflator

28.6 14.4 15.0 14.6 11.2
  • Consumer price index (annual average)

26.7 12.6 15.1 10.9 9.4
  • Consumer price index (end of period)

23.6 11.8 14.8 10.5 9.0

External sector

  • Exports, f.o.b. (percentage change, in U.S. dollars)

20.1 12.7 0.7 31.3 8.1
  • Imports, f.o.b. (percentage change, in U.S. dollars)

20.1 31.9 24.4 22.0 17.9
  • Export volume

-6.8 14.5 -0.9 14.9 -0.1
  • Import volume

6.9 13.8 14.1 11.9 19.2
  • Terms of trade

14.8 -15.1 -6.9 4.8 9.4
  • Nominal effective exchange rate (end of period)

-15.5 -8.7 7.1 -8.3 ...
  • Real effective exchange rate (end of period)

2.4 -0.5 19.9 -1.1 ...

Money and credit

  • Net domestic assets1/

7.2 1.0 7.0 16.0 16.0
  • Credit to the private sector1/

16.4 10.0 23.1 25.8 24.2
  • Broad money (excluding foreign currency deposits)

40.9 26.4 13.7 39.4 23.9
  • Velocity (GDP/average broad money)

4.7 4.3 4.3 3.6 3.4
  • Prime rate (Bank of Ghana; percent; end of period)

25.7 19.1 15.5 12.5 ...
  (Percent of GDP, unless otherwise specified)

Government operations

  • Total revenue

20.8 23.8 23.8 21.6 22.2
  • Grants

4.7 6.4 5.2 5.2 5.1
  • Total expenditure

28.8 33.3 30.7 33.8 33.6
  • Overall balance (including grants)2/

-4.6 -3.7 -2.3 -7.7 -6.8
  • Overall balance (including grants)

-4.4 -3.6 -3.0 -7.5 -6.8
  • Domestic primary balance

2.3 0.7 3.4 -4.8 -3.2
  • Net domestic financing

0.6 0.1 -1.7 4.9 -0.9
  • Total government debt

118.8 93.4 77.1 42.4 39.6
  • Domestic debt (gross)3/

19.8 20.7 17.9 20.0 16.0
  • External debt

99.0 72.7 59.2 22.3 23.6

External sector

  • Current account balance (including official transfers)

1.7 -2.7 -7.0 -8.2 -8.6
  • Current account balance (excluding official transfers)

-3.5 -8.8 -12.3 -11.2 -11.9
  • NPV of external debt outstanding

71.5 35.2 19.9 17.5 19.0
  • (Percent of exports of goods and services)

175.7 89.6 55.1 45.9 53.6
  • Gross international reserves (millions of U.S. dollars)

1,427 1,816 1,951 2,325 2,568
  • (Months of imports of goods and services)

3.2 3.3 2.9 3.1 3.0
  • Total donor support (millions of U.S. dollars)

681 837 971 894 1,039
  • (Percent of GDP)

8.9 9.4 9.1 6.9 6.9

Memorandum items:

  • Nominal GDP (billions of cedis)

66,158 79,888 97,261 118,404 140,075
  • (Millions of U.S. dollars)

7,624 8,872 10,720 12,894 ...

Sources: Data provided by Ghanaian authorities, and IMF staff estimates and projections.

1/ Percent of broad money at the beginning of the period.

2/ Below-the-line.

3/ Gross debt including all outstanding government obligations, and including previously excluded items: noninterest-bearing perpetual Bank of Ghana revaluation stocks, and bonds issued in 2004-06 for recapitalization of BoG and TOR.

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.


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