Ghana - Reconstruction Import Credit Project

Document ofD The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3554-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 37.0 MILLION TO THE REPUBLIC OF GHANA FOR A RECONSTRUCTION IMPORT CREDIT June 8, 1983 This document has a restricted distribution and way be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedis US$1 = 2.75 Cedis 1/ 1 Cedi US$0.36 1/ US$1 = SDR 1.08163 FISCAL YEAR Government of Ghana: January 1 - December 31 (effective January 1, 1983) ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BOG - Bank of Ghana CIDA - Canadian International Development Agency GCMB - Ghana Cocoa Marketing Board GDP - Gross Domestic Product GNP - Gross National Product GOG - Government of Ghana MOA - Ministry of Agriculture MFEP - Ministry of Finance and Economic Planning MTC - Ministry of Transport and Communications MTT - Ministry of Trade and Tourism PNDC - Provisional National Defense Council RIC - Reconstruction Import Credit STABEX - Stabilization Fund for Export Commodity Prices UNDP - United Nations Development Programme 1/ Since April 22, 1983 bonuses and surcharges apply as described in paragraphs 37 and 38.  FOR OFFICIAL USE ONLY GHANA RECONSTRUCTION IMPORT CREDIT SUMMARY OF THE PROPOSED CREDIT Borrower: Republic of Ghana Executing Agency: Bank of Ghana Credit Amount: SDR 37.0 million (US$40 million equivalent) Terms: Standard Purpose: The proposed IDA Credit would make available US$40 million to help meet the priority import requirements of the Government of Ghana's economic recovery program. These funds would be allocated to the procurement of fertilizers, insecticides, agro-chemicals, agricultural implements, spares and tools, and truck tires, batteries, and spare parts in accordance with,,the Government's foreign exchange budget. Counterpart funds would be allocated to the recurrent or capital costs of priority projects included in the economic recovery program. The risks associated with the proposed Credit are that the economic policy reforms are not fully implemented, adequate financing is not provided to sustain imports at the required level, and the goods procured under the Credit are diverted away from the ultimate benefi- ciaries. On the basis of the difficult and far-reaching measures that the Government has already put in place under the economic recovery program, the efforts being made to maximize the flow of external assistance to sustain imports, and the procurement and distribution arrangements proposed under the Credit, these risks would be significantly reduced. Estimated Period of Disbursement: July 1983 - June 1984 Rate of Return: Not applicable Appraisal Report: None Map: IBRD 3112R 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.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED RECONSTRUCTION IMPORT CREDIT TO THE REPUBLIC OF GHANA 1. I submit the following report and recommendation on a proposed Reconstruction Import Credit to the Republic of Ghana for the equivalent of SDR 37.0 million (US$40.0 million equivalent) on standard IDA terms. PART I - THE ECONOMY 2. An economic report entitled "Ghana: Economic Memorandum" was distri- buted to the Executive Directors in May 1979 (2345-GH) and a special study, "Ghana: Report on Domestic Resource Mobilization", in February 1981 (3072- GH). Part I of this Report contains the principal findings of an economic mission which visited Ghana in November/December 1982 and Part II - The Government's Economic Recovery Program - is based on a follow-up mission in March 1983, information provided by the Government in May 1983 and a recent IMF mission to Ghana. Basic economic data and selected social indicators are summarized in Annex I. 3. On December 31, 1981 Flight Lt. Rawlings replaced the Government headed by President Limann. The ruling junta, the Provisional National Defence Council (PNDC), initially consisted of military men, trade union and student leaders, and appeared to be leaning towards an inward-looking strategy. Recent changes, following a coup attempt in November 1982, have consolidated the power base of Rawlings and strengthened the more pragmatic elements in the Council. 4. Ghana has been beset with extreme economic difficulties over recent years. The discussion in this part of the Report is centered around the following questions: What endowments does Ghana possess, what has happened in the past, and where does the economy stand at present. Part II of this report describes what is being done to rectify the present situation. Basic Structural Characteristics 5. Agriculture is the largest sector of the economy, accounting for 50 percent of GDP in 1980, 57 percent of the labor force and 75 percent of exports. Industrial production and services account for 17.5 and 32 percent of GDP respectively. Although Ghana had traditionally enjoyed a fairly high standard of living compared with most other West African nations, the poor growth performance of the economy over more than a decade has caused a severe setback. A declining gross national income in the face of a high population growth rate has contributed to substantial erosion in real per capita income.  - 2 - The incidence of absolute poverty has been on the increase and almost one half of the country's total population is now estimated to live in absolute poverty. Accompanying the stagnation in the economy there has also been a worsening of income distribution and growing unemployment. A,t least 18 per- cent of the labor force is estimated to be unemp'Loyed and under-employment iS also widespread. 6. Although Ghana has in the past devoted considerable efforts to the development of its human resources and is often credited with a relatively high level of social development, more recent statistics suggest that Ghana's basic needs indicators are on par with other Sub-Sahara Africa countries with comparable income per capita. Ghana's population of 12 million is estimated to be growing at 3 percent. Despite the growth in health facilities, modern health services are available only to about one third of the people and only 21 percent of these services are available to rural people. Only 35 percent of the population have access to safe water. Fifty percent of all adult males and 70 percent of adult females have had no formal education. Although the education system is well established and elementary education has been free and universal since 1962, a significant portion of Ghana's middle-to-high level manpower has migrated to other African countries and overseas in search of better living conditions. 7. Ghana is a typical example of a developing country with primary commodity export concentration. Cocoa (of which Ghana is now the world's third largest producer) contributes about 70 to 80 percent of the country's export earnings and together with timber, gold, manganese and diamonds accounts for 95 percent of exports. Cocoa purchase in 1982/83 will be around 180,000 metric tons compared to the peak output of 540,000 tons in 1964/65. Diversification of the export base, although emphasized by every succeeding Government, has not made much headway during the :Last 25 years. The decline in the volume of exports has been the most significant factor underlying Ghana's poor economic performance. 8. The basic staple foods are maize, rice, millet, yam, cassava and plantain. Except for a few years in the early seventies when near self- sufficiency was reached in basic cereal production, Ghana has been importing rice and maize (10 to 15 percent of its consumption on average in the last five years). Yields of the basic staples have been stagnant 1with the major exception of cassava. Prolonged drought in 1975-'77 and in 1982-83, inadequate support services, poor transport facilities and lack of ferti:Lizers and inputs have contributed to a decline in food production. Domestic output of cereals is estimated to have declined from 890,000 tons in 1974 to 672,000 tons in 1982. About 55 percent of the labor force are engaged in farming and nearly 70 percent of the population derive an income from agricultural or related activities. However, only about 11 percent of the! total land area is cultivated and divided equally between cocoa and food crops. 9. Manufacturing in Ghana remains heavily dependent on imported inputs. Manufacturing contributed 14 percent of GDP in 1971 but this figure has declined progressively to 9 percent in 1980. Ghana's manufacturing industries include textiles, steel, tires, oil refining and simple consumer goods. This sector also provides full and part-time employment; to about 12 percent of the  - 3 - labor force. As most of the industries are import-dependent for raw materials and other inputs, the goal of import substitution through industrialization has not met with much success and has imposed a serious burden on the economy. 10. 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. Rising oil import prices have resulted in crude oil imports absorbing an increasingly large percentage of Ghana's export earnings. Recently, some oil deposits have been discovered and commercial exploitation has commenced. Production of crude oil is about 2,000 barrels per day equivalent to 7 percent of Ghana's requirements. Hydro- electric power meets most of Ghana's non-transport commercial energy requirements. 11. Mining is the second largest foreign exchange earner after cocoa, contributing about 10 to 15 percent of Ghana's foreign exchange earnings. Ghana has a substantial endowment of gold, diamonds, manganese, and bauxite and production could increase considerably through the rehabilitation of existing mines and the development of new ore bodies. TABLE 1: GHANA: ECONOMIC PERFORMANCE TRENDS 1970 - 1982 Annual Growth Rates 1970-80 1975-80 1980-82 1. Per Capita Income -2.8% -3.7% N.A. 2. Consumer Price Index 40.2% 68.4% N.A. 3. Recorded Merchandise Exports (Value) 11.0% 7.4% -13.2% 4. Export Value Index -6.2% -11.6% -14.0% 1/ 5. Merchandise Imports (Volume) -6.7% -10.6% -13.6% T/ 6. Exports of Cocoa (Volume) -5.3% -7.6% -13.5% 2/ 7. Tax Revenues 21.6% 30.0% 23.3% 8. Current Expenditure 28.7% 33.8% 43.6% 9. Credit to the Private Sector 22.1% 25.2% 28.8% 10. Money and Quasi Money 31.5% 37.8% 36.6% 11. Oil Consumption (Value) 39.7% 20.0% 3.5% 12. Domestic Savings -7.4% -20.0% 3.5% 13. Investment -9.4% -16.5% N.A. 14. Real Wages N.A. -26.2% N.A. 1/ estimate 2/ 1979/80 - 1981/82 seasons Note: The quality of data in Ghana has deteriorated in recent years and therefore the above numbers should be interpreted with great caution.  -4- Recent Economic Developments 12. Despite a relatively well-endowed natural resource base and human capital, Ghana's economy has been ailing for the past several years. A summary of the economic performance trends since 1970 is shown in Table 1. Prominent among the symptoms have been: declining per capita income, persis- tent high inf. tion, a greatly overvalued exchange rate, flourishing illegal economic activities such as smuggling, large public sector deficits, a diffi-- cult balance of payments situation, low productivity, low domestic savings and declining investment, deteriorating transportation network and other infra- structure, severe under-utilization of productive capacity, high unemployment;, a brain drain of skilled professionals, a more skewed income distribution and much weakened institutions. The reasons for these difficulties are mani- fold. Political instability and persistent mismanagement of the economy by successive Governments, an over-extended parastatal sector, sharp increases in oil prices and adverse terms of trade for Ghana's major exports are among the most important factors contributing to this situation. 13. Real GDP has declined in every year since 1975, except for 1978. Since that year, real per capita income has declined by about 25 percent and was estimated at $400 in 1981 at the official highly over-valued exchange rate. Per capita food availab ,lity is 30 percent lower than in 1975. Food production in 1980 was only 88 percent of the level in 1975. Most basic commodities, except cereals andl starchy staples, are not available or, if they are available, can be purchased on:Ly on the black market. 14. Inflation has been rampant in Ghana since the mid 1970's. The consumer price index has increased by an average of about 80 percent per annum since 1975 and reached the triple digit level in 1981. Large public deficits, excess liquidity and shortage of goods have all contributed to the general rise in prices. Price controls have *been extensively employed by successive Governments but with very little success. The income distribution conse- quences of inflation have been quite severe for fixed wage earners and cocoa farmers while traders, import licensees, speculators and farmers with market- able crops have been the main beneficiaries. There has been some moderation in inflation in 1982 and the ccnsumer price index is estimated to have risen by 30 percent as compared to 116 percent in the previous year. This decline in the rate of inflation was brought about by extraordinary measures such as demonetization to siphon off excess liquidity, sealing of borcders, severe restraint on Government expenditure! and monetary growth. 15. The overvalued exchange rate (which was adjusted only in April 1983) had acted as a strong disincentive to production for exports. Exports were discouraged as the cost of their production far exceeded the price received at the official exchange rate. Over-valuation also resulted in Ea wide variety of illegal and unproductive economic activities. Domestically-produced and imported goods were smuggled to the Ivory Coast and Togo for sale against the hard CFA with tremendous losses (estimated unofficially at over $100 million per annum) to the country's external account.  - 5 - 16. Under a program of stabilization begun in 1978, Government expendi- tures were cut by about one third in real terms in 1978/79, 1/ and the budget deficit was reduced to 5 percent of GDP compared with 12 percent in the preceding year. However, this improvement was short-lived and could not be sustained during the subsequent years. The increase in the minimum wage in November 1980 and a serious shortfall in revenues widened the deficit to 04.7 billion or 10 percent of GDP in 1980/81. Cocoa duties fell dramatically to 5 percent of total revenues in 1980/81 from 47 percent in 1978/79. The collapse in cocoa revenues was due to the fall in cocoa prices in the world market and an overvalued exchange rate compounded by acute difficulties in evacuating cocoa and increases in Ghana Cocoa Marketing Board's (GCMB) marketing costs. In addition, the Government tax base had narrowed as excise and sale tax assessment was based on official controlled prices of commodities which were much lower than actual transaction prices. Similarly, import duties were assessed on the c.i.f. value converted at the official exchange rate while actual sales of imported commodities took place at much higher black market rates. The tax-GDP ratio in 1981 declined to about 10 percent of GDP which is about half the average of similar countries in Africa. 17. In 1981/82 the government deficit amounted to about 05 billion, i.e. 50 percent of the total estimated expenditures of 010 billion or equivalent to the total revenue collection. The deficit during the last six months of 1982 was, however, contained at 02.5 billion or almost the same proportion as the preceding 12 months. In real terms and as a ratio of current GDP, the deficit went down but this was achieved at a substantial cost. The wage/non-wage ratio of recurrent expenditures became more skewed while development expen- ditures as a proportion of total Government expenditures declined significantly. 18. The financing of the budget deficits has been the main source of credit and liquidity expansion in the Ghanaian economy. In 1977 alone the money supply increased by 60 percent. Following the 1978 stabilization pro- gram the growth of money supply was held at a more reasonable 29 percent in 1979. But by 1980 the tight rein on monetary policy began to slip. Net domestic assets of the banking system rose by 29 percent with net claims on Government rising by 33 percent; money supply rose by 34 percent. The same pattern was followed in 1981: money supply rose by 55 percent, domestic assets of the banking system increased by 63 percent and net claims on Government went up by 63 percent. 19. The balance of payments difficulties continued to worsen. Given the negligible capital inflows, the level of imports and service payments were perforce held to the level of export earnings. Capital inflows almost dried up because private capital was shy due to political uncertainties; commercial lending was not feasible due to accumulation of large arrears and lack of creditworthiness while official aid was reduced due to lack of action on macroeconomic policy. Export earnings in 1981 were estimated to be 33 percent lower than in 1980 ($766 million as compared to $1.1 billion). Continuing decline in the real value of producer prices and the shortage of consumer 1/ Through 1982 the fiscal year was July-June.  - 6 - goods in rural areas acted as ifurther disincentives to agricultural production and contributed to the smuggling of foodstuffs and cocoa to neighboring countries where consumer and other goods were available. International recession also contributed to this poor export performance. Because of weak demand, world prices of cocoa recorded a steep fa:Ll in recent years and prices of other primary exports were equally unfavorable. Other major "xports - gold, bauxite, diamonds, and timber - also declined in quantitie_. The international oil crisis also hit Ghana hard. Imports of crude and petroleum products preempted almost one half of the country's export earnings. The foreign exchange problems have resulted in the accumulation of external pay- ments arrears which have damaged Ghana's creditworthiness and its access to foreign capital markets. The current account balance showed a small surplus in 1979 - equivalent to 0.3 percent of GNP - but has since registered increasing deficits, amounting to around 0.7 percent of GNP in 1982. 20. While the current account deficit is low, it masks the fact that the decline in the level of imports has created chronic and extremely acute short- ages of raw materials, spare parts, investment and consumer goods in the eco- nomy. The import-GDP ratio in Ghana was 20 percent in 1974 but had declined to only 3.6 percent by 1981 (at; the official exchange rate), signifying an overall stagnation in production and consumption. Production in the manufacturing sector has been curtailed to only one fourth of the installed capacity due to shortage of spare parts, components and impor-ted raw mater- ials. There has also been a sharp deterioration in the physical infrastruc- ture, especially roads, railways and the transport fleet. Shortages of fuel, lubricants and spare parts have immobilized a large part of the trucking and road maintenance fleet and badly affected the export mining and forestry indu- stries as well as the efficiency of the ports. It is estimated that about 70 percent of the road vehicle fle!et is presently out of service while more than one third of Ghana Railway Corporation's locomotives are awaiting spare parts for major repairs or overhaul. Road maintenance operations have come to a virtual standstill and the entire r oad network is deteriorating rapidly and is already unusable in many places. 21. In comparison with many African countries, Ghana had originally a large reservoir of skilled and trained manpower. In recent years, there has been a tremendous exodus of teachers, doctors and other professional workers to other countries where salaries and living conditions are better. It is reported that approximately one thi-rd of all secondary school teachers have migrated to Nigeria, Liberia, Sierra Leone and other countries. 22. A growing imbalance is emerging between the quality and output of skilled manpower and the economy's skilled manpower requirements. The outflow of managerial and professional personnel has further thinned the administra- tive talents in the Civil Service while redundancy and overstaffing is a problem at lower echelons. The GhaLnaian public administration has been demor-- alized by relatively low salaries, an economic system which has penalized thema severely compared with other segments of the society, and uncebrtain and adverse working conditions. There are problems o:f quality and motivation at the senior level.  - 7 - 23. Capital formation was quite rapid during the 1950's, probably excessive, but became increasingly negative thereafter. By the 1970's, gross investment averaged only 8.9 percent of GDP suggesting that net investment may even have been negative. Gross investment is currently estimated at an extra- ordinarily low 5 percent of GDP as compared to 21 percent for Sub-Sahara Africa as a whole. In an inflationary environment with very little scope for productive investment opportunities and negative real interest rates, domestic savings were also low - about 5 percent of GDP (the average for Sub-Sahara Africa is 23 percent). Savings deposit rates of 8 to 9 percent provide inade- quate incentives to savers facing inflation rates in excess of 30 percent. The binding constraint is, however, availability of foreign exchange rather than domestic resources for investment. 24. Ever since independence, state enterprises in Ghana have been assigned a large role in production and distribution of goods and services. However, their performance has been distressing both in terms of their output and their financial record. They have generated serious pressures on fiscal and monetary policies. The main problems are inefficient management, Govern- ment control over prices, lack of required inputs, machinery and spare parts, heavy overhead expenses on redundant labor, too frequent changes in top personnel and lack of strict accountability. Economic Developments in 1982/83 25. As noted earlier, the new Government took some extraordinary measures soon after it came to power to contain budgetary deficits, monetary growth and inflation. However, export earnings continued their downward slide and declined to $875 million in 1982 ($1160 million in 1980). Consequently, imports had to be curtailed to a level of $694 million, down by 35 percent from the 1980 level. This is less than $60 per capita, or about half the corresponding level for Senegal and one fourth for the Ivory Coast. The foreign exchange shortage combined with the closing of the border dried up supplies of raw materials and spare parts, and reduced production levels throughout the economy. The non-oil imports in 1982, in nominal value, were lower than the 1974 level. The situation was further exacerbated by an excep- tionally poor harvest caused by inadequate rainfall, and a shortfall of 332,000 tons of cereal production, a steep fall in world cocoa prices, and the influx of the Ghanaian citizens who returned from Nigeria. 26. It is estimated by the Ghanaian authorities that about one million persons have returned from Nigeria. Although the initially elaborate system of registration and demographic and economic data collection broke down quickly, the authorities have been able to form a fairly accurate assessment of the regional distribution of the returnees. Seventy percent of these people have returned to Ashanti (32%), Eastern (18%), Central (12%), and Western (10%) regions. Only 10 percent are reported to be staying in the Greater Accra region. Limited sample surveys, however, indicate that in Nigeria the majority of them were involved in non-farm occupations such as fishing, artisans and domestic help. These particular groups may drift into Accra, Tema, Kumasi, Takarodi, and other large urban centers in pursuit of jobs.  - 8 - 27. The requirements of the additional 10 percent of the population who returned from Nigeria have added severe pressures on the food availability situation. Shortages in the economy became more widespreiad and acute, and market prices of foodstuffs have shot up in recent months. Absenteeism on farms, mines and offices became more pronounced, with adverse effects on productivity that was low to begin with. To make things wors,e, the inadequate rainfall in 11' ,2 also lowered the Volta Lake Reservoir to an historical low, resulting in the shutdown of three out of five potlines of VA" CO Aluminium Smelter, thus further reducing foreign exchange earnings. Wh:ile the unit export value of cocoa in 1982 was $1594/ton, it was $2179/ton in 1981, representing a decline of 37 pe!rcent. Short Run Outlook and Medium Term Prospects 28. On April 21, 1983 the Government announced the intro(duction of a short-term stabilization program and its budget for FY83, and invited the IMF to negotiate a standby arrangement to provide financial support for the program. The program, which is described and analyzed in Part; II of this Report, is centered around an exchange rate adjustment through a system of exchange bonuses and surcharges. It also includes fiscal, monetary and production policies as well as certain institutional reforms. While the stabilization program would, with adequate external assistance, provide some relief from the present crisis situation, it has been conceived as a first step in a longer term economic recovery program aimed over time at returning the economy to a more satisfactory growth path. 29. To make the program successful a substantial infusion of foreign exchange for increasing the overall level of imports is essential. Also improved allocation of these imports is required to appreciably augment the supply of basic consumer goods, raw materials and spare parts to sharpen the supply response of mining, manufacturing, timber and agricultural activi- ties. A program to rehabilitate the road, ports, railway and transport infra- structure of the country will also need substantial external support. The other tasks that need to be accomplished include improvement of parastatal operations, a review of the role of the private and public sectors in the economy and strengthening Government capacity for planning and economic management. 30. Ghana's growth prospects beyond the stabilization and rehabilitation phases will depend to a considerable extent on the determination of the Government to sustain the kind of economic policies indicated in the economic recovery program and on an investment plan that fulfills the key requirements of the economy. The speed of this transition process will depend upon the Government's ability and willingness to implement the reform program despite the fact that some of its features may not be universally popular. 31. Should the Government succeed in maintainiLng a more realistic structure of prices and costs and a viable exchange rate, restrain growth in public consumption, improve public revenue performance, reduce strong infla- tionary tendencies associated with large public sector deficits, and make a concerted drive to expand production and exports, particularly of cocoa and minerals, through more appropriate price incentives, support services and more  -9- assured supplies of necessary inputs, it should be feasible to achieve rates of real growth in excess of 4 percent per annum (or one percent per capita) after 1985/86. With sustained improvement in economic management, the economy is capable of even higher rates of growth. However, the attainment of even a modest rate of growth after 2-3 years of implementation of the stabilization and rehabilitation programs will be a major turn around. It will require that Ghana's own efforts be supported by an augmented flow of external assistance to overcome the present external resource constraint. External capital flows, both official and private, have slowed down to a mere trickle in recent years for the reasons described above. New loans and grants from all bilateral and multilateral sources in 1982, for example, amounted to only $45 million. Net transfers from all external sources were still lower - $38 million. The latter amount was sufficient to finance only 6 percent of the country's already depressed imports. For a country of the size, population and poten- tial of Ghana, this amount is totally inadequate. As analyzed in paras. 50-59, Ghana's needs for external capital will be substantial over the next few years and will call for a major effort on the part of the donor community provided Ghana continues to demonstrate good economic performance and prudent economic policies. The external capital has to come largely from official sources. Unless such concessional assistance is forthcoming, the possiblity of a successful stabilization program and an economic rehabilitation program would be seriously diminished and could adversely affect the country's stability. External Debt and Creditworthiness 32. An agreement on a long-term rescheduling of Ghana's medium-term external debt was concluded in March 1974. Under this agreement, all payments due after February 1, 1972, in respect of pre-1966 debt obligations, are to be paid over a period of 28 years beginning 1982, after a grace period of 10 years, at 2-1/2 percent per annum. Ghana's medium and long-term external public debt outstanding and disbursed at end-1981 is estimated at US$978 million. The debt service ratio of public and publicly guaranteed medium and long-term debt is about 9 percent of exports of goods and non-factor services and is expected to rise modestly after the grace period on the rescheduled debt expires. Arrears on Ghana's short-term debt increased from US$245 million in 1977 to US$489 million by end-1978. By December 1980 these arrears had declined to US$332 million. However, 1981 saw a relapse with arrears increasing by $142 million. By the end of 1982, the short term arrears had accumulated to $570 million. The economic recovery program aims to reduce these arrears in a phased manner. 33. Ghana is relying on official sources for the bulk of the external capital required to support its development program, and relatively little of its medium and long-term borrowing is on commercial terms. Consequently, Bank loans and IDA credits disbursed together represented about 11 percent of the estimated country's total public external debt at end-1981. Service payments on Bank loans and IDA credits in 1980 accounted for 21 percent and 2 percent respectively of the country's external debt service. The share of the service  - 10 - payments on Bank loans 1/ has increased in recent years as other sources of non-concessional lending to Ghana have been almost phased out and bilateral loans contracted in the sixties were rescheduled. The share of service pay- ments to the Bank is projected to decline to 17 percent by 1985. Net trans- fers from the Bank Group to Ghana during the last decade have averaged $25 to $30 million per annum and was 'less than $10 million in 1982. Bank Group commitments, on a per capita basis, have amounted to $1.76 durii, 1977-82 and Bank Group lending has dropped to less than a project a year during this period. 34. Ghana's extremely difficult economic conditions and its vulnerability to fluctuations in cocoa export earnings, make it desirable that future debt service obligations be kept as low as possible. Consequently, Ghana will have to depend upon IDA resources for Bank Group borrowing over the next few years. This is also consistent with Ghana's relatively low per capita income. At the same time, to help ensure a more adequate flow of foreign exchange resources to the coun-try, it would be appropriate to finance a portion of the local costs of projects. PART II - THE GOVERNMENT'S ECONOMIC RECOVERY PROGRAM 35. The economic recovery program announced on April 21, 1983 was designed to initiate the process of correcting structural imbalances and reha- bilitating the economy to pave the way for restoration of economic growth in the country. The main objectives of the program are to realigfn relative prices in favor of production eLnd the export sectors, to reduce the Government budget deficit and thereby the underlying inflationary pressures, and to facilitate the flow of imports to ease the severe foreign exchange constraint faced by the economy. 36. A summary of actions taken and to be taken by the Government is shown in Table 2. The main elements of the program are discussed in the following paragraphs. Exchange Rate Adjustment 37. The Government has introduced a multiple exchange rate system based on payments of bonuses on exchange receipts and imposition of surcharges on exchange payments. On both the receipts and payments side, transactions are divided into two categories. A bonus and surcharge rate of 990 percent, calculated on the basis of the exchange rate of 02.75 = US$1, is applied to one category of transactions, and a bonus and surcharge rate of 750 percent is applied to the other category of transactions. Thus, the multiple exchange rates resulting from the system are 029.975 = US$1 and 023.375 = US$1 as compared with the previous exchange rate of 02.75 = US$1. The weighted average exchange rates for payments and receipts transactions are about 1/ The last Bank loan granted to Ghana was for a power project in 1977.  - 11 - 025 = US$1. This change, representing a devaluation of approximately 810 percent in local currency terms and reflecting purchasing power parity movements, would bring the value of the cedi close to what it was in 1972. The bonuses and surcharges are applied at the authorized dealers of foreign exchange, and the system is operated to ensure that the Bank of Ghana does not incur losses in its exchange transactions over time. 38. An important decision taken by the Government is to follow an exchange rate policy whereby the two effective exchange rates are adjusted periodically so that the real purchasing power of the weighted average exchange rate in terms of the currencies of Ghana's major trading partners would be maintained. It is the intention of the Government to unify the mul- tiple rates at a realistic level by mid-1984. In pursuance of this objective, the lower rate (presently 023.375 = US$1) will be depreciated faster than the higher rate (presently 029.975 = US$1). Agricultural Pricing Policy 39. To stimulate the production of export and food crops, the Government has increased the producer price of cocoa from 012,000 per ton to 020,000 per ton, effective May 1983, and has already increased the minimum support price for maize and rice to 05,000 per ton and 013,000 per ton respectively, and palm oil to 025,000 from 017,000 in 1982. 40. Subsidies on insecticides and sprayers for cocoa farmers would be gradually phased out. Subsidies on fertilizers have been reduced from 50 percent of the farm gate price to 20 percent. The Government gave assurances that it would, by October 31, 1983, review with the Association its program to gradually phase out the remaining subsidies on fertilizers (Section 3.06 of the draft Development Credit Agreement). There are no subsidies in existence on any other agricultural inputs. 41. The Government has announced its intention to maintain cocoa prices at a level that will ensure adequate incentives to producers. To this end, assurances were received from the Government that it would review annually the prices paid to farmers for the purchase of cocoa and, in consultation with IDA, adjust such prices to maintain adequate incentives and announce such adjustments sufficiently in advance of the beginning of the cropping season (Section 3.08 of the draft Development Credit Agreement). In addition, the Government intends to implement comprehensive and far-reaching measures aimed at reducing the current level of marketing costs of the GCMB. Petroleum Pricing 42. Petroleum product pricing has been inadequate over the last decade due to a grossly overvalued cedi. Petroleum product prices are controlled by the Government at the ex-refinery, wholesale and retail levels . As the action on the exchange rate would imply an immediate pass-through of prices to consumers of an unmanageable magnitude, the Government considers it necessary to maintain a consumer subsidy on petroleum prices on a temporary basis. However, an upward adjustment of about 100 percent has already been made in petroleum retail prices and further adjustments will be made periodically, phasing out the subsidy completely, not later than 1984.  TABLE 2 GHANA ECONOMIC RECOVERY PROGRAM Action to be Taken Policy Issue Action Already Taken Proposed IMF Standby RIC External Sector 1. Exchange Rate Multiple exchange rates intro- Government will adopt a duced in April 1983 reflecting flexible system and move to- devaluation of 810% in terms wards a unified exchange rate. of local currency on an average basis. 2. Foreign Exchange Government will integrate Allocation import programming And foreign exchange allocation processes. 3. Arrears Arrears will be reduced in a phased manner. Public Finances 4. Revenue Policy Tax bases restored as a result Tax administration will be of exchange rate adjustment. strengthened. New tax measures include an increase in duty on gold and a new tax on net wealth. A simplification and reduction in tariff rates on imports: zero for oil, 25% and 30%. Substantial increases on a wide range of fees and departmental sales of goods and services. 5. Expenditure Policy Expenditure control system has The share of development expendi- been established. ture in total expenditure will be increased. 6. Budgetary Deficit Budgetary deficit for FY83 Credit to Government from the targetted for reduction from banking system in 1983 will be 43% of expenditure to 20% restrained to 02.3 billion, or 13% of expenditure. of expenditures.  Action to be Taken Policy Issue Action Already Taken Proposed IMF Standby RIC Cocoa 7. Producer Pricing Cocoa producer prices Prices will be reviewed increased from 012,000/ton annually with IDA and adjust- to