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Economic and Financial Policy Framework Paper, 1998–2000
1. This document, prepared by the Government of Ghana in collaboration with the staffs of the International Monetary Fund and the World Bank, is the policy framework paper (PFP) for the period 1998-2000. It sets forth the socioeconomic strategy of the Ghanaian authorities in the context of the second and third years of the present Enhanced Structural Adjustment Facility (ESAF) arrangement that was approved in 1995. This arrangement was designed, in part, to address the strong inflationary pressures that had resulted from the lapse in fiscal discipline in 1992 and had failed to abate under the policies pursued in subsequent years. The government is committed to establishing a sound and stable economic environment that will sustain strong economic growth and a broad-based improvement in living standards.
2. Ghana launched an economic recovery program (ERP) in 1983 aimed at reversing a protracted period of serious economic decline characterized by lax financial management, inflation rates well over 100 percent, and extensive government involvement in the economy. The ERP, which adopted a market-oriented approach, made considerable progress in reducing macroeconomic imbalances and liberalizing the external sector. Inflation was lowered from 142 percent in 1983 to 10 percent by the end of 1991. The highly distorted exchange and trade system was liberalized. The balance of payments registered sizable overall surpluses throughout the period. Real GDP growth averaged about 5 percent a year, resulting in appreciable increases in real per capita incomes. However, inflation remained high and variable, discouraging private sector saving and investment, and constraining the pace of economic activity. Private investment and economic growth were also hampered by the slow implementation of critical structural reforms in the financial, parastatal, and agricultural sectors. Export growth, particularly in nontraditional sectors, was disappointing and Ghana continued to depend on external assistance. At the recent rate and pattern of economic growth, it would take the average poor in Ghana 30 years to cross the poverty line.
3. In 1992, fiscal imbalances re-emerged as a consequence of large wage awards in the public sector. Repeated delays in passing through imported oil costs to retail petroleum prices gave rise to revenue losses. As a result, the domestic primary balance shifted from a surplus of 1.9 percent of GDP in 1991 to a deficit of 4.9 percent in 1992, the money supply grew considerably, and inflationary pressures resurfaced. Ghana's problems since 1992 are rooted in recurrent lapses in financial discipline.
4. In 1993-94, the authorities made some progress in reducing fiscal and external imbalances. The domestic primary balance shifted to a surplus of 0.8 percent of GDP in 1994, bolstered by increased revenue from taxes on cocoa exports. However, import duties were not imposed as planned on a range of zero-rated or exempted goods, while overruns occurred in wages and domestic interest payments. The government's external position was supported by large privatization proceeds, mostly from the sale of the Ashanti Goldfields Company.
5. In 1995, policy implementation under the first annual ESAF arrangement was uneven. The budget outturn for 1995 was weaker than programmed, with the domestic primary balance about 1.5 percentage points of GDP short of the program target, primarily because of overspending in the capital budget, particularly on roads. This overspending was accompanied by arrears to contractors, reflecting a continued weakness in expenditure monitoring and control. Reserve money was well above target, even though central bank credit to the Ghana National Petroleum Corporation (GNPC) was cut off. The 12-month rate of inflation started to decline in the second half of 1995, but remained high at 71 percent at the end of the year. On the positive side, the divestiture program remained on track and GDP grew by 4.5 percent. External reserves exceeded the program target, largely due to higher exports associated with a bumper cocoa crop.
6. Large fiscal slippages emerged during the second half of 1996. Most indicative quantitative benchmarks and several structural benchmarks were missed. The budget showed a deficit for the year of 10.4 percent of GDP, about 6 percentage points of GDP higher than the program target. The domestic primary surplus was only 0.3 percent of GDP compared to a target of 4 percent, primarily owing to serious lapses in expenditure discipline which resulted in unbudgeted spending of about 3 percent of GDP. Domestic financing of the budget rose to 5.1 percent of GDP, which increased domestic interest costs and kept interest rates high. On the structural side, the automatic pricing mechanism for petroleum products, which had only been introduced in June as a critical step in liberalizing the petroleum market, was suspended when its implementation became difficult in the face of rising international oil prices.
7. In 1997, the government launched a fiscal adjustment plan motivated by the need to restore budgetary discipline, generate the domestic primary surplus needed to reduce public borrowing, and lower inflation and interest rates. The plan succeeded in reducing the overall budget deficit on a commitment basis from 10.4 percent of GDP in 1996 to 8.6 percent in 1997, and the domestic primary balance improved from 0.3 percent of GDP in 1996 to 3.3 percent in 1997. Total expenditure declined in relation to GDP by 5.4 percentage points, largely in capital outlays where overruns had been concentrated in 1996. Tax revenue fell from 16.5 percent of GDP in 1996 to 14.9 percent in 1997, owing mainly to smaller collections of petroleum taxes and cocoa duties as a result of a decrease in export volume. The government has launched an effort (described below) to enhance the efficiency and buoyancy of the tax system by shifting its structure toward the taxation of consumption, which is expected to yield results in 1998.
8. After adjusting for the shortfall in required reserves, reserve money grew by 37.4 percent compared to 44.3 percent in 1996. Owing mainly to the recovery in domestic foodstuff production and slowdown in aggregate demand, inflation fell from 33 percent at the end of 1996 to 21 percent at the end of 1997.
9. The government's overall strategy is to inspire the confidence of investors and the public in liberal, market-oriented policies and further structural reforms aimed at securing a stable macroeconomic environment and increasing private investment, thereby creating jobs, increasing incomes, and reducing poverty. The program is designed to achieve by 2000 a reduction in inflation to low levels, an improvement in the balance of payments to raise reserves to at least 3 months of imports, and an increase in GDP growth to 5.8 percent, or at least 2.5 percent on a per capita basis. This will require an increase in gross fixed capital formation from 16.5 percent of GDP in 1997 to 19.2 percent in 2000, with the private portion more than doubling. Investment recovery will be supported by a projected increase in national saving of over 3 percentage points of GDP between 1997 and 2000. The emphasis on financial and structural policies to mobilize domestic savings reflects modest prospects for donor support in the medium term. Prudent wage policies and further liberalization of the trade regime will enhance Ghana's international competitiveness and attract foreign investment. Critical to achieving these objectives are financial policies and structural reforms aimed at reducing inflation to single-digit levels as well as the government's involvement in economic activities that can be better handled by the private sector.
10. The government recognizes that higher rates of economic growth can be achieved in the medium term by restoring financial discipline and bringing inflation under control quickly. To this end, the domestic primary surplus will be increased and monetary policies will be tightened. This will help lower interest rates, reducing domestic interest payments, increasing public savings, and reducing crowding out.
11. The government's strategy is to generate the savings needed to achieve significant primary surpluses, which, in turn, support external current account objectives. The overall budget deficit on a commitment basis is projected to decline from its estimated level of 8.6 percent of GDP in 1997 to less than 4 percent in 2000. The macroeconomic framework targets the domestic primary balance to improve to 4 percent of GDP in 2000. The improvement in the primary balance will be supported by tax and expenditure reforms.
12. Tax revenues are projected to increase by at least 1.3 percentage points of GDP from 1997 to 2000. A substantial part of this increase comes from greater reliance on taxation of consumption, mainly through the implementation of the VAT. The VAT was passed into law on February 17, 1998, but with a standard rate of 10 percent rather than 15 percent as proposed by the government. In response to the implied revenue loss, the government, reflecting its commitment to fiscal discipline, intends to implement compensatory revenue measures.
13. Tax collection in general will be improved through reform of the tax administration. Specifically, the adoption of a single, unique taxpayer identification number in conjunction with the implementation of the VAT, along with improvements in collection procedures, audit practices, and the organization of the tax administration, are expected to enhance taxpayer compliance. In addition, ad valorem excise duties will be applied to petroleum products so that changes in the international oil price and the exchange rate will be automatically passed through to retail prices. Measures will be taken to improve incentives for private savings and investment through adjustment of income tax brackets for inflation and harmonization of the withholding tax on dividends and interest.
14. In 1998, measures will be taken to improve the import tax structure, which include continuing the cutback in exemptions initiated in 1997, shifting a significant number of zero-rated items to a positive duty rate, and requiring parliamentary approval to grant customs exemptions.1 The reduction in zero-rating made it necessary to introduce a new tariff rate of 5 percent, in addition to the existing rates of 10 percent and 25 percent. Although this contributes to reducing tariff rate dispersion, reduction of the top rate will be considered in the medium-term to further reduce dispersion. In addition to these measures, revenue collection in 1998 will benefit from the full-year effect of measures taken in 1997, in particular the extension of the services tax and the cutback in tax and customs exemptions. As a result, the effective import duty rate is expected to rise to 8.6 percent in 1998 from 8 percent in 1997, which will contribute to a projected increase in international trade tax revenue of 0.8 percentage point of GDP from 1997 to 2000. Taxation of cocoa exports is expected to be reduced in conjunction with the gradual increase in the share of the international price received by farmers.
15. The program seeks to improve the quality and sectoral allocation of public spending, as well as strengthening budget management. To this end, the government will implement a three-year rolling Medium-Term Expenditure Framework (MTEF), the formulation of which was financed by the U.K. Department for International Development with technical assistance from the World Bank, as the appropriate mechanism for rationalizing both recurrent and capital expenditures over the medium term. The MTEF will incorporate the government's public investment program and will concentrate on completing ongoing projects and undertaking new projects with rates of return in excess of 15 percent, maximizing the leveraging of donor funds, and ensuring that recurrent costs can be met within the budget. Priority sectors for investment are infrastructure, health, and education.
16. To meet the program's overall budgetary targets, total expenditure will be lowered by about 3.4 percent of GDP from 1997 to 2000. This decline will result mainly from a significant fall in domestic interest payments as the result of lower borrowing requirements and interest rates, and a projected decline in foreign-financed projects in 1999 and beyond. Domestic capital expenditures are projected to rebound in 1998 and 1999 from low levels in 1997.
17. Although the domestic primary surplus will improve to 3.3 percent of GDP in 1997, the government's domestic borrowing was 5.2 percent of GDP owing to large external amortization payments that exceeded program loans and high real treasury bill rates. In 1998, the domestic primary surplus is projected to improve further to nearly 4 percent of GDP, which, along with an expected decline in external amortization payments, is expected to result in a reduction in domestic financing.
18. The main objective of monetary policy is to consolidate and extend the progress made thus far in reducing inflation. In 1997, monetary policy continued to be dominated by the government's large financing requirements, with broad money increasing by an estimated 41 percent. In 1998, reflecting the projected lower domestic financing needs of the government, broad money is expected to grow by 18 percent and by 11-12 percent thereafter. Thus, the average inflation rate is expected to decline from 28 percent in 1997 to 16 and 8 percent in 1998 and 1999, respectively.
19. The Bank of Ghana (BOG) applied a uniform reserve requirement of 8 percent to all deposits (cedi and foreign currency deposits) as of March 27, 1997. This action has resulted in uniform treatment of foreign currency and cedi deposits, and effectively has tightened overall reserve requirements. Reserve money growth is projected to decline to 17 percent in 1998.
20. In early 1996, the BOG discontinued its practice of issuing treasury bills in retail auctions and, in 1997, discontinued its practice of tap sales for small investors. Government paper is instead being issued in wholesale auctions and the BOG is developing a network of primary dealers. After sufficient preparation, namely the introduction of a centralized book entry system in 1998, the BOG will implement its liquidity operations mainly through short-term repurchase agreements with these dealers. This will not only improve the effectiveness of the BOG's operations, but also stabilize the auctions of government paper.
21. The soundness of the banking system was adversely affected in late 1996 and early 1997 by the emergence of bad debts linked to a case of check fraud of a magnitude in the range of 0.6-1.0 percent of GDP. Although the largest bank in Ghana, the Ghana Commercial Bank (GCB), had sufficient provisions in its balance sheet to withstand the losses from these bad debts, the two small banks affected by this case are to be absorbed by sound financial institutions. The BOG took measures to help recover some of the bad debts and to safeguard the soundness of the banking system by significantly strengthening its banking supervision department. As a result, a budgetary burden is not expected to arise.
22. Ghana's external situation is projected to remain vulnerable owing to relatively small cocoa crops, depressed gold prices, and reduced grants from bilateral donors. In 1997, tight financial policies have stemmed a further deterioration in the external accounts. The current account deficit including official transfers is targeted to improve gradually to about 4.5 percent of GDP over the next three years. Gross international reserves declined to the equivalent of about 2 months of imports at the end of 1997, but are targeted to improve steadily to more comfortable levels through 2000. Adherence to the program's fiscal and monetary targets should permit the exchange rate to stabilize at a level that will help preserve Ghana's external competitiveness.
23. Ghana maintains some capital account restrictions. In general, all outgoing capital movements need approval from the BOG, loans and overdraft facilities to resident companies controlled by nonresidents require approval of the BOG, and regulations stipulate that private sector and commercial bank borrowing abroad should be approved by the BOG. Capital account liberalization in the medium term requires consideration of the strength and capacity of the commercial banking system to handle additional inflows of foreign exchange, the BOG's ability to monitor and supervise the open positions of the commercial banks, and the strength of the balance of payments position.
24. Ghana's debt burden increased in 1996 by almost US$150 million due to nonconcessional borrowing, resulting in a deterioration of debt indicators. Ghana's external debt service is projected to rise further, as a result of recent nonconcessional borrowing and the need to settle deferred payments to Paris Club creditors. Nevertheless, provided that no public or publicly guaranteed external borrowing is undertaken on nonconcessional terms, even in the short term, and strictly adhering to tight financial policies, Ghana's debt service is projected to decline from 27 percent of exports of goods and nonfactor services in 1996 to 25 percent by the year 2000 without rescheduling. Further, the net present value of debt relative to exports, which stood at 250 percent at the end of 1996, is projected to fall throughout this period. Thus, Ghana's external debt burden is sustainable and its debt capacity can withstand modest external shocks.
25. External financing requirements over the 1998-99 period would total about US$1.6 billion. Concessional assistance pledged by donors at the Consultative Group meeting in November 1997 together with World Bank disbursements are expected to cover Ghana's financing requirements in 1998-99.
26.The central focus of the structural and sectoral policies—as articulated in the Government's document "Ghana: Vision 2020"—is to reduce poverty through an acceleration of economic growth, investment in human resources, and the implementation of direct poverty alleviation measures. The government's long-term vision of accelerated growth is predicated on a breakthrough in private investment. But private investment and sustainable growth will require improvements in complementary government operations—in particular, better delivery of public services. While these will provide the overall environment for growth and poverty reduction, specific sectoral and structural policies for promoting private sector activity, improving agriculture and the environment, strengthening infrastructure, and developing human resources will be necessary to promote higher private investment and more rapid growth and poverty reduction.
27. The government has continued implementing significant structural reforms to promote the private sector. The dialogue between the public and private has been broadened, and foreign investment promotions launched. In addition, the government has made progress in reforming the regulatory framework, accelerating the divestiture program, and liberalizing the financial sector and petroleum sector.
28. Regulatory Framework. Significant legislation to provide the framework for private sector participation in the economy was enacted: a very liberal Investment Act (with automatic approval of investments) was approved in 1994; the "Free Zone"Act (to attract direct foreign investment into sites with good infrastructure) was passed in 1995; the Statutory Corporations Act (to provide for the conversion of public corporations into companies in preparation for privatization) was passed in 1995; and the National Communications Act (permitting liberal entry of the private sector into the telecommunications sector) was approved in 1996. These legislative developments contribute to a clearer definition and enforcement of property rights, and deterrence of abuse of authority, providing a more transparent structure for contract enforcement. The government will continue to enlarge the scope for private sector activity by laying down the regulatory framework for private participation particularly in other infrastructure sectors, such as power generation and distribution, rails, ports, and large urban water supply systems.
29. Accelerated Divestiture. An acceleration and expansion of the divestiture program lies at the core of the government's efforts to establish a climate conducive to private investment. During 1993-97, the government divested a total of 48 state-owned enterprises from a pre-determined divestiture list of 110. Of the large and strategic enterprises, the government divested 30 percent of its shares in Ghana Telecom in late 1996. During 1998, the government will offer for sale at least another 20 of the remaining small and medium-sized enterprises from the list and will have completed privatization for at least two of the following large and strategic enterprises: the State Insurance Corporation, the State Housing Corporation, and Mim Timber.
30. Financial Liberalization. The government has also sought enhanced competition in commercial banking through a program of divestiture of publicly-owned commercial banks—the Social Security Bank (SSB) and the Ghana Commercial Bank (GCB).2 Majority share holdings in SSB passed into private hands in 1996 with foreign strategic investors obtaining management control. Forty-two percent of the shares of GCB were divested through a public offering in 1996 and negotiations with a strategic investor were conducted in 1997. Negotiations could not be concluded due to complications arising from Bank of England regulations governing the sale of the London branch of GCB. Financial sector reforms will continue in 1998 with the divestiture of the National Investment Bank, the State Insurance Corporation, and the Reinsurance Corporation. Overall banking supervision will be strengthened throughout the medium-term in order to safeguard the soundness of the banking system.
31. Petroleum Deregulation. In response to problems in the petroleum sector, the government initiated a program of deregulation. Under this program, the government removed in mid-1996 GNPC's monopoly over the importation of crude oil and adopted a system of open bidding for oil procurement contracts. A formula was adopted to allow retail prices to fully and automatically reflect international price and exchange rate changes but was not applied consistently in 1996 due to sensitivity over the impact of petroleum price increases and the risk of reopening wage negotiations.
32. The authorities have renewed their commitment to continued deregulation of the sector and the following measures are planned. First, the government reinstated a system of automatic price adjustment for petroleum products in early 1997. The formula includes an ad valorem tax component and applies import parity pricing, and will result in the decontrol of ex-depot petroleum prices subject to safety and competition standards. Second, GNPC operations will be restructured in order to confine the company to hydrocarbon and energy-related activities. GNPC assets unrelated to its primary functions will be liquidated and corresponding outstanding debts repaid. A timetable for the repayment of GNPC debt to the Bank of Ghana has been agreed upon and the debt will be fully repaid by April 1998. Third, during 1998, the Tema Oil Refinery's (TOR) and the Ghana Oil Company will be offered for sale. The operations of TOR will be fully exposed to competition after 1998, which will complete the liberalization of the import of petroleum products.
Rationalizing government operations
33. The government plans to adopt measures to introduce public service reforms, improve public expenditure management, and implement revenue reforms.
34. Public Service Reforms. Reforming the public service to achieve greater efficiency and a sustainable wage bill is essential for fiscal stability, higher private investment, and efficient delivery of social services. This reform has been on the government's agenda under the National Institutional Reform Program (NIRP) since 1994 and a participatory process of self-appraisals and beneficiary assessments has fostered a national debate and discussion of the issues, but a program of reform measures is yet to be formulated. Without formulation and implementation of such a program, cycles of real wage erosion and real wage catch-up are likely to continue, thereby making it difficult for the service to recruit and retain skilled staff.
35. In recognition of this problem, the government announced in the Budget of 1998 plans to rationalize the regulatory regime for subvented agencies and specific measures to rationalize the size and structure of the public service. These include measures to reorganize the functions of the civil service and subvented organizations, reduce staffing levels, rationalize hiring practices, and raise relative pay in favor of managerial staff.
36. Public expenditure management. The government has also initiated steps to improve the management of public expenditures under its Public Financial Management Reform Program (PUFMARP) which was launched in July 1995 and is being supported by the World Bank, the IMF, and donors. Critical elements of the program are the introduction of a medium-term expenditure framework (MTEF) as the basis for annual budgeting and a new computer-based budget and public expenditure management system (BPEMS). The BPEMS will revamp government accounting through the adoption of a unified chart of accounts, the reinforcement of commitment accounting, improvements in the recording of payments, and reconciliation on a regular basis of the cash position of the budget with bank statements. The MTEF will be launched in 1998. The design of BPEMS has been completed and the invitations to tender for the software have been sent out. Phased implementation will begin in 1998 with the start of software customization, testing, and the training of staff as part of the transition plan to the new system. The new BPEMS is expected to be fully operational for the budget cycle for calendar year 2000.
37. Tax administration. In additional to the implementation of VAT, the government will strengthen and modernize tax administration as part of its revenue reform program. Currently, coordination among the revenue agencies is difficult as the Internal Revenue Service (IRS), and the Customs, Excise and Preventive Services (CEPS) function as separate subvented agencies with their own Board of Directors, and report directly to the Minister of Finance. In addition, a National Revenue Secretariat (NRS) exists in the Ministry of Finance with responsibility for revenue coordination and policy making. The government intends to establish a central revenue authority by June 1998 to provide for improved coordination among the various tax agencies. The central revenue authority will have a strong head office with responsibility for the administration of the taxpayer identification number system, monitoring the collection and audit activities of the revenue agencies, developing effective cooperation among the agencies, designing and implementing uniform personnel policies, and implementing an effective internal audit system. The introduction of a unique and uniform taxpayer identification number system from 1998 will be an effective tool for improved taxpayer compliance and inter-agency coordination.
Improving agriculture and the environment
38. Ghana's program of accelerated growth depends critically on faster agricultural growth, especially in agricultural exports. Over the past decade, agricultural output has risen by an average of only 2 percent a year. A new agriculture growth strategy has been developed which places particular emphasis on rural infrastructure (especially safe water, village and feeder roads, post-harvest facilities, and electricity), improving access to technology for sustainable natural resource management, enhancing human resources and institutional capacity, providing food security, and jump-starting private investment in agricultural exports.
39. Cocoa Liberalization. There remains an important structural constraint on agriculture: high taxation of cocoa production and state control over cocoa marketing. Cocoa farmers obtained during the 1996-97 crop season about 52 percent of the world price of cocoa, with 29 percent going to the government as tax revenues and the remaining 14 percent being absorbed by the Cocoa Board. For the 1997/98 crop season, the government increased the farmers' share to 54 percent of the f.o.b. price. Cocoa export is the sole monopoly of the Cocoa Marketing Company (the external arm of Cocoa Board). Domestic purchases of cocoa also used to be a state monopoly before 1993 when private participation in the internal market was permitted. After four years of domestic liberalization, about 30 percent of total crop is now procured by the private sector.
40. The original program called for the removal of Cocoa Board's monopoly over crop exports. However, a 1996 independent study by UK-based LMC International, which was commissioned by the government and financed under a World Bank credit, recommended the continuation of the state monopoly of cocoa exports. This recommendation is based on the perception that removal of the export monopoly carries risks for quality control, reliability of deliveries, forward sales, and the predictability of export proceeds and taxes. The government will nevertheless reassess options for eliminating the Cocoa Board's export monopoly once the privatization of domestic marketing is completed.
41. However, through further rationalization of the operations of the Cocoa Board and the reduction in export taxation, the farmers' share in the f.o.b. price of cocoa will be raised to 60 percent for the 2000-01 crop season. Over this period, the Cocoa Board's share of the f.o.b. price will be reduced by at least one-half of the increase in the share of the farmers. The operational savings will come primarily through efficiency gains from the privatization of the Produce Buying Company (the domestic arm of the Cocoa Board).
42. Environmental Management. Ghana was among the first countries in Africa to draw up a comprehensive National Environmental Action Plan. The Environmental Protection Agency (EPA) was formed to monitor developments and policies, including those governing wildlife, forest areas, and mining activities. However, the agency is under-funded and needs to be strengthened to become more effective in a number of areas, such as enforcement of environmental laws, monitoring and analysis, and waste management activities. Two critical areas for environmental action are land degradation and water resource management.
43. In recognition of the deteriorating quality of water, the government passed in 1996 a Water Resources Act which has set up the institutional and regulatory framework for water management. A Water Resource Management Study is currently underway with donor support which will lead to recommendations for an integrated program of water management including further capacity building measures especially at the local level. Deforestation rates have fallen in the 1990s relative to the 1980s and the government is committed to conserving and sustaining its forest resources through an extensive system of protected areas and a newly developed National Forest Protection Strategy. The private sector will be increasingly required to bear the cost of the forest depletion through an increase in stumpage fees. Extension services are also being strengthened to implement soil fertility programs.
44. The government's strategy in infrastructure is to co-opt private participation in the expansion and maintenance of the nation's infrastructure in most sub-sectors. This is seen as necessary to reduce costs, improve the quality, and overcome the financial constraint on investments. In the telecommunications sector, the government has moved the farthest through the enactment of the 1996 National Communications Act which set the basis for the divestiture of 30 percent of Government shares in Ghana Telecom to an international consortium led by Telekom Malaysia, and the grant of license for a second national network to another international consortium, African Communications Group.
45. In the area of power generation and distribution, a bill setting out the regulatory framework for private participation was submitted to Parliament in late 1997. The Government also set up, with Parliamentary approval, a Public Utilities Regulatory Commission to deliberate on the appropriate levels of power tariffs for ensuring the sector's financial viability. After extensive public hearings, the commission recommended a modest increase in two steps (February and September 1998) that the government realizes will still leave the power utilities with operating deficits. These deficits will be covered by privatization of assets and domestic borrowing. The government will collaborate with the World Bank to formulate a plan for a transition to rates that restore the power sector's financial viability. The Government plans to proceed with the planned GNPC Tano Field and Power Development Project only if significant private equity participation is available. In rails and ports, the government's objective is to improve operational efficiency and financial viability. To that end, the government will seek private participation (for example, a concessional arrangement), which will take into consideration the specific conditions of the Ghanaian transport market. In large urban water supply systems, too, the Government will seek private participation.
46. However, in some sub-sectors, public provision will continue to dominate. This is particularly true for the maintenance, rehabilitation, and upgrading of the road network where a five-year Highway Sector Investment Program, supported by several donors, was started in 1995 at a total cost of over US$1 billion. The Road Fund, established in 1985, was reformed through legislation in September 1997 to render it autonomous and provide it with revenues designated to cover all basic road maintenance. Similarly, the legislation governing the Ghana Highway Authority is under revision, so that by early 1998, both financing and implementation of road maintenance will be on a stable footing.
47. Public funds will also be directed to investments in basic rural infrastructure such as rural water supply, small-scale irrigation, village roads, post-harvest facilities (including storage and marketing), and rural telecommunications as both residual financing and a catalyst for private investments. But the government will seek to increase the efficiency of public spending, raise the share of infrastructure public expenditures that are targeted to low-income areas, and ensure the sustainability of these investments through community participation and, where possible, cost recovery. In roads, the government will seek to increase private participation in the management and maintenance of the existing road network, which complements the ongoing reform of road maintenance financing.
48. Broad-based social development is critical to faster growth and a better quality of life for all Ghanaians. Two-thirds of Ghana's poor live in rural areas and most have little access to basic social services, wider access to which is a pre-condition for broad-based growth. The government's strategy for social development, therefore, focuses on increasing the efficiency and targeting of public social spending.
49. To that end, the government has increased budgetary allocations for services consumed by the poor and which promote service quality enhancements—primary health care, basic education, and rural infrastructure. Nonwage expenditures in these sectors increased in real terms over 1994-96 by 288 percent, 103 percent, and 266 percent respectively. In both health and education, the government has adopted medium-term strategies focusing on primary health services and on free and compulsory basic education. This has already been translated in a Health Sector Investment Program and a Basic Education Sector Improvement Program supported by several donors.
50. The quality and timeliness of reporting of core economic statistics will be improved. The government is undertaking steps to facilitate provision of fiscal data. This includes strengthening the Policy Analysis Division in the Ministry of Finance, the Office of the Accountant General, and the Ghana Statistical Service. An important step in improving statistical reporting is the completion of a compilation of domestic payment arrears, outstanding government loans, and loans guaranteed by the government and the BOG. The government is committed to addressing a wide range of weaknesses in statistics, including the lack of timely data on the national income accounts, inadequate data on public enterprises, and a lack of data on the labor market. This will be done with technical assistance from a number of bilateral agencies and the Fund.
51. Ghana's program of macroeconomic adjustment and structural and sectoral reforms will be supported by technical assistance from the World Bank, IMF, and several bilateral and multilateral agencies.
52. The World Bank will assist the authorities in the following areas: implementation of an expenditure control system; reevaluation of spending priorities in the social sectors; development of a public service restructuring plan, including identifying areas for downsizing of functions and employment, and specifying structural benchmarks; implementation of the VAT; banking supervision; divestiture and privatization of parastatals; concessioning of rail transport services and reform of the road network management and maintenance.
53. The Fund will provide the following technical assistance: review monetary statistics and the database management system of the BOG; assistance with improving the BOG's banking supervision capacity—including a resident advisor—and developing the indirect monetary control system of the BOG, including the introduction of a book entry system; review of progress on the implementation of the VAT and general reform of the tax structure and tax administration; and assistance with measures to improve the timeliness and quality of statistics.
1In 1995, zero-rated and exempted items comprised about 60 percent of total imports. Exemptions to attract foreign investment, especially in the mining sector and in the context of regional integration, contribute the bulk.
2This is part of the second phase of financial sector reforms: under the first phase, completed in 1990, most of the nonperforming assets of commercial banks were taken over by the Government. Since then, the Bank of Ghana has enforced strict prudential regulations which significantly improved the soundness of the financial sector.