Ghana - Sugar Rehabilitation Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1159-GH REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO GHANA FOR A SUGAR REHABILITATION PROJECT December 8, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1 Cedi = US$0.7 8 1 US$ = Cedi 1.28  INTERNATIONAL DEVILOPI'vENT ASSOCLTION REPOUT AND RECONENDATION OF THET PRESIDENT TO THFE E)ECUTIVE DIRECTORS ON A PROPOSED CREDIT TO GHANA FOR A SUGAR RjEHABILITATION PROJECT 1. *I submit the following report and recommendation on a proposed development credit to Ghana for the equivalent of US$15.6 million on stand- ard IDA terms to help finance a project for rehabilitation of Ghana's sugar industry through expanding cane production; replacing field and factory equipment; providing more efficient management; and a feasibility study of future expansion. The project also provides technical assistance for strengthening the Agricultural Development Bank. PART I - THE ECONOMY 2. An IBRD economic mission was in Ghana in June-July 1972. The mission's report (AW-4o) was an updating of the Economic Report (AW-32a), issued in March 1972. Both reports have already been distributed to the Executive Directors. The salient features of the economic situation are summarized in the following paragraphs. 3. The economy continues to be characterized by major structural imbalances on external account and in public finances. Cocoa remains the principal source of export earnings (accounting for about 70 percent of merchandise exports) and with slow-growing world demand together with widely fluctuating world cocoa prices the balance of payments situation has been highly unstable. There has been a persistent failure to diversify exports or to reduce the very high dependence on imports for meeting both domestic consumption and production demands. The balance of payments situation has been further strained by a rising burden of external debt service arising from an intensive and largely inappropriate investment policy in the early 1960's. Furthermore, with the existence of a manda- tory 180-day credit system for the finance of imports since 1965 the cost of the already disproportionately high level of imports has been increased. These factors have resulted in recurring balance of payments crises, a continuous deterioration in the foreign exchange reserve position and a growing volume of short-term external debt. 4. On public finances there has been a persistent tendency for budget current expenditures to rise at a rapid rate and to outstrip budget revenues which are overly dependent on cocoa export duties and import taxes. In addition to the imbalances in the government budget per se, there are a large number of public agencies and enterprises whose activities have not been subjected to adequate economic criteria and which remain depend- ent on budget support or easy access to bank borrowing. This imbalance in public finances and the general high consumption orientation in the economy have produced strong inflationary tendencies.  5. In general, Ghana's pace of economic development over the last decade has failed to keep abreast of population growth. 6. This difficult set of circumstances confronted the new Government, led by the National Redemption Council (ICC), which assumed office on January 13, 1972. Its predecessors had failed to make very substantial inroads on the basic structural problems. Just prior to the change in administration, a major crisis in the balance of payments dominated the economy. Cocoa prices declined by approximately 25 percent in 1971 reducing export earnings by about 90 million dollars below the 1970 level. Following import liberalization measures introduced in 1970 and 1971 import growth was particularly rapid, short-term external debt increased dramatically and there was a further decline in foreign exchange reserves which at end 1971 covered only about two weeks imports. The previous Government tried to correct the situation in December 1971 by a 78 percent devaluation of the New Cedi (from N$1.02 to $1.00 to N$1.82 to $1.00). 7. One of the first actions of the NRC was to announce a revaluation of the Cedi from N