Ghana - Public expenditure review : 1989-91

Repowt No. 7673.GH Ghana Public Expenditure Review, 1989-91 Cobr 30, 1989 Western Africa Region FOR OFFICIAL USE ONLY Document of the World Bank 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 1985 1988 1/ 1987 j/1 1988 USl1 064.37 oleo 0162 0202.36 Cedi (0) 1 USSW.919s USSg.0094 USS. 62 USSIe6e FISCAL YEAR JANUARY 1 - DEEMBER 31 ABBREVIATIONS AESC - Architectural and Engineering Services MIST - Ministry of Industries, Science and Corporation Technology AFDB - African Development Bank MOA - Ministry of Agriculturo AHP - Animal Health and Production MOEC - Ministrr of Education and Culture APPP - Agriculture Productivity Promoting MOH - Ministry of Health Project MRH - Ministry of Roads and Highways OCR - Benefit Cost Ratio MSD - .9.nagement Services Division BHC - Bank for Housing and Construction MTAC Medium Term Agricultural Development CAG - Controller and Accountant General Program CIDA - Canadian International Development MTC - Ministry of Transport and Communication Agency M'H - Ministry of Works and Housing CIDU - Crops Inputs Development Unit NORRIP - Northern Region Rural Integrated Program CSD - Crops Services Division ODA - Overseas Development Assistance DFR - Department of Feeder Roads OHCS - Office of the Head of the Civil Ssrvice DUR - Department of Urban Roads PAMSCAD- Programl of Action to Mitigate the Social EdSAC - Education Sector Adjustment Credit Costs of Adjustment EEC - European Economic Community PER - Public Expenditure Review EIB - European Investment Bank PIP - Public Investment Program Economic Recovery Program PIPTF - Public Investment Program Task Force ERR - Economic Rate of Return PHC - Primary Health Care FASCOM - Farmers' Service Company PNDC - Provisional National Defense Council GA - Ghana Airways PWD - Public Works Department CCAA - Ghana Civil Aviation Authority SAC II - Second Structural Adjustment Credit GES - Ghana Education Service SCC - State Construction Corporation GFDC - Ghana Food Distribution Corporation SEC - State Enterprises Commission GHA - Ghana Highway Authority SGMC - State Gold Mining Corporation GIDA - Ghana Irrigation Development Authority SHC - State Housing Corporation GIHOC - Ghana Industrial Holding Company SIC - State Insurance Corporation GOG - Government of Ghana SME - Small and Medium Scale Enterprises GOPDC - Ghana Oil Palm Development Corporation SOE - State Owned Enterprise GPHA - Ghana Ports and Harbors Author'ty SSNIT - Social Security and National Insurance GPT - Ghana Ports and Telecommunications Trust GRC - Ghana Railway Corporation TDC - Tems Development Corporation GWSC - Ghana Water and Sow-isag- Corporation TOR - Te-ms of Reference IDA - International Development Association TRP - Transport Rehabilitation Project IFAD - International Fund for Agricultural TSC - Technical Services Center Development UNDP - United Nations Development Program ILO - International Labor Organization URADEP - Upper Region Agricultural Development JSS - Junior Secondary School Project MFEP - Ministry of Finance and Fconomic USAID - United States Agency for International Planning Development WSRP - Water Sect r Rehabilitation Project 1/ A dual exchange rate system was established on September 19, 1986 when a foreign exchange auction was instituted for specified transactions. The t90 rate applied to the first window (cocoa and residual oil exports, petroleum and essentia! drugs imports, and central government debt service contracted before January 1, 1988); 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 merging in the weekly auction. In the week ending November 3, 1989 the marginal rate at the auction was 0289=US31.  FOR OFFMCIAL USE ONLY GHANA: PUBLIC EXPENDITURE REVIEW 1989-91 Table of Contents Page No. SUMMARY OF MAIN RECOMMENDATIONS . . . . . . . . . . . . . I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 II. MACROECONOMIC FRAMEWORK ... . . . . . . . . . . . . . . 2 A. Overview ... . . . . . . . . . . . . . . . . . . . . 2 B. Resource Availability ... . . . . . . . . . . . . . 2 C. Expenditure Trends . . . . . . . . . . . . . . . . . . 5 III. ALLOCATION ISSUES . . . . . . . . . . . . . . . . . . . . 6 A. Civil Service Wages . . . . . . . . . . . . . . . . . 6 B. Recurrent Expenditure on Goods and Services . . . . . 9 C. Subventions . . . . . . . . . . . . . . . . . . . . . 11 D. Capital Investment Levels and Allocation . . . . . . . 14 IV. IMPLEMENTATION ISSUES . . . . . . . . . . . . . . . . . . 21 A. Norms and Recurrent Expenditure Allocations . . . . . 21 B. Discrepancies Betwef Program and Actual PIP Expenditure . . . . . . . . . . . . . . . . . . . . 22 C. Supercore . . . . . . . . . . I . . . . . . . . . . . 25 D. New Projects . . . . . . . . . . . . . . . . . . . . . 26 V. SECTORAL REVIEWS . . . . . . . . . . . . . . . . . . . . . 28 A. Overview . . . . . . . . . . . . . . . . . . . . . . . 28 B. Agriculture . . . . . . . . . . . . . . . . . . . . . 28 C. Manufacturing . . . . . . . . I I . . . . . . . . . . 50 D. Mining . . . . . . . . . . . . . . . . . . . . . . . . 60 E. Water Supply . . . . . . . . . . . . . . . . . . . . . 68 F. Transport . . . . . . . . . . . . . . . . . . . . . . 78 G. Posts and Telecommunications . . . . . . . . . . . . . 88 H. Highways . . . . . . . . . . . . . . . . . . . . . . . 94 I. Works and Housing . . . . . . . . . . . . . . . . I . 102 J. Education . 1 . . . . . . . . . . . . . . . . . . . . 111 K. Health . . . . . . . . . . . . . . . . . . . . . . . . 125 This report is based on the findings of a core mission that visited Ghana in November 1988 and a follow-up mission in February 1989. The core mission consisted of Stephen Mink (Task Mautager), Isabelle Tsakok (Agriculture), Benson Ateng (Manufacturing), Erol Haker (Cons. - Infrastructure), Rogati Kayani (Telecommunications), Thampil Pankaj (Roads and Highways, Transport), Nicholas Bennett (Education), David Berk (Health) and Long Ton (Macroeconomic framework). Jim Moose (Mining) contributed from Headquarters. Cristina Perez and Tania Hollestelle provided secretarial support. This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties Its contents may not otherwise be disclosed without World Bank authorization.  INDEX OF TABLES Table Page No. II. Macroeconomic Framework Table 2.1 Actual and Projected Revenue Performance, 1984-1991 . . . . . . . . . . . . . . . . . . . . . . 4 Table 2.2 Allccation of Government Expenditure, 1985-1991 . . . . . . . . . . . . . . . . . . . . . . 6 III. Allocation Issues Table 3.1 Civil Service Wage Bill - 1989 Policy Scenario ... . . . . . . . . . . . . . . 8 Table 3.2 Relation of Recurrent to Development Expenditure, 1985-1989 . . . . . . . . . . . . . . . . 11 Table 3.3 Budget Allocations, Recurrent Items 2-5 for Selected Ministries, 1987-89 . . . . . . . . . . . 12 Table 3.4 Recurrent Budget Subventions, Economic Classification, for 1988 . . . . . . . . . . . . . . . 13 Table 3.5 Recurrent Budget Subventions, Economic Classification, for 1988 . . . . . . . . . . . . . . . 14 Table 3.6 Public Investment Programme, 1989-1991 . . . . . . . . . 15 Table 3.7 Comparison of PIP and Macromodel Development Expenditure, by Funding Source 1989-91 . . . . . . . . 16 Table 3.8 Investirent and Savings, by Public and Private Sectorq . . . . . . - . . . . . . . . . . . la Table 3.9 Capital Expenditure by Sector, 1987-89 . . . . . . . . . 19 IV. Implementation Issues Table 4.1 Public Investment Program, Program Actual Expenditure, 1987-88 . . . . . . . . . . . . . . . . . 23 V. Sectoral Reviews B. Agriculture Table 5.B.1 MOA Recurrent Budget, Disaggregated by Expenditure Items Approved and Provisional Estimates, 1987-89 . . . . . . . . . . . . . . . . . . . . . . 32 Table 5.B.2A Forestry Department . . . . . . . . . . . . . . . . . 35 Table 5.B.2B Forestry Department . . . . . . . . . . . . . . . . . 35 Table 5.B.3 Proposal for Short-Term Rehabilitation Needs for the Departments of Extension, Animal Health and production, and Fisheries . . . . . . . . . . . . . 38 Table 5.B.4 Fertilizer: Retail Prices, Scale of Imports and Budgetary Requirements for Local Handling for 1989 Crop Year . . . . . . . . . . . . . . . . . . . 39 Table 5.B.5 Public Investment Programme 1989-1991 . . . . . . . . 41  Page No. C. ManufacturinA Table 5.C.1 1987 End of Year PIP Financial Disbursement Report (Industry).54 Table 5.C.2 1988 PIP Mid Year Financial Disbursements.55 Table 5.C.3 Public Investment Program=e 1989-1991.56 D. Minina Table 5.D.1 Public Investment Programme 1989-91 .63 E. Water Supply Table 5.E.1 Project Costs, Funding Gap, Execution and Cost Inflation in the 1989 Multi-Year PIP .71 J. Education Table 5.J.1 Public Investment Programme 1989-91 .113 Table 5.J.2 Budget Hearing for 1989 Estimates Agreed Levels of Recurrent Expenditure .119 K. Health Table 5.K.1 Public Investment Program in Health .126 Tabl^ 5.K.2 MOH Recurrent Budget 1989 .130  INDEX OF ANNEXES Page No. IV. Implementation Issues Annex IV.1 Supercore Projects for 1989 . . . . . . . . . . . . . . 27 V.E. Water Supply Annex 5.E.1 Public Investment Programme 1989-91 . . . . . . . . . 77 V.F. Transport Annex F.1 Public Investment Program 1989-91 . . . . . . . . . . 85 V.G. Post and Telecommunications Corporation Annex 5.G.1 Public Investment Program 1989-91 . . . . . . . . . . 93 V.H. Highway Annex 5.H.1 Public Investment Programme 1989-91 . . . . . . . . . 100 V.I. Works and Housing Annex i.I.' Public Investment Prograrme 1989-91 . . . . . . . . . 110 V.K. Health Annex 5.K.1 Public Investment Programme 1989-1991 . . . . . . . . 132 Map of Ghana  Summary of Main Recommendations 1. This Public Expenditure Review was undertaken to assist the Government in its annual budget preparation. A number of recommendations made at earlier stages of the review have already been addressed by Government prior to the writing of this summary 1/. The focus in this summary is thus on issues that are still outstanding or which, because of their complexity, will need consistent and concerted attention over a number of years to be dealt with effectively. 2. This report builds upon the base of annual Bank reviews undertaken since 1985. The core work for the present report was undertaken during November 1988 in close collaboration with the Ministry of Finance and Economic Planning (MFEP) and the sector ministries and agencies. A smaller, follow-up mission took place in February 1989 once the Bu,get had been finalized. The report contains recommendations on expenditure allocation issues, implementation constraints, and detailed sectoral issues. Allocation Issues 3. Civil Service Compensation. The Government is pursuing two objectives in civil service compe-sation policy, to at least maintain real wages and to target additional increases at management and technical grade levels in order to retain and attract quality staff. The civil service compensation increase for 1989 is a successful step towards these two objectives. It consists of across-the-board increases in basic wage and flat allowances, as well as stretching of the pay scale through additional graduated increases, such that about 28Z of the distance to the target pay structure has been covered. The Government is encouraged to continue following this prudent strategy, that should permit achieving the target pay structure within two more years, subject to overall resource availability and macroeconomic stability. 4. Other Goods and Services. The 1989 budget makes commendable but 1 still partial progress in allocating sufficient resources to non-wage goods and services. The use of expenditure norms for the first time in drafting recurrent budgets for three key ministries has given a preliminary indication of the recurrent resource .ortfalls that need to be met through a shift in allocation of existing and orthcoming growth in resources. The Government will need to continue givir., this issue priority over the next several years until the balance between wage and non-wage recurrent expenditure is appropriate. 5. Investment. In the aggregate, the planned level and composition of public investment are consistent with the Government's growth strategy. One area of concern, however, is the significant difference in the relative shares of donor and Government financing of investment in a number of sectors. At present these divergences result more from donors and Government having different priorities than from a careful coordination of total resources by Government. It is recommended that Government improve the allocation of donor finance through clearer articulation of public investment objectives, and stronger guidance of donor interests. 1/ This document incorporates information and data available through February, 1989.  - ii - Recognizing the limits of donor flexibility, however, the Government will need to improve its capacity to manage and balance total resources, such that it's own resources can be allocated strategically to sectors where there is inisufficient donor interest. For this reason, it is important that donor-financed investment be fully integrated into the budget process. Implementation Issues 6. Recurrent Expenditure Norms. The use for the first time of expenditure norms for non-wage recurrent items in preparing the 1989 budget was a qualified success upon which improvements can be built. The immediate priority is for the MFEP to review and refine the existing norms for the next budget exercise, on the basis of experience already gained during budget hearings and the norms' initial application. Filling gaps between actual and optimal recurrent expenditure that are identified through applying the norms should be a priority with incremental resources. As resource growth permits, norms should also be developed for higher education, the Ministry of Roads and Highwavs, and the Ministry of Works and Housing for use in preparing the 1990 lget. 7. Application of the budget nor.s needs to be accompanied by an estimation of recurrent expenditures that are being covered by externally- financed projects. In the initial years of applying the norms, the implied budget requirements for Agriculture, Health and Education are expected to be substantially greater than can be financed out of the Government's revenues without undesirable cuts in other ministries' recurrent budgets, or in capital expenditure. But donor resources for proiects currently cover some recurrent costs, and by specifying these and accounting for them during budget preparation, the Government will be more able to meet the budget norm targets while allocating its own resources more rationally. Over the medium term, it would be preferable to meet recurrent costs out of the Consolidated Fund rather than project resources, and this is attainable through continaed growth of tax revenues, better cost recovery, and through additional savings on the wage bill resulting fzom the civil service redeployment program. 8. Monitoring Investment Expenditure. There is concern about undermining of the Public Investment Ptogramme (PIP) caused by the discrepancy between programmed and actual expenditure. The reasons for the differences are multiple, and there is no easy solution. The Government recognizes the seriousness of the problem and has already begun to take action on several cf the necessary actions for improving management of investment expenditure: (a) re-establish a control mechanism to prevent commitments beyond available resources; (b) ensure that the PIP document's definition of resource allocation by project is translated into the Budget Division's allocation by account number. It should become obligatory that the project proposals that ministries submit to the PIP Task Force include a breakdown by Items 7-9, and by existing account numbers for projects already underway; (c) restructure 'umbrella' projects that consist essentially of multiple, but similar, sub-projects (school or health station  - iii - construction) into separate, phased projects, emphasizing initially those sub-projects which can be completed quickl: (d) to facilitate monitoring, provide more detail on projects' component costs in the PIP document, and improve cross- referencing of approved project and tender documents; (e) improve the preparation of sectoral capital budgets by providing ministries with indicative capital expenditure guidelines for their use in preparing draft budgets; (f) review the role of Architectural and Engineering Services Corporation to determine how to re-establish in the public sector a competent, efficient and professional mechanism for project design, documentation, implementation and monitoring; 9. Supercore. The supercore mechanism, designed to protect a set of key projects from disruption caused by fiscal shortfalls, is becoming less useful as fiscal management improves. It only begins to define priorities once there is about a 702 shortfall in Government resources available for capital expenditure, but provides no guidance for managing less critical expenditure adjustments. Consideration should be given to implementing by 1991 a more flexible mechanism for coping with current year resource shortfalls or increases. This would involve categorizing all investment projects into several levels of priority. Lowest priority projects would be the first to be pared down, and the last to receive additional funds, if resource availability differs from projections. To establish this ranking, each Ministry should be renuired to provide a priority categorization along with the investment program that ic submits for budget review, which would then be compiled for management by the MFEP. 10. New Projects. The selection criteria for inclusion of new projects in the PIP need more rigorous implementation. The 1989-91 PIP contains 62 new projects, or nearly 202 of the total, with many of these only consisting of feasibility studies for projects whose justification has yet to be established. In addition, many on-going projects are de facto new projects because of such substantial changes in scope and cost that they scarcely resemible the projects originally approved. It is recommended, firstly, that a "Studies" category by used in sectors' investment portfolio, into which would be placed all projects which are still ir. the preparatory stage, thus clearly identifying them as requiring review and approval by the MFEP's Project Seleceion Committee. Secondly, guidelines need to be established for defining when alterations in the scope of existing projects are substantial enough to warrant review as a new project. Sectoral Issues 11. The reader is referred to the sectoral reviews of the main report for detailed recommendations. Several recurring themes are grouped in the following paragraphs. 12. Recurrent Budget Constraints. Strict application of recurrent expenditure norms is impractical in the near term because of resource constraints, but there are options for interim solutions during the transition to improve recurrent allocations. For instance, instead of all  - iv - students getting a full sct of text books, costs could be reduced by small groups of students shaving sets, or several sets being kept in a school library. Such interim solutions need to be identified and implemented. 13. Proiect Phasing. Over-optimistic project phasing in several sectors has led to divergences between planned and actual investment expenditure. Phasing should reflect the actual performance of implementing agencies in recent years. Also, in sectors benefitting from a rapid build- up in donor commitmerts, attention needs to be paid to ensure that there is a translation of these secured commitments into actual disbursements. 14. Investment Management. It is recommended that a number of projects should not be implemented until management arrangements are clarified. This typically entails concluding agreements with joint partners or management teams. The key projects involved are the air freight terminal (CAA 002), State Gold Mining Corporation rehabilitation (MNG 007), Ghana Consolidated Diamnonds rehabilitation (MNG 004), and GIHOC Steelworks (INDC 003). In the case of projects in the postal sector, improving the management of Ghana Posts and Telecommunications Corporation is crucial, and should be an antecedent to any ambitious investment program. 15. Problem Projects. Several projects that have been raised in the context of the PIP are both large-scale, and of ambiguous economic merit, such that their justification remains to be demonstrated. First is the Keta Coastal Protection Project (WH 016), which is discussed in some detail in Chapter V, Section I. The second is the Koforidua component of the Water Supplies for Pegional Capitals Project (WRT 005), which only in its scaled down version would be consistent with the Government's sectoral strategy. Future Directions 16. During the course of work on this PER, two issues surfaced as important topics for analysis and improvement in future budget preparations: strengthening of intersectoral links in setting expenditure priorities, and better analysis of future recurrent cost requirements of new investment. Increased attention is being paid to intersectoral links in discussions between the Bank and sector ministries, for example coordinating feeder road and agricultural developmeut strategies, or rural electrification and small scale industry promotion Underexploited complementary strategies need to be more consciously built into the PIP. Turning to the second issue, the incremental recurrent costs of new investment is crucial, since unless they are met, the investment strategy will not be sustainable. The Bank proposes, if Government agrees, to study these two issues.  GHANA PUBLIC EXPENDITURE REVIEW (1989-91) I. INTRODUCTION 1. Since 1985, the World Bank has conducted annual public expenditure reviews as part of its dialogue with the Government on the direction of the structural adjustment program. During this period, the Government has made substantial progress in reconstructing the planning and implementation components of the budget process that had become fragmented in previous years. An indication of the importance that the World Bank attaches to continuing this progress is the range of work that it is carrying out that directly relates to the budget process. This Public Expenditure Review (PER) is a companion document to these other efforts, and does not attempt to deal in depth with issues that are covered in them. The macroeconomic framework for this PER is presented in detail in the recent Country Economic Memorandum (January 23, 1989). Budget resource availability is addressed in Ghana: Tax Policy and Administration, An Agenda for Further Reform (forthcoming). 2. Fundamental institutional improvements remain to be made in the preparation of the budget despite substantial advances in the last several years. Improvements have come through establishment of budgeting on the basis of norms for non-wage recurrent expenditure, strengthening of investment budgeting through the work of the Public Investment Programme Task Focce (PIPTF), establishment of a project selection committee, and in recognitiorn of serious crl-oblems in expen.!iture control and monitoring, creation and staffing of a monitoring unit within the Ministry of Finance and Economic Planning (MFEP). Other problems include inadequate integration into the budget and management ot external donor assistance, lack of use of the final budget to guide spending by sector ministries, existence of a parallel system of expenditure controls operated by the Controller and Accountant-General (CAG), and lack of control over expenditure commitments. These institutional issues are fundamental to the establishment of an effective budget, but are only addressed selectively in this report since a separate Bank initiative is treating them comprehensively. 3. The following review is divided into four sections. The macroeconomic context for the budget is outlined in the first section. The second section focuses on allocation issues across the civil service wage bill, recurrent expenditure on other goods and services, subventions, and capital expenditure. Implementation issues are addressed in the third section, specifically, the use of recurrent budget norms, discrepancies between programmed and actual PIP expenditure, the superccre, and treatment of new projects. Detailed reviews of sectoral budgets comprise the last section. These each deal with the investment budget, while for the three key expenditure ministries - agriculture, health and education - there is also a review of recurrent expenditure.  -2- II. MACROECONOMIC FRAMEWORK A. Overview 4. Since the Economic Recovery Programme was put on track in 1983, management of budget aggregates has reduced the 'narrowv budget deficit (which excludes project costs covered by external financing) of 2.72 of GDP in 1983 into a modest 0.3Z in 1987. This success has resulted primarily from a dramatic recovery in tax revenues, while keeping expenditure growth under control. Along with increased domestic resource availability, a higher level of external assi3tance for development projects has enabled public capital expenditure to increase from only 2.5Z of GDP in 1984 to 7.82 in 1987, and an estimated 8.3Z in 1988 1/. This higher level of assistance notwithstanding, the program of increased public expenditures should be sustainable over the medium term. Both domestic and external public debt-service payments are expected to decline in the near term; net liabilities to the banking system are expected to fall gradually and the emphasis on increased external concessional financing is expected to lead to a lower external debt-service burden. Note that the "broad' definition of the budget deficit, which includes capital expenditure funded by external donor resources, in addition to that funded from domestic resources, has increased from 3.12 in 1984 to 5.5X, which reflects this improved availability of external resources. B. Resource Availability 5. Revenues (comprising taxes, fees, and investment income) have recovered from a low of 5.52 of GDP in 1983 to 14.1Z in 1987. They have since fallen somewhat to an estimated 13.42 in 1988, mostly due to a decline in cocoa tax revenues. From the 1983 low point, the implementation of a first phase of tax policy reforms and strengthening of tax administration, and adoption of a more realistic exchange rate, have contributed to the growth in revenues. 6. The Government is engaged in a multi-year effort to reform the tax system to meet multiple objectives of the Structural Adjustment Program. In general terms, the tax reforms aim to broaden the base of revenue collection, while minimizing distortions to private savings and investment and improving the efficiency with which resources are allocated. The reforms, which include both policy changes and administrative strengthening, are expected to permit some improvement in the level of revenue generation. But a balance is being struck over the next several 1/ Accounts of public enterprises are insufficient to permit full incorporation into public accounts. Thus public investment in this document only includes that portion of state enterprise investment that is directly financed from budget resources or external donor assistance. State enterprise investment that is financed from commercial borrowings or own funds remains categorized as private investment until improved accounts permit a consistent incorporation into public accounts.  - 3- years between reforms enabling a quick generation cf higher tax revenues, and those that, although not imiediately contributing to improved revenue collections, dre expected to benefit the economy over the longer term through their positive impact on the private sector. 7. Management of budget aggregates over the next several years will have to cope with continued slow growth of Government revenues in comparison to the rapid gains over 1984-86. This period of rapid recovery in budgetary resources is being followed by a period of consolidation and restructuring of the tax system, during which growth of revenues will occur more slowly. Revenues are expected to recover slightly in 1989 to 14.1Z of GDP, and subsequently to 16.12 by 1991 (see Table 2.1). 8. Consolidation is necessary because the Government is confronting a squeezing of export tax revenues from cocoa (a fifth of revenues in 1987) over the medium term as a result of declining international prices and the Government's policy of raising cocoa farmers' share of the world price. Other tax sources - primarily petroleum and sales taxation - will generate additional revenues, and provide the budget with a more stable resource base than in earlier periods when cocoa was the most important, but also volatile, source of tax income. But for several years it will be difficult to substantially increase overall revenues since gains in other tax performance will be offset by the falling share of cocoa export tax *evenues. 9. A principal feature of the ongoing tax reform is to expand revenue generation from consumption taxes, while de-emphasizing taxation of trade. Sales tax rates were raised in 1988 and simultaneously consolidated across domestically-produced and imported goods. Further, the Covernment is concerned to improve the efficiency of sales tax administration, and is exploring options for improving its current "ring" system which suspends taxes on purchases by registered producers, or replacing it with a credit system. Apace with improvement in the coverage and administration of the sales tax, the Government intends to reduce the standard rate of sales taxation, which was brought down to 22.5Z for 1989 from 25Z the previous year. 10. The Government is also gradually increasing petroleum and vehicle taxation to generate additional revenues, as well as to contribute towards improved recovery of the social costs of road use. The petroleum excise tax, introduced in 1986, is about 92 of tax revenues in 1988, and is expected to contribute an even larger share over the next several years. For passenger motor vehicles, sales taxes are being raised, while import duties and the purchase tax will continue to apply to vehicles above a specified engine capacity. 11. The contribution of direct taxes towards total tax revenue is expected to decline marginally just over 27Z of total tax revenues. Although the Government is continuing with a phased reduction of marginal tax rates on personal income, implied revenue losses are partially compensated for by expansion of the tax base. Progress continues to be made towards inclusion of various types of cash and in-kind benefits that remain tax-exempt or under-valued. Poor coverage and collection of income  -4- tax from the self-employed is also being remedied through more aggressive identification and collection administration by the tax authorities. Table 2.1 GHANA: ACTUAL AND PROJECTED REVENUE PERFORMANCE, 1984-1991 1984 1986 1998 1907 1988 1989 1990 1991 --------Projctod--------- million codi Taxes on Income and Property 4126 6079 14121 24087 40614 47656 68573 65617 Porsonal 1656 860 5242 8129 11697 12466 16396 21247 Company 2402 4628 8296 14381 27649 33140 37831 41751 Other 73 371 684 1677 1768 2066 2346 2620 Taxes on Domestic Production and Consumption 56e2 8365 23486 31417 48629 70669 91421 115389 Excise Duty 5121 7206 9866 13221 14891 22736 26393 29471 Sales Tax 441 le6 6820 12648 21893 32435 386e8 46701 Petroleum Tax a 6 68o6 4878 11450 15609 26920 38605 Other 6 0 390 770 396 480 547 611 Taxes on International Transactions 7668 16490 23819 39260 46079 44983 57493 59268 Import Duties 3159 7629 9868 12412 15615 20387 26091 26168 Export Cocoa Duty 4509 8881 13961 26838 24464 24576 32402 33091 Non-Tax Revenues 6792 10139 18909 28763 37788 64033 73397 81821 Income and Fe-s 3798 6562 7560 10111 13016 18144 20187 22620 Grants 1994 3677 11369 18842 24772 46889 63230 69301 Total Tax Revenues 17366 32934 61406 94764 129222 163278 206486 240286 Total Tax, Income and Fee Rev. 21163 39496 68965 104885 142238 181422 226563 262786 MEMO ITEMS: (As X of GDP) Tax Revenuis 6.61 9.7X 12.2X 12.71 12.2X 12.7X 14.06 14.71 Tax, Income I F-e Rev. 8.6x 11.61 13.6x 14.11 13.41 14.11 15.41 16.1% (As X of Total Tax Revenue) Direct Taxes 23.81 24.6X 23.6X 26.4X 81.4X 29.2X 27.5X 27.3X Sales Tax 2.65 3.65 10.81 18.2X 16.9x 19.91 18.81 19.41 Cocoa Tax 26.6x 26.91 22.7X 28.31 18.91x 1.1 15.8X 13.81 -- - - - - -- - - - - --- - - - - - - - - - - -- - - - - - - --_- --- --_ - _ ----- _----- - - - - -- - - - - - Source: MFEP, and Bank Staff projections, March 1969. 12. Trade taxation in the future will be contributing less towards total revenues. The Government began a phased restructuring of import duties in 1988 to create a lower and more uniform pattern of protection. This is intended to encourage the development of non-traditional exports and efficient import-substitution industries. The reform involves lower standard rates and elimination of the luxury import duty rate, since this role is being transferred to sales and excise taxation. In addition, the gradual elimination of special import taxes, which provide temporary protection to key economic sub-sectors with constraints to adiustment, is under review, but may also entail some reduction in revenues over the next several years. 13. The scope for improving domestic resource mobilization through cost recovery in the provision of public services is as yet unclear. By  law, public moneys collected as fees by Government agencies must be paid into the Consolidated Fund, and should be recorded as such by the CAG. In practice, collection and recording of fees by agencies had become inconsistent with the prescribed mechanisms. In addition, revoLving funds under the control of several ministries were created as a means to circumvent difficulties in assu:ing timely allocations out of the consolidated Fund. Further, some fees have not been adjusted to take into account i:flation, and are not generating even the revenues they once were in real terms. To address these issues, the National Revenue Secretariat has initiated a preliminary review and analysis of fee revenues, and may soon have an information base sufficient to undertake a more thorough investigation of their potential contribution to Government resources. 14. With respect to foreign resources, these are expected to continue playing an important role in financing public investment. Public investment is projected to increase to 112 of GDP by 1991, with over half of this to continue being financed by foreign resources. Reliance on external assistance at this level is consistent with probable aid flows reconfirmed at the meeting of the Consultative Group for Ghana in February, 1989. Although such recourse to external resources in recent years has already led to a significant increase in the stock of debt, the outlook is for a moderation in the debt service burden. The debt service ratio, after a temporary rise to nearly 70 percent in 1988, is projected to ease to 52 percent in 1989, and further to 25 percent by 1991. This favorably trend is due to (i) reduction of medium-term obligations that were used in the past to finance petroleum, (ii) a significant decline in debt service due the IMF as ordinary resources are replaced by ESAF, and (iii) an increased share of debt at concessional terms in total obligations. The assumption of additional foreign debt to support the Government's expenditure program thus does not create too great a debt-service burden, and is an appropriate funding strategy for the development program. This is unlikely to change in the medium term as improvements in domestic resource mobilization are expected to keep debL-service levels to manageable proportions. C. Expenditure Trends 15. Government expenditure (narrow budget definition) during the Economic Recovery Programme has undergone substantial growth as well as changes in compusition. Total outlays jumped from 1OZ of GDP in 1984 to about 14Z in the next year, then stabilized at this level, with another increase to 15.32 projected in the 1989 Budget (see Table 2.2). Initially, most of this increase was absorbed in recurrent expenditure for the wage bill, which grew form 19Z expenditure ir 1984 to 362 in 1986, as the Government attempted to reverse years of erosion in the real wages of civil servants. Although capital expenditure also increased its share of expenditure, the share of goods and services more than halved to about 172 of expenditure. Since 1986, the Government has managed to gradually shift the balance between recurrent and capital expenditure, with the latter increasing to almost 24% of total expenditure in 1988. This has been accomplished by keeping a prudent rein on additional wage increases, by stabilizing the share of non-wage expenditure on goods and services, and through the benefit of a substantial reduction in the burden of interest payments.  -6- Table 2.2 Allocation of Governmnt Expenditure, 1986-1991 (U) 1964 1986 19" 1987 19U 1989 (0et.) Budget (1) Current Expenditure 84.9 80.1 83.0 75.8 74.1 72.0 Wages 19.2 30.2 35.7 33.6 a3s. 32.2 Goods A Services 39.6 27.0 17.1 17.4 17.6 16.9 Transfere A Subventions 18.7 12.3 14.7 14.6 16.5 14.9 Interest 12.5 10.6 1656 9.9 6.0 8.1 (2) Capital Expenditure, Governmnt Financing 16.1 19.9 17.6 21.9 23.9 25.6 (3) Special Efficioncy 6.6 6.6 6.e 2.8 2.0 2.3 Memo: Gov. Expenditure (1+2.3), X GDP 10.1 14.6 14.3 14.3 14.4 16.4 Cap. Expenditure, Donor Financing, X CDP 0.9 1.4 4.8 4.7 4.4 5.6 Source: MFEP, Bank staff estimates 16. Within recurrent expenditure, there is pressure to increase both civil service wages and non-wage expenditure on goods and services. Management level civil servants are still paid salaries well below levels found in the private sector and compared with historical levels. This remains a central issue for Government, which in addition to the 30Z nominal increase in basic wages effective Jaruary 1988, has granted two additional "bridging allowances' averaging 12.52 (June) and lOZ (November). The pace of increasing real compensation of civil servants is a critical issue, not only its own right, but because it constrains the scope for progress in financing operations, maintenance, and capital expenditure. Current expenditure on non-wage goods and services, remains on the whole quite inadequate to provide civil servants with the means to carry out their functions, and has yet to recover from its substantial reduction in real terms in 1985 and 1986. The introduction of detailed recurrent budget norms for preparation of the 1989 budget has improved the mechanism for estimating requirements, and has permitted moce prudent budgeting. Determining the appropriate level of allocations to non-wage recurrent expenditure remains an important 'ssue for the future, however, since refinement of the norms will need to be undertaken, and the implications of capital expenditure for the recurrent budget incorporated into budget planning. III. ALLOCATION ISSUES A. Civil Service Wages 17. Wage policy for the civil service for 1989 continues to pursue two principal objectives. One goal is to at least maintain the real level of civil service wages through across-the-board increases that offset inflation. Towards this objective, there was a general 30Z increase in civil service wages granted effective January 1988. In addition, the  - 7 - Government recognizes that additional increases will need to be provided for management and technical grade levels in order to compete with the private sector for the quality managers .ieeded for the complicated programs being undertaken in the public sector. Progress in these two areas is constrained within the wage bill cap of 5.52 of GDP agreed as part of the macroeconomic program for 1989. 18. Increasing the relative pay of higher-level civil servants is a sensitive and not always consistently pursued objective, since it is difficult to embrace for a revolutionary government that champions the common laborer in its development strategy. Thus, a July 1988 compensation increase ("bridging allowance') was granted that entailed a minor compression on wage relativities, even though Government had officially reviewed and accepted a study that recommended an increase in the ratio of top to bottom compensation packages from 5.7:1 (as in 1986) to a target of 13:1. This mid-year adjustment consisted of a non -taxed 15.2Z increase of basic wage for the lowest grade level, falling to a 72 increase for the highest level. There was an additional increase in compensation granted in November 1988, of an effective 10% annual rate applicable to all grades. 19. The pace with which the two pr'.Acipal wage objectives can be achieved is partly linked to the Government's success in identifying and redeploying civil servants in excess of needed staffing levels. Unfortunately, despite fairly substantial gross redeployment, not much has been achieved on a net basis because of new hirings. The October 1988 payroll shows 282,788 public employees (exclusive of security services and defense personnel) as compared to 280,788 in January 1989. Since this net reduction of 2,000 occurred during a period when approximately 8,000 civil servants were redeployed, the implication is that 6,000 new employees have been engaged. It appears that redeployment has occurred almost entirely in unskilled labor grade levels, while new hirings have been among professional levels. In addition, routine promotions during the year have shifted the civil service structure to higher pay levels. These structural changes in the civil service payroll result in an increase in the wage bill despite the net reduction in employees, and before consideration of any increase in individuals' compensation. The change in structure has thus made more difficult further achievement of the twin objectives of a general wage increase and decompression in the 1989 budget. A large share of the approximately 6,000 new hirings during 1988 have been by the Ghana Educational Service (GES), despite an official cap on its hirings. Hiring by the GES needs urgent review, and discipline improved if progress towards priorities of civil service wage policy are to be achievable. 20. Limitation of the wage bill to 5.52 of GDP will permit only partial achievement of decompression targets in 1989. But an important first step can be taken, and as part of a phased program over 2-to-3 years should permit full achievement of this target. Three scenarios of the civil service wage bill are explored in Table 3.1 to show the trade off between general wage increases and increase that are structured to allow for decompression. All three scenarios assume thas the mid-1988 compensation increase is incorporated into the basic wage structure, including an additional amount sufficient to just cover the tax and social  security obligations incurred once this is done. The November compensation increase is not taken into account, however. 21. In Scenario I presented in Table 3.1, progress of over 70Z towards the decompression targets could be accomplished in 1989 in conjunction with an additional 1OZ across-the-board increase, while still remaining under the cap of 5.5Z cf GDP. With a 20Z across-the-board wage increase, the scope for progress on decompression drops to about 40Z. Ablo 3.1 Civil Service Wage Bill - 1999 Policy Scenarios '. Percent of CDP ----------------------------------------------------------------------__-- : :: Additional 1989 Basic Pay Adjustment :Achievement :: 10X 1SX 206 zof Target -------------- -------------- --------------- :Decompression :: I II III I II III I II III :Ratio, X --------------------