Ghana - Volta Agricultural Development Project

Document of k -70 The World Bank FOR OFFICIAL USE ONLY Report No. P-2762-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO GHANA FOR A VOLTA REGION AGRICULTURAL DEVELOPMENT PROJECT April 2, 1980 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 World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedis US$ 1 = 2.75 Cedis 1 Cedi = US$0.36 FISCAL YEAR Government of Ghana July 1 - June 30 ABBREVIATIONS ADB Agricultural Development Bank FASCOM Farmers' Services Company FSCs Farm Service Centers GHA Ghana Highways Authority GNPA Ghana National Procurement Agency GWSC Ghana Water and Sewerage Corporation IFAD International Fund for Agricultural Development ifOA Ministry of Agriculture NIB National Investment Bank PWD Public Works Department RAC Regional Agricultural Coordinator CSCO Ghana Seed Company VORADEC Volta Region Agricultural Development Committee VORADEP Volta Region Agricultural Development Project SDR Special Drawing Rights  FOR OFFICIAL USE ONLY GHANA VOLTA REGION AGRICULTURAL DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Ghana Amount: IDA Credit of US$29.5 million equivalent Terms: Standard Relending Terms: US$4.1 million of the proceeds of the credit would be relent to the Farmers' Services Company (FASCOM) for 30 years, including 7 years grace, at 12 percent per annum. US$1.7 million would be invested by Government in FASCOM as equity. The foreign exchange risk would be borne by the Government. ProJect Description: The project seeks to raise agricultural production and farm incomes in the Volta Region through the provision of a basic agricultural services package. To ensure sustained sector growth in the long run the project would also strengthen the Ministry of Agriculture's operational capabilities by providing training to field and technical staff and stream- lining existing institutional arrangements in the project area. An estimated 60,000 farm families each cultivating about 2.1 ha farm on the average would directly benefit from the project. The project would include: improved extension services, credit and training for farmers; the construction of 65 farm service centers for the distribution of farm inputs, staff housing and project offices; expanding the Adidome Farm Institute, construction and improvement of access and feeder roads, strengthening of the Ministry of Agriculture's Regional office; and consultant services. The project faces no special risks since the proposed technology would not require major changes in the traditional farming system. The project faces some risks related to local cost overruns and the availability of foreign exchange to meet the recurrent costs of imported farm inputs. However, provided Government continues with its economic stabilization program, these risks will be minimized. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: Local Foreign Total -------(US$ million)------- Crop Development 1.8 3.1 4.9 Livestock and Fisheries Development 0.4 0.9 1.3 Irrigation Development and Rural Water Supply 0.7 1.6 2.3 Access and Feeder Roads 1.0 1.7 2.7 Houses and Buildings 3.4 4.2 7.6 Nutrition Extension 0.1 0.2 0.3 Commercial Services 0.4 2.3 2.7 Training, Coconut Research, Consultants, Management Support Services 2.3 5.1 7.4 Total Baseline Cost 10.1 19.1 29.2 Physical Contingencies 0.8 1.5 2.3 Price Contingencies 12.5 5.8 18.3 Total Project Costs 23.4 26.4 49.8 Taxes and Duties 1.1 1.1 Total Net of Taxes and Duties 22.3 26.4 48.7 Financing Plan: IDA 11.0 18.5 29.5 IFAD 4.6 7.9 12.5 Government 6.3 - 6.3 Banking Institutions 0.4 - 0.4 TOTAL 22.3 26.4 48.7 Estimated Disbursement: Year Annual Cumulative ----(US$ million)- FY81 4.8 4.8 FY82 8.3 13.1 FY83 7.1 20.2 -FY84 4.5 24.7 FY85 4.8 29.5 Rate of Return: 16 percent. Appraisal Report: Report No. 2527-GH of MIarch 20, 1980.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF GHA!IA FOR THE VOLTA REGION AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit of US$29.5 million equivalent on standard IDA terms to the Republic of Ghana to help finance the Volta Region Agricultural Develop- ment Project. US$4.1 million of the proceeds of the credit would be relent to the Farmers' Services Company (FASCOM) for 30 years including 7 years grace at 12 percent per annum; US$1.7 nillion would be invested by Govern- ment in FASCOII as equity. The International Fund for Agricultural Development (IFAD) is expected to help finance this project on a joint basis with IDA with a loan of Special Drawing Rights (SDR) of 9.55 million equivalent on terms to be determined by their Board, but most likely repayable over 50 years including 10 years of grace with a service charge of 1 percent annually. PART I - THE ECONOMY 2. An economic report entitled "Ghana: Economic MIemorandum" was distributed to the Executive Directors in UIay 1979 (2345-GH). An economic mission visited Ghana in October, 1979, and its principal findings are incorporated in the following paragraphs. Basic economic data and selected social indicators are summarized in Annex 1. Basic Structural Characteristics of the Economy 3. Agriculture is the largest sector of the economy accounting for 51.1 percent of GDP in 1978. Industrial production and services account for 17.2 and 31.7 percent respectively. Although Ghana had traditionally enjoyed a fairly high standard of living compared with most other West African nations, the growth performance of the economy in recent years has been uneven and poor. In the period 1973-78 real GDP declined at an average annual rate of 0.4 percent, implying a decline in per capita income of 3.1 percent annually, as population was growing at 2.7 percent. The per capita GNP is estimated at US$390 in 1978. 4. The most significant factor underlying Ghana's poor economic performance in recent years has been the decline in the volume of exports, which depend almost entirely on a few traditional export commodities--cocoa (of which Ghana is the world's third largest producer), timber, manganese, gold and diamonds, which together constitute 94 percent of exports. In addition to contributing about 80 percent of the country's export earnings, cocoa provides around 48 percent of government revenues and employs more than 20 percent of the labor force. Cocoa exports have declined substantially in recent years due principally to low producer prices, inadequate rehabilitation  -2- efforts, and shortages of labor, imported inputs andl transport equipment. Aggravated by adverse weather conditions in 1975-77, cocoa output in 1977-78 fell to 271,000 tons, compared with well over 400,000 tons in the early 1970s; in 1978/79 output fell further to 265,000 tons. Cocoa export earnings, however, remained firm because of the high world market price for the crop. Production of most of the minerals is stagnating, because of depletion of the mineral ore reserves, poor transport facilities and run-down equipment. 5. Near self-sufficiency had been reached in basic cereal production with the "Operation Feed Yourself" program launched in 1972. But food pro- duction declined due to the prolonged drought in 1975-77, and because of inadequate support services and lack of fertilizers and inputs requiring foreign exchange. Rising food prices have been an important component of the high inflation rate. With improved rains,food production recovered to some extent in 1978, and the indications are that this recovery has been sustained in 1979. 6. Manufacturing in Ghana remains heavily deplendent on imported inputs. Manufacturing contributed 14 percent of GDP in 1971 but this figure has declined progressively to 10 percent in 1978 due to lack of raw materials and spare parts caused by continuing foreign exchange shortages. MIost plants are estimated currently to be operating at around 2CI-30 percent of installed capacity. This sector provides full and part-time employment to about 12 percent of the labor force. 7. Traditionally, Ghana has imported its entire petroleum requirements, mostly in the form of crude oil which is refined domestically and used chief- ly as a source of fuel for the transport sector. Rising oil import prices have resulted in crude oil imports absorbing an increasingly large percentage of Ghana's export earnings, from 12.5 percent in 1978 to 25 percent in 1979. Recently, some oil deposits have been discovered and commercial exploitation has commenced. Production in 1979 has reached 7,000 barrels a day, equivalent to about one-fifth of Ghana's oil requirements. Hydroelectric power meets most of Ghana's non-transport energy requirements in the modern sector. 8. Despite its economic problems, Ghana has in the past devoted con- siderable efforts to development of its human resources. The education system is well established, elementary education has been free and universal since 1962, and there has been considerable investment in public health facilities. However, social infrastructure and basic amenities in the rural areas remain poor: for example, only 14 percent of the rural population have access to safe water and only 21 percent of the country's health establishments are in rural areas. Recent Economic Developments 9. During the last decade the country's econoimic performance has been characterized by a high rate of inflation, widening budget deficits and a persistent foreign exchange shortage. This deterioration took place notwith- standing a relatively good natural and resource endolwment and a significant improvement in the country's terms of trade and has to be ascribed essentially to poor economic management. There was a growing imbalance in public finances  -3- due to rapid growth of budget current expenditures and slow growth in budget revenues reflecting in part a sharp decline in cocoa production. Also, the uneconomic operations of a large number of government enterprises has been an additional factor contributing to the budgetary imbalance. Tax revenues declined as a proportion of GDP from 15 percent in 1974 to 8 percent in 1977, and with lack of control over Government expenditures, the overall budget deficit increased from about 6 percent of GDP to nearly 11 percent over the same period. With virtually negligible external capital inflows, the growing a overall deficit was financed through an excessive reliance on inflationary borrowing, mainly from the Central Bank. During the period 1971-77, money supply increased on average by about 35 percent per annum. In 1977/78 alone the money supply increased by 60 percent. With no significant increase in production in the economy, the rate of inflation accelerated, reaching about 116 percent in 1977. In the management of the external sector, too, Ghana has been afflicted by the adverse effects of continuing domestic price increases. With the official rate of exchange fixed at 01.15=US$1 since February 1973, the cedi came to be increasingly overvalued, providing a strong disincentive to exports and encouragement to smuggling with consequential losses to the country's official reserves. 10. In June 1978, in face of an increasingly critical economic situation, the authorities commenced a program of stabilization. A managed downward "float" of the cedi was introduced, and in August 1978, a 58 percent devaluation was implemented which changed the rate to 02.75 to one US dollar. The devaluation was quickly followed with a tough budget for 1978/79 which aimed at drastically reducing the overall budget deficit. Other measures included: a doubling of cocoa producer price from 040 to 080 a headload (30 kg) to stimulate production; a 25 percent limit on the increase in money supply in 1978/79; and tightening of credit. 11. The outcome for the year 1978/79 shows that in the management of its budget, the Government did make serious efforts to limit government expenditures on both capital and current accounts which were kept at about the same nominal levels recorded in the preceding year--representing, therefore, almost a one-third reduction in government spending in real terms. In revenue collection, however, the shortfall in FY78/79 was 0645 million, from an estimated total collection of 03,206 million. The overall budget deficit for FY78/79 is estimated at 0981 million, compared with the targeted deficit of 0738 million and with the FY77/78 deficit of 02,156 million. It is noteworthy that this is the first occasion in recent years that Ghana's budget deficit has actually been reduced. Following the reduction in the budget deficit, growth in money supply has also been sharply curtailed--money supply increased by only 29 percent in FY78/79 as against a 60 percent increase in the preceding year. The demonetization in March 1979 which cancelled 0631 million from circulation also contributed tc limiting monetary growth. 12. Curtailment of monetary growth, improved local food supplies and the rolling back of prices between June and September 1979 under coercion by the Armed Forces Revolutionary Council, which took power in June 1979, have all contributed to moderating Ghana's inflation. After registering a 116 percent increase in 1977, the consumer price index rose by only 73 percent  -4- in 1978 and by about 54 percent in 1979. Although this is a significant achievement, the Ghanaian rate of inflation still far exceeds international levels and the beneficial effects of the 58 percent devaluation of August 1978 have now been negated. The overall balance of payments in 1978 regis- tered a deficit of US$72 million as against a small positive balance in 1977. The financing of the deficit as well as an increase in the reserve position was made possible by allowing payments arrears to rise. In terms of growth in GDP the recovery initiated in 1977 continued into 1978 and the indications are that it has been sustained during 1979. The cocoa crop in particular is expected to improve with good rains and a further price boost to 0120 a headload in July 1979. 13. In late 1978 the IMF approved a one-year standby arrangement of SDR 53 million and Trust Loan Fund of SDR 25 million (totalling US$102 million) in support of the Government's stabilization program introduced in June 1978. As a mid-term review of progress under the standby arrangement could not be completed by the IMF as scheduled in May 1979 because of the military intervention at that time, Ghana is not eligible to draw the last two installments of SDR 10 million each under the standby. Prospects 14. Ghana is relatively well endowed in terms of natural resources and has the potential to achieve a rate of growth considerably in excess of its performance so far this decade. The country's slow growth in revenues and export earnings and the acute inflation have severely hampered economic development; the restoration of economic stability is an essential pre- requisite for Ghana to resume effective development. The measures on the balance of payments and the budget initiated in June 1978 reflect an awareness of needed policy directions. The indications are that the new civilian Govern- ment which assumed office in September 1979 will continue to pursue the program of stabilization and policy reforms initiated by the previous Govern- ment. The Government has also indicated that its development strategy will emphasize increased food production through assistance to small farmers, rehabilitation of existing infrastructure, including mines and transport, and support for manufacturing enterprises giving priority to those using locally produced raw materials. However, the present acute shortage of foreign exchange constitutes a severe constraint upon the Government's efforts to move as quickly as the situation demands to increase production and generally rehabilitate the country's existing assets. 15. Ghana's growth prospects over the next few years will depend to a considerable extent on constant reassessment and follow-up actions in support of the objectives of the recent stabilization program. Key policy measures should continue to aim at: (a) correcting the imbalance on external account through a more realistic structure of prices and costs and the maintenance of a viable exchange rate; (b) restraining growth in consumption and reducing the strong inflationary tendencies associated with large public sector deficits; and (c) promoting an expansion of domestic production (of cocoa, food crops and industrial goods) through more appropriate price incentives, support services and more assured supplies of necessary inputs. Stabilization is clearly a formidable task and is likely to take time. On  - 5 -. the basis of the policy advances effected so far, and with improvements in performance over the recent past, growth in GDP of 3 percent per annum should be feasible. With sustained improvement in economic manage- ment the economy is capable of even higher rates of growth. However, the attainment of even a modest rate of growth will require that Ghana's own efforts be supported by an augmented flow of external assistance to overcome the present external resource constraint. External Debt and Creditworthiness 16. An agreement on a long-term rescheduling of Ghana's medium-term external debt was concluded in March 1974. Under this agreement, all payments due after February 1, 1972, in respect of pre-1966 debt obliga- tions, will be paid over a period of 28 years, including a grace period of 10 years, at 2-1/2 percent per annum. Ghana's medium- and long-term exter- nal public debt outstanding and disbursed at end-1978 is estimated at US$877 million representing 20 percent of GDP. The debt service ratio of public and publicly guaranteed medium- and long-term debt was about 4 percent of exports of goods and non-factor services and is expected to rise modestly in the late 1980s after the grace period on the rescheduled debt expires in 1982. Arrears on Ghana's short-term debt increased from US$245 million in 1977 to US$489 million by end-1978. By January 1980 these arrears had declined to US$453 million. 17. Ghana is relying on official sources for the bulk of the external capital required to support its development program, and relatively little of its medium- and long-term borrowing is on commercial terms. As at end- 1979, a total of US$314.8 million had been committed by the Bank Group to Ghana of which US$106 million was yet to be disbursed. As of the same date Bank loans and IDA credits disbursed each represented 10 percent of the estimated country's total public external debt. Service payments on Bank loans and IDA credits in 1978 accounted for 26 percent and 3 percent respect- ively of the country's external debt service. 18. The country's difficult economic situation and its vulnerability to fluctuations in cocoa export earnings, make it desirable that future debt service obligations should be kept as low as possible. Therefore, IDA credits will have to constitute the bulk of Bank Group assistance to Ghana over the next few years. This is also consistent with Ghana's rela- tively low per capita income. At the same time, to ensure an adequate flow of foreign exchange resources to the country it would, be appropriate to finance a portion of the local costs of projects. PART II - BANK GROUP OPERATIONS IN GHANA 19. Since 1962, when the Bank Group financed its first operation in Ghana, the Bank has made 10 loans totalling US$190.5 million and 14 credits totalling US$124.3 million. Bank Group lending has covered power generation and distribution, highways, agricultural development (including oil palm, cocoa, sugar, livestock, fisheries and regional agriculture), water supply,  -6- telecommunications and two DFC operations. Ghana is also a beneficiary of a Bank-financed regional clinker project covering three nations (Togo, Ivory Coast and Ghana). The recent high inflation in Ghana and the shortage of foreign exchange have adversely affected the implementation of several ongoing projects. There are no IFC investments. Annex II contains a summary statement of Bank loans and IDA credits as of February 29, 1980 and notes on the execution of ongoing projects. 20. The principal objectives of Bank Group assistance to Ghana are: (a) to support the adoption of economic policies designed to strengthen the balance of payments and improve domestic demand management, (b) to help reha- bilitate and improve capacity utilization of the country's existing assets, (c) to stimulate agricultural and industrial production, particularly for export promotion e.g., cocoa, and efficient import substitution, and (d) to improve the country's essential infrastructure so as to relieve constraints upon economic growth. The Bank Group is also supporting projects which would raise the living standard of the poorer groups of the population. 21. In line with the country's development priorities, future Bank Group lending will place increasing emphasis on the agricultural and manu- facturing sectors. In agriculture, the proposed credit is designed to improve farm incomes and the standard of living of about 60,000 smallholder farming families in the Volta Region. This would be the second Bank-financed integrated agricultural project in Ghana, following a similar ongoing smallholder project in the Upper Region. Following the two ongoing cocoa projects--one in the Eastern Region and the other in the Ashanti Region-- further assistance is contemplated for increased cocoa output to strengthen Ghana's foreign exchange earnings. As a prelude to a third project, a cocoa sector study is underway to analyze the present constraints to increased production and to make future policy recommendations for the sector. Further Bank Group assistance to the sector being considered includes a forestry project, currently under preparation, which would rehabilitate four state-owned wood industries, improve port facilities at Takoradi, strengthen forestry institutions and prepare a forestry and forest industries development planning study. 22. In infrastructure, a railway rehabilitation project aiming at strengthening the finances and operations of the Ghana Railways Corporation and improving the capacity of the railways for the movement of Ghanaian exports is being considered. Also proposed is a highway project designed to remove the immediate bottlenecks in the transport sector through injection of urgently needed foreign exchange working capital to import spare parts, lubricants and materials needed to reactivate the road maintenance program started under the Second Highway (Maintenance) Project and to assist the domestic trucking industry. A technical assistance project designed to  7- strengthen the Ghana Water and Sewerage Coriporation (GWSC), which has been assisted under previous Bank Group projects, has been recently negotiated with the Government and is planned for Board consideration in April. Also under preparation is an urban development project which would seek low-cost solutions to Ghana's urban problems and provide sites and services, infra- structural and social services as well as urban employment in lou-income areas. a- 23. In industry, a second line of credit to NIB was approved by the Executive Directors in May 1979. The project aims at stimulating increased production and improved capacity utilization in priority manufacturing and agro-industrial enterprises so as to expand the industry's contribution to foreign exchange earnings and savings and strengthen linkages with other sectors. This would be followed by a small-scale industries project, cur- rently under preparation, which would provide financial and technical assist- ance to small entrepreneurs utilizing local raw materials. 24. As noted in Part I of this Report, Ghana has experienced severe economic difficulties during the last few years and, as a consequence, there has been a low level of Bank Group lending during the last two years. Con- tinued improvement in the Government's management of the economy will be im- portant in determining the level of future Bank Group lending. PART III - THE AGRICULTURAL SECTOR 25. Agriculture, including livestock, fisheries and forestry, contrib- utes about 51 percent of GDP. About 70 percent of the population live in rural areas and derive an income from agriculture and related activities. The sector satisfies the bulk of Ghana's food requirements, the major crops being cassava, maize, plantain, sorghum, millet and groundnuts. Cocoa is Ghana's most important single crop covering some 50 percent of all cultivated land and presently accounting for nearly 80 percent of Ghana's export earnings. 26. Having been for many years the largest producer of cocoa in the world, Ghana has recently been overtaken by Ivory Coast and Brazil. Cocoa production has been constantly declining since 1972/73 and in 1978/79 it reached only 265,000 tons, less than half the 1964/65 production of 549,000 tons. As noted above the Government has ,recently increased the producer price substantially, although there are other problems affecting the subsector e.g., availability of insecticides, sprayers, and pruners, inadequate disease control, inadequate marketing capacity, etc., all of which will be examined in the cocoa study which is in progress. Recent Sectoral Performance 27. Growth of the agricultural sector has been unsatisfactory averaging 2 percent annually between 1965-72, 4 percent between 1972-75 and about 2.5 percent from 1975 to 1978. This poor performance was not due to decline in cocoa production alone, since food output also fell to the point that Ghana experienced in 1977/78 its worst fcod crisis since independence. With  -8- the good rains in 1978/79 food crop production has recovered to some extent, and is expected to improve further in 1979/80. The general economic deterio- ration has contributed to the sector's difficulties; for example, import restrictions, causing severe shortage of vehicles and spare parts, have undermined the country's transport capacity and affected the timely delivery of produce and discouraged production; the over-valuation of the cedi has also affected the allocation of resources, distorting demand levels, and relative attractiveness of various crops. Whilst three consecutive years of drought (from 1975 to 1977) undoubtedly aggravated the situation, inadequate policies and weak institutions also constitute important causes of the sector's poor performance. Agricultural Institutions 28. The Ministry of Agriculture (MOA) is responsible for agricultural development activities and national policy, excluding the cocoa sector. The MOA consists of the Departments of General Agriculture, Animal Husbandry, Veterinary Services, Fisheries and Planning, the Rice Mills Unit, and the Information Support Unit. While general extension is carried out by MOA's various departments, specialized development and crop specific extension work is carried out by five corporations (State Farms, Food Distribution, State Fishing, Ghana Commercial Farms, and Ghana Oil Palm Development), three boards (Cotton Development, Grains and Legumes Development and Bast Fiber Development), three companies (Ghana Tobacco, Ghana Livestock and Grains Warehousing) and the recently established Irrigation Authority. All the various departments of MOA and the above parastatals are represented in the regions. 29. For cocoa a separate Ministry of Cocoa Affairs had been set up in 1975 to take over responsibilities for the industry previously shared by various organizations. Cocoa purchase and marketing remained the responsi- bility of the already exLsting Cocoa Marketing Board. In September 1979 both organizations were dissolved and an interim 3--member Cocoa Council was established to be responsible for all of the cocoa industry. Government Policy 30. -During the 1960s the Government invested in capital intensive industries, with agriculture receiving lower priority. This strategy is gradually being modified. Agriculture now accounts for about 8 percent of the total budget, compared to only 3 percent in 1971. The agricultural development strategy set out in Ghana's Five-Year Development Plan (1975/76 - 1979/80) aimed at: (a) attaining self-sufficiency in food and raw materials for agro-based industries; (b) diversifying exports through promotion of non-traditional exports; (c) rehabilitation and expansion of the declining cocoa subsector, and (d) developing non-crop subsectors such as livestock, fisheries, and forestry. The Five-Year Plan also recognized the key role played by smallholders in the development of agriculture. In practice, however, Government strategy for the sector has emphasized mechanization of large scale farms and has given the public sector a large role to play in agricultural operations. The objective of this approach was to achieve a rapid increase in agricultural production. The results, however, have been  - 9 - disappointing since the parastatals have not emerged as efficient production units and mechanized farming poses difficult technical problems under Ghanaian conditions. At the same time the smallholders, who comprise abort 80 percent of the farming community, were unable to respond adequately since adequate support services and appropriate incentives were lacking. 31. Ghana's extensive system of input subsidies, covering seeds, fertilizers, sprayers, pesticides, mechanization services and credit has A' resulted in a substantial burden for the budget without significantly improving national production. In the absence of an effective distribution system, it has benefitted mainly a small number of large farmers, and has not encouraged the small traditional farmers to adopt improved technologies. 32. The Government now recognizes the need for policy changes and some action has already been initiated. Government has already started reducing fertilizer subsidies and has undertaken to remove them completely by 1981. Producer prices for cocoa have been tripled (from 040 to