Press Release No. 06/126

Press Release: IMF Executive Board Completes Fourth and Fifth Reviews Under Ghana's PRGF Arrangement and Approves US$77.9 Million Disbursement

June 12, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the fourth and fifth reviews of Ghana's economic performance under a Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the reviews makes available to Ghana two loan disbursements in a total amount equivalent to SDR 52.7 million (about US$77.9 million) under the arrangement.

The Executive Board also approved Ghana's request for waivers for the nonobservance of two quantitative performance criteria and one structural performance criterion, 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.

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$272.8 million). So far, Ghana has drawn SDR 105.4 million (about US$155.8 million) under the arrangement.

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

"The Ghanaian authorities are to be commended for the continued improvement in macroeconomic policies, which have set the base for stronger growth, a decline in inflation, a lower debt burden, and a strengthened external position. Encouraging progress is being made towards achieving the Millennium Development Goals.

"The authorities made considerable progress toward their objective of reducing domestic debt, owing in large part to moderate fiscal policies in 2005. While lower than expected revenue and grants in the first half of 2005 led to some fiscal slippage, this was largely corrected in the second half of the year. In addition, control and monitoring improvements have helped contain the government wage bill and will likely yield lasting benefits in fiscal control. Looking ahead, it will be critical to resist pressures to relax the prudent fiscal policy stance.

"Monetary policy has remained firm and inflation expectations appear benign thanks to the strengthened credibility of the central bank. The reduction in secondary reserve requirements for banks, together with lower interest rates and structural reforms in the financial sector, should encourage growth of private sector credit. However, there should be vigilance in monitoring inflationary pressures, lagged reactions of the monetary aggregates to the new framework, and the quality of banks' portfolios.

"The authorities' progress on structural reforms has contributed to an acceleration of private-sector led growth, while enhanced monitoring and managerial changes have supported the performance of many public enterprises. Continued emphasis on cost-recovery pricing should further improve the profitability of public enterprises and reduce quasi-fiscal activities. The cost and availability of capital remains an important impediment to private sector productive activity, and continued macroeconomic stability and the implementation of the government's Financial Sector Strategic Plan should help strengthen the financial sector. Progress on the ongoing civil service reform is welcome and will establish well-structured pay scales that will help retain qualified personnel, enhance the efficiency of development spending, and improve public service delivery.

"The managed floating exchange rate has served Ghana well as a buffer against external shocks. Allowing greater flexibility of the exchange rate in the face of strong foreign inflows would support further disinflation, while competitiveness concerns should be addressed through measures to enhance productivity.

"Debt relief under the enhanced HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI) has led to a substantial improvement in Ghana's debt service indicators, and now allows the authorities to increase expenditure in accordance with their poverty reduction strategy. As the government's economic strategy is now focused on accelerating growth through the preparation and implementation of an ambitious investment plan, it will be critical not to jeopardize Ghana's debt sustainability. Accordingly, Ghana should continue to rely on concessional development financing," 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 that are adopted in a participatory process involving civil society and development partners and articulated in the Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are 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 5½-year grace period on principal payments.