Ghana - Current economic position and prospects (Vol. 1 of 2)

FILE COPY AW6 lLE O lVol. 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMtENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE CURRENT ECONOMIC POSITION AND PROSPECTS OF GHANA (in two volumes) Volume I THE MAIN REPORT April 21, 1969 Western Africa Department  CURRENCY EQUIVALENTS 1 New Cedi US$0. 98 1 dollar NqZ 1. 02  PREFACE The present report is based on information collected by a Bank mission visiting Ghana during October and November 1968. Since then, additional facts have emerged and important policy decisions were taken which it was not possible to take into account in this report. HIowever, a brief up-dating memorandum setting out their major implications for the projections of Ghana's economic growth is being prepared and will be distributed at a later date.  CORRIGENDUM TO THE CURRENT ECONOMIC POSITION AND PROSPECTS OF GHANA (Report No. AW-6a dated April 21, 1969 in two volumes) Sose of the statistical appendix tables dealing with cocoa in Volume I have been revised in Volume II. The revisions are as follows: For Table 5 of Volume I, see Table 7 of Volume II. For Table 6 of Volume I, see Table 8 of Volume II. For Table 7 of Volume I, see Table 4 of Volume II. For Table 9 of Volume I, see Table 5 of Volume II.  -IjlE ORRIU . E;CONOMIC . C-T TI,.4. AN,D P110SPECTS OF GIANA TABLE OF CONTENT5 Page No. BASIC DATA SUMMARY AND CONCLUSIONS i - iv I. Introduction ........ ......... *.*................ ...... 1 II. Recent Economic Performance (1966-1968) .................. 2 A. Output and Investment .... .......................... 2 B. Domestic Financial Development ............. .......... 6 C. Balance of Payments .... . . .................... 12 D. Employment, Wages and Prices .............. ........ * . 15 III. Prospects in Major Sectors .................... 9-0........ 17 A. Cocoa ................ ** * ................. . ........................*. .. ......... 17 B. Agriculture ...... ....... .. 21 C. Forestry .............. ......................... ........ ............... 26 D. Manufacturing ........... ..... . 27 E. Mining ............................... 0.0........................ 31 F. The Overall Prospects for Growth .................. 32 IV. The Outlook for Investment and its Financing (1969-1973).. 36 A. Public Sector *.. .............. .................. 36 B. Private Sector .... ............. . ........ . *.** .... ... 40 C. IThe Prospective Balance of Resources .. .............. 42 V. Balance of Payments Prospects (1969-1973) .............. 43 A. General Strategy ............. .. .. . . ...... 43 B. Prospects for Exports and Imports .................... 44 C. Considerations for External Aid .... ......... 49 VI. The Longer term Outlook .................................. 52 STATISTICAL APPENDIX ANNEXES : A. The,'iro:rld Cocoa Outlook B. Population Growth and Characteristics ?YAP This report is based on the findings of a mission, which visited Ghana in COctober/November 1968. It consisted nf Messrs. Lyle M. Hansen, Nichola G. Carter, Werner Hammel, Plilip Hammond (Consultant) and Lcrne T. Saonl.rr  BASIC DATA Area: 92,100 square miles Population: 8.4hmillion; rate of growlth: 2.5-3.0 percent Gross Domestic Product: 1967 - at current prices: US$ 1,758 million 1967 - at 1960 prices: US$ 1,119 million GDP per capita 1967: at 1960 prices US$ 133.- at current prices US$ 209.- Rates of growth in real terms: 1960-63 Average 1964 1965 1966 1967 4.7 2.7 -3.4 0.3 3.6 Total Resources (in perce.nt) By source: Gross domestic product 95 97 89 94 97 Net import of goods and services 5 3 11 6 3 By use: Consumnption 81 78 78 89 84 Investment 19 22 22 20 16 Gross Domestic Savings (as % of GDP at constant prices) 14.3 19.0 12.5 115.3 13.0 GDP by Origin (in % - 1967): Agriculture 34 Forestry 5 Cocoa 8 Mining 3 Construction 4 Manufacturing 8 Fuel and Electricity 2 Services 32 Other 4  Government Finance: oTof GDP at current prices) 1967 Current revenue 13.4 Current expenditure 12.6 Saving .8 Capital revenue 2.8 Capital expenditure 4.2 Overall deficit 0.6 Tax Revenue: (% of GDP at current prices) 12.3 Balance of Payments: (Ur,$ million) 1965 1966 1967 1968 Exports 321.1 280.2 284.5 318.5 Imports (c.i.f.) 481.1 355.9 294.8 302.8 Trade balance -160.0 -75..7 -10.3 -15.7 Net invisibles -62.2 -54.3 -70.9 -73.4 Current account balance -222.2 -130.,0 -81.2 -57.7 Net private capital 85.8 52.8 25.7 25.2 Net public capital 48.8 47,0 19.6 18.5 Other capital (net) 41.8 -1.,0 -18.1 7.3 MF drawings -10.6 46.9 18.7 10.9 Change of reserves 56.4 -15.7 35.3 -4.2 (decrease +) International Reserves: (as of December 31, 1968) US$ 21.3 million IMF Position: (as of December 1968) Quota US$ 69 million Drawings outstanding US$ 87.2 million External Public Debt Outstanding: (as of June 30, 1966) Medium-term debt (rescheduled): US$ 312.0 Long-term debt: US$ 175.0 Changes in Money Supply: 1965 1966 1967 1968 (including quasi-money) - - l.6Aa ta.8% 1.3% 9X5% Consumer Price Index: (March 1963 = 100) End of period 1964 1965 1966 1967 1968 127.1 16-,0 5 h51.9 1'' 2. 169.'7  3TJ;>rJrA ANTI) O01N'I,USIC:'?ro 1, in the three-year period since the change of goennziit iD February 1966, Ghana has pursued policies designed to recover some measure of economic stability, and to pave the way for a new development effort. There has been considerable progress towards the first objec- tive. The overall balance of resources has improved markedly, the heavy burden of suppliers' and contractors' credits was rescheduled and efforts to rehabilitate massive public sector investments, inherited from the Nkrumah period, have by and large been successful, even though this task is not yet completed. However, the capacity to evolve a coherent and effective development effort is emerging more slowly than originally ex- pected. Although the basic objectives of the stabilization program have been achieved, investment capabilities have not yet been fully restored. The economy is currently in a state of transition. While external debt service will increase sharply in the 1970's, assessment of the country's prospective capacity to shoulder this burden, and at the same time satis- fy larger investment requirements, is subject to a number of imponder- ables. It is difficult to predict with confidence the future course of cocoa prices and output which will determine to a large extent government revenue as well as the country's foreign exchange earnings. Moreover, Ghana is preparing for return to civilian rule. The future direction of eccnomic policies and priorities will thus depend on the new Government which will emerge from free elections now scheduled for late September 1969. 2. After three successive years of stagnation, GDP in real terms grew by 4 4 percent in 1967. In 1968, agricultural production suffered from excessive rains. Statistics pnrmtting iope:7 quint4fication of such damage do noteiekis.4ABut othei sectors of the economy appear to have grown at about 4-5 percent. At the sare time Gharna's population has expanded at an annual rate estimated at 2.5 - 3.0 percent. Improvem,ents in Ghana's terms of trade contributed to this upswing. Just as low cocoa prices added to the crisis of 1965, the recent rise in prices has considerably facilitated economic recovery. At the same time, Ghana's manufacturing sector, which now accounts3 for about 8 percent of GDP, has increased its output spectacularly. More ample supplies of raw materials and spare parts, which were given priority in allocating scarce imports, contributed to the improvement. The public sector industries establishled during the Nkrumah regime also participated in the recovery. One of th1e main achievements of the new Government was to bring scme order into the state's industrial ventures. Much is still left to be done, but sales to, and joint ventures with, private interests as wel. as strengthened managerial capabilities have removed some of the more obvious deficiencies. Ghana's mining sector displayed some added strength, partly due to higher gold prices on the free market; and the forest industry, after a period of decline, was given needed support and was beginning to show results in 1968. Ghana's impressive fishing sector also continued tc expand, but non-cocoa agriculture, which still occupies 60 percent of the population, is showing only very modest signs of improvement. In retrospect, it appears that the disruption of agriculture and the de- moralization of the Government's'agricultural service during the Nkrumah regime has had more lastiqn adverse effects than was originally assumed. 3. Supported by fiscal discipline and a tight imLport-licensing system, a large measure of equilibrium was restored to the balance of  - ii - international payments. The deficit on current accowit was cut back from $220 million in 1965 to $60 million in 1968. Exports in 1968 barely recovered to the 1965 level, but imports dropped by more than one-third with investment goods bearing the brunt of these adjustments. Two agreements to reschedule medium-term external debt were reached with creditor countries in 1966 and 1968, and three drawings on the IMF, totalling US$ 85 million were arranged. However, despite such improvements and a significant increase in foreign aid, Ghana has not been able to build up significant foreign exchange reserves. Net foreign assets by the end of 1968 were $22 million, or the equivalent of three weekst imports. Thus, the shortage of foreign exchange has remained a serious obstacle to resumption of development. This is especially disturbing since recent economic growth was brought about by investments of early periods. (A trend which cannot be sustained indefinit- ely.) 4. Ghanats own ability to raise resources for development w^ill be critically dependent on cocoa, at least over the next five years. In the past, this coimnodity has accounted for about two-thirds of export earnings. Over the last five years, cocoa prices exhibited the most volatile behavior of any primary commodity. From a 1960-64 average of 24.1 cents, cocoa prices declined to their lowest level of 11-12 cents, (per lb., c.i.f. New York) in mid-1965,and then climbed to 45 cents in late 1968 as a result of short supplIes, which, in turn, were largely the result of Ghana's cwn extremely poor crop in 1968/69. Over the next few years, much will depend on Ghana's ability to capitalize on higher prices. If cocoa production can be increased quicki.Y to a level exceeding that of the last three years, with the help of an effective spraying campaign against capsid, Ghana could realize very favorable export earnings in 1969 and 1970, when buyers will be seeking to replenish depleted stocks. In the early 1970's, it is likely that in a lagged response to higher output, cocoa prices will drop from the present level of 40-45 U.S. cents to about 23-25 U.S. cents. Lower export earnings would then coincide with a sharp increase in external debt service, which is expected despite two agreements to reschedule medium-term debt. '9hile the short-tern outlook thus appears favorable, it could still be affected by the unpredict- ability of the weather and the effectiveness of cocoa disease control. 5. Although higher cocoa earnings may alleviate the foreign exchange constraint in the short run, Ghana's ability to finance the increased in- vestment required for satisfactory economic growth will fundamentally depend on its ability to attract more private and public capital from abroad. Some opportunities for private capital exist, but the investment climate is still to some extent adversely affected by the restric-tions on remittances of profits and by suspicion towards foreign investors harbored in some quarters. In the public sector the need to develop more projects eligible for foreign assistance is paramount. In 1968, only 20 percent of the $73 million of aid committed was for projects., but in the future, the volume of assistance is likely to depend more largely on the availability of good projects. Unfortunately, the Government's capacity to formulate specific investment programs has developed more slowly than was anticipated. In retrospect, it is evident that the past regime impaired considerably the quality of the government service, particularly in terns of the number of  capable civil servants at the middle and top levels. More recently, the Government hlas taken steps both to mobilize foreign technical assistance mrxd to decentralize decision-making, for the purpose of encouraging its own officials to take more responsibility. The serv:ices of a Harvard Advisory Group were obtained to assist in planning, and six teams have been enlisted to draw up programs in the fields of agriculture, industry, education, water resources, transport and telecommunications. The Govern- ment administration is being decentralized, for the purpose of encouraging more local and regional initiative. These efforts, however, will take some time to bear fruit, and in the short run administrative decentraliza- tion may even create difficulties. 6. In July 1968, a Two-Year Plan was published, which bears the title "From Stabilization to Development" and covers the years 1968/69 and 1969/70. The Plan is rather general in character and, in the absence of detailed sector programs, wisely abstains from proclaiming quantita- tive targets. It is hoped that the sector work now in progress will pre- pare the ground for a four-year development program to be launched in mid- 1970 under the auspices of a new Government. Presumably, the Plan will stress export diversification and less dependence on imports, particularly of agricultural commodities. It will have to give particular attention to the agricultural sector, which has not developed rapidly enough to fore- stall a continuing dependence on food and fiber imports or to provide addi- tional export potential. There is increasing awareness in Ghana that this sector has not only the potential for development but will indeed be the key to a rising standard of living. It is also realized that the concen- trated effort made in the past to develop state or quasi-state enterprises in agriculture have largely failed. In the future, therefore, the strate- gy will have to focus on the development of private,and primarily small- holder, enterprise. This will require support from the state in the form of improved research, better seed supplies, credit and more effective extension and marketing services. 7. Considering the pronounced fluctuation of cocoa-earning that can be anticipated over the next five years, as well as the uncertainties surrounding any forecast of their timing and amplitude, only very general conclusions can be drawn on the magnitude of Ghana's foreign aid require- ments and her ability to service already existing debt. It is clear that external assistance should be programmed without much reference to short- term changes in Ghana's foreign exchange position. It should be governed primarily by the need to ensure a smooth progression of the investment necessary to the economy. Given the prospects of relatively favorable export earnings over the next two years and a subsequent period of de- cline, aid commitments will have to be programmed over a longer period, since the inevitable time-lag between commitments and disbursements will not permit rapid adjustments. In the absence of multilateral efforts to stabilize and increase earnings from primary commodities, even medium- term programming of Ghana's resource balance appears unusually difficult. This difficulty can be overcome,and further debt rescheduling avoided, only if foreign aid agencies manage their commitments and the Ghanaian Government husbands its reserves in such a manner that actual resources available during periods of low cocoa earnings suff:ice to sustain invest- ment and debt service.  - iv - 8. Ghana's debt servicing capacity hinges on assumptions about export earnings from cocoa. Service on existing debt is likely to be' manageable in 1969 and 1970. On the basis of the projection of export earnings which the mission considers most probable, the debt service ratio might reach 14 percent in 1973. Thereafter, public debt service will rise at an average annual rate of about 10 percent; through 1978. It is highly doubtful that export earnings will grow on the average at the same rate, and it is virtually certain that they will continue to fluctuate in accordance with past patterns. If, on the other hand, the cocoa price dropped less sharply than assumed here, Ghana's foreign exchange position would change signif:icantly. A cocoa price of 27 cents in 1973 instead of 24 cents would yield additional export earnings of about U.s.$ 35 million and the debt service ratio would drop to about 13 percent. Any attempt to project the situation beyond 1978 would be even more speculative. In the intervening period, howfever, it does appear essential that new foreign ai,d be extended generally on concessional terms, if Ghana's still precarious recovery is not to be compromised and if service on the heavy debt incurred during the Nkrumah period is to be continued w.ithout further rescheduling.  I. `1N'TRODUCTI0i'. 1. Past performance of the economy and the evolution of economic policies in Ghana are closely related to political changes that have ocourred since independence in 1957. In the 1960is vuntil the change of Goverinent in February 1966, Ghana experienced a period of ambitious expansion of investments, chiefly in the public sector, designed to re- duce Ghana's heavy dependence on cocoa by means of developing modern irndustrial and agricultural sectors. This effort not only absorbed $450 million in foreign exchange reserves but also inc:reased external indebtedness by about $500 million, only a fraction of wnich consisted of long-term loans. Total fixed investment during 1958-1965 was in the order of $2.2 billion. This program failed to generate appreciable growth and by early 1966 Ghana faced a severe economic crisis marked by external and internal financial disequilibrium, soaring prices and a falling standard of living. The crisis, compounded by the collapse of world cocoa prices in 1965, hastened the change of Government and forced the new military and police regime to embark on a stabilization program the success of which is now beginning to provide the basis for a new development effort. The direction of this effort, however, will depend on a new Government since the ruling National Liberation Council appears determined to hand the Government of Ghana back to civilian authorities. Preparations for this are well under way, and a return to parliamentary rule is now expected in late September 1969. A new four-year develop- ment plan is to be introduced in mid-1970, which should give the new Government sufficient time to determine its own concept of future eco- nomic development. 2. The economy is currently going through a period of transition. Though Ghana, with a per capita GDP of $225 1 for her 8.4 million people ranks among the most advanced countries in Africa, growth of the economy wals seriously disrupted by the collapse of the first post-independence development effort. Some effects of this disruption are still very much in evidence. Perhaps the two most serious ones are the very heavy debt burden and the weakened morale and effectiveness of the civil service. Thus, while major objectives of the stabilization period have been achieved, authorities are still in the process of establishing important prerequisites for a resumption of development. It is with this back- ground in mind that Ghana's current economic position and prospects must be assessed. / At current prices. GDP per capita at constant prices in 1967 was $ 132 Before devaluation of the NO in July 1967 the dollar equivalent of real per capita GDP was 200.  - 2 - II. 1RECENT ECONOMIC PERFORMANCE A. Output and Investment 3. Between 1957 and :L963 the economy grew at a real annual rate of close to 5 percent. Then the growth rate dropped sharply, and between 1964 and 1966 GDP in real terms virtually stagnated. GDP rose by 4.4 percent in 1967. Real growth of the economy in 1968 was severely affected by the heavy rains in that year. Especially agricultural production appears to have suffered in that year. Unfortunately statistics on non- cocoa agriculture do not permit an assessment of damage inflicted in 1968. 1/ However, GDP excluding non-cocoa agriculture appears to have grown at 4-5 percent in that year. Improvements in Ghana's terms of trade were a ma.jor factor in this recovery. Cocoa, which accounts for 60-65 percent of Ghana's exports, experienced a spectacular upsurge of world market prices 2/; and this has greatly benefited the country, although only with a time lag owing to its practice of forward selling. However, even without the improvement in terms of trade, growth rates in 1967 and 1968 would have been about 2.5 andl 1.8 percent in the two years, if non-cocoa agriculture is again excluded in the latteryear. Output of manufacturing has almost doubled since 1965, and value added from this sector now accounts for 8 percent of GDP. With the completion of the Volta Dam and the Valco 3/ aluminum smelter at Tema, electricity generation tripled during the same period. In 1967, a good food crop added to economic growth, although this was primarily the result of favorable weather conditions rather than a reflection of a general strengthening of the agricultural sector which still supports 60-70 percent of the population. In 1968, the timber irndustry also showed signs of revival. 4. The improvement in the economic situation in 1967 and 1968 is in large part duie to factors which are unlikely to be long-lasting. First of all, gains from higher cocoa prices have been the direct result of a lag- ging output in Ghana's cocoa industry. Since Ghana produces about 35 percent of world supply, prices generally tend to be inversely related to her production. However, over the medium term Ghana will probably be able to increase her output at favorable prices. Because there is considerable demand for the replenishment of manufacturers' stocks which have declined 1/ Estimates of GDP in 1968 used later in this report are based on growth of agricultural production equal to the rate of population growth, i.e. 2.6 percent. Lower output would mainly affect estimates of private consumption. 2/ Since the collapse of cocoa prices in mid-1965 when the price dropped to US cents 11-12 per lb. c.i.f. Naew York at its lowest point, it climbed steadily to about 30 cents by mid-1968 and to 45 cents in December 1968. 3/ Volta Aluminium Company. The smelter imports alumina and exports aluminum. Its domestic input consists of labor and electricity and its value added of essentially wages which, since Valco has no local currency earnings , appear as service receipts on balance of payments. Depreciation affects value added only to the extent that reinvestments, coupled with capital inflow, actually take place.  - 3 - continuously since 1964,/65. Ghana appears to be the only country which is well placed to increase cocoa output in the short run by a stepped- up program of disease control. Thus it should for scme time be able to count on higher export receipts. However, present prices are certain to induce new planting in competing countries and eventually Ghana may find herself witi a smaller share of the market if long-term efforts to strengthen the cocoa industry are not initiated as well. Seccndly, growth of manufacturing output occurred without significant additions to capa- cities installed at the end of 1965. Rather it was t;he result of govern- ment policy to increase the utilization of installed capacity by improving the allocation of imported raw materials and spare parts and to strengthen management which had left many enterprises, especially in the public sec- -bor, idle or underutilized. But after three successive years of growing production demand constra.ints are beginning to emerge. Progressive sat- uration of the domestic market will tend to slow future expansion, par- *ticularly since industry, protected by an array of import duties and restrictions, is unlikely to increase its exports very rapidly. In short, the Government has successfully pursued a policy of capitalizing on past investments, and improvements of terms of trade have stimulated recovery as much as their deterioration compounded the crisis in 1965. 5. Thus, despite improved performance no new growth factors have emerged that could confidently be expected to sustain a long-term expan- sion of the economy. At the same time, it must be recognized that new expansionary forces could hardly be expected to develop during a period wihen strong deflationary policies were required to reduce the vast re- source deficit previously financed with foreign exchange reserves, and, after thEirdepletion, withl suppliers' and contractors' credits. Table A: INVESTMENT AND SAVINGS AT CONSTANT 1960 PRICES (N0 million) 1957-60 1961-64 1965 1966 1967 1968 Average Average Estimate Gross domestic investment 155 198 250 222 163 180 Gross domestic savings 141 147 127 156 137 174 Balance of domestic resources - 14 - 51 -123 - 66 - 31 - 6 Average savings rate 16.3 14.7 12.5 15.3 13.0 15.4 Investment rate 17.9 19.8 24.8 21.8 15.9 15.9 6. Deflationary policies were necessarily focused on a reduction in the resource gap. Per capita consumption in real terms had been de- creasing since 1964 and there was little scope for retrenchment of pri- vate consumption, quite apart from the political effects such a policy  would have had for a newly established government. In addition to public consumption, capital formation therefore had to be the main target of stabilization not only because Ghana's domestic and external resources could no longer support investment rates which had reached almost 25 percent in 1965, but also because this expansion had clearly exceeded the managerial capacity of the country, especially in the public sector where most of the expansion had taken place. Beginning in early 1966, f'iscal, monetary and trade policies were applied which, as shown in Table A, resulted in remarkable improvements of Ghana's resource balance. In 1968 the resource deficit was reduced to 1N0 6 million which, as will be seen, was inevitable in view of Ghana's tight balance of payments position. As a result of the stabilization effort, gross investment dropped by one-third between 1965 and 1967; and the increase experienced in 1968 was apparently due only to a substantial increase of stocks in the manufacturing sector. The main objective of the stabilization pro- gram was thus achieved with remarkable swiftness. That output improved despite these retrenchments further helped to reduce the resource gap and contributed to the success of recent economic performance. 7. From inadequate records, it appears that the reduction in capi- tal formation applied abouit equally to the public and private sectors. In the public sector, curtailment was dictated not only by a shortage of resources but also by the need to allow both existing and new investments the time to come to fruition. It is estimated that public sector invest- ments had tripled between 1957 and 1965. Initially investments in infra- structure, such as constniction of the port and township of Tema, absorbed a major share. Increasingly, however, capital expenditure for productive capacity in industry and agriculture in the public sector became dominant, and an array of pubolic enterprises was created in both areas. In addi- tion, the Government became involved in air and shipping lines, road trans- port, housing, construction and hotel corporations, and marketing boards for food, timber and diamonds. A trading company and gold mine were taken over from the private sector. iManagement and staffing of this vast realm became more and more inadequate, especially as political considerations tended to dominate personnel policy. While the inflow of investment goods, financed with suppliers' and contractors' credits, reached staggering pro- portions, low cocoa prices and stagnating domestic food production cur- tailed the supply of foreign exchange available for the purchase of necessary raw materials and spare parts. In the end, the public sector's failure to generate output ccmmensurate with the heavy investment contri- buted materially to economic stagnation. 8. Given this background, a reduction in new public sector invest- ments proved necessary in order to improve the productivity of already existing capacity. Thus government strategy was directed at the productive utilization of past investnent, and new investments were authorized only for necessary complements to existing capacity and for essontial prograims in agri- culture and infrastructure. In order to stem the rising unemployment which set in in 1966 as a result of austerity measures, sone employment-creating pro- grams were also maintained or, as in the case of construction,, expanded, In retrospect this strategy has worked fairly well even though it now  appears that the time required for rehabilitating Gharnats public sector Was generally underestimated. The deterioration in the civil service that resulted from the policies and practices followed by the Nkrumah regime turned out to be more serious than originally assumed. This, as will be seen, applies to agriculture in particular. But on balance, performance of the public sector has improved during three years of stock- taking, and opportunities for expanding productive governmr2ent investment are slowly emerging again. 9.. In contrast, the shrinkage of private investment as a result of import constraints wJas more severe than envisaged. One important element of the original stabilization concept was that the suppressed private sector would be encouraged again to fill some of the gap left by retrenchment of the public sector. However, imports during the stabilization period fell far short of what was considered a desirable level, and in allocating scarce foreign exchange the Goverrment had to curtail imports for private investmer.- as well. Priority necessarily had to be given to imports of essential consumer goods and also to raw materials and spare parts for existing facilities which wrere able to generate more additional output with a given amount of imports than new investment. As a result capital goods received the lowest priority. While this resulted in an intentioial and necessary consolidation in the public sect:r, it also had unintentional, adverse effects on the private sector. Thus the private sector, though ex- periencing some inprovements in recent years, notably in transport and the timber industry, emerged from the stabilization period on the whole not appreciably stronger than it was in early 1966. 10. Cne source of additional foreign exchange that would have mitigated Ghana s severe balance of payments difficulties wqas foreign private invest- ment. Some resident foreign firms expanded their activities with funds accumulated in Ghana, but the inflow of new private capital did not materialize on a scale that was originally expected. A variety of factors contributed to this development. Firstly, foreign exchange remittances of profits and expatriate staff quotas are subject to tight control even though some liberalization has been introduced. Secondly, there is a strong public bias in favor of Ghanaian-owned enterprises, which is understandable in an emerging nation. Past failures are attributed to the former regime rather than the inherent incompentence of the public sector in general. Thirdly, administrative delays and complex approval procedures tend to deter potential investors and hamper the emergence of an investment climate that would attract much-needed foreign capital and expertise. Finally, recent announcements aimed at foste.-- ing Ghanaian participation in retail trade, transport and small-scale industrAy have further added to the hesitation of potential investors. Some progress  - 6 - has been made writh foreign participation in state enterprises and further steps in this direction are under consideration. But on balance, the in- flow of private capital during the last three years has been low relative to the potential attractiveness of the Ghanaian market. In summary, tho rather slow onorgonco of a climate conducive to foreign private invest- ment, together with the slow improvement in public management and adminis- tration, are the less favorable aspects of recent economic performance. B. Domestic Financial Development 11. The stabilization effort has had to cope with the inflationary consequences of past policies and has therefore been essentially defla- ticnary in character. Since foreign exchange reserves were almost de- pleted and further suppliers' and contractors' credits ruled out as a source of external finance a deficit of domestic resources could only be covered by new long-term aid and, initially, drawings on the ITF. Exter- nal aid, at least in terms of disbursements, was slow to emerge, so that imports had to be tightly licensed in accordance with available foreign exchange. In this situation, domestic demand had to be deflated to a level consistent with available resources if continued inflation, smuggling and a thriving black market for foreign exchange were to be countered. EIowever, deflation of private demand through increased taxation was hardly feasible. In 1964/65 tax revenue had reached 16-17 percent of GDP, up from 13.3 percent in 1960/61, and even though it could in theory be further raised, the frequent tax increases in the recent past had left the public very much opposed to additional tax burdens. In fact, the public expected some tax relief from the new Government; and the tax ratio actually dropped to 15 percent in 1967. However, such tax relief was more than offset by higher prices for consumer goods induced by shortages of both imports and domestically-produced foodstuffs. The devaluation of July 1967 added fur- ther to the cost of consumer goods. In real terms, private consumption received a declining share of total resources (66.4 percent in 1968 as against 71.2 percent in 1965). On the other hand, public consumption claimed 18.1 percent of GDP in 1968 compared wTith 16.3 percent in 1965. :L2. A quantitative assessment of public sector finance has to rest on inadequate data, especially with regard to public corporations where deficiencies in accounting provide an outstanding example of the short- comings of management. Also, differences in the fiscal years employed make presentation of consolidated financial accounts more difficult. Data on domestic credit developments and external finance, which are more readily available, must therefore be used to analyze trends in public finance between 1965 and 1968/69.  -7- Table B: CONSOLIDATED PUBLIC SECTOR FINANCE (NO million) 1965 1966/67 1967/68 1968/69 Financial gap of Central Goverrnaent and public entities 165 51 63 83 Financed by: External sources/a 71 29 37 56 Supplierst credits 55 14 u 7 Long-term loans 16 15 29 49 Domestic sources 85 15 9 8 Bank borrowing 77 3 5 - Non-bank borrowing /b 8 12 4 8 Uses of cash balances, IviF drawings; and 9 7 17 19 errors and omissions /a 1965 and 1966/67 values are in pre-devaluation equivalents, and there- fore not comparable with data on page 15. /b Excluding Government borrowing from Cocoa Marketing Board and Social Security System which are included in the first line. 1L3. Table B emphasizes the striking achievement of the stabilization effort: the sharp reduction of inflationary borrowing from the banking system and the gradual substitution of suppliers' credits with long-term aid. The change was most abrupt between 1965 and 1966/67 when Central Government borrowing dropped from N0 64 to 14 million, while public cor- porations, after net borrowing of NO 13 million in 1965, were able to re- ,duce outstanding debts by NO 10 million. Operations of the Cocoa Marketing Board (CI0) contributed materially to the reduction in the public sector deficit in 1966/67. By sharply reducing producer prices in late 1965, the CMB was able to realize a surplus of NO 26.8 million in 1966/67 as compared with a deficit of NO 21 million in 1965. The Social Security System, which was introduced in 1965, also contributed to the improvement of public finances, since it began to accumulate funds which by law must be invested in government securities. On the expenditure side, public sector investments were reduced by an estimated 34 percent between 1965 and 1966/67. A drop in supplier-financed projects accounted primarily  - 8 - for this development. Disbursements in 1966/67 and later years were for projects which were begun before February 1966 and which the Govern- ment decided to complete. As counterpart funds from commodity aid and draw-ings on the IPI began to accrue higher deficits could be financed again. As will be seen, resumption of external debt service accounted for much of this increase whiereas investments continued at a low level. It is significant that borrowing from the banking system has been vir- tually eliminated. Furthermore, the sharp reduction in recourse to suppliers' credits improved the balance of payments. 14. The evolution of the Central Government's finances in relation to the stabilization effort are summarized in Table C. Expenditures on development have been cut significantly, and although the 1968/69 budget envisaged a considerable increase once more, actual development outlays in that year will probably still prove to be 20 percent below those in 1965. Substantial temporary relief was afforded by the moratorium ob- tained from Ghana's creditors early in 1966, but debt service on suppliers' and contractors' credits was resumed on a reduced scale in January 1968 and has since again absorbed a major share of current surpluses. WZhile current expe-nditures have continued to rise, rising Government revenues s:Lnce 1966/67 have apparently permitted the realization of a growing sur- plus on current account. Moreover, the total deficit, after allowing for development expenditures and debt service, is no longer financed by infla- tionary bank borrowing but by long-term loans and social security fund reserves. Table C: CENTRAL GOVERMMETT FINA1NCES (NT million) 1965 1966/67 /a 1967/68 1968/69 Actual Actual 3(0.2" Budget Current revenue 2-4.0 2U.5 25746 Current expenditure(incl.lnternal 213.7 226.9 257.6 284.7 Current surplus debt service) + 70.3 +147.6 + 2T 7 External debt service (Interest and Principal) 5-