Ghana - Economic memorandum 1967-1968

RELUSJD FOR THE EXCLUSrVZ USE OF Participants in the (3iaia Aid RESTRICTED Report No. AF-72 Meeting, February 20-22, 1968 _____ ____ ___* FILE COP Y This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be! published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION GHANA ECONOMIC MEMORANDUM, 1967-68 February 5, 1968 Africa Department  CURRENCY. EQUIVALENTS Until July 7, 1967 1 new cedi = US$ 1.40 1 dollar = NqZ 0. 714 These equivalents are sued in Chapters I, II and III A of the memorandum. From July 8, 1967 I new cedi = US$ 0. 98 1 dollar = NO 1. 02 For the purpose of comparability with the documentation prepared by the Government of Ghana balance of payments data in Chapter III B are in post-devaluation N$.  PREFACE The following memorandum is based on the findings of an economic mission which was in Ghana in November/December 1967. It has bteen compiled specifically for the Ghana Aid Meeting and is meant to supplement other documentation prepared by the Government of Ghana and the International Monetary Fund; it therefore omits certain aspects of Ghanaian economic performance which, though standard elements of the Elank's economic analysis, are covered in these other documents.  TABLE OF CONTENTS Page No. SUMMARY AND COICLUSIONSo..O...........*............ i I. The Economy in 1966-67................... 1 II. Development Prospects*9*****o*........... 13 A. Agricltr c... l t u re.*060060 13 B. Industry..........@.................... 19 C. l1e1967/68 Development Budget..,..... 26 III. Prospects for 1968... 96..0............... 31 A. The Import Program ......31 Be External Finaece 45 APPENDIX: Notes on Ghana's National Accounts  Sunmary and Conclusions 1. Ghana, after the change of Government in February 1966, is now looking back on almost two years under an economic policy designed to guide the economy from a severe crisis back to a basis from which sustained economic development could be resumed. This crisis was marked by exhausted foreign exchange reserves and inability to service the external debt, by plant made idle by lack of spare parts and raw materials, and by inflat- ion and falling standard of living. It called for a stabilization pro- gram during which private and public chiams on resources would be brought in,,, line with the domestic product and available long-term finance. Given the extent to which these claims had been allowed to get out of hand, such a program inevitably had to have a strong deflationary element. Judging from two years' experience, the Governxfent's courage and deterrnin- ation to carry out such a program, with its many unpopular features, has met with appreciable success. 2. Government finances have played a prominent role in the stabili- zation effort. Recourse to borrowing from the banking system was greatly reduced in the first year and in the current year should disappear as ordinary revenue, together with borrowing from statutory corporations and external sources, is expected to cover total expenditure. Of critical importance in this improvement were restrained current expenditures for which the rate of increase has been halved. Within two years the Govern- ment budget has thus been freed from inflationary financing. 3. Inevitably, economic stabilization had to a4ffect the country's investment effort,. In the past, this had been propelled towards over- ambitious targets in public investment with consequential sacrifice of sound investment criteria while private investment stagnated. By 1965, investment absorbed 25 percent of available real resources, while the sav- ings rate had sunk to 12.5 percent. Not only were resources outstripped by this rapid growth of capital formation but, equally disastrous, it failed to generate an appreciable impact on growth. Public sector invest- ment tripled in the period 1960-65, an expansion which could not possibly be matched by a similar increase in managerial talent. As a result, man- power shortages swiftly arose in project preparation, execution and manage- ment. A reduction of the level of investment during the stabilization period therefore had the two fold aim of reducing the over-expanded claim on resources and of bringing the level of public investment in line with the country's manpower resources. The quality of investment could be improved within a reduced total, because of the many non-viable programs in the public sector. This policy has been successful in reducing gross fixed investment by about 46 percent in the last two years, with both public and private investment sharing about equally in the reduction. 4. rThe restraint on Government expenditures and sharply reduced capital fo:rmation have helped Ghanats balance of payments, a third crucial element in the country's stabilization program. Long-term balance of payments prospects have been further improved by a 30 percent devaluation of the cedi in July 1967. Despite only moderately increasing exports,  - ii - largely a result of higher cocoa prices, the current account gap was reduced by two thirds within two years, chiefly by drastically restrict- ing imports in line with available foreign exchange. Drawings on the IMF and new long-term aid were substituted for suppliers' credits and the use of reserves, which had previously been the chief sources of external finance. The reduction in the overall level of imports was accompanied by improved allocation through chances -n licensing so t4at the supply of basic consumer goods, raw materials and spare parts was appreciably improved. Consequently manufacturing output was considerably increased ancl there was no obvious shortage of basic consumer goods. Prices stabilized in 1967 and, aided by a bumper food crop in that year, private consump- tion has been substantially improved by the stabilization effort. GDP in real terms, after only a marginal increase in 1966, may have grovm by 3 percent in 1967. 5. I^Jith the balance of resources basically restored and substantial long-term aid beginning to show its impact, the economy's development effort comes up for consideration again. As originally envisaged, the aims of the stabilization period were to be mainly achieved by the middle of 1968, after which the emphasis was to shift to development. Indeed, the major question now facing the economy is whether new investment can ble organized or, as far as private sector is concerned, encouraged to achieve economic growth, especially of agriculture and exports, while maintaining -the gains of stabilization and devaluation and paying due a-btention to continuing foreign exchange constraints. This is as much a question of economic policies as of available finance, and while recent success w7ith the latter may raise optimistic expectations for the future, the former, i.e. the reformulation and implementation of sectoral policies geared to economic growth, has been slower to develop than would appear to be desirable. 6. Agriculture, which is increasingly coming into focus as a key to economic development in Ghana, provides a good example. Though a bumper food crop in 1967 helped to mitigate the adverse effects of defla- tionary policies, this good crop appears to be partly the result of farmer response to attractive prices in the proceding years combined with increased rural population and better marketing facilities rather than the result of government policies and supporting programs. It is ques- tionable whether this initial upturn will be permanent. The possibility of unfavorable farmer response to the food price slump in 1967 and there- fore the reoccurance of short-term food shortage and high prices cannot be discounted. The Government has laid out the directions of future economic policy and, as far as agriculture is concerned, their objectives are reasonable. However, the implementation of these policies is lagg- irng. One reason is that the agricultural agencies are undergoing a basic reorganization while consolidating the large programs inherited from the past. However, if ministries fail to draw appropriate implica- tions from proclaimed policies and lag in organizing operational programs, priorities may be disregarded and the resumption of development can only be less successful than expected by Ghanaian authorities.  72'. Progress in industry has been more appreciably affected by G'overnment policy: firstly by the improved allocation of imports, which helped to bring about a sizeable increase of manufacturing out- put; and secondly, by the coming into operations of several state enter- prises which had either not yet been completed or were operating much below capacity due to inadequate management. Some state enterprises have been sold to the private sector, and foreign private participation was obtained for others. In addition several management contracts have bieen signed for state enterprises, and, with UN assistance, the State Dfterprise Secretariat is being converted into an independent holding corporation. W4hile the public sector is still preoccupied with remedial actions to bring its inherited enterprises into profitable production, the private sector is expected to assume a more active role in indus- trial investment. Although the increase in productive private invest- ment since 1966 has been rost encouraging, future growth will depend on policies directed at further improvement in the investment climate. 8. The 1968 import program drawn up by the Governrment of Ghana reflects policies to further increase production and reverse the 1966- 67 trend of declining capital formation while maintaining the achieve- ments of the stabilization effort. Imports of food and consumer goods have been further reduced from the 1967 level in the expectation that a substantial increase in domestic manufacturing output as well as another favorable food crop will allow a further improvement in per capita consumption. The import program makes no allowance for a dis- appointing food crop and the Government would be well advised to provide for contingency imports in order to counter inflationary tendencies which would inevitable arise in such a case. Imports of raw materials as suggested in the Government program would result in a growth of output which, in the judgment of the mission, would exceed the absorbtive capacity of the domestic market in 1968 particularly when the impact of devaluation is taken into consideration. The mission therefore suggests a lower level of raw material imports. Finally, imports of investment goods have been amply provided for taking into consideration the absorb- tive capacity of different investor groups. Such imports should allow a 25 to 30 percent increase in gross capital formatiorn. 9. In total import requirements add up to NT 350 million (post devaluation) under the mission's suggested program and NO 369 million urnder the Government program. Both import programs and the resulting balance of payments gaps reflect the status of the Ghanaian economy in which considerable progress towards stability has been made but whose future development effort is severely limited by a continued balance of payments constraint. 10. Cn the basis of the NO 350 million import program, net capital inflow requirements from aid to be committed in 1968 would be in the order of US$ 54 million - a level which Ghana can only attain if the disburse- mient rate is drastically improved, as seems likely. Again the major share of aid will depend upon new direct balance of payments support. In 1967, only 14 percent of external aid commitments was project aid, and although a higher share is likely to emerge in 1968 projects suitable for  - iv - external finance are only slowly emerging. Some statutory corporations have projects but the Government's efforts to build ulp a pipeline of projects has been slower than anticipated. The pipeline of projects will probably not be large enough to shift the nature of foreign aid from balance of payments support to direct project assistance of the country's development until the conclusion of several sector studies now being undertaken by consultants. 1i. Looking beyond 1968 a number of factors will influence the future direction of economic development. In the first place the effects of devaluation will be more fully felt in 1968 and subsequent years and future levels of exports and imports will depend upon the economy's reactions to the price changes imposed by devaluation. In particular, if devaluation will help to bring imports in line with avail- able resources, future increases in imports should begin to correlate with the growth of total output and liberalization of essential imports could begin to replace the present rigid import programming. Prospects for this will depend as much on the outcome of further debt rescheduling and continued aid inflow, as on further improvement of export performance. On the other hand, a permanent solution to the balance of payments depends upon achieving sustained growth in exports and productive import substitution; indeed, the rate of growth in this area will be an import- ant regulator of the pace of expansion of the economy. It will also be very important in 1968 to see to what extent demand constraint begins to influence the rate of expansion of manufacturing output and, equally important, if signs of revival in agriculture, which began to show in :1967, will continue in 1968 which would more clearly indicate that the stagnation of agricultural output has finally been overcome. Finally the Government's declared policy to promote private investment and in general the emergence of an investment climate will be important to observe, in order to judge if, while the public sector is preoccupied with reorganizing its development effort, the development impact of private investments will be able to play the role which it was planned to have under the original concept of Ghana's new econonic policies.  ECONCMIC MEMCRANDUM ON GHANA I. THE ECONOMY IN 1966-1967 Introduction 1. Soon after taking power in early 1966, the Government embarked on a program to stabilize the economy, avoiding, so far as this was possible, stagnation of economic growth. A brief restatement of the original stabilization with development strategy is necessary, both to provide a "bird's-eye" view of what the Government is seeking to attain, as well as a benchmark against which this report attempts to assess how well the strategy is working. The report also seeks to evaluate where achievements appear to be well-founded and lasting, or where further adjustments are necessary. 2. The new Government recognized that the economic situation in- herited in 1966 was such that deflation and retrenchment were unavoidable, but that its room for maneuver was limited. The Government sought to work on both supply and demand in restoring balance to the economy. On the demand side, there was scope for reducing both Government consumption and investment as there were many low priority expenditures and non- viable projects to be retrenched. However, they hoped that retrenchment would not go beyond the point where essential programs and staffs for future development and viable projects wouild be impaired. Private con- sumption and investment were more difficult because both had declined in real terms in the 1960's from the combined effects of stagnatirgdomestic agriculture and manufacturing output, severely restricted imports, rising prices, and sharply increased taxation. There was therefore little scope for further restraint of private demand. On the other hand, restor- ing public sector balance, even after retrenchment of expenditures, left little scope for substantial reductions in tax rates except where incen- tives could be created for agriculture and export growth. Priority was given in this respect, to increasing cocoa producer prices and reducing mining and timber taxes as soon as resource availability permitted. In any event, it was hoped that despite further reductions in non-food con- sumer imports, increased domestic output from undm.iutilized manufacturing capacities, plus increased food imports, would arrest the decline in private consumption. 3. -On the domestic supply side, the target was to achieve a quick increase in supply from existing capacities. The substantial under- utilization of industrial, mining and timber capacities provided signifi- cant scope if imports, even at reduced levels, were re-allocated to pro- duction. Resources made free by reduced Government programs were also to be re-allocated to private agriculture which, combined with price incen- tives and viable public programs, would, it was hoped, increase agricul- tural output. 4. The balance of payments was in a critical state with stagnant exports, a distorted pattern of imports, no reserves, an unmanageable external debt burden and accumulated arrears. The targets were in the short-run, to regain control of the balance of payments through resched-  - 2 - uling medium-term external debt, reducing imports and obtaining external assistance from the IMF and other sources. Over the longer-term, the targets were to create incentives for exports; reduce the import content of consumption, production and investment through improved allocation of both imports and economic resources, and an orderly reduction in arrears. As resources permitted, the next phase would be to build up reserves to minimum levels, and liberalize essential imports and the remittance of profits. 5. Phasing was important. The first round was basically retrench- ment of public sector expenditures and increasing domestic production. As equilibrium was being restored, it was hoped that resources could be found for an increase in productive private investment. In regard to public investment, the stabilization period was seen primarily as one of completing existing viable projects and preparation of new programs for future implementation. Only a few new projects that were necessary ad- justments to existing ones, such as electricity distribution, or very high priority ones, as in agriculture or exports, would be started during the stabilization period. Finally, when equilibrium was restored, the economy could resume increased investment. 6. The Government recognized that its strategy required continuous adjustment, as there were many economic unknowns that could not be fore- seen with any accuracy. Effective budgetary control had been abandoned by the previous Government and it was therefore uncertain where public expenditures could be stabilized without impairing essential programs and viable projects, and to what extent unemployment would result. How fast domestic output increased would influence import planning, employment, and public and private savings. The greatest uncertainties surrounded the balance of payments: how fast would exports respond to incentives and what would happen to cocoa prices; how much relief from external debt re- scheduling,, and how much new external assistance would be forthcoming? 7. TChe new Government inherited in addition a civil service that was seriously over extended by existing Government programs, and Government machinery characterized by multiple agencies, complex pro- cedures and impaired budget and administrative controls. This meant that the stabilization program had to be implemented while a major effort was being made to reorganize the machinery cX Government. This reorganization effort was especially important in the crucial policy areas available to Government for allocating resources: fiscal planning, coordination and control; program and policy management in the spending ministries; and import management. 8. Inevitably 1966 was a year of improvisations. Emergency re- views and adjustments were made to the inherited 1966 budget and import licensing program, but systematic expression of the stabilization policy could only begin with the budget of 1966/67 and the import program of 1967. Even then the economic leadership was heavily engaged with emer- gency measures like external debt rescheduling and attracting emergency external assistance, and therefore the scope for implementing the new stabilization policies was still limited given the administrative  capacities and time available relative to the magnitude of the tasks. It is fair to say that systematic implementation of new policies could only be more fully expressed in the 1967/68 budgets and the import programs of 1967 and 1968. Output 9. After stagnating in the 1960's supply of essential foodstuffs improved in 1966 and 1967. Price statistics indicate that in 1966 domestic agricultural production including fish catches increased slightly thiough not sufficiently to. arrest the-upward trend of local food prices that had prevailed since 1964. There tere no indicat,lons that 1966 domestic output increased more than population growth. However, the overall increase in the cost of living index which had been as high as 26 percent in 1965, was reduced to 13 percent because the total food supply benefited as much or more from increased imports of staple food, made possible by food assistance prograris, as from cdomrstic output. Food supply from imports increased even more than the recorded 10 percent increase in value because tho) composition shifted from high value to predominately lower valie st-sle fouds. Available str&tistics and in- formed opiniion agree, howme;ver, that in 1967 domestic food output and fish catch increased sie-nifilcp.ally: the doraestic food price index for the same period declined about 20 percent iin th.nt year. Food imports in 1967 are eitimated at about the same 'Level as 1966 so that increased food supply was primarily the result of increased domestic output. It is estimated that total agricultural production, excluding cocoa, may have grown by 7 to 8 percent in 1967. 10. AlJthougb. the ouality of data prevents reliable analysis, there are i.ndicaors t a; the increase of output in 1957 resulted as much from attra.zutive relatoiv3 food prines in 1965-1966, increased rural labor force and improved road transport as from weather. Increased labor resulted part'y from tJre return to farming of those ur