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Country Report

Ghana

July 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Ghana at a glance: 2004-05

OVERVIEWThe president, John Agyekum Kufuor, and the ruling New Patriotic Party (NPP)are expected to be re-elected at December polls, which will be fought mainlyon the performance of the economy. Spending will increase ahead of theelections, but not by enough to jeopardise relations with donors. Strong goldproduction and higher cocoa output will lift real GDP growth to 5.4% in 2004.Real GDP growth will slow to 4.9% in 2005, assuming that weather conditionsfor the cocoa crop return to normal. Average inflation is forecast to fall to 13% in2004, owing to tighter monetary policy, before rising to 16.5% in 2005, aspetroleum prices are increased. The current account is forecast to move into adeficit of 0.8% of GDP in 2004, widening to 4.6% of GDP in 2005 as importsand services debits increase.

Key changes from last month

Political outlook• The National Reconciliation Commission concluded its hearings on July 13th

and will submit its report by October 14th. Should its conclusions be seen asparticularly partisan, this may lead to greater political instability ahead of theelections.

Economic policy outlook• The IMF has approved a new disbursement under Ghana's poverty

reduction and growth facility (PRGF), despite some policy slippage. In theshort term, the government's main policy objective is to ensure thatexpenditure is maintained within agreed targets ahead of the elections.

Economic forecast• The revised policy commitments agreed with the IMF give a clear indication

of the timing of inflationary price rises. There will be a 2.5 percentage-pointincrease in value-added tax in August to fund the National Health InsuranceScheme. Petroleum prices are to be lifted to a cost-recovery level in February.Combined with higher than expected rises in food price inflation so far thisyear, these factors have caused the Economist Intelligence Unit to increase itsforecast for average inflation to 13% in 2004 and 16.5% in 2005 (from 11.5%and 14.2%, respectively).

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Ghana 1

Country Report July 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

Ghana

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic policy outlook10 Economic forecast

13 The political scene

18 Economic policy

23 The domestic economy23 Economic trends25 Agriculture26 Mining26 Energy27 Finance

29 Foreign trade and payments

List of tables10 International assumptions summary12 Forecast summary18 Revised electoral register19 Recent lending agreements with the IMF22 Revenue performance, 1 Qtr 200423 Expenditure performance, 1 Qtr 200423 Inflation, Jan-May 2004

List of figures

13 Gross domestic product13 Consumer price inflation24 Inflation28 Ghana Stock Exchange all-share index

Ghana 3


GhanaJuly 2004

Summary

The president, John Agyekum Kufuor, and the ruling New Patriotic Party (NPP)are expected to be re-elected at December polls, which will be fought mainlyon the economy. Spending will increase ahead of the elections, but not byenough to jeopardise relations with donors. Strong gold production and highercocoa output will lift real GDP growth to 5.4% in 2004. Real GDP growth willslow to 4.9% in 2005, assuming that weather conditions for the cocoa cropreturn to normal. Average inflation is forecast to fall to 13% in 2004, owing totighter monetary policy, before rising to 16.5% in 2005, as petroleum prices areincreased. The current account is forecast to move into a deficit of 0.8% of GDPin 2004, widening to 4.6% of GDP in 2005, as imports and services debits rise.

Hearings at the National Reconciliation Commission (NRC) have ended. Priorto this, a key figure in one of the country's military administrations hadreturned to the NRC to cross-examine some of his accusers. The governmenthas set up another committee to attempt to resolve the Dagbon dispute. TheNPP convincingly retained the Upper Denkyira seat in a parliamentary by-election. Donors have prevented the government from contracting acontroversial loan.

The IMF has approved a US$39m disbursement under Ghana's povertyreduction and growth facility, but only after the government agreed to keepexpenditure within agreed targets ahead of the election. The government hasfailed to implement agreed rises in petroleum prices. Fiscal performance wasbetter than budgeted in the first quarter, as greater trade volumes boosted taxrevenue and spending on capital projects was reduced.

Rising food prices lifted year-on-year inflation to 11.2% in May. Strong inflows ofexport revenue and remittances have continued to support the cedi. Thedomestic debt stock has risen after declining for seven months. Anotherbumper cocoa crop is estimated for crop year 2003/04 (October-September).The IMF has criticised the government's intention to purchase Valco. Newreforms have been announced to encourage commercial bank lending.

Ghana has reached completion point under the IMF-World Bank's heavilyindebted poor countries (HIPC) debt-relief initiative. With the World Bank,Ghana's largest creditor, only gradually writing off debt, this is unlikely to havea large immediate impact on the external debt stock. According to new data,new disbursements lifted total external debt to US$7.3bn at end-2002.

Editors: Paul Gamble (editor); David Cowan (consulting editor)Editorial closing date: July 20th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Ghana


Political structure

Republic of Ghana

Unitary republic

A new constitution, based on the US model, was approved by referendum in April 1992

Parliament; 200 members elected by universal suffrage every four years

December 2000 (presidential and parliamentary); next elections due in December 2004

President, elected by universal suffrage for a maximum of two four-year terms;John Agyekum Kufuor was sworn in on January 7th 2001 for the first time

Cabinet, appointed by the president in January 2001; last reshuffle in April 2003

New Patriotic Party (NPP), the ruling party; National Democratic Congress (NDC), themain opposition party; other parties include People’s National Convention (PNC),Convention People’s Party (CPP), United Ghana Movement (UGM) and NationalReform Party (NRP)

President John Agyekum KufuorVice-president Aliu Mahama

Agriculture Courage QuashigahAttorney-general & justice Papa Owusu-AnkomahDefence Kwame Addo KufuorEducation, youth & sports Kwadwo Baah-WireduEnergy Paa Kwesi NduomEnvironment, science & technology Kasim KasangaFinance & economic planning Yaw Osafo-MaafoForeign affairs Nana Akufo-AddoHealth Kweku AfriyieInformation Nana AkomeaInterior Hackman Owusu-AgyemanLands & forestry Dominic FobihLocal government Kwadwo Adjei-DarkoManpower development & employment Yaw BarimahMines Cecilia BannermannParliamentary affairs Felix Owusu-AdjapongPrivate-sector development Kwamena BartelsPublic-sector reform John Henry MensahRegional co-operation & Nepad Kofi AprakuRoads & highways Richard W AnaneTourism Jake Obetsebi-LampteyTrade, industry & presidential initiatives Alan KyerematenWomen & children’s affairs Gladys AsmahWorks & housing Mustapha Idris Ali

Paul Amoako Acquah

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Key ministers

Central bank governor

Ghana 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices (C bn) 20.6 27.2 38.1 48.9 65.2GDP (US$ bn) 7.7 5.0 5.3 6.2 7.5

Real GDP growth (%) 4.4 3.7 4.2 4.5 5.2Consumer price inflation (av; %) 12.4 25.2 32.9 14.8 26.7 a

Population (m) 19.2 19.6 20.0 20.5 20.9

Exports of goods fob (US$ m) 2,005.5 1,936.3 1,867.1 2,015.2 2,651.9Imports of goods fob (US$ m) 3,279.9 2,766.6 2,968.5 2,707.0 3,232.8

Current-account balance (US$ m) -964.4 -386.4 -324.6 -32.6 222.0Foreign-exchange reserves excl gold (US$ m) 453.8 232.1 298.2 539.7 1,352.8 a

Total external debt (US$ bn) 7.0 6.7 6.7 7.3 7.7

Debt-service ratio, paid (%) 17.7 15.8 10.1 6.5 8.2Exchange rate (av) C:US$ 2,669.3 5,455.1 7,170.8 7,932.7 8,677.4 a

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2002 % of totalAgriculture, forestry & fishing 33.8 Private consumption 82.7Industry 24.3 Government consumption 9.9

Manufacturing 9.0 Gross domestic investment 18.8Services 41.9 Exports of goods & services 45.2

Imports of goods & services -64.8

Principal exports 2003 US$ m Imports 2003 US$ mGold 830.1 Non-oil 2,406.4Cocoa beans & products 802.2 Oil 562.9

Timber & products 174.7

Main destinations of exports 2003a % of total Main origins of imports 2003a % of totalNetherlands 11.2 Nigeria 21.2UK 10.8 China 8.6

France 7.8 UK 6.7Germany 6.2 Côte d'Ivoire 5.8Italy 4.6 US 5.6

a Based on partners’ trade returns; subject to a wide margin of error.

6 Ghana


Quarterly indicators2002 2003 20042 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Central government finance (C bn)Revenue & grants 2,646.6 3,079.6 3,081.6 3,262.6 4,072.6 4,518.4 4,792.8 n/aExpenditure & net lending 3,438.8 3,271.5 3,782.0 3,204.6 5,099.4 4,918.8 5,758.4 n/aBalance -792.2 -191.9 -700.4 58.0 -1,026.8 -400.4 -965.6 n/a

PricesConsumer prices (Accra; 2000=100) 150.9 155.2 159.8 180.8 195.9 198.4 198.1 206.9Consumer prices (% change, year on year) 14.3 13.2 14.1 25.2 29.8 27.8 24.0 14.4

Financial indicatorsExchange rate C:US$ (av) 7,855.3 8,137.3 8,301.2 8,540.4 8,671.1 8,716.2 8,781.8 8,912.2Exchange rate C:US$ (end-period) 8,043.4 8,187.9 8,438.8 8,600.3 8,700.4 8,732.3 8,852.3 9,018.3Deposit rate (av; %) 14.8 15.4 16.5 13.8 13.9 15.0 14.6 14.1Discount rate (end-period; %) 24.5 24.5 24.5 27.5 27.5 26.0 21.5 20.0Treasury rate (av; %) 24.0 25.6 26.2 27.2 30.7 29.5 21.6 16.9M1 (end-period; C bn) 4,965.0 5,498.0 8,048.6 7,408.3 7,719.3 7,748.9 n/a n/aM1 (% change, year on year) 50.1 42.8 59.9 54.5 55.5 40.9 n/a n/aM2 (end-period; C bn) 10,901 11,891 14,991 14,790 15,690 16,158 n/a n/aM2 (% change, year on year) 43.1 40.2 48.9 39.8 43.9 35.9 n/a n/aGSE all-share index (end-period;1990-1993=100) 1,224 1,311 1,395 1,644 2,068 2,643 3,553 5,665

Sectoral trendsGold price, London (US$/fine oz) 312.78 314.24 323.0 352.1 346.8 363.3 391.9 408.5Cocoa beans price, New York & London

(US$/tonne ) 1,609.8 1,999.6 2,017.4 2,136.8 1,746.8 1,582.6 1,546.1 1,565.6Foreign trade (US$ m)a

Exports fob 511.5 440.6 542.8 565.1 650.5 574.0 772.9 n/a Cocoa beans 114.4 37.9 99.1 187.7 202.1 161.5 124.8 271.4 Gold 170.3 170.3 184.2 189.0 201.0 204.4 235.3 218.8Imports fob -655.9 -744.9 -660.0 -692.7 -801.8 -834.7 -903.6 n/aTrade balance -144.4 -304.4 -117.1 -127.7 -151.3 -260.7 -130.7 n/a

Foreign reserves (US$ m)Reserves excl gold (end-period) 287.3 370.0 539.7 510.2 788.3 906.2 1,352.8 1,255.9

a Balance of payments basis.

Sources: IMF, International Financial Statistics; Bank of Ghana, Quarterly Economic Bulletin; Statistical Bulletin; Standard & Poor's, Emerging Stock Markets Review.

Ghana 7


Outlook for 2004-05

Political outlook

Political activity will focus on the presidential and parliamentary elections,which are due in December 2004. The elections will be fought mainly on theperformance of the economy, with the ruling New Patriotic Party (NPP)claiming credit for macroeconomic stabilisation and for implementing anumber of crucial infrastructure projects, particularly the construction of majorroads. The National Democratic Congress (NDC), the main opposition party,will attempt to exploit the lack of a visible improvement in living standards.The president, John Agyekum Kufuor, has been selected to stand again for theNPP, while the NDC has selected John Atta Mills as its candidate. This meansthat the 2004 presidential election will be a re-run of the 2000 poll.

Popular disenchantment with the final years of the presidency of JerryRawlings, with whom Mr Atta Mills was (and remains) closely associated, costthe NDC the last election. These feelings are likely to linger. The NPP's by-election successes—it has won all seven contested since its election (gaining fourseats from the NDC)—also support the Economist Intelligence Unit's view thatvictory is likely for Mr Kufuor in 2004. The NDC appears to be aware that itsprospects for the election are not good and may attempt to exploit the NPP'sreputation as a party focused on the Ashanti region, which could raise ethnictension. It will also criticise the government for bowing to donor demands; forexample, for agreeing to end popular utility subsidies in early 2005 (eventhough these policies are in the country's long-term interest). Should the NPPmake inroads into NDC strongholds, there is a strong possibility that the NDCwill formally split after the election, with reformers such as the party chairman,Obed Asamoah, and the loser in the contest for the party's presidentialnomination, Kwesi Botchwey, breaking away. Policy is expected to be broadlyunchanged under a new NPP administration—many of the key economicpolicies have already been agreed with donors.

Much attention will be focused on the report of the National ReconciliationCommission (NRC), which conducted a judicial inquiry into wrongdoing byprevious military regimes, due for publication on October 14th. Although theNRC has been accepted in principle as a genuine vehicle for nationalreconciliation, some of its practices have undermined its independence andcredibility. In particular, the focus on Mr Rawlings and his former securityadvisor, Kojo Tsikata, has heightened the NPP's suspicions that the commissionis partisan and aims to undermine the party ahead of the elections. Should theNRC's report be viewed as highly biased, it may presage greater politicalinstability ahead of the elections.

As Mr Kufuor was re-elected chairman of the Economic Community of WestAfrican States for another year in December, and a Ghanaian, Mohammed IbnChambas, is the organisation's executive secretary, Ghana will play a leadingrole in regional affairs. In 2003 Mr Kufuor hosted talks on the crisis in Liberiaand he has continued to play an important role in trying to push ahead the

International relations

Domestic politics

8 Ghana


stalled political reconciliation in Côte d'Ivoire—a new effort will begin with asummit of Ivorian parties, West African states and UN representatives, which isto be held in Accra from July 29th. The Ghanaian government is expected tomaintain its neutrality and has committed peacekeeping forces to bothcountries, strengthening Ghana's international image. Members of the WestAfrican Monetary Zone have announced that a regional central bank will beestablished in Accra in 2005, but owing to divergences between the economiesof the member countries this is not expected to happen. Mr Kufuor willmaintain good relations with the West and will be a leading proponent of theNew Partnership for Africa's Development and of adherence to its underlyingprinciples, including good governance and peer review. (Ghana was the firstcountry to subject itself to peer review, and the report of the peer reviewcommittee is likely by mid-2005).

Economic policy outlook

Although relations between the government and donors have been tense inrecent months, the IMF approved a new disbursement under Ghana's three-year poverty reduction and growth facility (PRGF) in July. Recent strains werecaused by the government's failure to implement politically sensitive policies(such as utility-price hikes) ahead of the elections. A revised policy documentagreed by the Fund pushes most of these reforms in 2005. In the short-term, thegovernment's main goal is to prevent fiscal policy from going off-track ahead ofthe elections. This will be difficult. Previous governments have slipped on theimplementation of policies agreed with donors ahead of elections andalthough the NPP's re-election prospects are good, political expedience isdriving policymaking. The Economist Intelligence Unit thus forecasts thatspending will exceed agreed targets ahead of the polls. Although this will addto inflationary pressure, the effect will only be moderate, unlike thedestabilisation caused by excessive spending in previous election years.

Adherence to donor policy recommendations will improve after the elections.The priority will be to lift petroleum prices to cost-recovery level and introducean automatic adjustment formula that keeps them at this level. Thegovernment committed to doing this in February and any slippage will bebadly looked upon by donors. The PRGF also demands tough measures tostrengthen public-expenditure management and increase revenue in order toreduce the fiscal deficit and therefore allow the government to cut domesticdebt. Acceleration of the privatisation programme, the modernisation of thefinancial sector and the implementation of the Ghana poverty reductionstrategy (GPRS) are other important requirements. The GPRS is typical ofpoverty reduction strategies followed by African countries, prioritisinginfrastructure development, the modernisation of agriculture, ruraldevelopment, the improvement of social services (with particular emphasis onhealth and education), good governance and private-sector development. Thepoor capacity of the civil service, the approaching elections and difficulties inmobilising resources will limit progress in all these areas.

Policy trends

Ghana 9


The 2004 budget, announced on February 5th, projects a reduction in the fiscaldeficit to 1.7% of GDP, from 3.3% of GDP in 2003. This is based on boldassumptions for revenue growth (the rationale for which is not laid out in thebudget) and a freeze on public-sector pay in real terms. Fiscal policy has beenderailed ahead of previous elections and, as we are assuming that thegovernment is unlikely to adhere to its expenditure targets, this will occur againin 2004. In particular, in order to demonstrate its electoral commitment toimproving infrastructure, the government will increase capital spending andmay be tempted to start some projects before receiving the necessary donorfunding. Recent measures agreed with the IMF, including a downward revisionto the previously announced public-sector pay award, will prevent spendingfrom spiralling out of control. Nonetheless, the government will struggle toimplement the agreed cutbacks to compensate for the fiscal loss incurred fromnot removing the subsidy for petroleum prices. Although ongoing reforms willlead to an improvement in tax administration, and revenue from the gold andcocoa sectors will remain strong, the growth in tax receipts that occurred in2003 is unlikely to be repeated. As a result, we forecast that the fiscal deficitwill widen to 4.6% of GDP in 2004, owing to election-related expenditure andresistance to tax rises. The budget is consistent with the government'sagreement with the IMF to target net repayment of domestic debt equivalent to1.4% of GDP (revised from 2.2% owing to higher nominal GDP), but given ourforecast for the fiscal deficit we do not expect this to be achieved. The budgetprojects an increase in exceptional (in effect, donor) financing from C1.8trn(US$200m) in 2003 to C3trn (including a financing gap of C1.47trn), which willbe difficult to secure, particularly with agreed reforms going off track. Therefore,in 2004, we forecast a small accumulation of domestic debt, which stood atC16.2trn (23% of GDP) at the end of March 2004.

Fiscal discipline will improve in 2005, as the government moderatesexpenditure growth, resulting in a narrowing of the deficit to 3.2% of GDP.Revenue will be hit by a reduction in corporation tax—a measure announced inthe 2004 budget, but effective from 2005—although, in anticipation of this,companies are likely to attempt to shift their 2004 profits into that year. Taxrevenue from gold and cocoa producers is also expected to fall, owing to lowerinternational prices. However, should fiscal performance deteriorate as much aswe expect, the government could back down from implementing the reductionin corporation tax. With donor inflows unlikely to pick up substantially, afurther increase in domestic debt is expected in 2005.

The Bank of Ghana (BoG, the central bank) is expected to keep monetary policyrelatively tight in an attempt to reduce inflation. In the past, domestic interestrates have remained high because of inflationary pressure caused by thegovernment's high level of domestic borrowing. As this has not been the caserecently, the central bank has been able to reduce interest rates; the latest cut inthe prime rate (the rate at which the BoG lends to commercial banks), from 20%to 18.5%, came in May. The expected deterioration in the fiscal deficit in thesecond half of 2004, as the government steps up expenditure ahead of theelections, will force the administration to increase domestic borrowing.Although the central bank is concerned that high rates are constraining lending

Fiscal policy

Monetary policy

10 Ghana


to the private sector, it will respond to the inflationary risk of highergovernment spending by raising the prime rate. Improved fiscal discipline anda slowdown in underlying inflation (that is, excluding the projected utility-pricehikes) will allow rates to be eased in 2005. Pressure from the BoG will cause anarrowing of the differential between lending and deposit rates, but this islikely to remain over ten percentage points. Commercial banks have beenpushing for a reduction in their secondary reserve requirements, but the centralbank will proceed slowly with this, as it is concerned about its capacity to mopup the liquidity that such a move would generate. The BoG is expected to usethe lower inflation expected over the forecast period to attempt to lengthen thematurity profile of government debt in order to define a yield curve forfinancial markets, but it is likely to prove difficult to attract interest in issues thathave a greater maturity than one year.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.9 4.9 4.3OECD 1.6 2.1 3.5 2.8EU25 1.2 1.1 2.2 2.4Exchange rates¥:US$ 125.3 115.9 111.8 108.5US$:€ 0.945 1.132 1.202 1.293SDR:US$ 0.772 0.714 0.688 0.662Financial indicators¥ 2-month private bill rate 0.10 0.03 0.03 0.10US$ 3-month commercial paper rate 1.70 1.10 1.38 3.00Commodity pricesOil (Brent; US$/b) 25.0 28.8 33.5 26.0Cocoa (US cents/lb) 80.9 78.8 65.5 64.6Gold (US$/troy oz) 310.3 362.8 421.3 375.0Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 10.6 -0.7Industrial raw materials (% change in US$ terms) 2.2 12.7 18.8 -0.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is expanding at its most rapid pace for about 20 years. Weforecast that world GDP growth (on a purchasing power parity basis) willaccelerate from an estimated 3.9% in 2003 to an extremely strong 4.9% in 2004,before moderating to a still robust 4.3% in 2005. Nonetheless, owing to concernover the value of the US dollar and heightened geopolitical risk, the gold pricewill remain high, rising to an average of US$421.25/troy oz in 2004. Thesefactors should ease by 2005, causing the gold price to fall to an average ofUS$375/troy oz. Bumper production in West Africa, Asia and Latin America willcause cocoa prices to fall to an average of 65.5 US cents/lb in 2004 and 64.6 UScents/lb in 2005.

Developments in gold mining and a further improvement in the cocoa cropwill lift real GDP growth to 5.4% in 2004. The success of a South African

International assumptions

Economic growth

Ghana 11


company, AngloGold, in the bidding war for Ashanti Goldfields, Ghana's largestgold producer, will lead to a rise in investment, as will the opening up ofproductive forest areas for mining in 2003. With some new mines due to comeon stream in 2004, gold production will also rise. Owing to high producerprices, good rains and continued instability in Côte d'Ivoire, the 2003/04(October-September) cocoa crop is likely to be around 30% higher than thebumper crop harvested in 2003. Given that the government is increasingsupport services to farmers and is committed to raising the producer price,another good crop is possible in 2004/05, although as we are assuming normalclimatic conditions, it is expected to be down on 2003/04. This will cause realGDP growth to slow to 4.9% in 2005.

Manufacturing will benefit from various Presidential Special Initiatives topromote the domestic processing of local raw materials. The reduction incorporation tax in 2005, which was announced in the 2004 budget, shouldboost the sector in the second half of the forecast period, but it may encouragefirms to invest more during 2004, as their profits will be taxed at a lower rate in2005. Construction growth will be supported by increased infrastructurespending as part of the government's poverty reduction strategy. Governmentspending will remain the dominant factor in determining services growth. Pre-election spending will therefore increase services growth in 2004, although theuncertainty generated by the elections will affect investor confidence.Conversely, confidence should improve after the elections, but owing to aslowdown in the expansion of government expenditure, real GDP growth isexpected to slow. An increase in trade through Ghana, owing to politicaltensions in Côte d'Ivoire, and further expansion in tourist arrivals, will supportservices growth throughout the forecast period.

Year-on-year inflation remained at 11.2% in May, as a slowdown in non-foodinflation offset rising food prices. Seasonal factors mean that food pricesnormally rise in the second quarter of the year, as crops become relativelyscarce ahead of the new harvest, so food price inflation is expected to ease inthe next few months. Further reductions in inflation hinge on the fiscal stance,and, as we expect government spending to rise ahead of the elections, inflationis not expected to fall into single figures. The headline inflation rate will bedistorted by an increase in value-added tax, of 2.5 percentage points, on August1st, to finance the National Health Insurance Scheme. Therefore, we expectinflation to average 13% in 2004. Although expenditure control will improveduring 2005, the government is committed to raising fuel prices to cost-recoverylevel in February. The impact that this will have is difficult to quantify, as itdepends on international fuel prices at that time, but we expect it to addaround three percentage points to the inflation rate. Assuming that the cediremains relatively stable, average inflation is forecast to rise to 16.5% in 2005.Improved fiscal discipline means that the underlying trend in inflation will bedownward during the year.

Favourable prospects for exports of gold and cocoa, strong remittances and aweak US dollar will provide support for the currency over the forecast period.Foreign-exchange reserves have reached a level that will allow the government

Inflation

Exchange rates

12 Ghana


to buy up local currency in order to slow down monetary growth, which maycause a short-term appreciation of the cedi. However, high inflation andstructurally higher demand than supply for foreign exchange (owing to theeconomy's import dependence) will ensure that the kwacha loses value on anannual basis. Foreign-exchange inflows are forecast to fall in 2005, which willrestrict the central bank's ability to intervene in the foreign-exchange market, sowe expect the cedi to depreciate further. Overall, the exchange rate is forecast tofall to an average of C9,093:US$1 in 2004 and C10,147:US$1 in 2005. The cediwill remain vulnerable to any sudden deterioration in the terms of trade.

Receipts from gold and cocoa are expected to remain high over the forecastperiod. Strong gold prices will be supported by a rise in production as newmines are opened, while higher producer prices will keep cocoa output wellabove its long-term average. A number of initiatives to boost the productionof cassava, textiles and palm oil should increase non-traditional exports.Ghana's strong export performance will release more foreign exchange onto thelocal market, which will be used to satisfy the high demand for imports.Mining development work will also boost imports, as will higher oil prices in2004. Services debits will increase in line with the volume of imports, andservices credits will also pick up, unless a stabilisation of the political situationin Côte d'Ivoire encourages shippers to switch their traffic back to that country'sports. The deficit on the income account will grow as debt relief under the IMF-World Bank's heavily indebted poor countries (HIPC) initiative is offset byincreased profit repatriation by foreign mining companies. Strong inflows ofexpatriate remittances and donor support will ensure a healthy surplus on thecurrent transfers account. Overall, the current account is forecast to move into adeficit of US$69m (0.8% of GDP) in 2004, before deteriorating further, toUS$419m (4.6% of GDP) in 2005 as imports and services debits increase.

Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 4.5 5.2 5.4 4.9Gross agricultural production growth 4.1 6.1 6.0 5.0

Consumer price inflation (av) 14.8 26.7 a 13.0 16.5Consumer price inflation (year-end) 15.2 23.6 a 14.8 15.7Short-term interbank rate 24.5 21.5 a 21.0 19.5

Government balance (% of GDP) -6.1 -3.3 -4.6 -3.2Exports of goods fob (US$ bn) 2.0 2.6 2.8 2.7

Imports of goods fob (US$ bn) 2.7 3.2 3.6 3.8Current-account balance (US$ bn) 0.0 0.2 -0.1 -0.4Current-account balance (% of GDP) -0.5 3.0 -0.8 -4.6

External debt (year-end; US$ bn) 7.3 7.7 7.4 7.6Exchange rate C:US$ (av) 7,932.7 8,677.4 a 9,093.4 10,147.2

Exchange rate C:¥100 (av) 6,328.4 7,486.9 a 8,133.6 9,352.2Exchange rate C:€ (year-end) 8,849.8 11,166.3 a 11,541.9 14,128.1

Exchange rate C:SDR (year-end) 11,472.7 13,154.3 a 13,842.2 16,321.2

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

External sector

Ghana 13


The political scene

The National Reconciliation Commission (NRC), which has conducted ajudicial inquiry into wrongdoing by previous military regimes, finished itshearings on July 13th. A written report of its findings and recommendations isto be submitted to the government by October 14th. The executive secretary ofthe NRC, Kenneth Attafuah, has indicated that the Commission will endeavourto provide comprehensive coverage of its deliberations over the past 18 months,but acknowledged that it will be unable to deal with all of the near 4,000petitions submitted to it. The report is likely to recommend victimcompensation, including: cash payments, streets to be named after victims, theerection of monuments in honour of victims, the de-confiscation of assets andan education fund for the children of victims. It is not yet clear whether thegovernment has the capacity to pay the kind of compensation the victims areexpecting, or if there are sufficient avenues for redress if a victim is not satisfiedwith what the NRC decides.

Although the NRC has been accepted in principle by Ghanaians as a genuinevehicle for national reconciliation, some of the Commission's practices haveundermined its independence and credibility, particularly its perceived pre-occupation with the former president, Jerry Rawlings, and Kojo Tsikata, thesecurity adviser to the Provisional National Defence Council (PNDC)—theforerunner of the National Democratic Congress (NDC), the main oppositionparty. Indeed, allegations of the involvement of Messrs Rawlings and Tsikata inthree separate incidents—the executions of three former military heads of state,the execution of a number of army generals, and the murder of three judgesand a retired army officer—have dominated the proceeding s of the NRC.

To some extent this was not surprising, as these three cases have long intriguedmost Ghanaians. However, it is not clear that the NRC was the right forum forinvestigating these cases. Most of those accused have not had the chance tocross-examine their accusers or call witnesses, and as the proceedings arelimited by time it has not been possible to fully establish the truth of the

Hearings end at the NationalReconciliation Commission

14 Ghana


allegations made. Furthermore, by focusing on the rule of the Armed ForcesRevolutionary Council (AFRC) in 1979 and the PNDC between 1981 and 1992—both forerunners to the NDC—the NRC has attracted criticism for beingpartisan. Critics have also attacked the focus on Mr Rawlings and Mr Tsikata,questioning whether these two alone were responsible for the activities of thePNDC; several prominent NPP leaders served in the PNDC governmentincluding the president, John Agyekum Kufuor, who was secretary for localgovernment, and three current cabinet members. Accusations of bias werealways going to be a problem, as many in the NDC have always argued thatthe NRC was set up to undermine Mr Rawlings, who remains closely linked tothe NDC, and the party itself, in the run-up to elections (July 2002, The politicalscene). The NRC is not a legal investigation, and in the absence of some of thetrappings of a court, such as a facility for all of the accused to cross-examinetheir accusers and introduce further witnesses, it will be unable to come to averdict on any of the main cases presented to it. Nonetheless, should itsconclusions be seen as particularly partisan, it may presage greater politicalinstability ahead of the elections.

Mr Tsikata returned to the NRC on June 15th to cross-examine some of thepetitioners who had implicated him in the above murders in their testimonies.The defence of the former PNDC security adviser was based on his not being inthe country when the murders were carried out, although he did not have theopportunity to produce supporting witnesses.

In earlier testimony to the NRC, Squadron Leader George Tagoe asserted thatMr Tsikata selected the eight generals who were executed under the AFRC'sregime. Under cross-examination, Mr Tagoe claimed that he had seendocumentary evidence of this. In response, Mr Tsikata argued that he was inAngola for the three months prior to the executions and so could not, and didnot, advise on the matter. Mr Tsikata also claimed that he was out of thecountry in February 1982, the date on which another petitioner, Alex Adjei,testified that soldiers tortured him in the presence of Mr Tsikata. Theelusiveness of Mr Tsikata has been heightened by another bout of submissionsto the NRC that he lied to the Commission about his whereabouts onDecember 31st, 1981, the date of the second coup led by Mr Rawlings, and in itsimmediate aftermath. Although Mr Tsikata claimed that he was in Côte d'Ivoire,two retired military officers, Colonel R. D. Awudu and Captain FrederickBoaitey Amoh-Twum, differed. Colonel Awudu submitted that on December31st he received instructions from Mr Rawlings to facilitate the arrival ofMr Tsikata from Lomé, Togo, and that Mr Tsikata arrived later that day. Incontrast, Mr Amoh-Twum stated that he facilitated the re-entry of Mr KojoTsikata into Ghana from Lomé on January 5th, 1982.

Mr Tsikata's previous appearance at the NRC, in February (April 2004, Thepolitical scene), was to respond to allegations made against him, in particularregarding the abduction and murder of the three judges. Two of the principalaccusers, Matthew Adabuga and Chris Asher, who intimated at previousappearances at the NRC that they were in possession of incontrovertibleevidence that implicated Mr Tsikata, were cross-examined by Mr Tsikata duringhis second appearance at the NRC. Both maintained that it was Mr Tsikata and

Mr Tsikata returns to the NRC

Ghana 15


Mr Rawlings who engineered the murders. There are indications thatMr Adabuga, Mr Asher and other witnesses who claim to have information toindict Mr Rawlings and Mr Tsikata were themselves part of the revolutionaryprocess but have since fallen out of favour. Consequently, they harbour grudgesagainst the leaders of the revolution and want to ensure that they exact theirrevenge. Such motives and the problems of contradictory evidence makeestablishing the truth on many of the issues raised at the NRC very difficult.

On June 15th parliament unanimously voted to extend for one month the stateof emergency in the Tamale municipality and Yendi district of the NorthernRegion, which has been in place since March 2002. This followed the murder ofthe king of the influential Dagomba tribe, Ya Na Yakubu Andani II (July 2002,The political scene) and clashes between the two Dagomba sub-groups (or"gates"), the Andani and the Abudu, which resulted in 40 deaths. Contributingto the motion in parliament, the interior minister, Hackman Owusu-Agyeman,argued that it would be irresponsible to lift the state of emergency until allarrangements have been made to ensure the successful burial of the Ya Na.This may not be possible for some time, as the two gates are in dispute overwhich one will provide the new Ya Na. The Abudu claim that it is their turn totake over the kingship of Dagbon, whereas the Andani claim that it should beone of them, since the late Ya Na never finished his tenure, and because theybelieve that the Abudu killed the Ya Na so that an Abudu might become king.Although the government has made several attempts to resolve the impasse,including the use of eminent chiefs and a commission of enquiry, meaningfulheadway has yet to be made. Therefore, the government is preparing toinaugurate another committee (including six members of parliament,traditional rulers and civil society groups) to help resolve the issues in theDagbon crisis, although it is not clear whether this will be any more successfulthan previous attempts.

Another complicating factor is the perception that, for historical reasons, theNPP supports the Abudu and the NDC supports the Andani. This perceptionhas yet to be dispelled and the Andani do not trust the government'sinvolvement in the crisis. This feeling has been worsened by the failure ofMr Kufuor to visit Tamale and Yendi since the crisis broke out and because thegovernment appear to be more interested in resolving the high-profile cases infront of the NRC, than in the Dagbon crisis. This is despite the fact that there isa significant risk of further conflict. The local press have cited documents thatindicate a build-up of arms in the area and each gate has apparently appealedto its traditional allies for support if fighting breaks out. Owing to high levels ofpoverty and overlapping claims of chieftaincy, property rights and landownership, the northern parts of Ghana are more vulnerable to violent ethnicclashes than other parts of the country.

The NPP comfortably retained its seat at the Upper Denkyira by-election onJune 29th. Its candidate, Benjamin Kofi Ayeh, secured 22,958 votes, 86% of thetotal cast in the by-election, which was called after the death of the incumbentNPP MP. The other candidates, Elizabeth Debrah of the Democratic People'sParty and Abudu Issaku, an independent, won 9% and 5% of the vote,

No solution is in sight for theDagbon crisis

NPP convincingly retains seatin Upper Denkyira by-election

16 Ghana


respectively. The NDC refused to contest the by-election, raising two mainissues. First, it argued that it was uneconomical for the party to use its resourcesto fight a by-election when a fresh poll will be held in less than six months.Second, it argued that it was not clear which of the voters' ID cards could beused in the election. Indications were that, because new voter ID cards werebeing issued for the legislative election, some people had disposed of their oldvoter ID cards. The real reason, however, was that, because the seat is in theNPP's Central Region heartland, the NDC had virtually no chance of winningand wanted to avoid a potentially demoralising by-election defeat—the partyhas lost all the previous six by-elections since the last legislative election.

For the remaining six or so months before the next general election is held,Mr Ayeh has set himself the highly optimistic goals of settling all chieftaincydisputes in the constituency and enhancing education and job creation. A morerealistic goal would be to end the outmoded customs that disenfranchisedsome women. Women from several villages in the constituency were unable toget to the polling booths owing to a taboo that bars them from crossing theRiver Offin on Tuesdays. For the same reason, girls from these villages do notattend school on Tuesdays.

Donors have again deterred the government from contracting a large loan froma little-known private creditor. On April 13th parliament unanimously approvedthe contracting of a US$300m loan from Chinese New TechnologiesConstruction and Investment (CNTCI). This sparked concern from both thepress and donors, who drew parallels with the government's eventualclimbdown over a US$1bn loan that was to have been contracted from anequally unknown group of creditors, the International Financial Consortium(not to be confused with the International Finance Corporation, the private-sector-lending arm of the World Bank). Parliament approved that loan, whichrequired the payment of a substantial up-front transaction fee, but thegovernment eventually decided not to take it up after donor pressure (January2003, The political scene). After much concern over the origin of the lenders ofthe new loan, the finance minister, Yaw Osafo-Maafo, revealed that it was acompany based in the UK with links to companies in China and Hong Kong.That it took the government nearly two months to reveal the details of thecompanies involved highlighted concerns over the transparency of the loan.These concerns were heightened by the following factors.

• There were concerns as to why the lender would offer the money at aninterest rate of 0.65% with a 15-year moratorium. These highly concessionalterms make no sense for a private-sector organisation, which could earn a farless risky and greater return from, for example, putting its money in a bank orbuying US government debt. This has raised suspicions that either thearrangement was made in return for preferential access to government contractsor that it may be a conduit for money laundering.

• Representatives of the lenders could not be contacted at the addresses andtelephone numbers provided in the loan agreement.

Parliament approves acontroversial US$300m loan

Ghana 17


Some of these concerns were allayed when the government provided furtherclarification in June, revealing that rather than an outright loan, the agreementwas for a credit facility. The US$300m was to be drawn down to pay for projectand related services provided by CNTCI. There has been no comment on whatappears to have been the very opaque process under which the companieslinked to CNTCI were chosen for the various projects, but an open tenderingprocess was not used. The credit was to be mainly used as follows:

• for the construction of a dual carriageway between Accra and Kumasi;

• for the rehabilitation of the Eastern Rail Network, including the Accra-Temarailway line, so as to facilitate a mass transport system and reduce pressure oncommuter buses and the roads;

• to finance priority projects under the presidential special initiatives,including the construction a of "garment village" comprising 120 units of factorybuildings in the Tema Free Zone enclave and the establishment of six cassavastarch processing companies in the Eastern, Brong-Ahafo, Western, Volta,Northern and Ashanti Regions.

Nonetheless, owing to concerns over the source of the finances and, in thecontext of Ghana attempting to reach completion point under the IMF-WorldBank's heavily indebted poor countries (HIPC) debt-relief initiative, the IMFcompelled the government not to take on the credit. Under HIPC terms,governments can only borrow at concessional rates. Although the interest rateand grace period were concessional, the management fee of 4% (US$12m)clearly contradicted the spirit of the HIPC initiative.

The fact that the government intended to devote most of the new finances toinfrastructure projects indicates its anxiety over the elections. The governmentis aware that it has not fulfilled its pre-election promises on infrastructuredevelopment and fears that it may be held to account for this at the polls. Theloan would have enabled it to display visible progress on improvinginfrastructure by the time of the elections. Instead, the government can nowblame the IMF-World Bank for its inability to deliver on what were veryambitious commitments. Although the government will clearly benefit fromthe debt relief awarded under HIPC, opposition parties remain critical of theinitiative (April 2001, Economic policy). In particular, they argue that by seekingdebt relief through HIPC, the government has lost its access to private financingfor development projects and, in return, has to implement lending conditionsthat have negative effects. This argument is flawed in a number of ways. First, itis unlikely that the government will be able to attract private-sector financing atmarket rates owing to its poor repayment record; if it does, servicing this debtwill prove a fiscal burden. Second, although donor-led reforms often entailshort-term costs, most benefit the economy over the longer-term. Finally, HIPCdebt relief will lead to savings in debt-servicing costs that can be redistributedto the social sectors. However, criticism of the multilaterals does have someappeal for the electorate and it is likely to intensify ahead of the elections. Itshould be noted that the government does not need to take this approach, asthe greater economic stability attained during its term in office should ensurethat it is re-elected comfortably.

Further clarification revealsopaque government tendering

Emphasis on infrastructureprojects is related to elections

18 Ghana


Provisional results of the voter registration exercise, undertaken by the ElectoralCommission between Match 16th and 29th, put the total number of registeredvoters at 10,766,531, nearly 300,000 below the number on the previous voterregister. This list was revised as the population growth rate revealed in the 2000census (October 2000, The domestic economy) was less than had previouslybeen assumed. Rather than any specific attempt by previous governments tomanipulate the list, much of the discrepancy appears to have been the result ofdouble counting (for example, of people who moved constituencies) and of thenames of the deceased not being removed. The final list will not be availableuntil the Electoral Commission issues the photo-identity cards that will be usedfor the first time at the December elections.

Revised electoral registerRegion Previous figures New figures DifferenceWestern 1,114,216 1,070,064 -44,152Central 906,891 903,353 -3,538

Greater 1,906,121 2,099,189 193,068Volta 983,766 863,702 -120,064Eastern 1,144,991 1,229,114 84,123

Ashanti 2,148,556 1,995,239 -153,317Brong Ahafo 1,089,644 968,571 -121,073

Northern 962,926 935,890 -27,036Upper East 493,827 425,199 -68,628

Upper West 313,934 276,210 -37,724Total 11,064,872 10,766,531 -298,341

Source: Ghana Electoral Commission.

Economic policy

On July 9th the board of the IMF approved the successful completion of itssecond review of Ghana's performance under its poverty reduction and growthfacility (PRGF), approved in May 2003 (July 2003, Economic policy). This pavedthe way for another SDR26.35 (US$39m) disbursement. Not surprisingly, theFund was reasonably complimentary about developments in the economysince its previous review, six months earlier. In particular, it highlighted theimprovement in fiscal performance in 2003, when the government achieved itstarget of zero net domestic financing of the budget deficit (April 2004, Economicpolicy). Real GDP, officially estimated at 5.1% in 2003, exceeded the Fund'sexpectations, owing mainly to a strong cocoa crop, while tight monetary policyreduced inflation to five-year lows. The approval of the PRGF review enabledGhana to reach completion point under the heavily indebted poor countries(HIPC) initiative, entitling it to debt relief worth US$3.5bn over 20 years (seeForeign trade and payments).

The IMF approves a US$39mdisbursement

Revised voters' register cuts out300,000 names

Ghana 19


Recent lending agreements with the IMF

Approval ExpiryApproved

(SDR m)Drawn

(SDR m)ESAF Jun 1995 May 1999 164.40 137.00ESAF/PRGF May 1999 Nov 2002 228.80 176.22

PRGF May 2003 May 2006 184.50 79.05a

a As at July 30th 2004.

Source: IMF.

Policy discussions focused on the need for the government not to go off-track inthe run-up to the December 2004 presidential and legislative elections,especially with regard to maintaining expenditure within agreed targets. TheFund has agree that the government can revise its key fiscal target for netrepayment of domestic debt from 2.2% of GDP to 1.4% of GDP. This is becausenominal GDP is likely to be higher than previously anticipated, so netrepayment at this level would still allow the government to hit the pre-agreeddomestic debt/GDP ratio. To compensate for the government's failure tointroduce cost-recovery pricing for petroleum products (see below), it hasagreed to cut recurrent expenditure by C300bn and capital expenditure byC223bn, as it will have to spend the equivalent of 1.4% of GDP on petroleumsubsidies.

The Bank of Ghana (BoG, the central bank) has optimistically targeted areduction in inflation to 7% at end-year, which it aims to achieve throughintensified open-market operations and adjustments in the prime rate.Although the IMF has endorsed this target, the Economist Intelligence Unitthinks that it will be exceeded owing to spending pressures associated with theelections and higher oil prices. The Fund also supports the government's planto step up the volume of foreign-exchange sales in order to slow downmonetary growth now that import cover has reached over four months.Although this may cause a nominal appreciation of the cedi, this is unlikely tohave an impact on competitiveness, and will further dampen inflationarypressure. Financial-sector reforms to facilitate greater borrowing from theprivate sector will also be introduced later in the year (see The domesticeconomy: Finance).

According to the Fund, there are two main risks to the government'sprogramme. The first is continuing higher-than-budgeted oil prices. The Fundhas calculated that if the oil price averages US$37.1/barrel in 2004, thegovernment will have to spend an additional 1.2% of GDP on petroleumsubsidies—we forecast an average oil price of US$33.5/b in 2004, which wecalculate would result in an additional 0.6% of GDP in spending. The secondrisk is that spending control will slip ahead of the elections. This is inevitable tosome degree and we expect the IMF to tolerate overspending of up to 1.5% ofGDP.

The government's poor adherence to the targets under its PRGF prior to thecurrent review had put HIPC qualification in some jeopardy. The IMF waivednon-compliance with three of the agreed targets: the target for banking sectorcredit to the country’s sole oil refinery, the Tema Oil Refinery (TOR) was

Ghana's recent record onreform had put HIPC in doubt

The government agrees tomaintain tight policies

20 Ghana


exceeded, and the government failed to adjust petroleum prices and electricityand water tariffs sufficiently. The automatic adjustment of the petroleum pricewas also a completion point trigger (the only one that the government did notachieve). The government had pledged to implement a series of hikes in theprices of petroleum products in order to lift them to cost-recovery level. Thiswas because the subsidies the government provided on petroleum prices werea considerable fiscal burden and the TOR had built up a debt to domesticbanks that exceeded the primary capital of the entire banking system. Non-compliance with this target was not a surprise. The near doubling of petroleumprices in January 2003 (April 2003, Economic policy) and the subsequent surgein inflation was highly unpopular. With international fuel prices having risenby nearly 15% in the intervening period and elections approaching, the IMFappears to have accepted the political problems that further price hikes wouldcause. Donors were further aggrieved by the government's purchase of 90% ofthe loss-making Volta Aluminium Company after its private-sector operatorwithdrew (April 2004, The domestic economy: Energy), and the plannedUS$300m loan from Chinese New Technologies Construction and Investment(CNTCI) further aggrieved donors (see The political scene).

Recent government commitments to the IMF-World Bank

To address some donor concerns over policy going off track, the government agreeda number of measures with IMF-World Bank representatives at their April meetingsin Washington DC. These were as follows.• The announcement of a fresh regulatory/pricing regime that gives oil marketing

companies the right to adjust retail petroleum prices according to a transparentlyprescribed formula, without reference to any national authority or agency. Thenew regime must be in place by end-March 2005. The government announcedin June that a new pricing formula will be in place by February 15th that will beformulated to ensure that all costs and applicable taxes are fully recoverable,while giving the poor access to essential petroleum products, notably kerosene,on relatively favourable terms.

• The government agreed to introduce legislation in parliament by June 15th toensure the effective implementation and collection of the 2.5 percentage-pointincrease in value-added tax (lifting it to 15%) to fund the National HealthInsurance Scheme from August 1st. This was achieved with a few days to spare.

• The government resolved to revise the structure of civil-service wages for 2004,consistent with keeping the wage bill within the budgeted amount of C6,632bn.In order to achieve this, the government has revised down the public-sector payrise awarded this year.

• To ensure fiscal discipline, the government must publish maximum cash ceilingsallowed to ministries, departments and agencies for the third quarter of 2004.

• The government must take measures to implement cost-effective pricing in theutilities industry. As a first step towards this, the government must clarify thecomputations underlying the water and electricity tariff-adjustment decisions ofthe Public Utilities Regulatory Commission, particularly assumptions about thegeneration mix.

• The government must also ensure that the profits of state-owned enterprises—particularly the Cocoa Board of Ghana and the National CommunicationAuthority—are transferred into the national consolidated fund.

Ghana 21


The IMF's waiver with regard to the government's non-observance of certainperformance criteria reflects the political nature of the Fund's decision tocontinue lending to Ghana as much as the government's implementation of theshort-term measures outlined above. Ghana has enjoyed a higher internationalprofile under the administration of the president, John Agyekum Kufuor, bothbecause of its efforts at conflict resolution in the sub-region and improvedeconomic performance. Mr Kufuor's strong support for the New Partnership forAfrica’s Development (Nepad), particularly its underlying principles of goodgovernance and peer review—Ghana is the first country to subject itself to aNepad peer review—has won him many friends among Western countries. Asuspension of lending would have prevented Ghana from reaching HIPCcompletion point, which would have been a severe blow to the president, whohas made numerous references to achieving completion point in mid-2004. Itwould also have been embarrassing to leading donors, who have lauded thecountry's recent performance. Therefore, although policy did veer off track inseveral areas, IMF disbursements to Ghana were unlikely to have beensuspended unless there had been a cataclysmic break with donor-recommended policy.

Provisional data released by the Bank of Ghana show that fiscal performancewas better than budgeted in the first quarter of 2004. With revenue exceedingtarget and expenditure below target, the overall balance was C211.5bn(US$23.7m), compared to a budgeted level of C456.2bn. Total domestic revenueand grants were 4.3% higher than budgeted in the first quarter of 2004. Taxrevenue of C3,259.0bn exceeded its budgeted level by 8.3%, whereas non-taxrevenue fell short of its target of C120.6bn by 31.3%. The impressiveperformance of tax revenue was the result of higher than projectedinternational trade and petroleum tax revenue, stemming from greater tradevolumes—specifically of imports and cocoa exports—and higher petroleumprices. The corporate tax take was 5.7% below the budgeted level, an indicationthat companies are shifting their profits into 2005 when the government haspledged that it will cut the corporation tax rate (April 2004, Economic policy).Revenue from grants, which was projected for the first quarter of 2004 atC684.2bn, was exceeded by 23.2%, owing to a jump in project grants. The sharpdivergence from target for other revenue measures reflects the government'sfailure to enact the National Health Insurance levy, which will now be fundedby a 2.5 percentage-point increase in value-added tax. This is scheduled forAugust 1st.

Fiscal revenue exceeds targetin first quarter of 2004

22 Ghana


Revenue performance, 1 Qtr 2004(C bn)

Budgeted Provisional Variance Variance (%)Total revenue & grants 4,224.4 4,404.1 179.7 4.3 Total revenue 3,540.2 3,561.5 21.3 0.6 Tax revenue 3,010.5 3,259.0 248.5 8.3 Direct taxes 927.9 933.7 5.8 0.6 Company tax 428.7 404.3 -24.4 -5.7 Other direct taxes 499.2 529.4 30.2 6.0 Indirect taxes 1,432.2 1,560.7 128.5 9.0 VAT 908.3 952.7 44.4 4.9 Domestic 330.3 332.3 2.0 0.6 Imports 577.9 620.4 42.5 7.4 Petroleum 384.8 453.4 68.6 17.8 Other indirect taxes 139.1 154.6 15.5 11.1 International trade taxes 650.5 764.6 114.1 17.5 Import duties 566.0 654.7 88.7 15.7 Export duty 84.4 109.9 25.5 30.2 Other revenue measures 409.1 219.6 -189.5 -46.3 Non-tax revenue 120.6 82.9 -37.7 -31.3 Grants 684.2 842.6 158.4 23.2 Project grants 178.3 394.0 215.7 121.0 Programme grants 257.2 246.7 -10.5 -4.1 HIPC assistance (multilateral) 248.8 201.9 -46.9 -18.9

Source: Bank of Ghana, Statistical Release, Vol 1 No. 2/2004, May 2004, Fiscal Developments.

In terms of expenditure, the provisional outturn for the first quarter of 2004was put at C4615.5bn, compared to a programmed target of C4680.6bn.However, in its May 2004 Statistical Release, the Bank of Ghana states that totalexpenditure for the first quarter of 2004 was above the programmed limit. Itsays that this was the result a spillover of commitments amounting to aboutC669.0bn from the last quarter of 2003, which was liquidated in the firstquarter of 2004. Although this contradiction highlights a significant caveat toworking with Ghanaian data, looking at the expenditure data in more detaildoes highlight a number of important trends.

The main expenditure savings have come from a reduction in spending ongoods and services and domestically funded capital projects. Both of theseappear to have been held back to compensate for above-target growth inpersonal emoluments (mainly wage and salary payments) and the petroleumsubsidy. Interest payments on domestic debt were also well below target, theresult of a fall in Treasury-bill yields, stemming from reductions to the bankrate, lower inflation and reduced government borrowing. Personal emolumentsaccounted for the largest amount of over-expenditure, owing to thegovernment's miscalculation of the impact of its public-sector pay increase. Thegovernment has subsequently revised down its pay awards to certain public-sector staff in order to hit the wage bill target agreed with the IMF.

Lower interest payments keepspending below target

Ghana 23


Expenditure performance, 1 Qtr 2004(C bn)

Budgeted Actual Variance Variance (%)Total expenditure 4,680.6 4,615.5 -65.1 -1.4 Recurrent expenditure 3,142.3 3,060.7 -81.6 -2.6 Non-interest expenditure 2,244.4 2,244.7 0.3 0.0 Personal emoluments 1,280.3 1,475.7 195.4 15.3 Goods & services 446.6 261.0 -185.6 -41.6 Transfers 517.5 508.0 -9.5 -1.8 Interest payments 897.9 816.0 -81.9 -9.1 Domestic 649.9 569.3 -80.6 -12.4 External 248.1 246.7 -1.4 -0.6 Capital expenditure 1,343.8 1,334.3 -9.5 -0.7 Domestically funded 742.9 559.4 -183.5 -24.7 Foreign funded 600.9 774.9 174.0 29.0 HIPC-financed poverty expenditure 194.5 220.5 26.0 13.4Overall balance (commitments basis) -456.2 -211.5 244.7 -53.6

Source: Bank of Ghana, Statistical Release, Vol 1 No. 2/2004, May 2004, Fiscal Developments.

The domestic economy

Economic trends

The downward trend in year-on-year inflation has been reversed in the last fewmonths. The year-on-year inflation rate fell each month from April 2003, whenit stood at 30%, to March 2004, by which time it was only 10.5%. The size of thisfall was distorted by the impact of the fuel-price hike in January 2003 (April2003, Economic policy) falling out of the annual comparison. In April 2004year-on-year inflation rose to 11.2%, where it remained in May. The rise was dueto an increase in food prices, which were up by 3.9% in month-on-month termsin April and a further 2.2% in May. Non-food price inflation has continued tofall, to 9.2% year-on-year in May, from 9.9% in March—the government's failureto adjust petroleum prices to cost recovery level means that rising internationalfuel prices have had little impact.

Inflation, Jan-May 2004(% change, month-on-month)

Food Non-food CombinedJan 1.5 0.6 1.1

Feb 3.1 1.9 2.5Mar 2.3 1.2 1.8Apr 3.9 0.3 2.1

May 2.2 0.2 1.2Average 2.6 0.8 1.8

Source: Ghana Statistical Service, Statistical Newsletter No. BS/2004, June 16, 2004.

Seasonal factors mean that food prices normally rise in the second quarter ofthe year, as crops become relatively scarce ahead of the new harvest in June.According to the Ghana Statistical Service, some of the main food items thatrecorded significant increases in April and May 2004 were maize, yam and

Rising food prices lift year-on-year inflation

24 Ghana


plantain. Despite the rising trend in food prices in the first half of the year, on acomparative basis inflation has been relatively low in the first five months ofthe year compared with the last five years, owing to tight monetary policy andthe relative stability of the cedi. The improvement in food supply following theharvest should lower food price inflation, but countervailing pressures mayprevent the year-on-year inflation rate from slipping into single digits. Anydeterioration in fiscal discipline ahead of the elections will add to inflationarypressure, while the impact of the 2.5 percentage point rise in value-added tax tofund the National Health Insurance levy, effective from August 1st, will liftprices. With the government committed to raising fuel prices to cost-recoverylevel in February 2005, if single-digit inflation is not achieved in the next twomonths, it is unlikely to be feasible again until March 2006 at the earliest.

The cedi has maintained its relative stability against the US dollar so far thisyear, depreciating by just 1.8%, to stand at C9,012:US$1 on July 19th. Strongreceipts from both cocoa and gold exports, growing expatriate remittances anda weak US dollar have continued to support the currency. According to theBank of Ghana (BoG, the central bank), gold exports in the first quarter of 2004were up by 21.4% on the same period of 2003, owing to higher internationalprices. Export revenue from cocoa also rose, despite lower international prices,reflecting higher production. Expatriate remittances, at US$200.7m in the firstquarter of 2004, were up by 4% on the same period of 2003. Remittances havegrown strongly in recent years, although this is mainly the result of animprovement in their measurement, as more data have been captured frommoney-transfer agencies. With all the major banks now linking up withWestern Union to formalise money transfers, further growth in capturedremittances is likely. Remittances will also be supported by the growing numberof healthcare staff who are being poached by developed countries to fillstaffing gaps at a relatively low cost.

The seven-month decline in the stock of government domestic debt came to anend in February. In line with the improving fiscal position, domestic debt fellfrom C15.3trn (US$1.8bn) at end-June 2003 to C13.2trn at end-January 2004.However, the increasing use of the banking system to finance the fiscal deficit

Strong inflows of remittancescontinue to support the cedi

Stock of Treasury-bills rises,but yields continue to fall

Ghana 25


caused domestic debt to rise to C15.7trn at end-February and C16.1trn at end-March. Nonetheless, greater confidence over the inflation outlook means thatmost of the new debt has been issued as one-year Treasury-notes, rather thanshort-yielding Treasury-bills. This has helped to consolidate the yield curve,which was inverted—that is, where short-term interest rates are higher thanlong-term interest rates—until late 2003. Although the yield curve remainsnormal, the slight recent pick-up in inflation has increased demand for short-term T-bills. Should concerns over rising inflation, particularly thoseengendered by the increased issuance of government debt, intensify, aninversion of the yield curve is possible. This is likely to have an impact on thestock market, which has been booming, partly because of lower yields ongovernment paper.

Agriculture

Cocoa production could hit a 30-year high in the 2003/04 season (October-September). Cumulative cocoa purchases from the start of the season to end-April were 541,700 tonnes, 35.6% higher than for the same period in the2002/03 season, when the total crop was 497,000 tonnes, the highest since1964/65. At this level, Ghana will retain its position as the world’s second-largestcocoa producer (ahead of Indonesia; Côte d’Ivoire is the world’s largest cocoaproducer). This impressive performance is due to good weather, an increase inthe producer price, continuing government programmes of mass spraying ofcocoa farms to rid them of pests that are inimical to crop development, and theconflict in neighbouring Côte d’Ivoire. Presently, the dollar value of the farmers'price in Ghana is over one-third higher this season than it was in 2001/02 andthis price increase has had a positive effect on fertiliser use and general farmmaintenance. The government has pledged to increase farmers’ share of thefree-on-board (fob) price of cocoa to 70% (from 69%) ahead of the next season,which should stimulate further production.

One factor that is not easy to establish in the crop data is the amount ofGhana's 2003/04 cocoa crop that originated in Côte d’Ivoire. Instability in thatcountry has encouraged a number of Ivorian farmers to smuggle their cropsover the border to avoid problems in transporting them to the ports. A strongerstimulus is the higher prices available in Ghana, where the hikes in producerprices have lifted them above those available to farmers in Côte d’Ivoire. Thissituation could change, as, pressed by the local industry, the Ivoriangovernment is planning a substantial increase in the minimum guaranteedfarm-gate price for cocoa.

The large Ghanaian crop will contribute to what the Economist IntelligenceUnit is forecasting to be an all-time high global crop of 3.2m tonnes. This hascaused a downward revision to our forecast for cocoa prices, which we nowexpect to average 65.5 US cents/lb in 2004 and 64.6 US cents/lb in 2004 (downfrom 72.8 US cents and 74.5 US cents, respectively). The weather throughoutWest Africa, most of Asia and Latin America has generally been favourable forthe development of the 2003/04 crop, with prospects enhanced by spending oncrop maintenance and inputs (particularly fertiliser and pesticide). This has

Another bumper cocoa crop isexpected in 2003/04

Strong production has hitinternational cocoa prices

26 Ghana


been encouraged by prices that are still very attractive compared with a fewyears ago, although they have fallen from recent highs. Demand for chocolatecontinues to rise in all the main consumer markets, which gives some supportto the cocoa price, but the improved supply outlook has recently caused pricesto hit their lowest level for two-and-a-half years.

Mining

Australia's Resolute Mining is to sell its Obotan plant to Golden Star Resources.The US$5.5m deal will also involve the firm's 4.5% stake in Red Back Mining,whose main Ghanaian resource is the Chirano gold project, which is expectedto produce an average 130,000 oz/year when it comes on stream in 2005.Resolute acquired its stake in Red Back Mining in 2003, but has decided not topursue its interest in developing Chirano in order to shift its focus to itsTanzanian gold projects (including the Golden Price mine, which producesaround 160,000 oz/year), although the firm insists that it will maintain itsinterest in Ghana. From Red Back's perspective, Golden Star would be a usefulpartner in the development of the US$40m Chirano project and it is possiblethat the two may merge. Golden Star currently produces an estimated 130,000oz/year from its Bogoso and Prestea mines.

Ireland's African Gold has paid US$4m for a 70% stake in the Konongo Oweregold resource, and has an option to acquire a further 10% share. The purchasecovers 125 sq km in the Ashanti Gold Belt, and the licence area is thought tocontain more than 950,000 oz of gold at an average grade of 2.30 grams/tonne.It also includes a prospecting licence for an adjacent area covering around 76 sqkm, which contains a number of potential gold exploration sites.

Energy

In response to IMF pressure, the government has agreed not to take up theoption to buy 90% of the Volta Aluminium Company (Valco), the country’s solealuminium smelter, until it has consulted with the Fund. Valco's owners, KaiserInternational, filed for Chapter 11 bankruptcy protection in the US in February2002 and have been looking to sell a number of Valco's non-profitable assets—Valco has not been operating for the past nine months. As the biggest private-sector entity in Ghana, the government was loathe to see Valco close, especiallyin an election year, and so had stepped in to buy Kaiser's stake (April 2004, Thedomestic economy: Energy). A US$18m fee was agreed. Not surprisingly, theIMF took exception to this deal for the same reasons that we pointed out in ourApril report—principally, it argued that if Valco could not run the company atprofit, there was no assurance that the government could do so.

The government indicated to the Fund that any purchase of Valco would onlybe temporary, until another buyer could be found. However, it also suggestedthat it would maintain a stake in the company in order to put pressure on anynew shareholder to develop Ghana's bauxite deposits and adhere toenvironmental standards. Again, the Fund strongly opposed this, arguing that it

IMF criticises the governmentfor intended purchase of Valco

Resolute Mining is to sell itsObotan plant to Golden Star

African Gold buys a stake inKonongo Owere gold resource

Ghana 27


could expose the government to large potential liabilities and give theimpression that the government would bail the company out again. Eventuallythe government agreed that it would consult with the Fund before taking afinal decision. Should the government be unable to find a buyer for Valco, theIMF is unlikely to accept a public-sector takeover, although it is expected to waituntil after the December 2004 presidential and legislative elections beforeadvising the government to close Valco.

All may not be lost for the company, as it is rumoured that a US firm, Alcoa, theworld's largest aluminium producer, is considering plans to increase its stake inValco—it holds the remaining 10%, not the government as we incorrectly statedin our April report (April 2004, The domestic economy: Energy). This wouldallow it to exploit Ghana's bauxite deposits—the Minerals Commission believesthat there are 120m tonnes of bauxite reserves at Kibi in the east. Last year BHPBilliton expressed interest in developing an integrated aluminium facility usingbauxite from Kibi.

Finance

The government's policy memorandum to the IMF, which was published at thesame time as the documents approving the latest disbursement under thepoverty reduction and growth facility (PRGF), outlined new measures toencourage commercial banks to lend to the private sector. The improved fiscalsituation has caused interest rates to fall and encouraged banks to increaselending to the private sector. Annual growth in credit to the private and publicsector from commercial banks was 56.1% in March, compared to 3.7% one yearearlier, with the private sector receiving 78% of this. However, some commercialbanks are now claiming that the secondary reserve requirement—on top of a9% primary reserve requirement, commercial banks have to hold a minimumof 20% of their deposits in T-bills and 15% in index-linked government bonds—ispreventing them from allocating more funds to the private sector. The Bank ofGhana decided not to reduce the secondary reserve requirement straightaway,as it was concerned about managing the boost to liquidity caused by the fundsfreed up by this, particularly as financial markets are likely to become nervousahead of the December elections. Instead, it is to implement two steps thatcould pave the way for a reduction in the secondary reserve requirement sometime after the polls. These are:

• strengthening indirect instruments for controlling liquidity by introducingshorter-term T-bills for open-market operations from the third quarter of 2004;

• establishing by September a central securities depository that should makeit easier for banks to trade government debt, encouraging the development of asecondary market.

Although a reduction in the secondary reserve requirement would in theoryincrease the amount of funds available to commercial banks to lend to theprivate sector, there is no guarantee that the freed up funds would be used inthis way. Private-sector demand for credit is still inhibited by high real lendingrates, which remain over 30%, nearly 20 percentage points higher than deposit

New reforms aim to encouragecommercial bank lending

28 Ghana


rates. At over 20% in real terms, rates at this level are too expensive for manylocal entrepreneurs to consider borrowing. The high spread between lendingand deposit rates is partly the result of a legacy of bad debts and until therepayment records of borrowers improve and banks become less risk averse,banks are unlikely to devote much of the freed up funds to start-ups.

The all-share index of the Ghana Stock Exchange (GSE) has continued itsremarkable performance of the last 18 months, doubling over the six-and-a-halfmonths to mid-July 2004. Since the end of 2001, it is up by over 400% in cediterms (around 380% in US dollar terms). The relatively good performance of theindex continues to be driven by the improved macroeconomic situation—increased foreign-exchange reserves, a stable currency and lower inflationpressures—combined with falling yields on government debt. The reduced yieldavailable on T-bills has encouraged some investors to switch their holdings toequities. The improved economic environment has allowed most listedcompanies to post impressive results, further buoying the all-share index.

To absorb some of the surge of funds directed towards the exchange, the GSE isencouraging new firms to list. The response has been good, as it is clear toprivate companies that even if their initial public offering (IPO) is pricedreasonably expensively, there will still be demand for their stock. The last newlisting, of Clydestone (Ghana) Limited, an IT company, in May, was over-subscribed by 57%, enabling the sole shareholder to divest a further 10% of hisholding to satisfy the excess demand. In June, two companies—StarwinProducts and Golden Web—were put on the GSE's provisional list, which theyhave to be on pending the meeting of other requirements for the flotation ofshares and full listing. Starwin Products manufactures pharmaceutical products,while Golden Web is mainly involved in the processing of vegetable oils. Twomore companies are rumoured to be planning to join the GSE's provisional listthis year.

Although new listings will take some of the pressure off existing valuations,there is concern over the rapid pace of the rise in the all-share index. Accordingto a local stockbroker, Databank, the market is trading on a price/earnings ratioof around 21, compared to a long-term average of around seven. Although the

Stock market index continuesto increase very strongly

Ghana 29


improved economic situation has enhanced the prospects for companyearnings, it does not make such a valuation justifiable. The main risk to the all-share index at the moment is that the government will step up expenditureahead of the elections, forcing T-bill rates upward and reducing the attraction ofequities relative to debt. Should the government keep its spending undercontrol, the boost to liquidity caused by the planned reduction in thesecondary reserve requirement could push the market even higher in 2005.

Foreign trade and payments

Shortly after the IMF approved the latest disbursement of funds under thepoverty reduction and growth facility (PRGF), it announced that Ghana hadreached completion point under the IMF-World Bank's heavily indebted poorcountries (HIPC) debt-relief initiative. This entitles Ghana to debt relief ofUS$3.5bn over 20 years (US$2.2bn in net present value terms, after discountingaccording to the degree of concessionality of the debt stock). The relief is to bephased over a period of around 20 years. The International DevelopmentAssociation, the World Bank's soft lending arm, will forgive US$1.4bn in debt-service payments, which is equivalent to a two-thirds reduction in debt-servicepayments between 2002 and 2022. The IMF will forgive US$112m in net presentvalue terms between 2002 and 2009, while the remainder of the relief willcome from bilateral and other multilateral creditors. Savings on debt servicingwill be spent in accordance with the pro-poor objectives of Ghana's povertyreduction strategy.

As much of this relief will be phased, any immediate reduction in Ghana's debtstock will be limited to those bilateral donors that rapidly approve the debtwrite-off—this process can take some time and is subject to delay in nationalparliaments. The World Bank, which is by far Ghana's largest creditor, isadopting a very gradual approach to forgiving the debt, as it classifies the debtas an asset that it can lend against. Writing off the debt would reduce its abilityto lend: an argument that it is using to try to get more money from its majorshareholders.

The limited impact of HIPC on the debt stock is shown in data released by theWorld Bank in its Global Development Finance publication, the benchmarksource for external debt data. This report contains detailed debt data up to end-2002, which show that of the five countries in Sub-Saharan Africa that reachedcompletion point prior to this, debt stocks only fell in Tanzania andMozambique. (In the case of Mozambique, this was because of the forgivenessof a large amount of debt owed to the former Soviet Union rather than HIPCper se.) The debt stock in Tanzania, which reached completion point in 2001,jumped by 8% the following year to end it only just below the end-2000 total.

HIPC's lack of impact on the debt stock is attributable to two factors. First, oncedebt relief has been granted, future donor support, notably for increasedspending on poverty reduction, health and education, is supposed to bepredominantly in the form of grants. However, grant support has notmaterialised on the scale envisaged and many HIPC countries have taken on

Ghana reaches HIPCcompletion point

The immediate impact of debtrelief will be limited

30 Ghana


new loans to fund development spending. Second, it has been apparent in thelast few years that many Sub-Saharan African countries are taking on newexternal debt simply to finance their growing current-account deficits. This is ofparticular concern where the current-account deficit has increased in order tofinance consumption, notably growing imports of consumer goods, or where itreflects disguised capital flows out of the subcontinent.

The data in Global Development Finance show that Ghana's total external debtstock rose by around US$600m in 2002. This was mainly because of anincrease in borrowing from bilateral and multilateral creditors (including largedisbursements from the EU—January 2003, Foreign trade and payments), almostall of which were at concessional rates. Over 70% of Ghana's external debtstock is now on a concessional basis. The jump in disbursements appears toreflect approval of the government's efforts to stabilise the economy in 2002.Debt-service payments fell sharply in 2002 to US$211m from US$314m in 2001,reflecting the relief awarded when Ghana reach HIPC decision point inFebruary 2002 (April 2002, Economic policy). This reduced the debt-serviceratio to only 8%, compared to 32.5% in 1997. Despite this, the government didbuild up some arrears—US$4m in interest and US$15m in principal—mainly tomultilateral creditors.

External debt(US$ m unless otherwise indicated)

1998 1999 2000 2001 2002Total external debt 6,933 6,979 6,624 6,734 7,338 Long-term debta 5,878 5,951 5,744 5,896 6,382 Short-term debt 722 718 588 555 593 Interest arrears on long-term debt 16 20 26 18 21 Use of IMF credit 334 310 293 284 363Public & publicly guaranteed long-term debt 5,615 5,691 5,487 5,641 6,129 Official creditors 4,959 5,111 4,989 5,085 5,596 Multilateral 3,563 3,682 3,663 3,723 4,084 Bilateral 1,396 1,429 1,326 1,361 1,512 Private creditors 656 580 498 556 533 Bonds 0 0 0 0 0 Banks 171 132 114 182 195

Total debt service 579 519 465 314 211Ratios (%)Total external debt/GNI 94.7 92.5 137.1 129.5 121.7Debt service/exports of goods & services 22.4 20.6 18.7 12.8 8.0Short-term debt/total external debt 10.4 10.3 8.9 8.2 8.1Concessional long-term debt/total external debt 66.1 68.5 71.2 68.8 70.5

a Long-term debt is defined as having original maturity of more than one year.

Source: World Bank, Global Development Finance, 2004.

New disbursements lift thedebt stock in 2002

ghana - iuj.ac.jp€¦ · overview the president, john agyekum kufuor, and the ruling new patriotic...

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