Ghana - Oil Palm Project

FILE COpy TO BE.RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-14 REPORT AND RECOMMENDATION OF THE- PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR AN OIL PALM PROJECT February 6, 1975 This repon was. repared for Offlial. use only bythe Bank Group.It may not bpu h quotd o citd wthou Bak Grup uthoizaion he ankGroup, does not acp  CURR&=CY EUIVALINT Currency Unit u cedi (0) US$ 1.00 0 .1538 0 1.00 a US$ 0.8667 0 1 million = US$ 866,700 FISCAL YEAR July 1 - June 30  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENiDATION OF TEE PRESDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR AN OIL PALM PROJECT 1. I submit the following report and recommendation on a proposed development credit to Ghana for the equivalent of US$13.6 million on standard IDA terms to help finance an oil palm project. US$9.L4 million of the credit would be onlent to the Ghana Oil Palm Development Corporation (GOPD) in approximately the following amounts: US$3.8 million for plantation development at 12 percent for 23 years, including 8 years of grace; US$4.6 million for the oil mill at 15 percent for 15 years, including 5 years of grace; and US$1 million for loans to outgrowers at 8 percent for up to 21 years, including 9 years of grace. About US$3.8 million of the credit would be made available to GOPD as part of the Government's equity con- tribution. The remaining US$0.4 million would be retained by Government for road construction and technical assistance to ADB. PART I - THE ECONOMY 2. The economic report entitled "Current Econmic Situation and Prospects of Ghana" (R72-223) dated March 9, 1972 was distributed to the Executive Directors on October 3, 1972. A report on Ghanars industrial sector (465a-GH) dated October 25, 1974, has also been distributed to the Executive Directors, and an updating economic report, the draft of which was discussed with the Government in December, 1974, is in preparation. A summary of basic data on the economy is presented in Annex I. 3. Ghana's GDP in real terms grew by an average annual rate of 2.7 percent during 1966-1972; the rate increased considerably in 1970 and 1971, but there was virtually no growth in 1972. During the same period, population increased by between 2 1/2 and 3 percent annually. GNP per capita was estimated at US$300 in 1972. Information on production in 1973 and 1974 is fragmentary; however, it appears that both agricultural and industrial production have risen significantly during the past two years. The economy in recent years has been strongly oriented towards consumption, and the rate of investment has been low - not more than 12 percent of GNP per annum over the period 1966-72. 4. Since independence in 1957 and through the 1960's, the main objective of economic development policy in Ghana was to create extensive infrastructure, capital-intensive import-processing industries and heavily mechanized farming operations. Except for traditional export sectors like cocoa, timber and mining, very few export industries were created. A large number of medium and large-scale manufacturing units were established behind high protection  - 2 - from foreign competition; small-scale enterprises in industry and agri- culture received little attention. The manufacturing sector had low domestic value added at international prices, a limited employment potential and few linkages with other sectors. Inefficient State enterprises have become a serious drag on the economy, and the present Government has taken a number of steps to improve their efficiency and reduce their losses. Its aim is to increase and diversify agricultural output - food and industrial raw materials - and to discourage excessive capital/labor substitution in manufacturing by levying duties on imported machinery and by granting employment tax credits. In addition, the Government is formulating plans and policies for the develop- ment and efficient use of the country's human resources. Important changes have been made in the direction of economic policy, with increased emphasis placed on agriculture and greater concern for industrial efficiency, but the progress made in implementing the new policies is still quite limited. Guide- lines have just been issued for a five-year development plan to cover the period 1975-1980, with a target rate of growth in GNP of 5 1/2 percent a year, and work is proceeding on the preparation of sectoral programs and projects to fill out the macro-economic framework. At the same time the Government has acknowledged the importance of mobilizing larger domestic resources to finance the planned increase in investment. 5. After cocoa and timber, Ghana's principal traditional exports are gold, manganese, diamonds and bauxite. Production of some of these minerals has not increased substantially for a number of years, partly because of depletion of ore reserves. Gold production stabilized at about 800,000 fine troy ounces annually during 1968-1973 with a potential for limited expansion, while production of manganese declined by about 25 percent during the same period. Annual extraction of diamonds averaged about 2.5 million carats a year in the last six years, while that of bauxite increased by 80 percent; there is a proposal to process bauxite in the country. The country has potential to accelerate its growth and development through export promotion. The Government recognizes this and is determined to expand and diversify exports. 6. Ghana imports its entire oil requirements, mainly in the form of crude which is refined domestically. Oil is used chiefly as a source of fuel for the transport industry. Oil exploration is being carried out offshore and in the Volta Basin, but no commercially viable reserves have yet been discovered. Ghana obtains most of its energy requirements from hydro-electric power. 7. Despite the poor performance of the economy, Ghana has a fairly advanced infrastructure. The education system is well established; elementary education has been free and universal since 1962. Health facilities are moderately extensive, and further expansion favors rural areas. It is the declared policy of the Government to achieve a more equitable income distribu- tion by increasing productive investments in rural areas and by expanding low cost rural housing and water supply and improving feeder roads.  -3- Public Finance 8. There have been growing imbalances in public finances due to rapia growth in current expenditures and slow growth in budgetary revenues; this has depressed government development expenditures to inadequate levels. Recently, the Government succeeded in expanding the growth of current non- cocoa revenues by improving tax collection. However, most of the incremental gains were largely offset by rapid increases in current expenditures. With negligible external capital inflow, the Government has had to borrow extensively from the Central Bank in order to finance development expenditures; this has been a persistent source of inflation, the rate of which increased from about 10 percent in 1972 to 18 percent in 1973 and is likely to exceed 20 percent in 1974. 9. The 1974/75 budget anticipates an increase of about 18 percent in current revenues, while current expenditures are projected to increase by 30 percent above the 1973/74 actuals. About one-third of the anticipated increase in current expenditure is accounted for by the long overdue salary adjustment granted in 1974. The budget provides about US$245 million for development expenditure, representing an increase of about US$200 million o-er that realized in 1973/74, which seems overly optimistic. Even, however, if actual development expenditures fall considerably below the budgeted level, a large increase in domestic savings will be needed if inflation is to be contained. Public savings at present are negligible, and a vigorous effort is required to contain goverment current expenditures, to reduce the losses of government enterprises, to increase charges for public utilities and other services and to mobilize additional tax revenues. Balance of Payments and External Debt 10. The economy continues to be characterized by major structural imbalances on external account. Due to favorable price developments for Ghana's traditional exports (cocoa, gold, timber) and to the retrenchment of imports in 1972, the balance of payments situation improved from a current account deficit of US$175 million in 1971 to a surplus of about US$122 million per annum in 1972 and 1973. Net foreign exchange reserves increased from about US$20 million at the beginning of 1972 to about US$200 million at the end of 1973. 11. While prospects for continued high world prices for major exports seem good, the recent increases in petroleum prices are estimated to have increased Ghana's petroleum import bill by about US$120 million in 1974. Petroleum imports are estimated to account for about 22 percent of imports in 1974-1976, compared to less tlhn one-tenth in 1973. Increased oil and other commodity prices, combined with an unusually large increase in the volume of imports, are expected to result in a substantial current account deficit in 1974. It is estimated that food imports in 1973 amounted to aoout US$100 million and may have been US$120-125 million in 1974. The increase in imports was the result of a much more liberal import licensing policy and extended over a wide range of goods. Foreign exchange reserves declined by about US$135 million during the first three quarters of 1974. Towards the end of the year some of the outstanding import licenses were cancelled, and a much tighter foreign exchange oudget was decided on for 1975.  -4- 12. The current balance of payments situation and the medium-ternm projections indicate that, even with continued favorable price prospects for major exports, the external resource constraint, which has hampered Ghana's past development, will remain severe. The Government should be able to draw on the IMF's oil facility, and some program assistance is available from bilateral sources, particularly the United States and Canada. In addition, there are good prospects for the commitment of substantial amounts of project assistance from bilateral and multilateral sources over the next two years. Most of the bilateral aid is being offered on concessionary terms. However, this aid cannot be effectively utilized to finance public investment unless the Government is able to provide the funds required to supplement external assistance, and a major increase in public savings is a necessary condition for a sustained development effort. Faced with a difficult problem of re- adjustment at a time when rising food and oil prices have put fresh strains on the economy, the Government needs time to bring about the necessary shifts in patterns of taxation and expenditure. In these circumstances, and in the case of high priority projects aimed at reducing the growing balance of pay- ments problem of the country, it would appear appropriate for external lenders to cover some portion of local currency expenditure. 13. Daring the last two years, Ghana had made considerable progress in repayment of outstanding trade credits. However, there were still an estimated US$80 million of arrears outstanding in October 1974. A substantial part of these arrears will have to be repaid before Ghana can regain access to normal trade credits. Other potential obligations include outstanding applications for remittance of profits and dividends estimated at about US$90 million in October 1974, and the Government has also undertaken to pay compensation for the increased equity it has acquired in several foreign private investments, particularly in the field of extractive industries. The Government is currenitly negotiating compensation arrangements with the affected parties; some settlements have already been reached. 14. An agreement on a long-term rescheduling of Ghana's medium-term external debt was concluded at a meeting in Rome March 11-13, 1974. Under this agreement, all payments due after February 1, 1 972, in respect of pre- 1966 debt obligations will be paid over a period of 28 years, including . grace period of 10 years, with an interest rate of 2 1/2 percent per annum. This agreement was the culmination of more than two years of negotiations between Ghana and the creditor countries in which the good offices of the Bank were provided. Good progress is being made, in the second phase of the agreement, which calls for bilateral negotiations after Ghana's review of the validity of the contraQts underli.ig the xDbtS in 'uesticali, and a1 fir