Ghana - Second National Investment Bank (NIB) Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2518-GH REPORT AND RECOMMENDATION OF TIIE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO TIE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND EEC SPECIAL ACTION CREDIT TO THE REPUBLIC OF GHANA FOR A SECOND NATIONAL INVESTMENT BANK PROJECT April 25, 1979 This document has a restricted distribution and may be used by reciplents only in the performnce of their official duties. Its contents may not otherwise be disclosed witout World Blank autherluton.  CURRENCY EQUIVALENTS February 1973 - June 18, 1978 US$1 = 01.15 01 US$0.87 June 18 - August 26, 1978 The exchange rate was floating, gradually moving from US$1 - C1.15 to US$1 = 01.69 Since August 26, 1978 US$1 = C 2.75 el = US$0.36 FISCAL YEAR Government of Ghana July 1 - June 30 NIB January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADB - African Development Bank ADB (Ghana ) - Agricultural Development Bank of Ghana BHC - Bank for Housing and Construction DEG - Deutsche Entwicklung Gesellschaft DSI - Development Service Institute of NIB EIB - European Investment Bank EEC - European Economic Community FED - European Development Fund GCB - Ghana Commercial Bank KfW - Kreditanstalt fur Wiederaufbau NIB - National Investment Bank  FOR OFFICIAL USE ONLY GHANA - SECOND NATIONAL INVESTMENT BANK PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Ghana Beneficiary: National Investment Bank Amount: IDA Credit of US$19 million equivalent; EEC Special Action Credit of approximately US$6 million equivalent. Terms: Standard 1/ Relending Terms: The Government would relend to NIB US$12.2 million for term lending and US$12 million for working capital lending, at 13-1/2 percent per annum. In cases where the Government assumes the foreign exchange risk on term loans, it would charge a foreign exchange risk premium of 10 percent per annum on outstanding loan balances. Amortization on the term lending portion would conform substantially to the aggregate of the amortization sched- ules of NIB sub-loans; funds relent for the working capital portion would be repaid at the end of the fourth loan cycle under the Revolving Import Fund scheme. Project The project aims at expanding and rehabilitating Ghana's Description: manufacturing and agro-industrial capacity with special emphasis on the contribution of the industrial sector to increased foreign exchange earnings and savings and improved domestic linkages with agriculture and other sectors. The IDA credit would provide foreign exchange for: (a) term loans (US$12.2 million) for capital invest- ments to expand and rehabilitate industrial capacity; (b) working capital loans (US$6 million) to finance importa- tion of spare parts and raw materials required to improve utilization of the existing industrial capacity; and (c) technical assistance (US$0.8 million) to strengthen Ghana's export program and NIB's promotional and appraisal activities. The EEC Special Action credit of approxi- mately US$6 million would be utilized solely for working capital sub-loans. The project faces no major risks except that the uncertain economic environment could affect NIB financed projects. This is, however, an acceptable risk given the present direction of the Govern- ment policy and the progress so far made in implementing the economic stabilization program. 1/ The EEC Special Action credit would be provided under the same tenns _s applicable to the IDA credit except that a variety of EEC currencies will be used and repaid in the amounts disbursed. This documnent 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 *'Xrld Bank authorization.  * ii- Terms of Loans (a) Term Loans: Interest at 18-1/2 percent per annum to NIB's Sub- plus a one-time 1 percent service fee and 1 percent Borrowers per annum commitment fee. In addition, sub-borrowers would have an option of either assuming the foreign exchange risk or paying a foreign exchange risk pre- mium of 10 percent per annum on outstanding balances with the Government assuming the foreign exchange risk. The premium would be refundable in an amount equal to 5 percent of actual export sales of sub-borrowers but not exceeding the aggregate amount of premium paid over the entire sub-loan period. Amortization of up to 15 years including 3 years of grace. (b) Working Capital Loans: interest at 18-1/2 percent per annum with sub-borrowers assuming the foreign exchange risk. Amortization of up to 2 years. Free Limits: For term loans, US$200,000 subject to an aggregate limit of US$5 million; For working capital loans, US$50,000 subject to an aggregate limit of US$3 million. Procurement: Through normal commercial channels. Disbursements from the EEC Special Action credit would be in respect of goods from EEC member countries and the developing coun- tries eligible to receive assistance under the EEC Special Action Account. Debt Covenants: Maximum debt equity ratio of 5:1 Projected NIB Performance: -------Year ending December 31 ------- (O Millions) Actual Project Approvals: 1977 1978 1979 1980 1981 1982 Loans: 21.3 14.0 32.6 39.0 46.8 56.2 Local Currency 8.7 10.5 12.8 15.4 18.5 22.2 Foreign Exchange 12.6 3.5 19.8 23.6 28.3 34.0 Equity: Local Currency 1.4 1.4 2.1 2.6 3.1 3.7 TOTAL APPROVALS 22.7 15.4 34.7 41.6 49.9 59.9 Project Income Statements: Total Revenues 14.1 18.8 24.5 24.8 34.5 39.6 Financial and Admin. Expenses 8.7 10.5 14.5 17.3 20.5 23.7 Provisions and write-off 3.2 1.0 0.4 0.8 1.4 1.1 Net Income as % of net worth 9.4 18.5 15.0 12.8 17.1 19.6 Project Balance Sheets: Current Assets 37.0 73.4 96.2 92.8 79.6 82.5 Net NIB Loans 95.7 115.0 121.6 135.0 157.7 174.4 Equity Investments 13.1 13.2 15.0 17.3 20.2 23.5 Fixed Assets (net) 2.3 2.8 3.2 3.7 4.3 4.9 TOTAL ASSETS 148.1 204.4 236.0 248.8 261.8 285.3  - iii - Actual Project Balance Sheets: (Con't) 1977 1978 1979 1980 1981 1982 Current Liabilities 49.1 48.0 42.6 44.0 47.8 59.5 Medium and long-term loans 75.4 120.2 148.2 152.6 151.7 149.6 Paid-in Share Capital 19.0 29.0 35.0 40.0 40.0 40.0 Reserves 4.6 7.2 10.2 12.2 22.3 36.2 TOTAL LIABILITY & EQUITY 148.1 204.4 236.0 248.8 261.8 285.3 Debt/Equity Ratio 3.1:1 3.3:1 3.3:1 3.0:1 3.5:1 3.5:1 Estimated Disbursements: IDA FY (US$ Millions) 80 81 82 83 (a) IDA Credit Annual 5.9 7.2 4.3 1.6 Cumulative 5.9 13.1 17.4 19.0 (b) EEC Special Action Credit Annual 3.6 2.4 - - Cumulative 3.6 6.0 6.0 6.0 (c) IDA/EEC Combined Annual 9.5 9.6 4.3 1.6 Cumulative 9.5 19.1 23.4 25.0 Appraisal Report: Report No. 1743a-GH dated April 16, 1979.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND EEC SPECIAL ACTION CREDIT TO THE REPUBLIC OF GHANA FOR A SECOND NATIONAL INVESTMENT BANK PROJECT 1. I submit the following report and recommendation on a proposed development credit of US$19 million equivalent, on standard IDA terms, and a proposed EEC Special Action credit, expressed in the currencies of the nine EEC Member States equivalent to about US$6 million, 1/ to the Republic of Ghana, to help finance a Second National Investment Bank (NIB) project. The EEC and IDA credits, except for US$0.8 million to be used for technical assistance, would be relent by the government to NIB at 13-1/2 percent per annum. Amortization on the term lending portion would conform substantially to the aggregate of the amortization schedules of NIB sub-loans; funds relent for the working capital portion would be repaid to the government at the end of the fourth loan cycle under the Revolving Import Fund scheme. PART I - THE ECONOMY 2. An economic report entitled "Ghana: Economic Position and Prospects; Prospects for Exports of Processed Products; Financial Structure - A Flow of Funds Approach" (1533a-GH) was distributed to the Executive Directors in June 1977. A sector report entitled "Ghana Agricultural Sector Review" (1769- GH) was distributed in April 1978. An updating economic report entitled "Ghana: Economic Memorandum" will be distributed shortly. Basic economic data and selected social indicators are summarized in Annex 1. Basic Structural Characteristics of the Economy 3. Agriculture is the largest sector of the economy accounting for 40.7 percent of GDP in 1975-76. Industrial production and services accounted for 21.6 and 33.3 percent respectively in the same period. Although Ghana had traditionally enjoyed a fairly high standard of living compared with most other West African nations, the growth performance of the economy in recent years has been uneven and poor. In the period 1970-77 the annual rate of real GDP growth has averaged only 0.6 percent, implying a decline in per capita income of 2.1 percent annually, as population has been growing at 2.7 percent. The per capita GNP is estimated at US$380 in 1977. 4. The most significant factor underlying Ghana's poor economic perfor- mance in recent years has been the fact that there was virtually no growth in the volume of exports, which depend almost entirely on a few traditional export commodities--cocoa (of which Ghana is the world's largest producer), 1/ In accordance with the agreement between the EEC Member States and IDX dated May 2, 1978, standard IDA terms will apply to the EEC Special A tion Credit except that a variety of EEC currencies will be used and repaid in the amounts disbursed.  timber, manganese, gold, diamonds and bauxite, whiclh together constitute 88 percent of exports. In addition to contributing 60 percent of the country's export earnings, cocoa provides around 30 percent of government revenues and employs more than 20 percent of the labor force. Cocoa exports have declined substantially in recent years due principally to low producer prices, inade- quate rehlabilitation efforts, shortage of imported inputs and transport equip- ment. Aggravated by adverse weather conditions in 1975-77, cocoa output in 1977-78 hit an all time low of 227,000 tons, compared with well over 400,000 tons in the early 1970s. Production of most of the minerals is stagnating, because of depletion of the mineral ore reserves, poor transport facilities and run down equipment. 5. Near-self sufficiency had been reached in basic cereal production with the "Operation Feed Yourself" program launched in 1972. But food pro- duction has been depressed recently with the prolonged drought in 1975-77, inadequate support services and lack of fertilizers and inputs requiring foreign exchange. Rising food prices have been an important component of the high inflation rate. 6. Manufacturing in Ghana remains heavily dependent on imported in- puts. This has resulted in recurrent balance of payments crises and an accumulation of external debt. Manufacturing contributed 14 percent of GDP in 1971 but this figure has declined progressively to 10 percent in 1977 due to the lack of raw materials and spare parts caused by continuing foreign exchange shiortages. Most plants are estimated currently to be operating at around 30 percent of installed capacity. This sector provides full- and part-time employment to about 12 percent of the labor force. 7. Traditionally, Ghana has imported its entire petroleum requirements, mostly in the form of crude oil which is refined domestically and used chiefly as a source of fuel for the transport sector. Recently, some oil deposits have been discovered and commercial exploitation has commenced. Production in 1979 is expected to meet about one-sixth of Ghana's oil requirements. Hydroelectric power meets most of Ghana's energy requirements. 8. Despite its economic problems, Ghana lias in the past devoted con- siderable efforts to development of its human resources. The education system is well established, elementary education has been free and universal since 1962, public health facilities are fairly widespread and current gov- ernment development strategy is to give rural areas priority. It is the declared policy of the Government to achieve a more equitable income dis- tribution by increasing productive investment in the rural areas, by expanding low-cost rural housing and water supply, and by improving feeder roads. Recent Developments 9. The military government that took office in early 1972 inherited a critical balance of payments position. Large medium- and short-term debts had been incurred and foreign exchange reserves were virtually exhausted, largely as a result of a liberal import policy and a decline in cocoa pro- duction and export. In an endeavor to redress the situation, the previous Government, in December 1971, had introduced a 44 percent devaluation of the  - 3 - cedi in terms of the IJS dollar. The new Government, shortly after taking over, revalued the cedi, reducing the previous devaluation to about 20 per- cent. In addition, the Government enacted an import retrenchment program which hit the industrial and distributive sectors hard, causing GDP to fall by 2.5 percent in 1972. A recovery followed in the next two years (growth rate in CDP of 5.6 percent each year) encouraged by the greater availability of imports facilitated by favorable price developments for cocoa, gold and timber. 10. The strong improvement in the balance of payments in 1972 and 1973, ended abruptly in 1974 when the impact of higher oil prices and a breakdown of the import licensing system caused a foreign exchange crisis. But the situ- ation was reversed in 1975, and at the end of that year exchange reserves had increased to US$150 million (about two months' imports) following a reenforce- ment of import controls and a drawing on the IMF Oil Facility. Tightening of import restrictions, however, caused GDP to decline by 4.8 percent in 1975 and 5.7 percent in 1976. In 1977 the decline halted and GDP is estimated to have risen by 1.2 percent as a result of favorable growth in the agricultural sector spearheaded in part by a record increase in cocoa export prices in spite of a lower export volume. The rise in cocoa export prices more than compensated for the loss in revenue which would have resulted from the lower export volumes. This somewhat eased Ghana's foreign exchange position in 1977/78. 11. The rapid rise in price levels has been one of the most arresting features of the Ghanaian economy in recent years. In 1977, the national consumer price index rose 116.3 percent after registering increases of 56.3 percent and 29.7 percent in the two preceding years. According to unofficial estimates, the annual rate of inflation in the first nine months of 1978 abated, however, to 68 percent. Local food prices rose sharply, by 78 percent in 1976, and 139 percent in 1977, as a result of prolonged drought and the stringent limitations on food imports. Another major factor exerting strong pressure on prices has been rising Government budget deficits financed by the banking system (the major part by the Bank of Ghana) and the rise in the money supply. In 1977 alone, the money supply rose by 50 percent. With no significant increases in production in the economy, the rate of inflation accelerated. For some time, the Government attempted to dampen inflation by limiting sales of certain consumer goods (e.g. milk, sugar, mackerel, baby foods, cement) through approved outlets at controlled prices. However, the scheme turned out to be unworkable and was abandoned in mid-1977. The current policy is to work towards the gradual dismantling of price controls. 12. Faced with a critical foreign exchange shortage, stagnating produc- tion, spiralling inflation and a greatly overvalued exchange rate, Government commenced a program of stabilization in June 1978. A managed downward "float" of the cedi was introduced, and in August 1978, a 58 percent devaluation took place which changed the rate to 02.75 to one US dollar, compared with a fixed rate of