Ghana - Structural Adjustment Program Project

Document of The World Bank FOR OFfICIAL USE ONLY Report No. P-4403-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 26.9 MILLION AND A PROPOSED AFRICAN FACILITY CREDIT OF SDR 64.0 MILLION TO THE REPUBLIC OF GHANA FOR A STRUCTURAL ADJUSTMENT PROGRAM March 23, 1987 This document has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Calendar 1985 From January 1986 From September 1986 US$1 054.054 090.0 0128-155 1/ Cedi (0) 1 US$0.0185 US$0.011 US$0.0073-0.0065 FISCAL YEAR JANUARY 1 - DECEMBER 31 ABBREVIATIONS ADF - African Development Fund Cocobod - Ghana Cocoa Board ECG - Electricity Corporation of Ghana EFF - Extended Fund Facility ERP - Economic Recovery Program GHAIP - Ghana Italian Petroleum Company Limited GNPC - Ghana National Petroleum Corporation COIL - Ghana Oil Company Limited GP&T - Ghana Posts and Telecommunications GPHA - Ghana Ports and Harbour Authority GRC - Ghana Railway Corporation GWSC - Ghana Water and Sewerage Corporation IFAD - International Fund for Agricultural Development LODP - Letter of Development Policy MFEP - Ministry of Finance and Economic Planning NATCAP - National Technical Cooperation Assessment OHCS - Office of the Head of Civil Service PIB - Prices and Tncomes Board PNDC - Provisional National Defence Council SAF - Structural Adjustment Facility SATS - Structural Adjustment Institutional Support SEC - State Enterprises Commission SGMC - State Gold Mining Corporation SIL - Special Import Licence SOE - State-owned Enterprise UNFPA - United Nations Fund for Population Activities VRA - Volta River Authority 1/ A dual exchange rate system was established on September 19, 1986 when a foreign exchange auction was instituted for specified transactions. The 990 rate applied to the first window (cocoa and residual oil exports, petroleum and essential drugs imports, and central government debt service contracted before January 1, 1986); the rate on the second window was established at the weekly auction. The two rates were unified with effect from February 20, 1987; all transactions are now valued at the rate emerging in the weekly auction. In the week ending March 13, 1987, the marginal rate at the auction was 0155 = US$1. FOR OFFICIAL USE ONLY TABLE OF CONTENTS Credit and Program Summary ........................... i-i PART I - THE ECONOMY A. Introduction .................................... 1 B. Structure of the Economy ......................... 2 C. Economic Performance between 1970-1982 ........... 3 D. The Economic Recovery Program 1983-1986 ........... 4 E. The Economy's Response: 1983-1986 ................ 6 F. Stabilization Issues in 1986 ..................... 8 G. Remaining Adjustment Tasks in the Short to Medium Term .......................... 9 PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM OVERVIEW ............................................. 10 INCENTIVE POLICIES ......................... . ......... 14 A. Trade Liberalization ............................. 14 B. Cocoa Sector Policy .............................. 16 REFORM OF THE PUBLIC SECTOR .......................... 19 C. Public Expenditure Policy ..................... 19 D. State-owned Enterprises (SOEs) Sector ............ 22 E. Public Sector anagement ......................... 24 MEDIUM- AND LONG-TERM ISSUES ........................ 29 F. The Next Phase of Adjustment ..................... 29 G. Addressing the Longer Term Challenges ............. 29 PART III - IDA'S ROLE AND THE PROPOSED OPERATION A. Experience with Past Policy-Based Lending .......... 34 B. Background to the Proposed Operation ............. 35 C. The Proposed Financing Package ................... 35 D. Procurement and Disbursement ..................... 38 E. Monitorable Actions .............................. 39 ECONOMIC AND SOCIAL EFFECTS .......................... 40 F. Economic Effects ................................. 40 G. Social Impact ................ .................. 46 H. Risks ............................................ 48 PART IV - BANK GROUP OPERATIONS IN GHANA ................. 50 PART V - COLLABORATION WITH THE IF ....................... 53 PART VI - RECOMMENDATION ................................... 55 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. Pavie TEXT-TABLES: I Projected Financing Needs and Availabilities .... 36 2 Selected Economic and Financial indicators ...... 41 3 Two Scenarios (1986-95) ............ 44 ANNEXES: I Economic Indicators It Status of Bank Group Operations in Ghana lit Supplementary Data Sheet IV Letter of Development Policy V Matrix of Policy Actions Vt Macro-Economic Projections GHANA STRUCTURAL ADJUSTMENT CREDIT Credit and Program Summary Borrower: Government of Ghana Credit Amounts: IDA: SDR 26.9 million (US$34 million equivalent) African Facility: SDR 64.0 million (US$81 million equivalent Total: SDR 90.9 million (US$115 million equivalent) Terms: Standard IDA and African Facility terms. Program Description: The proposed credits would support the Government's structural adjustment program which aims (i) to establish an incentive framework that stimulates growth, encourages savings and investment, and strengthens the balance of payments, and (ii) to improve resource use, particularly in the public sector, and direct resources to key areas of adjustment, while ensuring fiscal and monetary stability. The Ghanaian authorities have, with Bank staff assistance, prepared an action program of monitorable measures in a few strategic areas to be implemented in the present phase of the Government's adjustment program (1987-88) and to be supported by SAL. The Government's Letter of Development Policy (Annex TV) outlines these measures and sets them in the context of the overall adjustment program. The SAL policy framework will focus on trade liberalization, cocoa sector policies, public expenditure policy, state-owned enterprise reform, and public sector management. Program Benefits: The structural adjustment program is expected to improve the Ghanaian economy's growth prospects through a strong stimulus to exports and efficient import substitution, improved incentives to private and public savings, the planned expansion in public investment, and increased efficiency in the use of resources. The resultant recovery in exports and private sector remittances will improve the long run viability of the balance of payments. The exchange and trade reforms will shift incentives further from trading and rent-seeking activities to production, and encourage manufacturers to shift emphasis towards exports. The reduced role of the state in the productive sectors, the planned rehabilitation of infrastructure, and the - ii - overall improvement in incentives, is intended to improve the environment for the private sector. The public sector will be slimmer, and more efficient in the use of resources. State-owned enterprises, in particular, will be more subject to market forces. Public investment is to be stepped up and prioritized to rehabilitate essential economic and social infrastructure and support the recovery of the private sector. The increased resource flows to health and education and the restructuring of these expenditures to emphasize primary education and primary health care will reverse the downward slide of these important sectors. Programs to monitor and minimize the social costs of adjustment are under preparation. Program Risks: The risks associated with the structural adjustment program are; (i) weak implementation capacity of the Government; (ii) possible delays in the supply response to the reforms; (iii) exogenous shocks from climatic or commodity price behavior; and (iv) socio-political risks. However, technical assistance available under the accompanying Structural Adjustment Institutional Support Project and other ongoing projects, and smoother import flows based on the past three years' procedural strengthening and experience, will mitigate the implementation capacity and supply response risks. In addition, the general public is benefiting from the return to economic growth, and with the increasing strength of the economy, exogenous shocks may be better absorbed. Financing Plan: IDA US$34.0 million African Facility US$81.0 million Estimated The credits would be disbursed in two tranches: Disbursements: US$57.5 million equivalent would be available upon effectiveness, and the remaining US$57.5 million equivalent after a performance review to be held around January 1988. IDA FY 1987 1988 1989 (US$ million) IDA 7.5 9.5 17.0 African Facility 23.0 50.0 8.0 Staff Appraisal This is a combined President's and Appraisal Report: Report. map: 18112R1 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT AND A PROPOSED AFRICAN FACILITY CREDIT TO THE REPUBLIC OF GHANA FOR A STRUCTURAL ADJUSTMENT PROGRAM 1. I submit the following report and recommendation on a proposed Development Credit of SDR 26.9 million (US$34 million equivalent) and a proposed African Facility Credit of SDR 64.0 million (US$81 million equiva- lent) on standard IDA terms to the Republic of Ghana to support the Govern- ment's structural adjustment program. A proposed Development Credit of SDR 8.6 million (US$10.8 million) for a parallel Structural Adjustment Institutional Support (SAIS) Project is submitted separately (Report No. P-4493-GH dated March 23, 1987). 2. Part I of this report reviews the characteristics and recent performance of Ghana's economy and outlines the main adjustment issues. Part II describes the Government's structural adjustment program, and Part III describes the present operation and analyzes its economic and social impact. Part IV describes Bank Group operations in Ghana. Part V describes IMF relations with the borrower and collaboration with the Bank. PART I - THE ECONOMY 3. A report entitled Ghana: Policies and Issues of Structural Adjustment (Report No. 6635-GH) focusing on aid requirements for the structural adjustment program is being distributed to the Executive Directors separately. Country data appear in Annex I. A. Introduction 4. Ghana lies on the Gulf of Guinea on the west coast of Africa, a few degrees north of the equator. Preliminary data from the 1984 census show a population of 12.2 million, of which over 70 percent is concentrated in the southern half of the country, where much of its economic and natural resource base is located. Ghana once enjoyed a fairly high standard of living compared with most other West African nations. However, poor economic policies, combined with external shocks such as drought and oil price increases, have contributed in the 1970s and early 1980s to a declining gross domestic product. With a high population growth rate (a natural rate of increase of about 3 percent), there has been a substantial erosion of real per capita income to its present level of about $390 (1985). As a result, almost half the population is estimated to live in absolute poverty. The country's basic needs indicators, once ranked the - 2 - best in Africa, are now no better than those of other sub-Saharan African countries with comparable per capita incomes. Modern health services are available to only about a third of the people, and less than half have access to safe water. Although the education system is well established and primary schooling has been free since 1962, there has been a substan- tial decline in standards, and 50 percent of adult men and 70 percent of adult women have had no formal education. 5. Since April 1983, when the Government of Ghana announced a major Economic Recovery Program (ERP), there has been a marked improvement in both policies and economic management. There has also been an impressive recovery of the economy, with considerable progress in the realization of the Government's stabilization and adjustment objectives. The Government recognizes that to sustain these initial gains will require substantial further adjustment over the remaining years of this decade, if not longer. The structural adjustment program described in this report represents the first stage of this longer term adjustment process. The initial response of the economy to the significant adjustment efforts to date bodes well for the outcome of the further measures planned. Nonetheless, the path ahead is long and difficult, and success is contingent on political will, compe- tent economic management, and a favorable external environment, including sizeable concessional aid flows. B. Structure of the Economy 6. Ghana is comparatively well endowed with natural and human resources. The country has a good supply of land suitable for growing a variety of tree crops, most importantly cocoa, cereals, and starchy sta- ples, and considerable fishing and forestry resources. The economy is based primarily on small-scale agricultural production, chiefly of cocoa and staple foods (maize, rice, millet, yam, cassava, and plantain). Agriculture accounts for 40 percent of GDP (at current 1985 market prices), and 70 percent of the population derives its income from agriculture or related activities. Productivity is typically low, due to inadequate support services, lack of fertilizers and other inputs, and poor transport facilities. Mining and forestry have been important sectors since the nineteenth century. The country has valuable mineral deposits, particularly gold, but also diamonds, bauxite, manganese, and some offshore oil. Domestic petroleum production still accounts for a small share of the country's requirements, which are met largely through the import of crude oil which is refined domestically and used chiefly as fuel for transport. The Akosombo Dam on the Volta River, built in the mid- 1960s, and the Kpong Dam, commissioned in 1982, are capable of meeting the country's foreseeable needs for power, and there is further potential for hydro-power generation. 7. After Independence in 1957, manufacturing output increased substantially due to government policies which encouraged import substitu- tion behind high protective walls. Thus, although Ghana's manufacturing capacity is relatively well developed, diverse and long established compared to most other African countries, much of it is inefficient, with low capacity utilization, and accounts for only 11 percent of 1985 GDP. - 3 - The services sector, which accounts for slightly over 40 percent of GDP, is dominated by wholesale and retail trade. The country's transport infrastructure was once relatively well developed, with railways in the more populous south and a reasonable road network throughout. However, years of neglect have substantially eroded the value of this investment. 8. Until the mid-1970s, Ghana had one of the most developed and effective education systems in Western Africa, with a significant increase in enrollment at primary and secondary levels following the introduction in 1962 of compulsory and free universal education from the age of six. On top of this substantial base lay a sizeable educated intelligentsia which was larger in relation to the population than in other sub-Saharan African countries. However, with reduced expenditures on education (falling faster than even the rate of decline in the rest of the economy), there has been a marked deterioration in the system. While primary enrollment has been maintained at about 70 percent, there is a high drop-out rate, and access to secondary and tertiary education is severely limited. Erosion of teachers' incomes has led to a substantial exodus of trained teachers from the system. This exodus is part of a larger brain drain that has eroded the country's educated manpower base. C. Economic Performance: 1970-1982 9. Throughout the 1970s, Ghana's economy was poorly managed. Large budget deficits, driven partly by the need to support a sprawling, ineffi- cient public sector, led to high inflation. Given a reluctance to adjust the exchange rate, the fixed nominal rate became grossly overvalued, shifting relative incentives away from exports into import trade. The resulting deterioration in export performance, combined with a growing disenchantment on the part of aid donors with Ghana's performance, caused a perpetual foreign exchange crisis that pushed successive governments into increasingly restrictive import regimes, which in turn starved the economy of the main fuel for its growth. The erosion of the tax base due to declining exports and imports and the related drop in economic activity forced severe cutbacks in Government operations and maintenance and capital expenditures. There was, thus, a marked deterioration in what was once a fairly well-developed economic and social infrastructure. This, in turn, further reduced the country's productive capacity. 10. A tendency to respond to shortages with controls and rationing worsened the problem by eroding the incentives to produce and save, dimin- ishing the capacity of public sector entities to maintain the level and quality of services, and creating a vast parallel black market with its related corruption, smuggling and tax evasion. Declining real wages, political instability, and reduced economic opportunities, led talented and skilled Ghanaians to leave the country, depriving it of scarce managerial, administrative, and technical resources. 11. To add to all its difficulties, Ghana was subjected in the early 1980s to three other problems. First, a prolonged and severe drought created the worst food shortages since Independence. Second, the external terms of trade sharply deteriorated following the increase in petroleum prices, and a softening in prices of Ghana's major exports (cocoa and gold, the latter as compared to the high 1980 price). Third, the sudden return of over one million Ghanaians from Nigeria severely strained the food and employment situation. The cumulative effect of Cho downward economic spiral and the first two of these "shocks" to the system can be soon in the trends in key economic indicators between 1970 and 1982: per capita real income declined by 30 percent; import volumes fell by a third; real export earnings foll 52 percent; domestic savings and investment declined from 12 and 14 percent of GDP respectively in 1970 to almost insignificant levels; and inflation averaged 44 percent per annum over the period. D. The Economic Recovery Program: 1983-86 12. A Provisional National Defence Council (PNDC) was constituted when Flight Lieutenant J. J. Rawlings took power on December 31, 1981. To address the general erosion of the country's economic and social founda- tions, the PNDC introduced an Economic Recovery Program (ERP) in April 1983 which was developed in close consultation with the IMF and the World Bank. The program established a framework of policies for the 1984-86 period. The IMF provided support for the program (see Part V) by making available two successive stand-by arrangements covering the period July 1983-December 1985 and approving two purchases under the Compensatory Financing Facility. The Government met the performance criteria under the two programs and has successfully completed all purchases. A third stand-by arrangement was approved by the IMF Board on October 15, 1986. IDA has supported the program, with four policy-based loans totalling some US$274 million (including African Facility allocations) together with conventional project lending of US$212 million. Total assistance from members and observers of the recently reconstituted Consultative Group for Ghana, including IDA, has risen sharply, with annual average commitments in 1984-86 of $434 million, compared with $198 million during 1980-83. 13. The ERP's major objectives have been (a) the realignment of relative prices in favor of exports and the productive sectors, and away from trading and rent-seeking activities; (b) the restoration of fiscal and monetary discipline, (c) the initiation of efforts to rehabilitate the country's productive base and economic and social infrastructure, and (d) a restoration of incentives and the establishment of a proper climate for private savings and investment. The main actions taken between April 1983 and June 1986 under the program are summarized below: (i) Exchange and trade policy: The Government committed itself to a flexible and realistic exchange rate policy. Over a three-year period to January 1986, the cedi was depreciated, through frequent and large discretionary changes, from g2.75 - US$1.00 to 090 - US$1.00, a depreciation of over 90 percent in real terms. Nevertheless, the official rate remained strongly overvalued, necessitating the retention of quantitative controls over imports using official foreign exchange. However, import controls were lifted on goods financed from importers' own foreign exchange, for which "special unnumbered licenses" (SUL) (later renamed "special import licenses" (SIL)) ware issued. The SIL arrangement was further lItheralized in 1985 by shifting from a positive list of eligible goods to a short negative list. Meanwhile, the basic structure of import taxation was simplified in 1983 to subject most imports to a uniform customs duty rate of 30 percent, plus n 20 percent sales tax (compared with 10 percent for most domestic production). Many exceptions remained, however, especially in the form of exemptions for favored producers. (ii) Prices and incomes policy: A related component of the program is the establishmnent of realistic relative prices and incomes in the context of the large movements in the exchange rate. Cocoa producer prices were raised from 012,000 per metric ton in 1982/83 to 085,500 per metric ton in 1986/87. Administered prices of imported goods have been adjusted promptly to permit a full pass-through of the higher cedi cost following successive exchange rate changes. Tariff rates on all utilities were raised sharply to reflect cost increases and eliminate or reduce subsidies. Price controls have been largely dismantled to allow market forces to determine price levels. Comprehensive statutory price controls were reduced to a list of eight essential goods 1/ and distribution controls were lifted during 1985. Remaining price controls take the form of flexible price caps which allow the full cost plus a profit margin to be passed on to the consumer. Public sector wages and salaries were raised substantially in an effort to reverse partially a severe erosion in real incomes of civil servants. Interest rates were increased sharply in an effort to achieve positive real interest rates. As a result, the rate on 12-month time deposits more than doubled from October 1983 to 20 percent in August 1986 while the maximum lending rate rose nine percentage points to 23 percent. (iii) Fiscal and monetary policy has been substantially tightened since 1983. There has also been a significant improvement in the structure of the budget, with an impressive recovery in revenues (para 15) and a restructuring of expenditure programs in favor of essential rehabilitation expenditures. (iv) External payments arrears: Cash payments together with consoli- dation into medium-term loans reduced the level of arrears from $601 million in April 1983 to about $175 million at the beginning of 1986. Arrears rose during the first half of 1986, but were reduced again to $171 million by December 1986 (para 21). (v) Sector-specific programs were prepared to rehabilitate key export industries (cocoa, gold, timber) and supporting infrastructure (power, transport, telecommunications and water supply) needed to ensure an adequate supply response. These attracted considerable donor support. More 1/ Imported rice, sugar, baby food, cement, textiles, drugs, matches and soap. - 6 - recently, new sector programs have been developed for agriculture, indus- try, health, and education. (vi) Private sector environment: A determined effort has been made to improve the climate for private investment. The private sector is being increasingly consulted at the higher levels of economic policy formulation and is represented on the National Economic Commission. Furthermore, a number of decisions that affect the sector are now brought before a tripartite committee of Government, trade unions and employers. There has been a marked improvement in industrial relations. A new Investment Code has been approved which is designed to encourage domestic and foreign private investment and establish a framework of rules to protect investors. E. The EconomX's Response: 1983-1986 14. The initial response of the economy to the policy reforms was heavily dampened by the severe drought in 1983, infrastructure bottlenecks, and lags in aid inflows. Nevertheless the Government persisted with, and broadened the reform program. This has paid rich dividends in terms of substantial gains in output, improved fiscal performance, a deceleration in inflation and enhanced aid commitments in support of the program. After a decline in real output in 1983, economic performance improved sharply. CDP growth in the 1984-86 period averaged 6.3 percent, led by the strong recovery in agriculture due to improved incentives and the return to more normal weather. Manufacturing responded strongly to the increased avail- ability of imported raw materials and spares, with growth averaging 14 per- cent per annum. Minerals production recovered sharply from the low levels of 1983 following the restoration of railway services to port, while the services sector grew at 6 percent per annum. Thus, for the first time in a decade, Ghana enjoyed three successive years of strong per capita income growth. Data on savings and investment are sparse, but Bank staff esti- mates suggest a healthy recovery in these key areas as well. 15. The government's fiscal position also improved markedly. Reve- nues rose from 5 percent of GDP in 1983 to 14 percent in 1986. This increase reflected in part the impact of the exchange rate depreciation on the tax base and on the profits of the export sectors, particularly cocoa. Direct taxes and non-tax revenues have also risen sharply, reflecting improved tax administration, additional resource mobilization measures and the improved economic performance. On the expenditure side, recurrent expenditures have risen as a result of the decision to reverse partially the erosion of real public sector wages and salaries, but have been suffi- ciently contained to permit a small surplus on the current account. Development expenditures have been stepped up to address infrastructure bottlenecks. Capital expenditures (including project aid disbursements) have risen from miniscule levels to nearly 6 percent of 1986 GDP. Despite this increase, the overall deficit has been contained at levels well below those prevailing in the 1970s and early 1980s. At the same time, dependence on inflationary bank financing has been virtually eliminated. - 7 - 16. Money and prices: The sharp drop in the ratio of broad money to GDP to as little as 13 percent in 1984 has been partially reversed in this period, with the ratio rising by 1986 to nearly 17 percent. This has been possible despite conservative credit policies in which not credit to Government has been reduced from about 9 percent of GDP in 1984 to 6 percent by 1986. Credit outstanding to the private sector has increased from 5 percent of GDP in 1984 to 8 percent in 1986. Nevertheless, the private sector complains of a severe liquidity problem due to the very large changes in the cedi costs of imports, the poor financial position of most companies and a tight credit policy. The substantial improvement in demand management since the ERP was launched combined with a sharp recovery in agricultural production have contributed to the marked deceleration in inflation, as measured by the consumer price index, from 123 percent in 1983 to 25 percent in 1986. This is despite the very large exchange rate adjustments during this period, suggesting that prices of most commodities in the economy were already reflecting their scarcity values. 17. As for the balance of payments, the recovery of exports and imports has been slow, and considerably below initial expectations. Although the nominal value of exports rose by 21 percent per annum between 1983 and 1986, the recovery has been below program targets. The slow export recovery reflected severe infrastructure constraints, structural bottlenecks, and the continuing (albeit rapidly diminishing) inadequacy of incentives. The strong reform program attracted a high level of external aid commitments. Bilateral commitments have averaged around $165 million in 1985 and 1986 while multilateral commitments averaged $285 million. While bilateral commitments have remained below the levels recommended by the Bank, they have risen sharply for a number of key donors such as Canada, Germar.r. Japan and the UK. The dependence on multilateral aid remains high and the shift to quick disbursing aid has been somewhat slower than desirable. Aid disbursements fell in 1985 to $224 million before rising sharply in 1986 to $360 million. This partly reflected the shift in the composition of new 1985 commitments away from quick disbursing program, food and commodity aid provided in 1984; in addition, indications were not converted into commitments till late in 1985 in many cases. Procedural delays and liquidity problems facing importers added to the difficulties. The improvement in 1986 disbursements reflected the greater utilization of quick disbursing program assistance, improvement in procedures and processes, and the establishment of the automatic licensing system following the introduction of the auction in the last quarter of 1986. The capacity to import was, therefore, somewhat constrained in 1985, but improved substantially in the second half of 1986. 18. Debt service burden: Ghana's medium- and long-term external public debt outstanding and disbursed (excluding the IMF) at end 1985 amounted to US$1.2 billion. Short-term debt is estimated at $300 million. Thus total debt is about 24 percent of GDP. Bilateral creditors account for two-fifths of medium and long-term debt; multilateral sources for about one half (Bank and IDA loans comprised 32 percent of the total debt); and suppliers credits for the balance. In addition, use of IMF credit at the end of 1986 totalled SDR 611 million. The debt service ratio has risen - 8 - sharply from 14 percent in 1982 to 37 percent in 1986, due mainly to short- term oil borrowings. The debt service ratio, inclusive of IMF repurchases and settlement of payment arrears, rose to 47 percent in 1986. F. Stabilization Issues in 1986 19. Following two successful stand-by arrangements, the Government began negotiations with the Fund for a third stand-by late in 1985. However, it took nine months to reach agreement on the program, mainly because of slippages and implementation difficulties associated with the initial package of measures that constituted the 1986 program. This package comprised the large (33 percent) exchange rate adjustment to g90 - US$1.00, and accompanying adjustments in administered prices. At the same time, the minimum wage was raised by a further 29 percent to 090 per day and civil service pay relativities were revised to raise the ratio between top and bottom pay scales from about 2:1 to almost 6:1. Income tax rates were adjusted to ensure adequate improvements in after-tax relativities. This package had been discussed and agreed with Fund and Bank staff. The increase in the minimum wage was necessitated by the need to partially compensate workers throughout the economy for erosion in their real incomes and for the increase in productivity since the initiation of the reform program. The increase in relativities for the civil service was intended to improve morale and efficiency which was at an all time low. Both objectives were largely attained. 20. However, the wage and salary increases actually implemented differed significantly from the ones originally intended (para 19). Moreover, a number of salary related allowances were increased without being properly costed. These led to a severe strain on the budget at a time when there were unexpected shortfalls in revenue receipts on account of delays in cocoa shipments. The increase in government salaries led to leap-frogging action by employees of state enterprises and the private sector. Thus, net claims on government by the banking system rose sharply in the first half of 1986, as did credit to the rest of the economy, resulting in pressures on domestic prices and the build up of external arrears for the first time since the initiation of the recovery program. To correct the situation, the government took a number of measures aimed at a turnaround in the budgetary and balance of payments situation. These measures included the institution of a foreign exchange auction on September 19, 1986 for specific transactions together with total relaxation of discretionary import licensing for virtually all producer goods, reductions in budgetary expenditures, including a revised permanent wage and salary scale which went into effect in June 1986, and limitations of civil service allowances for the year to those already paid through June. Credit expansion was tightened and concessional lending rates eliminated for agriculture and exports. Agreement on these measures formed the basis for the Fund's third stand-by, which came into effect in mid-October 1986. 21. Despite the limited time remaining in the year, the measures introduced resulted in a significant reduction in the internal and external imbalances that had emerged in the first half of 1986. The foreign - 9 - exchange auction resulted in a depreciation of the auction rate from p128 at the first auction to $154 by end January, narrowing the spread between the auction and parallel market rates to 20-25 percent, compared to 100 percent prior to the auction. The Bank of Ghana's net foreign assets position, which had deteriorated by $191 million during the first half of 1986, improved by $125 million during the second half of the year. Similarly, external arrears after increasing by $139 million during the first half, were reduced by $143 million in the second half. The expenditure reduction measures introduced in the second half of the year also enabled the Government to restrict its access to the banking system to the sub-ceiling set under the Fund program. Credit to the "rest of the economy" (the private sector) also remained within the targeted amount. 22. However, net domestic assets as a whole exceeded the program target by g9.3 billion. Of this, some g2.3 billion was due to Cocobod as a result of larger than projected crop purchases and delays in anticipated cocoa shipments. The rest represented developments in the "other items net" account due mainly to a deterioration in the net position of the Bank of Ghana in the last quarter of 1986, reflecting foreign exchange losses, unanticipated obligations to the Ghana Commercial Bank, as well as an increase in net unclassified assets. This substantial increase in net domestic assets contributed to a total expansion of broad money of 54 percent for 1986, as against the programmed increase of 19 percent. However, the real growth and inflation (consumer prices) objectives for the year of 5 and 25 percent respectively were met. Under the stand-by arrangement, the Fund and the Government have reached agreement on a program for 1987 which aims at a growth of GDP of 5 percent in real terms, a reduction in inflation to 18 percent, and an overall balance of payments surplus equivalent to $120 million. C. Remaining Adjustment Tasks in the Short to Medium Term 23. Despite the considerable progress on structural issues during the first phase of the ERP, the Government recognizes that further efforts are needed in several areas. Reform of the exchange rate regime with a view to unifying the different foreign exchange markets remains a centerpiece of the adjustment program. With continued market determination of the exchange rate through the auction, further liberalization of trade policies is a logical corollary to improve incentives and reduce the bias against exporting. A more realistic exchange rate for cocoa exports would also permit improvements in the producer price, which is around one-fourth of the f.o.b. price at the anticipated average official exchange rate- implying an excessively high level of taxation. Part of this high taxation represents the inflated operating costs of the Cocobod despite substantial reductions in its staff in late 1985. 24. Achievement of the Government's development objectives continues to be impeded by severe resource constraints. Despite the large wage increases announced in 1986, salaries for senior staff are still too low; operations and maintenance expenditures are inadequate; and development expenditures are still inadequate, and have been insufficiently - 10 - prioritized, and subject to stop-go policies. State-owned enterprises constitute a heavy drain on the budget. Moreover, as was clear from the policy and monitoring slippages in 1986, despite a strong political commit- ment to fiscal and monetary discipline, the capacity of the country's key institutions to monitor and implement an adjustment program remains inade- quate. 25. The private sector response to the reform program has been uneven. While confidence is recovering, the recovery is slow as the massive changes in relative prices penalize trading, squeeze rents, and create some uncertainty in the economic environment. Moreover, the recent somewhat excessive zeal in tax collection to correct the difficult budget- ary situation, and continuing uncertainty about the future direction of policies and the Government's intentions have complicated the business climate. Lack of confidence in the banking system in particular remains a major obstacle to resource mobilization and contributes to the still low ratio of broad money to GDP. Finally, the high debt service burden requires a much more effective management of the external debt. 26. This assessment of priorities has driven the Government's agenda for structural adjustment described in Part II. PART II - THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM OVERVIEW 27. The basic objective of the Government's Structural Adjustment Program is to lay a firm foundation for the development of a "buoyant, self-reliant and increasingly integrated economy'. To attain this objec- tive will require an incentive framework that stimulates growth and encour- ages savings and investment, and economic management that improves resource use, particularly in the public sector, and directs resources to key areas of adjustment, while ensuring fiscal and monetary stability. 28. Within this broad overall objective, the Government is setting itself the following more specific goals for the 1987-89 period: (i) sustain economic growth at around 5 percent per annum; (ii) increase the level of investment from about 10 percent of GDP in 1986 to 23 percent of 1989 GDP at current market prices, and to shift its composition to lay the foundation for sustained long term growth; (iii) increase the national savings rate from the present 7 percent of 1986 GDP to 15 percent of 1989 GDP; (iv) improve the viability of the balance of payments; and - 11 - (v) improve the management of resources within the public sector. These objectives are to be attained in the context of macro-economic stability, implying the continuation of the present regime of strict fiscal and monetary discipline. The principal instruments to attain these goals are summarized below: 29. Incentive Policies: The economic growth objectives are to be attained through further improvements in the incentives structure supple- mented by sector-specific rehabilitation programs. On the incentives side, the principal policy components are: (a) further progress towards a unified and realistic exchange rate and rationalization of the several foreign exchange markets with a view to their complete merger by January 1988; and (b) a phased program of trade liberalization. The unification of the exchange markets and a proposed rationalization of taxes on trade are intended, in combination, to enable domestic prices to reflect more closely their international equivalent and domestic value-added in production to receive reasonable and more uniform effective protection. Meanwhile, the once severe distortions in domestic prices have been moderated already by the removal of price control on most commodities and the elimination of distribution controls (para 13 (ii)). Remaining price controls will be progressively removed as the availability of goods improves further. Agricultural producer prices have been liberalized for most crops. The Government intends to ensure remunerative prices for the six crops (cocoa, coffee, sheanuts, tobacco, cotton and rubber) for which the producer price is still set administratively. 30. Sector rehabilitation programs are designed to increase capacity utilization in the key productive sectors through the financing of inputs, spares and capital goods, removal of transport and other infrastructural and institutional bottlenecks, and the improvement of management of key parastatals (such as the State Gold Mining Corporation). These programs have now been integrated into a medium-term development program (see paras 60-61). 31. Policies to stimulate investment: The substantial increase in investment levels proposed over the 1987-89 period is an essential compo- nent of the government's development strategy. Almost all of the increase in the public sector will need to be directed towards the rehabilitation of the country's economic and social infrastructure (para 60), while the private sector will need to take on the responsibility for rehabilitating the country's productive base, particularly in agriculture and industry. To bring about this increase in investment, the Government proposes to maintain a stable and attractive environment for the private sector and to seek joint ventures for selected public enterprises with foreign and local private investors. It is seeking IFC's assistance in operationalizing the new Investment Code and reviewing current disincentives to foreign and domestic investment. In particular, the Government intends to develop a phased program to clear the backlog of remittances of dividends and royal- ties, while easing access to the auction for future such remittances. It - 12 - also intends to increase substantially public expenditure directed specifi- cally at removing infrastructural bottlenecks (highways, railways, tele- communications and ports) that are impeding the private sector's supply response to the policy reforms. The Government's proposed expenditures also aim at restoring the effectiveness of the health and education systems. 32. Policies to increase domestic resource mobilization: The sub- stantial increase proposed in the national savings rate is to be achieved through measures to (a) encourage private savings, (b) attract a higher level of private transfers from abroad, including workers' remittances, and (c) increase the level of public savings. 33. The main focus of policy in the area of private savings will be to reverse the precipitous decline in the holding of financial assets between 1977 and 1984 (when the ratio of broad money to GDP fell from 29 percent to 13 percent). With the reversal in the policies that were the cause of this decline, the projected financial deepening to some 22 percent of GDP by 1989 is a reasonable target, based on the stabilization experi- ences of other countries and the expected recovery of this ratio to 17 per- cent in 1986. It is intended to achieve this through efforts to restore confidence in the financial system and in financial institutions. An IDA financial sector credit is under preparation under which arrangements would be made to restore the financial and managerial health of state-owned banking institutions and, more generally, to reduce the operating costs of commercial banks. Interest rates are to be maintained at positive levels in real terms; with this in view, a three percentage point increase in interest rates is to take place in the second half of March 1987. New financial instruments, such as bearer bonds, are being issued and commercial banks are being urged to pursue more aggressively the mobi- lization of deposits. Tax policies are being progressively adjusted to encourage savings. Overall macro-economic policies will be pursued with a view to containing inflation. 34. Private transfers and workers' remittances are expected to be stimulated through the further progress planned on exchange rate policy and through special measures designed to encourage flows through official channels (to be designed with Fund and Bank staff assistance as part of the ongoing financial sector study). 35. The Central Government's budget is intended to be a major vehicle for domestic resource mobilization. The ratio of revenues to GDP is expected to increase from around 14 percent of GDP in 1986 to around 17 percent in 1989 (para 58). At the same time, Government intends to contain recurrent expenditures (para 59), especially the total wage and salary bill, and thus generate public savings. 36. Policies to improve the balance of payments: The Government sees exchange and trade policy as the principal instrument for improving the balance of payments in the 1987-89 period (see para 29 above). This will be supplemented with measures to remove procedural and policy impediments to - 13 - non-cocoa exports under the policy framework being designed under the IDA assisted Industrial Sector Adjustment Credit (e.g., the removal of export permits, increased flexibility in use of export retentions, streamlining of import duty drawbacks, strengthening of the Export Promotion Council, etc.). Workers' remittances are to be encouraged (para 34). 37. The second component of the Government's strategy to increase the capacity to pay for imports is an effective debt management strategy. The country's debt-service ratio (debt-service payments expressed as a proportion of exports of goods and non-factor services) is expected to climb sharply from 48 percent in 1986 to 61 percent in 1987. About two-fifths of the projected debt-service in 1987 is owed to the IMF and to reduce arrears. The debt service ratio is projected to decline over the adjustment period to 40 percent by 1990. This still leaves debt service ratios at extremely high levels of 60-70 percent during the 1987-89 period. To deal with this problem, the Government has developed jointly with IDA a financing plan described in Part III of this report (paras 97-100), which assumes a substantial but attainable level of concessional aid inflows, a cautious approach to medium-term non-concessional borrowing, recourse to medium-term IMF facilities designed to partially offset repurchases due during 1987-89, and extend repurchase obligations from new facilities over a longer time horizon (1993-1998). 38. Policies to improve the management of resources in the public sector: Four sets of measures are currently under various stages of implementation in this area. These are: (a) restructuring of public expenditures (b) measures to reform and restructure the state-owned enter- prise (SOE) sector; (c) measures to improve economic and financial manage- ment; and (d) strengthening public administration by addressing problems of low remuneration levels, shortage of manpower skills, inadequate wage differentials and overstaffing at lower levels. 39. As is clear from the above, the Government's proposed structural adjustment program for the 1987-89 period covers a wide canvas. The Bank's SAL supports the program as a whole. The main focus of the policy frame- work under the ongoing IMF stand-by arrangement, and under the proposed medium-term program now being discussed between the Government and the IMF will be exchange rate policy, domestic resource mobilization, financial sector policies, and external debt management. Allowing for this, and also taking into account the policy framework under ongoing policy based IDA operations such as the Second Reconstruction Imports Credit, the Export Rehabilitation Credit, the Industrial Sector Adjustment Credit, and the proposed Financial Sector Credit, the Government has, with Bank staff assistance, prepared an action program of monitorable measures to be implemented in the present phase of the program (1987-88) and to be sup- ported by SAL. The Government's Letter of Development Policy (LODP) (Annex IV) outlines these measures and sets them in the context of the overall adjustment program. A Matrix of Policy Reforms (Annex V) and Attachment I to the LODP list the SAL actions. Much work will be required by the Ghanaian authorities to prepare and implement these measures. The parallel - 14 - Structural Adjustment Institutional Support (SAIS) Project and the proposed Public Enterprise Project are designed to assist in this effort. 40. The SAL policy framework will focus on two areas of reform: incentive policies and public sector reforms. Under incentives policies, the two main components are trade liberalization (paras 41-45)and cocoa sector policies (paras 46-53). Under public sector reforms, there are three components: public expenditure policy (paras 54-62), state-owned enterprise reform (paras 63-68), and public sector management (paras 69-80). INCENTIVE POLICIES A. Trade Liberalization 41. In the past, protection for domestic industries was provided, frequently at excessive levels, through low prices for imported inputs, high tariffs, and quantitative restrictions on competing imports. As noted above (para 13(i)), the policy changes which the Government introduced between 1983 and June 1986--notably, the drastic depreciation of the official exchange rate, the harmonization of tariffs at a moderate 25-30% rate and the removal of quantitative restrictions on imports that do not require foreign exchange from official sources (the so-called SIL market)-- restored incentives to producers and greatly reduced the level of protection. Through effective management of fiscal and monetary policies, the successive devaluations had remarkably little inflationary impact and the ratio of the parallel to the official (fixed) exchange rate narrowed from over 30 to below 2. Nevertheless, the continued existence of a large parallel market with a rate double the official rate necessitated the continuance of administrative rationing of official foreign exchange. Thus the level of protection remained well above that indicated by the tariff structure, its pattern remained highly uneven, the benefits from it were accruing to traders rather than producers in many cases, and potential exports continued to be thwarted by the low cedi value of surrendered proceeds as well as the tariff protection. Further measures were needed to facilitate profitable exports, to reduce protection to reasonable levels which would expose inefficient producers to competition, and to simplify what had become an excessively complicated tax and tariff structure that would continue to distort the pattern of protection once this was no longer dictated by overvaluation and quantitative controls. 42. The government's exchange and trade policy reforms aim at sub- stantially increasing the reliance on market mechanisms for the allocation of resources and reducing distortion through: (i) further reform of the exchange rate by merging the various markets for foreign exchange and establishing a realistic exchange rate; (ii) removal of quantitative controls on imports; and (iii) related tax and tariff reforms. The estab- lishment and maintenance of a realistic and market determined exchange rate is at the heart of Ghana's adjustment program. Prior to September 19, 1986, there were three officially recognized markets for foreign exchange in Ghana: the official market in which foreign exchange was - 15 - administratively allocated at a fixed exchange rate of %90-$1, the export retention market in which exporters are permitted to retain a certain portion of their export receipts for approved imports and debt service payments, and the SIL market in which importers can bring in unrestricted quantities of any goods (except five on the negative list) as long as they do not require official foreign exchange and as long as they pay the requisite taxes. In addition, unrecorded exports and remittances enable an unknown quantity of "smuggled" imports on which taxes are evaded. 43. The move to a unified and market determined rate under the program is being attained in three stages. Stage I, which was initiated on September 19, 1986, introduced a second-tier official market for foreign exchange covering almost all non-cocoa transactions on the receipts side, and all non-petroleum transactions, other than essential drugs and central government debt service payments on debt incurred prior to January 1, 1986, on the payments side. The exchange rate for this market was determined at weekly foreign exchange auctions, and depreciated by about 70 percent in relation to the official rate. The sources of supply of foreign exchange for this auction were non-cocoa export receipts (other than those retained by exporters under the export retention schemes), invisibles earnings, non-project concessional aid flows and commercial borrowings, tourism and private remittances. During Stage I demand comprised all private sector and state owned enterprises (other than Cocobod) that wished to import non-consumer goods other than petroleum. External debt servicing, Govern- ment, Cocobod and petroleum imports were financed from cocoa exports. To enable the auction to set market exchange rates closer to the equilibrium, the Government removed quantitative restrictions on virtually all imported raw materials and spares and capital goods with effect from October 1986 by issuing licenses automatically to anyone who wished to import these goods. It also moderated the effect of the higher foreign exchange cost by reducing the customs duty rate to 20 percent for approved manufacturers' imports of raw materials which did not already enjoy lower rates or exemption. 44. Stage II, which was announced on February 20, 1987, merged the two-tier official market by using the auction determined rate for all officially funded transactions, thus ending the discrimination against cocoa exports and the implicit subsidy on petroleum imports. Sources of demand and supply for the auction remain virtually the same under the new regime. Stage III, which is to be implemented during calendar 1987, will progressively merge the SIL and auction markets by permitting importers to bid at the auction for imports of consumer goods. During 1987 the size of the auction market is expected to be around $160-190 million, or under one-fourth the value of non-oil imports. Agreement has been reached jointly with the Fund and with IDA on the timing of various actions for achieving this. In particular, categories of goods which comprised about 40 percent by value of SIL imports in 1986 are to become eligible for auction funding by April, and full integration is to occur by January 1988. The process of achieving full liberalization, including the removal or relaxation of prior licensing on consumer goods imports and the progressive liberalization of invisible transactions, will need to be coordinated with - 16 - other measures. Those include efforts to further rationalize the structure of effective protection provided by the tax and tariff regime in order to facilitate the adjustment of efficient activities, encourage export produc- tion, and build confidence in the auction market so as to expand the supply of foreign exchange from non-traditional exports and personal remittances. Retention accounts for traditional exports are to be reduced to increase the supply of foreign exchange to the auction subject to review of contrac- tual obligations to third parties. The export retention scheme for non-traditional exporters is to be retained (and the allowance was increased to 35 percent in February 1987), pending a review of its role in the new exchange and trade regime. 45. The full liberalization of imports will need to be accompanied by a reform of the system of trade taxes, including tariffs, to provide a moderate and even pattern of effective protection. The Government has made a start on the reform process by introducing some interim changes in its 1987 Budget, to remove some obvious distortions in the sales and excise tax structure and to improve the scope for exporting under the policy framework agreed for the Industrial Sector Adjustment Credit. However, more compre- hensive reforms to rationalize the structure of protection and put export production on a more equal footing with domestic market production will need to await a comprehensive review, including subsectoral analysis. The Government proposes to conduct such a review, with IDA and IMF assistance, during the first half of 1987 and to introduce the needed fiscal reforms prior to second tranche release. Implementation of the program for phasing consumer goods imports into the foreign exchange auction on the agreed timetable as well as implementation of related tax and tariff reforms is a condition for release of the second tranche. B. Cocoa Sector Policy 46. The Government's main objectives in the cocoa sector are to: (a) improve producer incentives; (b) reduce the share of resources absorbed by the Cocobod from an estimated 32 percent of the cocoa export proceeds in 1985/86 to 15 percent of the currently projected f.o.b. price of cocoa in 1988/89; (c) reassess the present system of cocoa taxation with a view to ensuring its consistency with adequate producer incentives; and, thereby, to increase production of cocoa from 212,000 tons to 258,000 tons by 1988/89, and to 305,000 tons by 1994/1995. 47. Cocoa Producer Price: Although cocoa production has responded well to the improved incentives for cocoa farmers following the seven-fold increase in the cocoa producer price since 1983, farmer incentives, though much improved, remain inadequate. At the current producer price of 385,500 per ton, incentives for rehabilitation and replanting of cocoa remain weak; the cocoa farmer gets far too small a share of the world price compared with cocoa growers in other countries; and the incentive to smuggle cocoa out of Ghana remains considerable. - 17 - Cocoa indicators: 1984/85 1985/86 1986/87 1987/88 (actual) (actual) (estimate) (SAL program) Production ('000 KT): 174 219 230 243 Producer price (0/ton) 30,000 56,600 85,500 150,000 Real producer price (1970/71 - 100) 38 62 80 124 Producer price as % of world price: a/ 25 24 28 42 Producer price as 1 of Ivory Coast price b 27 29 33 57 at official exchange rate b/ at parallel market exchange rate The Government recognizes that the present producer price results in an excessively high level of effective taxation of cocoa farmers and intends over time, and as rapidly as feasible, to bring taxation of cocoa farmers in line with taxes for persons earning similar net incomes in the economy at large. 48. In the short to medium term, under the Structural Adjustment Program, the Government intends to raise the producer price progressively with a view at least to (a) ensuring that the benefits of further exchange rate movements are fully passed on to farmers, (b) reducing the price incentive to smuggle cocoa, and (c) ensuring an adequate stimulus to improved yields and output. It is the Government's intention to announce on May 1, 1987 a producer price of 0140,000 per metric ton for the 1987/88 crop year. In addition, farmers will receive a lO,000 per ton bonus at the end of the season linked to a production target for the crop year. If the cedi equivalent of cocoa export proceeds exceeds the level currently projected somewhat conservatively, the excess will be shared between farmers and Government in proportions to be agreed with the Association by April 30, 1987. Farmers will be provided this compensation payment at the beginning of the 1988/89 crop year. For producer price setting beyond 1987/88, further studies are needed on the price elasticities of supply, the likely consequences for smuggling of further price adjustments, and the relative returns to replanting and rehabilitation compared to those for competing crops. A cocoa incentives study to be carried out by the Cocobod and completed by December 1987, with the help of consultants and IDA staff, will also establish a methodology for future producer price setting and train Cocobod staff in its use. Subject to the results of the study, it is the Government's intention to raise the producer price progressively to an indicative target of 55 percent of the long-run world price by 1988/89. Agreement with the Association on the producer price for 1988/89 is a condition for second tranche release. 49. Cocobod: In the first phase of the Economic Recovery Program (1984-86) the Ghana Cocoa Board was turned into a statutory public corpora- tion and reorganized into operating divisions and wholly owned subsidiaries. Studies were initiated under the Export Rehabilitation - 18 - Technical Assistance Project on all aspects of the Board's activities, and the results have been evaluated, and in some cases are already being implemented. One major accomplishment has been a reduction in Cocobod's payroll by about 41,000 (41 percent), of which 25,000 represented ghost workers and some 16,000 were retrenched following an initial staffing and functional review. Cocobod is currently entrusted with three major tasks: (a) the internal and external marketing of cocoa, coffee and shoanuts; (b) the provision of essential services to farmers, such as extension, research, and input supply; and (c) production activities, including the operation of 92 cocoa and coffee plantations, the processing of cocoa beans and the formulation of insecticides. The studies undertaken suggest that marketing costs for cocoa remain excessively high relative to those of Ghana's competitors; support services to farmers are poorly managed and overstaffed; and plantation and processing activities are inefficient and, in many cases, non-viable. 50. To address these issues, a two-pronged approach is proposed. First, the agreed budget and work program for 1986/87 will be followed by a rolling corporate plan for a three year period beginning with the crop year 1987/88 with a view to reaching the target of reducing Cocobod operating costs to about 15 percent of the presently projected f.o.b. price by crop year 1988/89. To effect these cost reductions, Cocobod will: (a) attempt to confine itself to activities which cannot be undertaken more efficiently by other public institutions or the private sector; (b) progressively shed all activities extraneous to its purchasing, marketing, extension and research functions, and (c) retrench all remaining excess labor. The 1986/87 work program and the 1987/88-1989/90 corporate plan will specify a series of monitorable actions with a timetable that will include a further reduction in the number of Cocobod employees, divestiture of at least 52 of the 92 cocoa and coffee plantations during 1986/87, and most of the remainder in later years (subject to a study now underway), establishment of a joint venture for the insecticide formulation plant, rationalization of processing plants, phasing out of input subsidies, and transfer of cocoa feeder road programs to the Department of Feeder Roads (DFR). The specific measures to be taken in the Cocobod's fiscal year ending September 30, 1987 have been spelled out in a Statement of Policy from Cocobod to Government. These include the transfer of cocoa roads to DFR, divestiture of 52 plantations, the establishment of a joint venture for the insecticide formulation plant, and implementation of the second phase reduction in employment levels. Implementation of the restructuring measures and agreement with the Association on the Cocobod corporate plan for 1987/88-1989/90 are conditions for release of the second tranche. Second, the Government has requested IDA to evaluate the lessons for Ghana from the experience of other countries in liberalizing the internal and external trade in cocoa with a view to studying in 1988 options for modifying Cocobod's role in the marketing of cocoa. 51. Cocoa taxation: As noted in para. 47, the level of taxation of cocoa is excessive and needs to be reduced. It is currently designed around the Cccobod: once the producer price is set, and a budget for the Cocobod is agreed, the balance of export receipts accrue to the Treasury. - 19 - The system takes little account of the expenses incurred by individual producers, either in the production process or for subsistence. The tax is inequitable as between large and small producers. Export receipto are highly volatile, with the budget bearing the entire burden of this volatility. Given these weaknesses, the cocoa incentives study (porn 48) will examine alternative ways of taxing cocoa but within the overall objective of eliminating as rapidly as possible the explicit discrimination against cocoa farmers implied by the tax on cocoa. The study will be completed by December 1987, and applied to the establishment of a producer price for 1988/89. 52. The agenda for cocoa reforms is ambitious, and will require the cooperation of a number of agencies within and outside the Government. With this in mind the Government has appointed a full-time Board of Direc- tors and new Chief Executive for Cocobod and a PNDC Secretary for Cocoa Affairs. 53. Production strategy: To enhance the impact of the above measures the Government has developed a production strategy which would be implemented under an IDA assisted Cocoa III project. This would strengthen extension and adaptive research services to cocoa farmers, improve disease control, increase the supply of cocoa hybrid seedlings to farmers for replanting and new planting as well as other key inputs, and also support the institutional reforms. The project is expected to be ready for implementation during 1988. REFORM OF THE PUBLIC SECTOR C. Public Expenditure Policy 54. The erosion of the country's resource base in the 1970s and early 1980s accompanied by a lack of fiscal discipline, produced a major budgetary crisis on the eve of the reform program. With a declining revenue base, and an overall budget deficit equivalent to 6 percent of GDP, public expenditures were severely compressed. Civil service wages and salaries were eroded substantially in real terms and wage differentials were drastically narrowed. At the same time, employment rolls were excessively padded. Operations and maintenance expenditures were neglected while public investment declined to less than 1 percent of GDP by 1982/83. This neglect of maintenance and rehabilitation investments in infrastructure resulted in a near collapse of the country's transport and telecommunications system and a severe erosion of a once well-developed health and education infrastructure. Clearing the backlog of rehabilita- tion needs in these sectors will take enormous resources and strain imple- mentation capacity, but it is as essential a component of the country's adjustment strategy as measures to ensure the more efficient use of budgetary resources and to reduce waste and unproductive expenditures. 55. Since the introduction of the ERP, the Government has made considerable progress in restoring fiscal stability by strengthening the revenue base (through economic growth, policy improvements, and new fiscal - 20 - measures), reducing substantially the size of the overall budget deficit and cutting drastically the dependence on inflationary bank financing. At the same time, civil service wages and salaries have been raised sharply and wage differential. partly decompressed. Nevertheless, senior civil servants are still grossly underpaid, and there are far too many employees at the lower rungs of the civil service. An effort has also been made to raise provisions for operations and maintenance and to incroase allocations for capital expenditures. However, weaknosses in the machinery for project preparation, selection and approval, lack of proper expenditure control, and stop-go policies designed to ensure adherence to expenditure ceilings have reduced the quality and effectiveness of public expenditure policy. 56. The principal reform measure designed to address these issues is the introduction of a rolling three-year public expenditure program initially covering the 1986-88 period. The program reflects policy improvements in the following areas: (a) the development of an overall macro-economic framework within which the government budget will be set; (b) increased domestic resource mobilization; (c) restructured recurrent expenditures; (d) formulation of a rolling investment program; and (a) establishment of criteria for project selection and for core expenditures. Underpinning the program is a set of sectoral strategies which are set out in the Public Expenditure Program (1986-88) issued in April 1987. The 1986-88 program has been agreed with the Association, and forms the basis for the 1987 budget. Agreement with the Association on a 1988-90 program is a condition for second tranche release. 57. Macro-economic framework: A macro-economic framework incorporat- ing the major policy assumptions has been prepared under the SAL program, and endorsed by the Government incorporating the growth, savings, investment and balance of payments objectives summarized in para 28 (see also Table 2). 58. Revenue Mobilization: The Government, in consultation with the IMF, is preparing a program of specific measures for dome&-ic resource mobilization. The overall objective is to increase the ratio of budgetary revenues to GDP from 14 percent of 1986 GDP to 17 percent of 1989 GDP, while reforming the tax system to promote efficiency and equity. Further improvements in tax administration, through strengthening management and personnel and rationalizing the legal and administrative system will supplement direct revenue raising measures. In the area of tax reform, measures already underway or to be implemented during 1987-88 include: (i) completion of the reform of personal income tax by further increasing exemptions, lowering rates, and taxing cash allowances; (ii) reform of the company income tax which currently does not provide appropriate incentives to the productive sectors; (iii) the development of the sales tax as a major source of revenue by extending its base, increasing the standard rate (which would compensate for the elimination of smaller excise duties) and introducing higher luxury rates; and (iv) enhanced taxation of petroleum which will bring petroleum prices progressively closer to those in neigh- boring countries. The implications of the major changes in the exchange and trade regime for import tariffs and indirect taxes will be studied as - 21 - part of the Structural Adjustment Program to arrive at a more uniform effective protection structure (para 45). Dependence on cocoa taxation is to be reduced by lowering its level, and alternative ways of taxing cocoa are to be explored via the study on cocoa incentives (para 51). 59. Recurrent Expenditure: The public expenditure program attempts to restructure recurrent expenditures within an overall ceiling nf 13 percent of GDP through three separate initiatives. First, expenditures on personnel emoluments will be held to between 5.5 and 6 percent of GDP over the 1987-89 period, while the size of the civil service will be reduced by about 10 percent in 1987-88 (see para 77). The resources thus released will be used to rationalize further the pay and allowances struc- ture based on a detailed compensation study (see also para 79). Second, expenditures on operations and maintenance will be increased substantially over the period. Given the paucity of data on these expenditures, a study has been initiated to develop guidelines for the three most important sectors (agriculture, health and education). The work is sufficiently advanced in the education sector to have been fully reflected in the allocations for the 1987 budget; preliminary findings on health and agriculture are reflected in the allocations for those sectors. The study on those two sectors will be completed by June 1987 and fully incorporated in the 1988 budget. As required, the study will be extended to other sectors during 1987 and these results also incorporated in the 1988 budget. Third, the Government will agree with IDA and announce in May 1987 guidelines to determine budgetary subsidies and transfers to SOEs. 60. Capital Expenditures: A draft public investment program for 1986-88 was submitted to IDA in May 1986. A November 1986 mission assisted the Government in finalizing the program. Under the 1986-88 investment program, budgetary investment will increase from an estimated 6 percent of GDP in 1986 to 9 percent of GDP in 1987. The Government's program emphasizes rehabilitation of existing infrastructure. Investment on economic infrastructure, primarily transport and particularly roads and highways, accounts for about 50 percent of total public investment. This reflects the severe deterioration which has occurred, and the need for adequate transportation facilities in order to facilitate the supply response from the private sector. In addition to expenditures on road rehabilitation and deferred maintenance, major projects are rehabilitation of critical railway lines and the country's two ports. In the power sector, which accounts for roughly 10 percent of the program, the major activities are rehabilitation of electricity distribution and extension of the transmission grid to the northern part of the country. Allocations to the productive sectors account for only 30 percent of public investment, reflecting the more prominent role expected of the private sector, particu- larly in manufacturing. The main investments are focused in agriculture, in order to improve the provision of basic services to farmers, and in the partially or wholly state-owned mining companies where rehabilitation and capacity expansion programs are in progress. The investment program increases the share of resources for health and education from 2 percent estimated for 1986 to 7 percent in 1987. The investments in these sectors - 22 - reflect an emphasis on rehabilitation and, in health, on primary health care. 61. In the process of finalizing the 1986-88 investment program, the Government reached agreement with the Bank on several revisions including, more recently, the postponement of a new road construction project, review of the construction of additional grain storage facilities after completion of an evaluation of food security strategy in Ghana, a shift in resources from tertiary education to primary and secondary facilities, and an increase in the provision for trunk road maintenance. In addition, many projects were rephased in order to reflect more realistic implementation goals and to bring the program in line with available resources in the 1987 central government budget. 62. Criteria for project selection. The Association reached agree- ment with the Government on the criteria for entry of projects and programs in the core investment program comprising some 80 percent of projected resources for the development budget. For major non-social sector projects (total costs exceeding $5 million), the main criteria for selection for the core program are economic rate of return and relevance to the priorities of the Economic Recovery Program. Major projects would not be included in the core program without a feasibility study. In order to guide investment decisions on projects below $5 million, priority would be given to rehabilitation, foreign exchange earnings or savings, projects which would generate additional budget revenue for the Government or have low recurrent cost implications, and those with external concessional financing equivalent or greater than 60 percent of total costs. The public sector management component of the program will address the institutional issues relating to project selection, and the Institutional Support Project is designed to help strengthen the Government's capacity for project evaluation. Beginning in May 1987 funding for an agreed select group (currently 21) of critical projects will be protected in the event of resource shortfalls through the use of special imprest accounts. D. State-owned Enterprises (SOEs) Sector 63. SOEs in Ghana play a major role in virtually all sectors of the economy. Currently, the Government has a majority interest in 181 enter- prises, and minority interests in a further 54. While these enterprises were originally established to meet a number of economic and social objec- tives, their performance has been characterized, for the most part, by large losses and low productivity, with the result that they are a heavy financial and managerial burden upon the Government. There are several reasons for this poor performance. Until recently, the overall incentive framework did not reward efficient production. Quantitative restrictions on trade, extensive price and distribution controls, and high levels of taxation contributed to poor overall performance. Management was subjected to political interference both in day-to-day operations and in major decisions relating to location, choice of technology, choice of product, wage negotiations and employment levels. Moreover, the quality of - 23 - enterprise management was poor, and as real incomes fell in the public sector, the consequent loss of talent contributed further to the poor performance. 64. The Government recognized the need for reforms early in the ERP and, in consultation with the Bank and UNDP, appointed consultants to conduct an in-depth review of the sector. A task force was established to evaluate the results of this review and subsequently proposed a comprehensive SOE reform program. The overall objectives of this reform program are: to improve the efficiency, profitability, and productivity of state enterprises; to reduce the financial and managerial burden of the sector on Government; and to increase SOE managerial autonomy and accountability. A detailed two-year action plan was agreed with the Association which focuses on three areas: (a) creation of an appropriate policy framework for the sector; (b) a divestiture program; and (c) strengthening SOE management and Government's ability to monitor and evaluate managerial performance, targeting initial attention to 14 priority SOEs with major budgetary and fiscal impact. 65. Policy Framework: A number of policy reforms will be introduced to ensure that SOEs operate efficiently in a commercial manner and are increasingly free from day-to-day interference in their operations. The Government will establish guidelines for access of SOEs to budgetary funds (para 59) with a view to reducing progressively both current and capital transfers to them and phasing out subsidies over a 3-5 year period. The Government will also introduce policies and procedures to ensure that: (a) all investments by SOEs receiving support from Government (loans, equity, loan guarantees) meet the criteria for inclusion in the Public Investment Program (para 62); (b) there is a minimum level of self-financing consistent with the SOEs' financial position; and (c) all borrowings are on acceptable terms and conditions. To restore financial discipline, SOEs will be expected to clear progressively all arrears with other enterprises, the banks and the Government (which will also clear its arrears to SOEs). Cross debts and arrears for the 14 priority SOEs have been tentatively identified and a plan for settlement will be prepared and agreed with the Association by October 30, 1987. SOEs will be expected to pay a dividend to Government on their equity. SOEs will be subject to increased competition and market discipline. Where there is only one domestic producer, trade liberalization will, wherever possible, expose SOEs to external competition. SOEs will be expected to compete for foreign exchange and credit on the same basis as private sector firms. To address overstaffing in the SOEs, the Government is continuing its current freeze on SOE hiring (with exceptions for skilled and professional positions) and will take steps to eliminate excess staff. A 5 percent annual target reduction over the next two years has been set by Government for the sector as a whole, subject to identification of surplus labor in individual enterprises. The initial focus will be on the priority SOEs, most of which have identified surplus labor for retrenchment in 1987 and 1988. The Government is preparing a labor retrenchment policy to ease the transition to other productive employment in the private sector and will develop a financing plan for SOE staff reductions by September 30, 1987. - 24 - 66. Divestiture Program: To reduce the managerial and financial burden of SOEs, the Government intends to contract the size of the SOE sector. Following a preliminary categorization of the SOEs, 30 were identified for outright sale, liquidation or conversion into joint ventures in the first phase of the program. This initial group includes a mix of profitable SOEs (which will be attractive to investors) and some major loss making SOEs (e.g., State Fishing Corporation). A committee on divestiture modalities and options has developed guidelines and policies for implemen- tation of the program. A Divestiture Implementation Committee has been established to manage the program. At least five of these SOEs (including the State Fishing Corporation) will be offered for sale and liquidation proceedings will be initiated for a further five as a condition of second-tranche release. The Government recognizes that in some cases valuation may be lower than Government's investment due to the fact that assets are run down and have minimal future earnings potential. By December 31, 1987, there will be a progress review and agreement with IDA on the next phase. Credit availability will be assessed during the upcoming financial sector mission and may be addressed through the possible financial sector project. For those non-viable SOEs selected for divestiture where it is proving difficult to find buyers, liquidation will be considered. 67. Management Reform: To strengthen the Government's ability to monitor and evaluate SOE performance, the State Enterprises Commission (SEC), the Government's oversight agency for the SOEs, has been restructured and a chairman and executive directors appointed. The SEC will monitor and evaluate the performance of selected SOEs, recommend managerial bonuses and penalties on the basis of performance, and advise the Government an key SOE issues. Enterprises will prepare three-year corporate plans on the basis of which performance agreements will be negotiated and concluded by the Government. By year-end 1987, 10 of the 14 priority SOEs will have completed corporate plans, approved by their Boards of Directors and sector ministries. Draft performance agreements (based on corporate plans) would be completed for 4 of the 10 priority SOEs, and an agreement signed with Cocobod, by year-end 1987. Completion of the SOE corporate plans and performance agreements is a condition for release of the second tranche. 68. To support implementation of these measures, technical assistance including SOE management training will be provided, initially under a PPF, through a proposed Public Enterprise project (FY88), and through other sector operations. E. Public Sector Management 69. The Government is contending with a large number of economic, technical, and institutional difficulties in carrying out the Economic Recovery Program, and the related Structural Adjustment Program. Of these, weak management and implementation capacity are emerging as particularly important constraints. The key economic and financial management agencies are seriously understaffed and suffer from severe shortcomings in - 25 - organization and equipment. In particular, policy analysis and the planning process, including public investment planning, budgetary control, aid coordination and debt management functions, need to be strengthened urgently. Economic and financial management information systems need to be modernized to facilitate policy making. The supply of professional skills to the civil service needs to be augmented substantially, while excess staff at the lower levels need to be retrenched. 70. The Government recognizes that as the adjustment program gathers momentum, already overloaded economic management institutions will be placed under increasingly severe pressure. It has, therefore, together with Bank staff, developed an action plan for public sector management reform, which will be supported by the parallel Structural Adjustment Institutional Support (SAIS) Project. The SAIS project provides training, technical assistance, equipment and materials to (a) strengthen analytical capabilities and management in the Ministry of Finance and Economic Planning, the National Revenue Secretariat, the Accountant General's Department, and the economic coordination functions of the PNDC; (b) attract and retain skilled Chanaians in the public service; (c) promote civil service reform through the Office of the Head of the Civil Service (OHCS) including strengthening of personnel management; and (d) assist in the implementation of labor rationalization. The policy framework under the SAL addresses the major elements of the action plan to strengthen economic and financial management and rationalize the civil service. 71. The Ministry of Finance and Economic Planning (MPEP) plays a central role in the ER?. However, it is seriously understaffed at the upper levels; it has insufficient policy analysis capability; its individual functional divisions need strengthening; and its decision making processes are ad hoc and overly centralized. At the same time, the load on the Ministry is rising dramatically--especially the new demands of preparation of the three-year rolling public expenditure program and handling the large rise in aid commitments and external resource flows. To meet this challenge, the Government is proposing to: (i) strengthen overall policy review and management of the Ministry by establishing an economic policy unit reporting directly to the PNDC Secretary (Minister); (ii) rationalize and strengthen the divisions responsible for planning and economic analysis, public investment appraisal and the overall public investment plan, the budget, aid coordination and the monitoring of project implementation. This involves the Budget Division, the International Economic Relations Division, the Planning and Research Division, the Investment and Projects Analysis Division, and the Central Project Monitoring Unit; and (iii) improve and rationalize debt management, particularly by its decision to allocate the responsibility to MFEP and to improve the flows of information between the MFEP, the Accountant-General, the Bank of Ghana and other bodies. - 26 - 72. The Government has prepared plans acceptable to the Association to deal with most of these issues. Budgeting and expenditure control actions are being defined in the light of an IMF technical assistance report, while UNCTAD is helping to define and implement the actions needed to improve debt management. 73. While the central responsibility for economic policy lies with the MPEP, effective coordination of the adjustment program must also closely involve sector ministries as well as other core agencies. The sector ministries are being strengthened under UNDP and IDA financed technical assistance projects, some underway and the rest under preparation, over the next few years. Policy coordination needs to be improved and put on a regular basis, with proper planning and procedures rather than ad hoc consultations. With this in view, the Government has decided to establish a national planning system with the primary focus on strengthening government capacity to determine national priorities, and assisting the decentralization process. A new Ministry of Planning is proposed together with a high level Planning Commission. Thus the planning functions of the Ministry of Finance and Economic Planning would be shifted to the new ministry, while revenue mobilization, now under an autonomous National Revenue Secretariat, would be brought back under the Ministry of Finance. A special committee of the PNDC has been established to work out the timetable and details of implementation. Assurances have been received from Government that the new structure will be consistent with the objec- tives of the structural adjustment program; that there will be a smooth and gradual transition to the new system; and that the shape of the new planning structure will be drawn up in consultation with the Bank and UNDP. Under the SAIS project, the Government has agreed to give IDA the opportunity to comment before any proposed major changes are made in the organization, structure and functions of MFEP. 74. A related issue is the capacity within the Office of the Secretary to the Committee of Secretaries (COS) (equivalent to a Cabinet Secretariat cum office of the Prime Minister) to deal with the many economic responsibilities which fall to it--its cabinet office function, its support for the Chairman of the COS (equivalent to the Prime Minister), and its direct responsibility for functions such as state enterprise reform, civil service reform, Cocobod and the public sector management component under the structural adjustment program. The functions of the National Revenue Secretariat--now to be shifted to the Ministry of Finance (para 73)--have been reviewed by an IMF fiscal mission, and its recommendations will be implemented over the period of the adjustment program. Under the SAIS project the PNDC Secretariat will be strengthened through the creation within it of an economic liaison unit with staffing--one member for the PNDC itself and two for the Office of the Chairman of the COS--and terms of reference already decided in consultation with IDA. 75. To prepare the Structural Adjustment Program, the Government created a Structural Adjustment Program Team (SAPT) headed by the Chairman of the COS, with the PNDC Secretary, MFEP, as Vice Chairman, and the - 27 - latter's Deputy as Secretary. The team is responsible for (i) monitoring and evaluating the progress of ongoing reforms as well as their impact on the economy; (ii) initiating preparatory steps for further adjustment measures; and (iii) liaison with the World Bank for periodic progress reviews of this first phase of the program. The SAPT is supported by a secretariat located in the HFEP which will have full time technical staff who will ensure coordination of various SAL components on an ongoing basis. A Project Management Unit (PMU) linked to the Secretariat has been estab- lished to monitor SAL program implementation and manage the SAIS project, headed by a PNDC Secretary who has been appointed. 76. The Government will face a difficult task in assigning and managing the considerable numbers of Ghanaians and others who will be mobilized under the SAIS project to help implement the adjustment program. The management of technical assistance (terms of reference, reporting relationships, selection, contracting, assignment, logistics, etc.) is a critical determinant of its productivity. It is almost impossible to ensure this in Ghana at present through "normal" administrative channels filled with other pressing business. Therefore, responsibility for manage- ment of the SAIS project has been assigned specifically to ensure that it can be done effectively. The PHU will be provided with adequate supporting staff and facilities. 77. Civil Service Reform. The civil service suffers from low salaries and understaffing at the higher levels and overstaffing at the lower levels. Under the SAL program, action will be taken to address these problems. To deal with the overstaffing problem, the Government has announced a target of retrenchment of 15,000 public service employees per annum in the 1986-1988 period. This is almost 5 percent per annum of the 318,000 such workers revealed by a census as of January 1986. The Govern- ment has approved the 1987 retrenchment program of approximately 15,000 public servants and will: (i) remove from the payroll by May 31, 1987 about 6,700 surplus staff already identified (instructions have already been sent to all departments), and identify and remove from the payroll by October 31, 1987 the remaining 8,300; (ii) establish a fiscally responsible compensation scheme together with programs to retrain retrenched workers and assist them to find productive employment in the private sector (see para 122); and (iii) implement the retrenchment objectives for the later years via the civil service staffing and functional review (see below). The review is expected to identify additional surplus staff of which up to 15,000 could be retrenched during 1988. Retrenchment of 15,000 public servants in 1987, and identification of candidates for 1988, are conditions of second tranche release. - 28 - 78. In recent years the human resources and personnel systems avail- able to the managers of the Ghanaian civil service have deteriorated. The Office of the Head of the Civil Service is not adequately supported for effective personnel management, and the quality of information about numbers, functions and qualifications of Ghanaian civil servants has declined considerably. One indication of these problems is the discrepan- cies which developed between the nominal roll and the Accountant-General's payroll as payroll mechanization was extended more widely in the civil service. Without a good base of information, it will be difficult to formulate and implement a coherent public service salary policy, implement a sensible retrenchment policy beyond the first round and ensure that staff are allocated rationally to priority tasks. 79. To achieve better deployment and management of the civil service, the Government needs to provide the public administration's managers (especially the Head of the Civil Service) a reliable picture of the present status of major ministries and agencies, their human resources and functional responsibilities, and a nucleus of skilled and experienced people to institutionalize inspection of staff and review of administrative functions as a critical continuing task of civil service management. Under the SAL program, the Government will follow up the 1986 census by con- ducting a civil service staffing and functional review in 1987, and prepare a staffing and training plan for the predominantly Ghanaian team which will carry out the review and provide these skills on a continuing basis. This will be one element in a comprehensive plan for strengthening OHCS in consultation with IDA, and to be funded by ODA (UK) under the SAIS Project. ODA will also fund a study of wage and salary policy and a review of the Civil Service Act. Finally, UNDP will include in its forthcoming NATCAP exercise for Ghana the preparation of a training plan for the public sector including the strengthening of local institutions. 80. Although salary decompression in the public service was begun in 1986, over the next few years the Government will face continuing severe problems in attracting and retaining highly skilled and committed profes- sionals for public service. To deal with this important issue, the Govern- ment will establish a skills mobilization scheme. The scheme has three components. The first would provide supplementary remuneration to a small number of civil servants engaged in crucial ERP/SAP work. The supplementary payments are intended to be phased out once salaries and managerial conditions have improved sufficiently in line with Government's broader public service salary policy. A second component provides for both short and long-term consultancies to Government by Ghanaians outside the public sector at market rates. The third component involves financing relocation expenditures for Ghanaians returning to take up civil service posts. IDA will fund the second and third components under the SAIS project. - 29 - MEDIUM- AND LONG-TERM ISSUES F. The Next Phase of Adjustment 81. The agenda for reforms beyond 1988 will naturally be influenced by the progress made in this phase of the structural adjustment program. On the incentives side, the main focus will probably be to support the objective to reduce the economy's present dependence on cocoa, particularly by encouraging non-traditional exports, while taking more concrete measures in the area of liberalization of the trade in cocoa. With the gradual return of confidence in the economy, policies to encourage private savings and investment will play a particularly crucial role in the future. The main thrust of adjustment policies will continue to be in the area of public sector reforms. Public expenditure policies will have to continue to direct resources to rehabilitate key economic and social infrastructure. The liberalization'of trade is likely to have particularly adverse conse- quences on state enterprises, and the acceleration of reforms of SOEs could well become the centerpiece of adjustment efforts in the next phase. Civil service reforms and public sector management issues will continue to be an important component of the adjustment agenda. G. Addressing the Longer Term Challenges 82. Despite the overriding need to concentrate attention and resources on achieving a structural adjustment of the economy over the next few years, the Government recognizes the importance of addressing longer- term development issues during this period. The following are some of the more important long term issues for which policy responses are in various stages of preparation: 83. Poverty: Although Ghana once enjoyed a fairly high standard of living compared with most West African nations, a recent estimate (1984) places half the population of 12 million in absolute poverty. While this estimate reflected the impact of the severe drought in 1984 and the situa- tion has since improved considerably, there can be little doubt that the severe decline in per capita real incomes and food availability caused a sharp drop in the living standards for a majority of the population. Within this fairly large group there are some who are particularly vulnera- ble (see the more detailed discussion in Part III, para 123-126) such as small-scale farmers, particularly in the northern area, and low income urban dwellers. The structural adjustment program has a strong focus on poverty alleviation, both through policies designed to restore growth generally and hence to boost incomes for a wide cross-section of the population, and through measures to be incorporated in the public expendi- ture program which are aimed specifically at the vulnerable groups. To assess the nature and dimensions of the poverty problem and identify more precisely the target groups, the Government is embarking on a Ghana Living Standards Survey (GLSS). Preparations for the survey are in an advanced stage and it is expected that it will be in the field in July 1987 and yield initial results early in 1988. The Government, however, is anxious not to wait for the GLSS results to initiate anti-poverty programs. These - 30 - can be refined and better targeted later as information flows in on the worst affected. Anti-poverty measures in advanced stages of consideration or under implementation are of two types: direct measures to improve the present income-earning capacity of the poor, and measures to revitalize the programs for human resource development and hence to raise the productivity of the lower income groups in the future. Under the first, income generating projects for small-scale farmers in the northern areas and low income urban dwellers are to be identified and prepared for support from central government budgetary allocations to local governments, eventually through a decentralized budget process. Consistent with this, the public expenditure program also attempts to shift resources towards the neglected northern savannah regions. In particular, the Canadian assisted Northern Region Rural Integrated Project, the forthcoming IFAD assisted agricultural project, improved north-south transportation via the Volta Lake, and the Northern Grid Extension and Road Rehabilitation projects, assisted by IDA and other donors,' support economic and social infrastructure and services to the north. 84. Second, the present phase of the Economic Recovery Program puts greater emphasis on the social sectors, especially health and education. These are being supported though two IDA assisted programs, the $15 million Health and Education Rehabilitation Credit (Cr. No. 1653) and the $34.5 million Education Sector Adjustment Credit (Cr. No. 1744). Measures to develop human resources are designed to effect a rapid and lasting improvement in the health and education status of the population. Under the Structural Adjustment Program, the substantial increase in budgetary allocations for these sectors and for water and sanitation (see paras 59-60) are intended to rehabilitate and expand facilities and reverse the sharp deterioration in health and education standards. The redirection of such expenditures is intended to rehabilitate and expand the access to these services in the rural areas, especially in the remote and backward regions, and improve the quality of services. Greater emphasis on primary education and primary health care is expected to improve the earning capacity of the poor in the longer term. Cost saving measures in education resulting from a reduction in staffing levels, higher cost recovery and the shortened length of pre-university schooling (from 17 to 12 years) will generate substantial savings designed to expand and improve the quality of services provided. Four significant changes are planned over the next six years. First, non-salary recurrent expenditures are to be increased substantially to enable improvements in the quality of education. Second, the proportion of expenditures on primary and junior secondary education is expected to increase from 44 percent to 62 percent of the total. Third, the subsidy costs of education at secondary and university level (feeding and boarding) would be largely shifted to parents who can afford it, making the system more equitable. Finally, unit costs of educational inputs and allocations of space and teaching resources would be reduced and standardized, improving cost effectiveness, to allow expansion of enrollments. 85. The delivery of primary health care would be improved and expanded through strengthened community outreach activities, the principal - 31 - beneficiaries being women and children, About 100 rural health stations (half the total), 11 urban health centers in Accra and Kumasi, and selected hospitals are to be rehabilitated; in-service technical and managerial training is to be provided at all levels; the logistical system for the cold chain for vaccines and distribution of supplies, drugs, and contracep- tives is to be strengthened; and a management information system developed. Cost recovery measures already introduced are expected to finance up to 15 percent of health sector recurrent expenditures and to ease pressure on the delivery system. The Government intends to prepare a long-term health sector plan which will be used to define a second phase of the health sector program. The Health and Education Rehabilitation project supports a number of nutrition-related activities in rural health stations and urban health centers. It will also rehabilitate two referral hospitals in Accra and Kumasi specializing in the treatment of malnourished children and offering nutrition education and family planning advice to mothers. Nutrition surveillance is to be strengthened in collaboration with UNICEF. Nutritional support projects aimed at those suffering from severe malnutri- tion (pregnant mothers and children under five) and food for work programs are to be prepared in cooperation with UNICEF and included in the public expenditure program. WFP support is also being sought in this area. 86. Rapid population growth: Ghana's demographic statistics are discouraging. With crude birth and death rates of 49 and 10 per thousand respectively, population growth would be massive were it not for extensive emigration to neighboring countries and further afield. Although Ghana was the first to establish an effective population policy in sub-Saharan Africa as early as 1969, contraceptive practice is low (5 percent) and desired family size is still large. In addition, the Government organizations responsible for family planning became practically moribund. Voluntary agencies have been the principal source of family planning information and services, providing 60 percent of contraceptive coverage. Under the public expenditure program, the goal is to increase coverage to 16 percent by 1988. The Ministry of Health is to take direct responsibility for family planning services in the health sector and greatly expand its program; the commercial sector is to use 3,000 outlets (assisted by USAID) to meet nearly half the planned target; voluntary agencies, it is assumed conserva- tively, would remain at their present levels. UNFPA is also to prepare an assessment of the national population policy and a multisectoral plan for population, human resources and development planning. 87. Meeting the food deficit: Based on the trends prevailing in the late 1970s and early 1980s, Ghana is likely to face a substantial and increasing food deficit by the year 2000. To meet these deficits without recourse to substantial levels of food imports would require foodcrop output growth between 4-5 percent per annum; these levels exceed the most favorable growth rate achieved by Ghana in the past (1961-71 of 3.9 percent). However, Ghana has a strong comparative advantage in agriculture, in general, and in the principal food crops in particular, and it would make sense to aim to reduce the projected food deficit to the extent this remains consistent with its comparative advantage. The required food output growth net of wheat (which could be imported) would be - 32 - attainable if Ghana could recapture the amount of acreage under cultivation during the 1960s, and subsequently lost in the 1970s as declining incentives reduced acreage under cultivation. The extent to which Ghana could recover this lost acreage is, of course, limited by the increasing fragility of soil due to rapid deforestation and desertification. Output gains through increased areas under cultivation will, therefore, need to be supplemented by substantial yield increases. Yields of principal crops are far below their potential. This requires an investment in productivity enhancing technologies in the food crop sector such as the use of fertilizers, agro-chemicals, higher yielding seed varieties and improved farming systems. The Government's agricultural sector strategy, to be supported by a parallel IDA-assisted Agricultural Services Rehabilitation Project (ASRP), focuses on the strengthening of agricultural extension and adaptive research to stimulate the fuller exploitation of yield potentials needed for the basic food crops (maize, cassava, sweet potatoes and yam) as well as cash crop's that will permit the diversification of agriculture and exports (see para 90). A pilot program in the central region is testing alternative approaches to extension and adaptive research in food crops and the experience gained will be extended to the rest of the country through a national extension and research system. In addition, field adaptation programs for improved planting materials are being developed for these crops. 88. Food Security: The Government's approach to food security has focused on (i) the high volatility of farmgate prices and (ii) the need to protect food availability against the eventuality of a drought such as the one experienced in 1982-1983. It has thus attempted to provide producers a minimum support price through its purchases to relieve the downward pres- sures exerted from localized gluts caused primarily by poor marketing infrastructure and disruptions in roads and communications. Similarly. through sales of foodgrains it wants to ensure minimum supplies to all. While these represent primarily transitory issues, the longer term food security issue is that even when there are normal harvests there are pockets of people, particularly in the North, who do not have enough food due to instability in the production, marketing and prices of food and to the low incomes of these vulnerable groups. Under the ASRP, the Government is undertaking a food security study with a view to formulating an afford- able and cost effective program which can be supported by the World Bank and interested donors. The program may consist of a mix of such instru- ments as public and private stockbuilding, food aid management, active promotion of trade and special relief measures. The study will review the financial and technical soundness of completed and planned investment in storage and identify and characterize the food insecure groups to set the overall framework within which cost-effective options can be developed. The Ghana Living Standards Survey (para 83) will provide the basis for judgements on the longer term issue of food insecurity, i.e., the nature, location and cause of poverty. The findings of the study will be discussed with IDA and an agreed action program developed under the ASRP. 89. Environmental issues: The environmental consequences of rapid population growth and the need to expand food production need to be studied - 33 - carefully. Much of the expansion in population and food production is likely to be concentrated in the southern half of the country where the country's tropical forests are located. Rapid deforestation to accommodate agriculture and meet the demand for the country's timber exports could have severe agro-ecological repercussions which are not fully understood. The replacement of forests by fooderops is likely to result in declining soil fertility, due to soil erosion and loss of organic matters, particularly in the case of short fallow slash and burn cultivation. A Forestry Sector Review has been recently conducted jointly by the Bank, UK ODA, CIDA and FAO. The review is expected to provide an assessment of the environmental impact of current and alternative development strategies and to identify policy and institutional support measures to strengthen forest management, support rural forestry and agro-forestry research, support the Wildlife and National Park Project and to develop a sound program for the exploitation of the country's forest resources consistent with environmental objectives. 90. Diversification of exports away from cocoa remains a major goal. While the thrust of medium-term policies will be to restore cocoa produc- tion to its full potential, other sources of foreign exchange earnings will need strong stimulation such as other tree and exportable crops and in- creased earnings from timber, minerals, agro-industries, manufactures, tourism and workers' remittances. Although exports other than cocoa and minerals have been exported in recent years, their volume has been small and the main motivation has been the earning of retainable foreign exchange. The new exchange and trade regime will reduce sharply the incentive to earn foreign exchange through unprofitable activities while creating the potential for the exploitation of Ghana's comparative advantage. Under its Economic and Sector Work Program, IDA will study and develop, jointly with the Government, the International Trade Centre, and UK ODA, the main components of a medium- to long-term strategy for export diversification. The study will identify in as much detail as possible the changes in production and marketing behavior of existing and potential exports as well as the further policy reform, inftastructure and other support activities needed if this potential is to be realized. The results of the study will be implemented and supported under future IDA operations. 91. Manpower and institutional development: Reversing the neglect of Ghana's once well-endowed manpower and institutional base is clearly a high priority. The Government took some early initiatives, establishing a Public Administration Restructuring and Decentralization Committee to address managerial and administrative problems in the civil service and to begin the process of increasing the responsiveness of the bureaucracy to local and regional needs. The adjustment program aims at strengthening of the civil service by strengthening the Office of the Head of the Civil Service and by dealing with the most pressing problems of inadequate remuneration and overstaffing. Longer term institutional development is being supported for a number of sectors by a series of IDA sector opera- tions, while the education sector adjustment program attempts to reverse the decline in educational services. The strengthening of the Government's planning capability, in the first instance on the investment and economic policy side, will itself strengthen the ability to develop a more coherent long term response to institutional issues. - 34 - PART III - IDA'S ROLE AND THE PROPOSED OPERATION A. Experience with Past Policy-Based Landing 92. The Bank has supported four policy-based operations in Ghana since the ERP was introduced. The first Reconstruction Import Credit (RIC I) (Cr. 1393-CH, approved in June 1983) provided $40 million for the priority import requirements of agriculture and transport. The Export Rehabilitation Project (Cr. 1435-GH and F009-GH, approved in January 1984 along with a related $17.1 million technical assistance project) provided $76 million to meet import requirements of the cocoa, timber, gold mining and ports subsectors. The Second Reconstruction Imports Credit (RIC II) and associated African Facility Credit (Cr. 1573-OH and A003-GH, approved in March and September 1985 respectively), and related Special Joint Financing from Germany (DH 16.6 million) and the United Kingdom (05 million), are providing a total of $100 million for import requirements of the agriculture, mining, manufacturing, and transport sectors. Finally, the Industrial Sector Adjustment Credit (ISAC) and associated African Facility Credit (Cr. 1672-GH and A013-GH, approved in March 1986) provided $53.5 million mainly to meet import requirements of the manufacturing sector. Disbursements took some time to start because of Government inexperience with Bank procedures, but have since accelerated steadily and are now fully satisfactory. 93. The policy based operations were aimed at supplementing the IMF stand-by arrangements by broadening and deepening the ERP through agreements with the Government on the size and composition of capital expenditures and the import program, improvement in producer prices and other administered prices, the removal of fertilizer subsidies, the phased elimination of price and distribution controls, the removal of policy constraints to exports and the rationalization of state owned enterprises. In addition, the credits provided assistance to the government to rehabilitate key export oriented sectors and develop a policy framework for structural adjustment. Thus, for instance, the trade policy work under ISAC has provided the basis for the subsequent liberalization of trade under the government's structural adjustment program. 94. Overall the experience with policy-based lending in Ghana has been good. Agreed policy actions have almost all been implemented and mostly with little delay except for the most sensitive ones. Institutional changes have by and large been achieved. The agreed studies b-ve been carried out too, albeit with more delay; and implementation of the longer-term recommendations has often had to be left for a follow-up operation. Finally, the projects have achieved their objective of providing substantial amounts of quick-disbursing assistance to priority aectors and providing vehicles for cofinancing with donors whose programs in Ghana had come to a standstill and who were looking for avenues to assist the ERP. - 35 - B. Background to the Proposed Operation 95. Following an extensive policy dialogue in the context of the 1985 CEM, the Government prepared for submission to the November 1985 Consultative Group an outline of the policy framework covering the 1986-88 period 1/ which represented an emerging consensus between the Government and IDA on the medium-term structural adjustment program. The considerable economic and sector work and project financed studies undertaken jointly with Government during FY8S and FY86 informed this policy dialogue and helped convert the policy framework into a detailed action program for structural adjustment. This included agricultural and industrial sector reviews, a public expenditure review covering eight sectors in April-May 1985, a major study by external consultants on state enterprises which led to the design of the SOE reform program, joint Bank-Fund missions on resource mobilization and exchange and trade policy, and a number of studies, particularly on the cocoa sector, financed under the Export Rehabilitation Technical Assistance Credit. 96. Two IDA missions in November 1985 and February-March 1986 helped the Ghanaian authorities integrate this preparatory work into Structural Adjustment Program. An appraisal mission visited Ghana in July 1986. The mission participated in a series of policy seminars organized by the Structural Adjustment Program Team (para 75) attended by members of the PNDC, PNDC Secretaries, key civil servants, and representatives of trade unions, employers and the Committees for the Defense of the Revolution. As a result of these seminars, the issues in each area were widely debated and a consensus emerged on the policy framework. Negotiations were conducted in the last week of February 1987. The Structural Adjustment Program was subsequently endorsed by the PNDC. The Letter of Development Policy (Annex IV) outlines this consensus. A Policy Matrix is provided in Annex V. Supplementary data appear in Annex III. The parallel Structural Adjustment Institutional Support Project was appraised in November 1986 and negotiated and endorsed together with the SAL. C. The Proposed Financing Package 97. Bank staff have worked closely with Government to determine the financing requirements of the adjustment program and to put together a feasible financing plan. The preliminary balance of payments projections and assessment of financing requirements are based on the following key assumptions: (i) world cocoa prices will continue to decline in real terms over the medium term; (ii) the planned integration of the official and parallel markets in foreign exchange will eliminate the incentive to 1/ "Progress of the Economic Recovery Programme 1984-86 and Policy Framework, 1986-88," prepared by the Government of Ghana in October 1985 for the November 1985 meeting of the Consultative Group for Ghana. - 36 - smuggle and hence boost export earnings and encourage remittances from Shanaians abroad; (iii) payments arrears will be phased out in an orderly manner; (iv) access to the international capital market will be limited until confidence builds up in the continuation of adjustment policies and in political stability; (v) concessional aid flows to Ghana other than from IDA and African Facility structural adjustment lending will be maintained in real terms at the levels attained in 1986; and (vi) Ghana will have access to the Fund's medium-term facilities at a level sufficient to substantially reduce net resource transfers to the Fund. These assumptions imply a modest recovery in imports from their present depressed levels, but sufficient to permit the expected increase in investment and to meet the targets for economic growth. 98. Taking into account official projected current account deficits, medium- and long-term amortization, IMF repurchases, arrears repayments and other short-term liabilities, total financing requirements average $786 million per annum over the 1987-1989 period. Nearly 59 percent of this amount will be financed from concessional aid flows. Table 1: Projected Financing Needs and Availabilities (millions of U.S. dollars) Average Financing Needs 1987 1988 1989 1987-89 Current Account Deficit 331 357 340 343 Official MLT Amortization 166 189 185 180 IMF Repurchases 161 235 161 186 Arrears Repayments 26 72 73 57 Other Liabilities 71 -36 0 11 Reserve Requirements -7 15 20 9 TOTAL 748 832 779 786 Financing Sources Grants 161 157 194 171 Long-Term borrowing 267 310 293 290 IDA Project (66) (76) (70) (71) Program (111) (129) (110) (117) Of which: SALs (58) (87) (60) (68) Other Multilateral & Bilateral (90) (105) (113) (103) Net Private Foreign Borrowing (incl. Direct Foreign Investment) 30 50 41 41 Non-Concessional 151 112 103 122 Other 138 147 131 139 TOTAL 748 776 762 762 FINANCING GAP - 56 17 24 99. The main components of the financing package are indicated below: (i) In addition to the proposed Development Credit of US$34 million and the proposed African Facility Credit of US$81 million on - 37 - standard IDA terms, Special Joint Financing (SJF) under the African Facility of about $35.5 million has been assumed. In addition, Canada is considering parallel financing of C$25 million in support of the program. The proposed credits and SJF contributions, and C$10 million of the Canadian contribution are expected to be disbursed over a 20-month period ending December 1988. They would finance about 7 percent of Ghana's imports of goods and 6 percent of its gross external requirements in the 1987-88 period. Assuming successful implementation of the first Structural Adjustment Credit, a second credit amounting to approximately $90 million is envisaged for FY89, of which roughly a third could be disbursed in 1988 and the balance in 1989. (ii) The IMF approved a stand-by arrangement (SBA) for SDR 81.8 million in October 1986, and drawings under the proposed IMF Structural Adjustment Facility could total some $49 million during 1987 and $33 million each during 1988 and 1989, subject to approval by the Fund's Management and Board. The SBA is expected to be followed by an Extended Fund Facility (EFF). (iii) The pipeline of unutilized aid from all sources including IDA is expected to total $860 million at end December 1986. Dis- bursements from this pipeline are projected at $290 million during 1987, $225 million during 1988 and $150 million in 1989. New commitments of concessional aid for 1987-89, excluding the Structural Adjustment Credit and associated Special Joint Financing, from all sources are anticipated to average $530 million each year, based on conservative projections of recent past performance by individual donors. Disbursements from these new commitments are anticipated at about $60 million in 1987, $140 million in 1988 and $277 million in 1989. (iv) Disbursements from non-concessional borrowing averaging $122 million are assumed in 1987-89. These are consistent with the assumed commercial borrowing levels in the "With Adjustment" Scenario described in para 114 below and merely imply new borrowings at levels that cover amortization of medium-term debt. No rescheduling of debt is explicitly assumed. However 12-month oil credits are to be gradually phased out. This would still leave an average financing gap of $24 million over the 1987-89 period. Filling this gap will be part of IDA's aid coordination agenda for Ghana. 100. Under the above financing assumptions, Ghana's debt service ratio would fall from about 60 percent in the 1987-89 period to 37 percent by 1990 and 21 percent by 1995. The degree of concessionality in Ghana's debt structure would increase from an average maturity of 28 years in 1986 to 32 years by 1995 with corresponding improvements in grace periods and average interest rates. - 38 - D. Procurement and Disbursement 101. The proceeds of the proposed credit would be used exclusively for the financing of the foreign exchange cost of eligible imports through the foreign exchange auction in the Bank of Ghana. Procurement procedures have been designed to permit rapid use of the funds while ensuring efficiency and economy. Except for a few exclusions such as luxury and defense items and foodgrains, any imports would be eligible for financing. Retroactive financing would be limited to a maximum of US$23 million worth of items paid for after January 1, 1987. Not more than US$20 million of the proceeds of the credits would be used for petroleum imports. In view of the above, imports below US$2 million by private entities and SOEs would be procured in accordance with their normal procedures; the SOE procedures would be acceptable to the Association. Imports worth US$2 million or more in the private and SOE sectors and US$1 million or more in the Government sector would be subject to international competitive bidding according to Bank Guidelines. International suppliers are well represented in Ghana; this, together with the ongoing auction system and trade liberalization, should ensure an internationally competitive market in which importers can be relied on to procure their goods and services from the most efficient sources and to minimize costs. Imports by the Government sector below US$1 million would be procured according to its procedures which are acceptable to the Association. 102. To facilitate procurement and disbursement, two special accounts, one for the IDA credit and the other for the African Facility credit, would be established in U.S. dollars at a commercial bank, on terms and condi- tions acceptable to the Association. Initially, $6 million of the IDA credit and $30 million of the African Facility credit will be deposited in the accounts. Applications for replenishment of the special accounts will be submitted monthly, or when withdrawals equal one-third of the amount advanced. Applications will be fully documented with respect to payments against contracts of more than $1 million equivalent. Reimbursements for payments against smaller contracts will be made on the basis of statements of expenditure certified by the Bank of Ghana with supporting documents retained for review by visiting missions. Annual audit reports will include a separate audit of amounts withdrawn on the basis of statements of expenditure. 103. The proceeds of the proposed Credits would be disbursed in two tranches as follows: (a) a first tranche of US$57.5 million (SDR 45.5 million equivalent) would become available immediately upon effectiveness (anticipated in May 1987); (b) the balance would be made available provided a review of perfor- mance, around January 1988, determines that the conditions stipulated in para 104 have been fulfilled. - 39 - E. Monitorable Actions 104. The Letter of Development Policy (Annex IV) describes the specific measures that have been or will be taken during this phase of the adjustment program. These measures are summarized in the matrix of policy actions shown in Annex V. Disbursement of the second tranche would be contingent upon satisfactory progress in implementing the structural adjustment program, notably in completing the following actions in a manner satisfactory to the Association and consistent with the objectives of the program: (i) announcement of the program and timetable for phasing consumer goods imports into the foreign exchange auction and its implemen- tation according to the timetable as well as implementation of related trade and tax reforms (para 45); (ii) announcement of a cocoa producer price as agreed with the Association for the crop year 1987/88, and agreement on the cocoa producer price for 1988/89 (para 48); (iii) implementation of agreed Cocobod restructuring measures for the crop year 1986/87, and agreement on the COCOBOD corporate plan for 1987/88-1989/90 (para 50); (iv) agreement with the Association on the 1988-90 medium-term public expenditure program (para 56); (v) divestiture actions initiated for at least 10 SOEs (at least 5 offered for sale including State Fishing Corporation; and liqui- dation proceedings initiated for 5 inactive SOEs); (para 66); (vi) completion of corporate plans for 10 priority SOEs and draft performance agreements based on corporate plans for 4 of these 10 (para 67); performance agreement signed with Cocobod; and (vii) retrenchment of 15,000 public servants in 1987; and identification of further surplus workers following, and subject to, a staffing and functional review with a view to their removal from the payrolls during 1988 (para 77). 105. The Government intends to maintain the Structural Adjustment Program Team that was established to prepare the SAL. The team would monitor the implementation and impact of the structural adjustment program, prepare future adjustment measures and liaise with the Association for the purpose of reviewing progress under the adjustment program. The Government would submit to the Association a report evaluating the progress made in implementing the adjustment program since credit approval as the basis for the mid-term review of the program scheduled for January 31, 1988 and the release of the second tranche (expected in February 1988). The Association has the option to cancel all or part of the second tranche if the - 40 - conditions for its release have not been fulfilled within 90 days after the mid-term review. The Government would submit to the Association a final report on the implementation of the adjustment program within six months of the full disbursement of the credit. ECONOMIC AND SOCIAL EFFECTS F. Economic Effects 106. Medium-Term Scenario: As is clear from Part II, the Structural Adjustment Program comprises a series of closely interlinked and mutually reinforcing policy reforms which are designed to simultaneously stimulate growth, investment and domestic savings. Table 2 illustrates a medium-term scenario based on a full and timely implementation of the adjustment program and relatively cautious assumptions about resource availabilities and the likely supply response. 107. The adjustment program aims at a growth of 5.0-5.3 percent per annum in the 1987-89 period, and a sustained growth of 4-5 percent per annum in the period through 1995. This is to be achieved through measures to create an appropriate incentives framework for the private sector, to increase the level of investment and to improve the efficiency of investment. Exchange and trade policy reforms, which lie at the heart of the adjustment program, are designed to price foreign exchange realistically and thus to remove the bias against exports and to encourage a more efficient use of foreign exchange. The accompanying liberalization of trade and access to foreign exchange (through the auction) and the dismantling of price and distribution controls will encourage fuller capacity utilization both directly and through the shift in incentives from trading to productive activities. Improved producer prices, particularly for cocoa, will provide a strong stimulus to continued agricultural recovery. The liberalization of trade will also stimulate the growth of the services sector, as financial and communication services respond to the further stimulus to economic activity. 108. Investment is to increase from an estimated 10 percent of 1986 GDP at current market prices to 23 percent of GDP by 1989; the increase is more modest in real terms, from 9 percent of GDP in 1986 to 16 percent in 1989 at constant 1984 prices. The initial impetus for this increase will come from the public sector investment program. The substantial rehabili- tation programs in the energy, transport and communications sectors are an essential precondition for the resumption of sustained growth, as are the higher allocations for operations and maiitenance in the recurrent budget, which would increase the effectiveness of essential support to the produc- tive sectors such as agricultural extension and research. At the same time the effectiveness of public investment will be increased through a more rigorous project evaluation machinery being established under the adjustment program. The improved policy environment accompanied by other measures (such as the Investment Code) to bolster private sector confidence is expected to have a positive effect on private investment. Profitable investment opportunities in exporting and efficient import substitution -41- GHANA Table 2: Selected Economic and Financial Indicators Annual Average Actual Estimates Projections --------- ------- ---------------- **------------------------ 1980-83 1984 1985 1986 1987 1988 1989 Growth Rates GDP -5.1 8.6 5.1 5.3 5.0 5.3 5.3 GDP Deflator 106.6 3.5 31.2 30.2 18.0. 12.5 7.5 Percent of Market Price GDP National Accounts: Consumption 96.5 95.1 95.7 92.3 89.8 86.7 85.0 Investment 4.5 7.6 7.3 10.3 17.1 21.0 22.8 Private 3.1 4.0 3.4 4.4 7.9 11.1 11.9 Budgetary Cap. Expenditures a/ 1.4 3.6 3.8 5.9 9.2 9.9 10.8 National Savings 3.9 4.7 3.1 6.6 8.5 12.2 14.8 Public b/ -4.4 -0.4 0.1 1.7 3.2 3.5 3.6 Private 8.3 5.1 3.0 4.8 . 5.3 8.7 11.2 of which: Foreign Transfers 0.0 1.0 0.5 0.9 1.3 2.0 2.8 Foreign Saving 0.6 2.8 4.2. 3.7 8.6 8.8 7.9 Central Government Budget: Total Revenues 6.4 8.0 10.4 13.6 16.1 16.2 16.5 Total Expenditure 12.2 11.8 14.1 17.8 22.8 23.6 24.4 Recurrent 10.7 8.4- 10.3 11.9 12.9 12.7 12.9 Capital 1.5 3.4 3.8 5.9 9.2 9.9 10.8 Special Efficiency 0.0 0.0 0.0 0.0 0.7 0.9 0.6 Overall Deficit 5.8 3.8 3.8 4.1 6.6 7.4 .7.9 Balance of Payments Exports of GNFS 4.5 8.0 9.9 15.8 21.7 22.2 22.7 Imports of GNFS -5.4 -10.7 -12.9 -18.5 -28.6 -30.0 -30.5 Resource Balance -0.9 -2.7 -3.0 -2.6 -7.0 -7.7 -7.8 Current Account Balance -1.6 -2.8 -4.2 -3.7 -8.6 -8.8 -7.9 Overall Balance -1.0 -1.6 -1.7 -1.1 2.8 3.0 2.5 a/ From 1984, includes State Enterprises capital expenditures financed by external concessional assistance. b/ Represents Central Government's savings only. Source: Bank staff estimates (see Annex VI) - 42 - activities will increase as a result of the exchange rate reform and trade liberalization. There will be less crowding out of the private sector, particularly in relation to the banking system. The reduced role of state enterprises will also expand the opportunities for private sector initiative. At the same time the more realistic pricing of capital and foreign exchange will help improve resource allocation and increase the productivity of investment. 109. The growth in investment is financed partly from a sustained high level of concessional aid flows including SAL counterpart funds. But there is to be a much larger increase in the level of national savings, both public and private. Public savings are intended to play a significant role in the recovery of domestic savings, due to a strong resource mobilization program, based on the favorable impact of exchange rate policies, new revenue measures, tax reform and improvements in tax administ,ation. The unification of the exchange rate at the more depreciated auction rate in early 1987 will result in a temporary windfall gain of cocoa revenues to the budget, which alone will jump from 2.4 percent of GDP in 1985 to 4.3 percent in 1987. However, as producer prices are adjusted to pass on the benefits of the exchange rate change to producers, the share of cocoa revenues will decline; the reform measures at the Cocobod are designed to reduce operating costs and help contain the impact on budgetary revenues from cocoa until the efforts to reduce dependence on export taxes bear fruit. Among measures designed to bring this about are a broad based sales tax, reform of company taxation, and increased taxation of petroleum. 110. On the expenditure side, recurrent expenditures are to rise only moderately from their present share of GDP (12 percent). To attain this objective, the dual and conflicting objectives of containing the wage bill while increasing real incomes for senior civil servants are reconciled by a program of staff retrenchment of 10-15 percent of the civil service. The SOE reforms will also reduce the dependence of SOEs on the budget. Expen- ditures on other goods and services will need to be raised to reverse the past neglect of operations and maintenance expenditures; nevertheless, strict expenditure controls will be needed to live within the expenditure ceilings and realize the targeted current savings of 3-4 percent of GDP. 111. Private savings are expected to respond positively, if relatively modestly, to the financial sector reforms, which include attaining positive real interest rates, the introduction of vehicles to mobilize small savings and tap rising rural incomes, particularly of cocoa farmers, and tax policy changes that stimulate savings and restore confidence in the banking system. These will be supplemented by remittances from overseas which respond to the unification of the parallel market and official exchange rates with the merger of the official auction and SIL markets. Here again, confidence building measures for the private sector, tax incentives, and financial sector policies will play a key role (para 33). 112. Longer Term Prospects. The medium-term adjustment scenario described above is intended to generate the momentum needed for sustained growth in the longer term. The two alternative scenarios prepared for the - 43 - 1985 CEK (Report No. 5854-GH) have been updated. The first sets out the longer term outcome of a continued reform scenario; the latter describes the probable consequences of a failure to make the further adjustment described above. Table 3 summarizes the two scenarios. In the first scenario (illustrated in the charts), sustained growth of around 4 percent per annum is achieved, based on a strong performance of agriculture. The adequacy of the incentives and a determined effort through improved exten- sion and research services to raise yields closer to their present poten- tial will be critical determinants for growth of food and industrial crops. Cocoa production is expected to respond well to improved incentives. Near term increases will come from improved husbandry, while after 1990, the yield from hybrids planted during the 1970s and early 1980s will begin to be felt. Timber production is expected to recover to its previous levels following the substantial new investments in rehabilitation currently taking place. 113. Growth in mining would be fairly rapid through 1990 (12 percent per annum), and then decelerate to around 4 percent in the first half of the next decade. Gold production is expected to recover by 1995 to some 570,000 fine oz. as against the present level of 286,000 fine oz. This may prove conservative as new investment policies and the improved exchange rate have greatly increased applications for gold prospecting licenses. Bauxite and diamond output is also expected to respond strongly through 1990 to the stimulus of exchange rate policy and the rehabilitation programs in this sector. Rapid growth in manufacturing is anticipated in the near term from improved availability of raw materials and spares and the substantial excess capacity in the sector. In the longer term, improved incentives for efficient import substitution and exporting will result in a shift in the structure of industrial production, requiring new investments which would in turn depend on the overall climate for the private sector. Manufacturing growth is expected to average 12 percent per annum through 1990 before decelerating to around 5 percent. Growth of the service sector is expected to be roughly in line with growth in GDP, responding to the liberalization of trade, the substantial rehabilitation investments in the transport and communication sectors and the generally improved climate for the private sector. 114. On the external side, export growth at nearly 6 percent per annum in real terms between 1986-95 is made possible by the recovery of exports other than cocoa from their presently depressed levels to their historical past highs. Cocoa exports are not expected to recover to their past highs, growing more modestly to about 300,000 tons by 1995. Non-traditional exports will provide a strong stimulus for export growth in the early 1990s. Import growth will be contained at about 5 percent per annum in real terms, initially growing quite rapidly with import liberalization, and then decelerating partly on account of declining food imports. The current account deficit is contained at 8-9 percent of GDP before declining to 4-5 percent by the end of the period and since this is largely financed by concessional aid flows, the debt-service ratio declines over the period to 23 percent by 1995. The projected concessional aid flows conservatively assume only a moderate (10 percent) increase in commitment levels over - 44 - 1984-86 levels in real terms. With higher aid flows, a more vigorous growth performance would be feasible. 115. In the adjustment fatigue scenario the policy reforms contemplated under the Structural Adjustment Program do not materialize. In particular, there is an erosion of the gains in exchange rate policy, agricultural incentives are allowed to decline, and trade liberalization stalls. While the reforms to date provide some momentum in the short to medium term, providing a false illusion of progress sooner rather than later, the export momentum falters as cocoa production and exports stagnate, and incentives for non-traditional exports become a constraint to their expansion. The consequences for the balance of payments could be exacerbated by the inevitable retreat of donors and other sources of external capital as confidence once again weakens in Ghana. This would erode the already limited import capacity and make the debt service burden unmanageable, triggering off yet another downward spiral sparked by recurrent foreign exchange crises. Table 3: Two Scenarios (1986-95) (annual average growth rates; percent per year) (constant 1984 cedis) Continued Reform Adjustment Fatigue Scenario Scenario Population 3.0 3.0 CDP 4.5 2.6 Consumption 3.3 2.5 Investment 13.2 3.6 Exports 5.5 2.5 Imports 5.3 2.5 Per Capita GDP 1.5 -0.3 Private Consumption 0.3 -0.5 116. Growth under this scenario averages 2.6 percent per year, resulting in a decline in per capita GDP. Investment bears the brunt of the failure to adjust; resources for public investment are eaten away by much poorer revenue effort due both to poor policies and the lower growth; private investment is adversely affected by the poorer climate for the sector. The lack of investment in turn reduces the economy's future growth potential. A further consequence of the failure to adjust would be an increased dependence on food imports as food output growth in this scenario is substantially below population growth. - 45 - Ghana's Economy: Performance and Prospects (1975 - 1995) Ghana: Performance of GDP. Agriculture. Ghana: External Trade and Current and Manufacturing Account Balance ProjACTUAL PROJECTION Actual Projectin ,o *R XGOODS Agricultureo CURRENT ACCOUNT it175 1175 19561 1984 1987 1990 1s95 1975 17 1*7n 19811983 19851967 199 19919 e1995 Ghana: Ratlo of Broad Monøy (M2) to GDP Ghana: Exports of Cocoa and Cocoa Products 25- 400 ACTUAL 200 Actuat E ;5.o20 PROGRAM C 104o . .. . . 1977 1979 1981 1983 1985 1987 1989 1975 1978 1979 1982 19851 198ó 1991 1994 Ghana: Annual Inflation Rate Ghana: Exports of Gold 150-20 - ACTUAL 20000 ~-100- Actual 50 PROGRAM oo@ 0 "% . , -, I 1978 1980 1982 1984 1986 1988 1990 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 - 46 - G. Social Impact 117. The prolonged decline in the economy through 1983, as noted in Part I, caused a substantial reduction in per capita real incomes and food production. While the majority of the population experienced a sharp drop in its living standards over the period, the poorer groups, primarily the rural population and the urban informal sector, were among those least able to protect their position. Living standards were further eroded by the debilitation and misdirection of public sector infrastructure investment and programs in health, education, water and sanitation. The social impact of the adjustment program needs to be evaluated in the context of the social costs of a failure to adjust. In the absence of further adjustment measures,the economic recovery experienced to date would falter, and the economy would resume its downward decline with severe adverse consequences for Ghanaians rich and poor. 118. Under the Continued Reform Scenario, per capita incomes and consumption will show a modest but steady growth through 1995. The im- provement in producer incentives, the increase in levels of investment, both public and private, and the shift in resources from urban to rural areas and from traders to producers will enhance economic opportunities throughout the economy, but particularly for small farmers, and substan- tially increase employment opportunities in both rural and urban areas. The shift in resource allocations within an expanded level of expenditures for health and education towards primary health care and primary and secondary education will bring substantial productivity gains to lower income groups. In sum, the majority of the population is likely to be better off with the policy reforms than without. 119. The adjustment policies envisaged could have a potentially adverse impact on the poor through (a) price changes resulting from ex- change rate movements and petroleum taxation; (b) the retrenchment of some 30,000 workers from the civil service and some 20,000 from SOEs in 1987-88, and (c) employment losses arising from the adverse effect on inefficient enterprises from the further liberalization of trade and related tariff reforms. To the extent that prices of end products already reflect their scarcity values--the marked deceleration in inflation during a period of sizable exchange rate adjustment suggests this is indeed so--the price impact of further exchange rate movements on the poor will be marginal and declining in significance since the major adjustments in the rate have been already achieved. Inflation is expected to decelerate further, helping the poor. 120. The reduction in employment levels from the public sector retrenchment program may well be somewhat lower than currently targeted by the Government. In the civil service, a staff and functional review will determine actual reductions beyond an initial 15,000 based on a careful study of staffing needs. Many ghost workers are included in those likely to be removed from the rolls. SOE retrenchment will also be based on a labor survey of key enterprises. The largest component of the SOE retrenchment program is to come from the divestiture of cocoa plantations - 47 . owned by COCDBOD. These workers will likely find employment with the new owners of these plantations or may obtain rights to the land themselves. Similarly, the divestiture program for other SOEs will count towards the overall target the Government has set itself. Moreover, the incomes of most of the workers likely to be let go are so low that the only way many survive now is by "moonlighting." Their departure will bring productivity gains to both the public sector and the other activities which chey pursue. 121. Any employment losses arising from this or other program compo- nents must be set against the substantial employment gains expected from trade liberalization, improved producer incentives and the higher levels of investment in both public and private sector. In particular, the major increase in public investment directed towards the labor-intensive mainte- nance and rehabilitation of feeder roads and the highway network will create substantial new employment opportunities. The substantial increase in the road vehicle fleet will also bring large employment gains. However, the main gains will come from agriculture, where daily labor rates already exceed two to three times the minimum wage in the organized sector. Moreover, in the past the informal sector in Ghana has shown a remarkable capacity to absorb sudden large additions to the labor force, as evidenced by the successful absorption of nearly 1 million returnees from Nigeria in the 1982-83 period. This suggests that the economy should be able to absorb the displaced workers from the public sector. 122. Frictional unemployment will remain a problem; the Government's proposed resettlement assistance programs will assist workers in a variety of ways. While pensionable workers would be receiving both their pensions and one year's salary in cash for every 8 years of service as compensation, and others would receive ex gratia cash payments, the Government intends to assist them to shift to new occupations through a number of measures now under consideration. These include retraining programs, an entrepreneur development program, the allocation of divested state-owned farm land to retrenched workers along with credit and technical advice, incentives to contractors in the roads and highways sector to hire retrenched workers under the cocoa and other feeder roads rehabilitation and maintenance programs, WFP supported food-for-work and public work programs and credit programs for self-employed schemes in livestock, fishing and other produc- tive and service activities. The UNDP and ILO are to assist Government in the design of the program. The budget for 1987 carries a provision of %2,800 million ($19 million equivalent) for cash payments and g1,400 million ($8 million equivalent) to initiate other programs; the latter is expected to be supplemented by contributions from other donors. The accompanying SAIS credit provides an allocation of $0.8 million to assist in the design of the programs, and implementation of training programs. 123. Detailed and up-to-date household income and expenditure data are not available to help identify the worst-off groups and to work through the implications of the adjustment program for different population groups. Such information as can be assembled suggests that rural households are worse off than urban households as a rule in terms of incomes and the - 48 - availability of social services. However, subsistence farming households are relatively insulated from price increases. Among rural households, those in the northern part of the country, including the Northern and Upper regions, are the poorest. Moreover, they are the worst off in terms of access to social services. Social indicators such as infant mortality, life expectancy, the crude death rate, literacy and primary school enroll- ment confirm that they constitute some of the most deprived groups in Ghana and will need special attention. 124. Low-income urban households were clearly hard hit during the period of economic decline; with shrinking economic opportunities, their incomes were not able to keep up with price increases. A much lower proportion of urban food consumption is home-produced, 6 percent compared with 37 percent for rural households; as primarily consumers of food, the urban population only feels the effect of food price increases on the expenditure side. Within urban areas, the informal sector is worse off in absolute terms than the formal sector; despite the collapse of real incomes of civil servants, public sector employment rose rapidly, especially for unskilled workers. The adjustment program should help raise formal sector incomes directly in a period of relatively stable food prices, while the informal sector will have to rely on general economic recovery and growth for some positive repercussions on their economic environment. Thus the urban informal sector will also require some immediate assistance. 125. Nutritional studies and growth surveillance data have drawn attention to the especially poor nutritional status of children under five and pregnant and lactating women, with the northern regions again being found to be the worst off in this regard. The urgent need for special assistance to improve the nutritional status of these groups is recognized and a number of programs have been drawn up or are under consideration (see para 85). 126. The last official household survey for Ghana was conducted in 1974-75 and an improvement in the statistical base to increase the knowl- edge of the extent and causes of poverty is planned as part of the adjust- ment program through a Living Standards Survey to be launched during 1987 (para 83). The results of the survey will be used to monitor the impact of the Structural Adjustment Program on the poor, with a view to making such mid-course corrections as may prove necessary. In the meantime, the Government feels that there is need to take immediate action, albeit on the basis of out-of-date and fragmentary information, and to refine the program when better data become available. The main components of the program were described above (paras 83-85). H. Risks 127. The significant reforms already introduced since 1983, and the economy's strong positive response to these have created a favorable initial climate for the further adjustments now being envisaged. This has been reinforced by the substantial aid pipeline built up over the past two years, the expected availability of additional resources from the Fund and - 49 . the decline in crude oil prices which provides substantial relief to the balance of payments. Ghana is, therefore well placed to embark on a more vigorous program of reform. There are, nevertheless, at least four risks associated with the program. These relate to: (i) the implementation capacity of the Government; (ii) possible delays in the supply response to the reforms; (iii) exogenous shocks from climatic or commodity price behavior; and (iv) socio-political risks. 128. The Government's implementation capacity remains a key bottle- neck. The adjustment program will impose a considerable burden on the policy formulation and decision making capacity and on implementation capability. The parallel Structural Adjustment Institutional Support Project to strengthen public sector management is designed to reduce the risks associated with implementation capacity. Its focus is on improving the supply of trained Ghanaians from within and outside Ghana to improve and strengthen public sector implementation capacity, particularly in key areas of economic and financial management. The institution of premia and local consultancy arrangements as a means of improving incentives to work for Government will assist this process. Training programs will be geared to reducing dependence on external technical assistance. Cocoa sector reforms will be assisted under the proposed Cocoa III project through technical assistance to Cocobod. State enterprise reforms will be assisted through technical assistance under the proposed Public Enterprise project. Bank and Fund economic and sector work will supplement the Government's own policy analysis. Moreover, all projects addressing rehabilitation constraints are also addressing implementation capability through training and technical assistance. 129. Delays in the supply response could be triggered by a number of factors. The two most important ones are liquidity constraints and infra- structure bottlenecks. Major changes in relative prices have had and will continue to have a severL impact on the creditworthiness of firms. The sharp rise in input prices and relatively tight demand management have squeezed liquidity ratios and enterprise cash flows, which are further compounded by old and obsolete equipment, over-manning and lack of trained manpower. Debt-equity structures have also been adversely affected. Commercial banks have proved reluctant to extend credit to customers who may have viable businesses but whose past performance and current liquidity position are sources of concern. The liquidity constraint has been a significant factor in past low aid disbursements. Bank and Fund staff have been discussing this issue over the past year. Under the SAL policy framework, the adequacy of liquidity and the measures needed to address the problem will be periodically reviewed by Government. A proposed Financial Sector Adjustment Credit may address institutional constraints, and in particular, the management and financial health of leading public sector financial institutions. Bank staff will continue to work closely with Fund staff in discussions on credit ceilings. Infrastructure bottlenecks are being addressed under a number of IDA assisted projects; nevertheless, the projects are small in relation to needs and their implementation is subject to a number of constraints. This could impede the supply response in the next year or two. - 50 - 130. Climatic shocks, such as another drought, or a fall in cocoa prices below levels currently being projected could have a serious impact on growth. Preliminary estimates show for instance that a decline in cocoa prices of about 10 percent would result in an addition to the financing gap in 1987-88 of about $50 million each year. If this additional gap were financed on non-concessional terms, debt service ratios would climb by 5 percentage points to 65-75 percent, falling in 1990 to 45 percent. 131. Last, but not least, are the socio-political risks. In any adjustment program of this magnitude, there are both gainers and losers: moreover, the costs of adjustment can precede the benefits. In the Ghanaian reform program, the main beneficiaries will be farmers, particu- larly cocoa farmers, and exporters, and the losers will be the urban poor, who are adversely affected by rising food and petroleum prices and those newly unemployed as the Government and State-owned enterprises shed their surplus labor and inefficient enterprises are unable to cope with the competition from imports. The costs associated with price adjustments and unemployment could, however, precede the gains. There will then be consid- erable pressure on the Government to reverse the policies or to compensate low paid urban workers through large wage increases unrelated to productivity gains. For reasons bet out in paras 119-122, these risks need not prove to be significant. 132. The success of the reforms to date is partly due to the Govern- ment's careful efforts to explain the rationale of the program to the general public. Continued effectiveness in communications will be critical to the success of the program. The Government recognizes that the costs of not adjusting will be substantially higher than the costs of adjustment; the sacrifices required in the short term will have a high pay-off. PART IV - BANK GROUP OPERATIONS IN GHANA 133. Until March 1983 when lending was resumed after a hiatus of 18 months the Bank Group's assistance to Ghana was project oriented with a strong emphasis on export promotion and rehabilitation of basic infrastruc- ture. Since 1962, when the Bank Group financed its first operation in Ghana, the Bank has made 10 loans totalling US$189.7 million and 37 credits totalling US$728.8 million (including three African Facility Credits for US$62 million and a $6.3 million credit for the Northern Grid Extension Project approved February 17, 1987). In addition, Ghana participated in a Bank-financed regional clinker project covering three countries (Togo, Ivory Coast and Ghana). An IFC investment of US$55.0 million in Ashanti Goldfields Corporation was approved in June 1984. In addition, an IFC equity contribution of $4.5 million to an oil exploration project was approved in December 1986. Annex II contains a summary statement of Bank loans and IDA credits as of December 31, 1986. 134. Following the introduction of the ERP there has been a major shift in Bank Group strategy, which now has the following major objectives: - 51 - (a) to assist the Government through the Bank's economic and sector work, technical assistance and program lending, to improve incentives for production, to increase the efficiency of economic management and restore in the medium-term a sound financial basis for growth; (b) to promote long-term development of the economy by underpinning structural adjustment lending with infrastructure rehabilitation and sector adjustment operations within a framework of appropriate sectoral policies, the latter encompassing industry, agriculture, education, and public enterprise; and (c) to contribute to improved aid effectiveness in Ghana by acting as the focal point for aid coordination between donors and Ghana as the Government strengthens its own planning and aid coordination ability. 135. Thus since April 1983, the Bank has approved a series of program credits designed to provide critically needed imports, particularly to export sectors and supporting economic infrastructure such as transporta- tion. These included credits for export rehabilitation and related technical assistance. The credits also laid the base for policy reforms in critical areas such as cocoa producer prices and marketing, price and distribution controls, and public expenditures. 136. Energy has been a major focus of Bank Group lending to Ghana (19 percent of commitments as of December 31, 1986). The projects include three hydro power generation, three power distribution and, more recently, rehabilitation of the power system. A project aimed at strengthening Ghana's technical capacity to accelerate petroleum exploration was approved in May 1983. Another project provides technical assistance and financing of immediate requirements for rehabilitation of the petroleum refinery. The second most important sector in the Bank Group's program in Ghana is transportation (19 percent of commitments) with four road projects, a railway rehabilitation project and a ports rehabilitation project. The two Reconstruction Import Credits and Export Rehabilitation Project also provided emergency imports to the road transport and port subsectors. The Accra District Rehabilitation Project supports the transport subsector in the Accra area as well as the strengthening of the administrative and financial basis of the Accra City Council and the improvement of a poorer section of the city. The Ports Rehabilitation Project will improve Ghana's two major ports to remove major bottlenecks to exports. The projects provide for institution building in highway subsector organization, planning and maintenance, railway management and ports. A transport rehabilitation project being prepared will continue institutional support to the sector. 137. In agriculture (14 percent of commitments), the main thrust of the Bank Group's operations has been to assist the country in achieving greater self-sufficiency in agricultural production, particularly food and raw materials for agro-industries, and rehabilitating the cocoa subsector. - 52 - An agriculture rehabilitation project under preparation will focus on sector policy coordination, sector planning, strengthening the Ministry of Agriculture, food security issues, pricing policy for crops other than cocoa, privatization and strengthening of support services, and reform of agricultural SOEs. A Cocoa III project also is being prepared, the main components of which are research, input supply, and disease control; but it would also support the actions on the cocoa producer price and institutional reforms which are being addressed in the SAL. In the field of water supply, three projects have increased and improved water supply in the Accra-Tema metropolitan area and adjacent rural areas, with the most recent one helping to carry out emergency repairs and maintenance on main water pipelines, and contributing to institution building. Two credits have financed investments in manufacturing and agro-industry undertaken by small and medium-sized enterprises. The recent Industrial Sector Adjustment Credit aims to improve capacity utilization through provision of imported inputs and sectorwide adjustment measures, including trade liberalization which will be broadened to cover all sectors in the SAL. While most Bank Group lending has focused on financing supporting economic infrastructure and rehabilitation, there is recognition of the need to support the social sectors. A credit to meet urgent rehabilitation needs in health and education is ongoing and a project to support the Government's education reform was approved by the Executive Directors in December 1986. Each of these involves actions to strengthen sector planning and the sector ministries involved. In addition, a project to support the Government's state-owned enterprise reform program, following through on the actions in the SAL, is under preparation. 138. The Bank Group is pursuing a two-fold strategy for strengthening policy planning and public sector management in Ghana. At the macro level, it is focusing on the core economic and financial management functions and some wider issues of public sector (especially civil service) management through the proposed SAIS pro4ect. At the sector level, it is pursuing the strengthening of sector policy formulation, planning, coordination and management. Both areas of action are being coordinated with UNDP, which in a series of parallel or cofinanced projects is proposing to assist with the SAIS project and is undertaking a series of sector planning projects, all in close consultation with the Bank. 139. The country's past economic difficulties have adversely affected a number of Bank Group-financed projects. Dwindling Government revenues have denied projects needed local financing, and the lack of foreign exchange has resulted in a severe shortage of imported materials and spare parts required for completed projects. The mass exodus of qualified Ghanaians to neighboring countries, and demoralization, absenteeism and low productivity among the remaining work force have also adversely affected project performance. The unusually adverse conditions surrounding Bank Group-financed projects and their generally poor performance have been described in greater detail in Project Performance Audit Reports. Because of delays experienced in the implementation of a number of Bank Group-financed projects in Ghana, disbursement performance is behind appraisal estimates. Annual gross disbursements over the four-year period - 53 - FY81-84 averaged about 20 percent of outstanding loan/credit commitments. Through periodic implementation reviews, the Government and the Bank have made efforts to improve the disbursement record, and performance in FY85-86 was substantially better. A Central Project Monitoring Unit established within the Ministry of Finance and Economic Planning in October 1985, has proved to be very effective. 140. Given the need to focus Ghana's public expenditures on high- priority rehabilitation and maintenance and on adequate provision for non-salary recurrent costs, improved aid coordination is now assuming increased importance. In this connection, the Bank has chaired the Ghana Consultative Group meetings annually since 1983, organized an industrial sector aid coordination meeting in May 1986, and co-sponsored with UNICEF a similar meeting for the social sectors for interested donors later in September 1986. During 1987 the Consultative Group will meet again in May, and aid coordination sessions are planned for transport and agriculture. PART V - COLLABORATION WITH THE IMF Fund Relations with Ghana 141. Since the inception of the ERP, the Fund's Executive Board has approved three stand-by arrangements and two Compensatory Financing Facility (CFF) purchases by Ghana resulting in a total use of Fund credit by end December 1986 of SDR 611 million or 299 percent of quota. The first stand-by arrangement for SDR 238.5 million (150 percent of Ghana's quota then in force) for a one-year period was approved on August 3, 1983, together with a CFF purchase of SDR 120.5 million (75.8 percent of quota) on account of a shortfall in exports during calendar year 1982. Ghana made all purchases under the stand-by arrangement upon meeting the relevant performance criteria and successfully completing two reviews--the first successful program in Ghana for ten years. On August 27, 1984, the Execu- tive Board approved a second 16-month stand-by arrangement for SDR 180 million (88 percent of quota). Once again, Ghana made all six purchases upon meeting the established performance criteria and successfully completing two reviews. On December 4, 1984, the Fund's Board approved another CFF purchase of SDR 58.2 million (28 percent of quota) on account of a shortfall in exports and an excess in the cost of cereal imports for the 12-month period ending May 1984. 142. A third stand-by arrangement equivalent to SDR 81.8 million (40 percent of quota) was approved on October 15, 1986. The stand-by could be followed by a medium-term program supported by Fund resources under the Extended Fund Facility and the Structural Adjustment Facility. The stand-by covers a 12-month period ending October 14, 1987. The first two of five equal purchases of SDR 16.36 million have been made upon Board approval and meeting end-September 1986 performance criteria; a third purchase was expected to be made upon meeting the end-December performance criteria and completion of a review with the Fund. Since the performance - 54 - criteria were not met (para 21-22), the third purchase will now be made along with the fourth purchase upon meeting the end-March 1987 performance criteria. The policy framework under the current stand-by arrangement includes, inter alia, the institution of the foreign exchange auction system in September 1986 for specified transactions, the unification of the fixed and auction rates on February 20, 1987, and increases in interest rates. It establishes limits on the contracting of non-concessional external debt, targets for the reduction of external arrears and objectives for net foreign assets and domestic credit expansion. Fiscal policies include targets for bank borrowing and the overall deficit, and measures to convert the windfall profit on petroleum into a specific excise duty. The Fund program supports the Government's structural adjustment program described in this report, focusing in particular on exchange and trade liberalization as well as domestic resource mobilization issues through interest rate policy and revenue measures. 143. With the large recourse to Fund credit in the early years of the ERP, substantial repurchases are now falling due. Fund charges and repur- chases (assuming no new arrangements beyond the present stand-by) will climb from $77 million in 1986 to $208 million in 1987, and $278 million in 1988 before declining to $195 million in 1989, $127 million in 1990 and $85 million in 1991. Net transfers to the Fund could however be substan- tially lower in the context of a three year program under an Extended Fund Facility supplemented by purchases under the Structural Adjustment Facility now under discussion between the Government and Fund staff. Under the latter Facility alone, Ghana would be eligible to request drawings of SDR 96 million over three years. Ghana has no overdue obligations to the Fund. Bank-Fund Collaboration 144. Collaboration between the Bank and Fund staff has been good, both in the field, where there have been parallel and joint missions, and where the Bank's Resident Mission is in close touch with the Fund Resident Representative, and at headquarters, where there are frequent consultations. The staff of the two institutions have worked extremely closely with the authorities in designing the structural adjustment program. The Fund staff have focused in particular on exchange and trade policy, fiscal and domestic resource mobilization issues and external debt management, while the Bank staff have focused on incentive policies including cocoa policy and trade liberalization, and public sector reform, including public expenditure policy, state enterprise reform, and public sector management. A draft Policy Framework Paper for the proposed IMF Structural Adjustment Facility is under preparation and will provide the framework for Ghana's recourse to medium-term IMF facilities, now under discussion. It will be discussed jointly by the staff of the two institutions with the Ghanaian authorities during a mission planned in June 1987. Fund staff also anticipate initial discussions on an Extended Fund Facility to begin in June and be completed in August 1987. - 55 - PART VI - RECOMMENDATION 145. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. I an also satisfied that the proposed African Facility Credit would comply wth Resolution No. IDA 85-1 adopted on May 21, 1985 by the Executive Directors of the Associa- tion. 146. I recommend that the Executive Directors approve the proposed Development Credit and the proposed African Facility Credit. Barber B. Conable President by Ernest Stern Attachments Washington, D.C. March 23, 1987 ANNME I - 56 - Page 1 of 2 GHANA ECONOMIC INDICATORS GNP PER CAPITA IN 19853 US$390 1/ GROSS NATIONAL PRODUCT IN 1985 ANNUAL RATE OF GROWTH (t Constant Prices) Cedis Nil. 5 1979-84 GDP at Market Prices 372,982 10D.0 -2.5 Gross Domestic Investment 27,094 7.3 -8.3 Gross National Saving 31,539 3.1 -3.3 Current Account Balance 15,555 4.2 -- Export of Goods, NFS 36,931 9.9 -10.9 Import of Goods, NFS 48,153 11.9 -11.8 OUTPUT AND LABOR FORCE Output in 1985 Labor Force, 1983 Cedis Nil. t Nil. t Agriculture 153,373 41.1 2.584 57.2 Industry 57,651 15.4 0.691 15.3 Services 161,959 43.5 1.242 27.5 4.517 100.0 GOVERNMENT FINANCE 1985 1986 Cedis Nil. t oE GDP Cedi. Nil. % of GDP Total Revenue and Grants 40,311 10.8 73,625 14.4 Total Expenditure and Net Lending 47,891 12.8 73,326 14.3 Overall Deficit (-) -7,580 -2.0 299 .1 MONEY. CREDIT AND PRICES 1977 1978 1979 1980 1981 1982 1983 1984 1985 Money and Quasi-money 2 3,044 5,131 5,942 7,949 12,029 14,837 20,497 28,552 44,987 Bank Credit to Government 3,203 5,636 4,903 6,518 10,649 f1,057 21,059 22,819 24,825 Bank Credit to Private Sector 560 739 796 940 1,342 1,558 2,841 6,104 10,517 (Percentages or Index Numbers) Money and Quasi-money as t of GDP 2/ 27.3 24.4 21.1 19.4 15.7 16.7 10.7 10.2 12.8 General Price Index (1977-100) 100.0 173.1 267.3 401.2 868.6 1,062.4 2,357.4 3,304.2 3,647.2 1/ Atlas Methodology. 2/ Includes primary banks only ANNEX t - 57- Page 2 of 2 BALANCE OF PAYHENTS MERCHANDISE EXPORTS (AVERAGE 1983-86)) 1985 1986 1 (US$ Million) US$ Million Trade Balance -95 -7 Cocoa Beans & Products 397 65.8 Exports f.o.b. 632 773 Gold 101 16.8 Imports c.i.f. 727 780 Residual 011 24 4.0 Timber 28 4.6 Invisibles (Net) -188 -186 Electricity 29 4.8 Services -220 -235 Manganese 8 1.3 Transfers 32 49 Diamond 4 0.7 All Other Goods 12 2.0 Current Balance -283 -193 Total 603 100.0 Capital Account Grants 105 115 Official Capital (Net) 32 88 EXTERNAL DEBT, DECEMBER 1985 Private Capital (Net) 5 18 Capital n.e.s. 2/ 24 -84 US$ Bil. Overall Balance -117 -56 Total Outstanding and Disbursed W&LT 1.2 Net IMF 122 17 Arrears Payments -57 4 Other 33 Gross International Reserves (End of Period) 145 172 DEBT SERVICE RATIO FOR 1986 3/ February 1973 - June 18, 1978 Total Outstanding and USS1 = $1.15 Disbursed Mf1= 47 Since Aug. 26, 1978 US$1 - 0 2.75 Since April 21, 1983 US$1 - 024.69 Since Oct. 10, 1983 US$1 - 030.00 IBRD/IDA LENDING (December 31, 1986) Since March 25, 1984 US$1 - 935.00 Since August 25, 1984 US$1 - 038.50 IBRD IDA Since December 3, 1984 USS1 - 050.00 Since April 19, 1985 USS1 - 053.00 Outstanding & Disbursed 112.77 422.34 Since August 12, 1985 USS1 - 057.00 Undisbursed 0 352.59 Since Oct. 7, 1985 US$1 - 060.00 Outstanding, incl. Since Jan. 11, 1986 US$1 - 090.00 Undisbursed 112.77 774.93 Since Sept. 19, 1986 Second Windov Auction US$1 - 9128-155 1/ Estimates. 2/ Includes errors and omissions. / As % of exports of goods and non-factor services (includes IMP debt). March 18, 1987 -58 - ANNEX II THE STATUS OF BANK GROUP OPELATIONS IN CHANA 11 STATEMENT OF BANK LOANS AND IDA CREDITS (AS OF DECEMBER 31, 1986) Loan or Amount (US$ Million) 2/ Credit Fiacal Less Cancellation Number Year Borrover Purpose Bank IDA UndLabursed SV Ten loans and fifteen credLts fully disbursed 189.70 166.21 1000-CH 1980 Republic of Ghana Volta Region Agr. Dev. 29.50 17.20 1029-CH 1980 Republic of Ghana Third Highway 25.00 0.12 1170-CH 1981 Republic of Ghana RaiLway 29.00 5.61 1327-CH 1983 Republic of Ghana ReconstructLan CIMAO 9.30 10.52 1342-CH 1983 Republic of Ghana Water Supply 13.00 4.16 1373-GH 1983 Republic of Ghana Energy Project 11.00 8.18 1435-CH 1984 Republic of Ghana Export Rehabilitation 40.10 14.58 P009-CH 1904 Republic of Ghana Export RehabiLitation 35.90 19.82 1436-CH 1984 Republic of Chana Export RehabiLitation TechnicaL Assistance 17.10 7.62 1446-CH 1984 Republic of Ghana Petroleum Reftnery Rehab. and TechnicaL Assistance 6.90 4.68 1498-GH 1984 Republic of Ghana Second OIL PaLm 25.00 21.81 1364-GH 1985 Republic of Ghana Accra District Rehab. 22.00 20.17 1573-GH 1985 Republic of Ghana Second Reconstruction Imports Credit 60.00 17.90 AD3-GH 1985 Republic of Chana Second Reconstruction Imports Credit 27.00 13.58 1601-GH 1985 Republic of Ghana Road Rehabilitation and Maintenance 40.00 42.82 A001-GH 1985 Republic of Ghana Road Rehabilitation and Maintenance 10.00 9.91 1628-GH 1986 Republic of Ghana Power System Rehabilitation 28.00 29.73 1653-GH 1986 Republic of Chana Health and Education Rehabilitarion 15.00 13.56 1672-CH 1986 Republic of Ghana Industrial Sector Adjustment Credit 28.50 13.17 A013-GH 1986 Republic of Ghana Industrial Sector Adjustment Credit 25.00 18.44 1674-GH 1986 Republic of Ghana Ports Rehabilitation 24.50 24.16 1744-GH 1987 Republic of Ghana Education Sector Adjustment Credit 34.50 34.50 41 Total 189.70 722.51 352.24 of which has been paid 76.95 5.48 Total now outstanding 112,75 717.03 * Amount sold 0.40 of which has be 0.40 0.00 0.00 0.00 Total now held by Bank & IDA 112.35 717.03 Total UndLsbursed 0.00 352.24 352.24 11 The status of the projects listed in this part is described in a separate report on all Bank/IDA-financed projects In execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31 2/ Prior to exchange adjustments. 3/ Calculated at the exchange rate applLcable on December 31, 1986. 4/ Not yet effective as of December 31, 1986. - 59 - ANNEX III GHANA STRUCTURAL ADJUSTMENT CREDIT Supplementary Data Sheet Section I - Timetable of Key Events (a) Time taken to prepare the program 8 months (b) Appraisal mission July 1986 (c) Completion of negotiations February 1987 (d) Planned date of effectiveness May 1987 Section I - Special Bank Implementation Actions Prior to February 1988, or other agreed date, the Bank will review the Government's progress in implementing the structural adjustment program (para 105). Section III - Special Conditions Release of the second tranche would be contingent upon satisfactory progress in carrying out the structural adjustment program, in particular (para. 104): (i) (a) announcement of program and timetable for phasing consumer goods imports into the foreign exchange auction and its implementation, and (b) implementation of related trade and tax reforms; (ii) announcement of an agreed cocoa producer price for 1987/88 and agreement on the price for 1988/89; (iii) implementation of Cocobod restructuring measures in 1986/87 and agreement on its 1987/88-1989/90 corporate plan; (iv) agreement with the Association on the 1988-89 public expenditure program; (v) initiation of divestiture actions for selected SOEs: putting up for sale 5 SOEs, including State Fishing Corporation, and initiation of liquidation proceedings for 5 inactive SOEs; (vi) completion of corporate plans for 10 priority SOEs and draft performance agreements for 4 of these, and signing of performance agreement with Cocobod; and (vii) retrenchment of 15,000 public servants in 1987, and identification of further surplus public servants for removal from the payroll in 1988. - 60 - ANNEX IV . ... MINISTRY OF FINANCE AND tw Aw ECONOMIC PLANNING P.O. BOX M.4 a ACCRA rsi. N.---. -hlmnorama March 2, 87 GHANA STRUCTURAL ADJUSTMENT CREDIT LETTER OF DEVELOPMENT POLICY Mr: Barber B. Conable President The World Bank Washington, D.C. U.S.A. Dear Mr. Conable, Re: Ghana's Structural Adjustment Programme 1. As part of its Economic Recovery Programme (ERP), the Government of Ghana has decided to implement a programme of structural reforms of the economy. By this letter, the Government of Ghana requests from the International Development Association a first Structural Adjustment Credit to support the implementation of the first phase of the programme. To this end, let me briefly recapitulate the reforms already undertaken under the Economic Recovery Programme since 1983, the objectives of the Structural Adjustment Programme (SAP), the actions taken to date and those planned during this first phase (1987-88) of the SAP. Background 2. After a prolonged period of economic decline, the present Government on assuming power on December 31, 1981, decided to reverse the erosion of the country's economic and social foundations. The ERP was formulated in late 1982 and announced in April 1983. The programae's major objectives have been: (a) the realignment of relative prices in favour of productive sectors; (b) the restoration of fiscal and monetary discipline; (c) reversal of the severe erosion in the country's productive base and its economic and social infrastructure; and (d) the encouragement of private savings and investment. The programme has been supported by the IMF through successive Standby Arrangements. The third such Arrangement went into effect on October 15, 1986. As you are aware, IDA has supported the reform programme with two Reconstruction Import Credits, an Export Rehabilitation Credit, and an Industrial Sector Adjustment Credit. 3. The major elements in the policy reforms introduced through June 1986, under the ERP include, inter alia, a substantial depreciation of the exchange rate from 02.75-US$1.00 in April 1983 to 090US$1.00 in January 1986, the liberalization of imports not requiring foreign exchange - 61 - ANNEX IV Page 2 from official sources (under the STL system), the establishment of export retention schemes, harmonization of the tariff structure, a seven-fold increase in cocoa producer prices, prompt adjustments in administered prices to reflect changes in the exchange rate, the restoration of positive real interest rates, the dismantling of price and distribution controls, substantial upward adjustments in public sector salaries to boost morale and restore incentives in the civil service, retrenchment by the Cocoa Marketing Board (Cocobod) of some 16,000 employees and elimination of a further 25,000 ghost workers, a sizeable additional resource mobilization effort which has permitted a reduction in the overall budget deficit and the virtual elimination of inflationary bank borrowing, and the establishment of an Investment Code to encourage private domestic and foreign investment. These macro-economic reforms have been supplemented by sector specific rehabilitation programmes with a heavy focus on exports and the economic infrastructure associated with exports. 4. The ERP has already achieved a considerable measure of success in terms of increases in real GDP and reductions in the rate of inflation. Specifically, real GDP grew by 6.3 percent per annum during 1984-86 led by the recovery in agriculture following the severe drought of 1982-1983. The overall budget deficit has been contained at around 2 percent of GDP and overall credit expansion through September 1985 met Fund performance criteria established under the first two Standby Arrangements. This strict fiscal and monetary discipline, accompanied by the decline in food prices following successive good harvests, has greatly moderated inflation, which fell from 122 percent in 1983 to 25 percent in 1986. Exports and imports have recovered, albeit modestly, from their excessively depressed levels in 1983. The sharp increase in cocoa production in 1985/86 reflects, in our view, the quick response of our cocoa farmers to the improved incentives being provided to them. Our rehabilitation programmes for road and rail transportation, assisted by the World Bank and other donors, have already significantly reduced the severe bottlenecks experienced in 1983 and 1984 in evacuating cocoa, timber and mineral exports. The increased supply of spares, batteries, and tyres has substantially increased capacity utilization in goods transport by road, and this is being supplemented by the replacement of aged equipment. The improved performance of the western railway line has been a particular source of satisfaction to us. Ports remain a significant bottleneck, but we have recently successfully negotiated an $80 million ports rehabilitation project jointly with the Government of Japan, the Saudi Fund, the EEC and the World Bank. In sum, the severe scarcities that had marked the 1982-84 period have almost disappeared; stocks have recovered to more normal levels and consumer goods are available in plenty, albeit at prices which many of our people find difficult to afford. Nevertheless, this improved supply situation has enabled us to further liberalize price and distribution controls, while at the same time gradually improving the purchasing power of our people. 5. Had it not been for the severe drought that gripped the country in the first 15 months after the launching of the ERP and the necessity of absorbing some 1 million returnees from Nigeria, we are convinced that the economy's response would have been even stronger. These additional - 62 - ANNEX IV Page 3 complications forced us to devote our attention primarily to crisis management and the stabilization objectives of the ERP. We nevertheless persisted with and expanded the scope of our reform programme despite severe odds, and this resolve has paid rich dividends. we havq, however, for some time been acutely aware of the need to broaden and deepen the reforms initiated under the ERP so as better to address the structural weaknesses that have been revealed in the uneven response of the economy to the programme. Moreover, now that the growth process has begun to get underway, we have extended the focus of our attention to sectors such as education and health. While we propose to continue with the main thrust of our Economic Recovery Programme, we wish to fully integrate it with the programme of structural reforms that is outlined below. We are attempting to ensure a comprehensive and internally consistent approach that deals in a systematic manner with all major areas of economic performance. At the same time we are only too aware of the severe administrative and managerial bottlenecks that have constrained our ability to accelerate the pace of implementation or to monitor performance. It is, therefore, important that any programme of reform has high on its agenda the strengthening of our capacity for implementation. We recognize that the structural adjustment required will take the better part of a decade to bring about: the programme we outline here initiates this process by building on the progress already made under the ERP and laying a sound foundation for the further adjustments required. Objectives of the Structural Adjustment Programme 6. The proposed Structural Adjustment Programme has the following major objectives: (i) Ensure sustained economic growth at around 5-6 percent per annum through further improvements in incentives accompanied by sector rehabilitation. In the area of incentives, the principal instrument to attain the growth objective will be exchange and trade policies. We propose to allow the exchange rate to be progressively determined by market forces. At the same time, we have already removed almost all quantitative restrictions on imports and are in the process of putting into place a structure of tariffs and indirect taxes on imports that provides greater uniformity of effective protection. Among other incentive policies, the few remaining price controls will be progressively removed as the availability of goods improves further. Host agricultural producer prices remain market-determined and it is our intention to ensure remunerative producer prices for the few remaining crops for which prices are administratively set. (ii) Stimulate a substantial increase in the levels of savings and investment in the economy. We propose to encourage private savings, which are currently at very low levels, by restoring confidence in the financial system and banking institutions, through tax policies that encourage savings, by reducing bank operating costs, by taking measures to improve the financial and managerial structure of state-owned banks, by ensuring confidentiality in the relationship of banks with their clients, -63 - ANNEX IV Page 4 and by continuing our present policies of providing positive real interest rates for time deposits. We recognize that this will need to be supplemented by measures to encourage the many Ghanaians overseas to direct their remittances through official channels. The further reforms planned for the foreign exchange regime3 together with a package of incentive policies designed to attract remittances, which we are developing in consultation with the Association and the TF, will, it is hoped, facilitate this process. Public savings, which have been consistently negative until the launching of the ERP, will also play a significant role. An Ef fiscal policy mission made a number of proposals to improve the buoyancy and elasticity of the tax system. M1any of these proposals have been implemented during 1986 and in the 1987 budget. The reforms of state-owned enterprises, discussed below, will help reduce the drain on the budget. As for investment, the Government intends to take advantage of the generous response of the donor community to help supplement its own resources to finance a substantial increase in public investment to be directed primarily at the rehabilitation of social and economic infrastructure. At the same time, the Government will continue to endeavour to create a favourable environment for the private sector to ensure an adequate increase in investment in the rehabilitation of the productive sectors. (iii) Place the balance of payments on a sounder footing. The principal instruments to achieve this objective will be the exchange and trade policies described below, accompanied by measures that have been outlined in my letter of industrial policy to Mr. Clausen of 21 February, 1986, that are designed to remove impediments to exports. It is also our intention to pursue a prudent borrowing strategy and to take a number of measures that would ease the present high burden posed by our borrowings to finance oil imports and our efforts to reduce payments arrears. These measures will be part of the reforms envisaged under the proposed medium-term arrangements being discussed with the Tff. () Improve the management of resources in the public sector. The principal instruments to achieve this objective will be the public expenditure programme, the reforms of the state enterprises sector, and specific initiatives to improve public sector management and introduce civil service reform. 7. As is apparent from the above, the objectives and the instruments designed to attain them together constitute a closely inter-related programme. Success dependa on simultaneous progress on multiple fronts. It is for this reason that we are seeking support simultaneously from both the Bank and the Fund, and through these institutions, from the larger donor community. For the programme to succeed, it will need substantial and well coordinated external support for all its various components. We have jointly with your staff developed detailed action programmes in five areas for which we are seeking support in the form of the Structural Adjustment Credit. These are: (a) trade policies, (b) cocoa sector policies, (c) public expenditure policies, (d) state-owned enterprise reforms, and (e) measures to strengthen public sector management. In S- ANNEX IV Page 5 addition, we are developing a set of policy actions to address social concerns associated with structural adjustment. Attachment 1 to this letter lists the policy reforms to be supported by the SAL. Attachment 2 summarizes the macro-economic framework underlying the programme. Trade Policy Reform P. An open trade regime has long been an objective of the Government, and extensive, often difficult reforms of trade policy have been introduced over the past three years. There are now no controls on trade since special import licences (STL) are provided automatically for "own funds" imports of almost any goods. However, liberalization of imports requiring official exchange was constrained during the difficult process of adjusting the exchange rate towards a level at which demand for and supply of foreign exchange are in balance. Until recently this aim had not yet been achieved, and administrative rationing of official exchange continued to constrain imports of raw materials and spare parts for domestic producers without access to retained export proceeds or the parallel market. Since informing Mr. Clausen in February 1986 that a Working ;roup had been charged with developing detailed proposals for easing r%:trictions on imported inputs for industry and other productive sectors, the Government has established a new foreign exchange market in which the rate is determined by auction. The new market was activated on 19 September 1986. This exchange reform has enabled the conversion of an import licencing regime which sought to ration scarce foreign exchange among goods and users into one which merely identifies categories of imports according to the source of foreign exchange to pay for them, i.e. unofficial ("own funds"), tied aid, direct allocation or auction. 9. To enable the auction to set market exchange rates close to equilibrium, direct allocation has been eliminated with effect from October 1986, for all private and parascatal imports. The transactions outside the auction and SIL markets are: (i) the Central Government's imports of goods for its own use and of crude oil and bulk grains for resale, (ii) imports under tied project or commodity aid and counter-trade agreements, (iii) imports funded by retention accounts, (iv) the very short list of items for which neither SILs nor auction funds are available, and (v) those imports which must be regulated for non-trade reasons. Since the unification of the two official exchange markets on February 20, 1987, petroleum, essential drugs, and the amortization of debt incurred prior to January 1986, cocoa, and residual oil export earnings will also be converted at the auction rate. Thus, all transactions are now accounted at the rate determined in the auction. This determination occurs by the interactiun of supply and demand of private and parastatal importers of productive inputs and a few consumer items for which import licences are issued automatically. The Government promulgated the list of goods which are not initially eligible for the new automatic licences that provide access to the auction if funds are required. Meanwhile, these consumer imports are permitted under STL if financed unofficially. We propose to complete the integration of consumers goods with the auction market no - 65 - ANNEX Page 6 later than January 1988, with an initial integration of at least 40 percent of 1986 STL imports by April 1987. 10. The transition is being accompanied by fiscal reforms to set in place the essential elements of simplified and less distortive structures of trade taxation and protection. In particular, many of the anomalous exemptions from sales tax and customs duty are being removed. The complex sales and excise schedules for all domestic commodities (except alcohol, tobacco and fuel) are being merged into a simplified and compressed five-rate structure ranging from zero to 45 percent with 20 percent for most commodities. Although the maximum 20 percent sales tax rate is maintained for most imports, some goods are now to be taxed at the lower rate of 10 percent while textiles, tobacco and alcohol products are subject to special sales taxes. The customs duty rate on imports of consumption goods other than luxuries has been reduced from 30 to 25 percent and SIL importers will no longer pay the special 10 percent tax. The policy that the 20 percent advance income tax payment is not required of taxpayers in good standing and of agricultural enterprises will continue. The duty rate has been reduced from 20 percent to 15 percent for four raw materials (clinker, cotton, jute and pig-iron) while the rate for inputs to pharmaceutical remains at 10 percent. Improvements are intended also in the arrangements which attempt to avoid double taxation on production inputs and to remove indirect taxes from the cost structure of exports. To facilitate export from the timber and mineral sectors, their export duties have been replaced by a stumpage fee increase for timber and by royalties for minerals extraction. All these changes reduce the chance that tax anomalies and eroded protection could distort or impede domestic enterprises' supply response to the removal of administrative rationing. Meanwhile the Government's revenue is being increased since all imports are now valued at the auction-determined exchange rate. The fiscal structure will be refined further following a comprehensive trade tax and tariff review which the Government will complete during 1987 in cooperation with the Association and the IMF. The review, which will give due consideration to protection, exports, reveLue and equity, is to be conducted in accordance with terms of reference to be agreed with IDA prior to Board presentation. 11. Recognizing the critical importance of facilitating a rapid real expansion of official foreign exchange earnings, the Government is also pursuing a vigorous policy of liberalization, reinforced by other incentives, on the export side. The most important measure is that all export proceeds be surrendered at the auction rate, providing an immediate increase of about 66 percent in their cedi values compared with the official exchange rate set in January 1986. Although exporters, like other producers, now have ready access to whatever foreign exchange they can afford to import inputs, the retention account scheme is being continued for non-traditional exporters. The retention has just been increased from 20 percent to 35 percent for these exporters, and its use has been liberalized to irclude more business related expenses. However, to enlarge the supply of foreign exchange to the auction, we intend to reduce the retention facility for selected large enterprises engaged in traditional - 66 - ANNEX IV Page 7 exports wherever contractual obligations permit. These exporters already have access to foreign exchange through the auction. 12. Several other key elements of the trade policy reform program for exports have been initiated in cooperation with EDA in the context of its Industrial Sector Adjustment Credit. These include the stmplification of export documentation, the removal of tax elements from exporters' costs, the reorganization and strengthening of the Export Promotion Council, and a study of the introduction of central discounting facilities for pre- and/or post-shipment export credit. The first of these has already been largely accomplished by abolishing the export permit and streamlining other procedures. To facilitate the second, the Government will improve the present arrangements by July 1987 and is proposing to design a more comprehensive suspension/refund scheme to give export production a virtually free trade regime without discouraging domestic sourcing. Other export incentives also are at the design stage and will be implemented during 1987. Cocoa Sector Policies 13. The SAP relies heavily on the cocoa sector to meet its growth objectives. Significant progress has been made in motivating production by increasing returns to cocoa farmers, strengthening Cocobod's senior management and streamlining its operations. Yet, the cocoa sector contains a productivity reserve which, if exploited, could contribute to reduced rural poverty, increased foreign exchange availability, and higher Government revenue. The key steps to exploiting this productivity reserve are: (1) further real increases in returns to farmers; (ii) reduction in procurement and marketing costs of cocoa, and (iii) formulation of a development strategy to address constraints on output arising from the need for extension services, adaptive research, disease control, inputs, credit, etc. 14. We have set the following majo- objectives for the cocoa sector under the SAP: increase of cocoa output from 219,000 tons in 1985/86 to 258,000 tons by 1988/89; improve producer incentives sufficiently with a view to ensuring annual production of at least 305,000 tons by 1995; reduce the share of resources that currently accrues to Cocobod from about 30 percent of the f.o.b. price in 1985/86 to an indicative target of 15 percent of the currently projected f.o.b. price in 1988/89; initiate gradual removal of the barriers to private sector participation in the sector; re-evaluate the present system of cocoa taxation to ensure its consistency with adequate producer incentives; strengthen extension services to cocoa farmers, cocoa research and disease control; and implement the production strategy developed under the Export Rehabilitation Project. 15. In pursuit of these objectives, an implementation programme has been drawn up with the following major elements: - 67 - ANNEX IV Page 8 16. Cocoa Producer Prices: Since the launching of the ERP, the cocoa producer price has been raised seven-fold from Cedi 12,000 to Cedi 85,500 per ton over four crop years. However, much of the gain to producers from this increase has been eroded by inflation, so that in real terms the present price is only three times the level of 1982/83. Farmers have begun to respond well to these price increases. Nevertheless there is a need, in the short run, to improve further farmer incentives with a view to: (i) passing on to producers the full benefit of further exchange rate movements; (ii) eliminating to the extent possible the incentive to smuggle; and (iii) providing adequate incentives for rehabilitation, replanting and new planting, and over the medium to long term to progressively bring taxation of cocoa farmers in line with that of other income earners. While the issues involved in setting an appropriate producer price will be formally evaluated in a detailed study of incentives and taxation, it is the Government's preliminary intention to move the producer price gradually from the present nearly 30 percent of the long run world price of cocoa to an indicative target of 55 percent of the long run world price by 1988/89. With this in mind, we propose to announce on May 1, 1987 a producer price for the 1987/88 crop of t140,000 per ton. In addition, a bonus of r10,000 per ton will be announced and set aside to be paid to farmers at the end of the crop year if cocoa output exceeds the target set by Cocobod for the crop year. Furthermore, if export proceeds exceed the projected level for the year, the surplus will accrue to a compensation account to be shared between the cocoa farmer and the Government in proportions to be agreed with the Association. 17. Role of Cocobod. Studies initiated under the 1984-86 ERP on all aspects of the Board's activities have now been evaluated and in some cases are being implemented. One result has been the reduction of Cocobod employment to 60,000, by terminating the services of 16,000 employees and by eliminating 25,000 ghost workers from the payroll. Despite these substantial adjustments, extension, procurement and marketing require major efficiency improvements, and extraneous activities need to be divested if Cocobod is to reduce operating costs from the present 30 percent of the f.o.b. price to a more appropriate target figure of 15 percent, net of any costs associated with retrenchment. 18. Measures to enable Cocobod to reduce its operating costs have been discussed with the Association. It is Government's intention to apply the following general principles to the exercise: (a) Cocobod will attempt to confine itself to activities which cannot be done more efficiently by other institutions or the private sector; (b) in line with (a), the Cocobod will progressively shed all extraneous activities not directly related to its purchasing and marketing operations and its extension and research functions; (c) Cocobod will eliminate in a phased program all remaining excess staff; (d) in effecting cost reductions, care is taken to protect essential functions relating to Cocobod's buying and extension and research functions. 19. A corporate plan for Cocobod covering the 1987/88-1989/90 crop years, that will incorporate the specific measures to be implemented will - 68 - ANNEX IV Page 9 be submitted to IDA by September 1987. Meanwhile, a statement of cocoa policies incorporating the principles and main actions, and the 1986/87 Cocobod budget and work program, were submitted to the Association. These include divestiture of plantations resulting in a reduction in staff in February 1987 of about 10,000 workers. Implementation of the corporate plan will be supervised by the reconstituted Board of Directors and will come t(nier the performance monitoring and evaluation system of the State Enterprises Commission. The Government has asked the Association to evaluate the lessons for Ghana from the experience of ocher countries in liberalizing the internal and external trade in cocoa. The Government will discuss with the Association the findings of thu review with a view to studying in 1988 the pros and cons of liberalizing the trade in cocoa. Public Expenditure Policy 20. The impetus of production growth under the SAP is expected to come primarily from small scale farmers and the private sector. However, the response of the private sector to policy change depends on adequate and well-maintained economic infrastructure as well as investment in human ca 'tal through the provision of health and education services and specific interventions to alleviate poverty. Although there has been some improvement recently, the deteriorated state of social and economic infrastructure in Ghana has impeded the private sector's response to the ERP. We, therefore, recognize the need both to increase the levels of investment and shift resources towards key sectors within the context of continued monetary and fiscal prudence. Public expenditure policies include: (i) a restructuring of current expenditures to increase the other goods and services component of spending compared to spending on personnel; (ii) formulation of a rolling three-year investment programme and (iii) strengthening domestic resource mobilization and cost recovery for public services. The public expenditure programme is designed in the context of the overall macro-economic framework, to ensure that its composition is consistent with the growth targets and other objectives of the SAP and supports key sectoral programmes to be summarized in the document to be submitted to the Consultative Group. Restructuring of Recurrent Expenditure 21. To correct the current imbalance between expenditures on personnel and the provision for materials and supplies, the Government is committed to increase the allocations for the latter. In studies now underway, guidelines will be developed to assist in the allocation of adequate levels of funding for this component of expenditure in the Ministries of Agriculture, Education, and Health. It is our intention to substantially increase the level of budgetary resources provided to these sectors. The results of the work relating to primary and secondary education have guided the preparation of the 1987 budget. in the case of agriculture and health considerable work remains to be done, but the 1987 budgetary provisions took into account the most critical needs already identified with the balance in 1988. Studies of remaining key sectors will be undertaken as needed in 1987. - 69 - ANNEX IV Page 10 22. The wages and salaries component of the government budget will be held at about 5.5-6.0 percent of GDP, reflecting the major improvement in salary levels and structure accomplished in the 1986 budget, which amounts to a near doubling in the government's wage bill over 1985 actuals. A study of salary policy will be carried out. Future real salary adjustments will be aimed primarily at improving incentives for the civil service, particularly key personnel and technical staff, and tied to the growth in nominal GDP and savings achieved from the planned reductions in civil service employment. To this end, the Government has committed itself to achieving up to 5 percent per annum reduction in the size of the Civil and Education Services. A redeployment of 15,000 surplus staff has been approved for 1987. Some 6,740 surplus staff have been identified and will be removed from the payroll by April 1987. The balance will be identified shortly and removed by October 1987. As for compensation, a Special Efficiency Fund of 0 3 billion has been included in the 1987 budget towards the cost of gratuities and pensions as well as other programmes such as retraining. If this proves insufficient, compensation payments may have to be spread over a longer period. A civil service staffing and functional review to begin no later than July 1987 with assistance from UK ODA will guide the 1988 redeployment program. Capital Expenditures 23. Investment planning and allocation will be improved substantially through the introduction of a three-year rolling investment programme. Agreement will be reached between the Government and the Association concerning the size and composition of the programme. This programme, which is summarized in Attachment 3 and totals $1.7 billion (at an exchange rate of 0 150 - $1.00), implies an increase in the level of public investment (excluding extra-budgetary projects) from 6 percent of GDP in 1986 to 10 percent of GDP in 1988. Within that, the capital expenditures of the central government, including foreign aided projects, would rise from 4 percent of GDP in 1986 to 7 percent of GDP by 1988. 24. Because of the large backlog of rehabilitation needs in Ghana a core investment programme has been identified. Its composition reflects the need to rehabilitate social and economic infrastructure with the greatest emphasis given to roads and highways (22 percent) and a substantial increase planned for transport and communications, which accounts for a fifth of the program. Within this core several key projects have been selected which are crucial to the objectives of the Economic Recovery Programme. The core programme will be shielded from fluctuations in funding. The programme will address to the extent feasible, the longer term development issues such as our ability to develop social and economic infrastructure adequate for a population that is expected to double by the year 2010, the need to reverse the severe environmental consequences of deforestation and desertification, and the rapid rate of growth of our population. Economic rates of return will be calculated for all large projects (US$5 million and over), outside the social sectors. All projects to be included in the core programme will have an economic rate of return of at least 15 percent. - 70 - ANNEX IV Page 11 25. The Government and the Association have reached agreement that expenditures on irrigation projects will be limited to those projects showing an adequate race of return. The Government also has agreed to transfer responsibility for constructing cocoa feeder roads from the Cocoa Marketing Board to the Department of Feeder Roads. We propose to review the design of the Kaneshie-Mallam road to explore the potential for lowering costs and to reallocate the outlays on road investment to fund more adequately trunk road maintenance. Investments in cocoa processing rehabilitation will not be carried out until their feasibility is clearly established. Investments on additional grain storage facilities will be reviewed after completion of the evaluation of food security strategy in Ghana to be carried out during the first half of 1987. The role of barter agreements within the public expenditure prograse will be kept under careful review, not only with a view to ensuring that the free foreign exchange available from sales of the country's main export, cocoa, and needed for the foreign exchange auction is not excessively preempted, but also to ensure that investment projects funded under these arrangements reflect the Government's critical priorities. These projects will be subject to the same criteria as other investments in the core. Resource Mobilization 26. Under its stabilization programme, the Government already has adopted measures to increase the tax effort and improve tax administration. Major efforts have been made to improve collection procedures, especially for the company income tax. The main new measures to increase revenue are: taxation of a portion of the allowances of non-civil service employees and an excise duty on petroleum. In addition, continued progress towards a more realistic exchange rate and the impact of the 1986 increase in salaries will increase revenue receipts. Future measures being taken or envisaged, apart from those described in para. 10 above include a reform of the company income tax to improve the incentives for production. 27. The Government has taken several cost recovery measures. In 1985 hospital fees were raised sharply. As part of the IDA-financed Health and Education Rehabilitation Project, a study on cost effectiveness and cost recovery is currently underway in the Ministry of Health to identify additional cost recovery measures. In the education sector, boarders in secondary schools now pay two-thirds of their food costs, and exercise books are sold rather than supplied to students. The Government is studying to what extent additional fees can be charged, especially for the use of textbooks at secondary, tertiary, and university levels. In addition, the Government is examining ways to increase user fees for irrigation to cover reasonable operations and maintenance costs. State Enterprise Sector 28. State enterprises in Ghana play a major role in virtually all sectors of the economy. While these enterprises were originally established to fulfill a number of economic and social objectives, their performance has been characterized by large deficits and low productivity -71 - ANNEX IV Page 12 with the result that they have become a heavy financial and managerial burden upon the Government. The Government, as part of its SAP, has begun to reform and restructure the sector. The overall objective is to achieve a more efficient and productive SOE sector which is well managed, commercially- oriented, and financially autonomous, and contributes to economic growth. To achieve these objectives, we are taking steps to establish the appropriate policy, legal and institutional environments with a view not only to having commercially-oriented state enterprises operate without direct or indirect subsidies, but also having them contribute to Government revenue and development. 29. To restore financial discipline and reduce the burden upon the Central Government budget, we propose to establish new guidelines for use of budgetary funds by SOEs, aimed at a progressive phase-out of explicit and implicit budgetary subsidies over a three to five-year period. SOEs requiring Government financial support for their investment programs will be required to justify the project in the context of an internally consistent corporate plan; such projects will need to meet the criteria required of other projects to be included in the investment program. Enterprises will also be expected to contribute to project financing from their own resources. To strengthen the financial position of those SOEs which are critical to the success of the ERP, the Government will agree with IDA by October 31, 1987 on a plan to eliminate the outstanding cross-debts between 14 key enterprises, as well as to clear outstanding arrears between these SOEs and the Government. To ensure that the Government receives an appropriate return on its investment, a dividend policy will be introduced so that profitable enterprises contribute to the Government's resource nobilization efforts. 30. To improve SOE efficiency and productivity, a labour rationali- zation program will be introduced. We propose to continue the current freeze on hiring (with exceptions for skilled and professional positions). Labour surveys will be undertaken and, in accordance with the Government's target for the ERP, aggregate staff reductions for the sector as a whole, of approximately 5 percent annually will be implemented, commencing in 1987 and subject to staff audits. A labour redeployment policy will be introduced to facilitate the transition of both civil service and SOE employees to other productive employment. A variety of programmes are under preparation with assistance from ILO and others. 31. There is an urgent need to revamp and strengthen SOE management. A comprehensive program of management training and development will be initiated to ensure that Ghana has a core of skilled SOE managers. Furthermore, the Government is prepared to provide remunerative salaries and bonuses as well as ensure greater security of tenure and autonomy for managers who are successful in improving the performance and productivity of their enterprises. However, given the urgent need to solve critical management problems in some enterprises, the Government has already begun to enter into management contracts with foreign firms and will explore similar options with Chanaian firms, while concentrating on the development of an adequate core of Ghanaian managers. - 72 - ANNEX IV Page 13 32. To alleviate the excessive financial and managerial burden of the SOE sector upon Government, we intend to take steps to rationalize the SOE sector through mergers, divestiture (partial and total) and liquidations. Non-strategic enterprises which are inactive or clearly have up potential for commercial viability or for whom it has not been possible to find suitable investors despite determined efforts, will be liquidated. Reducing the number of SOEs will allow Government to channel its resources to those strategic SOEs which are essential to the success of the ERP; other SOEs will be considered for joint ventures and divestiture. The Government will proceed with rationalization in a phased pragmatic manner, examining enterprises to assess their long term economic and financial viability, the overall business and market environment, the level of competition, potential investors, and policy and financial issues to be resolved prior to divestiture. An initial implementation program, covering 30 SOEs has been agreed with the Association which will involve putting up for sale at least 5 SOEs including the State Fishing Corporation and initiating liquidation of 5 inactive SOEs by the end of 1987. No undue advantage or protection will be provided to individuals or firms which acquire existing SOEs. 33. To strengthen Government's ability to monitor SOE performance, the Government is restructuring the State Enterprises Commission (SEC) as Government's SOE oversight agency. The SEC will advise Government on key SOE issues and monitor and evaluate SOE performance. Selected SOEs will be expected to prepare three year corporate plans and enter into performance agreements with Government setting out the agreed objectives and performance targets. The SEC will then in conjunction with the appropriate sector ministry evaluate actual results vis-a-vis the agreed targets, and enterprise management will receive bonuses or penalties on the basis of their actual performance. The initial focus will be on 14 priority SOFa targeted for attention due to their economic and budgetary impact. By December 31, 1987 corporate plans will be completed for at least 10 of the 14 SOEs with draft performance agreements for 4 of these enterprises and an agreement signed with Cocobod. Public Sector Management 34. As the ERP gathers momentum, the Government's economic management institutions and administrative capabilities are being put to a severe test. These have suffered severely during the years of decline, and are still constrained by the long deterioration of public service salaries with its result of an exodus of capable and experienced people, and by grave shortages in materials and equipment. Unless swift action is taken, shortcomings in policy management and implementation could jeopardize the success of the recovery. The Government is, therefore, instituting an urgent programme, under the direct supervision of senior officials, to strengthen key administrative and policy functions. At the same time, it is our intention to develop a medium-term programme of reform for public sector management. Consistency between short-term responses and the medium-term reforms will be a major consideration in the design of the immediate programme. - 73 - ANNEX IV Page 14 35. In undertaking public sector management reform, Government's objectives are to improve co-ordination of economic policy measures under the ERP, to strengthen economic management functions, and to raise sharply the productivity of the civil service. An action programme has been drawn up and implementation has begun. 36. Economic policy coordination is being reinforced by additions to the high-level policy staff of the Ministry of Finance and Economic Planning. An economic policy group is being recruited to advise me on macroeconomic, fiscal, monetary and planning issues, and to strengthen the analytical capacity of my Ministry. The Government also plans to expedite economic policy decisions at the level of the Committee of Secretaries and the PNDC. It has therefore established a small liaison office in the Castle to ensure efficient processing of policy documents and aid agreements and better communication and wider dissemination of policy decisions. 37. The Government is tackling weaknesses in economic management on several fronts. To complement the strengthening of planning units in sector ministries the divisions responsible for planning and project analysis are being restructured, and additional staff are being recruited. This will go in parallel with the recent decision to create a new planning structure with a view to strengthening governmental capacity to determine national priorities in the context of decentralization. A special committee of the PNDC is currently working on a timetable and details of implementation. In the event that establishment of the new planning system necessitates the movement of any unit from MFEP, it is intended that appropriate consultations will be held with IDA prior to any change. Every effort will be made to ensure a smooth transition to the new system. Near-term improvements on the budget side are being pursued through the addition of experienced advisory staff, coupled with the introduction of expenditure norms, budgetary protection for priority activities and improved methods of forecasting current expenditure. 38. Given the critical importance of external assistance for the Recovery Programme, the machinery for managing and monitoring disbursements, and implementation of foreign aid, is being substantially strengthened. An improved information system on all aided activities is now operational. The Central Project Monitoring Unit set up in 1985 will retain its identity but will be integrated into the International Economic Relations Division of my Ministry. That division's staffing and linkages with the public investment function are being improved, and all aid coordination is being actively supervised. For debt management, the Government has now assigned clear responsibilities which affirm the primary role of the MFEP in formulating and implementing the nation's borrowing policy, monitoring overall debt management, and maintaining debt data and clarify the respective roles of the Bank of Ghana and the Controller and Accountant-General in the payment of public obligations. Full implementation of the new arrangements will include installation of an improved debt information system with UNCTAD assistance. ANNEX IV - 74 - Page 15 39. Restoring the productivity of the public service to acceptable levels will require prolonged effort, given the fiscal and manpower constraints which Ghana faces. Nevertheless, several important measures have been instituted to reverse past decline and to concentrate the energies of the civil service on the nation's priority tasks. 40. As indicated above, public service salaries were raised substantially in 1986. The increases entailed substantial decompression of the salary structure. Over the 1987-89 period, the Government intends, within the ERP's resources and priorities, to at least maintain real public service salaries and to concentrate pay increases permitted by resource availability and redeployment on key personnel. 41. The Government recognizes that these actions will not fully restore the competitiveness of upper-level salaries for some time, and that further measures are needed to mobilize the skills necessary to manage and implement economic recovery. It has approved and is instituting arrangements to mobilize skilled Ghanaians at home and abroad on short-term and secondment assignments on a consultancy basis, supplemented where necessary by international expertise, and for supplemental remuneration to a small number of civil servants engaged in crucial ERP work. 42. An important component of the Government's public sector management reform programme is the retrenchment of surplus public sector personnel announced in 1985, under which 16,000 Cocobod employees were redeployed and compensated in December 1985. As noted in para 22 above, for the civil and education services, the first phase of the Government's 1987-88 target of about 5 percent per annum will be met with the removal of some 15,000 surplus staff during 1987. The second phase of about another 15,000 workers will be implemented during 1988 subject to a civil service staffing and functional review. Retrenched workers will be compensated under the ERP's Special Efficiency Scheme, and training and resettlement facilities are being arranged further to encourage these and future retrenched workers to take up private sector opportunities. 43. These measures will be complemented by an active programme to improve the management of the civil service itself. The Office of the Head of the Civil Service is being strengthened, and information on personnel and the payroll, which had become incomplete and unreliable, is being brought up-to-date and evaluated by that agency and by the Controller and Accountant-General. The Government is reviewing training needs and training institutions in the public service to give greater emphasis to functional training needs. As a prerequisite for measures to improve civil service management, the Government will revise the Public Service Act during 1987. Climate for Private Investment 44. The success of the SAP depends partly on a strong response from private producers. Accordingly, the Government has backed up policy reforms with institutional measures and other incentives to improve the ANNEX IV - 75 - Page 16 climate for private investors, to increase confidence in the banking system, to create better opportunities for dialogue between the Government, business and labour, and to encourage private participation in enterprises now owned by the State. 45. The independence of private producers in conducting their business affairs has been enhanced particularly through measures to reduce the extent of Government intervention. Price and distribution controls have been virtually dismantled, with elimination of enfLrcement agents and with prior approval of the PIB for price changes now limited to eight commodities which involve monopolistic producers or special problems of supply. As indicated above, the necessity for these remaining controls will be reviewed by the end of 1987 with a view to their removal. Workers are being encouraged to work positively with Management and Government to raise production and productivity, and the Tripartite Committee was established as a forum for these three groups to share in making decisions. As noted earlier, (para. 10) the system of taxation is being improved by simplifying it and by ensuring effective relief of taxes on inputs and on manufacturing profits. 46. Other positive efforts to stimulate private sector investors have included issuance of a Statement of Industrial Policy, promulgation of a new Investment Code, private sector participation in the membership of the National Economic Commission, and joint sponsorship with the Association of Ghana Industries of the INDUTECH '86 Trade Fair. The Ghana Investments Centre has already processed a substantial number of applications for benefits available to priority investments under the Investment Code, and it plans to issue guidelines to further clarify investment priorities and criteria shortly. To further improve the climate for foreign investors, the Government will review in 1987 ways of reducing the backlog of remittances of dividends and royalties as the foreign exchange situation eases. We will also explore ways to develop a market for equity capital. As noted earlier, a medium-term export development strategy is being prepared and institutional support for potential private exporters will be strengthened. Meanwhile, several steps have already been taken to reduce impediments and improve incentives for export. 47. The ability of the private sector to respond to improved incentives has been inhibited by the weak liquidity position of some producers. The Government has greatly improved the incentive for banks to extend credit by significantly raising interest rates and by containing inflation. We intend to ensure confidentiality of relations between banks and their clients. Banks are being encouraged to support priority sectors by providing the necessary credit and concessionary lending rates in those sectors have been phased out. Measures are planned to reduce operating costs of banks. Financial and management audits will be initiated for state-owned banks. The Bank of Ghana is facilitating lending by introducing rediscounting facilities for trade bills, sponsoring a domestic resource mobilization programme and making efforts to hasten disbursements of external credits. To encourage firms to revalue their assets in order to improve their creditworthiness, the Government has waived the Stamp Tax ANNEX IV - 76 - Page 17 on asset revaluation. We propose to study with the Association and the IMF further measures needed to improve the performance of the financial sector. 48. It is our intention to further enhance our efforts to improve our dialogue with the private sector and to continue to provide an overall environment conducive to a strong response from the sector to the reform programme. Social Aspects of the Structural Adjustment Programme 49. The major thrust of the ERP and the SAP is economic recovery and growth that will raise the incomes of all population groups and increase economic opportunities for all. Living standards had deteriorated substantially prior to 1983. In the absence of appropriate policies to improve the incentives to domestic productiot and exports, export performance would have deteriorated further, commodity shortages would have persisted, and the tax base would have been eroded further. All Ghanaians, rich and poor, would have been victims of a general continuing contraction in income-earning opportunities, scarcity of consumer goods, and a breakdown in the provision of infrastructure and social service. In short, the cost of not adjusting would have been a further economic collapse that would have compromised living standards still further. 50. Notwithstanding the fact that the ERP and SAP have been designed to improve the living standards of all segments of the population, the Government is keenly aware that the prolonged decline of the economy had resulted in substantial reductions in per capita real inbome and food production. The poorer groups, primarily the rural population and the urban informal sector, would have been among those least able to protect their position. Nutritional problems mainly resulting from very low real incomes and declining food production have affected particularly small- scale farming households in the drought-prone northern areas, by far the poorest areas in the country, and low-income uiban households. In each case the nutritional problems appear particularly severe among children under five and pregnant and lactating women. In the northern part of the country, the problem is especially acute just before harvesting. The recovery of food production in 1984 and 1985, which coincided with the arrival of large quantities of food aid, has improved the situation compared with 1983, but we recognize that serious nutritional deficiencies persist among these groupe. Moreover, living standards have been further eroded by the past decline in quality and levels of service in the health, education, and water and sanitation sectors. Rural areas in the north are worst off in terms of access to social services and a number of social indicators confirm that rural northern households constitute some of the most deprived groups in Ghana. 51. The Government is anxious to ensure some measure of immediate relief for the groups who have been hardest hit by the economic decline and will also design programs to raise their incomes and to provide them with more adequate public services. The structural adjustment framework will address the above concerns through nutritional support projects for - 77- ANNEX IV Page 18 selected target groups. Food-for-work schemes in the northerii areas and in the low income urban areas aimed at improving water and sanitation, schools, clinics and feeder roads are under preparation. Parallel schemes to enhance the self-sufficiency of households through income generating projects for small-scale farmers particularly in the north, and for low-income urban households are also under preparation. Resource flows towards health and education and rural drinking water will be expanded and focussed on the poor. Special programmes are also being designed to assist retrenched workers in the public sector to resettle. Finally, the Government is mounting a living standards survey to improve the knowledge of the nature, extent and causes of poverty, while at the same time developing baseline data against which to monitor the impact of the adjustment program on income levels and distribution, employment, health and nutrition. Monitoring _f the Structural Adjustatnt Program 52. During the preparation phase of the Structural Adjustment Programme, the Government created a Project Team headed by the Chairman of the Committee of Secretaries. This team will continue its work in the future and will: (i) monitor and evaluate the progress of the ongoing reforms as well as their Impact on the economy; (ii) formulate and prepare recommendations for future structural adjustment measures; and (iii) liaise with the Association for periodic progress reviews of the first phase of the structural adjustment programme. Conclusion 53. In view of the initiatives taken by Ghana in the formulation and implementation of the first phase of the structural adjustment program, the Government requests your favourable consideration for the extension of a first Structural Adjustment Credit in the amount of at least US$115 million. as o r y, aDr. Kwesi&ecPien c: _PNDC Secretary for Finance and Economic Planning - 78 - ANNEX IV ATTACHMENT 1 nage 1 of 5 A. POLICY REFORMS IN THE FIRST PHASE OF TRE STRUCTURAL ADJUSTMENT PROGRAM I. Measures Adopted Exchange Rate 1. Establishment of second window foreign exchange auction (September 19, 1986). 2. Unification of fixed and auction exchange rates (February 20, 1987). Trade 3. Issue of import licenses automatically to any Importer of production goods (October 1986). 4. Abolition of export permits and streamlining of export documentation; took initial steps to strengthen Ghana Export Promotion Council (January 1987). 5. Replacement of export duties by extraction taxes for timber and minerals; budgetary provision for prompt payment of import duty rebate for exporters; increase of retention for non-traditional exporters from 20 to 35 percent of export proceeds (February 1987). 6. Reduction of customs duty and removal of special tax on most consumption goods imports; abolition of many previous exemptions to import duties; and introduction of special sales taxes on Imports of textiles, tobacco and alcoholic products (February 1987). 7. Consolidation of excise duties Into new structure of sales taxes on domestic production, except for tobacco products and beverages; many exemptions abolished (February 1987). Cocoa Sector 8. Adjustment of producer price from 56,600 cedis per ton for the 1985/86 crop year to 85,500 cedis per ton for the 1986/87 crop (April 1986). 9. Elimination of 25,000 ghost workers and reduction of employment in the Cocobod by 16,000 to a level of 60,000 (December 1985). An additional 10,000 workers have been removed from the payroll (February 1987). 10. Drew up Cocobod budget for 1986/87 which includes initial rationalization measures such as the transfar of cocoa feeder roads to the Department of Feeder Roads and the divestment of 52 plantations (January 1987). - 79 - ANNEX IV ATTACHMENT 1 Page 2 of 5 Public Expenditure 11. Macroeconomic framework prepared for the November 1985 Consultative Group meeting (November 1985). 12. Prepared final draft of the Public Investment Program 1986-1988 (February 1987). 13. Raised personal examptions for income tax and adjusted rates and brackets in order to correct for excessively progressive rates. Introduction of implicit taxation of petroleum (April 1986) and its explicit taxation (February 1987). 14. Implemented reform of direct taxes including a decrease in the effective marginal personal income tax rate by widening income bands, the taxation of some cash allowances, a lowering of the corporate tax rate for manufacturing concerns, and introduction of a petroleum excise duty to bring prices more in line with those of neighboring countries (February 1987). 15. Developed guidelines for allocation of non-wage recurrent expenditure in Ministry of Education and incorporated in 1987 budget along with preliminary findings for health and agriculture (February 1987). State-Owned Enterprises 16. Preparation of a proposed SOE reform program including rationalization of the sector through mergers, divestitures and liquidations; elimination of arrears and the restoration of financial discipline; strengthening Government's ability to monitor SOs through a restructured State Enterprise Commission; introduction of an effective performance monitoring and evaluation system; and increasing the autonomy and accountability of SOs in their day to day operations (April 1986). 17. Preparation of a preliminary categorization of SOEs to remain wholly-owned (53), to remain as joint ventures (38), to be converted to joint ventures (40), to be totally divested (34) and to be liquidated (5) (April 1986). 18. Preparation of a memorandum on the restructuring of the State Enterprise Commission (SEC) as Government's oversight agency (April 1986). Appointment of a new Chairman of SEC (December 1986). 19. Draw up list of 20-30 priority divestiture and liquidation candidates and began implementation (January 1987). Public Sector Management 20. Implementation of large salary adjustment for the public service which significantly increased relativities in the structure (January 1986). -80 - ANNEX IV ATTACHMENT 1 Page 3 of 5 II. Other Measures to be Adopted in the First Phase External Debt 21. Continue to pursue a prudent debt management policy (1987-1988). Financial Sector 22. Reduce banking costs and improve efficiency by issuing higher denomination notes (September 1987). 23. Complete financial audit and thorough review of the portfolios, systems and management of Ghana Commercial Bank and the Social Security Bank (September 1987). Trade 24. Progressively extend access to the foreign exchange auction to consumption goods (January 1988); first stage of 40 percent of 1986 SIL imports by value (April 1987). 25. Implement additional tax reforms on basis of a review to be carried out in 1987, including new customs and excise/sales tax and exemption schedules (January 1988). 26. Reduce the retention account of Cocobod to 2 percent (March 1987) and review other retention accounts of large scale traditional exporters with a view to reduction (1987). 2. Implement suspension/rebate procedures for exporters' inputs (July 1987 and January 1988). 28. Adopt a medium-term export development strategy and implement additional export incentives (January 1988). Cocoa Sector 29. Raise cocoa producer price to 140,000 cedis per ton effective for crop year 1987/88 (May 1987) with a bonus of 10,000 cedis linked to production targets agreed with IDA (September 1988). 30. Establish a separate compensation account (October 1987) which would be credited with coLoa export receipts in excess of planned levels due to output, exchange rate and price developments to be shared between farmers and the Government. 31. Improvement of the producer price to an indicative target of 55 percent of the long-run world price by 1988/89 (May 1988). - 81 - ANNEX'IV ATTACHMENT 1 Page 4 of 5 32. Starting with 1987/88 crop year, prepare and implement a rolling 3-year corporate plan for Cocobod (October 1987) to reflect the rationalization program, including the establishment of a joint venture for the insecticide formulation plant; divestment of plantations; identification and elimination of excess labor; rationalization of cocoa processing plants; progressive withdrawal from road haulage; expanded role of private sector to provide inputs and storage; and such additional measures as recommended in IDA review of cocoa marketing (December 1987). Public Expenditure 33. Annual revision of macro-economic framework (1987-1988). 34. Develop guidelines for the allocation of non-wage recurrent expenditure for the Ministries of Agriculture and Health (June 1987) and incorporate into 1988 budget. 35. Annual review and roll-over of the 3 year public expenditure program (1987-1988). 36. Protection of budget funding for about 20 key investment projects (May 1987 and January 1988). State-Owned Enterprises 37. Adopt statement of policy on SOEs (March 1987). 38. Approve new legislation for State Enterprise Commission (March 1987). 39. Establish guidelines on access by SOEs to budget for current and capital transfers with a view to reducing level of subsidies (April 1987). 40. Identify arrears and cross-debts for 14 priority SOEs (GWSC, ECG, SGIC, GRC, VRA, Cocobod, GRAIP, COIL, GNPC, Black Star Line, Ghana Airways, P&T, Ports Authority, Ghana Supply Commission), agree with IDA on plan for settlement and clearance of arrears (October 1987). 41. Design performance, monitoring/evaluation system for SOEs (June 1987). 42. Identify redundant staff in priority enterprises. Level of staff retrenchment needed would vary depending on the enterprise, but is expected to result In a 5 percent aggregate SOE staff reduction both in 1987 and 1988. Identify cost of redundancy and develop financing plan (September 1987). 43. Complete audited 1985 and unaudited 1986 financial statements for at least 10 of 14 priority SOEs ( December 1987). 44. Complete corporate plans for at least 10 of 14 priority SOEs with approval by Board of Directors and sector minister (December 1987). - 82 - ANNEX IV ATTACHKEM' 1 Page 5 of 5 45. Sign performance agreement with Cocobod and prepare draft performance agreements with at least four other priority SOEs on the basis of completed corporate plans (December 1987). Public Sector Management 46. Remove about 6,740 staff from the payroll by April 1987; remove remaining 8,260 staff from the payroll by October 1987. Compensation scheme to be developed and agreed vith the Association by April 1987. Implement 1988 program of reducing civil service staff by 15,000 subject to civil service staffing and functional review (October 1988) 47. Implement temporary incentive scheme to deal with low civil service salaries for key personnel and technical level staff (1987-1988). 48. Complete interim assessment of salary policy (November 1987). 49. Commence strengthening of the Office of the Head of the Civil Service (July 1987). 50. Establish an economic liaison unit for PNDC and CCOS Secretariat to expedite economic policy decisions (June 1987). 51. Begin to implement action program to strengthen NPEP including: establishment of an economic policy unit and appointment of key staff; development of organization and staffing plans for the Planning, Budget and IPA Divisions (March 1987); action plan to reform budget process and expenditure control (1987). 52. Install debt management and information system (September 1987). Poverty Alleviation 53. Carry out the Ghana Living Standards Survey in order to provide a frequent and regular picture of trends in incomes and employment (1987-1988). 54. Design programs to assist the worst-off groups including subsistence farming households in the northern part of the country, the urban informal sector, children under five, and pregnant and lactating women (Jine 1987). B. STUDIES TO PREPARE FUTURE POLICY REFORMS 1. Complete comprehensive review of trade taxes (September 1987; see no.25). 2. Complete study of cocoa incentives, including the tax system (November 1987; see no. 16). 3. Complete detailed review of staffing and wages in the civil service and strengthening of the Office of the Head of the Civil Service (July 1988; see nos. 46 and 49). - 83 - ANNEX IV ATTACHMENT 2 CHANA MACRO-ECONOMIC TARGETS, 1987-89 Annual Average Actual Estimates Projections 1980-83 1984 1985 1986 1987 1988 1989 --------- ------- ------- ------- .------ ....--- .------ Growth Rates GDP -5.1% 8.6% 5.1t 5.3% 5.0% 5.3% 5.3w GDP Deflator 106.6% 3.5% 31.2% 30.2% 18.0% 12.5% 7.5% Percent of Market Price GDP National Accounts: Consumption 96.5% 95.1% 95.7% 92.3% 89.8% 86.7% 85.0% Investment 4.5% 7.6% 7.3% 10.3% 17.1% 21.0% 22.81 Private 3.1% 4.0% 3.4% 4.4% 7.9% 11.1% 11.9% Budgetary Cap. Expenditures a/ 1.4% 2.6% 3.84 5.9% 9.2% 9.9% 10.8% National Savings 3.9% 4.7* 3:1% 6.6% 8.5% 12.2% 14.8% Public b/ -4.4% -0.4% 0.1% 1.7% 3.2% 3.5% 3.6% Private 8.3% 5.1% 3.0% .4.8% 5.3% 8.7% 11.2% of which: Foreign Transfers 0.0t 1.0% 0.5% 0.9% 1.3% 2.0% 2.8% Foreign Saving 0.6% 2.8% 4.2% 3.7% 8.6% 8.8% 7.9% Central Government Budget: Total Revenues 6.4% 8.0% 10.4% 13.6% 16.1% 16.2% 16.5% Total Expenditure 12.2% 11.8% 14.1% 17.8% 22.8% 23.6% 24.4% Recurrent 10.7% 8.4% 10.3% 11.9% 12.9% 12.7% 12.9% Capital 1.5% 3.4% 3.8% 5.9% 9.2% 9.9% 10.8% Special Efficiency 0.0% 0.0% 0.0% 0.0% 0.7% 0.9% 0.6% Overall Deficit 5.8% 3.8% 3.8% 4.1% 6.6% 7.4% 7.91 Balance of Payments Exports of GNFS 4.5% 8.0% 9.9% 15.8% 21.7% 22.2% 22.7% Imports of GNFS -5.4% -10.7% -12.9% -18.5% -28.6% -30.01 -30.5% Resource Balance -0.9% -2.7% -3.0% -2.6% -7.0% -7.7% -7.8% Current Account Balance -1.6% -2.8% -4.2% -3.7% -8.6% -8.8% -7.9% Overall Balance -1.0% -1.6% -1.7% -1.1% 2.8% 3.0% 2.5% a/ From 1984, includes State Enterprises capital expenditures financed by external concessional assistance. b/ Represents Central Government's savings only. -84 - Attachment 3 CHMAN PUBLIC INMESTNERT PROGRAM 1986-88 1987 PROGRAM COSTS AND FIMANCING 11 (MilLions of Ced1a) Domestic Budget Financing Secured---- --------- --- Total Foreign Financing -mvelopment Budget Net Lending Cost -------------------- ------------------ ----------- 1987 FC LC FC LC LC (A) Productive Sectors 13,331 10,603 427 30 906 1,365 Agriculture 7,102 5,160 427 800 715 Industry 3,229 2,943 30 106 150 MiLning and Timber 3,000 2.500 500 (B) Economic Infrastructure Sectors 34,995 21,910 398 . 2,290 9,785 612 Transport and Communications 10,505 8,317 525 1,051 612 Roads & Highways 14,191 4,545 378 1,765 7,593 Energy 6,474 5,880 20 574 Water 3,825 3,168 657 (C) Social Sectors 5.445 1,602 1.248 442 2,153 Education 3,232 452 1,055 375 1,350 Health 2,213 1,150 193 67 803 TotaLs 53,771 34,115 2,073 2,762 12,044 1,977 Exchange Rate: US$1.00-150 Cedias it Excludes financing (and associated expendLtuxes) from commercial. sources, domestic and foreign, and from the retained earnings of public enterprises. GHANA MATRIX OF POLICY ACTIONS ACTIOS TAEEN BT OVERMWT EASUREB TAKEN O TO B1 TAEE MEAu S TAE OJECIVE PIMOR TO NARC 1986 UENDR I>E PROGAM FIg To WRD PUSENTATICU IZCRAULE AChTIhS fADE POLICY anREFRM teplaa adMnlatrative Off1et61 ahana rate Preparation and implementtion Establighad foleln =ahax e :etrol by prIce rationina dapreciatad to C904 of forfiln e hang~ aution. auction (September 1986) våth 31 formign e ah*a for (soptenber 1958) autamatit accese for anT Loporc and unkfy the iarter ef prd Lafet goods (Ostober 1986). UnIficatlen af fUxed and AuctIan rate applied for ustian axchang raea Gustoms valuatlon and far CFbruary 1987). alle«ations outside the auctiLo for all trantactions. Almost all iparta Progr«aively etnd aesess decontrolled IU own funde to ~tion ta cam=ption used (SIL) o (Janur 1 ) rst i =a.a of 402 of 19 SIL imports by value (dpril 1987). ii CmUtffnt to turthur llberallsatkom and inCentiveA. ILmpILfy and rationalise the Pr~paraXLan d im ementatlon Imlented Interim tan .rad* tax system. af interif tax reforma reformå. (Fpbruary 87). Aga* en and Llement tax Adpted agred prizalplas for Conduct cowrhenlve revLe« rufgrm inaludifn new ~usgms, desgln of furthr tax refa of trade tame by Suptehr axelslsala& tag, and to be detalled ln the review. 1987 and Ifpl~t f th Gzofftion s-heduls. tax raa as indicarad by the reviev (January 1988). emave exchanx~ rate Eåtnd auction rate to caoa. Auttion rate used far all isLznentlve And provtde aport proacede exept cocoa usther licentives for export (sptber 1986). Extmded roduction and Ivard to coaca (February 1987). emigtanatis. Export retention åchames kaduced etnanLm ancant af avieV retenton am-~ for Cocobod to 2z. tradztial sperts with a viev ta rduerien. Streamlning of export Ilement 6uspenuimfrebate procedures encad. procedurs far aprtar' Lapu%d (July 19, and Jamagy 1988. ACTIONS TAEN BT GOTERNMT EASURES TAEEN OR TO NI TAKEN MEASUES TAu O*JECTrvEs PRM TO HMARCE 196 UNDER nF PROGRAM nIo ro 3AR PmEsnTATIn MITneAL Acuis TRADE POLICY REGRM~ (Contd.) Ran aexeange rate Implmented export lcntiveas diinentLvc and provide putuant to IlAC a d?»nt. urther incentiva for eporz production and Invård (Centinued) sultiatd dusigön et turchr Adopt en agread meda-ze export ancentveas. emxpo devulu0~t arategy. I8n add tInal export Incentäves (Jaay 1>). Vltbholng ta an intermåt Taka meaure ta ncuraga parmnta vitbdrava. tegal Invard remiLttances. Indlvlduals permitted to open forelgn accounta at banks. ca ACtI0NS TAKE UY COVERMMMNT NRAStES TAMN OR T0 RE TAE mASURE TA OBJZCTmS POR 20 MARCE 1986 MnER IMU PROn R te 3A m mMSn æTI EAbtE åæmAM s 000 SECITR POLICUSU Rtionalime producer Adjustmen ofd producer prics Agread mith xD an: Zfpemnt araG om tnantivem to enaure from 56,600 ctdta per tan to (L) producer pris for 1987/88 produeer price. production goal& 65,500 aodis per ton for 1907/8 erop of 140,000 eed 1986/87 arop. per to . (11) banu pa nt ø£ 10,000 Zerøvemøt of prod~ser pris. edis per ta at ~n ot erop to a ndetive target .t Sub1Ldised replanting prgra year. SS of thm les-rm world for diueaed plants. (II1) etablishmant of pst., by 1Igs969 tup. comeaa tin &s t e. share ben£it ef -u-pe-ted -an rate depreeatiøn, nrta a stdy ~ f a ena world pric and output in WnS, t lis th. tax inreages, vith famerg. syste, the re~lts to be ifpiean0an 19aI . pma mut Saper subaidieu. M0 RattnalIm Cocobod operatmna Elimnatiaon a 25.000 sheet Initiated further Prepare d&tailed and confLn* Coeobod to vorkers and reductem of rationaLmaton measure ratialim atta pla a~= at astivit, ms ~h sanne be done emlyent by 16,400 to includ4ag retr»e %em of redutn -. peratn more efaieOtly by ather 60,000. 10,000 piantation Vekers and meste to an ttUetive 15E of LnstItutian* ar Ute private shiftkng aautherity at preamty projected gros etor, and ellminate ase Leeder rose to Dept. malen nua fra cena by activities that do mot have m Studie& of Caoabad activitie of Feder Road. year 198891 ostabtlts marketing, extenaLn, ar and fun~tie. JoLat Venture for insestiside resemrhfntton. femulatie plant dIvest 52 planta~n identfy m£ eltmnata a&=ege lar. ratILalise -osa proessig plat3 pr~gresmively vithdr=w ir rea ~mlagel permit private ester to mpply L~pute and to provide storage. Prepared Cocobod budget for Prepare and implemant zullIng 1986187 and verk program 3-yeat Coobod carporate plan inladsa aitial for 1987/&8-1989190 to reflee rationaltmation thasurem, te rmta~liazia program. l0 latter i embodted n a Statment of Policy agread La vith IDA. Ferformn agremt vith Gove. based om corperate plan to be mLged by December. ACTIONS TAxE BY COVERnMENT MEASURES TAKEN OR TO BE TAIEN MEASURES TAr OBJECTI'VS uat To MARC 1986 UNDER IMP PROGRAM PRIOR TO BOARD PRESETATION PITORAL AGlON PUBLIC EPEDITURm POLICIES ------------------------------- 1. FRAMEVOI Develop acro-e*Lna Macro-economic framework D assisting Goeent Updated macrecs ic Amnal revision of frameork incorporating major prepared for 1935 prepare a deastic resource framawork. macro-secomic framework. policy assumptons. Consultative Group. mobilisation program. 2. BUDGET GENERAL Nave budget in place at Agreed on levels of recurrent Anumummat .t 1987 budget Cacemen* of 1988 budget beginning of financial year. and capital expenditure and incorporating asreements with process in July 1987. overall budget defict and IDA on 1967 expenditure Amounceent of 1988 budget its financing for 1987 priouites. 1"Orporating agremnts with (February 181). IDA an 1988 epeakitrs If priorities. Go CD Agretm on pvogram of budgetary controls based on INP study (see page 8). 3. RECURRENT ELADITURZ Improve effectiveness of Instituted east-recovery Agreed to limit wage bill to Develowped guidelines for Develop guidelines for proviston of Govt. services measures in health sector. C34.6 billion in 1987. allocation of recurrent Ministries of Agriculture and by correcting iabalances expenditures in Ministry of Realth by Jma 1987, ad In between vages and salaries Education and incorporated in other key sectors by December and other expenditure. 1987 budget. Also incorporated 1987. into 1987 budget the preliminary findings on agriculture and health. Detesaie phased program to attain full prEWisin of non-salay re raet expenditures. 4. CAPITAL EEFENDITURE Raise level of public sector Increased to 3 of GDP in 1985. Agreed with IDA on the 1986-88 Agree on 1958-90 public development expenditure. public investment program. investment program. Improve average rate of First draft of PIP. Asseed an criteria for Protection of fuding for return on public seater inclusion of projects in the 21 key projects. investment. core and mchanism for preteett several hay prejees fro the effects of newUee shortfalls. Agreed a List of projets. ACTICNS TAME by COVEUM=N NEASURE TAME Cm TO aE TA~E NEAUS TAE oBJECT=ES PiM TO KAaC 19S6 UMDER wS PR~cAn f10R To BOARD PUSEAIU HWXIOA= AMOTINS WSBLIC EPUDITURE POLICIES (Cant'd) 1. D=STIC USCUE IDILIUATION lapren dmesti resource Penalma eepftLbos for Cafflete reform o£ personaL mbilisatkan små Lmcentlves for 1ntas tas ratsed a tas In.~ tas by further prduction. rates ønd brackats adjusted ineressing persal to redus eaeassL e ezeqtions and taxing a vide progressivty. range of cash llowaes. IWLialt tasten at Introdueed petroltm esoie petrol Latraoedi duty (February 1907) aa benLits of lover crude oil vilt be prograssively prica not passed an to ineressed to brin& petroleum ensuers. prieas La lie with thoa of Ø*iahboring countries. Introdued tuLtLal changes Ln C~oax sales and acise Indireat taxes as dusribed In sehedules for atl dmstie adjacent colum sipLify onUdities (eC~ept aleoL, æ taxes on beer al ciarettes. tabace and fuel) mraed into a simplified snd spressed five rate struature rangig rom ser to 45 vith 2SI for mst aoedite. Custo duty rates fevered ft non-luxury cocs~tin goads from 30 to 251 and 10¥ speanal tas on SIL l~rts abolished. Epart duties for mnrale a elmber abLishod and st~mage te a royalties inareased. Complete reform of indirøct Cafplete reform of lndireet taxes along lines recoended tanes vth m viw co in report øf 195 DW transformsn sales tas Sats tehnical &ssiten. mjor nøn-dLstørtLa97 re~ a S ani imitn g It camber of aeLsa dutles. t4 Zns teport tart embdies >4 appropriate patters wf C: effectIve proteeion. based m study ef Urtfs anl indirect tazos ~cah vill asesse iøpect of ez~e rate reforms (page i eheve). A焜10．騙望山口頃．管以界口月口煩絮閱U喀口」煙t卹q頃O臘加勵屆絮月U口闖馴四口纏黑實必口開 O馴尼焜工粈S凡遺O視觔抽賺復1，二（萬刀露p付劉圈萬讓A討，魷口亂加州細口亡劉口以口n勰I個州寫廈州萬矚開名州露1偉， ••一•一•－一•••－一•．-----－一••■一••■一•••．■一■■■■一•一•。一■■－.－一■■•－－一。－一‘～→－一‘--------－一•，&---------------－一•－-----－一，,---－一■一•••－一•••．一■•一•－一•••．.--－一■•，-－一■•－－一•－一••．．•■－一’•，.－一•一•－-－一• 名奮記偶•馴個寫勵馴n劉州紅名蠶•奮瀾才償馴 當．t•h1L.h鉀11oy，『‘．自，．比．C•，•此化“：日tU,c•■•亂二亂開．d細r,d,1止訌騙‘。t&t•■．•t勵。．，馴寫•t．細．二，．七d •弓O膩二。t.,．編。寫，。k，•r。•o’卯11熔偶馴寫•·1馴開．開闖認飼牌個州細r騙r.d •．七•hll•hd&hl由由作－．〝d才•露d二tl•••·b州“這叩神1&&. 越d pr叩•r.d drdt仲11”朧馴蠶點•用••■•盧．, .t．電個口由勵化。■閱膩‘‘萬’•馴口騙悶•■，•．&,,＇馴••■•• 屆‘&．朧豳寫騙•．。化風．.,1& ,.，啊鰓細6•蠶••口，•d 戶，U•••d•，寧，c•∥肥•實 ,．•d.&d戲滅•，1也•比馴胎 以濾•t．細自開繪啊坤”“必，&., 勵同網醒•，亂－· UI•L••“•寫實．:&“纏。：t&n留切團dtor•。••一“b“由山d絲∥．怔，d”細緲ld•建d實•呂蠶’•。．Od 11。•．．亂緘d亂二1.1幼‘．。“d么t .f二L.ctd以跑•．ld•。tUI .t言•．0．闖纏．&．一•實••．叫細細」為’1為付亂•lity j州t.,. r 1.,tl．。朧，默蠶•。膩他••d鰓實•．誠止寡O昌一I 餡•。盧馳。：U•．■自扣匕化U細t, 1．•t才。（〕 。一“一．fl.& ,，細蓄i勿劇屆細－ 細州朧自刀編。，觔細1&”• g念實•．‘••。細，馴跑•t．細d纏魷 h：••名言••．&d•網甲lt.1 馴，劉d“•，么電h&，馴•它• 實馴細編二閱1”•1緘“細．騙鳥。 l神劊匡磚細『）.h申1．劇•處邊tt•． .’『山I.IL••由吃徊唱1閱，••，。 么t亂••．1亂 t. th．口O唱二。tor閱寫言。乞才．&.Pr叩一d．細”d•1也功禹。取1&t .f添0。開•rh••曉一，以巡• 么寫．開么一r..,.,&&,&tL擊開：,．伶r.1細鰓縴實，。跑t•．0,1&tl“•江以場•t。細d馴，•電d鑲，“•t馳‘lih唱編化•萬．，么止”唱 .U Ll&1么tl。••．籐O屆．&0寥•■■恤，hol勿••馴•．d卹“•二，，閱矚寫磁‘&,．藝鳥••二•C．•寧．蓄‘宅黑。。．乞。黑tl•t• 《，3),t.，••‘鑲二1．勵．七戶•．日，.．『纏．．鳥紹．目．11亂寧U•t亂••。寫」織萬•。）屆e 審唱認化徊居•．1讓•）。二h．•．電名為亂U細吋口亂俗•．t二h認奮r醒•口n二常•甲1個奮b甲，唱己g個目面勵變 ．劇〝隨魄州to」0匯，t”鷗城•二匹叩L•■•。t.t亂‘蝨•■膩tt••t01奮屆7.,l巴 l為O】．電•b.t•t&LL&‘勵，•．t•d■•網j自•．常O個，••。。】『’ 《】循）•”d t.h.11中寫二d•t.dl,).1& 壇，•。•幼瀾．偽”•。•“個，•‘馴曰實‘由，．一，常啊陽劉總．點“勵亂鳥緘頃口，.．騙C二詞坤騙td加．騙。神：h一 。擊。1&t,t.-&t．•闖寫二••．••“由nd&．配一t留二閱戶，．•“•甩．細二L一t細•‘h.1一•••二化．’幼．1一1雙‘電二。自．,.t- 由．他，：釁•屆鷗•神，1•．“纏•U&，劇•“開•細．•．闢“•‘《J-1轉？》． 必細■亂·t一《r購》一喊也蠶口口一gU.t,,.r煙饞C 徐”陶、，‘•．二•，•，．騙h&”•■•，·”由，“唱•．•· ACTIONS TN= By GOVERNMT KUSUZU TAKER OR TO BE TAM NLASMS TAM OSJECTIVES PRIOR M KARCE 1986 UNDU DO` PRC~ MOR 10 ~ MSMATION NMTMAEZ Aalan ------------------------------------------------------------------------------------------------------------------------------------------------------------- STATE-Mm UTERMSES Pi~ ccont14) --------------------------------- stz"~ ~rm~t,s abLILLY IrAttatad prqý&rattm of ~tad IKS £L~W te unnaktav Sote. (CantL~) =dLtad fi~Lel ¥tala~ state~ ~ *a~ ta- (1"4) ~ «nmrazø plom «qwrata pi*» to be for 5 priarity g~ . A4~ c~ loted f« at lsaat LO at V[th IM en llat of £~ **5 14 priavler SOLo- Draft pzLoizL%y SMe to ha clasely portal~ agzø~ »aLtør"¥ Cociohod, G~ . pre~ for 6 at ~ 50 <MC, ~ . = P om p CHAI?# (Daceffibmw 1987). performenet Qon. Vaa, GOPA, ah=& agre to be a L~ wLtiz AIrways, Black Star I,Uwå» Co~ De~ r 1907. c~ Lffly C~sLen. *hån& r 9 1. ~evo SOZ =affeiemt and lpregge au Urlag Co=apt ~bed re&~ staff by Id~fy coat gi rødma~ 8£fLeleney. ProtossLOM19) La @££*c% for ty*bruary 1987). affika d~ IDP pl*a (Upz~r 1967). DuLga Uýd uvt - ras*ttl~ a4aLzz~ proaram. IdentLfy red~t staff ha prLarLty 5~ (~adu* Cocabod) =d taka jeuTs Lø a£iooz auresate sZ $M stal£ - *-LIGG la I"? =hå ACTIOus TauE By G0VERNMENT M|EASURS TAME MR Tm 1 TAME MASURES TlEm OBJECTMIES RIOR TO HARCE 196 UNDER DMP PROAn PCR TO XA PREET=Tm ~ICRANLE ACTIES PUBLIC SECTn MANAGEMEN mRPRs Iponva Eano Plley Comer nt set up Coordination hlgh-level Struetural Mjustænt Pr*gram tam. Etablish an et-me liaLs~ tnit £or PWC =nd CCS Seert«lats to exadLt& e ~e polLay døeLsi~ (Jna 1917>. EstabliuL Gme pulio? tlt in MP. Clarify organisacinca M4 rfpfgTng arrfG~m s dp t ky staff. MANAGEMII PUNCTIONS: A. Publi Epnditure Developed datalled Implnnt reorgansatlon nd ar&antian and staff&ng staff streag~znen« pr~gras plass far Plani and IPA azd appat tey staff. Division. Ifplnecutatian ofg DP Dveløp and ffilmt recooandations on budgatIng restrctu plan for eudgit and ependiture contrøl DivLson. artsing frem teahneal assistane mtsson. 5. mnsaent of EsternalMYEP Ifplementlng Leproved Deftnød att Gardinatien Ifpl nt argnLatton and Resources atd 5afomation systea under responatblltles & stafling staffing plan. UND1 project. riqulrementi ol IERD, 2PA,g CPIM, and drev up plan to Integrate CPM gradually into NMf(UD). Drev up orana&at£on and staffin« plan. Establtsh eoeoe lialsen unit (iee abow) to mdpedite prRssis % f alt agrd mtd n ap tnt staff. АСТх0Пс тА1Ф1 и WYIIUYФ7 1RASИi3 хАТЛ OL 10 1I 1АiЛ *` тАкгк оsпсгхvкк гим ю им® 199е идпi т гкосмх rкка т wи гвккгдхАгка )огпааии А1�ка: ------------------------°----------° -°-------------------------------------------------°-°------°----------°--°----------°------------------------------------ РСцIС s6CiQ! MdNAC761R sErcRfs (Соое'а7 ' °' °"""""""""°""' """"' _' _""""" ■. Киикмюе еЕ Lке.кыt 1lвеоитагв А1lеисвд п.ги„iьицtве tет гав{цl.еiеn et ык геаь{iеи.р ы6[ .ве,вrтт .ад а.Ьг втувтг вд ialeerгloe lеfегаадев, в7вw евтi 1RR, qвсв (5ере.вLвs 1Ату. 9ва1г ef СLвяв иа Асwтк+пс Сиви1. гнигоп гиlхс 9mvxcs гктосхмп А. 4е1аи11а С1�11 Млiае lарв 19к6 вцал вд7евгавдг 9в[в ЬlIL Чвивреlаы гесц .цв Ьх11 Г'1д вt кеlаеiвв ид IврsевТ гвtвад вiвil илtаа ввlакlи lfalsta{ игвl егв11 ввлiев !.к - i.p г.ке•es е1 W!. Iаиtlпв вед вiрцсеисll {тиивд �+{и еед в.1и1.в (lmldloa гвlесlТlсlТв 1n eka вСеиаи[в. [ваеЬвiв) [е 7.lii аг Wr bице lаее 1Ча-Ч ND1ee 1'вртдiсатв ггекгав. � b Drnlipвd skЧ1 вЪ1lWскт i�l�ucim е[ вl11Ч � ас6УТ [о YЫ1tи сдвявlив �Di11+вc1oo а дв. 1 . eenauleeeo� 1uL !ег hyh pгioscq eaoneвia wke ts гЬв puilla велlвв ид ке �еlлtв каlкlвд <1вl1 лиег МТlеевхев ееиеlц WjW икk. 2alгtata впдг о! at�l1 саврlвеа iдтвгtв ииввте квквlев arlвrlu. е! гцаq peliq (19r�Das 1997). {е1аТlав ta 1в тл1вМ 1а 19Ч soyat so! льsертсlр т Ьии вг всибl (а�lпtт ]цг 19sq. 9. 4дврlqвгес ef кисрlив саввеагае ватиnеад in 199! 19к7 исглеlrec рлкгr. Аррееввд 19П иtгтеt с LевЫlаЬ�г л! а[isullr Миеаа.l иаврlегввде свгкае ог !! р.а. рsеккев. га,рагицl. еа.рвnввгlт � 19кг4t ваЬ� !ст пектсЬвд wгЬвгв ' 1А9т11 19в7). � л lвле•цво ег ектеЪ�г яее9г>' гег 1Ч7. < гивsв аа Ыгiде (ваов9е In1гt.[a вга!!tц а хдаеецг еадаlыггв ког ргеlвввlwвlв) 1л вг[ие !аг Lwecleoal глlл а! С1Т1� твtкиеЬ.вае 1а 1fss. ад ei�l1 аалlса, с1вl1 игвlев гдд кдиев{lвац калW иа 1уl�влt хfЧ ркеккr аа Уыи игТ{Ч Nt. уТт1а1 ггеаИtц 6uL of вtаlfla� Тл1w иЬпдеiвиТ. ивиlек. ACTIO*s TAZU AT GOVUM«ZT MSURES TAM ØR TO 82 TAM ~UUS T~ OBJECTMs PRIOR TO KARCS 1986 UNDER D(P PRO~ PRIOR TO 3~ PRZ5EKTATIOM MCKITORå= ACTIMS ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------ PUBLIC SECTOYL KARAMMT REM1U4S -------- ---------------- C. NwMaement o£ Public Ejstabltsb~t 01 Project Teple~tatlan o£ agreed wark Sector Reform Protram ~ ~ Unit. prograa for PM. Appointment af full-tim ~er/coordi~g fa£ actLvittes to b« fi-ed under IDA SAIS Crodlt. Stren,,~ OffLee af Baad el CLVLI service - 95 - ANNEX VI Macro-Economic Projections Page 1 of 4 SHANAsSECTORAL SAONTH RATES OF GDP (in 1984 Prices) Value Added By 1995 1996 1987 1988 1989 1990 1991 1992 1993 1994 1995 Industrial Sector 16.12 6.41 13.01 12.8Z 13.52 6.22 4.82 5.22 5.22 5.22 5.21 Mining 12.72 -1.11 19.01 9.91 9.12 9.22 5.92 3.92 3.81 3.0% 3.81 Manuf. 19.02 7.01 14.01 14.0 15.02 6.02 5.01 5.52 5.51 5.51 5.5Z Utilities 20.72 9.92 12.01 12.01 13.02 4.02 4.02 5.02 5.01 5.01 5.01 Construction 6.02 7.01 '1.01 11.02 11.02 6.02 4.02 5.02 5.01 5.0? 5.01 Agricultural Sector 0.2! 4.81 1.81 2.82 2.71 3.52 3.52 3.11 3.12 3.02 3.02 Cocoa 13.22 11.22 0.02 0.02 0.02 5.02 5.52 2.8 2.51 1.02 1.7Z Forestry 0.22 0.72 6.02 10.02 0.0% 6.12 5.52 5.02 5.0% 5.02 5.02 Other -1.1% 4.5% 1.71 1.62 1.61 3.02 3.01 3.01 3.01 3.02 3.01 Other Sectors 6.22 5.42 6.01 5.62 5.32 4.02 4.42 4.61 4.62 4.62 4.62 Transport 6.41 4.51 6.02 5.02 5.02 5.02 5.02 4.52 4.52 4.52 4.51 Mholesale & Retail 9.12 6.2% 6.52 6.22 5.7% 5.02 4.52 4.82 4.02 4.02 4.52 Financial Services 9.32 3.8 5.51 5.52 5.52 5.02 4.02 4.52 4.51 4.52 4.51 Public Admia. 4.12 1.52 2.01 2.02 2.02 2.1% 2.22 2.32 2.42 2.51 2.62 Other Services 3.92 3.81 4.02 4.0% 4.01 4.02 4.01 4.0% 4.01 4.01 4.01 GDP Sromth Rate 5.12 5.3% 5.01 5.32 5.31 4.52 4.12 4.12 4.11 4.02 4.01 8HANA:SECTORAL DISTRIBUTIDN OF DP ememe ememe emem - -- - - - ---ee - o e e e m m e e ------s (in 1984 Prices) Sector 1904 1985 1986 1997 1988 1909 1990 1991 1992 1993 1994 1995 Industrial Sector 10.62 11.72 11.62 12.02 13.7% 14.91 15.0% 15.12 15.32 15.51 15.62 15.8 Nining 1.22 1.32 1.21 1.42 1.41 1.52 1.52 1.6z 1.61 1.61 1.52 1.51 Mano. 6.42 7.21 7.4% 0.01 0.61 9.41 9.62 9.71 9.0 9.92 10.1% 10.22 Utilities 0.8% 0.92 1.01 1.02 1.12 1.22 1.22 1.22 1.22 1.22 1.22 1.22 Construction 2.22 2.3Z 2.3% 2.42 2.62 2.71 2.7Z 2.72 2.82 2.8 2.02 2.92 Agricultural Sector 49.22 46.91 46.72 45.32 44.21 43.2 42.8 42.51 42.22 41.81 41.42 41.02 Cocoa 4.12 4.41 4.7% 4.52 4.62 4.71 4.72 4.82 4.02 4.71 4.62 4.5Z Forestry 3.42 3.32 3.1% 3.22 3.3% 3.42 3.42 3.51 3.52 3.61 3.62 3.61 Other 41.62 39.2% 38.9% 37.72 36.41 35.11 34.62 34.21 33.91 33.51 33.22 32.92 Other Sectors 40.3Z 41.42 41.51 41.92 42.11 42.12 42.2Z 42.32 42.52 42.0Z 43.01 43.22 Transport 6.4Z 6.52 6.52 6.52 6.52 6.52 6.52 6.62 6.62 6.72 6.72 6.72 Mholesale & Retail 20.31 29.32 29.61 30.01 30.32 30.42 30.62 30.72 30.91 31.12 31.42 31.62 Financial Services 1.7 1.02 1.02 1.82 1.82 1.81 1.82 1.0% 1.8% 1.02 1.82 1.82 Public Adain. 3.41 3.32 3.22 3.12 3.01 2.92 2.92 2.82 2.82 2.7% 2.72 2.72 Other Services 0.52 0.52 0.52 0.42 D.4Z 0.4% 0.42 0.42 0.41 0.42 0.42 0.42 EDP 100.02 100.02 100.02 100.02 100.02 100.01 100.02 100.02 100.02 100.01 100.02 100.02 Source: Bank staff estimates. - 96 - ANNEX VI Page 2 of 4 GHANAi B ASIC EIPENDITURE INDICATORS (in 1904 Prices) Indicator 1984 1905 1996 1987 1988 1989 1990 1991 1992 1993 1994 1995 Import%lBDP 10.71 11.11 11.81 12.71 12.9X 13.01 13.0 12.91 12.81 12.71 12.51 12.41 Exports/BDP B.0% 9.32 10.1% 10.2! 10.61 10.91 10.9% 11.1 1.01 10.81 10.6! 10.5 Consumptionl6P 95.1% 95.3% 92.5! 90.91 90.1% 66.0% 85.91 95.4% 85.1! 14.7% 84.4 U4.11 Total Investuat/DP 7.6% 7.31 9.1! 11.61 14.3! 15.51 16.2% 16.4% 16.91 17.2% 17.51 17.91 Source: Bank staff estisates. - 97 - ANE VI Page 3 of 4 8ANA: BALACE BF PITNEIT5 fim Hillions af Currøgt Uf> Catqry 1994 '9M 1916 -1987 1999 1989 1990 1991 1992 19 99 95 -- -- %nt %~% t bt,~ %",^ %.% ,b« Vht% Esports 604 671 i1l 132 89 975 17 1154 1241. 1333 1423 1529 Nerchandse (lb 66 632 773 777 945 920 992 1096 1179 1267 1357 14153 Om-Factor Service§ 38 39 45 55 53 55 55 50 62 66 70 75 lports 910 976 955 1100 1210 1309 1409 1516 130 1750 1067 2000 Iqrchadis (cifi 6 l8 727 790 O91 915 1072 1159 1253 1353 1458 1560 1671 Non-Factor Servicen 129 149 175 209 225 237 250 263 277 292 307 324 Resoarce alance -206 -204 -137 -268 -312 -335 -362 -362 -." -416 -440 -472 Factr Paymts (iet) -81 -111 -115 -113 -125 -125 -118 -113 -107 -109 -113 -119 af wkich: Interst -79 -læ -101 -108 -121 -121 -fl6 -113 -106 -105 -107 -110 Net Tranurs 73 32 49 50 90 120 140 150 161 172 14 198 Currut Balance -215 -293 -193 -331 -357 -340 -339 -326 -335 -352 -369 -3*3 Capital Accænt 94 166 137 439 478 446 401 413 440 440 422 434 Grant 141 93 115 161 157 194 215 213 206 198 192 195 Official Nt 70 32 99 252 235 211 195 191 209 209 201 209 Dishrsmmets 211 297 358 419 425 396 365 360 363 369 379 394 ertitation -141 -255 -259 -I6& -198 -185 -170 -169 -155 -160 -172 -185 Private Olt) 4 5 18 24 38 21 -26 -11 4 12 4 12 ather -121 36 -95 2 49 20 1e 20 21 21 19 10 Overall alace -121 -117 -56 108 121 106 62 97 105 8 54 41 Net IIF 214 122 17 -23 -El -30 -74 -62 -9 -66 -59 -45 Arreari Payuots -61 -57 -4 -26 -72 -73 0 0 0 0 0 0 Source: Dank staif timates. - 9B - 6HANAi VOLUNE OF EIPORTS ANNUX VI Page 4 of 4 Product 1964 1985 1906 1987 1999 1999 1990 1991 192 1993 1994 1995 CocoA (IT) 164139 191706 214114 214114 231244 249743 264191 279639 296441 293602 290136 303916 Loq (CH) 140000 247012 39761Y 421551 463706 500002 531351 560575 589604 618034 640936 681303 Bold IFOT1 285759 299902 206013 343216 377539 415291 456820 485600 505024 525225 546234 569094 Oiamend (Carat) 323000 489699 494075 592090 696566 616566 606566 686566 696566 686566 686566 606566 Manganese (NT 241000 256665 243032 256267 266519 273447 290557 217571 294760 302129 309682 317424 01 Residuals INT) 124445 192890 123449 166657 166657 166657 166657 166657 166657 166657 166657 16665? Electricity (an koh) 624 1529 2928 3111 3579 3579 3570 3570 3578 3570 3578 3570 Bauxite (NT) 44000 146520 190476 247619 346666 398666 459466 458466 451466 458466 459466 459466 GHANA: EXPORT PRICE INDICES Product 1964 1985 1996 1987 198 1909 1990 1991 1992 1993 1994 1995 Cocoa 100 93 105 96 91 90 90 94 98 102 107 111 Log 100 79 04 09 95 99 104 110 115 120 125 131 Gold 100 8 103 106 110 114 119 123 128 134 141 147 Diamond 100 100 115 218 122 126 131 136 143 149 156 163 Manganese 100 102 102 105 109 114 117 120 126 131 137 144 Oil Residuals t 100 92 72 75 77 79 83 93 103 115 128 143 Electricity 100 69 55 55 55 55 55 55 57 59 61 64 Bauxite 100 110 110 115 120 120 125 130 136 143 149 156 6HANA: EXPORTS IN CU R RENT PRICES fin illion of USW Product 1984 1985 1986 1997 1988 1989 1990 1991 1992 1993 1994 1995 Cocoa 382 412 519 475 490 524 554 609 652 697 739 764 Log 21 29 47 53 62 71 79 BB 96 105 115 126 Bold 103 92 106 131 150 171 195 215 234 254 277 301 Diamond 3 5 5 6 B 8 8 9 9 10 10 10 anqantse 9 9 a 9 10 10 it It 12 13 14 15 Oil Residuals 23 33 16 23 24 24 26 29 32 35 40 44 Electricity -20 33 49 54 63 63 63 63 65 68 70 73 Bauxite 1 4 5 6 9 11 13 14 14 15 16 16 Other 5 17 16 18 30 38 45 60 65 70 76 93 Exports of Goods 566 632 773 777 B45 920 992 1096 1179 1267 1357 1453 Kon-Factor Services 30 39 45 55 53 55 55 5 62 66 70 75 Total Exports 604 671 018 032 B98 975 1047 1154 1241 1333 1420 1528 Source: Bank staff estimates. 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Аьм _ -- Г6КОПID� �У " �t f а• AANYCH 1987