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The following item is a Letter of Intent of the government of Ghana, which describes the policies that Ghana intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Ghana, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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November 12, 1998

Dear Mr. Camdessus:

1.  The Executive Board of the Fund approved a three-year Enhanced Structural Adjustment Facility (ESAF) arrangement for Ghana on June 30, 1995, and the second annual arrangement thereunder on March 23, 1998. The purpose of this letter is to inform you on the progress in implementing the economic program supported by the second annual ESAF arrangement as set out in the staff report (EBS/98/46) and in the policy framework paper (EBD/98/21), and to request disbursement of the second loan under the second annual arrangement.

2.  In 1998, Ghana suffered a drought-related energy crisis with significant effects on the economy and the program. Despite the negative impact on GDP growth and prices, Ghana continued to make progress toward its macroeconomic objectives. In particular, all the end-June 1998 quantitative performance criteria have been observed.

3.  While some delays have been experienced in implementing the measures which form the structural performance criteria and benchmarks of the program supported by the second annual ESAF arrangement, they do not represent lack of commitment on the part of the Ghanaian authorities. Instead, they reflect the time-consuming parliamentary and legal consultation and approval processes. Every effort is being made to quickly resolve these issues and we expect that by the time the Executive Board considers the mid-term review under the second annual arrangement, corrective action would have been taken to address these delays. In light of this, the government requests that the Fund waive Ghana’s non-observance of the end-June performance criteria on the offers for sale of the Tema Oil Refinery Ltd. and the Ghana Oil Company Ltd. and the establishment of the Central Revenue Authority.

4.  The attached memorandum of economic and financial policies provides an update of developments in the first half of 1998 and describes the adjustment to the program required to compensate for the larger-than-programmed domestic interest rate bill.

5.  The government of Ghana believes that the policies and measures set forth in the staff report dated March 9, 1998 (EBS/98/46, Appendix I) and the attached memorandum of economic and financial policies are adequate to achieve the objectives of the program supported by the second annual arrangement, but will take any further measures that may become appropriate for this purpose. During the remaining period of the three-year arrangement, Ghana will continue to consult with the Managing Director on the adoption of any measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. Moreover, after the period of the second annual arrangement and while Ghana has outstanding financial obligations to the Fund arising from loans under the arrangement, Ghana will consult with the Fund from time to time on Ghana’s economic and financial policies, at the initiative of the government or whenever the Managing Director so requests.

6.  The government of Ghana will continue to provide the Fund with such information as the Fund requires to assess Ghana’s progress in implementing the economic and financial policies described in EBS/98/46, EBD/98/21, and in the attached memorandum of economic and financial policies.

7.  The government of Ghana intends to make these understandings public and authorizes the Fund to provide this letter and the attached memorandum to all interested parties that so request. It also authorizes the Fund to provide to any international organization providing aid to developing countries that might request, solely for its own use, the documents related to the mid-term review under the second annual ESAF arrangement, including this letter and the attached memorandum.

8.  The government is determined to fully implement the program and comply with all performance criteria thereunder. We hope that we can count on the continued support of the Fund.

Sincerely yours,


Kwame Peprah
Minister of Finance

Mr. Michel Camdessus
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, DC 20431


Memorandum of Economic and Financial Policies
of the Government of Ghana for 1998

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I.  Introduction

1.  This memorandum reviews Ghana's performance to date under the economic program being supported by the Fund’s second annual enhanced structural adjustment facility (ESAF) arrangement, and describes the additional measures taken by the government to accelerate the structural reform process and adjust the policy stance. Despite drought-related energy shortages in early 1998, the government has remained fully committed to the program objectives and was able to observe all quantitative performance criteria for June 1998. It has also made progress in carrying out its structural reform agenda, although some temporary delays occurred.

II.   Performance in the First Half and Prospects for 1998

2.  In the first half of 1998, Ghana’s economic performance was adversely affected by an unforeseen electricity shortage that curtailed production in some sectors such as cement, aluminum, and mining. However, the negative impact of the energy crisis was mitigated by energy management measures and by the decline in world prices for oil. Agriculture, which accounts for 37 percent of GDP, was largely unaffected. Therefore, real GDP growth in 1998 is now projected at 4.5 percent, significantly higher than forecast at the onset of the crisis, but lower than the 5.6 percent target.

3.  While the inflation rate in the first half of 1998 showed a tendency to rise as a result of the energy crisis, by September the end-of-period annual inflation rate had declined to 17 percent, and the government’s expectation is that it will be only slightly above the program target (11 percent) by year-end. Helped by higher-than-projected cocoa exports, the cedi remained relatively stable, depreciating by 3 percent from January to June 1998.

A.  Fiscal Performance

4.  The government was able to maintain the fiscal stance broadly in line with the program. The primary domestic fiscal surplus for the half-year exceeded its floor by 0.5 percent of GDP. Tax revenue was slightly below its nominal benchmark, but exceeded its target in GDP terms. Company taxes fell in the second quarter because of the impact of the energy crisis, but petroleum taxes were higher owing to the increased use of thermal power to meet energy demand. Grants were also below their target for the half-year by the equivalent of 1.3 percentage points of GDP.

5.  To compensate for the weakness of revenue, noninterest recurrent and foreign-financed capital expenditures were curtailed below original projections. The shortfall in noninterest recurrent expenditure in the first half of 1998 was due, for the most part, to prolonged wage negotiations, which delayed the annual wage increase to July. Domestic interest payments, however, were significantly above projected levels as interest rates declined more gradually than expected. The effect of this increase was partly compensated by lower-than-budgeted external debt service payments, as the budget included debt service of state-owned enterprises (with government guarantees), which these enterprises were able to pay from their own funds. In mid-1998, expenditure arrears in the road sector were found to be nearly 0.7 percent of GDP higher than reported at the beginning of the year, indicating a need to improve expenditure control in this sector. Net domestic financing of the government at end-June 1998, a performance criterion, remained below its ceiling.

6.  In the second half of the year, the government is further tightening the fiscal stance to mitigate the effects of the energy crisis and higher-than-programmed interest rates. Total domestic revenue is expected to be slightly better than the program, with higher collections of sales and petroleum taxes and cocoa export duties compensating for the shortfall in direct taxes.

7.  For 1998 as a whole, domestic interest payments are likely to be 1.2 percentage points of GDP more than forecast, raising recurrent expenditure above programmed levels. Wage payments are expected to be in line with program assumptions. The government reduced road-related arrears to 0.5 percent of GDP by end-July, and will take measures to eliminate all road arrears by 2000. To ensure that new arrears do not arise, the government, with World Bank assistance, is conducting an audit of road contracts, and future road expenditures will be planned in the context of a medium-term expenditure framework.

8.  With revenue collections expected to turn out slightly better than programmed and with the pressure on tax administration from the imminent reintroduction of the VAT, it would not be realistic to entertain measures to raise revenue beyond what is now expected. Therefore, continued expenditure restraint will be needed to permit the government to increase the domestic primary surplus above the level projected under the program.

9.  Budget for 1999. Preliminary work on the 1999 budget has been completed within the context of the new medium-term expenditure framework. The 1999 budget envisages a further increase in government savings based on improved domestic revenue collections, relying in part on further reform and rationalization of the tax system. Noninterest domestic recurrent expenditure relative to GDP is projected to decline, with social spending expected to rise as a share of GDP. The projected decline in domestic interest payments as a percentage of GDP follows from the programmed decline in interest rates.

B.  Monetary Policy and the Financial Sector

10.  The 1998 economic program envisages a tight monetary policy to support the government’s inflation target. During the first half of 1998, the growth in broad money was 5.4 percent, considerably higher than envisaged under the program (1 percent).1 This development was due to an increase in the money multiplier as the Bank of Ghana has continued to maintain reserve money within the limits of the program. The higher-than-expected multiplier results from increased deposit mobilization efforts by the banking system as reflected in the decline of the currency-to-deposit ratio.

11.  Interest rates have been slowly declining since the beginning of the year. The interest rate on 91-day treasury bills, a key reference rate for the money market, has fallen from 42 percent at the end of 1997 to 33 percent at end-July 1998. The real interest rate on the 91-day treasury bill rates has declined from 18 percent at the end of 1997 to 10 percent at end-September 1998.2 The Bank of Ghana expects that the interest rates will show a declining trend during the remainder of the year, and is prepared to reduce its rediscount rate (currently at 45 percent) as monetary conditions permit.

12.  The Bank of Ghana has continued to take steps aimed at facilitating the smooth operation of financial markets. As net foreign assets of the banking sector declined in the first half of 1998, the Bank of Ghana encouraged transactions in foreign currency to temporarily redistribute foreign exchange working balances among market participants. A new instrument was introduced in September 1997, which took the form of repurchase operations in foreign currency collateralized by treasury bills and intermediated through the central bank. The Bank of Ghana is gradually disengaging itself from its role as intermediary for these transactions. The Bank of Ghana is also promoting the use of repurchase operations to permit better management of liquidity between treasury bill auctions. A centralized book-entry system for treasury bills was completed in July and a master repurchase agreement was formally introduced in August 1998 setting the stage for a more active use of repurchase operations by the Bank of Ghana and market participants.

13.  Conscious of the importance of a sound banking system, and in the wake of a massive check fraud uncovered early in 1997, the Bank of Ghana is strengthening its banking supervision, drawing on technical assistance from several donors and the Fund. The government has completed its investigation of the incident and has brought charges against more than 20 individuals. All bank employees charged in connection with this fraud have been relieved of their functions pending the completion of the judicial process. The Bank of Ghana has also taken steps to improve the payments system by standardizing checks and introducing magnetic ink coding to expedite check clearing. These measures have already resulted in a significant shortening of the time necessary to clear checks. The Bank of Ghana will continue to monitor closely open foreign exchange positions by commercial banks and introduce new prudential limits by end-1998. In early August, the Bank of Ghana temporarily suspended the licensing of new commercial banks while focusing its supervisory efforts on the rehabilitation and divestiture of the existing banks. The government reduced its participation in the capital of the Barclays Bank of Ghana through sales of some of its shares in the stock exchange. Finally, the Bank of Ghana has been taking steps to ensure that foreign exchange bureaus and rural banks operate in accordance with their licenses.

C.  External Sector

14.  Ghana’s external situation is gradually improving, but remains vulnerable to exogenous factors, such as terms of trade changes and weather patterns. The current account deficit (including official transfers) is estimated to have increased from about 5 percent of GDP in 1996, to almost 9 percent in 1997, but is expected to decline in 1998 to about 6 percent owing to an improvement in Ghana’s terms of trade. Ghana’s export receipts are projected to increase by about 17 percent in 1998, owing mainly to a recovery in cocoa exports, and notwithstanding the expected weakness in the international gold price. Imports are expected to increase by 6 percent in 1998. External financing requirements for 1998 are expected to be covered by the concessional assistance pledged by donors at the Consultative Group meeting held in November 1997 and disbursements associated with the second annual ESAF arrangement. Donors will be contacted to ensure that the foreign assistance shortfalls observed in the first half of the year are at least partially reversed in the rest of the year. The government will promptly resolve remaining issues regarding bilateral arrangements with a Paris Club creditor. In the first half of 1998, gross international reserves declined by US$56 million; for the year as a whole gross international reserves are expected to increase beyond the program target, but at 2.6 months of imports (c.i.f.), will remain modest.

15.  The external debt service ratio increased from 27 percent of exports of goods and non-factor services in 1996 to 32 percent in 1997, reflecting the impact of large non-concessional borrowing in 1996. Under present assumptions, Ghana’s external debt service ratio would fall below 20 percent in 2001. With strict adherence to the financial policies envisaged in the program, and to the moratorium on nonconcessional borrowing, Ghana should be able to meet its external debt service obligations including those to the Fund. In this context, the government has withdrawn its commitment to guarantee any nonconcessional borrowing by the Ghana National Petroleum Company (GNPC) for the intended Tano Field Development and Western Power projects. These projects will now only proceed if significant private equity participation is secured. To further improve its external debt management, the government will embark on a program to strengthen monitoring of the external debt.

16.  The cedi has been appreciating in real effective terms since 1995 raising some concerns about the long-term competitiveness of the economy. The Bank of Ghana is committed to maintaining a floating exchange rate system and will continue to aim its foreign exchange operations at attaining the net foreign assets target of its economic program. It believes that exchange rates can only be affected in a sustainable fashion by a change in monetary and fiscal stance. Therefore, it will continue to focus its efforts on vigorously pursuing price stability, a strategy that will eventually result in more stable real effective exchange rates. Nevertheless, the government will continue monitoring developments in the foreign exchange markets and will conduct studies of export competitiveness to help guide future Bank of Ghana policies in this area.

III.  Structural Reforms

17.  Implementation of structural reforms has not been without difficulties owing to the wide-ranging nature of the reforms being pursued in an open and democratic system. The need for parliamentary debate and the broadening of public support for measures have resulted in delays in carrying out the program policies. The government believes, however, that this consensus-building process yields more sustainable and long-lasting reforms as well as strengthened ownership. The main areas of structural reforms are the tax reforms, the enhancement in expenditure controls, trade liberalization, public sector reforms, and modernization of the energy and cocoa sectors. The divestiture program will be pursued vigorously.

18.  The government is implementing tax reforms with technical assistance from several multilateral and bilateral donors. A major measure is the reintroduction of a value-added tax (VAT) to replace the current sales and services taxes. The VAT law was adopted by parliament in February 1998, and the tax will take effect in December 1998. It will have a single rate of 10 percent, with limited exemptions and an effective refund mechanism for exports. Consistent with the intended coverage of the VAT, the government extended the services tax in 1997 to cover a broad range of professional services. To avoid a repetition of the difficulties following the short-lived introduction of the VAT in 1995, the government has launched an intensive public information campaign, which includes visits with new taxpayers by officials to explain procedures for complying with the tax. The assignment of taxpayer identification numbers (TINs) to the targeted group of current sales, service, and import taxpayers, about 2,500 in number, was completed in July. In addition, TINs have been assigned to about 5,000 new taxpayers. TIN assignment for new taxpayers is basically completed, which puts the VAT implementation on a tight, but achievable, schedule for introduction of the tax in December.

19.  The implementation of a Central Revenue Authority (CRA) has progressed more slowly than anticipated under the program. The objective of establishing the CRA was to improve the efficiency of tax administration by merging services—such as legal support and audit—and by allocating resources among the revenue collection agencies to achieve greater compliance. The bill to establish a CRA could not be submitted to parliament in light of legal opinion that pointed to constitutional provisions that preserve the existing tax agencies as separate institutions. Instead of setting up the CRA as a new agency, the government has decided to appoint a central revenue board that will take over the functions of the governing boards for each agency, and set up a secretariat under it to coordinate activities between the revenue agencies. The legal framework for the new central revenue board will be in place by end-November and the Board and Secretariat will be established thereafter. In the meantime, the nominated members of the Board are meeting in regular sessions as members of the VAT Oversight Committee to ensure coordination of activities between the revenue agencies. The government believes that this alternative approach can achieve the same administrative improvements expected from the creation of a central revenue authority, while avoiding the delays that a constitutional amendment would entail.

20.  The Cabinet approved in May the issuance of the circular for preparation of the 1999 budget and provisional ceilings based on the methodology of the medium-term expenditure framework (MTEF). Workshops on the methodology were conducted in June-August for about 500 senior managers and officials from 11 ministries and various agencies. The MTEF was initially to be completed for the priority sectors of education, health, and roads. Further, as a result of the workshops, a decision was made (and implemented in September) to extend the use of this methodology to all sectors ahead of schedule. The next step will be to develop a macroeconomic modeling capability for the MTEF to ensure that economic trends and assumptions are fully taken into account when drawing up the budget.

21.  A new tariff structure was introduced in March 1998 with a view to reducing tariff dispersion and achieving a more uniform treatment of imports. Particular attention was given to limiting by as much as possible the number of items that were zero-rated or exempted. In order to facilitate the shift away from zero-rating, a new rate of 5 percent was added to the existing positive rates of 10 and 25 percent. Imports will be exempt from the VAT only if they are on the list of exempted goods in the VAT law. The government is reviewing tariffs on imports that are not subject to sales tax with a view to rationalizing them in line with the forthcoming VAT schedules.

22.  The government is enhancing its capacity to implement public sector economic reforms. The National Oversight Committee of the National Institutional Renewal Programme (NIRP) is consolidating job functions with a view to streamlining and downsizing the public service. The government is negotiating with the social partners a comprehensive long-term wage policy, aimed at reforming the pay structure based on a detailed job evaluation across the entire public sector.

23.  An important part of this reform is the rationalization of the regulatory framework for subvented agencies. In December 1997, Cabinet approved a comprehensive strategy for public service reform over the next 10 years.3 Approximately 70 percent of the civilian public service is employed in 174 subvented agencies, including the Education Service, Health Service, and Highways Authority. A review of activities and staffing levels of these agencies is ongoing with a view to making them more efficient and, where appropriate, incorporating them in the budget, closing them down, or commercializing them prior to privatization. The Cabinet approved a pilot project for the reform of subvented agencies, which would restructure at least seven agencies, commercialize at least five, and close down five others. The draft legal framework and procedures for closing down or commercializing subvented agencies are to be prepared by the end of December 1998. The Cabinet is expected to approve the specific subvented agencies for the pilot project by the end of 1998 and the project is to be completed by the end of 1999. The reform of the subvented agencies will be supported by a World Bank credit, which encompasses assistance for the pilot project and preparation of a medium-term program to reform the sector.

24.  Key measures to deregulate the petroleum sector were introduced in mid-1996, including the liberalization of crude oil imports, and the adoption of an "import parity" pricing mechanism to ensure transparency in the setting and adjustment of ex-refinery prices of petroleum in line with import costs. The government is continuing to make progress in this area by introducing uniform ex-regional depot wholesale prices in February 1998, and by taking steps to phase out the setting of uniform marketing/retail margins for oil marketing companies that result in a uniform national pump price for petroleum products. By end-December 1998, the government, through the Energy Commission, will introduce new regulations that will liberalize margins for petroleum product marketing and retailing activities. The GNPC completed the repayment of its long-standing debt to the Bank of Ghana in April 1998.

25.  In November 1997, the government created an independent Public Utilities Regulatory Commission (PURC) to regulate tariffs and customer service standards in the electricity and water sectors. The PURC adopted a program to restore electricity tariffs to economic levels by end of 2000. Accordingly in February 1998, the PURC increased tariffs by 90 percent, and in September 1998, announced a further 100 percent increase in electricity tariffs to enable the power utilities to recover the relatively higher costs of procuring thermal power to fill in the deficit in hydropower generation that had emerged. The new tariffs of September 1998 will also ensure that power utilities at least cover the cash operating costs of transmission and distribution services and a portion of current debt service obligations. Furthermore, as part of the government’s efforts to restore the financial viability of the power utilities, it has adopted a Financial Recovery Plan under which, by end-1999, all outstanding arrears in debt service and power supply up until December 1997 are to be converted into government equity, and subsequently recovered through sale of its shares in the power utilities. The Financial Recovery Plan also provides for some debt service payment obligations for 1998 through the end of 1999 to be deferred until the year 2000.

26.  The government has continued to implement a strategy to rationalize and increase the efficiency of the cocoa sector while improving the return to farmers and enhancing the quality premium of the Ghanaian cocoa. Incentives for cocoa farmers were improved through an increase in the share of the f.o.b. price of cocoa that accrues to farmers from 51 percent in the 1996/97 crop year to 54 percent in the 1997/98 crop year and further to 56 percent in the crop year that started October 1, 1998. The government will identify further cost-cutting measures for the Cocoa Board to support future increases in the share of the farmers. The government will proceed with its already announced plan to divest the Produce Buying Company (PBC), a subsidiary of the Cocoa Board, and will offer it for sale by March 1999. The divestiture process was delayed by a discussion regarding splitting the PBC into two companies so as to increase competition in the sector. The unification of the extension services of the Ministry of Agriculture and the Cocoa Board were slowed down by the existence of salary scales that were significantly different. While a common salary scale is being considered, the government has gone ahead with the first phase of the unification covering selected producing areas. Full unification is expected early in 1999. The government intends to request assistance from the World Bank to finance possible retrenchment costs associated with the reforms in the extension services and the PBC. Various options for eliminating the Cocoa Board’s export monopoly will be assessed while safeguarding the quality of the cocoa crop. The government, with World Bank support, has scheduled a workshop on cocoa in January 1999 to discuss ways to deepen the ongoing reforms and to consolidate the future prospects for the sector.

27.  During 1998, the government will continue its privatization program with the divestiture of at least two large and an additional 20 small- and medium-size enterprises. Of the large enterprises, three quarters of the government’s share in Barclays (40 percent) and one half of its shares in Twifo Oil Plantation (80 percent) were divested during the first half of 1998. At the same time, the State Insurance Corporation was privatized. By end-1998, the Mim Timber Company and the Ghana Reinsurance Corporation will be offered for sale. Regarding the small-scale enterprises, government divestiture initiatives remains on track.

28.  GNPC divested its nonenergy-related assets in March 1998. The government appointed international consultants to prepare comprehensive prospectus for the sale of shares in Tema Oil Refinery Ltd. and the Ghana Oil Company Ltd. The request for bids for Ghana Oil Company Ltd. is expected by end-October, 1998, and the sale should be completed in early 1999. For the divestiture of Tema Oil Refinery Ltd., the process is expected to involve negotiations with creditors to convert their debts into equity in the company by end-1999. Subsequently, government will arrange sale of a second batch of shares to reduce its shareholding to a minority stake.

29.  The government does not intend to (i) introduce multiple currency practices; (ii) impose new or intensify existing restrictions on payments and transfers for current international transactions; (iii) for balance of payments purposes, introduce new or intensify existing restrictions on imports; or (iv) conclude any new bilateral payments agreements that are inconsistent with Article VIII of the Fund’s Articles of Agreement. The government will not accumulate external payments arrears, on a continuous basis, apart from those arising from debt-service payments pending the conclusion of debt rescheduling agreements.

IV.   Statistical Issues

30.  The government recognizes the need to improve the quality and timeliness of the economic and social data, and, to that end, is seeking technical assistance. The Ghana Statistical Service (GSS) has been publishing a new national consumer price index but publication of monthly export and import statistics on the basis of the Harmonized System has been irregular. Following technical assistance from the Fund in July 1997, the Bank of Ghana is implementing the agreed action plan to improve monetary data. The government plans to reduce the two-month lag in the publication of the consumer price index to no more than a month, and make the import and export statistical bulletins available regularly with a lag of at most six weeks. The GSS will reconcile its import data with that from customs by end-1998, and will publish the quarterly digest of statistics regularly.

31.  In order to ensure effective monitoring of the program, the government will make available to Fund staff all core data on a timely basis.

1Broad money is defined as currency outside banks and all deposits, including foreign currency deposits. It also includes payment orders, and bank drafts. Whether the latter items should be part of broad money is an empirical question. The Bank of Ghana is studying this issue since preliminary indications are that without them broad money would have shown a lower growth rate and a closer relationship with price behavior.
2Calculated using the inflation rate for the 12-month period ending at the time in which the interest rate is quoted.
3Government of Ghana, Public Sector Re-Invention and Modernization Strategy for Ghana, National Institutional Renewal Programme, December 1997.


Table 1. Ghana: Quantitative Performance Criteria and Benchmarks Under the Second Annual ESAF Arrangement, 1998
Table 2. Ghana: Structural Performance Criteria and Benchmarks Under the Second Annual ESAF Arrangement, 1998
Table 3. Ghana: Summary and Time Frame for Macroeconomic and Structural Adjustment Policies, 1998–2000