Press Release No. 05/145

Press Release: IMF Executive Board Completes Third Review Under Ghana's PRGF Arrangement and Approves US$38.7 Million Disbursement

June 21, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the third review of Ghana's economic performance under a Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review makes immediately available to Ghana an amount equivalent to SDR 26.4 million (about US$38.7 million) under the arrangement.

Ghana's three-year PRGF arrangement was approved on May 9, 2003 (See Press Release No. 03/66) for SDR 184.5 million (about US$271.3 million). So far, Ghana has drawn SDR 79.1 million (about US$116.2 million) under the arrangement.

In completing the review, the Executive Board also decided to extend the current PRGF arrangement to October 31, 2006 so that the sixth and final review and all disbursements under the arrangement could be completed. It also decided to waive the nonobservance of three quantitative and one structural performance criteria, as the authorities have since reviewed the factors that contributed to their nonobservance, and have put measures in place to ensure that they achieve the original program objectives.

Following the Executive Board's discussion on Ghana's request, on June 20, 2005, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Economic performance continued to strengthen in Ghana during 2004, with growth exceeding earlier projections and a further buildup in gross international reserves. Strengthened policy implementation helped consolidate macroeconomic stability, supported by favorable external factors including higher-than-expected inflows from donors. Inflation declined by half at the end of 2004, but the recent deregulation of petroleum product prices has led to a jump during the first quarter of this year.

"The execution of fiscal policy improved in 2004, although there were some slippages. Total revenue relative to GDP reached its highest level yet, although this was not enough to offset unanticipated capital outlays, the increased subsidy for petroleum products as world oil prices rose, and an overrun in government wages. Consequently, the overall budget deficit narrowed but was still above the target for the year. Faster GDP growth helped reduce the ratio of domestic debt to GDP, which is the anchor of the fiscal strategy.

"Monetary policy has remained firm, contributing to the decline of inflation during 2004. The central bank is to be commended for managing significant inflows in a manner that balances monetary expansion and competitiveness. Also, the recent rapid buildup of gross international reserves provides an important cushion against shocks.

"Structural reform has progressed, thereby enhancing the environment for private sector-led growth. Efforts to strengthen public expenditure and financial management are helping to improve the transparency, accountability, and efficiency of the use of public resources. Regulatory and legislative changes and macroeconomic stability have helped strengthen the financial sector. The reform of public enterprises is ongoing, with full cost recovery for public utilities.

"The government's decision to deregulate the petroleum sector and the adoption of a new petroleum product pricing mechanism earlier this year were important achievements. The establishment of an oversight body to monitor the application of the mechanism is also welcome, as this will ensure fair pricing and provide safeguards against anti-competitive behavior. These measures will remove government involvement in product pricing, reduce the vulnerability of the budget to world oil prices, and free up resources for growth enhancing and poverty reducing expenditures. It will be important to ensure the automatic adjustment of petroleum prices under the new mechanism.

"The reform of the civil service is also welcome. While this initiative is primarily aimed at improving the delivery of public services, it should also lead to prospective fiscal savings, in particular, through a reduction of civil service wages relative to GDP. The demand for these savings to fund priority expenditures is very high.

"Debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative has led to a substantial improvement in Ghana's debt-service indicators. Ghana's long-term debt sustainability is vulnerable, however, to a sustained deterioration in key economic variables, and most importantly, to a significant reduction in grants as a source of financing. Until conditions are more favorable and a longer track record of good macroeconomic performance is established, Ghana should continue to rely on concessional borrowing to finance development," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.