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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 3, 1999

Dear Mr. Camdessus:

1. The Executive Board of the Fund approved a three-year Enhanced Structural Adjustment Facility (ESAF) arrangement for Ghana on May 3, 1999. The purpose of this letter is to inform you on the progress in implementing the first-year economic program set out in the staff report (EBS/99/57; 4/16/99) and in the policy framework paper (EBD/99/53; 4/14/99), and to request disbursement of the second loan under the first annual arrangement.

2. In the first half of 1999, Ghana suffered an external shock, caused primarily by a shortfall in donor assistance but magnified by a sharp decline in gold and cocoa prices, on the one hand, and a significant increase in oil prices, on the other. In spite of these difficulties, the government of Ghana is moving ahead with the implementation of its economic program.

3. The external shock made it difficult for Ghana to comply with all performance criteria under the program. The government of Ghana hereby requests a waiver for non-observance of the following performance criteria for June 1999 and September 1999: (a) net domestic financing of the central government; (b) domestic primary surplus of the government budget; offer for sale of the Produce Buying Company (PBC); (d) withdrawal of banking licenses from banks that do not meet capital adequacy requirements; and (e) elimination of external payments arrears. The government of Ghana also requests modification of the performance criteria for December 1999 relating to the government domestic primary surplus, net domestic financing, reserve money, and the change in net foreign assets of the Bank of Ghana.

4. I am happy to inform you that the government has taken action to expedite the sale of the PBC and clear the external arrears to Italy. The attached memorandum of economic and financial policies of Ghana, based on the policy framework paper referred to above, sets out other remedial measures for 1999 and the key elements of an economic strategy that the government intends to pursue during 2000.

5. The government of Ghana will meet all quantitative and structural benchmarks set for September 1999 under the revised program and will take the actions spelled out in the attached memorandum to underscore its commitment to the program. In support of its 1999-2001 program of economic and financial adjustment, the government hereby requests a second disbursement amounting to SDR 22.14 million, subject to Executive Board approval of the first review under the three-year ESAF arrangement.

6. The government of Ghana will provide the Fund with such information as the Fund requests in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

7. The government of Ghana believes that the policies and measures set out in the attached memorandum are adequate to achieve the objectives of its program; it will take any further measures that may become appropriate for this purpose. During the remaining period of the three-year ESAF 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 three-year ESAF arrangement and while Ghana has outstanding financial obligations to the Fund arising from loans under the arrangement, the government will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultation on Ghana's economic and financial policies.

8. The government of Ghana will conduct with the Fund the second review of the first annual program supported by the three-year ESAF arrangement, based on performance criteria for end-December 1999, not later than April 30, 2000.

9. The government of Ghana intends to make these understandings public and authorizes you to provide this letter and attached memorandum to all interested parties that so request. It also authorizes you to provide to any international organization providing aid to developing countries that might request it, solely for its own use, the documents related to this request, including this letter and attached memorandum.

10. I can assure you that the government is determined to fully implement the program and comply with the performance criteria. The non observance of the above-mentioned performance criteria of the 1999 program do not reflect a lack of commitment of the Ghanaian authorities, but, instead, unforeseen difficulties. Every effort is being made to quickly carry out the agreements contained in the attached memorandum.

11. 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
Washington, D.C. 20431

Memorandum of Economic and Financial Policies
of the Government of Ghana for 1999 and 2000

I. Introduction

1. Ghana is facing a major external shock. World prices of gold and cocoa, Ghana's main exports, have plummeted, while oil prices have risen sharply. Foreign assistance has fallen significantly short of donor commitments.

2. Even if foreign assistance picks up in the second half of the year, the terms of trade shock is expected to have a serious effect on the economy, despite the widespread use of forward contracts and hedges. In order to cushion the effects of this exogenous shock, the government has taken a number of measures to manage the situation, but it will need additional external financial assistance in 1999-2000 if economic performance is to remain close to government objectives for the period.

3. This memorandum provides a summary of the economic trends in 1999 and prospects for 2000. It reports on what the government has done, and intends to do, in response. It also sets out the general lines of an approach to strengthen the economy, given the unfavorable trends in 1999-2000, including additional measures to help limit the deterioration in the balance of payments and the fiscal position.

4. Despite its own efforts, the government will need the full support of civil society, the parliament, and the donor community if a major setback to Ghana's economic development is to be avoided.

II. Recent Economic Developments and Prospects

5. Economic growth appears strong in the first three quarters of 1999. However, fiscal and monetary measures taken in response to the external shock are expected to slow down growth in the last quarter of the year. As a result, real GDP growth for 1999 is expected to fall to about 4.5 percent, despite a good agricultural crop.

6. Up to June 1999, monetary policy remained tight, and both reserve money and broad money were within their target ranges. Annual inflation continued its downward trend from last year, dropping to 12 percent in August, although remaining above projected levels. In particular, food prices declined markedly, outweighing increases in nonfood prices. Revisions of utility prices and retroactive payment of wages--owing to the late completion of the salary negotiations--contributed to slow the downward price trend. For the twelve 12-month period ended in August, the cedi depreciated by 12 percent, about twice as fast as in the previous year.

7. The additional financing of the budget--caused by a foreign assistance shortfall, the decline in cocoa taxes, and nontax revenue and divestiture slippages--is placing significant pressure on monetary policy. While real interest rates have declined since the beginning of the year, they remain high. Reserve money expansion in the third quarter was limited by sales of foreign currency by the Bank of Ghana in excess of program targets and by open market operations.

8. The domestic primary surplus for the first half of 1999 was below its projected level by 0.1 percent of GDP; as domestic noninterest spending was about as projected, but lower nontax revenue was not fully made up by higher collections of direct taxes and cocoa tax. The overall deficit was 0.3 percent of GDP lower than projected, mainly the result of delays in foreign financing for capital expenditure. Road-related arrears are being reduced, although late interest charges are making this effort more challenging than initially planned. The government also did not collect any divestiture receipts. Net domestic financing was 1.1 percent of GDP higher than projected for the midyear, mainly because of delays in foreign program assistance and project loans. Even after adjustment for the shortfall in foreign program assistance, the net domestic financing ceiling under the program is estimated to have been exceeded by 0.2 percent of GDP.

9. In April, the government and civil service reached agreement on an average wage increase of about 20 percent, as assumed under the program. The increase was applied retroactively to the beginning of the year and became effective in June. Retroactive payments were made in July on account of wages in the first half of the year. In June, the legal framework for the reform of subvented agencies was approved by the cabinet.

10. The value-added tax (VAT) has been in effect from the beginning of the year and is operating well. VAT revenue is on target, mostly because the VAT has few exemptions, a single rate, and covers a larger number of taxpayers than the previous sales tax.

11. Net foreign assets (NFA) of the Bank of Ghana were below program targets at the end of June. However, after applying program adjusters for the shortfall in foreign program assistance, the net foreign asset position was on target. NFA of the commercial banks have declined considerably as banks have taken advantage of strong credit demand while moving toward greater compliance with the new foreign exchange exposure regulations.

12. Total cocoa purchases in the 1998/99 season are now projected at 396,000 metric tons, about 10 percent above program estimates. However, average cocoa prices declined by 22 percent in 1999. World gold prices fell by 11 percent in the 12-month period ended June 1999. Gold export volume is running slightly above 1998 levels. Available data on imports and exports indicate that both export and import volume growth has been strong. The substantial declines in world prices for Ghana's two principal exports, cocoa and gold, and the increase in the world price of oil have had a negative impact on Ghana's external current account.

III. Structural reforms

13. Structural reforms have progressed broadly in line with the program. In the financial sector, the Bank of Ghana cancelled the freeze on bank licensing in March 1999. Two well-known international banks are exploring the possibility of entering the Ghanaian market. Banks not meeting capital adequacy requirements were instructed in March 1999 to invest any increases in deposits in treasury bills and to adhere to monitorable quarterly targets for handling non-performing loans. The National Investment Bank has been asked to adhere to a business plan to strengthen its financial situation and make it a better candidate for divestiture. As part of ongoing efforts to strengthen management, the NIB board has removed from office several senior managers. A new general manager will be hired by the NIB board from a list of professional bankers compiled by the Bank of Ghana. Meanwhile, the Bank of Ghana has reiterated its decision to liquidate banks that do not meet the capital adequacy requirement by end-September. The foreign exchange exposure regulation introduced in December 1998 has been enforced since July. Some banks, however, are not yet in full compliance with the regulation. The Bank of Ghana has already notified these banks that penalties will be applied. Draft laws for the central bank and the banking system are scheduled for submission to parliament by the end of the year as agreed in the program.

14. In April 1999, the cabinet approved a medium-term cocoa strategy, after extensive consultations with stakeholders. The strategy was published and distributed widely. This strategy was designed to promote competition in the domestic market and end the public monopoly in cocoa exports. Specifically, the Cocoa Board began to provide equal access to its crop financing and warehousing facilities to all licensed buying companies. However, the Produce Buying Company (PBC) had not yet been offered for sale by June 30, 1999, as agreed under the program. The government publicly announced in September its intention to offer PBC for sale, and the prospectus will be available shortly. In June, the producer price of cocoa for the 1999/2000 crop season was announced at the same nominal level as in the 1998/99 season despite a sharp decline in cocoa export prices, which raised the producers' share in the f.o.b. cocoa price to 74 percent, substantially above the 60 percent minimum target under the program.

15. Also in April, the Divestiture Implementation Committee (DIC) published a divestiture work plan, annual targets for divestiture receipts for the period 1999-2001, and a privatization impact assessment done in collaboration with the World Bank. The government is taking steps to complete the divestiture of a number of companies already in the pipeline, including the State Transport Company and GHACEM, a cement factory. Divestiture revenues in the second half of the year are estimated to amount to 80 billion.

16. In the energy sector, the government published in April its "Statement of Power Sector Development Policy" and also posted it on its website. A draft financial restructuring plan for the Tema Oil Refinery (TOR) was prepared, and plans to offer TOR for sale before year's end are on course.

17. On the measurement and reduction of poverty, the government completed the fourth Ghana Living Standards Survey (GLSS4) in June; it is expected to complete a draft report describing survey results by end-October and present a national program for reducing poverty at the November Consultative Group meeting.

18. In recent years, trade statistics compiled by Customs, Excise and Preventive Service (CEPS) and used by the Bank of Ghana to prepare the balance of payments showed imports significantly lower than those obtained from the Ghana Statistical Service (GSS), the Ministry of Trade, and partner countries.1 An effort to reconcile the data was launched in the first half of 1999. This review concluded that the manual CEPS data set was incomplete, and, as a result, Ghana's balance of payments for 1996-98 was revised using import data from GSS and export data from the IMF's Direction of Trade Statistics. The data for travel receipts were replaced by a new series from the Ministry of Tourism. The Bank of Ghana also revised some other series, such as private transfers based on data from commercial banks.

IV. Remedial measures for 1999

19. Fiscal policy will have to be tightened to compensate in part for the foreign assistance shortfall and decline in cocoa tax revenue, as well as for the policy slippages in the first three quarters of 1999. The main adjustment will be a substantial reduction of domestic capital expenditures in the fourth quarter--specifically, from 1.3 percent of GDP in the original program to only 0.4 percent of GDP in the revised program. The VAT Service has been asked to strengthen its effort to enforce compliance with requirements for VAT invoicing and return filing through the application of penalties, automatic assessments of liabilities, and prosecution of nonpayers. Aggressive enforcement of customs procedures, including the close monitoring of bonded warehouses, is also expected to reduce tariff revenue losses.

20. In addition, the government will submit to parliament a package of fiscal measures that is expected to have effect next year: an increase in the VAT rate; enhancement of nontax revenue; increases in petroleum taxes; limitation of exemptions under the VAT and the tariff code; and a reduction of the minimum cocoa prices paid by government to producers for lower-quality beans. The government is also considering limiting capital allowances under the income tax.

21. The government will not seek completion of the second review under the three-year ESAF arrangement until the VAT rate and petroleum tax increases mentioned in paragraph 20 above are decided upon by parliament and implemented. In case parliament decides against the government's proposal, the government understands that an alternative package of measures acceptable to the Fund will need to be in place before the review can be completed.

22. The government will reduce the top tariff rate from 25 percent to 20 percent in the 2000 budget, in line with regional trends. A comprehensive review of the tariff regime is being conducted by government and is expected to be completed in September, as planned. This review has two main objectives: to ensure that Ghana's tariff system remains competitive with neighboring countries, and to enhance efficiency in production. The government will then adopt and implement the accepted recommendations in the 2000 budget.

23. In the third quarter of 1999, the retroactive payment of wages and the increase in government borrowing put strong pressure on monetary policy. Reserve money benchmarks for September had to be revised upward to account for the increase in currency in circulation, while the projection of the net foreign asset position of the Bank of Ghana was revised downward. The Bank of Ghana intends to resume its tight monetary policy in the fourth quarter, aiming at bringing the inflation rate as close to 10 percent as possible by year's end. Reserve money growth will be constrained to remain at about 12 percent, at unchanged velocity assumptions.

24. Given the terms of trade shock and shortfall in foreign program assistance, the Bank of Ghana will be unable to attain its target of raising gross international reserves to 2.7 months of imports as originally programmed.2 To adjust for the external shock, the Bank of Ghana will reduce its net foreign assets target from an increase of US$77 million down to US$50 million.

V. Key Elements of an Economic Strategy for 2000

25. Ghana's external situation is expected to deteriorate in 2000. The price of cocoa exports to be delivered in 2000 is estimated to decline by about 24 percent, compared with 1999. Export receipts will increase by only 2 percent, despite increases in export volumes and rising levels of nontraditional exports. Therefore, the capacity of the economy to import will be limited. While the government hopes to obtain additional assistance from its development partners to minimize the external constraint, imports may be able to increase by 7.2 percent only (in value terms). Under the circumstances, the government believes that the real GDP growth projections may have to be scaled down to 4 percent in 2000. The government will target the inflation rate at or below 8 percent.

26. To maintain macroeconomic stability in the face of this externally imposed constraint, fiscal and monetary policies will need to be restrictive. Increases in the VAT rate and petroleum taxes, improvements in customs administration, and the use of a two-price structure for cocoa producer prices are projected to raise domestic revenue to 18.1 percent of GDP. Noninterest recurrent expenditure is expected to be cut by 0.1 percentage points of GDP to 10.3 percent. The domestic primary surplus is expected to remain level at 3.4 percent of GDP, and the overall fiscal deficit (on a commitment basis) will be 6.7 percent of GDP. The government is appealing to its development partners to increase their contribution to the financing of the budget deficit, particularly through program grants, so as to limit net domestic financing of government to no more than 2.4 percent of GDP.

27. These fiscal targets were chosen based on the assumption that foreign assistance will increase considerably in 2000, as described in paragraph 29 below. The government will define contingency measures and adjustment scenarios to be used in case foreign assistance falls short of the values assumed in this memorandum.

28. Monetary expansion for 2000 will be limited to 12 percent, in line with present expectations for real growth and the inflation target. Assuming a slightly higher money multiplier, reserve money growth will be limited to 11.5 percent. The Bank of Ghana will keep the reserve money on target through open market operations; interest rates are expected to adjust as needed to ensure adherence to the monetary program. Credit to the private sector is expected to increase by 15.8 percent, in line with the expansion of nominal GDP.

29. Given the relatively low level of gross international reserves expected at the end of 1999 (two months of imports), the Bank of Ghana will focus its intervention in the foreign exchange market on its net foreign assets target while leaving the determination of the exchange rate to market forces. The level of gross reserves will decline to the equivalent of not less than two months of imports.

30. The government will convene a Consultative Group (CG) meeting in November 1999, under the sponsorship of the World Bank, in which it will present its strategy for poverty reduction and discuss its financing requirements for 2000. The government's preliminary estimate of financing needs for 2000, excluding World Bank assistance, is US$769 million, of which at least US$241 million are needed in program grants and loans. World Bank assistance in 2000 is estimated at US$230 million. The government requests the IMF to consider providing additional resources under the present ESAF arrangement in the context of the next annual program.

31. The government is also considering the establishment of a domestic debt fund to reduce the burden of domestic debt, which at end-1998 amounted to 100 percent of government domestic revenue, with interest payments reaching 28 percent. Present estimates indicate that contributions from donors amounting to US$50 million a year, for a period of at least three years, could be sought to reduce the domestic debt service, with some of the savings from debt relief being for social programs. These contributions will need to be in addition to the amounts mentioned in paragraph 29.

32. The government intends to develop an active interbank market in foreign exchange and would like to request assistance from the Fund in the form of an expert with experience in setting up such a market in a developing country. Technical assistance is also needed to help the Bank of Ghana improve its balance of payment statistics.

VI. Prior Actions and Program Monitoring

33. Prior actions. The government will take prior actions to underscore its commitment to resolve the economic difficulties caused by the adverse world price trends. It will meet all quantitative and structural benchmarks set for September 1999 under the revised program. It will offer PBC for sale and eliminate all external arrears by end-September 1999. Prior to the completion of the first review of the current ESAF arrangement, scheduled for November, the government will seek parliamentary approval for an increase in the value added tax rate. It will provide an assessment of the factors that led to the loss of merchandise from bonded warehouses, together with an estimate of the resulting revenue losses, steps to identify and prosecute those responsible, and measures taken to prevent recurrence of such incidents in the future. More generally, the government will indicate the measures it will take to strengthen customs. It will complete the steps to divest the State Transport Company and GHACEM, a cement factory. The Bank of Ghana will calculate the market exchange rate based on commercial bank transactions reported to the central bank, and not from indicative rates quoted by commercial banks.

34. Performance criteria. Performance through end-1999 will be monitored on the basis of the following benchmarks (for September 1999) and quantitative performance criteria (for December 1999): (a) domestic primary balance of the government budget; (b) government revenue;3 (c) net domestic financing of the government budget; (d) reserve money; (e) net foreign assets of the Bank of Ghana; (f) new nonconcessional external borrowing; and (g) the stock of external short-term debt (Table 1). The nonaccumulation of new external payments arrears will also constitute a performance criterion, applying on a continuous basis. Structural performance criteria and benchmarks are shown in Table 2.

35. Provision of information. In order to ensure effective monitoring of the program, the government will continue to make available to Fund staff all core data on a timely basis, including the set of weekly indicators of financial policies described in our memorandum of economic and financial policies dated April 14, 1999. In addition, starting in the third quarter of 1999, the Bank of Ghana will release to the public monthly information on its gross international reserves, with a delay of not more than a month. The GSS, in collaboration with CEPS, the Ministry of Trade and the Ministry of Tourism, will publish monthly data on exports, imports and tourist arrivals with a lag of not more than 60 days. Summary information on the results of the GLSS4 will be provided to the Fund staff before the end of October. Publication of the Quarterly Digest of Statistics of the GSS and the Bank of Ghana Quarterly Economic Bulletin will be kept current, with publishing delays of not more than 60 days, starting in the third quarter of 2000. The backlog of unpublished issues will be eliminated by the end of 1999. Publication delays owing to printing will be minimized by posting the data to a website.

1Based on IMF, Direction of Trade Statistics.
2Gross reserves in U.S. dollar terms did not increase by as much as targeted, and imports have been significantly revised upward.
3Benchmark only.