Ghana - Second Oil Palm Development Project

Document of The World Bank FOR OFFICIAL USE ONLY ! i . r -- Report No. P-3825-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 23.5 MILLION TO THE REPUBLIC OF GHANA FOR AN OIL PALM DEVELOPMENT PROJECT PHASE II May 22, 1984 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 = 35.0 Cedis 1 Cedi = US$0.029 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS ffb fresh fruit bunch GCMB Ghana Cocoa Marketing Board GOPDC Ghana Oil Palm Development Corporation IRHO Institut de Recherche pour 'Les Huiles et Oleagineux MOA Ministry of Agriculture OPRC Oil Palm Research Center  FOR OFFICIAL USE ONLY GHANA Oil Palm DeveloDment Project - Phase II Credit and Project Summary Borrower: Republic of Ghana Amount: IDA Credit of SDR 23.5 million (US$25 million equivalent) Terms: Standard Relending Terms: A total of SDR 18.4 (about US$19.6 million) would be onlent to the Ghana Oil Palm Development Corporation (GOPDC) at 12.5 percent for 15 years, including 7 years of grace. This rate would be adjusted in line with any changes in the interest rate charged by the Central Bank of Ghana for agricultural sector loans. GOPDC in turn would onlend up to US$1.2 million to outgrowers at 12.5 percent per annum for 13 years including 6 years of grace. The onlending rate to outgrowers would be fixed at the prevailing Central Bank rate at the time these loans are committed. The borrower would bear the foreign exchange risk. Project The project would provide for consolidation of Phase I Description: development of the nucleus plantation and smallholder/ outgrower plantings. It would also increase palm oil production through an additional 2,500 ha of outgrower plantings. The main components include: vehicles, equipment, and housing for nucleus estate and oil mill employees; inputs, extension services, and credit to smallholders/outgrowers; consultant services; training; and development of an oil palm research program. There are no unusual technical project risks and implementation problems are expected to be minimal since the project would be based on the institutions and experience of Phase I. However, the project faces risks related to (a) the high rate of domestic inflation which, if it continues, could lead to cost over- runs, and (b) the availability of foreign exchange to meet recurrent costs of imported farm inputs. However, in view of satisfactory experience with the Government's contribu- tions under Phase I, and assuming continued efforts by the Government at containing inflation, these risks are sig- nificantly reduced. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Costs: -------US$ million------- Local Foreign Total 1. Project Hdqtrs. and Management 1.1 1.7 2.8 2. Nucleus Plantation 5.4 7.3 12.7 3. Outgrowers/Smallholders Scheme 1.3 2.9 4.2 4. Palm Oil Mill 0.8 4.6 5.4 5. Training, Consultancy and Research 0.2 2.7 2.9 Base Cost 8.8 19.2 28.0 Physical Contingencies 0.5 0.9 1.4 Price Contingencies 4.5 2.0 6.5 Total Cost 1 .8 22.1 31-1 Financing Plan: -------US$ million------- Local Foreign Total IDA 2.9 22.1 25.0 GOPDC 9.1 - 9.1 Government 1.3 _ 1.3 Smallholder/Outgrowers 0.5 - 0.5 Total 1.8 22.1 . Estimated Disbursements: -------------------US$ million------------------- FY85 FY86 FY87 FY88 FY89 FY80 Annual 1.2 5.1 7.2 6.3 2.8 2.4 Cumulative 1.2 6.3 13.5 19.8 22.6 25.0 Rate of Return: 17%. The ERR for combined Phases I and II includes all costs incurred from 1977 onward and is 12%. Staff Appraisal Report: No. 3724-GH dated May 22, 1984 Map: IBRD 16043  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR AN OIL PALM DEVELOPMENT PROJECT - PHASE II 1. I submit the following report and recommendation on a proposed Devel- opment Credit to the Republic of Ghana for the equivalent of SDR 23.5 million (US$25.0 million equivalent) on standard IDA terms to help finance an Oil Palm Development Project - Phase II. SDR 18.4 million (US$19.6 million equivalent) of the proceeds of the Credit would be onlent to the Ghana Oil Palm Develop- ment Corporation (GOPDC) at 12.5 percent for 15 years including 7 years of grace. GOPDC would in turn onlend up to US$1.2 million equivalent to out- growers at 12.5 percent per annum for 13 years including 6 years of grace. SDR 3.0 million (US$3.2 million equivalent) of the Credit would be made available to GOPDC as part of the Government equity contribution. Of the remaining amount, the Government would make available SDR 1.9 million (US$2.0 million equivalent) to the Oil Palm Research Center (OPRC) in the form of a grant and SDR 0.2 million (US$0.2 million equivalent) would be made available to the Ministry of Agriculture (MOA) for studies relating to future agriculture projects in Ghana. PART I - THE ECONOMY 2. An economic report entitled "Ghana: Policies and Program for Adjust- ment" was distributed to the Executive Directors in October 1983 (4702-GH). Its principal findings are summarized in this section. Basic economic data and selected social indicators are summarized in Annex I. 3. Ghana once enjoyed a fairly high standard of living compared with most other West African nations. However, a declining gross national income has combined with high population growth (estimated at about 3 percent a year) to cause a substantial erosion in real per capita income. The average real income in 1982 is estimated at US$360, which represents a decline by about one-third from what it was a decade ago. The rate of unemployment is quite high and underemployment is widespread. Almost half the population of about 12 million is now estimated to live in absolute poverty. The country's basic- needs indicators, once the best in Africa, are no longer much better than those of other Sub-Sahara African countries with comparable per capita in- comes. Modern health services are available to only about a third of the people and fewer in rural areas; only 35 percent have access to safe water. Although the education system is well established and elementary education has been free since 1962, 50 percent of adult men and 70 percent of adult women have had no formal education.  - 2- Basic Structural Characteristics 4. Ghana is comparatively well endowed rith natural and human resources. The country has valuable mineral deposits, particularly gold, but also dia- monds, bauxite and manganese, and offshore oil. There is further potential f3r hydro power generation. Ghana has a relatively good supply of land suitable for growing cereals and starchy staples and possesses considerable fishing and forestry resources. 5. Agriculture is the largest sector of the economy, accounting for over half of GD?. Only 11 percent of the land area is cultivated, half of which is under cocoa. Nearly 70 percent of the population derive an income from agriculture or related activities. The basic staple foods are maize, rice, mi-Llet, yam, cassava, and plantain but, except for cassava, yields of these crops have stagnated in recent years. Food production in 1980 was only 88 percent of that in 1975. Prolonged droughts in 1975-77 and 1982-83, inade- quate support services, poor transport facilities, and lack of fertilizers and other inputs contributed to the decline. In the last five years, Ghana has had to import 10 to 15 percent of its cereal consumption (mainly rice and maize). 6. Ghana's economy is highly dependent on primary products for exports. Cocoa (of which Ghana is the world's third largest producer) still contributes about 60 percent of total export earnings, although production has been declining. Timber is also an important export item. Mining is still Ghana's second largest foreign exchange earner, contributing 10 to 15 percent ,f the total, although productiorn has been declining over the past two decades. Efforts to diversify the export base have not made much headway. 7. Manufacturing production and services currently account for 7.5 and 41 percent of GDP, respectively. Xanufacturing--including textiles, steel, tires, oil refining and simple consumer goods--contributed 9 percent of GDP in 1980 (down from 14 percent in 1971) and provided full- or part-time employment to about 12 percent of the labor force. Manufacturing in Ghana remains inefficient and heavily dependent on imported inputs, however. As a result, the goal of import substitution through industrialization has met little success and imposed a serious bhirdern on the economy. 8. Ghana used to import all of its petroleum, mostly in the form of crude oil. which is refined domestically and used chiefly as a source of fuel for the transport sector. Recently, some oil c'eposits have been discovered and commercial exploitation has commenced. Production of crude is now about 1,200 barrels per day, equivalent to 7 percent of the country's requirements. Hydroelectric power meets most of Ghana's non-transport commercial energy needs, although it has been drastically affected by the drought in recent years (see para. 15).  -3- Recent Economic Developments 9. Throughout the 1970s, Ghana's economy was subject to gross misman- agement. Large budgetary deficits, necessitated partly by the need to support a sprawling, inefficient public sector, led to a marked acceleratLon in domestic inflation. Given the reluctance to move the exchange rate, the fixed nominal rate became grossly overvalued, shifting relative incentives away from exports into import trade, and more specifically from cocoa, Ghana's main export, into subsistence food production. The resulting deterioration in export performance, combined with a growing disenchantment on the part of aid donors with Ghana's policy performance, caused a perpetual foreign exchange crisis that pushed successive Governments into increasingly restrictive import regimes. Thus, what was once an economy with ample imports became starved of the main fuel for its growth. The erosion of the tax base due to declining exports and imports, and the related decline in economic activity forced severe cutbacks in Government Operations and Maintenance and capital expendi- tures. Thus, foreign exchange shortages and declining public expenditures contributed to the marked deterioration in what was once a fairly well developed economic and social infrastructure. This in turn further reduced the country's productive capacity. 10. A tendency to respond to shortages with controls and rationing worsened the problem; extensive price controls and widespread resort to administrative price setting eroded the incentives to produce and save, diminished the capacity of public sector entities to maintain the level and quality of services, and created a vast parallel black market with its related evils of corruption, smuggling, and tax evasion. Declining real wages, political instability and reduced economic opportunities led talented and skilled Ghanaians to leave the country, depriving the country of scarce managerial, administrative and technical skills. 11. To add to all its difficulties, Ghana was subjected in the early years of the present decade to three additional problems. First, a prolonged and severe drought that has created the worst food shortages since Indepen- dence. Second, a sharp deterioration in external terms of trade following the increase in petroleum import prices, and a softening in prices of Ghara's major exports (cocoa, gold and manganese). Third, the sudden and unexpected return of over one million Ghanaians from Nigeria, placing a severe strain on the food and unemployment situation. The cumulative effect of this downward economic spiral and these most recent "shocks" to the system can be seen in the trends in key economic indicators between 1970 and 1982: per capita real income declined by 30 percent; import volumes fell by a third; real export earnings fell 52 percent; domestic savings and investment declined from 12 and 14 percent of GDP respectively in 1970 to almost insignificant levels; inflation averaged 44 percent per annum over the period. A Program of Reforms 12. The Provisional National Defense Council (PNDC) which came to power under the leadership of Flt. Lt. Rawlings on December 31, 1981, established a National Economic Review Committee early in 1982 to review the country's economic difficulties and to develop an adjustment program that would check  - 4L - this downward economic spiral and pave the way for national economic recovery. An IMF staff team was invited to Ghana in July 1982. Following further discussions with Fund and Bank staff in the winter of 1982/83, a program of far-reaching reforms was announced in April 1983 which is being supported by an SDR 23845 million Standby Arrangement covering a 12-month period through August 2, 1984. The reforms focussed on: (i) establishing a more realistic exchange rate, which resulted in an exchange rate movement from .2.75 = US$1.00 to 035.00 = US$1.00 within one year; (ii) establishing realistic relative prices and incomes in the context of the new exchange rate. Cocoa producer prices were raised by 67 percent to p20,000 per ton on May 1, 1983 and a further increase to