Ghana - Structural adjustment for growth

Report No. 7515-GH Ghana: Structural Adjustment for Growth January23, 1989 Western Africa Region FOR OFFICIAL USE ONLY Document of the Word Ba .k This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Wbrld Bank authorization.  CURRENCY EQUIVALENTS Currency Unit 1985 1986 1/ 1987 1988 (est.) US$l 054.054 0106 0162 2/ 0202 Cedi (0) 1 US$0.0185 US$0.0094 US$.0062 US$.0050 FISCAL .2AR JANUARY 1 - DECEMBER 31 ABBREVIATIONS AESC - Architectural and Engineering Services Corporation CDH - Consolidated Discount House CPI - Consumer Price Index Cocobod - Ghana Cocoa Board ECG - Electricity Corporation of Ghana EFF - Extended Fund Facility ERP - Economic Recovery Program ESAF - Enhanced Structural Adjustment Facility GIC - Ghana Investment Center GLSS - Ghana Living Standards Survey GNPC - Ghana National Petroleum Corporation GPT - Ghana Posts and Telecommunications GWSC - Ghana Ilater and Sewerage Corporation IERD - International Economic Relations Department IFAD - International Fund for Agricultural Development LSMS - Living Standards Measurement Study MFEP - Ministry of Finance ind Economic Planning OHCS - Office of the Head of Civil Service PAMSCAD - Programme of Actions to Mitigate the Social Costs of Adjustment PIP - Public Investment Program SAF - Structural Adjustment Facility SAPSEC - Structural Adjustment Program Secretariat SEC - State Enterprises Commission SGMC - State Gold Mining Corporation SIL - Special Import Licence SOE - State-owned Enterprise VRA - Volta River Authority 1/ A dual exchange rate system was established on September 19, 1986 when a foreign exchange auction was instituted for specified transactions. The 090 rate applied to the first window (cocoa and residual oil exports, petroleum and essential drugs imports, and central government debt service contracted before January 1, 1986); the rate on the second window was established at the weekly auction. The two rates were unified with effect from February 20, 1987; all transactions are now valued at the rate emerging in the weekly auction. In the week ending January 6, 1989 the marginal rate at the auction was 0230=US$l. 2/ Period Average for auction rate.  FOR OMFCIAL USE ONLY GHANA: STRUCTURAL ADJUSTMENT FOR GROWTH Table of Contents Page No. ECONOMIC INDICATORS FOREWORD SUMMARY AND CONCLUSIONS ......... .............................. i INTRODUCTION ................................................... 1 CHAPTER I - RECENT ECONOMIC PERFORMANCE Economic Growth. 3 Agriculture. 3 Industry. 3 Services 7 Savings and Investment. 7 The Budget. 8 Money and Credit .10 Prices and Wages .12 Ealance of Payments .13 Conclusion .15 CHAPTER II - IMPLEMENTATION OF STRUCTURAL ADJUSTMENT POLICIES - 1987-88 Incentives Policies .16 Exchange and Trade ............ ................. 16 Cocoa .19 Public Sector .22 Public Expenditure Policy .22 Public Investment Program .22 State Enterprise Reforms .24 Public Sector Management .25 Economic Management .25 Civil Service Reform .......... ................. 25 Sector Policies .26 Conclusion .................... ......... 27 CHAPTER III - THE SOCIAL DIMENSIONS OF STRUCTURAL ADJUSTMENT Introduction .28 Distribution of Welfare in Ghana .28 Survey ....... ..... 28 Household Characteristics by Expenditure Level 29 Other Indicators of Living Standards .29 Poverty Profile .31 Implications for the Structural Adjustment Program 33 Employment .33 Background .33 IThis document has a restricted distribution and may be used by recipients only in the performance | of their official duties, Its contents may not otherwise be disclosed without World Bank authorization.  Impact of Redeployment .......................... 35 Employment Prospects 1988-90 .................... 37 Economic Environment for Employment Generation 38 Program of Actions to Mitigate the Social Costs of Adjustment (PAMSCAD) ............................ 40 Conclusion ............. 42 CHAPTER IV - THE AGENDA FOR FUTURE REFORM The Government's Medium-Term Objectives .... ......... 43 Incentives Policies ................................. 44 Domestic Resource Mobilization ...................... 44 Tax Reform ...................................... 44 Financial Sector Reform ............................. 47 Private Sector ............. .......... 48 Public Sector ....................................... 50 Public Expenditure Policy ........................ 50 State Enterprise Reforms ......................... 50 Public Sector Management ............................ 52 Economic Management ............ ................. 52 Civil Service Reform ............................. 52 Long-Term Challenges ................... 53 Food Crops ...................................... 53 Environment ..................................... 54 Population ....................................... 55 Conclusion .......... ................................ 56 CHAPTER V - MEDIUM-TERM PROSPECTS Policy Reforms ...................................... 57 Investment and Growth in Production .... ............. 57 Growth Prospects .................................... 58 The Adjustment Path for 1988-91 ..................... 61 Balance of Payments ................................. 63 Export Growth ....................................... 63 Import Projecti.ons .................................. 65 Terms of Trade ...................................... 66 External Balance and Capital Inflows .... ............ 66 Alternate Scenarios ................................. 67 Conclusion .......... ................................ 68 CHAPTER VI - EXTERNAL ASSISTANCE NEEDS Aid Trends in 1987-88 ............................... 69 Aid Requirements 1989-91 ............................ 71 Technical Assistance ................................ 74 Aid Coordination .................................... 74 External Debt ....................................... 76 Conclusion .......... ................................ 78  ANNEXES Annex A Recent Policy Changes Since 1987 .... ...... 80 Annex B Macroeconomic Projections 1984-95 .... ..... 84 Annex C Merchandise Exports and Aid Data .... ...... 92 Annex D Operations of the Foreign Exchange Auction and Bureaus ..... ............. 97 Annex E Selected Tables from Ghana Living Standards Survey ..... .......... 106 .T/C.ISTICAL APPENDIX ............... 113 LIST OF TABLES 1 Economic Indicators .................................. 4 2 Selected Production Indicators ....................... 6 3 Summary of Central Government Finance, 1982-88 ....... 9 4 Movements in Liquidity of Commercial Banks .... ....... 12 5 Selected Key Economic Variables ...................... 17 6 Incentives for Cocoa Farmers ......................... 20 7 Development Budget 1987-88 ........................... 23 8 Characteristics of Households by Quintiles .... ........ 30 9 Distribution of the Poor by Degree of Urbanizationi and Ecological Zones ............................... 31 1O Distribution of the Poor by Employer and Occupation of Head ............................................ 32 11 Education and the Poor ............................... 32 12 Employment Distribution by Sector, 1970-87 .... ....... 35 13 Distribution of Employment ........................... 36 14 Estimated Employment by Sector, 1988-90 .... .......... 38 15 Main Economic Aggregates ............................. 58 16 GDP Growth Rate by Subsector ......................... 59 17 Selected Economic and Financial Indicators .... ....... 62 18 Balance of Payments Overview, 1986-91 .... ............ 64 19 Export Growth Rates ........................ 65 20 De:erioration of Terms of Trade ...................... 66 21 Ghana Aid Commitments 1986-88 ........................ 71 22 Projected Aid Disbursements .......................... 72 23 Overall Aid Pipeline, 1987-91 ........................ 74 24 External Debt Service on Government and Government-Guaranteed Debt ......................... 78  EX1tMIC IDOICJNlR ___________________ GN PEEt CAPITA IN 1987: US$ 390 1/ NMRAL RAM OF GfI GROSS XNWNICtAL PK=JZT IN 1987 (Z Ccnstant Prices) ----- -- -- Cedis Mil. z 1980-87 GDP at MudWt Prices 746,000 100.0 1.1% Gross Dnestic Investment 80,588 10.8 1.5Z Gross Natiaral Saving 44,294 5.9 -- Current Accoumt Bal nce -36,294 -4.8 -- Export of Goods & N?factor Serv. 147,139 19.7 2.9% Import of Goods I Ncnfactor Serv. 194,697 26.1 1.52 C1JrU)T AN4D LABOR FPO Output in 1987 Labor Force, 1984 (Cedis Mil.) Milion Z Agriculture 377,481 3,311 61.1 Industry 118,947 680 12.5 Services 245,258 1,431 26.4 GVE*0r FINANS ------------------- 1986 1987 Cedis MiU. Z of GDP Cedis Mil. Z of GDP Total Revenue 69759 13.6 105009 14.1 Total Expenditure & Net Lending 73328 14.3 106987 14.3 Overall Deficit (-) -3569 -0.7 -1978 -0.3 MiXNEY, CREDIT AND PRICES 1980 1981 1982 1983 1984 1985 1986 1987 Mbney and Q asi-money 7938 11637 14834 20495 34621 55625 85937 132263 Bank Credit to Governent 6526 10655 11064 21059 24170 27176 29647 22220 Bank Credit to Private Sector 943 1345 1562 2841 12153 21178 37455 46945 Mbney and Quasi Money as Percent of GDP 18.5 16.0 17.4 11.1 12.8 16.2 16.8 17.7 General Price Index (1977-100) 401 869 1062 2357 3304 3647 4543 6352 __ote__________las____________ Note: 1/ Atlas nethod.  RALANCZ OF PAYMENTS MEWiANDLSE EXRS (AVERAGE 1986-87) __.__________------ 1986 1987 ------------------ ---- ---- US$ Mi1 I Trade Balance -56 -198 ------- ----- Exports (FOB) 749 827 Cocoa Beans & Products 499 63.4 Imports (CIF) -805 -1025 Gold 124 15.7 Residu l Oil 19 2.3 Tinber 67 8.5 Invisibles (Net) -148 -26 Electricity 48 6.0 Services -221 -227 Mbyguese 8 1.0 Transfers 73 202 Dimond 5 0.6 Bauxite 5 0.6 Current Balance -203.6 -223.5 All Other Goods 14 1.8 Capital Account 184.5 374.7 Total 788 100.0 Grants 118.2 122.2 Official Capital (Net) 128.2 218 Private Capital (Net) 2.7 -3 Capital n.e.s. -64.6 37.5 EXIRNAL EDT, EMqER 31, 1987 Errors & oCmissions -37.8 -12.4 -------------------------------- USS Bil. Overall Balance -56.9 138.8 Total Outstanding and Disbursed MLT 2,202 Net DMF 16.1 -25.2 Arrears Payments -3.6 -71.1 Other 44.3 -42.5 Gross Internatical Reserves (eni of period) 163.2 194.4 rT SERVICE PAIIO FOR 1987 Total Outstanding and Disbursed MELT 1/ 53.9 EXCHANG RATE Cedib/US$ IBRD/imT LENDING (December 31, 1987) IBRD IDA IFC Average 1988: 202 ---- ---- --- Average 1987: 162 Outstanding Average 1986: 106 and Disbursed 151.1 699.7 30.0 Average 1985: 54 Undisbursed 0.0 409.3 15.0 Outstanding, Inc. Undisbursed 151.1 1109.0 45.0 -------------------------------------------------------------------__--------__----------------------- Note: 1/ Debt Service includes IXF debt and excludes arrears payrnits. As percent of exports of goods and nnn-factor services.  FOREWORD (i) The report, Ghana: Structural Adjustment for Growth, evaluates the progress achieved under the structural adjustment prog.am, the priorities for the continuation of that process, particularly during 1989-90, and the projected impact on the economy. The report also examines the role of donors in sustaining the momentum of the reforms. (ii) The Statistical Appendix presents a time series of key economic data for Ghana. As the appendix mainly draws on officially published data sources, some of the text tables may differ slightly from the Statistical Appendix. The text tables are drawn from diverse sources, and include Bank or IMF staff estimates wherever the official data are either inconsistent or incomplete. (iii) The report is based on the findings of missions which visited Ghana in May and July 1988. The mission consisted of Theresa P. Jones (Chief of Mission), Pirouz Hamidian-Rad (Macroeconomist). Peter Gregory (Labor Economist/Consultant), Thang-Long Ton (Research Assistant), and Ismail Ibrahimi (Debt Specialist). Paul Glewwe (Economist) analyzed the data from the Ghana Living Standards Survey. Annette Minott provided secretarial support at Headquarters. The mission benefited from assistance provided by staff of the Bank of Gh.na, the Ministry of Finance and Economic Planning, the Ghana Statistical Service, and other agencies in Ghana.  SUMMARY AND C_ NCi.USIONS Introduction 1. In April 1983, the GoveLnment of Ghana launched reforms that were intended to reverse the decline in the economy since 1970. The program has been supported by the International Monetary Fund, the World Bank, and other donors. The achievements of the Economic Recovery Program (1983-86) are impressive. Growth resumed and adjustment of the official exchange rate narrowed the differential between the parallel and official rates. Production of cocoa rose, largely a result of higher prices for the farmer. Fiscal and monetary stability was restored and external ar:ears reduced. Nevertheless, the economy faced structural problems which, if not remedied, would inhibit growth. Production was below potential. The banks were weak and investment was insufficient. Public resources were tiot managed well. 2. In order to lay a firm base for sustained growth, the Government decided to formulate policies to continue the process of structural adjustment. Substantial progress was made in carrying out this program during 1987-88. Experience also has demonstrated some problems. Among these is the lagging response of private investment and still weak capacity in economic management. At the same time, Ghana must endeavor to reach its growth objectives in the face of deteriorating terms of trade. The need to respond to these problems, as well as to consolidate the gains achieved, has determined priorities for the next two years. The Government is also confronting longer-term issues - how to promote growth in agriculture, protect the environment, and make population policy more effective. Concessional assistance will be crucial to support the country's efforts to achieve the economic expansion necessary to raise per capita incomes. Recent Economic Performance 3. Economic growth decelerated slightly in 1987, owing to the impact of poor weather on agriculture. Leading sectors were trade, transportation, construction, manufacturing, and mining. Growth in 1988 is estimated at about 6 percent. In 1987, investment rose to nearly 11 percent of GDP; preliminary estimates show a further increase in 1988. Higher public investment was the main factor; private investment also grew, but was confined mainly to mining. To an increasing degree, future expansion in the economy will depend on adequate private investment in a wider range of economic activity. Although several recent actions by the Government should encourage a greater response from the private sector, additional measures may be needed to improve the investment climate. In 1987-88, both foreign and nationas -,vings rose, the former explained by higher levels of concessional assistance. Public savings increased sharply in 1987, while private savings declined in real terms. In 1988, the trend appears to have been reversed. Budget targets were surpassed in 1987. Revenue collections exceeded estimates, increasing to 14.1 percent of GDP. The Government constrained the growth, while improving the structure, of expenditures by emphasizing operations and maintenance and the development  - ii - budget. A lower overall deficit, coupled with an increase in foreign financing, enabled the Government to retire debt to the banking system. The 1988 budget contained several tax reforms. Slower revenue growth (primarily owing to the trend in receipts from cocoa), together with the priority placed on critical expenditures, is expected to lower current savings and raise the overall deficit. Nevertheless, higher foreign financing would enable the Government to repay the banking system again. 4. Monetary developments in 1987 reflected the improvement in the balance of payments and fiscal performance. Broad money rose by 53 percent, mainly because of an increase in net foreign assets. All areas of the economy felt the restrained growth in net domestic assets. Due to a strong increase in deposits and restrictions on _ expansion of credit, the banking system holds substantial excess reserves. One manifestation of the problem is the persistence of negative real interest rates, although the Government has decontrolled rates. The combination of excess reserves and unmet credit demand highlights the difficulty of managing liquidity in this complex situation. Policies must address several objectives in the context of an oligopolistic and weak banking system and without sufficient instruments to ccntrol monetary aggregates. Inflation accelerated to 40 percent in 1987, owing to a rise in food prices and the depreciatica of the exchange rate. During 1988, good harvests moderated price pressures. Because of the upsurge in inflation in 1987, real wages for the civil service declined, in contrast to the improvement since 1984. However, the combination of larger wage increases and lower inflation should cause real wages to improve in 1988. 5. The balance of payments registered an overall surplus )f nearly $140 million in 1987, despite lower cocoa prices. Export earn::ngs rose by 10 percent, led by timber and gold. In real terms, imports grew by 18.5 percent. In spite of higher imports and interest payments, the current account d ficit widened only slightly. This was more than compensated by a doubling o47 the capital account surplus as inflows of concessional assistance increased by 14 percent. In 1988, the current account of the balance of payments is likely to have deteriorated, mainly because of the decline in cocoa prices and shipments. However, a higher capital account surplus is expected to finance most of the increase in the deficit. As a result, Ghana is expected to achieve the targeted overall surplus of $125 million. Implementation of Structural Adjustment Policies 1987-88 6. The Government focused on policies to improve incentives and the management of public resources. The auction has been key to the effort to reach a market-determined exchange rate. It has functioned well since its beginning in September 1986. Industry has received the largest share of foreign exchange, accounting for about half oi the total. There is still a substantial differential between the auction and bureau foreign exchange rates of over 40 percent, notwithstandir a temporary narrowing in May-June 1988 to about 20 percent. Although seasonal factors may have infiuenced the trend, it also points to the need for additional measures to promote the convergence of the two rates. During 1987 the Government reviewed  - iii - trade taxes and tariffs. Based on the review, the 1988 budget included several actions: the sales tax was unified across most import and domestic commodities; the sales tax on imports began to be levied on the duty- inclusive value; and the sales tax structure was simplified. In addition, the nominal tariff rate was reduced by a uniform 5 percentage points for the bulk of goods bearing a customs duty of 15 percent or higher. The net impact of these changes was to lea,e nominal levels of protection roughly the same, with the exception of several industries receiving temporary protection through special taxes. 7. Better incencives for cocoa farmers has been a major plank of the Government's program. Effective for the 1986/87 minor crop, the producer price was raised by 65 percent to