world bank documentdocuments.worldbank.org/curated/pt/195791468030676288/pdf/10686.pdfprogram...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10686

PROGRAM PERFORMANCE AUDIT REPORT

GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS(CREDITS 1777, A-025, A-025-1-GH AND 2005, 2005-1, 2005-2-GH)

MAY 29, 1992

FILE COPY

Report No. 10686-GH Type: (PPR)WISE, G / X31679 / T9003/ OEDD2

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(annual averages)

Currency Unit = Cedi

1986 US$1.00 = Cedi 89.2 1989 USSI.00 = Cedi 270.01987 US$1.00 = Cedi 153.7 1990 US$1.00 = Cedi 326.31988 US$1.00 = Cedi 202.4 1991 US$1.00 = Cedi 362.8 (first half)

ABBREVIATIONS AND ACRONYMS

ASYCUDA - Automatic System of Customs Data Entry, Control and ManagementBOG - Bank of GhanaCA - Crown AgentsCAG - Controller and Accountant GeneralCFF - Compensating Financing FacilityCIDA - Canadian International Development AgencyCOCOBOD - Ghana Cocoa BoardCPMU - Central Project Monitoring UnitDIC - Divestiture Implementation CommitteeEFF - Extended Fund FacilityEMS - Economic Management SupportERP - Economic Recovery Program or Export Rehabilitation ProjectERPTA - Export Rehabilitation Technical Assistance CreditESAF - Enhanced Structural Adjustment FacilityFINSAC - Financial Sector Adjustment CreditGCMB - Ghana Cocoa Marketing BoardGIC - Ghana Investment CenterGOG - Government of GhanaIDA - International Development AssociationIERD - International Economic Relations DivisionIMF - International Monetary FundIPA - Investment Projects Analysis DivisionISAC - Industrial Sector Adjustment CreditKfW - Kreditanstalt fur WiederaufbauMFEP - Ministry of Finance and Economic PlanningMSD - Management Services DivisionNDPC - National Development Planning CommissionNPART - Non-Performing Assets Recovery TrustNRS - National Revenue SecretariatODA - Overseas Development AdministrationOECF - Overseas Economic Cooperation Fund (Japan)OED - Operations Evaluation DepartmentOHCS - Office of the Head of the Civil ServicePAMSCAD - Programme of Actions to Mitigate the Social Costs of AdjustmentPETA - Public Enterprise Technical AssistancePFP - Policy Framework PaperPIP - Public Investment ProgramPNDC - Provisional National Defense CouncilPPA - Program Performance AuditPPAR - Program Performance Audit ReportRIC - Reconstruction Imports CreditSAC - Structural Adjustment CreditSAF - Structural Adjustment FacilitySAIS - Structural Adjustment Institutional SupportSAP - Structural Adjustment ProgramSAPSEC - Structural Adjustment Program SecretariatSAPT - Structural Adjustment Program TeamSEC - State Enterprises CommissionSOE - State-Owned Enterprise

FISCAL YEAR

January 1 - December31

FOR OFCIAL USE ONLYTHE WORLD BANK

Washington, D C 20433U.S.A.

Office of Director-4GneralOperations Evaluation

May 29, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Program Performance Audit Report on Ghana - First and

Second Structural Adjustment Credits (Credits 1777,

A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)

Attached, for information, is a copy of a report entitled "Program

Performance Audit Report on Ghana - First and Second Structural Adjustment

Credits (Credits 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)" prepared

by the Operations Evaluation Department.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

I I II

FOR OFFICIAL USE ONLYPROGRAM PERFORMANCE AUDIT REPORT

GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS(CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)

TABLE OF CONTENTS

Page No.

PREFACE ..................................................................... i

BASIC DATA SHEET ........................................................ iiiEVALUATION SUMMARY ....................................................... xi

PROGRAM PERFORMANCE AUDIT

I. IN TRODUCTION I.......................................... 1

II. OBJECTIVES OF BANK SUPPORT 2 .............................. 2

III. IMPLEMENTATION AND IMPACT 3 ............................. 3

Foreign Exchange and Trade Liberalization 3 .......................... 3The Exchange Regime 3 ...................................... 3Trade Liberalization 4 ....................................... 4

Price Incentives S ........................................... 5The Stimulation of Private Investment 6 .............................. 6Domestic Resource Mobilization ................................. 12Management of Public Sector Resources 7 ............................ 7

Public Expenditure Management 8 ................................ 8Civil Service Reform 8 ....................................... 8State-Owned Enterprise Reform 9 ................................ 9External Support 9 .......................................... 9

IV. RECENT ECONOMIC PERFORMANCE ........................... 10

Overview 11 ............................................... I1

V. EVALUATION ........................................... 12

Program/Project Cycle Issues ................................... 12Design ................................................ 12Appraisal .............................................. 15Implementation ........................................... 16Supervision ............................................. 17

Specific Components ........................................ 18SOE Reform ............................................ 18Cocoa ................................................ 19Tax Policy and Administration ................................. 20

The Effect of Adjustment on the Poor and Other Vulnerable Groups ............ 21Overall Evaluation ......................................... 23

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (cont'd.)Page No.

VI. SUSTAINABILITY ..................................................... 26

VII. LESSONS ............................................... 27

PROGRAM COMPLETION REPORT

PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE ..................... 33

Background to the Bank's Involvement in Program Lending in Ghana ..................... 33The First Phase of Program Lending: Supporting Economic Recovery ..................... 33The Second Phase of Program Lending: Supporting Structural Adjustment ................... 36

(a) The First Structural Adjustment Credit ....................................... 36(i) Preparation of the Credit ............................................ 36

(ii) Design of SAC I ...................................................... 37(iii) Implementation of SAC I .............................................. 40

(b) The Second Structural Adjustment Credit ...................................... 45(i) Preparation of the Credit .............................................. 45

(ii) Design of SAC II ................................................... 46(iii) Implementation of SAC II ............................................. 48

Why Were Some Components of the Program More Successful than Others? . . . . . . . . . . . . .. . . 53

PART II - PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE ............. 54

Economic Performance Under the Structural Adjustment Program ......................... 54Economic Reforms Under the Structural Adjustment Program ........................... 55

PART III - STATISTICAL DATA ................................................ 57

Basic Credit Sheets:SAC I (Cr. 1777-GH) ........................................................ 57SAC I African Facility (Cr. A025-GH) ........................................... 59SAC I African Facility Supplement (Cr. A025-l-GH) ................................ 61SAC II (Cr. 2005-GH) ......................................................... 63SAC II Supplement (IDA Reflows) (Cr. 2005-1-GH) ................................. 65SAC II Supplement (IDA Reflows) (Cr. 2005-2-GH) ................................. 67

ANNEX: Implementation Matrix ................................................... 69

ATTACHMENTS

1. Comments Received from KfW on the Draft PPAR .............................. 852. Comments Received from OECF on the Draft PPAR ............................. 873. Comments Received from Sweden on the Draft PPAR ............................ 914. Comments Received from the EEC on the Draft PPAR ............................. 93


GHANA


PREFACE

This is a Program Performance Audit Report (PPAR) on the First andSecond Structural Adjustment Credits in support of Ghana's structuraladjustment program, which reflects the shift in emphasis after 1985 of theEconomic Recovery Program started in 1983. The first of these credits --SAC I, Credit 1777-GH, African Facility A025 -- was approved in April 1987,became effective at the end of May 1987, and was closed in June 1990. Asupplementary credit from the African Facility A025-1-GH was approved inOctober 1987, became effective a month later, and was closed in June 1990. Thesecond credit -- SAC II, Credit 2005-GH -- was approved in April 1989, becameeffective in June 1989, and was closed in March 1991. SAC II Supplement (IDAReflows) Credits 2005-1-GH and 2005-2-GH were approved in October 1989 andNovember 1990 respectively, and were closed in March 1991. Cofinancing ofUS$60.1 million was linked to SAC I, and US$153.9 million to SAC II.

The PPAR consists of the Program Performance Audit (PPA) prepared bythe Operations Evaluation Department (OED) and the Program Completion Report(PCR) prepared by the Africa Region (Parts I and III) and the Borrower(Part II). The PPA is based on the attached PCR, the President's Reports, thecredit documents, on a study of Bank files, and on discussions with Bank staff.An OED mission visited Ghana in October/November 1991, and discussed theeffectiveness of the Bank's assistance with the Ministry of Finance andEconomic Planning, the Bank of Ghana, the Cocoa Board, the State EnterpriseCommission and other relevant ministries and agencies. The mission also metwith representatives of the private sector. Their kind cooperation andvaluable assistance in the preparation of this report is gratefully acknowl-edged.

The PCR provides a good account and assessment of the programexperience. The PPA elaborates on the strengths and weaknesses of the Bank'sperformance and on the lessons to be learned.

The draft PPAR was sent to the Government of Ghana and cofinancingagencies for comments. The comments received from the co-financiers (KfW,OECF, Sweden, and the EEC) are reproduced as Attachments to the report; nocomments were received from the Government.

I I

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GHANA

FIRST STRUCTURAL ADJUSTMENT CREDIT

(CREDITS 1777, A-025, and A-025-1-GH)

BASIC DATA SHEET

CREDIT POSITION

(Amounts in USS Million)

As of Mar. 31, 1992

Credit Oriainal Disbursed /a Cancelled Repaid Outstandinq /a

1777 34.0 35.2 - - 36.7

A-025 81.0 83.3 - - 87.4

A-025-1 15.0 15.2 - - 15.8

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a

Cr. 1777 FY87 FY88 FY89 FY90

Appraisal Estimate (US$M) 7.5 17.0 34.0 -

Actual (US$M) 10.2 11.0 33.7 35.2

Actual as % of Appraisal (%) 136% 65% 99% -

Date of Final Disbursement: May 31, 1990

Cr. A-025 FY87 FY88 FY89 FY90

Appraisal Estimate (US$M) 23.0 73.0 81.0 -

Actual (US$M) 16.5 16.5 63.4 83.3

Actual as % of Appraisal (%) 72% 22% 78% -

Date of Final Disbursement: August 31, 1990

Cr. A-025-1 FY88 FY89 FY90 FY91

Appraisal Estimate (US$M) n.a. n.a. n.a. n.a.

Actual (US$M) - - 15.0 15.2

Actual as % of Appraisal (%) - - - -

Date of Final Disbursement: July 3, 1990

/a The credits were fully disbursed. Disbursed and outstanding totals

differ from the original amount of the credits in terms of USS because

of changes in the US$/SDR exchange rate.

- iv -

PROGRAM DATES

Cr. 1777 Actual

Initiating Project Brief 12/31/85

Initiating Memorandum 02/26/86

Letter of Development Policy 03/02/87

Negotiations 02/23/87

Board Approval 04/14/87

Signing 05/19/87

Effectiveness 05/29/87

Credit Closing 06/30/90

Cr. A-025 Actual


Signing 05/19/87



Cr. A-025-1 Actual


Signing 10/30/87



STAFF INPUTS

(staffweeks)

FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL

Preappraisal 4.1 - 80.6 4.5 - - - - 89.2

Appraisal 6.7 - - 100.4 - - - - 107.1

Negotiations - - - 19.7 - - - - 19.7

Supervision - - - 11.7 66.8 12.5 2.9 4.9 98.8

Other - - 26.6 28.7 1.6 - - - 56.9

Total 10.8 - 107.2 165.0 68.4 12.5 2.9 4.9 371.7

MISSION DATA

No. of No. of Staff

Month/Year Weeks Persons Weeks

Appraisal 07/86 3.0 9 27.0

Supervision I 07/87 3.0 4 12.0

Supervision II 02/88 1.5 7 10.5

OTHER PROGRAM DATA

Borrower/Executing Agency: Republic of Ghana

Follow-on Operations:

Operation: Structural Adjustment Credit II

Credit No.: Credits 2005/2005-1/2005-2-GH

Amount: US$134.0 million

Board Date: April 18, 1989

Operation: Financial Sector Adjustment

Credit No.: Credits 1911/1911-1-GH


Board Date: May 31, 1988

Operation: Education Sector Adjustment II

Credit No.: Credit 2140-GH



Operation: Private Investment Promotion




- vii -


GHANA

SECOND STRUCTURAL ADJUSTMENT CREDIT(CREDITS 2005, 2005-1, and 2005-2-GH)

BASIC DATA SHEET

CREDIT POSITION(Amounts in USS Million)

As of Mar. 31. 1992

Credit Oriqinal Disbursed /a Cancelled Repaid Outstandinq /a

2005 120.0 119.8 - - 121.8

2005-1 5.7 6.3 - - 6.3

2005-2 8.3 8.0 - - 8.2

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a

Cr. 2005 FY90 FY91

Appraisal Estimate (US$M) 60.0 120.0

Actual (US$M) 56.7 119.8

Actual as % of Appraisal (%) 95% 100%

Date of Final Disbursement: February 1, 1991

Cr. 2005-1 FY90 FY91

Appraisal Estimate (US$M) 2.0 5.7Actual (US$M) - 6.3

Actual as % of Appraisal (%) - 111%

Date of Final Disbursement: September 13, 1990

Cr. 2005-2 FY91

Appraisal Estimate (US$M) 8.3

Actual (US$M) 8.0

Actual as % of Appraisal (%) 96%Date of Final Disbursement: May 16, 1991

/a The credits were fully disbursed. Disbursed and outstanding totalsdiffer from the original amount of the credits in terms of USS becauseof changes in the US$/SDR exchange rate.

- viii -

PROGRAM DATES

Cr. 2005 Actual

Initiating Memorandum 05/23/88

Letter of Development Policy 11/23/88

Negotiations 11/21/88


Signing 05/01/89

Effectiveness 06/09/89Credit Closing 03/31/91

Cr. 2005-1


Signing 01/19/90Effectiveness 04/12/90


Cr. 2005-2Board Approval 11/06/90

Signing 12/21/90



STAFF INPUTS

(staffweeks)

Pre-

FY87 FY88 FY89 FY90 FY91 TOTAL

Preappraisal 2.6 77.6 - - - 80.2

Appraisal - 2.0 33.9 - - 35.9

Negotiations - - 39.8 - - 39.8

Supervision - - 1.9 28.2 9.7 39.8

Other - 8.0 1.2 - - 9.2

Total 2.6 87.6 76.8 28.2 9.7 204.9

MISSION DATA

No. of No. of StaffMonth/Year Weeks Persons Weeks

Appraisal 06/88 1.5 8 12.0Supervision I 11/89 2.5 7 17.5Supervision II 05/90 1.5 4 6.0

- ix -

OTHER PROGRAM DATA

Borrower/Executing Agency: Republic of Ghana

Follow-on Operations:

Operation: Financial Sector Adjustment

Credit No.: Credits 1911, 1911-1-GH



Operation: Education Sector Adjustment II

Credit No.: Credit 2140-GHAmount: US$50.0 million


Operation: Private Investment Promotion




t

I

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- xi -


GHANA


EVALUATION SUMMARY

Introduction cluding US$215 million in co-financing for IDA's Structural Ad-

1. In 1983, the Government of justment Credits I & II (SAC I &Ghana launched its Economic Recovery II).Program (ERP) to reverse the deteri-oration of the economy through The Objectives of World Bank Supportmacroeconomic measures to stabilizethe economy and through structural 4. World Bank program support foradjustments to correct serious dis- Ghana's SAP consisted of SAC I & II,tortions and disincentives. Sub- several sector adjustment, projectstantial progress was made in re- and technical assistance credits;ducing inflation and the deficit in and recently, one for a "Program tothe overall balance of payments by Promote Private Investment and Sus-the end of 1985. tained Development".

2. Following consultations with 5. The objective of SAC I was tothe IMF and the Bank, the Government support:decided in 1985 to shift the em-phasis of the ERP toward structural a) trade liberalization, by:adjustment. The objectives of thisStructural Adjustment Program (SAP) * merging the two-tiered marketwere to: for foreign exchange and

using the auction determineda) "establish an incentive frame- rate for all officially

work that would stimulate funded transactions thereby

growth, encourage saving and ending the exchange rate taxinvestment, and strengthen the against cocoa and the subsidybalance of payments; and of oil imports;

b) to improve resource use, par- . removal of quantitative re-ticularly in the public sector, strictions on imports, andand direct resources to key related tax and tariff re-areas of adjustment, while en- forms;suring fiscal and monetarystability." b) an incentive framework to stim-

ulate growth through:3. The SAP attracted Fund supportof over US$600 million during . the payment to cocoa growers1987-90, Bank support of about of a larger share of theUS$480 million, and substantial f.o.b. price, to be financedsupport from bilateral donors in- mainly by cost-cutting im-

- xii -

provements in the Cocoa Mar- discrimination against importsketing Board; and has been eliminated by the re-

moval of the 10% tax on specialc) improved resource use in the license imports and by equal-

public sector, through: izing the excises on importsand locally produced goods.

* changes in public expenditure Customs duties on goods other

and tax policy; than luxuries were reduced from30% to 25%. Some trade liber-

* state-owned enterprise re- alization pursued under the

form; and Industrial Sector AdjustmentCredit (ISAC) included the

* better public sector manage- elimination of export permits

ment. and the redesign of the draw-back to remove the tax element

6. SAC II supported a program with on exporters. Trade liberal-

essentially the same objectives, ization was accompanied by the

except that there was greater empha- gradual removal of price con-sis on tax reform and on the promo- trols.tion of private sector developmentthan under SAC I. * c. Price Incentives -- action

focussed on cocoa producer

Implementation Experience & Results prices. These increased innominal terms from Cedi 56,600

7. The implementation experience per ton in 1985/86 to Cedi

under SAC I & II was highly, though 224,400 in 1990/91; and pro-

not uniformly, positive. The main ducers' share of the f.o.b.measures were the following: price increased from 24% to 47%

during that period. In real

* a. The Exchange Regime and terms the price fell by over 6%

Rate -- the auction was widened between those dates due to theto include all current trans- sharp decline in internationalactions; foreign exchange cocoa prices and the resurgencebureaus were allowed; the re- of domestic inflation.tail auction was replaced by awholesale one in which eligible * d. Stimulation of Private

banks and bureaus can bid; Investment -- efforts compriseddealers may trade among them- improvements in infrastructureselves in an interbank market and the policy environment.and are free to retail at rates Among the latter, the signifi-

negotiated with buyers. The cant measures taken under theovervaluation of the exchange SAP were the updating of therate was corrected; the spread Investment Code, the setting upbetween the parallel market and of export financing facilities,the official rate fell from 87% the lowering of the corporate

in 1986 to 3% at mid 1991. tax rate, reduction in importduties on semi-processed goods,

* b. Trade Liberalization -- the the increasing of corporate tax

import license requirement for rebates to exporters, and theaccess to the foreign exchange increase in the retention rate

auction was discontinued, and of foreign exchange allowedthe system of licenses abol- exporters.ished in January 1989. Tax

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* e. Domestic Resource Mobiliza- group of trained budgettion -- policies were aimed at preparation officers re-restoring confidence in the sulting in the timely prep-financial system and at in- aration of the annual budgetcreasing public sector resource statement;mobilization:

- civil service reform re-- Under the Financial Sector sulting in the retrenchment

Adjustment Credit (FINSAC), of an average of 12,000 staffthe Banking Law was amended per year over the periodto set capital adequacy and 1987-91 with the program con-reserve requirements, stipu- tinuing through 1992, andlate loan limits and formal- increased real pay and theize reporting requirements widening of the pay range tofor banks. The Non-Per- make high level positionsforming Assets Recovery Trust more attractive; andwas established to exchangefor GOG bonds the non-per- - the selling of 15 SOEs to theforming assets held by Banks. private sector and theBank supervision by BOG has closing of 23 others. Underbeen strengthened, and a a program of restructuring,Stock Exchange and a Credit performance monitoring andClearing House have been set evaluation 15 of 17 SOEs con-up. Banks have implemented stituting a core group torestructuring plans, reduced remain in the public sector,operating cost, and improved and which formerly losttheir efficiency. money, became profitable.

However, given the size of- Public sector resource the sector, the pace of SOE

mobilization has benefitted reform, particularly divesti-from a shift toward consump- ture, has been slow.tion based taxes and betteradministration. The budget Impact on the Poor and Otherdeficit has been eliminated Vulnerable Groupsand the GOG is no longer anet borrower from the private 8. The impact of the SAP at thesector and the monetary sys- household level depended primarilytem. on whether or not any or all of its

members lost their job and the ef-* f. Management of Public Sector fect of higher prices of output on

Resources -- emphasis was on money income and of higher prices ofpublic expenditure management, goods and services purchased on thecivil service reform and reform level of real consumption. Theof state-owned enterprises. impact of the SAP on the poorestAchievements included: groups appears to have been only

moderately negative in the early- improvements in public ex- stages and positive over the longer

penditure management term as the economy has grown, realinvolving the preparation of incomes have increased, the terms ofa detailed Public Investment trade have turned in favor of theProgram and its linkage to rural areas, and GOG has improvedthe regular Capital Budget, social services and oriented healthand the creation of a core

- xiv -

and education services more toward Sustainabilitythe poor.

11. The reforms under the SAP have9. In 1987 the Government of been so comprehensive and the GOG'sGhana, assisted by a secretariat commitment so firm that a reversalfunded by the Bank, prepared a "Pro- of policy directions is highly im-gramme of Actions to Mitigate the probable as long as this administra-Social Costs of Adjustment" tion remains in control. Moreover,(PAMSCAD). PAMSCAD was comprised of it is unlikely that a new government23 projects intended to generate could easily restore the regulatoryemployment, help those whose jobs and control mechanisms that havewere eliminated, meet the basic been removed. Therefore, the bene-needs (including education) of vul- fits from the SACs are likely to benerable groups, and promote com- sustained. The underlying assump-munity initiative projects. The tion is that Ghana is not faced withBank helped to organize a meeting of another severe shortage of foreigndonors in 1988, and US$85 million exchange which provokes non-marketwas pledged. Direct Bank/IDA sup- approaches to its allocation andport was in the form of a US$10 conservation. In practical termsmillion credit -- Priority Works this means that it is assumed thatProject (IDA Credit No. 1874-GH). Ghana will enjoy foreign inflowsRecent evaluation of PAMSCAD found adequate to bridge the gap betweenthat while it did mitigate the ef- Investment and National Savingsfects of adjustment on some vulner- mentioned above.able groups, it did not target thepoorest groups; and that design Evaluationweaknesses led to slow implementa-tion and limited effectiveness. 12. Ghana's structural adjustment

effort supported by SAC I & II hasEconomic Performance been highly successful. The major

factor was that the Government of10. The main macroeconomic indica- Ghana was highly committed to struc-tors of the effectiveness of the SAP tural adjustment and implemented ahave been positive. GDP grew at an wide range of measures promptly andaverage rate of 5% during 1986-90, wholeheartedly. Weakness of imple-in spite of unfavorable interna- mentation capacity, due to deficien-tional factors -- depressed price of cies in the structure and staffingcocoa on the world market, and sharp of institutions, and in managementincreases in the price of crude oil information systems in the publicand petroleum products. The Invest- sector, was the major constraint onment/GDP ratio rose from 9.7% to the structural adjustment process.16%; National Savings/GDP increased Facing this fact, the GOG set up thefrom 5.1% to 8.2%; exports grew at Structural Adjustment Program Secre-over 8% annually, and the level of tariat (SAPSEC) under the office ofgross international reserves in- the Chairman of the PNDC Secretariescreased by US$120 million notwith- to enable continuous high levelstanding a strong deterioration in political monitoring of the program,the terms of trade. However, this and to ensure that measures forpositive performance was accompanied decision by the Council were broughtby a resurgence of inflation in 1990 before it promptly. In addition,which showed signs of tapering off ten special units and task forces,in 1991. coordinated by SAPSEC, were set up

-xv -

to implement various parts of the SAP fostered an unambiguousprogram. sense of ownership of the pro-

gram by GOG;13. The pace of implementation wasmarkedly slower where adjustment * implementation -- arrangements,required changes in the structure of especially for SAC I, kept theinstitutions and the recruitment of political directorate andskilled staff rather than just senior officials informed, andchanges in rules. In addition, the provided for adequate coordina-paucity of up-to-date financial and tion and monitoring;other information for proper manage-ment decisions slowed the pace at . supervision -- Bank staff'swhich changes could be made, e.g. hands-on supervision facili-the divestiture of SOEs. The pace tated the work on the PIP,was also slower where adequate Budget, Tax Reform, Public Ex-studies had not been done, and a penditure Review, and to abasis for agreement at the technical lesser extent the Civil Servicelevel was lacking. Reform. Staff devoted twice as

much time to supervision as14. The main strengths of these SAC they have to the average Africaoperations lay in the following: Region SAL operation.

* timing -- they were the natural 15. Comparison of specific com-next steps in Bank support to ponents and interview results sug-Ghana's ERP, given the mutual gest that there were some weaknessesconfidence built up in the post in these generally successful opera-1983 period; tions. These include:

* consultations -- there were . ESW -- in cocoa marketing and

extensive consultations within for SOE reforms, economic andBank, between Bank and GOG, sector work was inadequate tobetween Bank and Fund, and be- underpin the Bank' position intween Bank and other donors; its effort to convince the GOG

regarding the need for, and* complementarity -- the SACs and direction of, change;

rest of the Bank/IDA lendingprogram were mutually rein- * inexperience -- the Bank lackedforcing in support of the SAP; experience in the reform of SOE

sectors and in cocoa marketing* time frame -- an optimistic due to the small sample of

time frame conveyed a sense of countries of significance asurgency at the outset, but was cocoa exporters;flexible enough to permit moremodest targets under SAC II; * narrowness of perspective --

Bank insistence on specific* ESW -- a considerable amount of targets for divestiture of SOEs

high quality studies under- did not appear to take intopinned the success of the pro- account the policy and institu-gram; tional constraints facing pri-

vate investment at the time;* ownership -- the consultative other options were inadequately

approach to the design of the considered. Similarly, thefinancial implications of wide-

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spread retrenchment in a public environment. They need to besector dominated economy were convinced that policy changenot sufficiently considered; will be permanent and compre-

hensive, and that the "offi-* institutions -- Bank study of cial" attitude to private

institutions and analysis un- profit and wealth will be con-derlying institutional reform sistent with the enhanced rolewas limited. Thus there was no envisaged for the private sec-definition of future roles of tor. Frequent consultationsinstitutions that would lose between the government and theregulatory functions as liber- private sector can be useful inalization proceeded; making the latter comfortable

with the policy changes and in* continuity -- frequent turnover identifying the continuing im-

of Bank staff, regarded by the pediments to their response.client as disruptive of theadjustment process, was an un- c) The structural adjustmentdesirable feature of the Bank's process in such an economy re-conduct of these operations. quires that in addition to pro-

viding incentives to stimulate

Lessons private investment, the insti-tutional arrangements for as-

16. The most important lessons from sisting the private investor inreview of these operations are the mobilizing resources need to befollowing: put in place, and the legal

basis and administrative proce-

a) Brainstorming sessions in- dures need to be clarified forvolving the political and offi- potential investors as well ascial levels of government at for bureaucrats. All threethe design stage of the struc- requirements have to be ad-tural adjustment program have dressed early in the adjustmentconsiderable merit as a means process.of enhancing the client's senseof ownership of the program and d) Ghanaian officials concur instrengthening the commitment to the view that the success ofimplement it. As the Ghana the adjustment program in manyexample shows, the inclusion of areas owes much to "hands on"the private sector, unions and supervision by Bank staff. Thisother interests in such ses- allowed Bank expertise to but-sions can foster greater under- tress Ghanaian efforts in crit-standing and acceptability of ical areas in a manner that isthe necessary policy measures. not possible with contract as-

sistance, and permitted flexi-

b) Where, as in Ghana, the public bility in resolving unforseensector has been the dominant and unforeseeable problems inoperator in the formal economy implementation. The norms offor over thirty years and the staff time provided for super-culture or tradition of private vision of structural adjustmententrepreneurship has been sub- operations should be reviewedstantially weakened, private in light of this experience.entrepreneurs should be ex-pected to respond cautiously toa partial change in the policy


GHANA


I. INTRODUCTION

1.01 Throughout the 1970s Ghana's economy was dominated by public sectorproduction and commercial activities, and was badly managed. Support for thepervasive, inefficient public sector led to large budget deficits, which inturn fueled high inflation. The fixed nominal exchange rate became grosslyovervalued, shifting relative incentives away from exports and leading todeterioration of export performance and in the capacity to import. Decliningexports, imports and economic activity eroded the tax base and forced severecutbacks in Government social services, maintenance, and capital investment;thereby undermining the once well developed social and economic infrastructure,and further reducing productive capacity. Meanwhile, the policy environmentwas distorted by the tendency of successive governments to 'respond to theforeign exchange crises by increasingly restrictive import regimes, rationingand price controls. The lack of economic opportunities and declining realwages led to an exodus of skilled Ghanaians and to the flight of capital. Inthe early 1980's the grave economic situation was exacerbated by prolongeddrought, deterioration in the terms of trade, and the forced repatriation ofover a million Ghanaians from Nigeria.

1.02 In 1983, the Government of Ghana launched its Economic RecoveryProgram (ERP) to stabilize the economy, restore creditworthiness, rehabilitatethe export sectors, and reverse the downward trend in GDP. Substantialprogress was made in stabilizing the economy by 1985, specifically in reducinginflation and the deficit in the overall balance of payments. In light of theprogress on stabilization issues during the first phase of the ERP, theGovernment concluded that it was time to emphasize the restoration of growth,for which further reform of the exchange rate regime, higher cocoa producerprices, and greater efficiency in the public sector were necessary.

1.03 The ERP shifted toward a Structural Adjustment Program (SAP) whichincluded a macroeconomic stabilization component essentially continuing thedemand management begun in 1983 and a growth component containing measures toexpand exports and to improve mobilization of and efficiency in resource use.Given the dominance of the public sector in resource use, the program calledfor the reform of taxation to reduce distortions associated with the protec-tionist policies of the past, reforms to improve public sector management --better planning, budgeting and monitoring of expenditures, and more efficientuse of manpower -- not only in its central administrative apparatus but in thelarge state-owned enterprise sector devoted to commercial and productivefunctions.

1.04 The SAP attracted IMF support resulting in purchases of over US$600million during 1987-90. Bank support was provided in the form of about US$250million in structural adjustment credits plus over US$150 million in sectoradjustment credits and another US$77 in project/technical assistance credits.

There was substantial bilateral support, including US$215 million of co-financing for the Bank's structural adjustment credits.

II. OBJECTIVES OF BANK SUPPORT

2.01 World Bank program support for Ghana's ERP took the form of twoReconstruction Imports Credits, an Export Rehabilitation Credit and associatedTechnical Assistance Project. The shift toward structural adjustment wassupported by an Industrial Sector Adjustment Credit, two Structural AdjustmentCredits, a Financial Sector Adjustment Credit, and a Program to PromotePrivate Investment and Sustained Development. Bank project lending forStructural Adjustment Institutional Support, Public Enterprise TechnicalAssistance, Cocoa Rehabilitation, and Economic Management Support also wasdesigned to assist the SAP. While this is an evaluation of the StructuralAdjustment Credits I & II, there was considerable overlapping of objectiveswith other operations in support of the SAP, and frequently the measuresdirected at any objective were not unique to any one operation. This in turnmakes it difficult to ascribe specific impact to any subset of operationswithin the group supporting the SAP.

2.02 In 1985, following consultations with the IMF and the Bank, theGovernment decided to reorient the ERP to :

* establish an incentive framework that stimulates growth, encourages

savings and investment, and strengthens the balance of payments; and

* improve resource use, particularly in the public sector, and direct

resources to key areas of adjustment, while ensuring fiscal andmonetary stability.

2.03 The objective of SAC I was to support the following aspects of thereoriented ERP, which was thence also referred to as the SAP:

a) trade liberalization, specifically:

* the merging of the two-tiered market for foreign exchange by using

the auction determined rate for all officially funded transactions,thereby ending the exchange rate tax on cocoa and the subsidy ofoil imports;

* the removal of quantitative restrictions on imports, and related

tax and tariff reforms;

b) an incentive framework that stimulates growth through:

* cocoa sector policies leading to the receipt by growers of a largershare of the f.o.b. price to be financed mainly by cost-cuttingimprovements in the efficiency of the Cocoa Marketing Board.

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c) improved resource use in the public sector, through:

* changes in public expenditure and tax policy;* state-owned enterprise reform;

* better public sector management.

2.04 SAC II (approved in FY89) supported a program with essentially thesame objectives, except that there was greater emphasis on tax reform and onthe promotion of private sector development than there was under SAC I.

2.05 One other objective of Bank support was to facilitate and coordinatesupport by other donors, by sponsoring meetings of the Consultative Group forGhana.

III. IMPLEMENTATION AND IMPACT

ForeiRn Exchange and Trade Liberalization

The Exchange Regime

3.01 Before September 1983 the foreign exchange regime pegged the exchangevalue of the Cedi to the US dollar at Cedi 2.75 = US$1.00. During the nextthree years a series of discrete devaluations brought the exchange rate toapproximately Cedi 90 = US$1.00. In September of 1986 a dual exchange ratesystem was set up, in which there was a fixed rate for cocoa exports and forimports of petroleum products and essential drugs and an auction ratedetermined by competitive bidding among holders of eligible import licenses.Importers of consumer goods were not allowed to bid in the auction but had toacquire foreign exchange in a parallel market where there was a premium of over80% compared with the auction rate.

3.02 Under the structural adjustment program access to the auction has beenwidened by the inclusion of additional categories of consumer goods and servicepayments and the exchange market has been unified. First, the fixed rate forcocoa, petroleum, etc., was abolished in February 1987 after which alltransactions through the banking system were settled at the rate determined inthe weekly auction. In 1988, the Government, on its own initiative, furtherwidened the exchange market by permitting the setting up of foreign exchangebureaus, thereby redefining the legal system in such a way as to encourage theabsorption of the parallel market into the formal one. Subsequently, thespread between the bureau rate and the auction rate converged almost to thepoint of disappearance. In April 1990, the retail auction was replaced by awholesale auction in which banks and licensed bureaus meeting the eligibilitycriteria could participate. These dealers freely determine their bids at theauction and sell to their customers and to other dealers at mutually agreedrates. In addition, in order to promote the development of an interbankmarket, dealers are authorized to trade among themselves. The Bank of Ghanamay participate as a buyer or seller in this market.

3.03 Under the unified exchange market the exchange rate of the cedi isdetermined freely in this two level market. The retail market rate is the

effective rate except for customs valuation and official purposes for which theauction rate is used. The official exchange rate between the cedi and the USdollar has gone from 89.2 in 1986 to 326.3 in 1990 and to 358.8 during thefirst half of 1991. The real effective exchange rate of the cedi depreciatedby 36% between August 1986 and December 1990. For all practical purposes thecedi is now convertible.

3.04 The changes in the exchange rate and regime have:

* improved economic incentives, especially the profitability of

investment in the export sector and contributed significantly tothe 8% rate of growth in exports of goods and non-factor servicesduring 1986-1990;

* permitted increased access to imported inputs and in turn helped

to rehabilitate the productive base;

* facilitated fiscal adjustment by maintaining the buoyancy of

revenues from taxes on international transactions;

* aided trade liberalization;

* depoliticized the exchange rate by eliminating government dominance

of the exchange market and making the rate in the public mind aprice like any other price; and

* stimulated flows of remittances from abroad through official

channels.

Trade Liberalization

3.05 Until October 1986 imports were controlled within the framework of anannual import program and licensing system dictated by foreign exchangebudgeting and exchange control considerations. There were two types of importlicenses -- specific and special. Recipients of the former were allowed toimport goods not on a negative list (which included consumer goods) and to buythe requisite foreign exchange from the banking system, while recipients of thelatter were allowed to import but could not receive foreign exchange from theofficial system. In general, exporters were allowed to retain only 20% offoreign exchange earnings, the remainder had to be surrendered for cedis at theexchange rate in the auction. Exceptions were mainly gold exporters which hadlarger retention rights and cocoa with lower retention rights.

3.06 Under the structural adjustment program supported by SACs I & IIconsumer imports were gradually made eligible for financing throuph the foreignexchange auction, and became 100% eligible by February 1988.- The importlicense requirement for access to the auction was phased out, and the systemfinally abolished in January 1989. Meanwhile, during 1987-89 steps were takento liberalize current payments for invisibles, and by the end of 1989 only a

1' Except for a small list of luxury items.

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few minor restrictions remained. Parallel with the liberalization of trade,fiscal reforms were introduced to reduce the distortions in trade taxation andprotection. For instance, the customs duty on consumption goods other thanluxuries was reduced from 30% to 25%; the 10% tax on imports under the "specialimports" license was abolished; and sales and excise schedules were merged andsimplified by setting a common rate of 20% for most commodities. The foreignexchange retention by exporters was raised from 20% to 35%.

3.07 Some aspects of trade liberalization were simultaneously pursued underthe sector adjustment program supported by the Industrial Sector AdjustmentCredit. These included (a) simplification of export documentation by abolishingthe permit to export; (b) redesign of the duty drawback scheme to remove thetax element from exporter's cost; (c) study of pre- and post-shipment exportcredit; and (d) reorganizing and strengthening of the Export PromotionCouncil.

3.08 Liberalization of exchange and trade was accompanied by the gradualremoval of price controls. The Prices and Incomes Board now only gets involvedin determining the price of wheat from the single importer to millers toprevent the former from taking advantage of monopoly power. The Board alsomonitors the cost components of cement in view of the lack of competition inthe cement market. While the Board continues to monitor price trends,generally price controls are no longer enforced.

Price Incentives

3.09 Action to improve price incentives to provide more remunerative pricesfor exports focussed on cocoa. The nominal price received by cocoa growers wasincreased from 56,600 cedi per ton in 1985/86 to 224,400 cedi in 1990/91. Theshare of the f.o.b. price at the official exchange rate increased from 24% to47% during the same period. Nevertheless, with the steep rise in the ConsumerPrice Index from 4,245 (1977=100) to 17,933 and the fall in international cocoaprice from US$2,434 per ton in 1986 to US$1,270 in 1990, the real price tococoa producers (cedis/ton in 1977 prices) increased from Cedi(1977) 1,333 in1985/86 to Cedi(1977) 1786 in 1987/88 but fell back to Cedi(1977) 1,251 in1990/91. Clearly, the fall in real producer price would have been more severebut for the increase in the share of export proceeds paid to the grower. Theexport of beans increased from 171,747 tons in 1985 to 260,001 tons in 1990.

3.10 It had been hoped that the larger share to the producers would havebeen financed through the reduction in Cocobod operating costs from anestimated 22% of the f.o.b. export price in 1987/88 to about 15% in 1988/89,which would not have involved the sacrifice of the share going to theGovernment. Indeed, significant effort has been directed at improving theefficiency of the Cocobod. The work force has been reduced from 79,000 in 1984to 46,000 in 1991, and effectively to 43,000 due to vacancies; input subsidiesvalued at about 9,000 cedi per ton of cocoa produced have been eliminated;corporate planning has been introduced; and there has been some rationalizationof functions, especially in haulage of cocoa through increased reliance on therailway and on the private sector.

3.11 However, in spite of these cost reduction efforts, Cocobod costs in1990 have been estimated at 28% of the f.o.b. value of exports. This reflects

the impact of the dramatic fall in price on the international market and thefact that costs are determined independently of the price. In the absence ofthe dramatic decline in price the cost ratio would have been nearer the target.However, some aspects of program performance militated against achievement ofthe 15% target. The divestiture of plantations has been slower than expected-- only 7 of the 52 targeted for divestiture were sold by 1990; and there hasbeen no significant progress in restructuring the cocoa processing company.Similarly, the pace of retrenchment of the labor force has been slowed, as thefinancial burden of the severance payments is particularly onerous given thedepressed state of international cocoa prices.

The Stimulation of Private Investment

3.12 Of the three sets of actions to stimulate private investment --

rehabilitation of infrastructure, improvement in the attractiveness of thepolicy environment, and setting up joint ventures of selected state-ownedenterprises -- substantial progress was made in the case of the first two. Theoutstanding example of infrastructure rehabilitation was the improvement of theport at Takoradi.

3.13 Efforts to improve the policy environment included:

* the updating of the Investment Code in 1990 to include benefits to

existing enterprises;

* the setting up in July 1990 of export financing facilities for non-

traditional commodities;

* the lowering of the rate of the Corporate Tax applicable to

agriculture, manufacturing, real estate, construction and servicesto 35% in the 1991 Budget after having been lowered in the previousbudget from 55% to 50%, except for construction which had beenalready at 50% and was lowered to 45%;

* the reduction in the rate of import duty on semi-processed

intermediate goods to 10% from 15% in 1991;

* the raising in 1991 of corporate tax rebates on exports from a

range of 30-40% to 60-75% for agriculture depending on theproportion exported, and for manufacturing from 25% to 30%.

3.14 These efforts were only some of the many through which the Governmentof Ghana sought to address the constraints on investment residing in theuncertainty about the economy, and in concerns about taxation, the restrictiveand cumbersome regulatory framework, and access to credit and financing. Theconcern over access to credit and financing was addressed through a financialsector adj'ustment program (see below). In 1991, when it became clear that theweak link in the adjustment program was the inadequate response of privatedomestic investment, emphasis shifted to the re-examination of the legal,regulatory, and consultative framework in order to make it consistent witheconomic liberalization and the creation of a dynamic private sector. Thisreorientation is supported by an IDA credit for SDR 84.6 million (US$120million equivalent) which was approved by the Board in April 1991.

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3.1-5 Running counter to the positive measures that were taken is theperception in part of the business community that there has been a continuationof some anti-private sector biases in some parts of the Government, reflectedin vigorous pursuit of businessmen for alleged economic crimes, overzealous taxenforcement, and occasional direct intervention in private operations. Thesebiases were also reflected in slow processing of applications for registrationof new businesses, and the failure on the part of civil servants to showwillingness to clarify for new entrepreneurs the legal and administrativerequirements for doing business in Ghana. The predominance of officials in thearrangements for government/private sector consultations, and the slowness insetting up the consultative apparatus were also mentioned as negative factorsin the new economic environment.

Domestic Resource Mobilization

3.16 Saving and investment goals were pursued through policies to increasedomestic resource mobilization. These policies were to a) restore confidencein the financial system, and b) increase public sector resource mobilization.Accordingly, the Government of Ghana implemented during 1989-1990 a program,supported by an IDA Financial Sector Adjustment Credit (FINSAC), to improve theregulatory framework and provide better supervision of banks; to restructurefinancially distressed banks; and to improve mobilization of savings and theallocation of credit. In August 1989 the Banking Law was amended by the PNDCto set capital adequacy and reserve requirements, stipulate loan limits andformalize reporting requirements. In February 1990 the Non-Performing Ass-etsRecovery Trust was set up to receive the non-performing assets of banks inexchange for special GOG bonds. Simultaneously, bank supervision capabilityof the Bank of Ghana was strengthened. Subsequently, a Stock Exchange and aCredit Clearing House were established. Although the evaluation of the FINSACis outside the scope of this inquiry, it is fitting to point out that inresponse to these policies banks have begun to implement restructuring plans,have reduced operating cost and have improved their efficiency.

3.17 In order to improve the Central Government's contribution to domesticresource mobilization, the Government has made a fundamental change in its taxpolicy and has reduced the deficit in the recurrent budget. There has been adefinite movement away from taxes on production toward taxes on consumption,hence reducing the taxation of savings. Sales taxes have doubled theircontribution to revenue since 1986. At the same time there has been an attemptto widen the revenue base while trying to reduce the importance of taxes oncocoa exports. Taxation of petroleum has gained in importance, its contribu-tion rising from under 5% of revenue and grants in 1987 to nearly 22% estimatedin the 1991 budget. In order to improve the efficiency of tax administrationand reduce the costs of collection the National Revenue Secretariat has beenstrengthened and re-integrated into the Ministry of Finance and EconomicPlanning. The overall effect of these changes has been that revenue hasaveraged 12% of GDP during the 1987-90 period compared with 8% during thepreceding four year period. At the same time the deficit in the current budgethas been eliminated, with the result that the Government has been able to avoidborrowing(net) from the private sector and has been repaying its debt to themonetary system.

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3.18 The objective of maintaining positive interest rates has generally notbeen achieved, except for the maximum lending rate in 1989, mainly because ofthe resurgence of high inflation and the slow take-off of the demand for creditand financing by private investors.

ManaRement of Public Sector Resources

3.19 The structural adjustment program focussed on three areas: a) publicexpenditure management, b) civil service reform, and c) state-owned enter-prises. The two areas of expenditure management targeted for attention werethe Public Investment Program and the Annual Expenditure Budget.

Public Expenditure Management

3.20 The GOG has made significant progress in developing its capacity toprepare a detailed Public Investment Program(PIP) and in substantiallyintegrating the current year's program with the annual budget. There is a 15%internal rate of return threshold for inclusion of any project, and an i.r.r.calculation is required for all projects costing over US$5 million. For socialsector projects there may be no i.r.r. but projects must be cost effective.The composition of the PIP is determined in accordance with guidelines set outunder the ERP, which require that more than 50Z be allocated to infrastructure.Typically, the allocation has been 62% infrastructure, 22% productive sectors,and the remainder to the social sectors.

3.21 The original objective was to automate the putting together of thebudget by 1989. A small Budget Task Force was set up, trained, and providedwith computers and technical assistance to do the initial study. Today thereis a core group of 16 trained officers plus support staff, all dedicated tobudget preparation. Compared with the situation four years ago when the budgetstatement was not available until five months into the budget year and detailssome months later, the basic budget statement covering recurrent and capital,and including subvented organizations is now ready in January -- the firstmonth of the financial year. Printed, detailed versions are generally readyby April, although by March most ministries have received advance copies. Theprocess now fully conforms with the guidelines on personnel emoluments, thewage bill falling from 5.1% of GDP in 1986 to 4.3% in 1990, and its share oftotal expenditure falling from 27% to 24%.

Civil Service Reform

3.22 Civil service reform involved the retrenchment of surplus staff, therecruitment of needed high level skills, and pay reform. Compared with a targetof 15,000 per year to be released from the civil and the education servicesover a three year period 1987-90, actual retrenchment was just over 12,000 pervear over a four year period, and the program has been extended through 1992.The net reduction in the service was somewhat smaller because inadequatelycontrolled recruitment initially eroded some of the gains from retrenchment.Still, there has been a cumulative net employment reduction of 3% annually.The achievements of the skills mobilization scheme were modest and mixed. Thescheme provided for the recruitment of local consultants, long term recruitmentof Ghanaians from the private sector, inducement of Ghanaians abroad to return,and the payment of special duty allowances to serving Ghanaians to do special

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tasks. Attraction of Ghanaians from overseas was particularly unsuccessfulsince some mechanisms were not used for fear of provoking resentment within theservice. The GOG has decided to explore the alternative of a fast trackdevelopment program for promising young officers. Pay reform objectives havebeen partially achieved -- real pay has increased by 8.7% between 1986 and1990, and the pay scale has been decompressed so that the ratio of highest tolowest pay scales has gone from 5.4 to 1 in 1988 to 9.5 to 1 in 19 9 0.!i

State-Owned Enterprise Reform

3.23 The main objectives of the state-owned enterprises reform were toreduce the size of the sector through divestiture and to improve the efficiencyof priority enterprises remaining in the public sector through restructuring,performance monitoring and evaluation (PME). As of January 1991, 15 smallenterprises with a total value of 2 billion cedis had been sold to the privatesector, and 23 had been liquidated. Seventeen SOEs were identified as coreenterprises to remain in the public sector and to be included under the PMEsystem. While in 1988 fifteen (15) of the core enterprises had a net lossbefore tax of Cedi 417 million, they realized a net profit of Cedi 19 millionin 1989 and Cedi 26.9 million in 1990. Under the PME system the SOEs arerequired to provide quarterly and annual performance reports to the StateEnterprises Commission but most have been unable to meet this requirement ina timely manner due to weak internal management information systems, especiallyup-to-date audited accounts.

3.24 As of the end of 1990 there were 97 SOEs in the SEC data base, notincluding the core group to remain in the public sector, employing a total of92,350. Of these SOEs, 60 were profitable and generated profits of the orderof Cedi 15 billion in 1989, while 33 loss makers recorded a total operatingloss of Cedi 12.5 billion. It has been estimated that the 114 SOEs in the SECdata base represents about one-half of the total number of SOEs and about two-thirds of employment in the SOE sector. When account is taken of the size ofthe SOE sector, it becomes apparent that the pace of divestiture has been slow.The GOG continues to face a financial burden reflected in a net current flowof subsidies and subventions of the order of Cedi 2 billion per year to theSOEs and in loan guarantees amounting to about Cedi 25 billion.

External Support

3.25 External assistance officially committed to Ghana by bilateral andmultilateral sources (not including the IMF) rose from US$437 million in 1986to US$749 million in 1987 and was nearly US$850 million during the next twoyears. Net disbursement were US$372 million in 1986, remained at that levelin 1987, but increased strongly in the next two years to reach US$553 millionin 1989. The average official commitments during 1987-89 amounted to US$815million compared with US$418 million during 1984-86. The corresponding figuresfor bilateral sources only were US$411 million and US$146 million. While notall of the increase in bilateral assistance was support for the SAP a

21 See Division Study Paper No.2, Africa Technical Department, WorldBank: "Civil Service Pay & Employment Reform in Africa: SelectedImplementation Experiences" by Louis de Merode.

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substantial portion was; the cofinancing for the SAC credits mentioned aboveis indicative. 3/

3.26 The above review of some of the main structural adjustment actions andachievements indicate the broad range and depth of changes in policy andadministration attempted by the GOG under the SAP. In the following sectionan attempt will be made to gauge, albeit roughly, the impact of this effort andof the associated stabilization program on the economy.

IV. RECENT ECONOMIC PERFORMANCE

4.01 GDP grew at an average rate of slightly more than 5% per annum -- theSAC target -- during 1986-89, and at 3.3% in 1990 due mainly to drought. Withpopulation growing at 2.6%, growth in real GDP per capita was positivethroughout the period. Underlying this growth in GDP was a significantresurgence in cocoa production of 26.7% between 1986 and 1990 notwithstandingthe decline in the export price of cocoa. Mining grew at 10% per year inresponse to renewed investments in gold; manufacturing continued to recoveralthough the impetus was provided by fuller capacity utilization and this wasbeing exhausted; utilities grew at about 10% and so did the private part of theservices sector. Agriculture (not including cocoa) was the weak performeramong sectors, with average GDP growth of just over 1% per annum during1986-90.

4.02 Investment improved during 1986-90, with the Investment/GDP ratiorising from 9.7% to 16%. While this means that the revised target of 16% setunder SAC II has been achieved, the growth of investment is still short of thatnecessary to meet long term GDP growth aspirations. Although the privatesector's contribution to the recovery of investment was significant, havingincreased from 2.1% of GDP to over 8% according to preliminary estimates, thiswas concentrated in mining and real estate and hence not indicative of a broad-based resurgence consistent with the intended shift from a public sectordominated to a private sector led economy. This has been recognized by the GOGand, with IDA support, a program to address the specific requirements for amore vigorous private response was put in place in 1991.

4.03 National savings increased during 1986-90 from 5.1% to 8.2% of GDP,reflecting the sharp rise in private saving from 3.4% of GDP in 1986 to 6.5%in 1990. Given that per capita income was increasing at about 2%, the impliedmarginal savings rate of over 30% is remarkable. This growth fell just shortof the revised target set for SAC II and substantially short of the moreoptimistic target of over 14% set under SAC I. Clearly, even if thesignificant capital inflows from overseas required to sustain the level ofinvestment consistent with growth targets do in fact materialize, a substan-tially greater fraction of incremental per capita income will have to be savedin future. This would seem to require that the rate of inflation fall and thatinterest rates become positive.

3/ OECD: "Geographical Distribution of Financial Flows to DevelopingCountries", Paris, 1991.

4.04 While CDP per capita rose at approximately 2% per year over theprogram period, private consumption per capita rose more slowly due to theincrease in the rate of saving. This explains the public perception in Ghanathat the adjustment program has brought less prosperity than the 5% per annumGDP growth rate would imply.

4.05 Exports of goods and non-factor services grew at an average rate ofover 8% annually during 1986-90, but the expected current account surplus ofUS$110 million per year was not realized due to deterioration in the terms oftrade, and especially the steep fall in the international price of cocoa.4These facts notwithstanding, Ghana was able to increase its gross internationalreserves from US$149 million at the end of 1986 to US$269 million at the endof 1990 and to reduce almost to the point of elimination the arrears on currentpayments. Repatriation of Ghanaian savings from overseas, estimated at overUS$200 million annually over the last two years, contributed significantly tothe recent improvement in the capital account.

4.06 As of the end of 1990 inflation had not been brought under control,the GDP deflator increasing at 34% in that year, approximately the averageannual rate of increase over the previous four years. The Consumer Price Indexshowed that up to 1989 inflation had been abating, albeit slowly, but thatthere was a resurgence in 1990. This resurgence has been attributed to higherfood prices due to poor crops resulting from drought and to a steep rise in theprices of petroleum products due to a sharp increase in world crude oil pricesas well as heavier excise taxes on the main petroleum products. There was asignificant reduction in inflation during 1991 partly in response to monetarypolicy aimed at reducing the excess liquidity that in 1990 had validated cost-push pressures.

Overview

4.07 Aside from the performance indicators mentioned above, there areothers indicative of the success of stabilization efforts. The fiscal balanceimproved, the broad fiscal deficit"' having been reduced from 3.3% of GDP in1986 to 2.4% in 1990. External debt service6/ as a percent of export of goodsand services was reduced from 47.8 in 1986 to 37.9 in 1990. The rate ofincrease in the supply of broad money fell from 53.7% in 1986 to 18.0% in 1990.Meanwhile, the overvaluation of the exchange rate was corrected, the spreadbetween the parallel market and the official rate fell from 87% in 1986 to 3%at mid 1991, and, for all practical purposes the cedi became a convertiblecurrency.

4/ Cocoa prices realized for Ghanaian exports fell by 46% between 1986and 1990.

5' Including capital expenditure financed through external project aid.

6/ Including the IMF.

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4.08 The question arises as to what extent the economic response notedabove was a byproduct of the substantial assistance received by Ghana after1986.1' It is difficult to separate the effect of aid on growth from that ofpolicy changes. However, it can be noted that a comparative study ofadjustment programs in seven African countries,-' showed that the aid percapita disbursed in 1987 to Ghana was slightly lower than the average forGuinea, Kenya, Madagascar, Malawi and Togo, and substantially lower than forSenegal, but that most of these countries did not match Ghana's growthperformance. Thus it would seem that while aid flows most likely assisted,this factor alone would not explain the growth rates achieved by Ghana.

4.09 While it can be stated with confidence that the performance of theeconomy outlined above broadly reflects the impact of the economic recoveryprogram, it is less clear how much is attributable to the effects of thestructural adjustment emphasis after 1985. The likely existence of lagsbetween implementation of policy change and the appearance of the effects oneconomic performance indicators suggests that the drawing of detailedconclusions regarding the effects of particular parts of the Ghanaian economicprogram should be approached with caution.

V. EVALUATION

5.01 The structural adjustment effort in Ghana has been successful in thatthe Government of Ghana has implemented a wide range of measures promptly andwholeheartedly, thereby achieving a substantial reorientation of the policyenvironment in a direction favoring greater efficiency in the use of resourceswithin the public sector and an enhanced role for the private sector in theeconomy. The macroeconomic indicators suggest that the economy continues itsrecovery from the negative growth, high inflation, and foreign exchange crisisof the early 1980s. However, the adjustment is an on-going process and furthermeasures are being introduced. So far, the private sector investment responsehas been slower than anticipated, and is now the subject of special attention.

5.02 The review of SACs I & II can serve to identify the strengths andweaknesses of the structural adjustment process and the Bank/IDA's role in it.The review is approached first from the point of view of program/project cycleissues. This is followed by a review of a sample of components to see whatfactors may have resulted in the differences in performance.

Program/Project Cycle Issues

Design

5.03 Several aspects of the design of SACs I & II stand out as having beenimportant in determining the generally positive outcome.

7/ See para. 3.25 above.

s' Robert H. Nooter & Roy A. Stacy, "Progress on Adjustment in Sub-Saharan Africa" dated October 15, 1990.

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* The structural adjustment program (SAP) and the supporting SAC Iwas timed to continue the natural progression of response to aneconomic crisis from the provision of emergency imports, rehabili-tation of the export sectors and the requisite infrastructure, andthe stimulation of recovery in the productive sectors to acomprehensive overhaul of the policy framework to serve areoriented economic strategy. This timing took advantage of thepossibility for policy dialogue in a context of mutual confidencebuilt up during the post 1983 crisis, and of the recognition by GOGthat more profound changes in the policy environment were neededto continue the recovery.

* There were extensive consultations:

a) within the Bank -- between Country Operations and Projects,Technical Divisions;

b) Bank/Fund -- several meetings to discuss coor-dination of support for Ghana's ERP, and acommon PFP;

c) Bank/GOG -- brainstorming sessions in July/August 1986served to identify the major adjustment issues and toagree approaches to them;

d) GOG/Private Sector -- brainstorming sessions also includedthe private sector, trade unions, and the press;

e) Bank/Donors -- meetings between the Resident Mission anddonors to discuss SAP details, and the inclusion of staff ofone donor in the appraisal mission.

* The SACs were an integral part of a lending program unified by theobjective of supporting Ghana's ERP. ISAC, SAIS, FINSAC, EMS,91although addressing particular aspects of adjustment, shared thecommon objective of adjusting the policy environment and institu-tions in the same direction as the SACs. This situation lentitself to the use of mutually reinforcing cross-conditionalitywhich would have increased Bank leverage had this been necessary.

* SAC I called for a wide variety of policy measures and institu-

tional changes to be accomplished within an optimistic time frame,especially given the capacity constraints imposed by the scarcityof skilled and experienced officials in the public service, and bythe available information base. SAC II was designed around moremodest targets.

91 Industrial Sector Adjustment Credit - ISACStructural Adjustment Institutional Support - SAISFinancial Sector Adjustment Credit - FINSACEconomic Management Support - EMS.

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* Considerable economic and sector work and project financed studies

were undertaken jointly with the GOG during 1985 and 1986. Thiswork included comprehensive reviews of public expenditures, and ofthe agricultural and industrial sectors. Attempts to study cocoamarketing and state-owned enterprises were not fruitful. Manycomponents of the structural adjustment program were designed onthe basis of this recent economic and sector work. This wasespecially true of the tax reform component which benefitted froma Trade Taxation and Tariff Review (1986), a Study of the Sales TaxCredit System, a Study of the Taxation of Investment, and a Studyof Income Taxation (1989).

5.04 The approach to the design of the SACs fostered an unambiguous senseof ownership of the program by the Government of Ghana and a high level ofcommitment to its implementation. The existence of recent studies were helpfulin providing convincing evidence of the need for action and of the potentialefficacy of certain measures. In some cases where such preparatory work hadnot been done, the Bank failed to convince the GOG of the merit of particularcourses of action, eg. in cocoa marketing reform and reform of state-ownedenterprises. The result was that the GOG was not fully committed initially tothese components. In any event, the absence of adequate information meant thateven if there had been total commitment, some necessary decisions could nothave been taken.

5.05 At the same time some aspects which negatively affected performanceof the SAP point to some areas of weakness in the approach to design of thepackage. Primary focus necessarily had to be on the measures to be implementedin order to change outcomes by changing procedures and/or institutions. Butthis focus should not preclude attention to side effects, for these can impedethe success of the program. Some categories of side effects were not givenadequate attention in the design of the structural adjustment process:

a) financial -- specifically the cost of severance benefits associatedwith the massive retrenchment in the SOEs. This is said to haveslowed retrenchment in the Cocobod and the divestiture of SOEs.This was partly addressed under SAL II by allowing retrenchmentcosts in'SOEs to be covered by grants from the budget of GOG, butit is not clear that firm targets were set and the fiscal implica-tions fully analyzed. Lack of up-to-date financial information onmost SOEs was also a factor in the absence of clear estimates ofretrenchment costs;

b) institutional -- little thought was given to revising the roles ofinstitutions made obsolete by the liberalization of the regulatoryframework. In the absence of ready programs defining their newroles, institutions such as the Ministry of Trade and the Pricesand Incomes Commission tend to search for new functions to justifytheir staffing and indeed their survival. This could result inoverlapping with other parts of Government and to continuedinefficiency of public sector resource use;

c) unemployment/underemployment -- the commitment of the politicaldirectorate in charge of the economy to a process of structural

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adjustment will depend on the extent to which the program issensitive to and addresses an existing or potential unemploy-ment/underemployment problem. It seems to have been assumed thatthe expansion of the economy would occur promptly and new jobswould be created, and/or the unemployed would be absorbed in theinformal sector. In the case of Ghana, which had just absorbedabout a million returnees from Nigeria, these assumptions shouldhave been carefully examined. Several reports suggest that the GOGperceived the existence of and was concerned about an unemploy-ment/underemployment problem especially among youth in urbanareas.- 10

d) temporary adjustment problems -- trade liberalization, thecenterpiece of Ghana's SAP, to push industries to become morecompetitive internationally and to develop export potential,involved the reduction of effective protection by the removal ofnon-tariff barriers and the reduction of tariffs. Some productiveactivities cannot survive in the atmosphere of internationalcompetition, but others can if given time and assistance to adjust.Attempts to address the interim adjustment problems of the latterreflected in phased reduction of protection and the provision ofspecial financing and technical assistance facilities are sometimesused in SAL operations, but were not initially considered in theGhana case. Advance planning for the interim problems can help toreduce the burden of adjustment by minimizing the loss of salvage-able activities. This is particularly important where productiveactivity is dominated by the SOE sector and the financial burdenof adjustment will be concentrated in the government budget.

Appraisal

5.06 The appraisal of SAL I did not follow the usual pattern in whichdiscussions and agreements are reached at the technical level and thenpresented to the political directorate for their approval. This approachfrequently puts the Ministry of Finance in the position of having to convincethe rest of the government of the merit of a package it had negotiated. TheGhanaian leadership reversed this process by introducing at the beginning ofthe appraisal a week-long brainstorming process involving members of the PNDC,ministers and senior civil servants, trade unions including the civil serviceemployees association, employers associations, representatives of the

°t See Report entitled - "Enhancing the Human Impact of the AdjustmentProgram" - prepared by the Government of Ghana for the Sixth Meetingof the Consultative Group for Ghana, Paris, May 14-15, 1991.

See also paper "Labor Markets in an Era of Adjustment: A Case Studyof Ghana" by P. Beaudry, Dept. of Economics Boston University, andN.K. Sowa, Dept. of Economics University of Ghana; August 1990.

See also "Trip Report of Assignment on Social Dimensions of Adjust-ment and Poverty Alleviation in Ghana" by James Bucknall and RobertMcKinnell, CIDA consultants; Feb/March 1991.

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committees for the defense of the revolution, and bank staff. This sessionsucceeding in developing a broad consensus on the main elements of the reformprogram. Once consensus was reached at this level, the outstanding technicalissues were resolved in a retreat attended by a sub-group of the cabinet,senior officials and technocrats, and officials of the Bank, Fund and onedonor.

5.07 This sequencing of events in the appraisal process did not find favoramong some officials, including some in the Ministry of Finance who felt theministry was losing control of subjects traditionally under its control. Someofficials elsewhere in the public sector were of the view that the politicaldirectorate was being led to agree on technical issues before of-ficials/technocrats had had an opportunity to study the issues and providetheir advice. Where studies which had been acceptable to the officials formedthe basis for Bank recommendations, the sequencing was not problematic. Butwhere there was not an accepted diagnosis and analysis of options based onadequate information, Bank proposals were regarded as deriving from Bank dogmarather than from technical expertise. Some issues which were agreed at thepolitical level, e.g. the recruitment of Ghanaians from overseas on specialterms, understandably provoked dissatisfaction among civil servants withadverse effect on implementation results.

5.08 The appraisal of SAC II did not follow in the manner outlined abovefor SAC I. Instead, the Ministry of Finance & Planning was left to play thelead role. Since the commitment of the political directorate to structuraladjustment had already been demonstrated, and given that no change in policydirection was involved, the issues to be resolved were essentially second ordertechnical details. However, some Bank staff are of the view that there mayhave been less attention to consensus building under SAC II and that littlewould have been lost and probably something would have been gained byexplaining further the Governments intentions.

5.09 The experience suggests that the momentum of implementation canbenefit from a consensus at political level at the outset. While this cannotensure success if there is disagreement at the technical level, it can ensurethat at least there are no obstacles to the adjustments requiring mainlydecision at political level.

Implementation

5.10 The arrangements for implementation of SAC I involved the setting upof a Structural Adjustment Program Secretariat (SAPSEC) reporting to theChairman of PNDC Secretaries who is equivalent to the Prime Minister. Aboutten special units and task forces were set up to implement various aspects.SAPSEC had the responsibility for coordinating the work of and providinglogistical support to these units and task forces, and for seeing thatappropriate documentation was prepared and submitted to the PNDC for necessarydecisions to be taken in keeping with the adjustment timetable. Thesearrangements were consistent with the priority of structural adjustment and theGOG's commitment to it, and with the need to alter the day to day administra-tion to serve the new priority. They permitted constant monitoring of actionsto satisfy conditionalities and facilitated the preparation of the necessaryinformation base for decision-making by the PNDC.

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5.11 Under SAC II the SAPSEC functions were transferred to the MFEP, whichthen became the focus for coordination of the SAP. This seems to have been anecessary first step in the transition from dramatic change in the policydirections and environment toward the absorption of the change in the regularadministration of government. While on cursory glance it may seem that thepace of adjustment has been slower under the new arrangements, this may in factreflect the passing to a more difficult phase involving fewer changes in rulesbut more institutional developments including the selection and training ofpersonnel in new and more sophisticated skills.

5.12 The arrangements for SAC I were short-term responses to Ghana's weakinstitutional capacity, which permitted the SAP to get underway and achievesignificant success but at the expense of the regular work of public adminis-tration. Many Bank staff concede that SAC I very probably over-burdened thelimited implementation capacity of the Ghanaian public sector, with the resultthat some aspects did not go well. Now that the program is well underway theGOG is moving away from the special units/task forces concept partly becausethe emergency approaches disrupted regular procedures and created uncertaintyamong regular civil servants regarding their roles and functions, partlybecause of the discontent associated with the system of special allowances thatwere paid to participants in these units, and partly because when these unitscome to an end institutional memory is lost. In retrospect it seems that froma sustainability point of view it might have been better to have used existinginstitutions, appropriately strengthened, to carry out adjustment policiesfalling within their area of responsibility than to have set up temporaryalternative structures. While the initial pace of adjustment would have beenslower, the loss of momentum at a later stage associated with the assimilationof special units into the regular structure might have been avoided.

Supervision

5.13 Ghanaian officials speak highly of the usefulness of Bank supervisionin facilitating the work on the PIP, Tax Reform, Budget Reform and PublicExpenditure Reviews. Special reference has been made to the flexibility of theBank in responding to emerging and unforseen problems and to the willingnessto help in devising innovative solutions. This detailed follow-up is alsoapparent from the trail of reports and background documents related to SAPimplementation. However, this work, which appears to be of consistently highquality, was not without a price as the staff time devoted to SACs I & IIexceeded the norms for adjustment lending in the Africa Region.

Adj. Lending Adj. LendingPreparation Supervision(staff weeks) (s.w./p.a.)

Africa Region Norms 144.7 19.7SAC 1 219.6 27.4SAC II 157.9 51.9

SACs c\f Norms 130% 201%

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5.14 Judging from the results achieved as well from the volume andquality of the work, the extra time devoted to the program seems to have beenmoney well spent. The norms may seem justifiable given the constraints on theBank's budget, but greater attention may need to be paid in SAL projectcompletion reports and audits to the issue of whether adequacy of investmentof staff time in supervision and to a lesser extent in preparation has been afactor in performance. It may well be that successful adjustment operationsare more expensive in terms of staff time than has been assumed.

Specific Components

5.15 The PCR specifically addresses the question of why some componentsof the program were more successful than others. It identifies the mainfactors responsible to be a) degree of commitment by the GOG to particularcomponent, b) the capabilities of the implementing agencies, and c) parallelcredits under which structural adjustment of some sectors was sought. Whileagreeing that these were important factors, this evaluation would suggest thata more detailed look at some components supports the view that inadequatepreparatory work explains in part the failure of the Bank to convince the GOGof the appropriateness of some prescriptions, which resulted in the lower levelof commitment to some components of the program. It also explains why eventhough the GOG agreed to the inclusion of these components, progress wasthwarted by the inadequacy of information for decision-making.

SOE Reform

5.16 Bank experience in the reform of SOE sectors was limited. Thislack of experience should have been compensated for by a careful study of thesector to develop a suitable information base for analysis of the options andthe likely effects of various types of intervention. The Bank pushed fordivestiture of enterprises, but in the absence of up-to-date information on theassets and liabilities, it was impossible to interest potential buyers and toenter into serious negotiations. There was little understanding of the roleof sector ministries under whose control many enterprises fall, and hence therewas no strategy for dealing with the natural response of those who felt thattheir power and influence was being threatened. The institutional arrangementsfor divestiture received little thought, with the result that this wasinitially assigned to the very agency whose reason for being was the monitoringof the SOE sector. Given that the ultimate concern was the efficiency of thesector, more thought should have been given to the possibility that manyfactories could not be privatized and should be closed. All of theseconsiderations make it easy to understand that the speed with which the Bankhoped that the privatization objective would have been achieved was notrealistic, and why there was failure to convince the client that the Bankreally knew how best to pursue the efficiency of the sector.

5.17 Ghana has achieved reasonable progress by focussing less onprivatization and by pursuing a wider set of options. It has sought to improveefficiency of those enterprises that will remain in the public sector; and hasidentified some to be closed, some to be sold, and some to be held as jointventures with the private sector. The necessary financial information aboutthe enterprises is being developed. Divestiture has been assigned to aDivestiture Implementation Committee, which is being provided a staff with the

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necessary skills to prepare a prospectus and to negotiate with potentialbuyers. Recent successes have come about partly in response to the improvedpolicy environment and political atmosphere, which can be seen as increasinglyfavorable to private entrepreneurs. It is doubtful that divestiture can besuccessful before this stage is reached.

5.18 The emphasis on divestiture, while appropriate at the time of SACII when the emerging strategy was beginning to give higher priority to theprivate sector, was premature under SAC I. The reform of the policy environ-ment to favor private activity had not yet started, and the financial sectoradjustments still lay in the future. Bank work on SOEs was inadequate to winrespect for Bank expertise and to foster a sense of commitment by the GOG tomake changes in this area. Bank insistence on divestiture was seen by someGhanaian officials as motivated by dogmatic rather than pragmatic consider-ations. Some Bank staff concede that the timing and timetable were unrealis-tic, and that improvements in the private sector policy environment includingfinancial sector reform should have been well underway before divestiture.

5.19 SOE reform was re-visited under SAC II. Although the generalobjectives identified in the President's Report were said to have remainedunchanged (ostensibly from SAC I) there was a shift in emphasis from dives-titure toward the broader aims preferred by the GOG. This had the effect ofdefining a role for the SEC which did not require its eventual dissolution.It is also evident that the Bank had been learning from experience and hadbecome sensitive to the need to address such issues as the financing ofretrenchment costs. Targets for divestiture of enterprises were adjusted tobe more realistic, and greater attention paid to the institutional requirementsfor managing the reform process.

Cocoa

5.20 The price incentives to cocoa growers have been increased and cocoagrowers have increased plantings and improved their fields with the result thatoutput and exports have recovered strongly, and there have been some reformstending to lower Cocobod costs. Yet, the achievements of this component didnot live up to expectations within the Bank and possibly in Ghana. Theproducer price has not reached the target share of 55% of the export price; and"Resources used to increase the producer price during 1989-91 have, for themost part, been at the expense of Government revenue, instead of from costsavings, the opposite of the trend in 1984-88".)1' While this has been partlythe result of the substantial decline in international cocoa price, and somereforms are being pursued under the Cocoa Rehabilitation Project (Cr. 1854) ofFY-91, these do not fully explain performance of this component under the SACs.

5.21 At the time SAC I was being designed the Bank did not know enoughabout the complexities of cocoa marketing to enable it to recommend a strategyfor reform in this area. Under the Export Rehabilitation Technical AssistanceProject approved by IDA in December 1983, high marketing costs and institu-tional weaknesses of the Ghana Cocoa Marketing Board (GCMB) were included among

I' Africa Region: Ghana - Progress on Adjustment; Report No. 9475-GH,April 16, 1991: page (iii), para. 8.

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the factors responsible for the decline in cocoa exports. The reduction ofGCMB operating costs was said to require divestment of inefficient plantations,divestment of cocoa processing factories, reduction in over-staffing, greaterreliance on private haulage services, and the introduction of corporateplanning and a management information system. Many of these requirements wereto have been studied; and a study of alternative systems of marketing was tohave been completed by June 1985. Studies led to the divestiture of themajority of plantations and to a joint venture ownership of the insecticideplant. The GCMB rejected the recommendations of the study of cocoa processingfactories and of the study on corporate planning; and, although there was aseminar on the subject, the marketing study was never done. The Board stafffelt that the study was unlikely to be useful since there were not manyalternative marketing cases to be studied, and the Ghana case was one of themost sophisticated as a result of long experience.

5.22 At the design stage of SAC I the Bank and the Cocobod did not agreeon cocoa marketing and there were no study results around which discussionscould revolve. There was disagreement over producer prices; the Cocobod didnot agree that the producer price target should be a ratio of the f.o.b. exportprice and thought more account should be taken of marketing costs. The factthat agreement was reached at a higher level on adjustments in the cocoa sectorbefore these differences at the technical level were resolved did not augerwell for the implementation phase. Failure of the Bank to foresee themagnitude of the financial costs of retrenchment and to address the gaps whichwould be created by reducing the extension service functions of the Cocobodprovided additional points of friction which slowed implementation.

5.23 In this situation, once the Bank had reached agreement in principleat higher levels of Government, the technical content of the adjustment packageshould have been the subject of greater follow-up with the Cocobod thanapparently took place. The issue of Cocobod reform was not considered in thePresident's Report proposing SAC II in February 1989, which seems to indicatethat by then it had been decided in the Bank to approach this matter in anoperation specific to cocoa rather than as part of a multi-component structuraladjustment package. However, the Cocoa Rehabilitation Project supported byCr.-1854 and approved in FY-88, which should have complemented cocoa pricepolicies by promoting improvements in areas such as domestic marketing, wasslow to start. At December 31, 1990 the total credit remained undisbursed.

Tax Policy and Administration

5.24 The experience with this component stands in contrast with thatwith cocoa and SOE reforms. There is general agreement that objectives weremet and that the component was very successful. Ghanaian performance on thetax side always exceeded that required by conditionality, both as regardscollection and policy changes. Among the many factors which seem to havecontributed to this outcome, the following are important:

a) commitment by the GOG was exceptionally high. The componentaddressed a felt need about which it was not necessary to convincethe political directorate or officials;

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b) studies provided the basis for a high level of agreement at thetechnical level between GOG and the Bank/Fund on almost everyaspect of the reform, and especially the timing of the work onvarious types of taxation;

c) dynamic leadership of the National Revenue Secretariat wasreflected in a highly motivated and enthusiastic staff;

d) the Ghanaian tax system was basically good even before the SAP butsuffered from shortage of personnel and inadequate documentation.Thus the institutional problems were limited and amenable to fairlyrapid solution. At the same time the level of expertise of staffwas high, and this facilitated the dialogue with Bank staff;

e) the Bank/Fund expertise in tax matters and relevance of theirexperience was readily accepted by the NRS;

f) in the course of supervision Bank staff provided significant hands-on assistance timed to support the regular work of NRS; and

g) the MFEP, being ultimately in charge of taxation, maintained a highlevel of interest in the implementation of agreed changes; the NRSwas reintegrated with the MFEP.

The Effect of Adjustment on the Poor and Other Vulnerable Groups

5.25 The discussion of the effects of adjustment on the poor must startby identifying the poor. The Ghana Living Standards Survey referred to thepoorest 30% of households as "poor" and the poorest 10% as "extreme poor",based on income per capita per year. Location and occupation of the "poor" and"extreme poor" are important determinants of the impact of adjustment policieson them. The survey found that just under two-thirds of the "poor" and the"extreme poor" are rural, the remainder being urban and semi-urban. Four-fifths of the "poor" are farmers; while slightly more of the "extreme poor" arefarmers. An important difference between these two groups is that while overa quarter of the "poor" are cocoa farmers, a much smaller proportion of the"lextreme poor" are cocoa farmers. Although the "poor" are overwhelmingly self-employed, over 8% are employed by the public sector. This discussion of theeffects of adjustment on the poor will focus on the "poor" lowest 30% ofhouseholds. Where the differential impact on the "extreme poor" may beimportant these are specifically mentioned.

5.26 Clearly, the impact on the poor deriving from the program and theeconomic circumstances during the period of the SACs would have depended ontheir location and on their occupation. In the absence of hard data one canonly theorize as to who were more vulnerable to particular factors, and becauseof differences in direction of effects, weight in expenditure patterns, andtiming of some effects one can only make tentative judgements about the impacton the group as a whole.

5.27 It seems likely that some of the urban poor were vulnerable to lossof employment in the public sector, to increases in food prices resulting fromthe increase in fertilizer prices associated with the removal of the subsidy,

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to the increase in transportation cost due to petroleum price increases, andto the increase in the cost of other non-food items associated with thedevaluation of the cedi. Survey data indicate that the poor account for 13%of the expenditures on public transportation and 25% of spending on other fuels(such as kerosene).121 At the same time, they stood to benefit from aresurgence in economic activity in the urban economy particularly in theindustrial and service sectors.

5.28 The rural poor were probably less vulnerable to the loss of publicsector employment than their urban counterparts. Some would have benefittedfrom the increase in producer prices of cocoa, the extreme poor to a lesserextent. As farmers, the increase in the cost of fertilizer input probably didnot affect the poor significantly since very probably they were not intensivefertilizer users, and as food producers benefitted from higher prices. It isvery likely that they were adversely affected by the rise in non-food pricesassociated with the devaluation of the cedi, though to a lesser extent thantheir urban counterparts. Both urban and rural poor stood to benefit from theimprovements and change in targeting of health and education services, theextent of benefit depending on the relative distribution of the services.

5.29 Because of the delay in the occurrence of offsetting benefits, theurban poor were probably made worse off initially. The rural poor wereprobably better off initially to the extent that they were cocoa farmers. Therural extreme poor being less integrated in the money economy, producing mostof their own food, and spending less on non-food items, were probably notaffected significantly in either direction. With the improved performance ofthe economy and the abatement of inflation both urban and rural poor were mostlikely made better off than before adjustment.

5.30 The Government, with support from the Bank, attempted to improvethe lot of the lower income groups by improving the delivery of socialservices. Starting in 1983, it made a conscious effort to increase spendingfor education, health and social services, with the result that the budgetshare of these items increased gradually form 29.1% of total expenditures in1983 to 41.7% in 1989, in spite of serious fiscal constraints. At the sametime there was a shift within social services toward those programs most likelyto benefit the lower income groups, primary education and primary health care.For example the share of primary education in the education budget increasedfrom 40% to 43% between 1987 and 1990.

5.31 The adjustment program had a more direct adverse effect on thepublic sector employees who were dismissed as part of the retrenchment of about50,000 civil and education service workers, 33,000 employees of the Cocobod,and an unknown number made redundant by adjustment in the SOE sector. Thesewere not the hard core poor, but were for the most part lower level employeeswith limited formal education or professional skills. The adverse impact ofjob loss was mitigated to some extent by the fact that they were paidseparation allowances increasing with length of service to well over a year'spay. To further mitigate the burden of separation the GOG established a

12/ Africa Region: Ghana - ProRress on Adjustment; Report no. 9475-GH,April 16, 1991.

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"special efficiency budget" in 1987 to finance the costs of retraining, andproject loans were made available to assist the restoration of income sourcesfor redundant employees. Several thousand persons were provided training, andmany were provided seeds and other agricultural inputs to assist theirresettlement in the rural areas.

5.32 Consideration was given by the Bank to the inclusion of a componentin SAC I to address the adverse impact of the adjustment program on vulnerablegroups, but the idea was abandoned when the GOG began preparation of a moreelaborate program with similar objectives. The program, entitled "Programmeof Actions to Mitigate the Social Costs of Adjustment (PANSCAD)", was preparedby the GOG in 1987 with assistance from a secretariat funded by the Bank. Itincluded 23 projects grouped into five categories -- employment generation,community initiative projects, help to the redeployed, basic needs forvulnerable groups, and education. The Bank helped to organize a meeting ofdonors in 1988, and US$85.0 million was pledged. IDA provided US$10 millionfor the Priority Works Project (IDA Credit No. 1874-GH) as its contribution toPAMSCAD.

5.33 In retrospect, PAMSCAD had a number of design weaknesses that haveresulted in slow implementation and limited effectiveness. The GOG, in areport presented to the May 1991 Consultative Group Meeting, outlined some ofthese -- (i) PAMSCAD contains too many projects relative to donors' and theGOG's capacity to implement; (ii) the program did not target the poorestgroups; (iii) there were too many donors for some projects; and (iv) the longterm elements of PAMSCAD should have been implemented as part of the GOG'sregular public investment program. Others have commented that complex multi-sectoral and multi-donor programs of this type are inherently difficult toadminister. Also, the GOG missed the opportunity to engage NGO's in thecommunity-based operations, where local level support of this kind can be veryeffective. Nevertheless, PAMSCAD represents a serious attempt to provide helpto vulnerable groups, and was successful in securing substantial additionaldonor support that might not otherwise have been forthcoming.

5.34 In summary, the impact of the adjustment program on the poorestgroup appears to have been only moderately negative in the early stages andpositive over the longer term as the economy grew and real incomes increased,and Government improved social services and targeted health and education moretoward the poor. Although with mixed results, PAMSCAD has served to mitigatethe negative impact of adjustment on vulnerable groups, even if these have notbeen the poorest segment of the population.

Overall Evaluation

5.35 This quick overview of the program cycle and of a sample ofcomponents including the very successful and the less than successful providesthe basis for some generalizations regarding the determinants of success of thestructural adjustment program in Ghana. The key seems to have been the degreeof commitment of the political directorate to macroeconomic policy adjustmentdesigned within the context of a close relationship between the GOG and theBank and Fund that had been nurtured during the first three years of Ghana'sERP in the context of an increasingly close dialogue accompanied by substantial

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financial support. Thus where adjustment depended on political decisions,these were taken promptly and adjustment proceeded rapidly.

5.36 The major successes were the correction of the overvaluation of theexchange rate, the liberalization of trade, tax reform, the reduction of thepublic sector deficit, and the improvement in producer price of cocoa and theassociated positive supply response. In all these areas studies, analyses anddata provided a basis for discussion and agreement as to the content and timingof adjustment measures. Adjustment involving changes in institutions,improvement in skills and staffing, and the streamlining of proceduresinvariably required greater attention to detail, and the success of componentsinvolving such adjustment was very sensitive to the adequacy of the informationbase and the degree of consultation at the technical level. Where this basisdid not exist, the degree of commitment at the political level was likely tobe less and the problems in implementation likely to be more if there had beenlittle prior consultation at that level.

5.37 The view of this evaluation is that the slower than expectedprivate sector response and the resurgence of inflationary pressures do notconstitute important failures of the structural adjustment program. Fromcursory observation it can be seen that most of the measures providingincentives to the private sector were taken in 1989 and 1990, and that, evenif there were no further obstacles to investment, not enough time has elapsedto allow the effects to be realized. Inflationary pressures were brought undercontrol in 1991. This said, it is useful, nevertheless, to see what lessonsmay be learned from experience in these areas.

5.38 There is little experience in the Bank or in governments or inuniversities and no widely agreed theoretical apparatus for guiding thetransformation of a public sector dominant and controlled economy into a marketoriented private enterprise driven one. The Bank's approach in support of suchtransformation so far has been ad hoc rather than on the basis of a granddesign. While this seems to have been the manner in which Bank guidance of,and support for, Ghanaian structural adjustment evolved, it is worthwhiletrying to understand why Ghana's private investment response has been slowerthan expected, in order to see what lessons may be gained for other adjustmentprograms.

5.39 From interviews with persons in the private sector it was clearthat the factors influencing investment response fell into three basiccategories -- those influencing willingness to invest, those determiningavailability of resources, and the clarity of the legal and administrativeframework for private business. The willingness to invest was adverselyaffected by uncertainty regarding the permanence and the comprehensiveness ofchanges in the policy environment and regarding "official" attitudes towardprivate profit and the acquisition of wealth. It was also adversely affectedby uncertainty about the economy, which showed in a preference for tradingrather than for longer term investment in productive capacity. Thesepreferences were reinforced by practices of the financial sector and by thelimitations in the range of financial institutions and services. Investmentresponse was also impeded by the uncertainty among entrepreneurs and officialsregarding legal requirements and administrative procedures for starting andregistering new enterprises.

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5.40 Investment response is seen to depend on the simultaneous presenceof components to address all three categories of influences. A sequentialapproach to them is likely to lead to a delayed investment response. This viewis consistent with that expressed by some Bank staff that, given hindsight,greater priority should have been given to financial sector adjustment. It isalso consistent with the view of some private sector spokesmen that removal ofprocedural obstacles to investment and the clarification of the legal frameworkshould have been given higher priority, as even today this aspect is frus-trating their efforts. At the same time, perfect foresight is impossible, andone cannot hope to consider every factor at the design stage. The alternativeis to establish early in the design stage meaningful government/private sectorconsultations in order to encourage in the private sector a feeling ofownership of the program affecting them.

5.41 This relates to the actual private sector and the entrepreneurs init. However, it should be observed that in Ghana the pool of potentialentrepreneurs has been limited by the fact that during over thirty years ofpublic sector dominance many would-be businessmen either joined the publicservice or migrated. The full effect of the new framework will be spread overmany years as young people leaving schools and universities make their careerchoices in an economic context that is no longer dominated by the publicsector.

5.42 The difficulty of bringing inflation under control indicates a needto address specific supply-side influences rather than rely solely on demandmanagement in tackling the problem. In the Ghanaian case it seems that foodprices, by dint of the weight of food in the index, was a major factor in theresurgence of inflationary pressures. Since there is reason to believe thatthe impact of adjustment on the poor depends in large measure on what happensto food prices, one is led to question the timing and to some extent the meritof removal of fertilizer subsidies, a measure which seems to have beenjustified by the simultaneous increase in cocoa producer prices but notnecessarily by price movements of domestic food crops. Between 1985 and 1990the price of fertilizer increased tenfold, as the subsidy fell from about 63%of the price to zero. The quantity of maize to purchase a kilo of fertilizerincreased from 360 to 900 grams between 1985 to 1988."' The removal of thesubsidies would seem to have helped to push up prices of food and to reduceproducers margins. Thus the poor among maize consumers and the poor amongmaize producers bore part of the burden of subsidy removal.

5.43 Ghanaians applaud the high quality of Bank staff deployed to workon the SACs. However, rapid turnover of Bank staff working on the structuraladjustment program has been mentioned as a factor which eroded the benefits ofcontinuity and experience to the adjustment process. By contrast the Ghanaianteam has remained essentially unchanged and has accumulated considerableexperience. Over the five year period during which three SACs have beenintroduced there have been three different country economic teams, withcontinuity provided only by the fact that one senior economist and the resident

t Based on Ministry of Agriculture data. The data also show that in1984 the year of Ghana's famine 610 grams of maize were requiredto buy 1 Kg. of fertilizer compared to 40 grams in 1983.

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representative stayed in the division through most of this period. Clearly,when the Bank embarks on a cycle of structural adjustment operations it shouldplan to keep the same team in place for the duration of the cycle, if at allpossible. The perception in the client country is that Bank staff use thestructural adjustment operation as a stepping stone to promotions, and move onas soon as the credit is signed and implementation starts; leaving successorswho have to learn the country from scratch. Yet, given that the Ghanaiansspoke highly of the quality of Bank staff deployed to work on the SACs, theBank must have made three successful transfers of responsibility which probablyhelped to maintain the energy and momentum of the program.

5.44 These observations must not be interpreted as suggesting that withmore preparatory studies and consultation and without changes in staff aperfect adjustment process could have been devised. The issues were novel,complex and overlapping; and there was pressure for action.L41 Thus the SAPturned out to be a learning process for the international institutions as wellas for the GOG. It is also evident from this experience that the orientationof the structural adjustment process changed over time from that of solving aproblem of debt/creditworthiness, foreign exchange shortage, and economicinstability to that of transforming the economy in order to achieve sustainedgrowth with equity.

VI. SUSTAINABILITY

6.01 The benefits from Ghana's structural adjustment program are likelyto be sustained. Widespread support for the reforms was one result of the openconsultative process by which the program was designed, and this support hasincreased as a result of the resurgence of economic growth associated with theprogram. The reforms have been so comprehensive and the Government commitmentso obviously beyond question that a reversal of policy directions is unthink-able as long as this administration remains in control. Indeed, it is unlikelythat a new government could easily restore the regulatory and controlmechanisms that have been removed.

6.02 The level of quick disbursing aid for the SAP has been higher thanmay be sustainable over the longer term. If the inflow of foreign financingfalls off before Ghana's export earnings increase sufficiently, there could bea slowdown in GDP growth and pressure on the exchange rate generating cost ofliving effects which may undermine the acceptability and popularity of theprogram. Should this coincide with the impending shift toward democracy,

41 Memo dated Sept.9, 1987 -Chief, AF4CO to Director, AF4 - Ghana -First Impressions - BTO report. "Indeed I believe there is a dangerthat we and they may be trying to do too much too fast, not becausethe political fabric cannot stand it but because of administrativecapacity. If we and they spread ourselves too thinly over too manyinitiatives, less may be accomplished than if we focussed morenarrowly. We may, therefore, need to be more selective....On theother hand, Ghana's leadership is impatient for results and thereis a counter danger... of losing momentum."

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future governments may be more sensitive to program acceptability consider-ations, and while they may not reverse the policy changes that have been madethey may be less willing to continue the economic liberalization process, suchas further privatization, and improvements in the investment climate.

6.03 Donors can do much to ensure the sustainability of the benefits bynot reducing quick disbursing aid too quickly, by careful planning of the shiftfrom program to project aid, and by taking into account the growth andviability of Ghanaian export earnings in making their decisions. To someextent this will depend on the international prices for cocoa and gold, Ghana'stwo most important exports. During this structural adjustment period the termsof trade have turned against Ghana, mainly as a result of depressed interna-tional prices for cocoa. Should this situation persist, future economic growthcan only be assured if alternative exports are developed and the dependence oncocoa reduced, and this will take time. In the interim foreign capital inflowseither in the form of donor support or private foreign investment will beessential to continue the momentum of the economy, which is necessary topreserve the acceptability of the present strategy.

6.04 Sustainability of the efficiency gains and improvements in economicmanagement within the public sector will depend on how effectively Ghana makesthe transition from the use of special units and task forces to implement newprocedures to the use of permanent units that will regularly apply theprocedures. This transition requires the reorganization and strengthening ofthe units that would ordinarily be responsible. The need for this has beenrecognized by the GOG, and supported by the Bank under its Economic ManagementSupport Project (Cr. No. 2224) which provided US$15.0 million in FY-91.Effectiveness of this and future Bank support in this area will depend on therecognition that the traditional approach of providing technical assistance inthe form of foreign "experts" has not been successful, has been over-utilized,and is increasingly likely to be resisted. More innovative approaches willneed to be devised; and this will need to be done within the context of closeand frank consultations between the GOG and the donor community including theBank.

VII. LESSONS

7.01 There are some important lessons to be learned from review of theseoperations. Among these mention should be made of the following:

a. One positive lesson for the Bank concerns the benefit of brain-storming sessions before designing adjustment programs. Not onlyis the ownership of the program unambiguously transferred to theclient government, but it assists the government in involvingvarious interest groups and economic decision-makers without whoseunderstanding of and cooperation with the program success cannotbe assured.

b. There is an important lesson regarding how quickly it can beexpected that there will be a resurgence of private entrepreneur-ship and investment in response to changes in the policy environ-

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ment. In a situation such as the Ghanaian, where a strategy ofpublic sector dominance has continued for thirty years, the cultureor tradition of private entrepreneurship has been essentially lost.This reflects itself in an unwillingness to undertake equityinvestment in ventures which promise a return only over the longerterm. It will take some time before the preference for tradingactivities, in which borrowed funds can be turned over quickly,will disappear. The few entrepreneurs will need to be repeatedlyassured that state controls and economic activity are unlikely tobe reasserted in the near future. Frequent and carefully struc-tured consultations between the private sector and the governmentcan be the vehicle for providing this assurance and for giving theprivate sector an opportunity to have an input in determining thecontent of policies affecting it. Paradoxically, the promiised movetoward democratic government is new source of uncertainty for theentrepreneur.

c. The structural adjustment process in an economy such as Ghana'srequires that in addition to providing incentives to stimulateprivate investment, the institutional arrangements for assistingthe private investor in mobilizing resources need to be put inplace, and the legal basis and administrative procedures need tobe clarified for potential investors as well as for bureaucrats.All three requirements have to be addressed early in the adjustmentprocess. Some officials, representatives of the private sector,and Bank staff have suggested that the investment response may havebeen stronger had the financial sector adjustment and the legalframework and administrative procedures affecting investorsreceived attention earlier in the sequence of actions.

d. In an economy in which the public sector is dominant, the financialimplications of widespread retrenchment have to be given carefulconsideration. It should not be assumed that the budget can takeon the burden of massive severance benefits without a disruptiveeffect on other expenditure objectives.

e. The SACs involved the setting up of a plethora of special units inthe government to coordinate and implement structural adjustmentmeasures. Now that significant effort has to be devoted tointegrating these special units into the regular fabric ofadministration, it is not clear that the alternative approach ofstrengthening existing, rather than creating substitute, unitswould not have been the more effective approach over the longerterm. In future operations of this kind these alternatives shouldbe carefully weighed at the outset.

f. The future role of institutions which are to lose their controlfunctions should be given more thought at the design stage ofstructural adjustment programs.

g. Mindful of the need to balance the interests of the client and ofstaff, at the beginning of a cycle of structural adjustment

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lending the Bank should plan the deployment of staff with a viewto minimizing turnover during the cycle.

i. A problem inherent in the structural adjustment strategy residesin the immediate adverse impact on employment, the lag in thecreation of new jobs in expanding productive sectors, and in theabsence of an adequate safety net to ease the social problemsresulting from the loss of income of people especially in urbanareas. The Bank's approach to poverty, correctly focussing onlonger term improvements in education and health services, does nottarget the short term hardships associated with job loss under astructural adjustment program. Labor intensive projects, timedappropriately can provide some relief, while making structuraladjustment more politically palatable.

j. Ghanaian officials concur in the view that the success of theadjustment program in many areas owes much to "hands on" super-vision by Bank staff. This allowed Bank expertise to buttressGhanaian efforts in critical areas, and permitted flexibility inresolving unforseen and unforeseeable problems in implementation.The norms of staff time provided for supervision of structuraladjustment operations should be reviewed in light of this experi-ence.

k. Last, but by no means least, is the importance of a high level ofcommitment by the political leadership to structural adjustmentboth in setting the overall tone for the implementation of theprocess and for setting a singular priority for the top decision-making body without which the crucial change in policies may notbe made promptly.

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GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS

(CREDITS 1777, A-025, A-025-1-GH AND 2005, 2005-1, 2005-2-GH)

June 26, 1991

Country Department IVCountry Operations DivisionAfrica Region

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GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS

(CREDITS 1777, A-025, A-025-1-GH AND 2005, 2005-1, 2005-2-GH)

PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE

Name Structural Adjustment Credits I and IICredit Nos.: 1777, A-025, A-025-1 i 2005, 2005-1, 2005-2Region : AfricaCountry : GhanaSector : Non-Project Lending

Background to the Bank's Involvement in Program Lending in Ghana

1. Ghana achieved independence in 1957 with a buoyant economy based on immensenatural resources, a large pool of educated labor, and a well-developed infrastrcture. Aneconomic strategy of state-led and controlled industrialization led to excessive growth in thepublic sector, inflation and serious price distortions. This strategy, coupled with theatmosphere of political instability due to frequent coups, discouraged investment anddepressed output. Infrastructure and industrial plant deteriorated as operations andmaintenance expenditures were neglected. Educational standards and enrollment levelsdeclined and a substantial brain drain took place.

2. In the latter half of the 1970s, real per capita income declined by almost 4 percent perannum and inflation averaged almost 70 percent. Since the nominal exchange rate was notdevalued to compensate for inflation, exports of goods and services declined by 36 percent inreal terms over the same period. As external payments arrears accumulated, creditworthinessdeclined and real imports fell in consequence by 14 percent over the same period. As a resultmuch of industry, agriculture and the transport fleet lay idle, starved of imported inputs andspare parts.

3. Faced with this disastrous situation, the Provisional National Defence Council(PNDC), which came to power by military coup on December 31, 1981, developed anEconomic Recovery Program. The program, announced in April 1983, combined two mainelements: (i) a stabilization package designed to reduce inflation and achieve externalequilibrium; and (ii) a program to promote economic growth and export recovery, through arealignment of incentives towards productive activities and through the rehabilitation ofinfrastructure. These objectives were pursued through substantial devaluation of the cedi,monetary and fiscal austerity, measures to increase the private sector's sbare of bank credit,extensive price reform and a structured increase in the availability of foreign exchange to theprivate sector for the rehabilitation of capital and the purchase of inputs.

The First Phase of Program Lending: Supporting Economic Recovery

4. Between 1983 and 1986, the Economic Recovery Program was supported by threeIMF Stand-by facilities and two Compensating Financing Facilities (CFF) focussing onmeasures to achieve stabilization (see Table 1). The objectives of output and export recoverywere supported by a series of program loans from the Bank: two Reconstruction ImportCredits (RICs I and II), an Export Rehabilitation Credit (ERP) and an Industrial Sector

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Adjustment Credit (ISAC) which financed crucial imports of goods and technical assistance insupport of priority reforms in internal and external trade policy, the public enterprise sector,and industrial policy (see Table 2). All of these credits financed imports targeted to facilitatethe rehabilitation and recovery of key sectors. .1/ The ERP was complemented by a ExportRehabilitation Technical Assistance Credit (ERPTA)(see Table 2). These credits formed partof a larger program of enhanced external assistance to Ghana - total assistance from Ghana'sConsultative Group (including IDA) averaged US$ 420 million per annum between 1984 and1986.

TABI E 1

IMF: Arrangements and Special Facilities (Millions of SDRs)

Arraneements and Date of Duration Amount UtilizationSpecial Facilities Approval (Months)

Special Facilities

CFF (exports, cereals) Aug 3, 1983 120.50 120.50

CFF (exports) Dec 4, 1984 58.20 58.20

Arrangements

Stand-by Arrangement Jan 10, 1979 12 53.00 32.00

Stand-by Arrangement Aug 3, 1983 12 238.50 238.50

Stand-by Arrangement Aug 27, 1984 16 180.00 180.00

Stand-by Arrangement Oct 15, 1986 12 81.80 81.80

SAF Arrangement Nov 6, 1987 36 129.90 40.90 a/

Extended Arrangement Nov 6, 1987 36 245.40 97.55 b/

ESAF Arrangement Nov 9, 1988 36 388.55 340.55 c/

Note: The SAF and extended arrangements in November 1987 were overtaken by theESAF of November 1988.a/ Unutilized balance (SDR 102.25 millions) available under the ESAF arrangement.b/ Unutilized balance was canceled.c/ As of April 30, 1991.

Source: IMF.

1/ RIC I and ERP specified a "positive list" of eligible imports, whereas RIC IIspecified a negative list of goods and a predetermined allocation amongst apositive list of sectors (agriculture, mining, industry and transport), withwholly publicly owned manufacturing enterprises being excluded.

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5. The iiiitial response of the economy to the policy reforms was heavily dampened bythe severe drought in 1983, infrastructure bottlenecks, lags in aid flows, and the burden ofabsorbing about one million returnees from Nigeria in the early 1980s. Nevertheless theGovernment persisted with its program of reforms, which paid rich dividends in terms ofincreased output, improved fiscal performance, a deceleration of inflation, and enhanced aidcommitments in support of the program. GDP growth in the 1984-1986 period averagedmore than 6 percent, led by the strong recovery in agriculture. Manufacturing industryresponded strongly to the increased availability of imported materials and spares, with growthaveraging 14 percent per annum. Minerals production recovered sharply from the low levelsof 1983 following the restoration of rail-to-port services, while the services sector grew at 6percent per annum. There was a healthy recovery in both savings and investment levels and,for the first time in a decade, Ghana enjoyed three successive years of strong per capitaincome growth.

TABLE 2

IDA PROGRAM LENDING AND ASSOCIATED TA CREDITSFY84-FY91

CREDITS FY84 FYS5 FY86 FY87 FY88 FY89 FY90 FY91

Proamm lending

1435 ERP 40.1F009 ERP-SF 35.9

1573 RIC E 60.0A003 RIC H AF 27.0

1672 ISAC 28.5

A013 ISAC - AF 25.0

1744 EDUCATON SEC. ADJ. 34.51777 SAC 34.0A025 SAC - AF 81.0

A025- 1 SAC - AF 15.0

1911 FlNSAC 100.0

1911-1 FINSAC Supplement 6.6

2005 SAC a 120.0

2005-1 SAC I Supplemet 5.7

2140 EDSAC a 50.0

2005-2 SAC H Supplemt 8.3

2236 PPPISD 120.0

ProijertTA Leadi.

1436 ERP/TA 17.11778 SAIS (SAL/TA) 10.8 10.51847 Public Enteprie 40.01854 Cocoa. P.--- .-La 15.0

2224 Econ. Mgt Support

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The Second Phase of Program Lending: Supporting Structural Adjustment

(a) The First Structural Adjustment Credit

(i) Preparation of the Credit

6. The considerable progress achieved in stabilization, rehabilitation and restructuringunder the Economic Recovery Program, allowed the extension of Government's economicstrategy to address fundamental structural constraints. Following an extensive policy dialoguein the context of the 1985 Country Economic Memorandum 2/, a government task forceprepared for submission to the November 1985 Consultative Group an outline of its policyframework covering the 1986-1988 period. I/ This policy framework represented anemerging consensus between the Government and IDA on a medium-term structuraladjustment program. The considerable economic and sector work and project-financed studiesundertaken jointly with Government during FY85 and FY86 informed this dialogue andhelped convert the policy framework into a detailed action program. This analytical workincluded agricultural and industrial sector reviews, a Public Expenditure Review coveringeight sectors in April/May 1985, a major consultancy study on state enterprises, joint Bank-Fund missions on resource mobilization and exchange and trade policy, and a number ofstudies financed under the ERPTA credit, in particular on the cocoa sector. In addition, closecoordination with the analytical work carried out by the IMF was ensured by the holding of ajoint seminar on Ghanaian adjustment policy issues in January 1986, efforts to coordinate thetechnical assistance offered by the two institutions, and by numerous other contacts.

7. IDA missions in November 1985 and February/March 1986 assisted the Ghanaianauthorities in the integration of this preparatory work into a Structural Adjustment Program.An appraisal mission for a first Structural Adjustment Credit (SAC I) visited Ghana in July1986. This mission participated in a series of policy seminars organized by the StructuralAdjustment Program Team (see para. 27) and attended by members of the PNDC, PNDCSecretaries including the Chairman of the Committee of Secretaries, key civil servants,representatives of trade unions, employers and the Committees for the Defense of theRevolution, and members of the press. 4/ As a result of these seminars, the issues in eacharea were widely debated and a consensus emerged on the appropriate policy framework.Further technical discussions were held with Government in December 1986, negotiations forSAC I were conducted in the last week of February 1987, and the resulting program was

2/ "Ghana: Towards Structural Adjustment", World Bank, October 1985.

3/ "Progress of the Economic Recovery Program, 1984-86 and PolicyFramework, 1986-88", Government of Ghana, October 1985.

4/ The PNDC is the country's ruling body, and its chairman is the head of state.PNDC secretaries are the equivalent of ministers and form a committee, thechairman of which is equivalent to a prime minister.

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subsequently endorsed by the PNDC. The Credit was approved by the Bank's Board on April14, 1987 and was declared effective on May 29 of the same year. 5/

(ii) Design of SAC I

8. The declared purpose of SAC I was to 'support the Government's structuraladjustment program which aims (i) to establish an incentives framework that stimulatesgrowth, encourages savings and investment, and strengthens the balance of payments; and (ii)to improve resource use, particularly in the public sector, and direct resources to key areas ofadjustment, while ensuring fiscal and monetary stability...The policy framework will focus ontrade liberalization, cocoa sector policies, public expenditure policy, state-owned enterprisereform, and public sector management." -/ The Credit was to provide support forimplementation of this framework during 1987 and 1988. Parallel financing was to beprovided by Canada, Germany, Japan, Saudi Arabia, Sweden, and the United Kingdom (seeTable 3); IDA approved adjustment credits in the education and financial sectors in December1986 and May 1988 respectively; the IMF approved a three-year Extended Financing Facility(EFF) and a three-year Structural Adjustment Facility (SAF) in November 1987, both ofwhich were replaced a year later by a three-year Enhanced Structural Adjustment Facility(ESAF) (see Table 1). Complementary external resources were raised at the ConsultativeGroup meeting in May 1987. 7/

9. The benefits projected for this strategy were "[improvement of] the Ghanaianeconomy's growth prospects through a strong stimulus to exports and efficient importsubstitution, improved incentives to private and public savings, the planned expansion inpublic investment, and increased efficiency in the use of resources." It was further arguedthat "the resultant recovery in exports and private sector remittances will improve the long-run viability of the balance of payments. The exchange and trade reforms will shift incentivesfurther from trading and rent-seeking activities to production, and encourage manufacturers toshift emphasis towards exports. The reduced role of the state in the productive sectors, theplanned rehabilitation of infrastructure, and the overall improvement in incentives, is intendedto improve the environment for the private sector. The public sector will be slimmer andmore efficient in the use of resources. State-owned enterprises, in particular, will be moresubject to market forces. Public investment is to be stepped up and prioritized to rehabilitateessential economic and social infrastructure and support the recovery of the private sector.

5/ Finalization of SAC I was delayed by fiscal difficulties in 1986, the effects of asubstantial wage adjustment having been miscalculated. This also causeddelays in the conclusion of the SAF and EFF with the Fund.

6/ Report and Recommendation of the President to the Executive Directors forProposed Development and African Facility Credits for a Structural AdjustmentProgram for Ghana, March 23, 1987.

7/ Intentions to commit about US$ 600 million in 1987 were indicated at thatmeeting.

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Table 3. GHANA: SAC I and SAC II COFINANCING

SIGNATUREDONOR CREDIT NAME DATE AMOUNT

US$ Mil.

COFINANCIERS WITH SAC I

CANADA SAF - FORESTRY Feb 1988 4.2GERMANY SECTOR PROGRAM/AGR Aug 1988 8.6GERMANY SAC Special Joint Financing Nov 1988 15.0JAPAN SAC Special Joint Financing Feb 1988 7.8SAUDI ARABIA SAC I Jul 1987 4.0SWEDEN: S.I.D.A. SAC Special Joint Financing 1988 3.1UK SAC Special Joint Financing Sep 1987 8.2UK SAC-SJF, Supplement Mar 1988 9.2

TOTAL 60.1

COFINANCIERS WITH SAC II

CANADA SAF II Jan 1989 26.2EEC Special Program for SSA-Ghana Dec 1988 13.0GERMANY SAC II May 1990 12.6JAPAN SAC II Dec 1990 35.0NETHERLANDS BOP Support 1989 16.8SWEDEN: S.I.D.A. SAC II Apr 1989 1.6SWITZERLAND BOP Support Dec 1988 6.8UK Program Assistance 1989 41.9

TOTAL 153.9

Note: Figurca arc roundedSource: World Bank

AF4CO 13-Jun-91

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The increased resource flows to health and education, and the restructuring of theseexpenditures to emphasize primary education and primary health care, will reverse thedownward slide of these important sectors. Programs to monitor and minimize the socialcosts of adjustment are under preparation." I/

10. In quantitative terms, it was projected that economic growth would be sustained atabout 5 percent per annum over the 1987-1989 period. Investment was predicted to increasefrom about 10 percent of GDP in 1986 to 23 percent in 1989, whilst national savings wouldrise from 7 percent of GDP to 15 percent over the same period.

11. It was explicitly recognized that this ambitious strategy was not without considerablerisks. Chief among these were:

(a) that Government's weak implementation capacity would remain a key bottleneck,particularly as the adjustment program would impose a considerable additionalburden on policy formulation and decision-making capabilities. To minimize thisrisk three parallel technical assistance operations were launched to (a) strengtheneconomic and financial management, particularly through extensive training(Structural Adjustment Institutional Support Project, SAIS); (b) assist cocoasector reforms (Cocoa Rehabilitation Project); and (c) assist restructuring of thepublic enterprise sector (Public Enterprise Technical Assistance Project, PETA)(see Table 2). Furthermore, all Bank investment credits focussing onrehabilitation also addressed implementation capacity issues. In addition, theanalytical work programs of both the Fund and the Bank were designed tocomplement the Government's own policy analysis.

(b) that the supply response to the restructured incentives framework would bedelayed. The two factors seen as most likely to be significant obstacles toincreased output were continuing liquidity constraints and infrastructurebottlenecks. The liquidity problem, which was already preoccupying policymakers, resulted primarily from commercial banks with fragile balance sheetsbeing unwilling to lend to often inefficient firms squeezed by rising input pricesand the effects of tight demand management. A Financial Sector AdjustmentCredit was proposed to support a program of financial sector restructuringintended to alleviate this constraint. The infrastructure problem was beingaddressed under a number of projects, some of which were IDA-assisted, but itwas recognized that "projects were small in relation to needs and theirimplementation is subject to a number of constraints". 9/

(c) that those bearing the costs of adjustment would exert Dolitical pressure on theGovernment to reverse its policies or to seriously undermine themi by grantinglarge wage increases unrelated to productivity gains. It was recognized that, atleast at the outset of the program, there could be groups such as the urban poorwho may be net losers from the adjustment process as both urban unemployment

I/ op.cit., P(ii).

2/ op.cit., P49.

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and some key prices rise. However, it was argued that as resources shifted inresponse to changed incentives and inflation was brought under control thesegroups would become net gainers. Meanwhile, the costs of frictionalunemployment would be mitigated by a range of measures including financialcompcnsation for retrenched employees, public works programs, and creditschemes for the self-employed. It was emphasized that "the success of thereforms to date is partly due to the Government's careful efforts to explain therationale of the program to the general public. Continued effectiveness incommunications will be critical to the success of the program". 10/

(d) that adverse exogenous shocks from climatic or commodity price behavior,particularly for cocoa, would have a serious impact on growth and could only befinanced at the cost of very high levels of debt service. However, it was arguedthat "with the increasing strength of the economy, exogenous shocks may bebetter absorbed". 11/

(iii) Implementation of SAC I

12. Policies on External Trade and Payments. Liberalization of the external trade andpayments system was the centerpiece of the structural adjustment program, building onimportant measures taken during the economic recovery phase. In February 1987, the officialand auction rates of exchange were unified. 12/ Over the 1987-1988 period access to theauction was progressively widened, particularly as regards the import of consumer goods, andthe exchange rate gradually depreciated. By February 1988, there were effectively noforeign exchange restrictions on the import of goods 13/, except for five items on a"negative list" and certain goods prohibited for social reasons. To promote the developmentof a competitive foreign exchange market, the Government approved the creation of foreignexchange bureaus that were free to set their own buying and selling rates for foreigncurrency. 14/ However, a substantial differential persisted between the auction and bureaurates since the auction did not yet cover all current transactions and the bureaus were few innumber.

IQ/ op.cit., P50.

!I/ op.cit., P(ii).

12/ The auction was established in September 1986, but certain transactions stilltook place at a different, administratively determined, "official" rate.

1N/ Sections in bold throughout this report refer to the fulfillment of tranche releaseconditions.

14/ This measure was not a component of the agreed program; indeed, it wascontrary to the proposal of the IMF to establish an interbank market in foreignexchange in preference to the bureaus.

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13. By 1987, Ghana's import tariff levels were already moderate by developing countrystandards, with most tariffs in the 20 to 25 percent range. However, differences in sales taxrates on imports and on domestic sales accentuated variations in effective protection.Consequently, the Government revised the sales tax structure in the 1988 budget, unifyingsales tax on domestic and imported goods, applying the sales tax on imports to the duty-inclusive value, and simplifying the rate structure to four rates. 15/ Import tariffs werereduced by a uniform 5 percentage points for most goods bearing duty rates higher than15 percent, thereby further compressing the rate structure. In addition, the special taxon imports of excisable products was henceforth levied on an ad valorem basis ratherthan as a specific tax. 16/

14. Cocoa Sector Policies. The main policy objective for the cocoa sector was to increaseproduction though improved incentives; in particular, this was to be achieved without unduepressure on fiscal revenues by means of trimming the operational expenses of the GhanaCocoa Board (COCOBOD). In agreement with IDA, the Government raised the cocoaproducer price to 33 percent of the export price for the 1987/88 crop year (from 23percent the previous year), and to 42 percent of the export price for 1988/89. 17/Agricultural surveys carried out in 1988 showed strong evidence that cocoa farmers werebeginning to respond to these improved incentives. To restructure its operations in order tocut its operating costs, COCOBOD laid off 12,000 of its staff, reduced its transport costs,ceased production on 52 of its 92 plantations, and sold off majority ownership of itsinsecticide plant. In addition, a corporate plan involving further restructuring through1990 was agreed between COCOBOD and IDA, and a performance agreement betweenGovernment and COCOBOD was signed.

15. Public Resource Management. During 1987-88, the Government had two majorpriorities for public expenditure management. First, the allocation of operations andmaintenance expenditures, particularly in agriculture, health and education, was to beimproved. In this regard, a Ministry of Finance and Economic Planning (MFEP) task forcecompleted a study on recurrent expenditure norms in late 1987, the results of which wereused in preparation of the 1989 budget. Secondly, planning of public expenditures,particularly those for investment, was to be made more efficient: April 1987 saw theintroduction of the first three-year rolling public expenditure program, of which the publicinvestment program (PIP) was a key element. This became an annual exercise and the 1988-90 public expenditure program was agreed with IDA following missions in November1987, and January and February 1988 to prepare the public expenditure review.

16. In order to improve domestic resource mobilization, the Government introducedseveral tax reform measures in the 1987 and 1988 budgets aimed at realigning taxes,expanding taxation of consumption, and strengthening tax administration. 1988 tax revenues

15/ Including an exempt category.

16/ The analytical work underlying these reforms was carried out with assistancefrom IDA and the IMF, and a program was then agreed with IDA to form thebasis of second tranche conditionality.

17/ The cocoa crop year begins in October.

were 36 percent higher than those in 1987, which were in turn 53 percent higher than in1986.

17. Reform of State-owned Fnterprises. Reforms in the state-owned enterprise sector wereintended to encourage efficiency through an appropriate policy framework, initiate divestitureof state-owned ente.rprises (SOEs) that could be better operated by the private sector, initiateliquidation of non-viable SOEs, and strengthen the management of enterprises remaining inthe public sector.

18. During 1987-88, a policy statement on SOEs and guidelines for SOE access tobudgetary funds were finalized, and a study of cross-debts amongst SOEs and Governmentwas completed. However, the SOE divestiture program started slowly, due in part todifficulties in updating accounts, valuing assets and meeting the net financial liabilities ofthose SOEs to be divested. By mid-1988, the divestiture of 5 SOEs and the liquidation of5 others had been initiated; by the end of the year, 10 SOEs had reached the final stage ofliquidation and Government's shares in six joint ventures had been offered to their foreignpartners. However, the extent of divestiture and liquidation remained modest in relation tothe size of the state-owned enterprise sector.

19. Corporate plans and performance agreements were one means by which theperformance of SOEs remaining in the public sector was to be monitored and improved. Of14 priority SOEs, 10 had prepared corporate plans by the end of 1987 and four of thesewere translated into draft performance agreements. Of these the agreement betweenCOCOBOD and the Government was signed in early 1988. By the end of 1988, theGovernment had finalized the corporate plans and performance agreements of all 14 prioritySOEs.

20. Civil Service Reform. Improving the efficiency of the civil service was a centralobjective of the adjustment program. The reforms aimed at reducing staffing levels, raisingremuneration, and increasing salary differentials. The redeployment program experiencedconsiderable start-up problems. Although there was widespread recognition that the lowerranks were overstaffed, identification of those to be redeployed was difficult in the absence ofadequate information. In addition, it took some time to sort out the amount and arrangementsfor termination payments. Nevertheless by the end of 1987, some 11,300 civil servants hadbeen retrenched compared to the target of 15,000. A further 12,000 were removed fromthe payroll in 1988, based on the interim findings of a stafring and functional review.However, some poorly controlled recruitment did take place (equivalent to about 25 percentof the number redeployed) although some of those recruited were people with scarce skills.No progress was achieved in 1987 with the objective of increasing salary differentials in orderto attract better qualified staff to senior positions. In 1988 this even received a slight setbackin that an across-the-board salary increase resulted in a small compression of the salarystructure.

21. Macroeconomic Performance. Although it is not to be expected that a structuraladjustment program would have very significant macroeconomic impact in the short term,macroeconomic performance was broadly favorable in 1987 and 1988. Despite the adverseeffect of erratic rainfall on agricultural production in 1987, the economy grew at almost 5percent rising to 6 percent in 1988 (see Table 4). Agriculture rebounded in 1988 as a resultof better weather and the use of improved technological packages in certain areas. Export

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volumes of timber and gold rose substantially in response to the rehabilitation of infrastructureand the continued depreciation of the cedi. The introduction and subsequent broadening ofthe foreign exchange auction increased the availability of materials and spare parts for themanufacturing sector, which was consequently able to plan production for the first time inmany years.

22. However, the sustainabilty of these high growth rates was put in doubt bydisappointing performance on investment and savings. By 1988 gross investment was stillonly about 11 percent of GDP compared to the initial target for 1989 of 23 percent (indeed,by 1989 it reached only 14 percent). Similarly, the national savings share of GDP hadattained only 6 percent in 1988, far short of the 15 percent target for 1989 (indeed, in 1989 itturned out to be only 8 percent). 18/

23. Total tax revenues grew strongly over the period despite a slippage in 1988 primarilydue to reduced cocoa export taxes. Recurrent expenditures declined steadily as a share ofGDP, although at some cost to desirable operations and maintenance expenditures. Theconsequent increase in public savings, supplemented by a rapid rise in foreign financing (onmostly concessional terms), allowed the Government to both increase capital expenditures andreduce its indebtedness to the domestic banking system.

24. Inflation remained high in 1987 at 40 percent (compared to 24 percent in 1986), butdeclined to 31 percent in 1988. This decline represented the effects of tighter monetary andfiscal control, as well as the working through of inflationary shocks from the rapiddepreciation of the cedi in late 1986, food production shortfalls in 1987 and sharp petroleumprice increases in the same year.

25. The overall balance of payments improved sharply allowing a substantial accumulationof reserves and a reduction in external arrears. This resulted from higher inflows ofdevelopment assistance, lower scheduled amortization of public debt and increased net privatetransfers. The latter probably reflected the more appropriate exchange rate, the emergence ofnew investment opportunities and renewed confidence in the stability of the economy.However, the current account deficit worsened under pressure from falling cocoa exportreceipts (as a result of adverse climatic and price developments) underscoring the need topromote non-traditional exports.

26. Second Tranche Release. The second tranche review concluded that the specificrelease conditions had been substantially met and that general progress on implementation ofthe structural adjustment program had been satisfactory. Consequently, the tranche wasreleased on May 10, 1988, only three months after the initial target date.

1g/ However, it should be noted that the statistical series have been reviseddownwards since the initial targets were set, such that the 1986 starting pointfor investment should have been 9 percent instead of 10 percent, and that forsavings 5 percent instead of 7 percent.

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TABLE 4. GHANA: KEY ECONOMIC INDICATORS

Actual Prel.

1985 1986 1987 1988 1989 1990

GDP Growth Rate 5.1% 5.2% 4.8% 5.6% 5.1% 3.0%

GDY Growth Rate a/ 4.2% 6.6% 4.7% 5.1% 3.0% 2.0%GDY/Capita Growth Rate b/ 1.6% 3.6% 2.0% 1.9% 0.0% -1.0%

Total Consumption/Capita Growth Rate 0.1% 3.9% 2.1% 1.5% -2.0% -0.4%

Private Cons./Capita Growth Rate b/ -3.3% 2.6% 2.8% 1.3% -2.2% 0.3%

CPI Growth Rate c/ 10% 24% 40% 31% 25% 37%

Debt Service (US$ mln) d/ 415 388 560 643 517 372Debt Service/XGS e/ 61.5% 48.3% 61.8% 67.0% 58.3% 39.3%

Debt Service/GDP 6.5% 8.0% 12.2% 12.4% 9.8% 6.3%

Gross Investment/GDP 9.6% 9.4% 10.4% 11.3% 13.6% 15.8%

Domestic Savings/GDP 6.6% 5.8% 4.3% 5.5% 6.2% 6.7%

National Savings/GDP 5.4% 5.1% 5.9% 6.3% 7.8% 8.2%

Marginal National Savings Rate 39.2% 2.0% 4.0% 13.0% 69.0% -17.0%

Public Investment/GDP f/ 4.2% 7.3% 7.9% 8.0% 7.9% 7.4%

Public Savings/GDP 0.1% 1.7% 2.9% 2.7% 2.5% 1.7%Private Investment/GDP g/ 5.4% 2.1% 2.5% 3.3% 5.7% 8.4%

Private Savings/GDP 5.3% 3.4% 3.0% 3.7% 5.4% 6.5%

Ratio of Public/Private Investment 0.78 3.48 3.16 2.42 1.39 0.88

Government Revenues/GDP 11.3% 13.6% 14.1% 13.5% 13.6% 12.2%

Government Expenditures/GDP 15.4% 19.2% 19.1% 18.9% 19.1% 18.0%

Overall Deficit/GDP h/ -3.8% -3.8% -3.1% -3.7% -3.1% -4.4%

Domestic Financing/GDP 1.2% 1.0% -0.4% -0.6% -1.1% -1.4%

Export Growth Rate 22.0% 12.4% 9.8% 6.6% 12.7% 6.3%

Exports/GDP 10.7% 16.6% 19.7% 18.4% 16.9% 16.0%

Import Growth Rate 8.9% 16.6% 19.8% -0.4% 2.2% 5.4%

Imports/GDP -13.6% -20.1% -26.1% -24.1% -24.4% -25.1%

Current Account (USS mln) -264 -204 -224 -252 -305 -450

Current Account/GDP -4.2% -4.2% -4.9% -4.9% -5.8% -7.6%

NOTE: Figures are rounded.a/ GDY = GDP adjusted for changes in the terms of trade.b/ Assumed population growth (U.N. estimates) differ slightly from Government official estimates.c/ Yearly average.d/ Includes IMF and arrears payments, but excludes private debt.e/ Exports of goods and services.f/ Includes foreign aid and net lending.g/ Staff estimates.h/ Includes external assistance; grants are a financing item.

SOURCE: Government of Ghana and World Bank Staff estimates.

AF4CO: 11-Jun-91

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27. Cred, Monitoring and Administration. To prepare and monitor the structuraladjustment program, the Government created a Structural Adjustment Program Team (SAPT)headed by the Chairman of the Committee of PNDC Secretaries, with the PNDC Secretary ofMFEP as Vice Chairman, and the latter's Deputy as Secretary. SAPT was responsible for (i)monitoring and evaluating the progress of ongoing reforms as well as their impact on theeconomy; (ii) initiating preparatory steps for further adjustment measures; and (iii) liaisonwith the World Bank for periodic reviews of the program. The SAPT was supported by asecretariat (SAPSEC) of technical officials headed by a PNDC Secretary, to which was linkedthe Project Management Unit of SAIS. Until early 1989, SAPSEC was headed by the PNDCSecretary for Fuel and Power (who was also responsible for the National Revenue Service),which created some coordination difficulties with MFEP.

28. From the Bank side, monitoring of the program was carried out through numerousmissions specifically to review progress under SAC I, and the related SAIS, PETA, andCocoa Rehabilitation projects. In addition, public expenditure review missions andsupervision missions for various sector adjustment and investment credits contributed tomonitoring of the program, as did the continual involvement of Resident Mission staff.

29. The proceeds of the Credit were used exclusively for the financing of foreign exchangecosts of eligible imports through the foreign exchange auction of the Bank of Ghana.Procurement procedures were designed to permit rapid use of funds while ensuring efficiencyand economy. Except for a few exclusions such as luxury and defense items and foodgrains,any imports were eligible for financing, although petroleum imports were subject to a ceiling. 19/There were some start-up disbursement difficulties, due mainly to slow transmission of thenecessary documentation for replenishment of the special account in the Bank of Ghana. Inlate 1987 therefore, special accounts were created in certain commercial banks, whicheffectively accelerated this process. Some procedural difficulties remained but these werelargely cleared up during 1987-88, aided by a study on the utilization of concessionalassistance financed by a IDA Special Project Financing Facility.

(b) The Second Structural Adjustment Credit

(i) Preparation of the Credit

30. Preparation of SAC II was considerably less intensive than for SAC I since the policyframework it was supporting developed out of experience under the first phase of structuraladjustment. Indeed, as SAC I was monitored, preparation of SAC II increasingly became anintegral part of that process - particularly after the successful second tranche review of SAC Iin February 1988. In addition, the process of preparation was assisted by the tripartiteformulation of the first Policy Framework Paper (PFP), and by Bank analytical work,including particularly the 1989 Country Economic Memorandum and the annual public

19/ The supplemental credit (A025-1-GH) signed on October 30, 1987 includedfoodgrains as eligible imports after a foodgrain production shortfall in Ghanaduring 1987.

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expenditure reviews. 20/ 21/ Appraisal was carried out in June 1988, in moreconventional style than for SAC I (see para. 7), and negotiations were held in November ofthat year. The Credit was approved by the Bank's Board on April 18, 1989 and was declaredeffective on June 6 of the same year.

(ii) Design of SAC II

31. The stated purpos of the program supported by SAC II was to "further improve theincentive structure to stimulate growth, encourage savings and investment, and strengthen thebalance of payments... [and to support] increased efficiency in the use of resources by thepublic sector, while ensuring a stable fiscal and monetary stance.. .The program of actionsdesigned to achieve these aims...focus on trade and exchange rate policy, tax policies andadministration, specific private sector development initiatives, public expendituremanagement, state-owned enterprise reforms, and civil service reforms". 22/ The programof actions under SAC II placed more emphasis on tax reform and specific measures topromote private sector development than did SAC I; broad-based cocoa sector reform formedpart of the preparation phase of SAC II, but the institutional and marketing components wereeventually subsumed under the Cocoa Rehabilitation Credit. SAC II was to provide supportfor implementation of the policy framework during 1989 and 1990. Parallel financing was tobe provided by Canada, the EEC, Germany, Japan, the Netherlands, Switzerland, Sweden,and the UK (see Table 3); the IMF continued to provide resources under its three-year ESAFapproved in November 1988; IDA approved a second adjustment credit in the educationsector in May 1990. Complementary external resources for Ghana were raised at theConsultative Group meeting of February/March 1989. 23/

32. In qualitative terms, the expected benefits from pursuit of this strategy were similar tothose projected for the first phase (see para. 9). It was predicted that "the rise in the share ofinvestment in GDP will lay the foundation of future growth, and the.. .growth in nationalsavings will lower Ghana's dependence on foreign savings in the future. The continuedreforms in exchange and trade policies will serve to promote non-traditional exports andstimulate new import substitution activities in the private sector. Reforms in the structure andadministration of taxes will strengthen public finances while improving incentives to work,save and invest. Better public expenditure management will concentrate public resources onhigh priority areas.. .Special attention will be given to.. .alleviating poverty.. .State-ownedenterprise reforms are expected to lead to a slimmer and more efficient public sector.

20/ The first PFP was approved in September 1987 by the Bank's Committee ofthe Whole and the Board of the Fund.

21/ "Ghana: Structural Adjustment for Growth", Country Economic Memorandum,World Bank, January 23, 1989.

22/ Report and Recommendation of the President to the Executive Directors for aProposed Credit for a Structural Adjustment Program for Ghana, February 28,1989, P(i)

23/ Intentions to commit about US$ 900 million in 1989 were indicated at thatmeeting.

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Changes in the size and management of the civil service will increase [its) effectiveness".2AW

33. The ajantitative targets for the second phase of structural adjustment were, however,less ambitious than for the first phase (see para. 10). Although growth was still projected toaverage 5 percent per annum, investment was projected to rise to only 16 percent of GDP by1990 and national savings to only 8.5 percent by the same year. These projections reflectedthe tempering of the optimism of SAC I by the experience of actual implementation of theadjustment process in Ghana.

34. Three principal risks were identified as potentially threatening achievement of theprogram's objectives and were similar to those identified for SAC I 2.1:

(a) the Government's implementation capacity was cited as still being weak,particularly as "measures to attract trained Ghanaians back into public servicehave so far met with only limited success, and the motivation of the civil servicecontinues to be low". 26/ Measures to reduce this risk focussed on trainingprograms and continued technical assistance under the SAIS, CocoaRehabilitation and PETA projects.

(b) the discussion of the weak supply response focussed more on the role ofinvestment than under SAC I, since opportunities for utilizing spare capacity andthe relatively inexpensive rehabilitation of existing capacity were beingprogressively exhausted. Liquidity constraints and infrastructure bottleneckswere again cited as contributing to the problem, and financial sector adjustment,public investment and the liberalized foreign exchange regime were proffered assolutions. However, it was also noted that "remaining policy impediments maycontribute to the reluctance of entrepreneurs to advance beyond the projectidentification stage" and that "despite [the Government's] efforts, renewed privateinvestment will need to involve a shift in perceptions and confidence in thedurability of the policies shaping Ghana's economic future, and it is difficult tojudge when patient commitment by the Government to appropriate policies willbegin to bring results". 27/

(c) the risk of opposition to some aspects of the structural adjustment process wasagain cited. Perceived inequities in the distribution of adjustment costs between

24/ op.cit., P(i).

25I However, the risk of adverse exogenous shocks was not raised, even thoughneither the weather nor commodity price behavior had become significantlymore predictable. Moreover, both these risks had proved to be justified in theSAC I period.

2/ op.cit., P27.

Z2/ op.cit., P27.

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different groups were now added to the SAC I explanation of costs precedingbenefits for some groups. However, it was argued that "Government should beable to forestall such socio-political risks by balancing and timing higher servicecosts with improved service provision, mitigating transitional unemploymentthrough achieving overall economic growth, providing generous compensationbenefits to redeployees, and implementing retraining and job creation projectsunder the Program to Mitigate the Social Costs of Adjustment (PAMSCAD)." Itwas again noted that 'the success of the reforms to date is partly due to theGovernment's careful efforts to explain the rationale of the program to thegeneral public and continued effectiveness in communications will be critical tothe success of the program" 28/

(iii) Implementation of SAC II

35. Policies on External Trade and Payments. Reform of government policy towards theforeign exchange markets continued in 1989 and 1990. In January 1989, the auction wasexpanded to include all bonafide requests for the transfer of profits and dividends. InDecember of the same year, it delegated to authorized dealer banks and eligible foreignexchange bureaus the responsibility of determining the eligibility of individual bids for foreignexchange. In April 1990, the auction was transformed from a retail to a wholesale marketand interbank foreign exchange transactions were authorized. At the same time the auctionwas extended to include service payments for approved private external borrowing.

36. The foreign exchange market adjusted smoothly to these structural reforms. Improvedfunctioning of the auction, expansion in the number of market participants, and an increase inforeign exchange channeled through the bureaus encouraged a gradual convergence of theauction and bureau exchange rates; by August 1990 the spread between the two markets haddeclined to about 1 percent from 40-50 percent in early 1989.

37. On trade liberalization, the objectives were to continue to rationalize the structure ofimport duties and trade taxes, and to reduce special taxes on certain imports. The process ofunifying sales and excise tax rates across comparable imported and domestically producedgoods was completed, along with elimination of inconsistencies in the determination of the taxbase. However, in the area of tariff reduction progress was mixed. The import duty rate onsemi-processed intermediate goods was reduced from 15 to 10 percent, and the special tax ontextile imports was lowered from 40 to 10 percent, but 1990 saw the introduction of a supersales tax on luxuries (with rates ranging from 75 to 500 percent). Since in practice thisapplied only to imports, effective protection was raised to quite high rates for some goods.29/

38. Cocoa Sector Policies. Pursuit of the closely related objectives of improving cocoafarmer incentives and reducing COCOBOD costs continued in the SAC II period. The impact

28/ op.cit., P28.

29/ This was largely reversed in the 1991 budget, since the rates of supertax werereduced and coverage narrowed.

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of the sharp fall in Ghanaian cocoa prices on farmers was cushioned to some extent by anincrease in output and a rise in their share of total revenues, producer prices for 1989/90and 1990/91 having been agreed with IDA (representing 42 percent and 47 percent of theexport price respectively). However, this increase in the farmers' share could only bemoderate since it came more at the expense of tax revenue than of COCOBOD expendituresas progress on COCOBOD operational reform slowed, thus the long-run target of 55 percentfor producer share failed to be reached. COCOBOD employment levels remained high,plantation divestiture was minimal, and the privatization of transport and input supply was notcompleted.

39. Public Expenditure Management. On recurrent expenditures, the key issue continuedto be the size of the wage bill and the decompression of the civil service wage structure. TheGovermnent achieved a decompression ratio of 7.7:1 in 1989 (in line with agreementsreached between the Government and IDA) and 9.5:1 in 1990, and did so within the resourceenvelope agreed with the Fund. 30/ Agreement was also reached between theGovernment and the Bank on the 1990-92 PIP, which continued to concentrate on physicalinfrastructure (58 percent), followed by productive sectors (21 percent) and social sectors (19percent). Encouraging progress was made on implementing planned investment expenditures.

40. Tax Policy and Administration. In the period of adjustment supported by SAC II, taxreform took a higher profile than had previously been the case, building on the notableimprovements in tax administration which had taken place earlier. 31/ The mainobjectives of the reforms were (i) to increase revenues while reducing reliance on cocoa; and(ii) to enhance the contribution of the tax system to growth by reducing tax rates andbroadening the tax base. Although tax revenues did not increase in relation to GDP between1988 and 1990, the share of cocoa revenue dropped sharply from 17 percent to 12 percentover the period. There was also significant movement away from narrow-based productiontaxes to broader-based consumption taxes.In particular, the company income tax rate andsome import duties were reduced, and vehicles and petrol were subject to highertaxation. The level of personal income tax relief was raised and brackets were expandedsignificantly; some loopholes on non-taxable allowances were closed. In addition, the ratestructure of capital gains taxation was modified and its administration rationalized. During1990, the Government, with the assistance of the Bank and the Fund, evaluated the impact ofthe tax system on the incentives for domestic savings and investment; key proposals fromthese studies were incorporated into a program of measures to be implemented in 1991 and1992. 32/

30/ Measured as the ratio between the gross salary of the highest and the lowestpaid civil servant.

31/ Tax revenue as a share of GDP, albeit a crude measure of administrativeperformance, rose from under 7 percent in 1984 to about 12 percent in 1986,around which level it has remained ever since.

32/ This program will be supported by an IDA credit to Promote PrivateInvestment and Sustained Development.

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41. Improvements continued to be made in the administration of taxes. The ASYCUDAcomputer system was installed at various ports of entry to cover the calculation of importduties and sales taxes. Progress was made in the introduction of a unique taxpayeridentification number, and a pilot test of the feasibility of replacing the current ring system ofsales tax with a credit system was introduced in one subsector in 1990.

42. Reform of SOEs. The slow overall progress on divestment continued into the SAC IIperiod, although Govermnent divested or liquidated the number of enterprises to which ithad been committed in its 1989 program. However, in late 1989, certain institutionalreforms were made with a view to accelerating the process. The Divestiture ImplementationCommittee (DIC) was separated from the State Enterprises Commission, new members and asecretariat to the DIC were appointed, and a generally higher political profile was given to itsactivities. In consequence, by mid-1990 implementation of the program agreed with IDAfor 1990 was more assertive than had previously been the case. Moreover, compared to the1988-90 program, the companies on the 1991-92 divestiture list approved by DIC in late 1990were in general larger, covered a wider range of activities, and could be privatized rather thanliquidated.

43. In order to assist in the effort to increase the efficiency of those enterprises remainingin the public sector, corporate plans continued to be formulated and performance agreementsconcluded, including updating 13 such agreements for priority SOEs in 1990. 33/However, monitoring of actual performance was weakened by institutional deficiencies andthe non-completion of enterprise accounts. In addition, performance was sometimesundermined by Government delaying decisions on tariff increases, and failing to pay bills andprovide financial transfers promptly.

44. Civil Service Reform. In the adjustment period supported by SAC II, progress oncivil service reform was both faster and deeper than had previously been the case. Theretrenchment program was implemented smoothly with almost 14,000 staff being laid off in1989 and slightly over 12,000 in 1990. During 1990, the recently-improved informationsystem on staffing levels showed that controls over new recruitment needed to be tightened,and a number of actions were taken to this effect. In order to sustain and extend theseinformational improvements, a program to integrate the payroll and personnelmanagement systems commenced in 1989, although this was later than originally envisagedand underwent further delays in 1990.

45. As noted above (see para. 39), substantial progress was made in decompressing thesalary structure of the civil service. 34/ After taking into account changes in the structureof personal income taxes, real salary gains were made at all but the lowest grades. However,

33/ In fact, the tranche release condition specified 14 SOEs, but active discussionon divestment of one of these (State Gold Mining Corporation) was takingplace, and conclusion of a performance agreement was therefore consideredunnecessary.

34/ However, it should be noted that this decompression was significantly moresubstantial for the relatively few civil servants at the very top of the salarystructure than for those just below.

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although these real wage increases succeeded in attracting relatively highly-qualified recruits,little was left over to improve real remuneration for those already in the civil service.

46. Analysis carried out as part of the program indicated that the grading and occupationalstructure suffered from several weaknesses. Salary increases for promotion were often smalland inconsistent; in the absence of job evaluation, pay scales were not based on properassessments of job weight or content; the system was complex and difficult to administer. Inorder to revise the structure, with a view to supporting career development and attractingmore skilled personnel, the groundwork for a comprehensive regrading exercise was laidduring 1990. 351 In the area of civil service management, the Management ServicesDivision (MSD) of the Office of the Head of the Civil Service continued to assist agencies tobring about efficiency improvements through job inspections. The MSD also began toundertake management reviews with a view to rationalizing organizational structures andreducing duplication.

47. Private Sector Development. Many elements of the program were aimed at makingthe economic environment more attractive for private investment, such as external trade andpayments policy reform, financial sector restructuring, divestiture of SOEs, and improvedpublic investment planning. More specifically, the Government implemented a program torelease private blocked capital and dividends and held meetings with private sectorrepresentatives to discuss economic policy issues. MIGA helped organize a conference topromote direct foreign investment in Ghana in 1990, which met with some success. Alsoduring the SAC II period, the Ghana Investment Centre streamlined its procedures forregistering enterprises with foreign participation.

48. Poverty Alleviation. Over the program period access of the poor to basic socialservices to combat illiteracy, lack of skills, ill health and malnutrition has improved; socialindicators show increased primary school enrollments, improved nutrition and more extensiveimmunization. In addition to these improvements in the human capital aspects of poverty,favorable movements in the rural terms of trade and increased agricultural productivity appearto have brought about an increase in incomes amongst the self-employed in agriculture - themain area of concentration of poverty in Ghana.

49. As to more targeted poverty alleviation measures, progress under PAMSCADremained behind schedule, but implementation accelerated during the period. Expendituresfocussed on assisting retrenched public sector employees, labor-intensive priority works, fooddistribution, and community initiative projects.

50. Macroeconomic Performance. The strong growth performance of previous yearscontinued in 1989, with GDP growing by 5.1 percent (see Table 4). In 1990 growth slowedto 3 percent largely as a result of drought, agricultural growth dropping from 4 percent in1989 to minus 2.4 percent in 1990. Industrial growth moderated to about 4 percent in bothyears (from about 7 percent in 1988), but this was largely due to the buoyancy of the miningsector; in manufacturing, value added rose by only about 3 percent a year. However, avariety of data sources suggest that the structure of manufacturing was in the process oftransformation: certain industries were in decline as the effective protection afforded by the

35/ The new grading structure is due to be ready for full implementation in 1992.

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trade and payments regime had been reduced with liberalization, whilst others werebenefitting from the new framework of incentives. Significantly, the strong growth in non-traditional exports of previous years was sustained in 1990 (although there was some slippagein 1989).

51. In contrast with the SAC I period, investment and savings levels under SAC II wereclose to target at 15.8 percent and 8.2 percent of GDP respectively (against targets of 16percent and 8.5 percent). This reflected both stronger performance and greater realism insetting targets. However, investment was still barely above the levels necessary just toreplace depreciated capital. Moreover, by 1990 private investment still accounted for onlyhalf of total investment, and much of this was concentrated in only one sector, mining, whichhas relatively few linkages to the rest of the economy.

52. Fiscal performance in 1989 was on target with a budget deficit of 3.1 percent of GDP,but this slipped slightly to 4.4 percent in 1990, largely because of shortfalls in tax receipts.These shortfalls resulted from the economic slowdown, lower tax rates on income, and fallingcocoa tax revenue. However, the availability of foreign financing allowed Government to bothincrease development expenditures and retire debt to the banking system. In addition,external arrears were fully repaid during the course of 1990.

53. Inflation fell to 25 percent in 1989 (from 31 percent in 1988) but rose again to 37percent in 1990, despite a sharp deceleration in monetary expansion. These continued highlevels of inflation were due primarily to the lagged effects of monetary expansion, poorharvests of food crops, and increases in petroleum product prices. The slow adaptation ofinflationary expectations may also have played a role. Whatever the precise combination ofcausal factors of inflation in Ghana, the failure to reduce it to more acceptable levels indicatedthe continued existence of serious supply rigidities.

54. Export earnings declined in 1989, but recovered in 1990 to their 1988 level. Thistrend largely reflected the sharp falls in the prices of cocoa and gold. Indeed, the terms oftrade deteriorated by 26 percent over the period, and the current account deficit widened inconsequence (from 4.9 percent of GDP in 1987-88 to 5.8 percent in 1989 and 7.6 percent in1990). Nevertheless, because net aid disbursements rose and non-concessional debtamortization declined, a sizable overall balance of payments surplus was maintained. Inaddition, the ratio of debt service to exports continued to fall.

55. Overall, macroeconomic performance in 1989 and 1990 indicates that economicreforms have helped the Ghanaian economy become more resilient in the face of externalshocks, such as poor weather and deteriorating terms of trade. At the same time, underlyingeconomic trends show that policy reform in some areas needs to be strengthened to lay afirmer base for sustainable growth, particularly through increased private investment.

56. Second and Third Tranche Release. The initial program of actions proved slightlyoptimistic in its estimate of the time required to satisfy the specific conditions for release ofthe second and third tranches 36/; these were programmed for 1990 in January and Marchrespectively. In the event, all the conditions were judged to have been met and overall

36/ Third tranche conditionality concerned the divestiture program.

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implementation progress to have been satisfactory by July 17, 1990 on which date bothtranches were released.

57. Credit Monitoring and Administration. The institutional arrangements for theGovernment's monitoring of the structural adjustment program under SAC II, were similar tothose under SAC I (see para. 27). However, at the end of 1989, responsibility for SAPSECbecame fully that of MFEP. In addition, later that year the Economic Liaison Unit wascreated and biannual high-level policy review meetings were instituted, with a view toincreased consensus building around the initiatives to be taken under the program, andensuring coordination between the PNDC and the SAP Team. The Bank's monitoring of theprogram was carried out in essentially the same fashion as under SAC I (see para. 28).

58. As under SAC I, the proceeds of the Credit were used exclusively for the financing offoreign exchange costs of eligible imports through the foreign exchange auction of the Bankof Ghana. Procurement procedures were designed to permit rapid use of funds while ensuringefficiency and economy. Except for a few exclusions such as luxury and defense items, anyimports were eligible for financing, although petroleum imports were subject to a ceiling.No significant problems were experienced on disbursements, since the system improvementsmade under SAC I were maintained (see para. 29).

Why Were Some Components of the Program More Successful than Others?

59. It is clear that the structural adjustment program in Ghana has met with considerablesuccess; much progress has been made in implementing structural reform and themacroeconomic data show major improvement. However, much remains to be done, andcertain important lessons can be learned for the design and implementation of follow-oncredits.

60. Overall commitment by the Government of Ghana to pursuit of the objectives of itsstructural adjustment program has been exceptionally great. However, the degree ofcommitment appears to have varied from one component of the program to another, and forgiven components over time. Although difficult to measure, the degree of commitment hasplayed an important role in determining the success of certain components. For example, theslow progress on divestiture, at least until 1990, contrasts with the pace of civil servicereform, even though both were politically very difficult areas. It seems that the Governmentwas simply more persuaded of the wisdom of civil service reform than of divestiture. In thisregard, the Bank has some role to play in consensus building - for example, the sense thatcommitment was greater under SAC I may be related to the participatory approach toappraisal instigated by the Government (see para. 7). The Bank also has a role to play inavoiding unrealistic expectations of progress in areas where consensus is still being built; inthis regard, flexibility was shown at early stages of the divestiture program.

61. Combined with the effect of the degree of commitment is the relative capabilities ofthe implementing agencies concerned. Comparatively strong institutions involved in tax,public expenditure and civil service reform help explain relative success in those areas;similarly the restructuring of responsibilities for divestiture (see para. 42) assisted theacceleration of progress in that component of the program. In this regard, the effective use ofparallel technical assistance operations played a role in providing necessary reinforcement;SAIS provided training, and assisted in the design and implementation of reforms of tax,

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public expenditure and civil service policies very effectively 37/, whilst PETA'scontribution appears to have been more modest in the area of public enterprise reform. 38/

62. Parallel credits also had a potentially important role to play in sustaining anddeepening dialogue between the Government and the Bank on specific issues. For example,the emphasis on the cocoa sector was much less in SAC II than in SAC I because theinstitutional and marketing reform elements were subsumed under the Cocoa RehabilitationProject. In the event, the planned study on the reform of cocoa marketing was not carried outand a key opportunity for further dialogue on reducing COCOBOD operational costs wasthereby missed. In the face of fiscal pressure, this effectively prevented full achievement ofthe SAC II objective of improving cocoa producer incentives. In contrast, SAIS reviewsproved an effective medium for dialogue on public expenditure management and civil servicereform.

63. As experience with structural adjustment developed in Ghana, it became increasinglyapparent that the response of private investment to the changed incentive framework wasconsiderably less than had been expected. In consequence, increasing emphasis was placed onidentifying specific measures to promote private investment rather than assuming thatmacroeconomic stability, improved infrastructure and the "right prices" would be sufficient.SAC II had a greater focus on these issues than did SAC I, yet private investment levelsremained below the levels necessary for sustainable growth. In 1990, the Government andIDA conducted a study on constraints to private investment 39/, which contributed to thedesign of the third phase of structural adjustment in Ghana, supported by a credit to PromotePrivate Investment and Sustainable Growth (PPPISD - see Table 2). The program to promoteprivate investment will focus on (i) further tax reform to improve incentives to save andinvest; (ii) taking steps to make the regulatory framework more consistent with the liberalizedeconomy; (iii) maintaining the momentum of reforms designed to increase the efficiency withwhich public resources are used; and (iv) making further progress on SOE reforms.

II. PROGRAM REVIEW FROM BORROWER'S PERSPECTIVE

Economic Performance under the Structural Adjustment Program

64. Over the period 1989-1990, the national income increased by an average annual rate of4.1 percent. This compares with the average annual growth of 5.5 percent over 1987-1988.The weakening in the pace of output growth was particularly evident in 1990, with real GDP

37/ In the case of civil service reform, parallel technical assistance from the UKOverseas Development Administration played a critical role.

38/ Also worthy of note in this regard are the various studies financed by IDASpecial Project Preparation Facilities, in particular those on sales tax collection,budgetary reform, taxation of investment, and the Ghana Statistical Service.

32/ "Towards a Dynamic Investment Response", World Bank, Western AfricaDepartment, October 1990.

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growing at about 3 percent. This deterioration in growth performance was due in largemeasure to delayed and inadequate rainfall which adversely affected non-cocoa agriculturaloutput. Thus, in contrast to the strong growth in agricultural output of 4.2 percent in 1989,the agricultural sector recorded a negative growth of 2.4 percent in 1990. The developmentsin 1990 underline the fragility of the Ghanaian economy, dependent as it predominantly is onrain-fed agriculture. Growth in the manufacturing sector has also slowed down considerablyin recent years, recording a growth rate of 3 percent in 1989 and an even slower 2.6 percentin 1990, as compared with an average annual growth rate of 7.5 percent in 1987-1988. Themining subsector (gold in particular), however, recorded much stronger growth.

65. Inflation as measured by changes in the consumer price index fell from an annualaverage of 31.5 percent in 1988 to 25.2 percent in 1989, but increased to 37.2 percent in1990. The acceleration of inflation in 1990 was due principally to food price increase broughtabout by poor harvests and the increases in prices of petroleum products.

66. The balance of payments position in 1989 and 1990 was adversely affected by theweakening in the world prices for cocoa. The price per metric ton averaged US$1,372 in1989-1990, as compared with US$2,190 in 1987-88. The value of merchandise exports for1990 is provisionally put at US$826 million, representing a nominal increase of 2.3 percentover 1989. This slight improvement in earnings was due mainly to an increase in goldearnings, but also to increased earnings from manganese, residual oil, and diamonds. Thecurrent account deficit (including official transfers) widened from US$83 million in 1989 toUS$259 million in 1990, but a positive net capital account position produced an overallsurplus of US$85 million in 1990. Although this was lower than in 1989, it allowed theretirement of external payments arrears, such that by the end of June 1990, Ghana had noofficial arrears. Total external indebtedness increased from US$2.9 billion at the end of1989, to US$3.1 billion at the end of 1990. The 1990 figure is equivalent to about 53 percentof GDP. The debt service ratio (including repayments to the Fund) declined from 58 percentin 1989 to 40 percent in 1990; if payments to the Fund are excluded, the ratio drops from 33percent in 1989 to 23 percent in 1990.

67. Although there has been significant progress in savings and investment performance inGhana since 1983, this still lags behind the average for Sub-Saharan Africa. The share ofinvestment and gross domestic savings in GDP in 1990 were 16 percent and 11.5 percentrespectively. A number of measures have been taken, and more are planned, to tap moreeffectively than hitherto the resources of the private sector in this regard.

Economic Reforms under the Structural Adjustment Program

68. One of the most significant stages in liberalizing the Ghanaian economy has been thedramatic improvement in access to realistically-priced foreign exchange. This has hadbeneficial knock-on effects in many key areas, but especially in adjusting the terms of tradeinternally, and providing undistorted profit signals, which discloses Ghana's real comparativeadvantage as a producer. Today the foreign exchange auction and bureau markets haveeffectively converged.

69. After foreign exchange, the second most important price given to the Ghanaianeconomy is the price of cocoa. Under the Structural Adjustment Program, declining exportprices for cocoa have not been fully transmitted to the farmer. Instead, each year the

- 56 -

producer price has been set so as to increase the historically low farmer's share of cocoarevenues; correspondingly, the operating costs of COCOBOD have been reduced and, in morerecent years, fax revenues from cocoa have declined. These improved incentives have led toincreased cocoa production and farmer incomes.

70. Reform of state-owned enterprises has been an important part of the StructuralAdjustment Program, and has two components. First, certain measures have been taken toimprove the efficiency, accountability, and profitability of the small group of enterprises thatare expected to remain in the public sector. With regard to most enterprises in this groupaccounts are being brought up to date and audited, corporate plans have been drawn up andperformance agreements have been signed. Secondly, the process of privatizing or liquidatingthe bulk of SOEs has recently accelerated following the separation of the DIC from the SEC.

71. There are four parts to the civil service reform program. First, the pay and gradingsystems are being reformed. Secondly, the personnel management and payroll systems arebeing integrated. Third, staffing is being reduced, and finally staff training and developmentis to become more systematic. In all these areas significant progress has made but muchremains to be done.

72. So far, improvements in public expenditure management have focussed particularly onestimation and planning of recurrent and capital expenditures. This will continue, with steadyprogress likely in the timeliness and realism of annual budget preparations, and themaintenance of the rolling three-year public investment program. Increased emphasis will beplaced on incorporating sector strategies into the budget process, which will allow, inter alia,a more explicit poverty focus to be given to public expenditure programming. This willcomplement the poverty alleviation measures taken under PAMSCAD and other programs,particularly in the health, agriculture and education sectors.

73. To facilitate private sector development, several major tax reform initiatives have beentaken in recent years; taxes on profits, personal income, capital gains and sales have all beenreduced and several double taxation agreements have been concluded. At the same time,foreign investment approval procedures have been streamlined and certain aspects of theregulatory framework have been revised to be more in keeping with a market-orientedeconomy.

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PART III: STATISTICAL DATA

GHANA: SAC I CR. 1777-GH

Original Disbursed Canceled Repaid Outstanding

34.0 35.18 0 0 36.37

Initiating Project Brief December 31, 1985Initiating Memorandum February 26, 1986Letter of Development Policy March 2, 1987Negotiations February 23, 1987Board Approval April 14, 1987Credit Agreement May 19, 1987Effectiveness May 29, 1987Original Credit Closing June 30, 1990Actual Credit Closing June 30, 1990Last Disbursement May 31, 1990

CUMULATIVE CREDIT DISBURSEMENT

FY87 EY88 FY89 FY90

(i) Planned 7.5 9.5 17.0 0(ii) Actual 10.2 Q0 22.7 1 5(iii) (ii) as % of (i) 136.0 8.4 133.5 -

MISSION DATA (inc. African Facilities)

No. of No. of StaffMonth/Year Weeks Persons weeks

Appraisal 07/86 3 9 27Supervision I 07/87 3 4 12Supervision II 02/88 1.5 7 14Completion

STAFF INPUTS (inc. African Facilities)

FY84 FY85 FY86 FY87 F;Y88 FY FY90 FY91

LENA 6.7 100.4LENN 19.7LENP 10.8 77.5 4.5SPN 66.8 12.5 2.9PCR 3.0

- 58 -

TOTAL STAFF INPUTS: 304.80 staffweeks.

FOLLOW-ON SAL OPERATIONS: Adjustment Credit No. 2005, approved on April 18,1989 in the amount of US$120 million.

DISBURSEMENTS SCHEDULE (CR. 1777-GH)

Date Amount

06/15/87 5,893,969.4606/18/87 3,248,473.5005/29/87 41,633.1805/29/87 391,910.1206/25/87 572,904.4601/05/88 351,294.0001/05/88 226,605.0106/09/88 95,060.0506/09/88 100,138.4607/19/88 308,328.1908/25/88 1,196,464.2109/07/88 3,248,212.3209/07/88 1,284,762.9710/06/88 333,067.1810/07/88 1,191,016.9210/06/88 2,647,999.5010/31/88 595,409.75-11/12/88 335,020.87-

670,041.7311/18/88 335,020.87-

670,041.7311/18/88 588,383.86-

1,176,767.7211/22/88 1,497,105.84-

2,994,211.6712/06/88 1,157,898.63-

2,315,797.2601/12/89 213,292.73

656,246.03-426,585.46

1,312,492.0602/16/89 687,291.74-

1,374,583.4802/17/89 287,561.29-

1,629,983.3103/10/89 2,438,861.4905/31/90 1,527,160.17

TOTAL FOR LOAN 35.183.003.29

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GHANA: SAC I AFRICAN FACILITY A025


81.0 83.3 0 0 86.52

Initiating Memorandum February 26, 1986Letter of Development Policy March 2, 1987Negotiations February 23, 1987Board Approval April 14, 1987Credit Agreement May 19, 1987Effectiveness May 29, 1987Original Credit Closing June 30, 1990Actual Credit Closing June 30, 1990Last Disbursement August31, 1990


FY87 FY88 FY89 FY90

(i) Planned 23.0 50.0 8.0(ii) Actual 16.5 46.9 19.8(iii) (ii) as % of (i) 71.7 0.0 586.2

MISSION DATA


Appraisal (See SAC I, Cr. 1777-GH)Supervision ISupervision IICompletion

STAFF INPUTS

FY90 FY91

LENA (See SAC I, Cr. 1777-GH)LENNLENPSPNPCR

TOTAL STAFF INPUTS: Included in SAC I, Cr. 1777-GH

FOLLOW-ON SAL OPERATIONS: Adjustment Credit No. 2005, approved on April 18,1989

- 60 -

DISBURSEMENTS SCHEDULE A-025

Date - Amount

06/12/87 30,000.0006/18/87 16,488,459.3007/20/88 2,883,271.7008/18/88 1,126,481.9909/02/88 691,456.4009/09/88 4,205,648.4810/28/88 978,562.03-

1,956,724.0510/28/88 441,103.42-

882,206.8411/14/88 621,329.4511/21/88 3,078,324.1812/12/88 3,194,567.8712/09/88 1,258,209.7901/03/89 2,047,480.4203/10/89 5,471,657.49-

5,471,657.4903/14/89 1,228,342.49-

2,259,765.2303/20/89 2,293,430.2303/20/89 2,572,360.3403/22/89 2,129,529.9905/09/89 1,245,589.18-

1,245,589.1805/30/89 4,946,953.6806/15/89 1,223,323.63-

1,223,323.6306/20/89 2,849,128.56-

2,849,128.5607/11/89 758,346.21-

758,346.2107/11/89 1,366,819.44-

1,366,819.4408/24/89 829,358.95-08/24/89 629,358.95

650,795.67-650,795.67

09/28/89 4,142,558.66-4,142,558.66

12/22/89 1,253,629.61-1,253 ,629 .61

01/05/90 4,512,603.33-3,512,603.33

01/04/90 934,758.95-934,758.95

01/11/90 1,253,629.611,253,629.61-

05/14/90 3,112,688.07-3,976,225.73

06/19/90 2,353,726.2206/26/90 98,692.9208/31/90 32.54

TOTAL FOR LOAN 83,304,381.34

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GHANA: SAC I AFRICAN FACILITY SUPPLEMENT A025-1-GH


15.0 15.21 0 0 15.68

First Mention in Files See SAC I, Cr. 1777Initiating Memorandum See SAC I, Cr. 1777Letter of Development Policy See SAC I, Cr. 1777Negotiations See SAC I, Cr. 1777Board Approval October 13, 1987Credit Agreement October 30, 1987Effectiveness November 24, 1987Original Credit Closing June 30, 1990Actual Credit Closing June 30, 1990Last Disbursement July 03, 1990


FY88 FY89 FY90 FY91

(i) Planned Not available(ii) Actual 15.0 0.2(iii) (ii) as % of (i) Not applicable

MISSION DATA


Appraisal (See SAC I, Cr. 1777)Supervision ISupervision IICompletion

STAFF INPUTS

FY90 FY91

LENA (See SAC I, Cr. 1777)LENNLENPSPNPCR

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TOTAL STAFF INPUTS: See SAC I, Cr. 1777

FOLLOW-ON SAL OPERATIONS: See SAC I, Cr. 1777

DISBURSEMENTS SCHEDULE A-025-1

Date Amount

06/19/90 1,082,472.596,999,999.79

06/16/90 433,185.861 ,500,485.36

06/19/90 5,028,372.1507/03/90 170,246.86


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GHANA: SAC II CR. 2005-GH


120.0 119.77 0 0 120.59

First Mention in FilesInitiating Memorandum May 23, 1988Letter of Development Policy November 23, 1988Negotiations November 21, 1988Board Approval April 18, 1989Credit Agreement May 1, 1989Effectiveness June 6, 1989Original Credit Closing March 31, 1991Actual Credit Closing March 31, 1991


FY90 FY91

(i) Planned 60 60(ii) Actual 56.7 63.1(iii) (ii) as % of (i) 94.5 105.2

MISSION DATA

No. of No. ofStaffMonth/Year Weeks Personsweeks

Appraisal 06/88 1.5 8Supervision I 11/89 2.5 7Supervision II 05/90 1.5 4Completion

STAFF INPUTS

FY86 FY88 FY89 FY90 FY91

LENA 2.6 2.0 33.9LENN 39.8LENP 79.6SPN 75.6 28.2PCR 3.0

- 64 -

TOTAL STAFF INPUTS: 264.70 staffweeks.

FOLLOW-ON SAL OPERATIONS: Adjustment Credit No. 2236, was approved on May 7,1991 in the amount of US$120 million.

DISBURSEMENTS SCHEDULE (CR. 2005-GH)

Date Amount

07/24/89 30,000,000.0008/10/89 22,500,000.0008/10/89 844,016.4408/21/89 304,977.5312/22/89 3,250,176.7110/01/90 5,312,560.8910/01/90 3,710,527.1610/01/90 2,918,253.8410/03/90 1,531,416.6710/03/90 1,186,797.3010/03/90 637,745.6510/09/90 3,931,414.8710/10/90 4,632,503.4710/19/90 3,935,147.0111/05/90 6,697,994.1111/28/90 5,971,622.4012/19/90 9,091,533.4912/27/90 1,048,000.0012/28/90 4,024,972.9901/02/91 2,910,000.0012/28/90 5,199,444.9411/05/90 6,697,994.11-01/09/91 4,107,008.5701/16/91 2,670,912.7102/01/91 342,233.50


- 65 -

GHANA: SAC II SUPPLEMENT IDA REFLOWS) CR. 2005-1-GH


5.7 6.28 0 0 6.22

First Mention in Files See SAC II, Cr. 2005Initiating Memorandum See SAC II, Cr. 2005Letter of Development Policy See SAC II, Cr. 2005Negotiations See SAC II, Cr. 2005Board Approval October 12, 1989Credit Agreement January 19, 1990Effectiveness April 12, 1990Original Credit Closing March 31, 1991Actual Credit Closing March 31, 1991


FY90 FY91

(i) Planned 2.0 3.7(ii) Actual 63(iii) (ii) as % of (i) 170.0

MISSION DATA


Appraisal (See SAC II, Cr. 2005)Supervision ISupervision IICompletion

STAFF INPUTS

FY90 FY91

LENA (See SAC II, Cr. 2005)LENNLENPSPNPCR

- 66-

TOTAL STAFF INPUTS: See SAC II, Cr. 2005

FOLLOW-ON SAL OPERATIONS: See SAC II, Cr. 2005

GHANA: SAC II SUPPLEMENT CR. 2005-1-GH DISBURSEMENT SCHEDULE

Date Amount

08/28/90 3,954,236.8807/20/90 2,326,481.03

TOTAL OF LOAN 6.280.717.91

- 67 -

GHANA: SAC II SUPPLEMENT (IDA REFLOWS) CR. 2005-2GH


8.3 8.0 0 0

First Mention in Files See SAC II, Cr. 2005Initiating Memorandum See SAC II, Cr. 2005Letter of Development Policy See SAC II, Cr. 2005Negotiations See SAC II, Cr. 2005Board Approval November 6, 1990Credit Agreement December 21, 1990Effectiveness March 21, 1991Original Credit Closing March 31, 1991Actual Credit Closing March 31, 1991


FY91

(i) Planned 8.3(ii) Actual(iii) (ii) as % of (i) 96.0 *

Note: */ Due to exchange rate fluctuations.N.B. As at March 31 no disbursements had been made, but since BOG had documentsavailable for reimbursement, credit was not extended. (Four months allowed fordisbursements after closing date).

MISSION DATA


Appraisal See SAC II, Cr. 2005Supervision ISupervision IICompletion

- 68 -

STAFF INPUTS

FY91

LENA See SAC II, Cr. 2005LENNLENPSPNPCR

TOTAL STAFF INPUTS: See SAC II, Cr. 2005

FOLLOW-ON SAL OPERATIONS: See SAC II, Cr. 2005

GHANA: SAC II SUPPLEMENT CR. 2005-2-GH DISBURSEMENT SCHEDULE

AmountDate mm

04/16/91 1,136,460.0204/16/91 5,908,417.9305/13/91 992,075.54


- 69 -

ANNEXPage 1 of 16

IMPLEMENTATION MATRIX

Objectives and Acdons SAC I or Origiruul Target Actual Completion Dates Status onSAC II March 31.

1991

TRADE AND EXCHANGE RATE POLICY REFORMS

Simplify and rationalize the trade tax system:

- Implement interim tax reforms SAC I February 1987 February 1987 Implemented

Remove exchange rate disincentive and SAC I September 1986 September 1986: Auction rate used Implementedprovide further incentives for export February 1987 for all export proceeds except cocoa;production and inward remift-n February 1987: Extended to cocoa

- Reduced rctention account of SAC I March 1987 March 1987 ImplementedCOCOBOD to 2%

- Streamlining of export procedures SAC I To begin in March July 1987 and January 1988: Implemented1987 Implemented suspension/rebate

procedures for exporters inputs

- Implemcnt export incentives SAC I March 1987 March 1987 Implemented

- Initiate design of further export SAC I March 1987 March 1987: An export development Implementedincentives strategy was prepared by the

Government

Pursue a flexible exchange rate policy and further liberalize the trade and exchange rate system:

- All goods available through auction; SAC 11 September 1988 February 1988 Implementedcomplete first stage of trade taxrationalization; foreign exchange bureausestablished

- All bonafide requests for transfer of SAC II before January January 1989 Implementedprofits and dividends to be made eligible 1989through the auction

- Introduce the second stage of reform in SAC 11 January 1989 January 1989 Implementedthe trade tax and tariff structure in the1989 budget; streamlining duty drawbackand suspension scheme; abolish importlicensing

- Expand auction to include service SAC 11: January 1990 1990 Implementedpayments on approved private extemal 2ndborrowing Tranche

ReleaseCondition

- All current transactions to be included SAC II June 1990 June 1990 Implementedin foreign exchange auction

- Introduce the 3rd stage of reform in the SAC 11 lanuary 1990 On-going Continuingtrade tax and tariffs structure in the 1990 implementationbudget

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ANNEXPage 2 of 16

Obiectives and Acdons SAC I or Origiml Target Actual Compledon Dates Status onSACH Dat March 31.

1991

COCOA SECTOR POLICIES

Rationalize producer incentives to ensure production goals:

- Adjustment of producer price to SAC I Match 1987 March 1987 Implemented140,000 cedis/ton for 1987/88; bonuspayment of 10,000 cedis/ton at end ofcrop year, establishment of compnsationaccount to share benefit of 'nospctndexchange rate deprcciaion, world price,and output increases, with farmers.

- Adjustment of producer price for SAC 1: 2nd Murch 1988 Much 1988 Implemented1988/89 crop year Tranche

ReleasCondition

- Improvement of producer price to SAC I 1988/89 crop year Not yet achieved Reached 47% inindicative target of 55% of the long-run 1990/91 cropworld price by 1988/89 crop

- Phase out input subsidies SAC I 1988/89 crop year 1990/91 crop year Implemcnted

- Privatization of input supplies SAC I Beginning in on going; all subsidies eliminted by Continuing198U819 through 1990 implementation1992

- Undertake a study of cocoa producer SAC [ March/April 1988 February 1989 Completedincentives, including the tax systems

Rationalize COCOBOD operations:

- Initiated further retrenchment of 10,000 SAC I March 1987 Mach 1987 Implementedworkers; shifting authority of cocoafeeder roads to Dept. of Feeder Roads

- Prepare detailed rationalization plan to SAC I Begining in 1986 On-going: Patiow-hI7ation program Implementedreduce COCOBOD operating costs satisfactorily -r - t Annual

corporate plans prepared

- Prepare COCOBOD budget for 1986187 SAC I March 1987 March 1987 Implementedand work program

Further improve incentives for cocoa producers:

- Review frst year of implementation of SAC n January 1989 January 1989 ImplementedCOCOBOD corporate plan

- Implement agreed cocoa producer price SAC II January 1990 January 1990 Continuingfor 1989/90 and agree with IDA on implementation1990/91 cocoa producer price. Reviewsecond year of implementation ofCOCOBOD corporate plan

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ANNEXPage 3 of 16

Objectives and Acdons SAC I or Original Target Actual Completion Dates Status onSAC H Pa= March 31.

1991

- Review third year of implrewp inn of SAC I 1990 1990 Continuingcorporate plan implementation

PUBLIC SECTOR

PUBLIC EXPENDITURE POLICIES:

FRAMEWORK:

- Develop maerc a:ono.ic framework SAC I March 1986 March 1986: Annual revision of Implementedincorporating major policy assumptions macro-ecoomic framework annually

BUDGET GENERAL:

- Have budget in place at beginng of SAC I March 1987 March 1987: Implenented in January Implementedfinancial year of each year since 1990

RECURRENT EXPENDITURES:

Improve effectiveness of provisbu of Government seryic., co.r4ng im.Ih&rcq between wages and salaries and other expenditures

- Develop guidelines for Ministies of SAC I June 1987 Implemented in 1988 ImplementedAgriculture and Health

- Develop guidelines for other key sectors SAC I December 1987 No other guidelines were developed Not yetimplemented

CAPITAL EXPENDITURES:

Raise level of public sector dze!: =. 'expendkure; improve average rate of return on public sector investment:

- First draft of the PIP SAC I March 1986 June 1986 Implemented

- Agreed on criteria for inclusion of SAC I March 1987 March 1987 Implementedprojects in the core and mechani- toprotect sevemal key projects from resourceshortfaU effects; Agreed on list ofprojects

DOMESTIC RESOURCE MOBILIZATION:

Improve domestic resource ob:r-g-tIoa and Inntivu for production:

- Raised personal exenpd-nn for income SAC I March 1986 Mach 1986: Implemented each year Implementedtax; Adjusted tx rats and brackets to since 1986, except for 1989 and 1990reduce excessive progressivity where there wu no change

- Introduce implicit taxation of petroleum; SAC I March 1986 March 1986: oil 'windfallU for some Implementedbenefits of lower crude oil price not tax years. Petroleum tax is now anpassed on to consumers excise tax

- Complex sales and excise schedules for SAC I March 1987 March 1987 ImplementedaU domestic commodities (exc. alcohol,tobacco, and fuel) merged into a

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ANNEXPage 4 of 16

Objectives and Actiouiq SAC I or Oriyinal Target Actual Compledon Dates Status onSAC 1 Dates March 31.

simplified and co ....- d five rmstructurm from 0% to 45%, with 25% formost commodities; cusoms duty rtolowered for non-luxury con- agoods from 30% to 25% and 10% specialtax on SIL imports aboliahed; exportduties for mineals an timber abolishedand stumpage fee and myalies increaed

- Complete reform of indirect taxes SAC I 198S 198S: First phase implemented in the First phase1988 budget implemented

PUBLIC SECTOR MANAGEMENT REFORMS

Improve economic policy co"-' -"- -!

- Set up high-level Structural Adjustment SAC I March 1987 and November 1987: Economic Liaison Implemented

Program Team; establish economic liison June 1987 Unit establishedunit for PNDC and CCOS to expediteeconomic policy decisions

- Ettb!ish ec,nomic policy unit in MFEP SAC I No date Government substituted with the NotPolicy Analysis Division in 1989/90 implemented

Update macro econoaic framework:

- Macro-economic framework updated for SAC U September 1988 September 1988, on-going, annual Implemented on

PFP and review of the 1988-90 public an annual basisexpenditure plan

- Monitor key economic indicators SAC II January 1989 January 1989: quarterly report on Implementedkey economic indicators and IDA toreceive a copy

- Update macro-economic framework SAC 11 January 1990 January 1990; on-going Implementedtwice a year in April and September forplanning purposcs

Streamlining budgetay proces

- 1988 budget prepared by late Januay SAC It January 1989 January 1989: on-going Implemented

1988. Sector ministries to rceive yearlytentative sectoral allocations for 1989budget

- Announcement of the 1989 budget as SAC II January 1989 January 1989: Budget announced Implementedagreed with IDA yearly

- Sector ministries to be given indicative SAC 1 July 1989 On-going; latest indications given in Implementedlevel and tentative sectorL allocations for July 1990 for 1991-93 PIP and 19911990 budget and 1990-92 public recurrent expendituresinvestment program

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ANNEX- Page 5 of 16

Objectives and Actions SAC I or OriLn'il Tariet Acti1u1 Convletion Dates status onSAC II Dale March 31.

- Commencement of 1990 budget SAC II July 1989 July 1989 Implementedpreparation. Announcement of bidget aagreed with IDA

- Commcncement of 1991 budget SAC II July 1990 July 1990 Implementedprparation

Improve allocation of non-wage recurrent expenditures and of public inveaent:

- Budget manuals and draft guidelines to SAC I September 1988 September 1988; dRft guidelines Partialbe prepared for recurrent expcnditure completed, but no manual prepared implementationallocations for health, education, andagriculture

- Implementation of budget manual in SAC II January 1990 January 1990; draft guidelines Same as abovepreparation of 1989 budget. Agreement compleed, but no manual preparedwith IDA on 1989 recurrent budget

- Guidelines for other key sectors for SAC 11: January 1990 January 1990; guidelin for sectors Partially doneallocation of recurrent expenditures. 2nd other than agriculture, health andAgreement with IMA on 1990 recurrent Tranche education wen not donebudget allocations Relcue

Condition

- Budget manual finalized for aU key SAC 11 1990 Not yetsectors, and used in the prparation of the implemented1991 budget

- The 1988-90 public investment program SAC I September 1988 September 1988 Implementedby the Public Investment Program (PIP)Task Force

- Integrate the PIP Task Force as a part SAC II January 1990 January 1990: PIP Task Force Implementedof the MFEP Investment Project Analysis integrated(IPA) division. Sector strategics to beupdated by sector ministries

- Sector ministries to set up effective SAC Il January 1990 January 1990 Implementedplanning units to prepare project profilesbased on feasibility studies in accordancewith sector strategies. Updatod sectorstrategies to include public expenditureimplications

- Project selection committie established SAC 1 September 1988 September 1988 Implementedto decide on projects for inclusion in PIP

- Agreement with IDA on 1989-91 PIP. SAC II January 1989 January 1989 ImplementedNon-PIP expenditure not to exceed 10%of total development expenditures for theduration of the program

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ANNEXPage 6 of 16

Objectives and Actions SAC I or Origiml Target Actual Conpletion Dates Status onSACles March 31.

199l

- Ageement with IDA on the 1990-92 SAC 11: January 1990 January 1990 ImplementedPIP 2nd

TrancheRelemCondition

- Agreement with IDA on the 1991-93 SAC 11 end-1990 end-1990 Beingpip implemented

Improve expenditure control m-ha-n- and monitoring of budgetary stuation:

- Draft plan to strengthen Accountant SAC U September 1938 September 19S8 CompletedGeneral's (CAG) office

- Initiate implementation of plan to SAC U January 1989 January 1989 Implementedstrengthen CAG

- Review to determine further need of SAC 11 January 1990 January 1990; on going On-goingCAG

- Implement review proposls for CAG SAC U end-1990 end-1990; on going On-going

- Mid-year review by MFEP on 1988 SAC a January 1989 January 1989 Implementedactuals for nonwage recurrent for PIP but notexpenditures in health, education, and for recurrentagriculture, and program of public expendituresinvestment

- MFEP to prepare twice yearly reviews SAC U end-March and Not achieved until 1990 On-goingof recurrent expenditures and PIP end-September

- IDA to receive quarterly reports from SAC 11 January 1989 January 1989; on going On-goingthe Budget Division of MFEP in agreedformat, on cash flow data, monetarysurvey, trends in revenue and expenditurereleases, including PIP, and on theoverall budgetary situation

Restore financial discipline in SOE-Government reltions:

- Draft guidelines on SOE-Government SAC 11 September 1988 September 1988 Implementedfinancial relations

- IPA to prepare twice-yearly monitoring SAC UI end-March and On-going Continuingreports on on-lending to SOes end-September implementation

STRENGTHEN KEY ECONOMIC MANAGEMENT FUNCTIONS:

Public Expenditure:

- Develop detailed organization and SAC I March 1987 Notstaffing plans for Planning and IPA implementedDivisions

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ANNEXPage 7 of 16

Objectives and Acdons SAC I or Originil Target Actual Comletion Dates Status onSAC 11 Dk March 31.

- Develop and implement restunuring SAC 1 1988 1988 Action planpln for Budget Division prepared for

1988, notimplemented

Management of Exttrnal Rl- w:

- AUocated responsibilies for debt SAC I March 1987 end 1988: Government decision on Implementedmanagement and debt information system - debt magemcnt and informiaonamong MFEP, Bank of Ghan, and system made end 1988; debtAccountant General management unit set up in MFEP

IMPROVE PUBLIC SERVICE PRODUCTIVITY

Ratiorl4 'e Civil Servie salaris and improve incentives:

- Wage bill assumptions limiting total SAC I March 1987 March 1987: Total wage bill Implementedcivil service wages and salaries to 5.5%- budgeted at 5.6% of GDP in 19886% of GDP built into 1986-88 PublicExpenditure Program

- Developed skiU mobilization scheme SAC I March 1987 March 1987 SMS designed(SMS) to mobilize Ghanaians on a and approvedconsultancy basis for high priority by theeconomic tasks in the public service and Government,to motivate selected civil srvants but was notperforming crucial ERP/ESAF work implemented

- Initiate study of civil service salaries SAC I March 1987 November 1987: Completed interim Implementedassessment of salary policy.1988: Salaries revised in 1988 budgetand subsequently on basis of study.First interim report on pay andgrading submitted in September 1987.Second repost in early February 1988.

Redeployment of Surplus Personnel:

- Announcement of retrenchment program SAC I March 1986 March 1986 Implementedin 1985, 1987, redeployment target of 5 %per year, 1986-88

- Approve 1987 retrenchment progam SAC I March 1987 March 1987 Procedures forcalculating andpayingseverance paymore efficient

- Initiate staffing and functional review of SAC I March 1987 March 1987 Done throughCivil and Educational Service and job inspection.agencies receiving subventions 1988 target set

per ministrypcnding results

-76 -

ANNEXPage 8 of 16

Objecives and Actions SAC I or Origin2l Target Acr-nl Completion Dates Status onSAC A DAIMI March 31.

1991

of functionalreviews

Management of Public Sector Rdorm Program:

- Establishment of Project Managemnt SAC I March 1987 March 1987 ImplementedUnit

- Appoinument of full-time SAC I Mauh 1987 March 1987 Implementedmanager/coordinator for activities to befinanced under IDA TA credit

Improve economic policy formulation and coordination:

- Establish Economic Liaison Unit in SAC 11 September 1988 September 1988 ImplementedPNDC and CCOS Secretariat to expediteeconomic policy decisions. Establisheconomic policy unit in MFEP. Decisionto establish National DevelopmentPlanning Commission. Neworganizational and staffing plan proposedfor MFEP, including absorption ofSAPSEC into IERD

- Economic policy unit to be staffed. SAC U January 1989 January 1989 ImplementedGovernment position on NDPC clearlyarticulated. Formation of inter-ministerialcoordination committee between MFEPand NDPC. Begin implementation oforganization and staffing plan for MFEP.Begin absorption of SAPSEC in to MFEP

- Finalizing restructuring of MFEP SAC 11 January 1990 January 1990 On-going

- Budgetary and Public Investment SAC U September 1988 September 1988: Staff from CPMU ImplementedProgram Task Forces established, absorbed by SAPSECCPMU integrated into IERD

SAC U January 1990 Not yet- Organization and staffing plans for implementedBudget division, IERD, and IPAimplemented

- Completion of Government and UK SAC 11 September 1988 September 1988 ImplementedODA plan on civil service pay andgrading

- Satisfactory progress in implementing SAC 11 January 1989 January 1989 Implementedpay reform. Total wage biU not toexceed 5.5% of GDP in the 1989 budget

- Implementation of 1989 pay reform; SAC U January 1990 January 1990 Implementedsatisfactory progress in comprehenivcevaluation of civil service posts. Agreeon detailed pay and grading structure and

- 77 -

ANNEXPage 9 of 16

Objectives and Actions SAC I or Origin%l Target Ac"lil Completion Dates Status onSAC 1 a March 31.

1991

on budgetry allocation for 1990. Totalwage bill not to exceed 6% of GDP in the1990 budget

Pay and Grading: improve incentiva and . Ati-- cavil service salade:

- Implementation of 1990 pay eform, SAC 11 1990 1990 lmplemcntedwith salary differentials rased subject toagreed ceiling on total wage bill

Efficienty - improve productivity ot the civil service-

- Almost 7,000 staff redeployed. 1988 SAC U September 1981 September 1918 Implementedpublic service census initiated

- Full inplementation of 1988 SAC II January 1989 January 1989 Implementedredeployment progm. Semi-annualrcports on redeployment to be preparedfor review by SAP Team and IDA.Completion of 1988 census

- Full implementation of 1989 SAC 11 June 1989: June 1989 and January 1990 Implementedredeployment program. Agreement on agreement ondetailed 1990 targets and implementation detailed 1990program targets; January

1990

Personnel Management - establishment of systems tor effrcient personnal -qn5ge r--

- Completion of the institutional SAC 11 September 1988 September 1988 Implementedassessment of OHCS. Government andUK ODA study's recommcndations toreview Civil Service legislation.Intensive training of OHCS staff -especially job inspectors. Head of MSDand PMD to be in post

- Prepare programs to introduce merit SAC U January 1989 On-going Beingsystem and to integrate personnel payroll implementedand management information systems

- Full implementation of the 1989 SAC E1 January 1990 January 1990 1989 programprogram to integrate personnel payroll implementedand management information system

- Full implementation of new merit SAC U 1990 1990: Done on pilot basis Done on pilotsystem basis

- Complete revision of Civil Service Act SAC U January 1989 January 1989 Implemented

- Main administrative instructions SAC 11 January 1990 January 1990 Implementedredrafted

- 78 -

ANNEXPage 10 of 16

Objectives and Actions SAC I or OriginIl Target Actual Completion Dates Status onSACII H Date March 31.

991

- New Civil Service Act nd new SAC 1 1990 On-going Beingadministrative instructions to be fuly imptrmntrdopcrational

TAX POLICY AND ADMINISTRATION REFORM (see also under Trde Policy)

Indirect taxation: rationalze and bwer tax rate; broaden tax base; etablish sales as major revenue raising instrument

- Agree with IDA on a plan of action for SAC U1 August 1989 Being implemented Beingimplementing recommen-4-tions of Sles implemantedTax Study

- 1st stage reforms in the structure of SAC I September 1988 September 1958 Implementedsales taxes and import duties in 1988budget; some tariff and sals taxexemptions and concessions eliminated

- 2nd stage of reforms in the structure of SAC 1 January 1989 January 1989 Impbrmendsales taxes, import duties, and specialimport taxes in 1989 budget

- Rationalize valuation basis for indirect SAC 11 January 1989 January 1989 Implementedtaxes and complete unification of tax ratesfor all imports and domestic goods

- Increase taxation of cars and petrol; SAC a January 1989 January 1989 , Implementedreduce tax concessions

- Undertake a joint review with IDA of SAC U January 1990 January 1990 Implementedprotection and unfair trade practice.

- Introduce the 3rd stage of reform in the SAC U January 1990 January 1990 Implementedstructure of sales taxes and import dutiesin the 1990 budget

- Eliminate or reduce most special import SAC U January 1990 January 1990 Implementedtaxes and temporary adjustment tariffs

- Further increase taxation of cars and SAC U January 1990 January 1990 Implementedpetrol

- Prepare and review with IDA proposals SAC U 1990 1990 Implementedfor further changes in special import taxeson beer, other alcoholic beverages,textiles and cigarettes

Direct taxation: broaden the base for income taxation, and reform the structure of direct taxes to enhance vertkal and horizontal equity,increase compliance, and rationalize incentives affecting work, savinp, and investment

- Personal income tax - Range of non- SAC I September 1988 September 19S8 Implementedwage remuncrations incorporated into thedefrnition of taxable income; marginal taxbrackets broadened; basic tax exemptionsincreased

-79 -

ANNEXPage 1 1 of 16

Objectives and AcdIons SAC I or Origirul Target Actlua ConVpledon Dates Stntus onMarch 31.

- Implement next steps in aggrepting SAC U1 January 1989 January 1989 and on-going Continuingincome sources into tax bue, adjisdng implementutionexemptions, rae and brackct stucee,and in reducing dividend income taxation

- Implement further steps to rationalize SAC 11 January 1990 January 1990 and on-going Continuingbase, rate, and bracket structure impiementation

- Company tax - Reduce level and SAC I September 1988 September 1988 and on-going Implementedcompress range of company tax rate

- Implement initl steps to unify SAC U January 1989 lanuary 1989 and on-going Implementedcorporate tax rates

- Initiate study of investment taation with SAC 11 Januay 1989 Januay 1989 Implementeda focus on dividend, interest and capitalgains taxation, unification of company taxrates, treatment of capital allowance,interest deductions, and incentives fornon-traditional exports and those providedunder the Investmcnt Code

- Agree with IDA on tax proposals in the SAC 11 January 1989 January 1989 Implemented1989 budget

- Agree with IDA on further steps to SAC II January IM January 1990 and on-going Continuingunify corporate tax raze and implement implmentation1990 budget

- Incorporate recommendations of study SAC 11 January 1990 January 1990 Continuingof taxation of inveatment in 1990 budget, implementationincluding revision of investment code ifnecesary, to provide less distortedincentives

- Agree with IDA on tax proposals in the SAC U: January 1990 January 1990 Implemented1990 budget 2nd

TrancheReleasCondition

Strengthen tax administration

- Creation of National Revenue SAC I September 1988 September 1988 ImplementedSecretariat (NRS); restructuring ofIntemal Revenue (IRS) and Customs(CEPS) Services

- Reactivate tax court and appeals SAC I September 1988 September 1988 Implementedmechanism. Adopt harmonized tariffnomenclature. Initiate feasibility study ofreplacing sales tax ring system with creditsystem. Prepare work and trainingprogram for 1989 acceptable to IDA

- 80 -

ANNEXPage 12 of 16

Objectives and AcdtnTm SAC I or Origiral Target Actual Completion Dates Stntnc onSACH r March 31.

1291

- Introduce unique tpayer nuqmbr SAC E Januay 1990 Being i . -t Beingsystem. implemented

- Start implementation of action plan for SAC E October 1989 Not yetintroduction in the 1990 budget implemented

- Prepare annual work and training SAC 1 January 1990- Being implemented Beingprogram acceptable to IDA .implemented

- Continue with impi-na-t-tinn of the SAC H 1990 1990 and on-going Continuingaction plan recommended in the Sales Tax implementationStudy

STATE-OWNED ENTERPRISE REFORM:

Establish polky framework:

Improve poliy framework:

- Complete studies on pricing, staffing, SAC n January 1989 January 1989 Completedand procurement autonomy of SO&s andprepare action plan

- Initiate implementation of SAC 11 April 1989 On-going Continuingrecommnendations as agreed with IDA implementation

Eliminated arrears and restore fnancil disciplie

- Hire auditors to help identify arrear SAC I March 1987 March 1987 Cross debtand cross-debts for 14 priority SOEs study for 14

priority SOEsprepared.

- Clearance of arrears of 14 priority SAC I no date done only three SOEs Included inSOEs corporate plans,

and cross-debtfinancing plans

- Guidelines for access by SOEs to budget SAC I April-May 1987 April-May 1987 Agreementsfor current and capital transfen with a reached underview to reducing level of subsidies; PublicImplementation of guidelines during Enterprise1987-89 Project.

Guidelines havenot beenimplementedrigorously

Eliminate arrears and cross debts:

- Cross debt study SAC I September 1988 SrpMber 1988 Completed

- 81 -

ANNEXPage 13 of 16

Objectives and ActiornIq SAC I or Original Target Actnil Completion Dates Stntus onSAC IIH Da March 31.

- 1991

- Clear cross-debts of VRA, GWSCM d SAC 1 lanuaLry 1989 January 1989 ImplementedECG. Agreed with IDA on me-;-and financing plan for remaining prioritySOEs. Plan to be reflected ii 19Mbudget and corporate plan

- Plan imnplernentation to continue and be SAC D lanuary 1990 January 1990 Continuingreflected in 1990 budget irnplementation

- Plan implementation to continue and be SAC U end 1990 end-1990: being implemented Beingreflected in 1991 budget irnplemented

Rsionsln-e the SOE setor through mergen, divestiures and liquidations:

- Agree with IDA on list of 30 SOES to SAC I March 1987 March 1987 Implementedbe divested in first phas; prepareddivestiture program guidelines; establishDivestiture Implementation Committee(DIC) to manage program

- Offer for sale S SOEs; initiated SAC 1 1987 and by year 1987 and by year Implementedliquidation of 5 SOEs. Progress reviewby year.

- Ten SOEs at final stage of liquidation SAC I Scptember 1988 September 1988 Implemented

- Government interest in six joint ventures SAC II January 1989 January 1989 Implementedto be sold

- Divest an additional ten SOEs and agree SAC D March 1990 March 1990 Implementedwith IDA on the 1990 divestitureprogram. Complete implementation ofagreed 1990 divestiture program

- Agree with IDA on a financing package SAC U January 1989 January 1989 Implementedto meet the costs of divestiture in 1989

- Allocate in FY90 budget an amount to SAC II January 1990 January 1990 Implementedbe agreed with IDA to support furtherdivestiture

- ALocate in FY91 budget resources to SAC U 1990 1990 Implementedsupport further divestiture

- Moratorium on creation of new SOEs in SAC I September 1988 September 1988 and on-going Continuingeffect, and remain in effect during the implementationprogrm, except as agreeed with IDA andsubject to existing law

Strengthen Government's ability to monitor SOEs:

- Establish SEC with full-time chairman; SAC I March 1987 June 1987: Designed performance Implementedagree with IDA on first year work monitoring&evaluation systemsprogram

-82 -

ANNEXPage 14 of 16

Obiectves and Actions SAC I or Original Target Actual Completion Dates Status onSAC 11 Dale March 31.

1991

- Initiated preparation of audited finacial SAC I March 1987 On-going; S have completed audited Continuingstatements and corporate plans for 5 accounts for 1989, 4 for 1987, and implementationpriority SOEs. Agreed with IDA on list one for 1986of 14 priority SOes to be closelymonitored

Improve SOE management and efflelecy:

- Identify cost of redundancy and develop SAC I 1987 September 1987 Some SOEsfinancing plan; Design and implement have preparedrese-lrtnent assistance program cost estimates,

but there is nofinancing plannor provision inthe 1988 budget

- Identify redundant staff in priority SOes SAC 1 1987 and 1988 No aggregte data available Redundant staffand take steps to effect aggregae 5% identified andSOE staff reduction in 1987 and 1988 laid off by some

SOes, but nooverall dataavailablk

- Draft corporate plan for 11 priority SAC I September 1988 September 1988 ImplementedSOEs. COCOBOD performanceagreement to be signed

- Most priority SOe accounts to be SAC I September 1988 September 1988 Implementedaudited to 1985 and some to 1986

- Finalize 14 corporate plans and 14 SAC II January 1989 January 1989 Implementedperformance agreements with prioritySOEs

- Sign updated corporate plans and SAC II: January 1990 January 1990 Implementedperformance agreements for all 14 2ndpriority SOEs and SEC to monitor and Trancheevaluate implementation Releas

Condition

- Accounts for 8 priority SOES to be SAC II January 1989 January 1989 Implementedaudited to 1987

- All priority SOe accounts audited to SAC 11 January 1990 January 1990 Implemented1988

- Monitor performance agreements and SAC 11 1990 1990 and on-going on-goingcorporate plans

- All priority SOE accounts audited to SAC I 1990 1990 and on-going on-going1990

-83 -

ANNEXPage 15 of 16

Objectives and Actions SAC I or Original Target Actual Completion Dates Status onSAC I 1a March 31.

Reduce transfers of budgetay rrourees to public m a ring enterprises:

- Government to prepare and implement SAC II June 1989 June 1989 Implementedplan to phae out budgetary tnaufen tonew or existing public manufacturingenterprises in five years

PRIVATE SECTOR DEVELOPMENT

Facilitate private investment

- New Investment Code introduced. GIC SAC I September 1988 September 1988 Implementedestablished and functioning. Planprepared for streamulining GIC proceduresfor investment approval

- GIC to implement plan for streamlining SAC 11 January 1989 January 1989 Implementedits procedures

- GIC to prepare a plan to strengthen its SAC II January 1989 January 1989 Implementedpromotional program (foreign anddomestic)

- GIC to review ares in which SAC II January 1989 Not yetprocedural changes can be made to the implementedInvestment Code

- GIC to revise implementation of plan SAC II January 1990 Being implemented Beinginplemented

- Introduce changes to Investment Code SAC 11 January 1990 Being implemented Bcingconsistent with changes arising from study implementedon investment taxation

- Monitor implementation of Investmcnt SAC 11 1m 1990 and on-going ContinuingCode implementation

Encourage increased consultation between Governmeat and private sector

- Occasional meetings between SAC II September 1988 On-going: Private Sector Advisory On-goinggovernment leaders and businessmen Group formed in 1991

- GIC to prepare proposals for structuring SAC II January 1989 January 1989 Beingregular dialogue between Government and implementedthe private sector

- GIC to initiate and review the effect of SAC 11 January 1990 Being implemented Beingactions taken implemented

- 84-

ANNEXPage 16 of 16

Objectives and Actions SAC I of Originnl Target Ac"n" ConVletion Dates Stitus onSAC I DM March 31.

i199

SECTORAL ACTIONS -

Improve the food crops policy ft

- Fertilizer subsidies reduced ftom 66% SAC 11 &Zc. r 1988 St. bac 1988 Impl -

to 42% of the price. Parl libalizationof fertilizer distribution in Volta ndEastern Regions. Import orden beingplaced for fertilizers to ensure timelydistribution

- Reduction of fertilizer subsidy to 15%. SAC 1 January 1989 January 1989 Tmpklintp.dInitiate launcing of private rtailmarketing of ferdlizer to at least tworegions. Ensure that sufficient felrlizer(40,000 tons) is in stock in the marketingsystan

- MOA to extend private retail marketing SAC 1 January 1990 On-going Beingof fertilizer to al regions. Ensure that impleneWidsufficient fertilizer is in stock in themarketing system

- Dometic fertilizer distribution to be SAC 1 1990 Being implr-entWd Beingcompletely in private hands jmplirnenr,d

-85 - 85 -Attac}mt1Page 1 of 2

TELEFAX I KJWKM"antftAM tfOr WIder,ufiauSEITE/PAGE 1 VON/OF 2, IDENT# 12376

Worldbank Operations Evaluation Dpmt. officer inAtt.: Mr. 'Mark Baird charge: Dr. BickelWashington / USA our ref.: Bke/De/1404

extension: 2762date: 13.04.92

-Comments Received from KfW on the Draft PPAR

Re: Ghana, First and Second Structural Adjustment Programs (SAPs)Draft Program Performance Audit Report (.your letter of 03-05-4992)

Dear Mr. Baird,

following are our comments on your draft report concerning the two SAPs.

We appreciate your effort to neutrally evaluate the elaboration andimplementation of the SAPs. We fully concur with many of your statements,e.g. those on the close relation with other Worldbank programs andcredits, the slow response of the private sector, on the difficultiesconcerning the state-owned enterprises (page 33 ff) or the reform of thecocoa sector (page 35 ff). On the other hand, we would like to mentionsome other aspects of your draft report on Ghana or on Worldbank's SAPactivities in general which could still be improved.

1. We are not sure whether the objectives of the SAPs mentioned by you(pages XI and 4), e.g. the strengthening of savings, investments, and thebalance of payments, or trade liberalization, are really the objectives -or not the technical measures of the SAPs. Economic terms are notobjectives themselves, but have to benefit the population and to beformulated in relation to it.

2. Eventually internal economic policy factors have been overestimatedand external factors underestimated in your report. This refers not onlyto the world market prices of cocoa (which, indeed, are mentioned severaltimes), but also to the world oil prices, the terms of trade, the veryhigh debt service of Ghana (40 to 60 percent of export earnings!), theslow structural adjustment in these and other aspects by the worldeconomy, the weather conditions etc. These factors, deficits in theseareas and their impact on the economic development of Ghana should bedealt with in the same detail as has been done for domestic economicpolicy deficits. E.g. what could be done to avoid the impact of a 30percent drop of governments revenues caused by the fall of cocoa exportprices?

3. Taking ag-iculture, not only exports (cocoa) are important, but alsoimports and their influence on domestic food production, which normallyis more closely related to the welfare of the population than areexports. What about the influence of cereal and meat imports (which areheavily subsidized by the industrialized countries) on the Ghanaianefforts tc raise food production and self-sufficiency? What is theoptimal extent of import liberalization or of effective protection? Animport duty of 25 (10) percent (page 8, 11), is it really sufficient ifprices of major imports are effected by dumping?

-86-

Attachment 1Page 2 of 2

TE LE FAX !i; KJ Kr@dnfttfr WledersufbauSEITE/PAGE 2 VON/OF 2, IDENT# 12376

4. Privatization is a major feature of the two.SAPs. While this isjustified, we think, similar importance should be given to theestablishment of-a governmental competition policy in all Its differentaspects, in order to avoid monopolies, oligopolies, cartels etc. Thisaspect is mentioned only once in your report (page 9). What are theeffects on the population if a public monopoly is just substituted by aprivate one?

5. We have some doubts whether the result of the SAPs can really bemeasured in macroeconomic aggregates (pages XVII and 21 ff), especiallybecasue of the importance of the external factors mentlioned. You, too,express the possibility of the improvement of these aggregates being theresult of the substantial foreign exchange assistance associated with theSAPs (page 21). Also the steep developments of export prices or of theterms of trade in a given year may be more important than domestic policychanges.

6. We think it is not sufficient that there are extensive consultationsbetween your bank and the government in elaborating and implementing theSAPs (pages XIX, 24). In the interest of the Ghanaian people it would bebetter to include also the private sector and other representatives ofthe population (e.g. local NGOs) in all major discussions (especially ifthere have not been elections since years) (vide also yourrecommendations, pages XXI and 12).

7. We are not so sure that the staff input in your supervision missionsshould still be increased (pages XXII 54), given the facts that theinput in this case has already been 36 and 100 percent, respectively,higher than in other cases (page 32) and that the ownership of theprograms was clearly with the government of Ghana.

We trust that you will understand the sense of our points (in spite oftheir brief formulation) and take them into account in your final report.

Yours faithfullyKREDITANSTALT FM WIEDERAUFBAU

- 87 -

THE OVERSEAS ECONOMIC Attachment 2

COOPERATION, FUND Page 1 of 4

TAxIBASHI OE0 BUILDIN(4.1. ONV.MXAC.Wn I-CWNod trrYOI)A KU. To0Eo 100

A AAf ~ ~ .j

April 23 1992

Mr. Mark Baird

Division ChiefCountry Policy, Industry and FinanceOperations Evaluation DepartmentThe World Bank

1818 H Street, N.W.,Washington .C. 20433US. A.

Coments Received from OECE on the Draft PPAR

Dear Mr. Baird,

Re: Ghana - First and Second Structural Adjustment Credits(Credits I m /A-025/A-025-1 and 2005/2005-1/2005-2-GH)Oraft Progrume Performance Audit Report

Thank You very much for sending us the draft Progranme Performance Audit

Report which contains valuable and suggestive information on the Structural

Adjustment Prorawme taken in Ghana.

Attached herewith Please find our comments on the Report. We hope they areconstructive for you, and we shall be most srateful if they could help you infinanlizins the said Report.

Very truly yours,

Nobuo HazevmDirector,2nd Division,Loan Department Ill

cc: OECF Washington Office

OECF London OfficeAttachment: Couuents on the Draft PPAR on Ghana SAC I and 11

- 88 -

Attachnment 2! Cbmmnts on the Project Criupletion Report Page 2 of 4

of the Structural AdjuLstrnt Programme in Ghana m

When evaluating effects of structural adjustment programnes, it is always

important snd valuable to clarifv the existing constraints which hindered the

smooth impl emcntatioon of the prograuites as well as the component of the programme

itself; i.e. whether it has brought about favourable impacts as expected. Ghana's

case, however, is said to be one of few sueeessful cases of structural adjustment

programmes in Sub-Saharan Africa. where, im most areas. the economies are

seriousiv recessed. The main reason of their success is being attributed to the

strong commitment by the Ghanaian government to the implementation of thc

adjustment progranmes. Consequently, it seems clear that clarifying the reason

ard analysing the factors which have led to the success in Ghana would be useful.

providing meaningful implication to the future prospects of the programmes in

other Sub-saharan African countries.

Subsequently, we would like to learn from this PPAR

(1)learning lessons from the experience in Ghana for further improvement.

(2)analysing and generalising, as much as possible, the factors which led to the

remarkable economic performance in Ghana, in order to apply their valuable

experience to other developing countries.

Of these purposes, we would like to emphasise the latter, therefore, we recognise

that it shall be very useful if you could elaborate slightly more on the following

issues concerning the successful implementation of the structural adjustment

progyrfves in Ghana.

1. Ghane's strong coamitment to SAP. Political Governance and Tmplementation.

As stated above, the strong commitment was observed bv the government when

implcmepting the SAP in Gbana. Indeed, it was one of the most important clmoents

which allowed the substantial aid inflow to Ghana and also the remarkable ceonomic

performance.

In this sense, strong government seems to be a key when SAPs are in progress.

However, at the same time, SAP is a programme which aims to achieve a

reorientation of the political envirornment directing a free. or market-friendlv

economy, favouring greater efficiency In the use of resources within the public

sector and enhanced role for the private sector. Therefore, the programme include

measures which reduces the degree of goverrnment intervention. On the other hand,

smcoth and satisfactory implewetatton of SAP requires a strong government simply

- 89 - Attachment 2Page 3 of 4

because SA.P measuros quiite often force both public and private sectors bear "'hardlife". Possible resistance from these sectors needs to be controlled by thogovernment. preferably before it comes out to the surface, for the successful

achievement of conditionality which finally allows consessional money from donors.Appearently. this contradictorv problem, i.e., reduction of intervention and

taking stronger initiative by the government, is now being well controlled in

Ghana, where, too, demeoratisation is taking place. Is there no opposition seen

in Ghana against the SAP? If yes. how are they suppressed? Analysing how the

Ghanaian government have managed these matters since the introduction of the SAP

as well as the democratisation movement. would greatly contribute to the smootier

Implementation of the programmes in other countries.

2. Coordination of interest groups during the SAP.

Generally, structural adjustment programmes depoliticize the economic system:

foreign exchange system by introducing an auction system: trade system byabolishing the licencing system. During this process, conflicts among different

interest groups can easily be expected to arise. However, from the PPAR, itappears that Ghana has hardly observed such disputes so far. Was there anyparticular consideration existed for the acquired rights? Has not any rent-seeking activity taken place in Ghana?

It would be very useful if the way how the Ghanaian government has controlled

these possible conflicts among different interests can be elaborated in the PPAR.

3. Pace of the SAP - Gradualism -

The appropriate pace of the SAP has always been the main issues in itsimplementation. In Ghana. the measures have been implemented gradually ratherthan quickly; it has been about a decade since the ERP in 1983, now. Is there anvcorrelation between the pace of implementation and the effects/impacts of theSAP? To which extent does the price of implementation infltw"ne the results of theSAP? Clearly, the "gradualism' worked in Ghana, but why? Can it be applied inwhich country and cannot be in which country? Or, is it universal?

The research focussing on the pace of the implementation would also have a deepimplication to the political aspects of the SAP mentioned above.


The macroeconomic performance! achieved in Ghana since 1983 has been

impressive. boreover. Ghana has expressed their willirngess to mitigate various

social costs of adjustment, hence became one of the first countries who

introduncd the special programe for this purpose - PA%SCAD. After all these

improvancnts, we quite agree that nnw Ghana has reached the stage at which private

sector activities should he encouraged while efficiency of the public seetor

should be promoted. In order to have a further economic development in Ghana,

there are, of course, a nmuber of lessons to be learned and wetters to be improved

(e.g. adequate institution building). However, taking into account of the

significant economic performance made in this recent decade, there are also many

to be applied from the experience In Ghana, to other developing countries in a

process of structural adjustment, which can he diseussed in the PPAR.

- 91 -

Attachment 3MINISTRY FOR * Page 1 of 2

1; FoREIGN; AFFAIRS

22 April 1992

Comments Received from Sweden on the Draft PPAR

Mr. Mark BairdDivision ChiefThe World Bank

Dear Mr. Baird, -

Re: Ghana - First and.Second Structural AdjustmentCreAits. Draft PrograTn PerfLormance Audit R

In referance to your letter of 5 March 1992 where

you request comments on the draft Program

Performance Audit Report (PPAR) on the First and

Second Structural Adjustment Credit for Ghana I

hereby forward the Swedish considerations on the

report, compiled by the Swedish Embassy in Lagos.

The Economic Recovery Program (ERP) and the

structural adjustment program of Ghana have served

as models in regard to the economic development

they have resulted in. It has hereby been showed

that strictly implemented reform programmes can

give positive effects in form of continuous

economic growth. The draft Programme PerformanceAudit Report confirms this, but some additional

conments will here be presented.

It is obvious that the economic growth in Ghana to

a large extent is due to the massive international

development assistance given. It would be

interesting to see, both in the adjustment program

Attachment 3Pago 2 of 2

and in the PPAR, an intensified discussion on

possible strategies for Ghana to in the long term

perspective move away from this aid-dependence.

Regarding export, the adjustment program is

focusing on cacao'. VeLy little is said aboutpossible incentives to promote alternativeexport-products.Could the primary product cacao bee refined

locally ?In the Program Completion Report, p. 9, the COCOBOD

is briefly menti6nad. What role should the board

play in a market oriented economy ?

Reforminq the banking and financial sector isImportant. Has any strategy been elaborated i.a.

"prudential guidelines" for the banks on how toavoid lending to non-productive activities ?

An important component in the adjustment program is

the Management of Public Sector Resourses including

the Civil Service Reform. The low level of civil

servants salaries causes a brain drain". The

reforms that were undertaken in the 80's failed to

increase the salary differentials. What could have

and can be done in order to adjust the public

sector salaries ?

We look forward to receiving the final version of

this very interesting and useful report.

Sincerely,

Anna HolmenFirst Secretary

Ministry for Foreign Affairs

Department for International Development

Cooperationl and Human Right issues

COM ONBSON 9 04.05.1992 Page I of 5of the Brussels, 5

aXROPIHAN COMMTlESDIRECTORATE-GENI .RAL

FOR DEVELOPME llT

Comments Received from the EEC on the Draft PPAR

Mr. Mark BalrdDivislon ChlefCountry Policy, Industry andFinanceoperations Evaluatlon Depart.The World Bank7818 H Street, N.W.Washington D.C- 20433U.S.A.

Dear Mr. Sairc',

Draft Prograitme Performance Audit Reports on Structural AdjustmentCredlts for Gfiana

Thank you vers much for having transmitted to me your evaluation reporton the World Bank's structural adjustment loans to Ghana, and forsharlng wlth us your assessment of these loans. The report makesextremely Int!?resting reaching and comes at a time where It seems veryImportant to think about the future pollcy strategy In Ghana.

In what folijws, I will first make some general remarks on theadjustment process In Ghana and then comment on some more specificissues. Unfo,-tunately, for reasons of staff changes, the Dlrectorate'sGeneral Struc;tural Adjustment Unit was not able to put forward detailedtechnical corn nents. The remarks which follow may therefore appearsomewhat genc!ral. Unfortunately, they also come a bit late. Inevertheless hope that you will find them of some use.

Let me first of all reconfirm the Commission's baslc agreement with theneed for a thi:rough adjustment policy In Ghana. Given the situatlon ofthe country at the beginning of the 1980's there was Indeed noaiternative t,: such a strategy Including as Its major elements theadoption and nalntenance of a reallstic exchange rate, monetary andfiscal dlsclp,'lne, trade llberalIsat/on and the ratlonalIsatlon of thetariff and taJi system (Including any kind of export taxatlon), as wellas a reform of the public sector and the management of publicresources.

This programm! has undoubtedly been highly successful . A number ofmeasures have 3een thoroughly Implemented, and In particular the reformof the forelgr exchange market (which was the main precondltlon for thesubsequent gro:wth in exports), Ilberallsatlon and ratlonallsatlon ofthe trading svitem, and the adoption of monetary and fiscal discipline(these elementv overlap of course wlth-the first stabilisatlon phase).

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Attachment 494 Page 2 of 5

The economy tias subsequently shown Improvements on the macroeconomiclevel, with ,DP and exports growing strongly, inflation coming down,and the balan:e of payments Improving markedly.

I also share your vlew as regards the major success factors of theprogramme, le. the extraordinary commitment of the Government of Ghanato It. To some extent, this certainly was the result of the verycareful preps,ation of SAC I on your past, which gave all the partlesconcerned the, opportunity to express their polnts of view, and whichgave you the opportunity, In the design of the programme, to take Intoaccount the svecial circumstances of the Individual case.

At the same time, a -stylized' sequence of the events which have takenplace In Ghana until now could be descrlbed as consisting of thethree phases stabillsatlon, rehabilltation and "real' structuralchange, wheri: the latter would Include, Inter alla, productivityincreases In agricultural smalIholder production, establIshment ofcompetitive smtall and medium scale Industrles, the development of non-traditional ecports etc. It would then seem that most of what hashappened in Glhana until now fell under the first two headings bulldingon existing p,oduction capacity. Glven that this capacity now seems tobe largely vxhausted - or Is no longer competitive under newcircumstances - growth In the future will to a much larger extent haveto rely on st:'uctural change than It did In the past.

It Is in thi! context that the relatively low leve/ of savings andInvestment, e,od In particular the low level of private savings andInvestment (o0,tside the mining sector) Is all the more worrying. This

fact Is of coijrse discussed In detall In your evaluation report, and Isalso mentionedl In the Programme Completlon Report. The lag In theresponse of te private sector Is certalnly the most disturbing factorin Ghana's economic development.

It may be duwt to a lack of confidence on the part of the privateInvestors, because of uncertainty about the Governments attitude toprivate econonic activity. It may also be due to the absence of atraditlon of a market economy In Ghana (not only for the last thirty

years). However, It should a-lso be taken Into accoun't that for acountry like Ghana wlth a very low per capita Income and an economywhich Is only partlY monetarily Integrated, the terms market economy,private sector, and also structural adjustment mean something totallydlfferent than for a country wlth a per capita Income of 4ay 2000 USS. Applying `he same reform package for different types of countriescould then eaeoly be perceived as "dogmatic".

It is therefo,'e my view that the general weakness and fragillty of a.modern' prlveAe sector, a sector which In fact In a dountry like Ghanacannot be take, as given, but Is just In the process of being created,as well as the general deficiencies In basic economic and-institutional 'nfrastructure, must have consequences for the design ofan adjustment ::trategy.

This concerns in particular

- a realistl: time-frame for the adjustment process Including theprovision ci external financing . While It might be polntless to


- 95 -

give bala,,ce of payments support to a country which continue tobuild up 1Oreign exchange-,reserves, one should at the same time notallow the growth process to slow down because of lack of externalfinancing luring a phase where reform measures are supposed to showlasting reaults;

- a graduall:,t Instead of a shock approach to reform measures;

16 - the need for 'positive' measures which go beyond financial reformand moblli,atlon of resources to support the process of resource-switching which apparently does not happen automatically;

- a very car9ful consideratlon of the social costs of adjustment, Inparticular as regards the Impact on employment, as the privatesector ag,arently creates much less new employment than wasexpected.

At the same time, one should resist the temptation to create an"artificial' boom durlng a phase where the basic structures forsustalnable growth still have to be laid.

It Is agains' this background that I would agree with some of thequallfication! you make In your evaluat/on report. This Includes yourcomments with regard to the divestiture exercise, where difficultiesseem to have .aeen underestimated concerning the constraints of privateInvestment an,' the avallabillty of private finance.

It also Incliudes your remarks as regards the financlal and soclalconsequences )f retrenchment programmes (the necessity of which canhowever not b- questloned) and of restructurlng In general. Glven thelower than ex,)ected creatlon of new employment by private Investment,the 'traditiotial rural economy' had to absorb part of the unemployed.As wlth the o, going commerciallsatIon of the rural economy this will beless and les; possible In the future, the soclal consequence ofrestructuring measures will have to be thought of very carefully, andwill In the future have to be accompanled by the creation of some kindof 'socIal In'rastructure.

It would alsc seem to be Important to be very careful wlth regard tothe effects o;' ilberallsation on the domestic Industrlal sector, and Inparticular sxaul and medlum-sized enterprises. This Is one of thesectors whern -Lt Is Important to support adjustment by, "positive"measures, whl:'h should however not take the form of direct financlalsupport.-but -should rather Include technical assistance In..managementtraining, marr.eting, technological Information and similar measures.This Is of c,:urse an Issue which Is belng adressed In projects andprogrammes whi'^h the World Bank and other donors are about to prepare.

It Is therefc-e my vlew that while a lot has been achleved at the-macroeconomic level, even more remalns to be done at the sectorallevel, In orde:r to further deepen the adjustment process. However, 'itwould also be an error not to be aware of the Instabilltles.of theeconomy which still exist at the macroeconomic level. The.country'sbalance of payi,ents positlon still very much depends on the prices of afew export (trd Import) commodities. While Inflation seems to havebeen brought itnder control for the time belng, this might easily bereversed due In particutar to Internal supply rigidities In

Attachment 4

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agriculture, wyhich still very much depends on climatic conditlons, andwhich until 70W has barely been touched by adjustment (except forcocoa). At Cie same time, if-would seem to be extremely Important tokeep inflatt:'n under control, so that nominal and real rates ofinterest can be further lowered, which seems to be another vital factorfor domestic nvestment incentIves.

As regards tre sectoral level, one of the problems which worries usmost Is the questlon of pub/ic finance, and in particular publicexpenditure i,anagement. In your report, this area might not havereceived the itttention It deserves. It Is our Impression, from what welearned during' our participation in the last Public Expenditure Revlew,that the whole process of budgetary planning, Implementation, andcontrol, is still very weak and characterized by enormousadmlnlstrativ! and organisatlonal difficultles. This includes, amongothers, the glow of Information between the ministry of finance, thellne ministrivs, and the regional and local administratlon, durlng allphases of the budget process.

Therefore, In order to make the budget an effectIve Instrument ofpolIcy Impledientatlon, In particular on the sectoral level, muchremalns to be done to improve the budget process, and pollcy reform inthis area Is tar from belng successfully Implemented.

Given the Imp.rtance of this area for the implementatlon of programmesand projects In general, the Commission Is very Interested Incontinulng Itu; Participation in the PER exercise and also to make amore Intenslvi. and technical contribution to It.

Flnally, I shu1uld like to make two remarks as regards the question ofImplementation and methodology of evaluation.

Firstly I share your vlews about the problems of project - or programme- specific Invtitutional Infrastructure. Agaln and agaln It has becomeclear from ou, own evaluations that while such Infrastructure makes Iteasler to start a project, later on It may create major problems asregards the cnvnershIp and the sustainabillty of the project. It Istherefore our view that one should Insist, from the very beginning,that proJects and programmes are Implemented by existing Institutlons,and that these! institutions should be strengthened, Instead of creatingnew and project-specif ic Institutions.

Finally, a word about the methodology of determining the Impact of anadjustment prcgramme.

An evaluation report which Is primarily meant to serve operationalpurposes Is ce.rtainly not the place to discuss evaluation methodology.However, In tile present case the questlon of methodology Is closelyltnked to the 7uestion of how to Isolate the effects of policy changes

_on growth ano other varlables. While this may be a very difficultexercise, It would nevertheless have been Interesting to rtave some vlewon it. It Is true that the level of aid per capita for Ghana Iscomparable to some other SSA countries which did not do as well asGhana (an arg,,ment also made In last year's 'Progress on Adjustment'Report). The mportant question however Is what would have happened InGhana, without the huge aid Inflows of the past, and what will happen

Attachment 497 - Page 5 of 5

In the future when these Inflows are longer available at the same leveland quality. In fact, given the macroeconomic Instabillties stillremaining anc' the need for further deepening the adjustment process onthe sectoral level, one should be very flexible in considering furtherneeds for bal.2nce of payments support.

In concludinc, I Should like to thank you again for having transmittedthe evaluaticn report to us. I am all the more sorry that for thereasons I me'rtioned above we were unable to produce more detalled

t comments, anui could only touch some baslc aspects of the adjustmentprocess In Gt,na, as we see It.

/ hope that although my remarks come rather late, they will still be ofsome interest to you.

Yours sincere'y,

M. D. LaldletHead of Dlvis onCoastal West 4frica

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