Ghana - Second Phase of the Structural Adjustment Program

Document of The World Bank FOR OMCIAL USE ONLY 6s+- -Z.c0- 5 i RqPout No. P-4915-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 89.2 MILLION TO THE REPUBLIC OF GHANA FOR A SECOND PHASE OF THE STRUCTURAL ADJUSTMENT PROGRAM FEBRUARY 28, 1989 This docment has a restricted dibution and may be used by reipients ooly In the perfomance of their offical duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedi Cedi 1.00 = US$0.0043 US$ 1.00 = Cedis 230 (as of January 13, 1989) 1/ ABBREVIATIONS BOG - Bank of Ghana CAG - Controller and Accountant General COCOBOD - Ghana Cocoa Board ERP - Economic Recovery Program ESAF - Extended Structural Adjustment Facility NDPS - National Development Planning Secretariat NRS - National Revenue Secretariat OHCS - Office of the Head of Civil Service PAMSCAD - Program of Actions to Mitigate the Social Costs of Adjustment PHC - Primary Health Care PIP - Public Investment Program PNDC - Provisional National Defence Council PIP - Policy Framework Paper SAC I - First Structural Adjustment Credit SAC II - Second Structural Adjustment Credit SAP - Structural Adjustment Program SOE - State-Owned Enterprise FISCAL YEAR January 1 - December 31 1/ All transactions through the official banking system are settled at the exchange rate determined at the weekly auction. Effective February 1, 1988, the Government permitted the establishment of foreign exchange bureaus. The selling rate for the US dollar set by the foreign exchange bureaus as of December 1988 was US$1 = 0330.  FOR 6O CAL USE ONL SECOND STRUCTURAL ADJUSTMENT CREDIT Table of Contents Page No. cREDIT AND PROGRAM SU)KERY ............................................ i-ii PART I- THE ECONOMY ........ .................. .... ............. 1 A. Background ................. *4 .................... 0.0 ....... 1 B. The Economic Recovery Program 1983-86 ...... ............. . 2 C. The Structural Adjustment Program 1987-88 ........... *# ...... 3 D. Economic and Social Effects of the Program ............ * ..... 5 PART II - THE STRUCTURAL ADJUSTMENT PROGRAM 1989-90 ... ........... 7 A. Medium-Term Objectives . ..................................... 7 B. Program Components . . . . ................... 9 1. Continuation of Macroeconomic Reforms .. .................. 10 2. Sectoral Strategies ..................... . . ................ 16 C. Program Management ..... ............................ .. ... 21 D. Program Effects ............................................. 22 PART III - THE PROPOSED CREDIT ......... ........................... 23 A. Credit History .............................................. 23 B. Proposed Financing .......................................... 24 C. Credit Administration, Procurement and Disbursement .......... 24 D. Monitoring and Tranche Release Conditions . .................. 26 E. Risks ....................................................... 27 PART IV - BANK GROUP OPERATIONS IN GHANA .............. .......... 28 PART V - CO..ABORATION TH THE I ............................... 29 A. Fund Relations with Ghana ................................... 29 B. Bank-Fund Collaboration . .................................... 30 PART VI - RECOMMENDATION .... ................... 30 A1WZ I. Economic Indicators ........................................ 31 II. Status of Bank Group Operations ...... ....................... 34 III. Supplementary Data Sheet . ..... .................. ........... 36 IV. Letter of Development Policy .... ............................ 37 V. Matrix of Policy Actions ............... ...................... 51 This document has a restrd distdbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be dislosed without World Bank authorzaon.  6ANA SECOND STRUCTURAL ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Ghana Amount: SDR 89.2 million (US$120 million equivalent) Terms: Standard IDA with 40 years maturity Program Description: The second phase of the Government's structural adjustment program (1989-90) aims to maintain an average growth rate of at least 5 percent per year, raise investment to 16 percent of GDP by 1990, and raise national saving to 8.5 percent of GDP. To achieve these targets. the program aims to further improve the incentive structure to stimulate growth, encourage savings and investment, and strengthen the balance of payments; it also supports increased efficiency in the use of resources by the public sector, while ensuring a stable fiscal and monetary stance. The Government's Letter of Development Policy and the accompanying matrix of policy actions outlines a program of actions designed to achieve these aims. These actions focus on trade and exchange rate policy, tax policies and administration, specific private sector development initiatives, public expenditure management, State-owned enterprise reforms, and Civil Service reforms. Program Benefits: The second phase of the structural adjustment program is expected to build on the economic gains achieved since the introduction of the Economic Recovery Program in 1983. The projected real GDP growth rate of 5 percent per year will allow real per capita consumption to increase at about 1 percent per year. The rise in the share of investment in GDP will lay the foundation of future growth, and the projected growth in national savings will lower Ghana's dependence on foreign savings in the future. The continued reforms in exchange and trade policies will serve to promote non-traditional exports and stimulate new import substitution activities in the private sector. Reforms in the structure and administration of taxes will strengthen public finances while improving incentives to work, save, and invest. Better public expenditure management will concentrate public resources on high priority areas in infrastructure, health, education, and agricultural research and extension. Special attention will be given to programs and projects aimed at alleviating poverty and  - ii - increasing the access of the poor to health and education facilities. State-owned enterprise reforms are expected to lead to a slimmer and more efficient public sector. Changes in the size and management of the Civil Service will increase the motivation and effectiveness of government departments. Program Risks: The main risks confronting the structural adjustment program aret (i) inadequate response of private investment to the new incentives structure; (ii) insufficient implementation capacity within the Government; and (iii) social reaction to some of the cost-cutting measures that are included in the program such as Pubsidy reductions, redeployment, and higher user fees. however, the Government is minimizing these risks through actions on a broad front. It is implementing a range of policies and programs to encourage private investment through infrastructural development, the financial sector adjustment program, liberalized trade policy and foreign exchange markets, and the clearance of arrears in the payment of profits and dividends. The implementation capacity of the Government is being bolstered through an institutional support project financed by IDA and through training programs financed from bilateral grants. And the Government is meeting some of the social reactions by explaining the objectives of the reforms, implementing a program of actions to mitigate the social costs of adjustment, and by balancing the reduction-in subsidies, parti. alarly in utilities, with improved quality of service. Economic Rate of Return: Not applicable. Estimated Disbursements: The credit will be disbursed in three tranches: US$60 million upon effectiveness, US$40 million after a performance review to be held around January 1990, and US$20 million after a review of the SOE component of the program to be held around March 1990. 18112R1  INTERNATIONAL DEVELOPHENT ASSOCIATION REPORT AND RECOWHENDATION OF TU6 PRESIDENT TO TUE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO TUE REPUBLIC OF GHANA TO SUPPORT A SECOND PHASE OF TIE STRUCTURAL ADJUStMENT PROGRAM 1. I submit the following report and recommendation on a proposed development credit of SDR 89.2 million (US$120 million equivalent) on standard IDA terms with 40 years maturity to the Republic of Ghana to support the second phase of the Government's Structural Adjustment Program. PART I - THE ECONOMY A. Background 2. The following assessment of the economy is based on the report entitled Ghana: Structural Adjustment for Growth (Report No. 7517-GH), which was distributed to the Executive Directors in January 1989, and on the work of various missions to review the first Structural Adjustment Credit (Cr. 1777-GH), update the policy framework paper, and assist the Government in preparing Phase II (1989-90) of its Structural Adjustment Program. 3. The economic deterioration of the Ghanaian economy in the 1970s and early 1980s stemmed from a combination of inappropriate economic policies and exogenous shocks both at home and abroad. Large budget deficits, in part required to support an extensive and inefficient public sector, led to a marked acceleration in inflation. Given a reluctance to adjust the nominal exchange rate, the real rate appreciated significantly, shifting relative incentives away from the production of tradables to non- tradables. The resulting decline in the production of exports and import substitutes, combined with disenchantment amongst aid donors with Ghana's economic management, caused a prolonged foreign exchange crisis. necessitating foreign exchange controls and quantitative restrictions on imports which in turn further constrained production and growth. The decline in the tax base due to the reduction in exports and imports and the related drop in economic activity forced major cuts in government recurrent and capital expenditure. The resulting deterioration in Ghana's once well- developed social and physical infrastructure further reduced its productive capacity. Government responded to shortages with additional price controls and rationing, which worsened the problem by eroding production incentives and creating a vast black market with related corruption, smuggling and tax evasion. Declining real incomes and reduced economic opportunities also caused many skilled Ghanaians to leave the country. 4. Ghana's economic problems were further exacerbated in the early 1980s by a severe drought that caused the worst food shortages since Independence, by a sharp deterioration in its terms of trade following increases in imported petroleum prices and lower prices for cocoa and gold exports, and by the strains imposed by the sudden return of over a million Ghanaians expelled from Nigeria. The cumulative effect of the downward  - 2 - economic spiral can be seen in the trends in key economic indicators between 1970 and 1982: per capita real income declined by 30 percent. import volumes dropped by a third, real export earnings fell by 52 percent, domestic savings and investment declined from 12 percent and 14 percent of GDP respectively in 1970, to almost insignificant levels vhile inflation averaged 44 percent per annum over the period. B. The Economic Recovery Pro&ram 1983-86 5. A Provisional National Defence Council (PNDC) was set up under Flight Lieutenant Rawlings on December 31, 1981. The PNDC introduced an Economic Recovery Program (ERP) which was developed in close consultation with the IMF and World Bank. The major objectives of the ERP were to: (a) shift relative prices in favor of production, particularly for exports; (b) restore fiscal and monetary discipline; (c) initiate rehabilitation of the country's productive base and its economic and social infrastructure; and (d) restore incentives for private savings and investment. The main actions taken by the Government under the ERP are summarized below. 6. The Government adopted a realistic exchange rate policy and devalued the cedi in stages from 02.75 to US$1 in April 1983 to e90 to US$1 by January 1986. A foreign exchange auction covering almost two-thirds of ,dxternal transactions was established in September 1986. Administered prices were increased to reflect the impact of the new exchange rate and price and distribution controls were removed from a wide range of products. Interest rates were adjusted successively so that they became positive in real terms in 1985. In the area of fiscal policy, Government concentrated on eliminating subsidies and mobilizing resources through improved tax collection and higher consumption taxes. Public sector wages and salaries and the statutory minimum wage were raised to partially offset the massive erosion in real incomes. Civil service pay differentials were also widened to improve incentives to those at the most senior levels. 7. Apart from the improved incentives framework, the Government also made significant improvements to its public expenditure policy. Recurrent expenditures were reoriented to increase provisions for operations and maintenance as well as for health and education. Preparation of an annual capital expenditure program was initiated in 1986. Major sectoral rehabilitation programs were also launched under ERP, particularly for transport, other infrastucture and the key productive sectors of cocoa, timber and mining. 8. IDA supported ERP between 1984 and 1987 with seven policy-based credits totalling almost US$400 million (inclusive of the African Facility) together with conventional project and sector lending of US$268 million. IMF support for ERP over the same period took the form of three Standby Arrangements, totalling SDR 501 million and a Compensatory Financing Facility of SDR 179 million. Total assistance from the Ghana Consultative Group including IDA rose sharply, with commitments averaging US$420 million annually between 1984 and 1986. 9. The initial response of the economy to ERP was dampened by the 1983 drought, infrastructural bottlenecks, and lags in aid inflows. Th-reafter, economic performance improved sharply. Inflation fell from 123  -3- percent in 1983 to 25 percent in 1986, goverrment revenues increased from 5 percent of GDP to 14 percent of GDP during the same period and GDP growth in the 1984-86 period averaged over 6 percent, resulting in thiee successive years of increased per capita incomes. C. The Structural Adjustment Program 1987-88 10. The Economic Recovery Program was succeeded by the Structural Adjustment Program (SAP), the first phase of which covered the 1987-88 period. The aims of the program were tot (i) establish an incentive framework that would stimulate growth, encourage savings and investment, and strengthen the balance of payments; and (ii) improve resource use, particularly in the public sector, while ensuring fiscal and monetary stability. Specifically, the Structural Adjustment Program comprised policy and institutional reforms in the areas of trade and exchange rate policy,-the cocoa sector, public resource management, State-owned enterprises, and public sector management. 11. Trade and Exchauge rate policies. Reforms in this area were the centerpiece of the structural adjustment program. In February 1987 the official and auction rates of exchange were unified at the then prevailing auction rate of 0150 per US dollar. Since then the exchange rate has depreciated to 0230 per US dollar (January 13, 1989). The average amount supplied to the auction each week came to US$4.35 million in 1987 and US$5.22 million in 1988. Access to the auction was also widened during this period. By February 1988 there were effectively no foreign exchange restrictions for the import of goods into Ghana, except for five items on the negative list of imports and those imports prohibited for social reasons. All bona fide foreign exchange requirements for business travel abroad up to a total of US$3000 per person were also made fundable through the auction. Finally, to promote the development of a foreign exchange market, the Government approved the establishment of a number of foreign exchange bureaus that are free to set buying and selling rates for foreign currency independently of the auction rate. The prevailing bureau rate of 0330 per US dollar (January 13, 1989) was about 43 per cent above the auction rate, partly because the foreign exchange bureaus cover a wider range of transactions and need to be competitive with the parallel market. It is expected that this differential will shrink gradually as the auction is expanded to include payments for all current transactions and the number of foreign exchange bureaus increases (see para. 37). 12. By the beginning of 1987, Ghana's import tariff levels were moderate by developing country standards, and except for a few products, import bans and quantitative restrictions had been removed. However, differences in import and domestic sales taxes accentuated variations in effective protection. These were addressed in the 1988 budget which realigned import and domestic sales taxes and further compressed the tariff structure. 13. Cocoa Sector policies. The principal policy objectives for the sector under SAP were to increase production by raising producer incentives, and to trim the operational expenses of the Ghana Cocoa Board (COCOBOD). Government raised the producer price hy 65 percent (to 42 percent of the export FOB price) for the 1987188 crop year and a further 18  -4- percent (to 50 percent of the export FOB price) for the 1988/89 crop year. To reduce its operating costs, COCOBOD reduced its staff by about 12,000 in 1987, ceased production on 52 of its 92 plantations, reduced its road haulage costs, and divested majority ownership of its insecticide plant. 14. Public Resource ManaRem_nt. SAP aimed to improve domestic resource mobilization, restructure current expenditures and formulate a three-year rolling public investment program. Government introduced several tax reform measures in the 1987 and 1988 budgets aimed at realigning taxes, expanding taxation of consumption, and strengthening tax administration. Revenues collected in 1988 are estimated at 36 percent above 1987 levels which in turn were 53 per cent higher than in 1986. Preliminary norms to help allocate and monitor non-wage recurrent expenditure in health, education and agriculture have been prepared. Finally, preparation of a three-year rolling public investment program has been established as an annual exercise and includes a mechanism to protect the funding of high priority projects from unplanned resource shortfalls. 15. State-owned enterprise (SOE) reform. Under the Structural Adjustment Program, reforms in the State-owned enterprise sector weze intended to encourage efficiency through an apppropriate policy framework, initiate divestiture of SOEs that could be better operated by the private sector, and strengthen the management of SOEs that would remain in the public domain. The policy statement on SOEs and guidelines for SOE access to budgetary funds have been finalized, and a study of cross-debts amongst SOEs and Government has been prepared. 16. The SOE divestiture program started slowly due to unanticipated complexities in updating accounts, valuing assets, and meeting the net financial liabilities of the SOBs identified for divestiture. However, the Government did succeed in making progress in the latter half of 1988. Of the 32 SOEs that it advertised for sale initially, ten have reached the final stage for liquidation, and the Government has offered to sell its interests in six joint ventures to the foreign partners. 17. Corporate plans and performance contracts were the means by which SOE performance was to be monitored and improved. Of the 14 priority SOEs, 10 had prepared corporate plans by the end of 1987 and four of these were translated into draft performance agreements. The performance agreement between COCOBOD and the Government was finalized and signed in early 1988. By the end of December 1988, the Gover,nent had finalized the corporate plans and performance agreements of all 14 priority SOEs. 18. Public Sector Management. Reforms in public sector management aimed at improvements in Civil Service efficiency and economic policy coordination. The principal means for increasing Civil Service efficiency were to be through a reduction in its size, and greater differentials in remuneration. The Government removed over 12,000 surplus staff 1 from the 11 This was in addition to the 12,000 redeployed by COCOBOD (see para. 13).  civil service payroll compared to the target of 15,000 by end-1987. In addition, the Government is implementing a comprehensive staffing and functional review of the Civil Service to identify further redundancies. On the basis of the interim findings of this review, the Government cut an additional 12,000 staff from its payroll in 1988 and paid them their full compensation. At the same time, another Government objective is to increase the salary differentials within the Civil Service to try and attract better qualified staff to senior positions. No progress was achieved with this objective in 1987, and in 1988 it received a slight setback when the Government announced an interim across-the-board salary increase which resulted in a small compression of salary differentials. The Government intends to correct this in 1989 by increasing salary differentials once again, subject to overall budgetary constraints. D. Economic and Social Effects of the Proaram 19. The economic consequences of the 1987-88 SAP are difficult to quantify at this point, partly because of the short period since its inception, and partly because the impact of many of the reforms under SAP are likely to influence the economy in the medium term. Nevertheless, conclusions drawn from the trend of broad economic aggregates and the performance of particular sectors indicate continued improvement in the Ghanaian economy. Despite the adverse effect of erratic rainfall in 1987 on foodgrains and cocoa production, the economy grew at a healthy 4.8 percent. And in 1988, economic growth was above 6 percent. Strong performances were registered in mining, construction, utilities, manufacturing, and the service sectors. Agriculture, particularly foodcrops, rebounded in 1988 as a result of better weather in the main agricultural areas and the use of improved technological packages in certain &reas. Export volumes of gold and timber products rose substantially in response to the rehabilitation of infrastructure and the continued depreciation of the Cedi. The introduction and subsequent broadening of the foreign currency auction have increased the availability of spare parts and raw materials for the manufacturing sector, which is now able to plan production for the first time in many years. 20. The Budget. Total revenues (excluding grants) grew strongly in 1987 to reach 14.1 percent of GDP, but slid to an estimated 13.3 percent in 1988 primarily as a result of lower cocoa export taxes. Recurrent expenditures, however, have declined steadily as a share of GDP since 1986. This has meant that public savings, which rose to 3.3 percent of GDP in 1987, steadied at 3 percent of GDP in 1988. Nevertheless, the Government pressed ahead with increases in capital expenditures which climbed from 7.3 percent of GDP in 1986 to an estimated 8.3 percent in 1988. But with a rapid rise in foreign financing, the Government was able to reduce its debt to the domestic banking system by 07.0 billion in 1987 and 011.2 billion in 1988. 21. Money and Credit. The broad money supply grew by 54 percent in 1987, reflecting a substantial increase in the net foreign asset position of the banking system. At the same time, the velocity of circulation declined slightly, reflecting an increased willingness on the part of the public to hold cedi-denominated assets. Net domestic assets of the banking system grew by only 11 percent compared to 42 percent in 1986. Since the  - 6 - banking system's outstanding claims on the Government declined during 1987, credit to the private sector (excluding cocoa) grew by 32 percent. The monetary survey for 1988 indicates that the growth of broad money fell to 43 percent. Again, the growth was largely attributable to an improvement in the net foreign assets position of the banking system, with net domestic assets registering an increase of only 10.7 percent. The relatively modest increase in the net domestic assets of the banking system occurred despite a 24 percent growth in credit to the private sector (excluding cocoa) partly because the Government reduced its debt to the banking system by ll.2 billion cedis. 22. Prices. Inflation remained high at 34 percent in 1987, compared to 33 percent in 1986. This was mainly caused by the shortfall in domestic food production, increases in domestic petroleum product prices, and the lagged effect of the rapid depreciation of the Cedi in the last quarter of 1986. Evidence for the first ten months of 1988 indicates that inflation fell to an estimated 26-27 percent for the year as a whole. Increased food production, and tight control over both the budget deficit and monetary expansion, have been the principal reasons for this decline and are likely to cont-inue their influence on prices well into 1989. 23. Balance of paiments. The overall balance of payments generated a surplus of about US$139 million in 1987, indicating a sharp turnaround from previous years. This permitted an addition to reserves of about US$30 million and a reduction of external arrears of over US$70 million. Three important factors contributed to the improvement in the overall payments balance. The first was a substantial increase in disbursements of official grants and long term loans. The second was a reduction in scheduled amortization of external public debt. And the third was higher net private transfers, the probable consequence of a more realistic exchange rate, the emergence of new investment opportunities, and increased confidence in the :tability of the economy. The trade balance, however, deteriorated significantly, largely as a result of a sharp increase in non-oil imports and a modest decline in receipts from cocoa. The trend in cocoa exports is likely to continue until the international price for cocoa stabilises, which is not expected to be before 1990. The bleak prospects for cocoa underscores the need for Ghana to improve its export performance in other products. The record so far has been encouraging. Exports other than cocoa have done better than expected over the last few years, with non- traditional exports almost doubling in 1987, albeit from a small base. 24. Latest estimates for 1988 indicate that foreign exchange earnings from cocoa declined by a further 15 percent, the combination of lower export prices and the effect of bad weather on cocoa production. But the consequent increase in the current account deficit was matche4 almost exactly by an increase in the disbursements of grants and a sharp increase in direct foreign investment. As a result, the overall balance of payments remained in surplus, albeit at a lower level of about US$125 million. Nevertheless, this permitted the Government to maintain its program of arrears reduction, meet its obligations to the IMF, and add a small amount to its international reserves. 25. Social impact. The prolonged decline in the economy in the 1970s and early 1980s caused a substantial reduction in per capita real incomes  - 7 - and the vast majority of the population experienced sharp falls in living standards. Reforms introduced under the Economic Recovery Program and the Structural Adjustment Program have reversed this trend as indicated by the increases in per capita income since 1984. The real increases in agricultural producer prices and the shift in resources from urban to rural areas has meant that the benefits of the reform program have been widely spread. The main losers from the Structural Adjustment Program are the minority - not usually the poorest - who benefitted from the rents created by the previous restrictive and distorted economic environment. However, some urban poor, particularly the unemployed and underemployed have also been adversely affected in the short term. Urban wages for unskilled labor could decline in real terms for a further short period as the Civil Service continues to reduce its numbers and the liberalization of international trade leads to job losses in inefficient public and private enterprises. 26. To ensure that the structural adjustment program includes measures that address these problems directly, the Government has introduced a Program of Action to Mitigate the Social Costs of Adjustment (PAMSCAD). This program, to be implemented over a period of 2-3 years, seeks to improve the delivery of basic services to the poor, enhance opportunities for employment, and raise labor productivity. PAMSCAD has received strong support from the donor community, amounting to about US$85 million, to cover the estimated total cost. PART II - THE STRUCTURAL ADJUSTMENT PROGRAM 1989-90 A. Medium Term Objectives 27. In formulating the components of the next phase of structural adjustment, the Government continues to be driven by two central concerns. The first is to create productive employment opportunitien for the rapidly growing number of job seekers. The second is to alleviate the extent and depth of poverty in the country. In the main, these are not new problems. Through the first phase of the Structural Adjustment Program, the Goverrment recorded some initial successes and ga4ned experience in managing and evaluating policies that address these two objectives. In addition, there is now greater recognition of the transitional effects of the structural adjustment program on unemployment and poverty. 28. The Government, therefore, intends to continue with the basic thrust of its macroeconomic reforms, strengthening those that have demonstrated effectiveness in promoting growth within a stable economic environment. Greater attention, however, will be given to the design and implementation of sectoral policies. In the sectors of industry, agriculture, and associated infrastructure, the program will contribute to increased growth in incomes, production, and employment. In the social services, improved delivery of health and education services will directly benefit the poor and contribute to the human capital base for sustained growth in the future. 29. A key macroeconomic target of the next phase of the Structural Adjustment Program is to maintain an average GDP growth rate of at least 5 percent per year which would improve per capita incomes by about 2 percent  annually. This growth will need to be accompanied by structural change in two central aspects of the economy: (a) an increase in the share of investment in GDP from an estimated 12.5 percent in 1988 to 16 percent by 1990, with a substantial improvement in the share of non-mining private investment; and (b) a rise in national savings from 6.5 percent of GDP to 8.5 percent of GDP. In addition, the Government intends to pursue its growth objectives within a stable macroeconomic environment. To this end, two additional macroeconomic targets are: (a) the reduction of inflation to 9 percent per year by 1990; and (b) the maintenance of overall balance of payments surpluses, averaging about US$110 million per year, consistent with repayments of arrears and a modest increase in foreign exchange reserves. 30. Achievement of the 5 percent growth target will depend to a considerable extent on the performance of agriculture and industry. Growth in agriculture, the most important sector of the economy (47 percent of GDP), is expected to accelerate to an average of 3 percent per year. Cocoa, in particular, is expected to rebound from its poor performance in the 1987/88 crop year, and benefit from the substantial increases in new plantings over the last four years. Food crop yields, especially of cereals, are expected to rise in response to improved fertilizer supplies and the introduction of a program to disseminate existing technologies. In industry, growth of manufacturing output is expected to remain strong, but there is some risk that the rate may decelerate towards the end of the period as further expansion comes to depend upon the creation of new capacity rather than the rehabilitation of existing plant. Minerals production, especially gold, is expected to be buoyant; output is expected to rise as a result of ongoing rehabilitation of public sector mines, as well as from initiated and planned new investments in the private sector. Construction is also expected to fare well, and is anticipated to increase by about 25 percent by 1990. Transport and utilities will benefit from large public investments planned for the next three years. Wholesale and retail trade, however, are expected to decline as a share of GDP as the internal terms of trade move in favor of tradeables. 31. Economic growth averaging 5 percent a year will require a rapid rise in the share of investment to GDP. And private investment, particularly in the non-mining sectors, will need to account for a substantial share of the growth in total investment. An inadequate private sector response to the new incentive structure will inevitably have consequences for overall investment, growth, incomes, and employment. This underscores the importance of further improvement in the structure of incentives and in the more general climate for private sector activity. It also explains the emphasis in the next phase of the program on the consolidation of gains made in the areas of trade and exchange rate policy  with complementary reforms in tax policy and administration, financial sector policy, and sectoral policies in industry and agriculture. 32. A similar structural change will need to occur in the sources of savings. Gross domestic investment will increasingly need to be financed from private domestic savings, although official external financing will continue to remain a major source of support. Consequently, private savings are to be encouraged through reforms in the financial sector, tax policy and administration, the emergence of new investment opportunities, and a reduction in the rate of inflation. Public savings will continue to be important and are to be raised modestly as a share of GDP despite the projected declines in cocoa tax revenues over the medium term. Non-cocoa taxation will be expanded in a manner that improves incentives to save and invest, and channels resources into efficient export and import substitution activities. 33. The pursuit of growth with structural change will be rendered easier in a stable macroeconomic environment. To lower inflation, the Government will pursue prudent fiscal and monetary policies. The budget deficit is expected to rise in the near future and then decline thereafter, but it will continue to be financed through non-inflationary external loans and grants. In fact, the Government intends to maintain its policy of reducing its net borrowing from the banking system over the program period. As a consequence, the Bank of Ghana will be able to permit increased net lending by banke to the private sector while limiting the expansion in net domestic assets of the banking system. In addition, seasonal credit to the cocoa sector will be provided increasingly by commercial banks rather than the Bank of Ghana, thereby reducing the inflationary injection of high powered money into the banking system. 34. Strict aggregate demand management will contribute towards further improvements in the external payments position. Disbursements of the pipeline of foreign grants and credits will permit the maintenance of a current account deficit of between 6-8 percent of GDP. But this should not affect the debt-service ratio, which is expected to decline after 1988. The Government intends to reach an overall balance of payments surplus of about US$110 million a year during the program period. This would permit it to eliminate all public external arrears by 1990 and achieve full normalization of relations with its foreign creditors, and at the same time increase its foreign exchange reserves to about 12 weeks of imports. B. Program ComPonents 35. The next phase of reforms falls into two general components. The first is the continuation of macroeconomic reforms, particularly incentive policies and public resource management. The second is the implementation of key sectoral strategies to provide the infrastructural and institutional support necessary to facilitate private investment and production, thereby contributing to growth, employment, and the alleviation of poverty. These macroeconomic and sectoral components will be linked through the public expenditure program. At the macroeconomic level, the public expenditure program will be consistent with resource needs and availabilities. At the sectoral level, it will be used as the Government's key instrument in  - 10 - implementing its sectoral strategies and its special programs to generate employment and alleviate poverty. 1. CONTINUATION OF MACROECONOMIC RPFOBS 36. The macroeconomic component of the SAP consists of a strengthening and deepening of incentives policies and management of public resources. Incentives policies, which will increase in importance as private investment grows, will be addressed through trade and exchange rate policies, tax policies and administration, specific private sector development initiatives, and financial sector policies. Public resource management, which can further contribute to the effectiveness of government programs in attaining development objectives, will consist of public expenditure management, State-owned enterprise reforms, and civil service reforms. Incentive Policies 37. Trade and exchange rate policies. This set of policies stood at the very center of the first phase of the SAP. The next phase will concentrate on further reducing the segmentation of Ghana's foreign exchange market in stages, and rationalizing the structure of trade taxes and tariffs (para. 42). The differential between the auction rate and the rate offered by the foreign exchange bureaus will be reduced by expanding the auction to cover all current transactions by 1990. In particular, all bonafide requests for transfers of profits and dividends will be made eligible through the auction by end-January 1989. By January 1990, the Government will permit the servicing of approved private external borrowing to be funded through the auction, and by June 1990 all current account transactions would be eligible for the auction. To ensure that the supply of foreign exchange to the auction is sustainable, the Government will ensure that the allocations to the auction are consistent with foreign exchange cash flows. The number of foreign exchange bureaus is being increased, and exporters (other than COCOBOD and mining companies) are permitted to convert their retained foreign exchange earnings with foreign exchange bureaus. This, and the new streamlined procedures giving exporters ready access to their retained foreign exchange earnings, will serve to increase the supply of foreign exchange earnings to the bureaus and exert a downward pressure on the bureau rate. 38. Ghana has steadily reduced its external payments arrears from over US$600 million in early 1983 to US$99 million by end-1987. The Government intends to eliminate all remaining external payments arrears by end-1990. On trade policy, the Government will continue to rationalize the structure of import duties and sales taxes, and progressively reduce special taxes on certain imports (para. 42). However, these reforms will be informed by a proposed study of the effects of trade liberalization on the manufacturing sector. To reduce the anti-export bias in the current incentive structure, and thereby promote non-traditional exports, the Government will strengthen the duty drawback systems. It will also, through the Ghana Export Promotional Council and the Ghana Investments Center, assist exporters with information on external markets and attractive investment opportunities in potential export products.  - 11 - 39. Tax Policies and administration. Government revenues from cocoa will be squeezed over the medium term as a result of declining international prices and the Government's policy of raising domestic producer prices. This, together with the need to maintain public savings and investment, will require a substantial improvement in the collection of non-cocoa tax revenues. The impetus for reforms in the tax policy and administration system. therefore, derives from the need to put in place broad-based sources of revenue while improving incentives for private savings and investment, and encouraging the efficient allocation of resources. 40. The strategy for meeting this objective will involve: expanding the role of consumption taxes; reducing the level and variation of protection afforded by import taxes; reforming direct taxes to enhance equity, improve incentives, and broaden the tax base; and finally, strengthening tax administration. 41. To expand revenues from consumption taxes, the Government will consolidate sales tax rates and improve the administration of sales taxes. The process of unification of tax rates across comparable imported and domestically produced goods will be completed, and inconsistencies in the determination of the base for excise and sales taxes will be eliminated. Furthermore, the Government will undertake a study of the feasibility of using a credit system to extend the coverage of the sales tax. If found feasible, the credit system would replace the current practice of suspending the tax on purchases by registered producers. In the interim, the Government will extend the sales tax to motor vehicles. This, along with an increase in the excise tax on fuel, would generate additional revenues and contribute towards capturing the externalities arising from road use. 42. The Government will introduce a phased restructuring of import duties to create a lower and more uniform pattern of protection to encourage the development of non-traditional exports and efficient import- substitution industries. This process will involve lower standard rates and the transfer of the role of luxury taxation to excises and the sales tax. It would also involve: phasing out special import taxes; further reductions in the scope of duty exemptions and concess rns; and streamlining the duty drawback system. The program to rationalize the structure of import duties, special import taxes, and exemptions will be informed by a study on the effects of trade liberalization on the manufacturing sector which will be completed by October 1989. In addition, the Government will also establish procedures for reviewing rates of duty on particular products and responding to requests for changes in protection. 43. In the area of direct taxes, the Government will progressively expand the base for personal income taxation to include various types of cash and in-kind benefits that remain tax-exempt or under-valued. Coupled with increases in the personal exemption, this will increase equity; and lower marginal tax rates and fewer tax brackets will encourage private initiative and effort. These measures will be coordinated to maintain the level of take-home pay, encourage compliance, and reduce administration  - 12 - costs. The Government will also reduce the tax on dividend income and is considering the introduction of a tax on bank interest at source. This would lower disparities in treatment between different types of investment income. The Government will also conduct a comprehensive review of the effects of personal and corporate taxes on saving and investment, and of benefits available through the Investment Code, to develop a strategy for future revisions of direct taxation. 44. Finally, to improve tax adminstration, the Government intends to computerize management information systems. An important first step is to introduce a unique taxpayer identification number system. Procedures to facilitate filing of returns and payment of arrears will be developed, with a particular focus on the self-employed. Assessment, collection, and auditing procedures will undergo further revisions to encourage greater voluntary compliance. To increase confidence in the fairness of the system, a Tax Court and a Tax Appeals Tribunal will be established. 45. Private sector development. The growth of private investment will be central to the success of the Structural Adjustment Program. To ensure that this response to the new incentive structure will be forthcoming, the Government will need to display a strong commitment towards private sector development. Several components of the program are aimed at building an economic environment attractive to private investors (for example, trade and exchange rate policies, financial sector policies, and a better focused public expenditure program). To complement this with more specific measures, the Governmenc has prepared an action plan for private sector development. It is already implementing a program to release private blocked capital and dividends as part of its broader program to clear its external arrears. In addition, the Government will establish structured channels of communication with key private sector organizations for regular and constructive dialogue between the Government and the private sector, and involve the private sector in government task forces and committees dealing with issues related to the private sector. To ensure that the tax structure does not unduly inhibit private investment, the Government will reduce the tax on dividend income and unify corporate tax rates (except for trading and financial institutions). It will also review the effect of the current structure of taxes and tax benefits on incentives to invest, and rationalize the structure accordingly. To encourage the flow of information on investment opportunities in the economy, and to reduce the regulatory impediments in the investment approval system, the Ghana Investments Center will streamline its procedures and strengthen its promotional and advisory functions. In addition, the Government will take steps to reduce delays in customs and immigration procedures, and ensure that complaints against private enterprises are dealt with through legal and authorized channels. 46. Financial sector policies. Fundamental weaknesses in Ghana's banking system have served as a key constraint in the development of the private sector. With the support of the IDA Financial Sector Adjustment Credit, the Government is introducing an ambitious set of financial sector reforms. To further improve the allocative efficiency of the banking system, the Government has abolished interest rate controls and sectoral credit ceilings and will review the floor for agricultural lending. To enhance the soundness of the banking system, the Government will improve  - 13 - Central Bank supervision of the banking system, and restructure individual commercial and development banks. To properly manage liquidity in the financial system, the Central Bank is investigating the prospects of introducing new monetary instruments. And to encourage the long end of the financial market, the Government is reviewing the need for resuscitating the capital market, and is changing the policies affecting the operation of insurance companies and pension funds, particularly the Social Security and National Insurance Trust. Public Resource fMnagement 47. Public exoenditure mana8ement. The Government's program to introduce a more efficient tax system will need to be matched by improvements in the management of public expenditures. To provide the planning assumptions for the preparation and monitoring of the public expenditure program, the Government will update the macroeconomic framework at least twice a year in April and September. To streamline the budget process, indicative allocations of expenditure will accompany the initial budget circular. The Budget Task Force has developed guidelines to apply the recently prepared norms for the allocation of recurrent expenditures in health, education, and agriculture for 1989. It will improve these guidelines for use in the 1990 budget. Finally, the Ministry of Finance will adhere to the guidelines for budgetary transfers to SOEs. 48. The Ministry of Finance will continue to prepare rolling three- year public investment programs to guide its annual development expenditure allocations. A Project Selection Committee has been established to ensure that investments proposed by sector ministries meet established criteria, the blend of projects reflects the strategies articulated for each sector, and the complementarity between projects in different sectors is adequately captured. Summaries of sectoral strategies on agriculture, industry, health, and education, and their implications for the public expenditure program are included in this report (paras. 61 to 84). The strategies will be revised at periodic intervals and will be used as the basis for the reviews of the three-year public investment program. 49. The Government will stress the monitoring of public expenditures. The Budget Division will continue to monitor cash flow on the basis of monthly expenditure returns submitted by the Controller and Accountant- General (CAG). In this context, the Government will also strengthen the audit and accounting capacity of the office of the CAG. An important improvement to be made in monitoring will be to provide greater detail of expenditures by recurrent categories, for each ministry. The Budget Division will monitor expenditures under the PIP and prepare half-yearly reviews. The Budget Division will also prepare a quarterly report on both recurrent and investment expenditures and submit these to IDA not later than two months after the end of each quarter. These quarterly reports will include an analysis of significant expenditure shortfalls and overruns, especially for priority sectors and supercore investments, and indicate mid-course corrections. Quarterly cash flow forecasts will also be prepared by the Ministry of Finance and updated monthly, based on projected expenditures and resource inflows.  - 14 - 50. State-owned enterprise (SOE) refonms. As noted earlier, the reform of the SOE sector started slowly but has begun to accelerate (see paras. 15-17). Nevertheless, the pace of progress in the future will remain uncertain, reflecting, in part, the complexity of some of the issues confronting the sector. It also reflects the limited administration capacity of the State Enterprises Commission (SEC), but this is being remedied gradually with technical assistance financed by the World Bank through the Public Enterprise Project (Cr. 1847-GH). 51. The objectives of the SOE reform remain unchanged, namely increasing the efficiency, profitability and productivity of State-owned enterprises and reducing the burden they place on Government. These objectives will be tackled through an improved policy framework, better management of priority SOEs, and the divestiture program. 52. Under the program period, the Government will introduce policies that encourage the commercial operation of SOEs. This would include permitting greater management autonomy in such areas as pricing, staffing, redeployment, remuneration, and procurement. To restore discipline in Government-SOE financial :elations, the Government will formalize the guidelines defining the criteria and procedures for budgetary transfers to SOEs. The budget will not provide SOEs with subsidies, equity, or loans, nor will the Government guarantee loans, unless such contributions are part of the approved corporate plans and, in the case of investments, are also included in the public investment program. 53. As envisaged under the Public Enterprise Project (Cr. 1847-GH), the SEC will be strengthened to monitor and evaluate SOE performance and to advise Government on SOE policy. The SEC will monitor and evaluate the performance of priority SOEs using the parameters agreed in the performance agreements between Government and the SOEs which will be drawn up annually. A performance-based incentive system will also be developed by SEC to encourage greater management efficiency in SOEs. By end-1989, updated corporate plans will be prepared and performance agreements signed for all 14 priority SOEs. 54. The divestiture program was slow in getting off the ground, but some progress has been achieved recently (see para. 16). The Government advertised the sale of 32 SOEs in April 1988. Ten of these SOEs are now in their final stage of liquidation, and the Government is committed to selling its interest in six others, all joint ventures. Dossiers have been prepared for another ten, with the remaining six to be completed by end- 1988. These dossiers provide a description of the activities of each company, present updated and audited accounts, and include a valuation of its assets and liabilities. An analysis of the prepared dossiers indicates that, in most instances, the assets of these companies (valued by the Land Valuation Board) exceed their financial liabilities, albeit by relatively small margins. However, virtually all these companies also have large unfunded liabilities in the form of redundancy and retirement benefits for labor that potential buyers will be reluctant to accept. This represents a significant hurdle to progress in the divestiture program, particularly since many SOEs employ surplus labor that private investors may not wish to maintain.  - 15 - 55. The Government has, therefore, decided to accept responsibility for the retrenchment costs in SOEs that arise as a result of divestiture. This acceptance vill permit divestiture negotiations with potential investors to proceed. The Government is committed to divest ten SOEs in 1989, including the State Fishing Corporation. These ten would be in addition to the six joint ventures that were scheduled to be divested by end-1988. Completion of this program, will be a condition of release for the third tranche of this credit. Finally, a moratorium on the creation of new SOEs will remain in effect for the duration of the program, except as agreed with IDA and subject to existing laws. 56. Civil Service reforms. The Civil Service suffers from low salaries, understaffing at higher levels, and overstaffing at lower levels. The Government formulated a reform strategy under the ERP aimed at addressing these problems and at the same time at strengthening its capacity to gradually and durably improve civil service performance. The main elements of the strategy involved reducing overstaffing within the Civil Service and seeking other efficiency gains; reforming pay and grading policies; overhauling personnel management systems; and instituting systematic training and staff development. Implementation of this strategy started under the first phase of the structural adjustment program assisted by the IDA-funded Structural Adjustment Institutional Support project and a management consultancy funded by the United Kingdom's Overseas Development Administration. 57. Despite initial implementation difficulties, efforts to reduce overstaffing have begun to take hold. About 12,100 employees were removed from the public payroll in 1987. The Government's redeployment program is assisting them in their efforts to find productive employment in the private sector. Taking into account recruitments of about 3,000 within the Government's selective recruitment freeze, this represents an initial 3 percent reduction in the size of the civil service. Based on a systematic program of payroll audits, functional reviews and job inspections meant to ensure that staff reductions do not affect e delivery of public services, the Government redeployed a further 12,000 V in 1988 and is committed to 12,000 additional redundancies in 1989. The program will be extended into 1990 as further instances of overstaffing are revealed. The Office of the Head of the Civil Service (OHCS), the civil service management agency, is gradually building up a capability to keep staffing levels of the Civil Service under continuous review, and to extend its investigations into other means of achieving efficiency gains. 58. To attract and retain the higher level skills critically required to carry out its difficult task of economic reconstruction, the Government has also begun to reverse a long decline in the competitiveness of its pay policy, and to establish a pay structure based on objective job evaluation criteria. Starting with an exceptionally compressed salary structure with a 2.3:1 ratio of highest over lowest gross salary in 1985, the Government introduced a first adjustment bringing the ratio to 5.7:1 in 1986, and 21 This figure does not include the recruitment of skilled staff at the higher levels of the Civil Service. The net reduction in the Civil Service is, therefore, likely to be less than 12,000 per year.  - 16 - intends to increase this gradually as budgetary resources permit to an indicative target of 13:1. The phasing and the precise timing of this pay increase will be determined on the basis of the Government's financial strategy which provides for containing the annual wage bill within 5.5 percent of GDP in 1989, and 6 percent of GDP thereafter. In parallel, a rationalized grade structure will be introduced in early 1989 for senior posts. and over a two year period in the remainder of the Civil Service. A system relating pay to performance will be gradually put in place as well, beginning with the introduction of a reformed individual performance evaluation system. 59. Planning of manpower resources in the Civil Service suffers severely from the lack of information on the numbers, deployment and occupational categories of civil servants. The establishment of a reliable data base integrated with the payroll represents a necessary first step towards effective manpower planning. A preliminary study will be completed by early 1989 and such a system put in place over the next two years. Full implementation of the 1989 program to integrate the personnel payroll and management information system will be a condition of second tranche release. A full personnel management development program will also be developed and agreed with IDA by the end of 1988. and implementation will begin in 1989. 60. Training constitutes an essential element of civil service reform. A training development program was agreed during negotiations directed to improving the relevance of training to job performance, to strengthening training management, to introducing more cost effective training packages and to increasing the productivity of training institutions. Implementation will begin in 1989. 2. SECTORAL STRATEGIES 61. The basic macroeconomic reforms of the structural adjustment program provide the framework and set the context of development. But to ensure the supply response to the new incentive structure that is now in place, the Government has identified key constraints in the context of two important sectors, agriculture and industry, and developed strategies to overcome them. And to lay the foundations for sustained human resource development, the Government will adopt strategies in the sectors of health and education. 62. The primary reason for including these sectoral strategies in the structural adjustment program is to provide a better basis for the annual review of the public expenditure program. The strategies as they exist at present have not been developed in sufficient detail to draw precise implications for public expenditures. But the Government expects to update these strategies every year, and with each successive round, it is expected that they will include clearer linkages between the priorities in the objectives and the priorities in the expenditure programs.  - 17 - Asricultural Strategy 63. Objectives. The Government's objectives in the agricultural sector are threefold. The first is to improve food security by increasing agricultural productivity and incomes while reducing their vulnerability to fluctuations in prices and weather conditions. The second is to increase export earnings from the agricultural sector. And the third is to improve management of natural resources. These objectives are to be attained by application of selected sectoral policies, especially those relating to pricing, privatization and the environment, and through the public expenditure program. 64. Sector Policies. Apart from the exchange rate and import tariffs which have had, and will continue to have, a major impact on agricultural incentives, the single most important agricultural policy instrument remains the price of cocoa. In the future, cocoa producer prices will be determined according to a set of principles acceptable to IDA and based on a study that was completed in August, 1988. Other pricing policies include the phasing out of subsidies for fertilizer by 1990. To address credit needs within rural areas, the Government will undertake a program to restructure the rural banking system and improve the efficiency of financial intermediation. Further gains in efficiency in the agricultural sector will be achieved through privatisation. As part of its program to reduce costs, COCOBOD, for example, will complete the feasibility studies for the divestiture of its remaining 40 plantations, and also remove subsidies on input supplies. The Government will also proceed with the phased privatisation of seed production and fertilizer distribution. In the meantime, however, the Government will ensure the timely availability of both improved seeds and fertilizer. For fertilizer, the Government is to ensure that import orders for fertilizer are placed in time to have sufficient stocks delivered by January each year (40,000 tons for January 1989). Finally, the Government is undertaking reforms in its forestry policy to discourage wastage and inefficiency and to control better the volume of cutting. The main instruments for this purpose will be royalty fees and concession rents. In addition, the institutions responsible for managing forestry resources will be strengthened. 65. The Government also plans to prepare a comprehensive Environmental Action Plan. Apart from reforms already specified as part of the forestry strategy, the Action Plan will also identify specific policy actions, related investments, and institutional needs in the following priority areas: (i) land management (soil degradation and erosion); (ii) water resource development; (iii) coastal zone management; (iv) control of mining and industrial pollution; and (v) planning for human settlement. Under this plan, procedures will be established for an environmental review of public and private investments and support will be provided for the expansion of environmental education. 66. Expenditure Programs. The public expenditure program will be a critical vehicle for implementing the Government's agricultural strategy. In particular, achievement of improved yields for food crops will depend on an appropriate allocation of budgetary resources to the provision of basic services, especially extension and research, the delivery of inputs and the rehabilitation of rural infrastructure. Among other things, the extension  - 18 - and agricultural research systems will need to be improved considerably and oriented more towards small farmers. Development of specific strategies to increase the production of roots and tubers, for example, is being given attention in the research program. Public sector investments are also being reexamined and priorities are being reset. The strategy for rice production, is being shifted from investment in large-scale irrigation schemes to smaller ones and swamp development. Improvement in rural infrastructure, especially feeder roads, is being concentrated on districts with high potential. Post-harvest losses -- a major cause of low realized yields -- are also being addressed on a priority basis. Not all of these programs have been fully costed at this stage but considerable progress has been made. To complete the process, the Government is preparing a medium- term agricultural development program which will define public expenditure priorities and allocations for the next two or three years in much greater detail. Industrial Sector Strategy 67. Objectives. The Government has two broad concerns in orienting its industrial strategy to facilitate the adjustment process. One objective is the development of a more internationally competitive industrial sector. Growth is to be encouraged particularly in local resource-based industries for exports and efficient import substitution. The second key objective in the sector 8.s to generate employment, with an emphasis on job creation in small- and medium-scale enterprises (SMEs), thereby contributing to absorption of new entrants to the labor market and redeployees from the public and private sector. 68. Sectoral Policies. Macroeconomic policies will continue to exert a major influence on incentives in the industrial sector. Refinements in trade taxation and exchange rate policies, as well as the adjustment program in the financial sector, are essential components of the industrial strategy. Further, the SOE reform program (para. 50) is expected to foster increasingly commercial operation of manufacturing SOEs. 69. Improved availability an. access to information of use to potential private industrial investors is being addressed. A national census of industrial establishments is complete and the results becoming available through publications beginning mid-1988. Small-scale, and medium to large-scale enterprises are being covered by separate national surveys in 1988, and the Ministry of Industries, Science and Technology is preparing for the regular release of information from such surveys, as well as other reports and reviews of industrial prospects and conditions. 70. The Government is undertaking a comprehensive review of agencies providing technical and support services to industry, including research and development. One focus of this effort is to improve institutional support to the small- and medium-scale industry subsector, which will be crucial in generating employment and private investment. The Ministry of Industry will strengthen extension services to assist new entrepreneurs in identifying and preparing projects for presentation to financial institutions, and in disseminating information on technological developments via regional out-reach units. Industrial research is also undergoing a reorientation to improve incentives for private research and  - 19 - development, and to find the most effective mandate and use of resources for publlr research agencies. 71. Expenditure Programs. This industrial strategy is leading to adjustments in public expenditure in the sector. Resources are being concentrated on the generation of information and improvement of support services, as well as, in liaison with the key infrastructure agencies, on ports, electricity, water, roads, and telecommunications. In this context, the Government will also assess the viability and cost effectiveness of establishing an export processing zone to promote manufactured exports. 72. Allocation of investment funds to manufacturing SOEs, whether through direct investment or net lending out of budget resources, will decline as their commercial viability improves and their access to commercial sources of finance increases. Allocation of the development budget for investments in both new and existing public manufacturing enterprises is to be phased out entirely in five years. Health 73. Obiectives. The Government's priority is to rapidly improve the quality and coverage of the current health services, which reach less than half of the population, are poorly managed, and are subject to widespread shortages of essential items. Within this broad objective, the main focus will be to speed the expansion of primary health care (PHC). 74. Sectoral Policies. Sector reform will concentrate on strengthening management, procurement, financing and manpower. The Ministry of Health (MOH) will be reorganized in 1989 to decentralize operational responsibilities and improve managerial systems and skills in key posts, with headquarters focusing on policy, planning, monitoring, supplies and aid coordination. Key central, regional and district managers, not necessarily doctors, will be appointed by end-1989. Planning and the rehabilitation of facilities and services will have immediate priority. 75. Procurement is being improved initially by limiting MOH drug procurement to an essential drugs list introduced in June 1988. Meanwhile, long-term estimates of needs have been prepared. Procurement procedures will be speeded up, inventory management improved, and delivery to health units streamlined. A broad national drugs policy will be implemented through 1990. 76. Expenditure Programs. The reform of Ghana's health services delivery system will include efficiency gains and cost recovery which will permit expanded service through 1990 at the same recurrent budget share as allocated in 1988. Based on service targets and expenditure norms, budget allocations will increase substantially for PHC, transport and maintenance. The3e will be balanced by savings achieved through redeploying excess non- technical staff by end-1990, increasing efficiency of drug supply, tightening medicalltechnical staffing and budget norms, and discontinuing subsidies on institutional feeding by end-1989. A revolving fund will be established in 1989 to finance essential drug purchases and port clearance costs, and will receive an initial capitalization as well as all proceeds  - 20 - from putting drug sales to all health institutions, and by them to patients, on a cash-and-carry basis. Cost recovery will remain equivalent to at least 15 percent of MOH recurrent expenditures through 1990. 77. Spending by MOH on PHC and drugs will be protected from overall resource shortfalls. Salaries of staff at facilities operated by missions will remain fully funded. Completion of PHC facilities will have first priority in the health sector PIP, and these will be included in PIP core investments as well. New projects will have satisfactory feasibility studies before implementation. Education 78. Obiectives. Ghana has embarked on a major six year program of education reform with three main objectives: to improve pedagogic effectiveness; to make education financing more efficient and equitable; and to ensure that the reformed system can be sustained with national resources within modest growth expectations. 79. Sectoral policies. A key element in the restructuring of the educational system is the phased introduction of a Junior Secondary School system and a consequent reduction in the length of pre-university education from 17 to 12 years. This will allow scarce pedagogic resources to be concentrated more effectively and will reduce considerably the private and public investment in the education of each child. This program is being supported by development of a revised curriculum, teacher training, and examination reform. 80. In addition to this fundamental restructuring. the Government is seeking to ensure that primary school intakes grow by at least 6 percent per year. This is to be achieved through media campaigns, greater curriculum relevance, increased teacher accountability and adequate supplies of educational material. At all levels, special attention will be devoted to strengthening students' cultural identity through the use of local languages, and the development of craft skills. 81. Policies addressing the secondary level are to double throughput. with increasing emphasis on science and technology. To improve the effectiveness and holding power of basic education, enrollments in residential teacher training college will increase significantly so that all untrained teachers will be eliminated from the system by 1993. For technical education and vocational training to play a direct role in promoting national development, curricula and programs will be directed at preparing the youth for productive *self-employment' and work in the informal sector. 82. At the higher education level, priority will be attached to improving the management of financial, human, and physical resources; to integrate tertiary education firmly into the national educational structure; and direct curricula and programs so that graduates play an active role in national development, especially in rural and technological areas.  - 21 - 83. Finally, to ensure a maximum level of public participation in the political as well as the development process, the Government has decided to reduce the 70 percent adult illiteracy rate. It plans to complement the education reform program with a massive functional literacy campaign that will be extended to full nationwide coverage by 1991. 84. Expenditure Programs. To improve equitable and efficient use of financial resources, both to and within the educational sector, the Government will begin applying established norms in drafting the annual budget and preparing the public investment program (PIP). Further cost savings and recovery will be achieved through reducing non-teaching staffing levels, raising annual book-user fees, and reducing food and boarding subsidies, with a concessional loan scheme introduced to cushion any hardship to students from poor families. In the recurrent budget, the share allocated to basic education (primary and junior secondary) will continue to increase, from its 1987 share (582) of actual recurrent expenditure to 602 by 1990, as will associated teacher training. Secondary and higher education shares will decrease. In the PIP, the focus will continue to be rehabilitation of facilities, with a priority given to non- tertiary education. Non-aid financed capital expenditures on higher education will await establishment of a university rationalization plan on the basis of the recently completed study. C. Program Management 85. The continuing constraint of economic management capacity within the Government is being addressed. The existing management framework is being modified and understaffing being relieved to strengthen the critical policy analysis and planning functions, particularly public investment programming, budgetary control, aid coordination and debt management. The SAP team, headed by the Chairman of the Committee of Secretaries, will continue as the highest body to make economic policy decisions, supported in its coordination function by the Economic Liaison Unit. Day-to-day management of the structural adjustment program will remain with the Ministry of Finance, which is being strengthened to undertake this task. The Structural Adjustment Program Secretariat, which was created to monitor implementation of the structural adjustment program, is becoming part of the International Economic Relations Department. It will also continue to be the project management unit for the Structural Adjustment Institutional Support Project. The International Economic Relations Department of the Ministry of Finance is also being strengthened to better monitor aid flows, particularly World Bank disbursements. The Investment Projects Analysis Division will be strengthened, and will be responsible for all budget matters including preparation of the Public Investment Program. The Ministry of Finance is also seeking to complete staffing of its Economic Policy Unit, in spite of difficulties in hiring qualified personnel. Terms of reference for a debt management unit and monitoring system within Ministry of Finance have also been prepared and are ready for implementation. Finally, the Government is continuing its preparations for establishing a National Development Planning Secretariat (NDPS), which is expected to become operational before the end of 1990. The NDPS will be responsible for the preparation of the medium- and long-term development framework and sectoral strategies to guide the preparation of the PIP. Based on this framework, the Ministry of Finance will prepare the rolling,  - 22 - three-year PIP for incorporation in the annual budget and submit it to the PNDC for approval. D. Program Effects 86. Economic benefits. The primary measure of the adjustment program's impact on the general well being of the Ghanaian population is growth in real GDP. With an annual growth of at least 5 percent, real GDP is expected to increase by slightly more than 10 percent during the two years of the program. Of this increase, approximately 40 percent is expected to be generated by the industrial sector, 32 percent by services and 28 percent by agriculture. These figures are indicative of the structural adjustment occuring in the economy -- industry, the smallest sector in 1988, is expected to increase most rapidly whereas agriculture, the largest sector in 1988, will decline as a share of GDP. 87. The change in real consumption per capita is often taken as a more appropriate measure of a program's impact on individual welfare. Allowing for population growth of 3.2 percent a year and for an increasing share of investment in GDP, the increase in real GDP of 5 percent a year translates into an increase in real consumption per capita of about 1 percent in 1989 and 1990. Realization of these growth rates would imply that real consumption per capita would have increased by 13.4 percent since the inception of Ghana's recovery program in 1983. 88. While growth in the immediate future is of great importance, an additional, and equally important dimension of a program's impact is the extent to which it lays the foundation for growth in the long run. In this respect, the current two-year program will achieve a further increase in the share of investment in GDP -- from 12.5 percent in 1988 to 16 percent in 1990. and then to 16.5 percent in 1991. The implication of this productive investmet is that growth will be maintained at current levels. National savings will continue to fund around half of this increased investment with the remainder being in the form of concessional external loans and grants. Current efforts to increase investment are not expected, therefore, to lead to future debt problems. In fact, the debt service ratio (including 1MF and arrears) is projected to fall from 69 percent in 1988 to 35 percent by 1990. As with the structure of production, these developments with respect to investment and saving are a further indication of the adjustment occuring in the economy. 89. Social effects. The next phase of structural adjustment is expected to result in a modest increase in per capita income and consumption and hence generate gains for the large majority of Ghanaians. Distribution of these gains is not likely to be even, however, and other groups may not share in the gains. Identification and monitoring of the effects of structural adjustment on households will improve with the first results of the Ghana Living Standards Study which was recently initiated. It is thought that the improvements in producer incentives, particularly for small-scale cocoa farmers and entrepreneurs, and the shift in resources from urban to rural areas, and from traders to producers will enhance economic opportunities and increase incomes in much of the economy. Poverty and economic hardship will remain difficult problems, however, particularly for such vulnerable groups as small farmers in the Northern  - 23 - and Upper regions, whose productivity is low, and who face unemployment and hunger in the lean season, as well as low income unemployed and under- employed urban households, and retrenched workers from the public and private sector. 90. The effort to moderate the costs of the adjustment program must be concerned primarily with creating employment opportunities. Labor supply and demand appear to be such that, in the aggregate, newly created jobs as a result of economic growth will exceed the number of new entrants to the labor force by a margin sufficient to absorb those retrenched from the public and private sectors and raise real wages. This aggregate picture may mask considerable unemployment and under-employment in some economic sectors. Absorption of redeployed w3rkers may become more difficult because of their changing geographical concentration and skills mix. For example, although many redeployed workers have opted to find employment in the agricultural sector, an increasing number will likely be clerical or unskilled workers who would compete with new entrants for available urban jobs. 91. Generation of employment opportunities is being pursued along several policy avenues. The short-term interventions of the PAMSCAD (para. 26) are designed to create jobs through priority public works and food-for- work programs and to retrain redeployed workers. In the longer term, the principal concern will be to continue capital deepening as well as improvements in capital and labor productivity. Strengthening existing macroeconomic reforms, particularly of trade, tax and regulatory policies that affect the level and efficiency of investment, will continue to be important. Finally, promotion of labor-intensive activities, consistent with Ghana's comparative advantage, offers scope for increasing job opportunities that match available skills, particularly in agriculture and manufacturing. 92. The structural adjustment program is also working through the public expenditure program to make a substantial improvement in delivery of social services and establishment of basic infrastructure. Recurrent expenditures for equipment, materials and other supporting inputs in health, education and other basic needs are being increased. In the development budget, investment programs in social development are being more carefully targetted to increase poorer groups' access to services that improve their productivity and participation in economic growth. Many of these crucial investments in Ghana's population and workers' productivity will only begin to contribute to economic growth and well-being beyond the current phase of structural adjustment, but they serve to strengthen the reversal from previous neglect and deterioration of human capital. PART III - THE PROPOSED CREDIT A. Credit History 93. Preparation of the proposed Credit commenced after the successful second tranche review for first Structural Adjustment Credit (SAC I) in February 1988. Appraisal was carried out in June 1988 and negotiations  - 24 - were held November 21-23, 1988. The Ghanaian team was led by Dr. Kwesi Botchwey, PNDC Secretary for Finance and Economic Planning, and included Mr. Ato Ahwoi, PNDC Secretary for Fuel and Power and Head of the NRS, Mr. W. Adda, PNDC Secretary and Chairman, State Enterprises Commission, Dr. G.K. Agama, Governor, Bank of Ghana, and Dr. J. Abbey, Ghanaian High Commissioner to the U.K. B. Proposed Financins 94. As part of the annual update of its Policy Framework Paper (PFP), the Government reviewed, in conjunction with the Bank and the Fund, the financing requirements over the next phase of the structural adjustment program. The preliminary balance of payments projections and assessment of financing requirements are based on the following assumptions: (i) an unfavorable outlook on the cocoa price, such that despite projected growth in the volume of cocoa exports, foreign exchange earnings from cocoa are likely to remain below the 1987 level through 1991; (ii) rapid growth in other exports, notably of minerals and non-traditional goods; (iii) import volume growth roughly in line with GDP growth; (iv) continued limited recourse to international commercial borrowing; (v) maintenance of real levels of concessional aid flows; and (vi) access to the Fund's medium-term facilities at a level sufficient to further reduce net resource transfers to the Fund. 95. On the basis of these assumptions, the total financing requirement for the period 1989-90 amounts to US$1.6 billion. The current account deficit alone is expected to total about US$731 million despite private unrequited transfers at higher levels than in the past. The next largest claim on Ghana's foreign exchange resources, almost US$283 million, will arise from obligations to amortize its medium- and long-term debt, and another US$70 million will be needed to meet Ghana's commitment to eliminate its external payments arrears by end-1990. In addition, the Government's schedule of repayments to the IMF will amount to US$283 million, and the Bank of Ghana plans to reduce its net foreign liabilities by about US$125 million. Finally, about US$120 million will be added to international reserves, which is expected to rise to almost 13 weeks of imports of goods. 96. About three-fourths of Ghana's financing requirements will be met by grants and loans from bilateral and multilateral sources. Close to half of the projected drawings from these sources is expected to come from commitments made as of end-1987. World Bank disbursements, including the Special Africa Facility, would amount to US$425 million. In addition, the Government is expected to draw about US$300 million from the Fund under the ESAF. The remainder, about US$125 million, would comprise short-term commercial borrowing to finance oil imports, medium-term suppliers' credits, and direct foreign investment. C. Credit Administration, Procurement and Disbursement 97. It is proposed to support the next phase of Ghana's structural adjustment program with a second structural adjustment credit of US$120 million. The Bank of Ghana (BOG) would administer the Credit on behalf of the Government and disburse the funds through its weekly foreign exchange  - 25 - auction. BOG would: (a) maintain separate accounts to record disbursements and repayments; and (b) arrange for an audit of such accounts by auditors acceptable to IDA, and submit certified copies of the relevant audited accounts to IDA within six months after the end of each fiscal year. The auditors report would include an opinion on whether satisfactory procedures are in operation at BOG regarding the use of statements of expenditure. 98. The proceeds of the proposed loan would be used exclusively to finance the foreign exchange cost of eligible imports through the foreign exchange auction in the BOG. Except for a few exclusions such as defense items, any imports would be eligible for financing. Not more than US$40 million of the proceeds of the credit would be used for petroleum imports. And up to US$24 million could be financed retroactively for imports paid for up to four months prior to loan signing. To speed up disbursements, imports below US$2 million by private entities and SOEs would be procured in accordance with their normal procedures; for such procurements, reimbursements can be requested from the Association on the basis of statements of expenditure. Imports by the government sector below US$2 million would be procured according to its procedures which are acceptable to IDA. Imports worth US$2 million or more in the private, government and SOE sectors would be subject to international competitive bidding according to Bank guidelines, using current standard bidding documents acceptable to IDA. 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 least costly and most reliable sources. 99. To facilitate procurement and disbursement, multiple special accounts (up to six), in U.S. dollars at commercial banks, are to be used on terms and conditions acceptable to the Association. US$30 million of the IDA credit will be deposited initially in these special accounts. Applications for replenishment of the special accounts will be submitted monthly, or when withdrawals equal one-sixth of the amount advanced. Applications will be fully documented with respect to payments against contracts of more than US$500,000 equivalent. Reimbursements for payments against smaller contracts will be made on the basis of statements of expenditure certified by the BOG 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 and on special accounts. 100. The proceeds of the proposed credit would be disbursed in three tranches as follows: (a) a first tranche of US$60 million would become available immediately upon effectiveness (April 1989); (b) a second tranche of US$40 million would be made available following a mid-term review of performance to determine the satisfactory implementation of the adjustment program (January 1990); and  - 26 - (c) a third tranche of US$20 million would be released following the successful completion of the 1989 SOB divestiture program and agreement with IDA on the 1990 SO! divestiture program (March 1990). D. Monitoring and Tranche Release Conditions 101. 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. A second tranche review would take place roughly nine months after release of the first tranche. Release of the second tranche will depend upon overall satisfactory progress of the structural adjustment program and the completion of the following actions in a manner satisfactory to the Association: (a) Conditions of Second Tranche Release (i) The foreign exchange auction system has been expanded to include service payments on approved private external borrowing. (ii) Reforms of the tax structure have been introduced and are reflected in the 1990 budget. (iii) Allocations for recurrent expenditures and the 1990-92 Public Investment Program are reflected in the 1990 budget. (iv) Performance agreements for all 14 priority State-owned enterprises have been updated and signed. (v) The 1989 program of pay reform for the Civil Service and the 1989 program of integrating the payroll and management information systems have been implemented; (vi) The cocoa producer price for 1989/90 has been set and announced and the cocoa producer price for 1990191 has been proposed and transmitted to the Association. Release of the third tranche will depend upon overall satisfactory progress of the structural adjustment program and the completion of the following actions in a manner satisfactory to the Association: (b) Condition of Third Tranche Release (i) Implementation of the 1989 SOE divestiture program and agreement with IDA on the 1990 SOE divestiture program. 102. The Government will submit to the Association a report evaluating the progress made in implementing the adjustment program starting from the date of credit approval, which will provide the basis for the mid-term review of the program scheduled for January 1990 and the release of the second tranche. The Association has the option to cancel all or part of  - 27 - the second tranche if the conditions for its release have not been fulfilled within 90 days after the mid-term review. Similarly, the Association has the option to cancel all or part of the third tranche if the condition for its release have not been met within 90 days after the review of the divestiture program scheduled in March 1990. 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. E. Risks 103. Three principal risks could threaten the achievement of the program's objectivest inadequate response of private investment, insufficient implementation capacity within the Government, and social reaction to some of the cost-cutting measures that are included in the program -- subsidy reductions, higher user-fees, and worker redeployment. 104. Inadequate private investment to achieve economic growth targets could become a problem in the next several years, especially as managers and entrepreneurs achieve rehabilitation of existing capacity, and need to shift to new investment projects. Liquidity constraints, infrastructure bottlenecks and remaining policy impediments may contribute to the reluctance of entrepreneurs to advance beyond project identification to implementation. The Government is taking concrete steps to address such issues through the financial sector adjustment program, through improvements in water, telephone and electricity services, as well as road, rail and port infrastructure, and through a liberalized foreign exchange regime and a program to clear arrears of blocked capital and dividends. Despite these efforts, renewed private investment will need to involve a shift in perceptions and confidence in the durability of the policies shaping Ghana's economic future, and it is difficult to judge when patient commitment by the Government to appropriate policies will begin to bring results. 105. Another possible constraint to the pace of economic transformation will be the still weak implementation capacity of the Government. Measures to attract trained Ghanaians back into public service have so far met with only limited success, and the motivation of the Civil Service continues to be low. A number of actions are in place to minimize the risks of inadequate implementation capabilities. The ongoing Structural Adjustment Institutional Support Project will continue to focus on strengthening public sector management. The project aims to improve the supply of trained Ghanaians from within and outside Ghana, particularly in key areas of economic and financial management. Training programs will be geared to reducing dependence on external technical assistance. However, in the interim, technical assistance will still be provided to support cocoa sector reforms under the Cocoa Rehabilitation project and to state enterprise reform through the Public Enterprise project. 106. The structural adjustment process also faces the risk of successful opposition from groups who may perceive that they are being asked to endure a disproportionate share of the costs of the program. Retrenched workers from the Civil Service and State-owned enterprises, students facing reduced boarding subsidies and higher book fees, and health  - 28 - service users facing higher drug costs, could play a vocal role in striving to delay or defeat reforms intended to improve budgetary management. The Government should be able to forestall such socio-political risks by balancing and timing higher service costs with improved service provision, mitigating transitional unemployment through achieving overall economic growth, providing generous compensation benefits to redeployees, and implementing retraining and temporary job creation projects under PAMSCAD (see para. 26). In addition, the success of reforms to date is partly due to the Government's careful efforts to explain the rationale of the program to the general public, and continued effectiveness in such communications will be critical to the success of the program. PART IV - BANK GROUP OPERATIONS IN GHANA 107. Bank and IDA lending to Ghana as of September 30, 1988 amounted to US$1,371.3 million, while total disbursements were US$958.2 million. Agriculture accounts for 13.5 percent of total Bank and IDA commitments; industry and energy for 23.4 percent; transport, urban and water supply for 21.2 percent; education and health for 3.6 percent; adjustment lending for 35.5 percent; and technical assistance for 2.8 percent. IFC has made. investments in Ghana totalling US$32.5 million. Annex II contains a summary statement of Bank loans and IDA credits as of September 30, 1988. 108. Following the formulation of Ghana's Economic Recovery Program (ERP) in 1983, the Bank provided a series of policy-based credits in the mid-1980s to help the Government arrest the deterioration in the economy and lay the basis for sustained growth. These credits and related technical assistance were designed to ensure the flow of urgently needed imports. particularly for the key export-oriented sectors -- cocoa, timber and mining -- and for manufacturing and transport. The Bank also increased investment lending over this period, emphasizing rehabilitation, maintenance and institutional strengthening in the transport (railways, highways and ports), energy (power distribution and petroleum refining), water and urban sectors. In addition, the Bank is supporting reforms in the industrial, financial and education sectors, and is providing assistance for operations aimed at increasing production potential and efficiency in agriculture. 109. Support for the structural adjustment program in 1987 took the form of the first Structural Adjustment Credit for SDR 90.9 million (US$115 million equivalent, including the African Facility) and its companion technical assistance credit of SDR 8.6 million (US$10.8 million). The latter was designed to strengthen the institutions responsible for implementing the SAP and to improve economic management. Supplemental financing of US$15 million was added to the first Structural Adjustment Credit in October 1987. Assistance has also been provided to support the public enterprise reform component of SAP by means of a Public Enterprise Project. 110. Support to the Government to help secure effective implementation of its reform program through both analytical work and financial assistance will continue to be the central focus of the Bank's strategy for Ghana. The other key elements of the Bank's strategy are to support the  - 29 - implementation of financial sector reforms to improve financial intermediation; to promote agricultural and industrial growth in line with Ghana's long-run comparative advantage; to help upgrade the economic infrastructure; to help improve the delivery of social services; and to mobilize increased cofinancing and strengthen aid coordination. 111. In agriculture, investment lending will be directed towards rural financial intermediation, applied research, and the upgrading of essential services, particularly extension and improved input supply. Assistance is also to be directed towards the development of the irrigation subsector, improvements in the cocoa subsector and in the management of the country's forestry resources. In industry, the main thrust of assistance to improve performance would be to increase capacity utilization in small and medium scale industries in the short term, and facilitate the selective rehabilitation and expansion of economically viable industries in the medium term. 112. The Bank's approach to help rehabilitate Ghana's economic infrastructure includes support for improvements in the finances and operational efficiency of parastatals in the water, transport and energy sectors. Equally important will be the upgrading of urban and rural infrastructure, including improved management, planning and revenue mobilization at all levels of gover.,nent. Special efforts will also be made to strengthen planning and delivery systems and ensure adequate maintenance of infrastructure and public services. In support of PAMSCAD, the Bank has provided financing for a labor intensive project to rehabilitate urban infrastructure. 113. In line with the Government's renewed emphasis on health and education, the Bank's social sector program is being boosted. In education, it would build on the success under the ongoing education sector adjustment credit to reshape the structure of the system and make it more relevant to Ghana's socio-economic conditions. In the areas of population, health, and nutrition, the Bank is helping to draw up a much needed operational strategy on the basis of which government policies and programs will be refined, taking into account overall budgetary constraints. 114. The need to ensure that scarce external resources are used for the highest-priority investments means that improved aid coordination will continue to be given high priority. In this connection, the Bank has chaired the Consultative Group (CG) meetings since 1983, organized or co- sponsored special aid coordination meetings on industry, the social sectors, mining, and PAMSCAD. It has also initiated a forum for regular consultations among donors at the local level. PART V - COLLABORATION WITH THE IMP A. Fund Relations with Ghana 115. Since the inception of the ERP in 1983 the Fund's Executive Board has approved three successive Stand-by Arrangements and two Compensatory Financing Facility purchases by Ghana amounting to a total use of Fund resources by end-1986 of SDR 611 million or 299 percent of quota. In  - 30 - November 1987 the Fund Board approved a three-year extended arrangement of SDR 245.5 million and a three-year structural adjustment arrangement of a further SDR 129.9 million. A year later, these were replaced by a three- year arrangement under the Enhanced Structural Adjustment Facility (ESAF) equivalent to SDR 368.1 million. B. Bank-Fund Collaboration 116. There has been close collaboration between Bank and Fund staff through joint missions and regular contact, both between the respective Resident Representatives in Accra, as well as headquarters staff. The staff of both institutions have worked extremely closely with the Government in design and preparation of the Structural Adjustment Program. A second policy framework paper (PFP) was jointly prepared in 1988 by Government, Fund and Bank staff in preparation for Ghana's request to the IMF for access to the Extended Structural Adjustment Facility. PART VI - RECOMMENDATION 117. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. I recommend that the Executive Directors approve the proposed Development Credit. Barber B. Conable President Attachments Washington, D.C. February 28, 1989  - 31 - ANNEX I Page 1 of 3 ONA" KEY ECONOMIC IIQICATORS (in percent) Pi Actual Prl la. Pro3ectod S84 1985 198S I987 1988 im 19 g 1991 GDP Growth Rate 8.6 5.1 6.2 4.0 6.0 6.4 4.6 4.8 GODY Growth Rate/ 5.6 4.2 6.6 4.7 6.7 3.8 4.6 4.8 GODY/Capita GrowtJm Rate / 2.3 1.6 3.8 2.0 2.6 0.8 1.a 1.4 Total Consump/Caplta Growth Rate 4.4 0.1 3.8 2.1 2.6 1.0 0.7 0.6 Debt Servie ELT (in US1 MW)5 408 415 M88 561 628 496 364 294 Debt Service ratio I/ 66.6 61.8 48.7 61.8 68.5 62.4 85.1 25.1 Debt Service/GDP 5.3 6.7 8.0 12.2 12.2 10.2 7.6 5.7 Gross Investment/GDP 6.9 9.6 9.7 10.8 12.6 14.3 16.0 16.S Domestic Savings/GDP 4.2 6.7 6.1 4.4 6.3 4.9 6.3 7.9 National Savings/GDP 4.0 6.4 5.6 5.9 6.6 6.7 8.6 9.4 Marginal Private Savings Rate ... 10.7 0.4 0.4 4.8 7.0 12.0 8.2 Publ Ic nvetment/GDP 2.6 4.2 7.8 7.8 8.8 9.6 10.9 11.0 Public Savings/GOP -0.6 0.1 1.7 8.3 3.0 B.0 4.0 4.8 Privato Investment/GODP 4.4 5.5 2.4 8.0 4.2 4.6 5.1 6.6 Private Savings/GODP 4.6 5.4 8.7 2.7 3.4 8.7 4.5 4.7 Ratio of Public/Private Invest. 0.67 0.76 8.0 2.6 1.9 2.1 2.1 2.0 Government Revenues/GDP 8.0 11.8 18.6 14.1 18.3 14.0 15.2 18.1 Government Expenditures/GDP 10.9 16.4 19.2 19.0 18.8 20.9 22.6 22.7 Deficit (-) or Surplus (*)/GDP -2.9 -4.1 -5.6 -4.9 -6.6 -6.9 -7.4 -6.6 Export Growth Rate 2.0 21.9 12.4 9.8 -0.1 14.1 7.8 10.4 Export/GOP 8.0 10.6 16.6 19.7 17.9 19.6 21.6 22.6 Import Growth Rate 28.9 8.9 16.4 18.6 8.2 3.3 4.9 4.4 Imports/GDP 10.8 18.6 20.1 26.1 25.1 28.9 81.3 81.2 Current Account (in USIM) -214 -264 -204 -224 -809 -38 -363 -389 Current Account/GDP -2.8 -4.2 -4.2 -4.9 -6.0 -7.6 -7.6 -7.1 Source: World Bank Estimates. a/ Except where indicated. / GODY Is defined as GOP per capita adjusted for changes In the terms of trade. c/ Ineludes IMF repurchsses and payments of arrears. {/ Debt service as a ratio of exports of goods and non-factor services. Note: Growth rates are calculated In real terms and all shares are calculated using current prices.  - 32- ANNEX I Page 2 of 3 BALANCE OF PAWIENTS (USO Mlillion) 1986 19? 1986 1989 1990 1991 _ ~~~- - -- -- - -- - - __- -- - -- _ Export of Goode (fob) 749 927 628 6o8 919 1047 Coco bons end Product. 503 495 430 870 409 438 Other export 248 382 896 408 510 609 Import of Goods (cif) -605 -1026 -lil -1201 -1291 -1396 O1i -125 -145 -140 -169 -178 -198 Non-oil -600 -860 -982 -1042 -1112 -1199 1rade Batlnce -56 -19 -282 -808 -872 -348 Non-factor Services -115 -95 -89 -90 -96 -103 Receipt. 48 To 90 110 117 127 Pnymnt. -168 -174 -179 -200 -212 -281 kesouroe Balance -171 -298 -871 -454 -467 -452 Net Factor Pyment. -106 -182 -189 -180 -118 -113 intorat payment. -102 -122 -130 -119 -106 -102 Public and BOG -45 -47 -76 -76 -71 -78 Privete -1 -3 -5 0 -1 -1 IMF Charges -55 -52 -49 -48 -84 -20 Factor Payment. and other -4 -11 -8 -11 -10 -11 Net Privat. Transfers & StL 73 202 201 2)5 220 106 Current Account Balance -204 -224 -ao9 -as8 -868 -3869 As X of CDP -4.2! -4.9s -6.03 -7.6! -7.6x -7.1! External Capital Inflow 185 375 484 478 478 494 Grants 118 122 177 212 220 213 Pubie Foreign Borrowings 128 218 195 247 285 803 ULT Net 139 280 209 259 289 380 Gross Inflows 890 418 414 406 411 431 Concession l (LT) 257 804 80o 85 854 S82 of which SALe 0 56 78 60 6o s0 Non-Conc ealonal (MT) 133 109 114 70 56 69 of which: oil 59 64 86 0 0 0 Amortization -251 -162 -205 -146 -122 -128 Trust Fund -11 -12 -13 -12 -4 0 Private Foreign Borrowing (Nt) 8 -a -1 2 1 1 Direct Foreign Investment 4 5 25 26 28 29 Short torn borrowing -19 8a 87 -6 -61 -62 Errors and Omnisione -86 12 0 0 0 0 Overal B no Ionce -57 139 126 110 110 125 Note: Total* may not add due to rounding.  - 33 - Page 3 of 3 GEM EXTSL FDWANP Eg ONS M7-91 (in US$ millimi) ______________________________________________ 1987 1988 1989 1990 1991 Total Financing Requireunt 686 825 623 785 737 Current Accomt, Excl. Official Transfers 224 309 368 363 369 Amortizatiml a/ 195 218 158 125 128 Reductiom in Arrears n 30 45 25 0 Change in Reserves and Other Liabilities b/ 22 13 77 164 174 DMF Repurchases 174 255 175 108 66 Disbursements: Existing Comitmtnts c/ 686 594 332 238 154 Grents 122 106 76 44 26 Loans 408 358 256 194 128 Bilateral Creditors di 46 73 89 75 47 .Wtilateral Creditors 250 247 151 111 76 ofr hich: World Bank 191 187 95 70 68 of dhich: Adjustment Lending 58 73 0 0 0 Private Creditors (net) 112 38 16 8 5 Direct ForeiVl Investmnut 5 0 0 0 0 ThY Purchases 94 130 0 0 0 SAF 56 0 0 0 0 Disbursemmnts: Expected New Ocmuitments 0 231 491 547 583 Grants 0 70 136 176 187 Loans 0 56 151 218 305 Bilateral Creditors d/ 0 10 15 32 91 Mbltilateral Creditors 0 22 120 155 182 of which: World Bank 0 15 15 145 161 of ihich: Adjustmnt Lending e/ 0 0 60 60 50 Private Creditors (net) 0 24 16 31 32 Direct Foreign Investmet 0 25 25 28 29 DMF ESAF 0 80 179 125 62 Total Identified Financing 686 825 823 785 737 Note: Total identified financing is inclusive of disbursements under Special Program of Assistance. a/ Includes IMF Trust Fund. b/ Includes outward official unrequired transfers. cl As of December 31, 1987. dl Includes concessional and ncnconcession-l loans. el Includes only structural adjustment credits.  -34- ANNEX II Page 1 of 2 A. TM STATUS OF SANK GROtUP OPERATIONS IN GHANA STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 80, 18) Amount in US3 M i Ion Loan or (less Cancellation) Credit Flscal ----------------------- Number Year Borrower Purpos Bank IDA Undisbursed Ten loans and seventeen credits fully disbursed 169.72 200.40 1009-GH 8B Ghana Volta Region Aar. Dev. 29.60 3.09 1170-CH 81 Ghana Ra lway RehabilIttation 29.00 0.98 1342-GH 83 Ghana Water Supply TA 13.00 2.26 1373-CH 83 Ghana Energy Project 11.00 7.16 143S-GH 84 Ghana Export Rehabilitation 40.10 1.52 F009-CH 84 Chan* Export Rehabilitation 38.90 6.79 1436-OH 84 Ghana Export Rehabilitation TA 17.10 0.49 1448-OH 84 Ghana Petroleum Rof. Rehab. A TA 6.90 1.48 1498-CH 84 Ghana Second Oil Palm 26.00 16.97 16e4-GH 85 Ghana Accra District Rehab. 22.00 11.SO 1573-OH 85 Chana RIC II 80.00 8.26 A003-GH 8S Ghana RIC II 27.00 1.63 1601-CH 85 Ghana Road Rehab. A Maintenance 40.00 17.79 AO01-GH 85 Ghana Road Rehab. & Maintenance 10.00 6.19 1628-OH 86 Ghana Power System Rehab. 28.00 9.46 1663-CH 86 Ghana Health A Education Rehab. 15.00 11.34 1672-OH 86 Chana Industrial Sector Adj. 28.50 8.24 A013-GH 86 Ghana Industrial Sector Adj. 25.00 4.05 1674-CH 86 Ghana Porte Rehabilitation 24.50 17.53 1744-GH 87 Ghana Education Sector AdJ 34.60 23.06 1759-OH 87 Ghana Northern Grid Extension 6.30 3.22 1777-OH 87 Ghana SAC I 34.00 14.81 A02S-GH 87 Ghana SAC I 81.00 27.34 A025-1-GH 88 Ghana SAC I 15.00 14.97 1778-GH 87 Ghana Struc. Adj. Inst. Support 10.80 8.49 1801-OH 87 Ghana Agricultural Svcs. Rehab. 11.00 18.07 1819-OH 87 Ghana Petroleum Ref. A Dist. 1.00 16.10 1847-GH 87 Ghana Public Entorprise TA 10.50 9.40 1864-OH 1/ 88 Ghan* Cocoa Rehabilitation 40.00 40.39 18S8-OH 88 Ghana Transport Rehabilitation 60.00 67.61 1874-OH 88 Ghana Priority Works 10.60 8.85 1911-OH 88 Ghana Financial Sector Adjust. 100.00 58.50 1921-OH 1/ 88 Ghana Mining Sector Rehab. 40.00 37.81 1946-OH 1/ 89 Ghana Toleccaunications II 19.00 17.81 TOTAL 189.72 1181.60 487.09 of which has been repaid 89.23 7.72 TOTAL now held by Bank and IDA 100.49 1173.88 Amount sold 0.38 of which repaid 0.38 TOTAL undisbursed 0.00 487.09 487.09 1/ Not yet effective as of September $0, 1988.  -35 - AM= I I Page 2 of 2 GHANA B. STATEMENT OF IFC INESTMENTS (s ot September 30, 198) Inveotment Fiscal Typos ot Nuber Year Obligor Business Loan Equity Tot.l - tUS6 million 777-OH 84 Ashanti Goldfield Mining 27.6 - 27.5 Corp. 914-OH 86 Kota Basin Oil Oil - 4.5 4.5 Exploration 8s Canadian Bogosu mining 0.6 0.S Resources Ltd. Total gross *ommitments 27. 65.1 32.6 Less cancel Iations, t.rmlnotlone, repayments and salea 1.6 Total commitments now held by IFC 27. 15.1 31.0 Total undisbursad - - 10.4  - 36 - ANNEX III GHANA SECOND STRUCTURAL ADJUSTMENT CREDIT Supplementarl Data Sheet Section I - Timetable of Key Events (a) Time taken to prepare the program 8 months (b) Appraisal mission June 1988 (c) Completion of negotiations November 1988 td) Planned date of effectiveness April 1989 Section II - Special Bank Implementation Actions (i) Prior to January 1990, or other agreed date, IDA will review the Government's progress in implementing the structural adjustment program (para 100). (ii) Prior to March 1990, or other agreed date, IDA will review the 1990 SOE divestiture program (para 100). Section III - Special Conditions (a) Release of the second tranche would be contingent upon satisfactory progress in carrying out the structural adjustment program, in particular (para 101): ,i) expansion of the foreign exchange auction system to include service payments on approved private external borrowing; (ii) introduction of reforms to the tax structure and their reflection in the 1990 budget; (iii) incorporation in the 1990 budget of allocations for recurrent expenditures and the 1990-92 Public Investment Program; Uiv) signing of updated performance agreements for all 14 priority State-owned enterprises; (v) implementation of the 1989 program of pay reform for the Civil Service and the 1989 program of integrating the payroll and management information system; and (vi) setting and announcement of the 1989/90 cocoa producer price and transmittal to IDA of the proposed cocoa producer price for 1990/91. (b) Release of the third tranche would be contingent upon implementation of the 1989 SOE divestiture program and agreement with IDA on the 1990 SOE divestiture program.  37 - NNEX IV 1J Ca ef WJY the MINISTRY OF FINANCE AND *umt.r and date of sht ECONOMIC PLANNING keeler solbequtoted EOOI PANN P.O. BOX M.40 ACCRA rot Ref .No. Ms rd*Wel RJWUPVSLIC O?OA__ NovemterA23N A88 SECOND STRUCrTURAL 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 Adiustment Proaram.e 1. As part of its Structural Adjustment Programme (SAP), the Go-Jernment of Ghana is implementing a wide range of economic reforms in the economy. By this letter, the Government of Ghana requests from the International Development Association a second Structural Adjustment Credit to support the next phase in the implementation of this programme. To this end, let me briefly recapitulate our experience with the reforms that we introduced in the first phase of the Structural Adjustment Programme, and then describe in some detail the objectives and further actions that we intend to implement as part of the next phase (1989-1990). Accompanying this letter is a matrix that presents these actions in timetable format. Backsround 2. In the depths of an economic crisis, the Provisional National Defence Council embarked on an Economic Recovery Programme in 1983. The major objectives were fourfold; (a) to shift price incentives in favor of production for exports and efficient import substitution; (b) to restore fiscal and monetary discipline; (c) to initiate the rehabilitation of the country's productive base and economic and social infrastructure; and (d) to encourage private investment. Among the key policies undertaken were a series of substantial devaluations of the currency followed by the introduction of an auction for foreign exchange, the dismantling of price and distribution controls for a wide range of products, the liberalization of interest rates, and the improved mobilization of tax resources and reductions in government subsidies. As part of the management of its fiscal affairs, the Government granted wage increases to reverse the erosion of civil servants' remuneration, and expanded its support to health, education, and to operations and maintenance costs. In addition, rehabilitation was initiated in key sectors such as cocoa, timber, gold mining and transport infrastructure.  -38- ANNEX IV Page 2 of 14 3. The second phase of the Economic Recovery Programme, also tevmed the Structural Adjustment Programme, covered the period 1987-88. IDA supported this programme through the first Structural Adjustment Credit, signed in April 1987 (and supplemented in October 1987) for US$130 million and a companion credit for US$15 million for institutional support. The aims of this first phase were to strengthen the recently implemented incentive framework to (a) stimulate growth, encourage savings and investment, and strengthen the balance of payments, and (b) improve resource use, particularly in the public sector, while continuing to ensure fiscal and monetary stability. Policy and institutional reforms were undertaken in the areas of trade and exchange rate management, the cocoa sector, public resource management, state-owned enterprises and public sector management. 4. We have recently reviewed available evidence on the outcome of this first phase of structural adjustment as part of the Policy Framework Paper for 1988-91 prepared in conjunction with the World Bank and IMF. The economic results achieved in 1987 and so far in 1988 have been encouraging, with the basic macro-economic objectives mostly realized. Growth of real GDP and the external payments position in 1987 actually outperformed targets. However, a number of problem areas exist, and will require our particular attention. First, the growth of real GDP remains constrained by savings that are inadequate to finance needed investment in priority sectors. Thus, domestic resource mobilization will need to improve, through increased government revenue generation, faster rehabilitation and restructuring of the state enterprise sector, and comprehensive reform of the financial sector. Second, determined efforts are needed to control inflation, which accelerated after 1985 and has shown few signs of abating. And third, special efforts will need to be made to compensate for the recent decline in the international price of cocoa, which is our major export earner and source of government revenue. bijectives of the Second Phase of Structural Adjustment Programme 5. During the next phase of adjustment, our focus will be to consolidate the gains achieved so far, and to ensure that the economy continues along a path of sustained growth. This will entail reinforcing the macroeconomic policies that have had the most positive impact, strengthening the institutional framework, and implementing a broad-based development strategy. If we are successful in achieving our objectives, we will have made some headway in alleviating the extent and depth of poverty in the country, and in creating sufficient employment to abso-b the sizeable number of new entrants into the labor market. 6. We have, therefore, set ourselves the ambitious target of maintaining the real GDP growth rate at about 5 percent per year. To achieve this target, we project that investment as a share of GDP will need to rise from 11.8 percent in 1988 to over 15 percent in 1990. But unlike in past years, we would like to see this rapid increase in investment come from the private sector rather than the public sector. We are, therefore, very conscious of the need to improve incentives for investment and increase the confidence of the private sector in the permanence of the reforms, and demonstrate the commitment of the Government to private sector development.  39 ANNEX IV Page 3 of 14 We also recognize the Importance of maintaining a stable macroeconomic environment within which private investment can flourish and serve the long term interests of the economy. To achieve this, we intend to reduce inflation to 8 percent per year by 1990, and maintain overall balance of payments surpluses of the order of US$110 million per year, which would be consistent with the repayment of arrears and a modest increase in foreign exchange reserves. 7. To achieve these targets, the program consists of continued reforms in trade and exchange rate policies, tax policy and administration, financial sector policies, and initiatives to facilitate private sector development. In addition, the Government will continue to improve its management of public expenditures, maintain the momentum of reforms of the civil service and the State-owned enterprise sector, and implement priority sectoral actions in agriculture, industry, health, and education. Policy Components Trade and Exchange Rate Policy 8. The central role of a flexible exchange rate policy and liberalization of the trade system in the first phase of structural adjustment will continue. Licensing by the Bank of Ghana of private dealers to operate institutionally separate foreign exchange bureaus began recently as a means of extending the legal foreign exchange system. Since the first opening of several bureaus in February 1988, a differential between the ut'ction exchange rate and the foreign exchange bureau rate has prevailed, much as anticipated. The Government is committed to the eventual convergence of these two rates, and several actions are being pursued to achieve this in the medium term. Licensing of additional foreign exchange bureaus is continuing, including for operation by comuercial banks. Increased foreign exchange flows to the bureaus is being encouraged by allowing them to handle exchange earnings of exporters of non-traditional goods, and this should exert a downward pressure on the bureau rate. Additional measures will expand transactions through the foreign exchange auction, to include transfers of profits and dividends by January 1989. Furthermore, by January 1990, service payments on approved private external borrowing will be eligible through the auction and by June 1990, the auction will be expanded to include all current transactions. To strengthen confidence in the operation of the auction, careful management of cash flow will continue to ensure that allocations of foreign exchange are consistent with sustainable inflows, and auction procedures will be followed in a routine and transparent manner. 9. To restore our credit worthiness in international capital markets, we have reduced our external payments arrears from US$600 million in 1983 to less than US$100 million by end-1987. We will continue to follow this course, and by the end of 1990 we expect to eliminate all our external payments arrears. On trade policy we will continue to rationalize taxes on imports, and to streamline regulations affecting export procedures. Import taxes will be adjusted in phases as detailed in para.ll, with the objective of reducing the level and variation of effective protection. Asrthe Government is actively promoting exports, particularly of non-traditional goods, it is also  -40 - ANNEX IV Page 4 of 14 reviewing and simplifying administrative procedures, such as the duty drawback scheme and retention accounts, that may be impeding growth in this area. Meanwhile, all restrictions on imports have been eliminated as of February 1988, with the exception of five items and those imports prohibited for non- trade reasons. The Government will completely eliminate the requirement for obtaining an import license before gaining access to auction funds, as this procedure has been rendered obsolete with the expansion of the auction to include all eligible goods. Tax Policies and Administration 10. We are committed to maintaining progress in financing from our own resources the expenditures needed to improve the living conditions for our people, and to supply the infrastructure and services which our productive sectors need to provide employment and generate wealth. Since cocoa.taxes, the mainstay of our public revenues, are expected to decline, we must intensify efforts to raise revenues from other sources. But we will do this by spreading the burden of taxation more fairly, and by taxing more comprehensively the incomes and spending of those who have so far borne less than their fair share. We will reduce the burden on those currently paying income taxes while strengthening the institutional and administrative framework to systematically expand the tax base. We will also take care to ensure that by improving the efficiency and consistency of tax administration and enforcement, the private sector will be encouraged to undertake the investment needed to sustain economic recovery. Our strategy for achieving these objectives involves expanding the role of taxes on consumption, since by this means we will be able to ensure that all who enjoy the benefits of our nation's resources will also make some contribution towards the public good. it also involves reducing the level and variation of protection afforded by import taxes, to encourage efficient production for export as well as the home market, and sustain only those activities which can thrive without large implicit subsidies borne either by the consumer or the Government. Since the desired tax changes will need to be consistent with targets for fiscal deficit and changing revenue prospects, their scope and pace of implementation will require careful review. This will be done in consultation with IDA as part of the annual budgetary process. 11. On the indirect tax front, we will continue to extend the coverage of the sales tax while rationalizing and lowering rates of tax to the extent possible within budget constraints. With this end in mind, we will study the feasibility of introducing a sales tax credit system or improving the existing ring system, and prepare an action programme which will improve compliance and allow for a fair and efficient extension of the tax in the future. In conjunction with these actions, we will continue to restructure import duties by bringing the top rate down by 5 percentage points annually to a maximum 15 percent. We will also phase out special import taxes, correct existing anomalies in how excise and sales taxes are applied, review and reduce the scope of exemptions and concessions from duties and sales taxes, while streamlining the duty drawback system to encourage the development of efficient import substitution and non-traditional exports. Finally, we will increase taxation on vehicles and fuel to improve eqfuity and also raise additional revenue.  - 41 - ANNEX IV Page 5 of 14 12. To encourage compliance, reduce administration costs and spread the burden of taxation more fairly, we will progressively expand the base for personal income taxation incorporating. over time, all forms of remuneration into the tax base. increase personal income tax relief and reduce marginal tax rates and the number of rate brackets. We will conduct a comprehensive study of the effects of direct taxes and Investment Code incentives to identify ways of taxing investment income while encouraging efficient investment decisions. The findings of this study will be evaluated and changes made in the Investment Code and Income Tax Law if necessary to provide a more desirable incentive structure for investment. In the meantime, we will reduce taxation of dividend income, and unify the company tax rate at 45 percent (with the exception of trading and financial entities which will continue to be taxed at 55 percent). 13. We will only be able to raise adequate revenues while nurturing private sector development if the tax system is fair, non-arbitrary, and based on publicly accepted and understood procedures. This requires that we continue to strengthen tax administration, focusing particularly on computerization of management information systems and tax processing, and developing systematic procedures for audit, assessment and collection. To facilitate these measures. We will shift to the harmonized tariff nomenclature by the end of 1988, and we will study ways of improving identification of taxpayers, and will adopt and implement a unique taxpayer number scheme by January 1990. At the same time, to increase confidence in the fairness of the system we are establishing a Special Tax Appeals Tribunal, and developing procedures to review requests for changes in protection. Private Sector Development 14. The Government is keenly aware that a cooperative partnership with the private sector must be cemented for the economy to move from rehabilitation to a period of stable and diversified grouth. We are thus committed to improving the policy and regulatory environment for the private sector, and in providing a stable and conducive climate for private investment. Reforms in the trade and exchange rate system, tax policies, and the financial sector, will all contribute towards strengthening the private sector. And more focused public expenditures on infrastructure, health, and education, will ultimately work for the benefit of private investors. In addition, however, the Government recognizes that a number of additional measures will also need to be taken, particularly to impro-e the regulatory framework for private investment. Specific measures include continuation of the programme to release private blocked capital and dividends. Dialogue with the private sector will become even more regular and structured through strengthening of formal and informal channels of communication and private sector contribution to Government task forces and committees dealing with relevant issues. The Ghana Investment Center will further streamline its procedures to facilitate private investment and strengthen its promotional and advisory functions.  - 42 - ANNEX IV Page 6 of 14 Fnancial Sector Policies 15. The Government has embarked on a broad reform programme of the country's banking system with the assistance of the World Bank through the Financial Sector Adjustment Project. The emphasis of this programme is d& policies and institutional reforms necessary to overcome constraints or imperfections in the financial system which are hindering the flow of funds to productive sectors, thus limiting investment and output responses to ongoing adjustments in trade and incentive policies. To improve the resource mobilization and allocative efficiency of the banking system, we have abolished sectoral credit ceilings and will review the existing floor for agricultural lending. Interest rates on deposits and credits have been liberalized. Improvements in the regulatory framework and stronger banking supervision by the Bank of Ghana are being coupled with restructuring of financially distressed banks to enhance the soundness of the banking system. The Bank of Ghana is also contemplating new monetary instruments to improve the management of liquidity in the financial system. Finally, means are being sought.to establish long term capital finance through a review of prospects for a securities market and of policies affecting the use of funds generated by insurance and pension schemes. Public Expenditure Manapement 16. It is the Government's intention to increase the efficiency and effectiveness of public expenditure in working towards our development objectives. A critical appraisal of the procedures for planning and implementing the recurrent and investment budgets has indicated to us gaps and weaknesses in our information, management, and control mechanisms to which our full attention is now turned. 17. To begin with, we have recently updated the macroeconomic framework for the preparation of the 1989-91 public expenditure plan. It is our intention to maintain routine updating of this framework twice a year, in April and September, beginning with the coming fiscal year, to provide a firm foundation for our economic planning activities. We have also begun preparing quarterly reports on key economic indicators, which we shall provide to IDA not later than two months after the end of each quarter. 18. To shorten the process of budget preparation. a number of organizational innovations have been instituted and will continue to be scrutinized for additional improvements. In addition, indicative sectoral allocations for recurrent expenditure are being introduced early in the budget process to streamline preparation by ministries and agencies. 19. Within the non-wage recurrent budget, progress is being made towards establishing expenditure norms upon which more effective budgets can be crafted and monitored. Physical and financial norms are being established and their use incorporated into an operational manual for preparation of recurrent budgets in the agriculture, health and education sectors. These norms will begin to be used in preparing the 1989 budget, albeit cautiously to ensure that sectors for which norms have yet to be established are not provided with inadequate funds. Refining these norms and developing  -43- ANNEX IV Page 7 of 14 guidelines for other key sectors will be the next step to be taken for inclusion in the 1990 budget. 20. Effective planning for the investment budget has in the past been hampered by inadequate planning capacity in the sector ministries. To overcome this, a Public Investment Programme (PIP) task force was created, and contributed immeasurably to our planning of the three-year, rolling investment program, starting with 1986-88. Additional steps now need to be taken to put this process on a more secure institutional footing. It is our intention to integrate the PIP task force as part of the existing Investment Project Analysis Division in the Ministry of Finance by the end of 1988. In addition, the capacity of planning units in the sector ministries is being upgraded so that they can more effectively prepare project profiles for the budget process, based on feasibility studies in accordance with well-articulated sector strategies. Out of the our experience with preparing the Public Investment Programme for the past several years, it has also become evident that a stronger project selection procedure is needed to ensure that established criteria are being fulfilled. We have, therefore, established a project selection committee within the Ministry of Finance for this purpose. Terms of reference are under preparation that will define its mandate to decide upon projects for inclusion in the PIP. To ensure the effectiveness for this process, the sector coverage of Public Investment Programme is being expanded at the same time, and beginning with the 1989 budget, non-PIP expenditure will not comprise more than 10 percent of total development expenditure. 21. An ongoing process to vhiLh we attach-much importance is improved integration of sectoral strategies into the PIP. These strategies, notably in agriculture, industry, health and education, are central to the structural adjustment program in that they articulate further actions needed to ensure supply responses to the new incentives structure, and lay the foundations for sustained human resource development. The strategies will need further development to strengthen their detailed consequences for public expenditure. For the 1988-90 PIP, it is currently foreseen that roughly 60 percent of the PIP will be allocated for the rehabilitation and development of economic infrastructure, that about 30 percent will be towards the directly productive sectors, with the social sectors accounting for the remaining 10 percent. These allocations will be examined and revised each year as necessary on the basis of experience and further information gained from implementation. The proposed PIP that results each year from these improvements will be reviewed with IDA. 22. Mechanisms for monitoring and controlling expenditures are undergoing modifications to strengthen the link between planned and actual expenditure. Within the Ministry of Finance, which is responsible for expenditure releases, cash flow data, including revenue trends and expenditure releases (PIP and recurrent), are to be monitored more closely through a reporting format that has been discussed with IDA staff. These data will be made available to IDA no later than two months after the end of each quarter. The Ministry of Finance has also begun preparing twice-yearly reviews of actual non-wage recurrent expenditures in health, education and agriculture, and the programme of public investment. Beginning in 1990, these recurrent  - 44 - ANNEX IV Page 8 of 14 expenditure reviews will be extended to other key sectors. Since this monitoring will depend on information provided by the Accountant General's office. which is responsible for actual expenditure, a plan is being established to strengthen its audit and accounting capacity for both recurrent and capital expenditure. State-Owned Enterprise Reform 23. The Government initiated a comprehensive reform of the state-owned enterprise sector under the first phase of the Structural Adjustment Program. The initial pace of the program was dictated by the difficulty of issues arising out of the detailed implementation of the program. Despite these start-up difficulties, there has now been an acceleration of programme implementation and expansion of its scope. Our resolve remains to continue pursuing with vigor the unchanged objectives of improving the efficiency and productivity of the sector and reducing its financial and managerial burden on Government. 24. Towards accomplishing our objectives, a number of actions are being pursued with regard to priority SOEs. The scope for further improvements in policies to increase autonomy in SOE staffing, redeployment, and wage decisions, would be investigated by January 1989, and reforms will be introduced where problems are identified. To improve financial discipline of SOE's and to wean them from past dependence on subventions and loans from the central budget, established guidelines that define the criteria and procedures for Government financial transfers will be applied in the 1989 and subsequent budgets. In addition, a study of cross debts and arrears for 18 SOEs has been completed. On the basis of this-study, cross-debts and arrears of the Volta River Authority, the Ghana Water and Sewerage Corporation, and the Electricity Corporation of Ghana will be cleared by the end of 1988. The cross debts and arrears of the remaining SOE's and the government will be settled by the end of 1989. The State Enterprise Commission has been restructured to effectively monitor ane evaluate the performance of SOEs and to assist SOEs in the restructuring of their finances and in the preparation of their corporate plans. By the end of 1988, corporate plans and performance agreements for all 14 priority SOE's would have been finalized, for implementation to commence in 1989. Subsequently, all priority SOE's. would update their corporate plans, and updated performance agreements would be signed by the Government prior to the beginning of each fiscal year. 25. To reduce the scale of government participation in non-priority activities, we have identified and advertised 32 SOEs for divestiture. Ten of these are in their final stage of liquidation. The Government's interest in another six, all of them joint ventures, will be sold by the end of 1988. At the same time, the Government is preparing a divestiture strategy to carry the programme through for the next several years. For example, the Government is committed to divesting ten additional state-owned enterprises in 1989, including the State Fishing Corporation. In selecting SOEs for divestiture, we will give priority to those which have attracted investor interest, as well as those which impose a significant burden on the budgetary resources of the Government. To maintain the momentum of the program, we will explore every divestiture option available to us, including sale, leasing, management  - 45- ANNEX IV Page 9 of 14 contracts, liquidation, and public and employee share issues. A similar plan will be prepared for 1990 by the end of 1989 and its contents agreed with IDA before implementation. A particularly difficult issue remains, however, over how to handle the unfunded liabilities of SOE's, often arising out of contractual agreements with labor groups on pension and termination benefits. Financing of these will in most cases be necessary as a precondition for divestiture, and we are developing a detailed strategy for this that will include a commitment of budgetary resources. The extent of this commitment will need to be established with care since it entails sacrifices in other important programmes that otherwise would be financed from the constrained resources of the budget. While we hope to identify and mobilize non- budgetary resources for the financing plan, including an amount available from IDA under this credit, it must be recognized that the pace of divestiture will in the end be determined by the availability of resources and the expressed interest of investors. In light of this, the Government has adopted a flexible approach to the divestiture program not only in terms of modality, but also of degree of Government ownership to be retained (if any), and the degree of foreign investment. A Divestiture Implementation Committee, reporting directly to the Committee of Secretaries has been established as a focal point for managing and implementing the program with representatives from relevant government agencies, including sector ministries, the Trades Union Congress, and Committees for the Defence of the Revolution. The broad guidelines by which the programme will operate are as follows; i) where an SOE is not viable and all reasonable options for selling or leasing it have been exhausted, the SOE will be identified for liquidation: ii) the Government will consider foreign investment where there is a need for external equity, management and/or technology; and iii) a general moratorium will be in effect on the creation of new SOEs for the duration of the divestiture programme except in special emergency or strategic cases, subject to agreement with IDA and in accordance with prevailing law. Civil Service Refonm 26. The Government will continue to pursue efforts to bring productivity of the public service up to acceptable levels and focus it on the nation's priority tasks. This we will accomplish through a combination of measures involving a frontal assault on waste and inefficiencies (notably overstaffing), the establishment of competitive compensation rates, especially for higher-level staff, and an active programme to improve the management of the Civil Service itself. 27. Efforts to reduce overstaffing have begun to take hold. About 12,100 surplus employees were removed from the public payroll in 1987. Another 6,800 were retrenched between January and September 1988. The Government's redeployment programme is assisting redeployees in their efforts to find productive employment in the private sector. Based on a systematic program of payroll audits, functional reviews and job inspections meant to ensure that staff reductions do not affect the delivery of public services, the Government is committed to a targeted programme of redeploying a total of 12,000 civil servants in each of 1988 and 1989. The Office of the Head of the Civil Service is gradually building a capability to keep staffing levels of  - 46 - ANNEX IV Page 10 of 14 the Civil Service under continuous review, and to extend its investigations into other means of achieving efficiency gains. 28. To attract and retain the higher level skills indispensable to carry out its difficult task of economic reconstruction, the Government has also begun to reverse a long decline in the competitiveness of its pay policy, and to establish a pay structure based on objective job evaluation criteria. Starting with an exceptionally compressed salary structure with a 2.3:1 ratio of highest over lowest pay in 1985, the Government introduced a first adjustment bringing the ratio to 5.7:1 in 1986, and intends to gradually raise it in the medium-term subject to budgetary constraints. A system relating pay to performance will be assessed for its viability in the Ghanaian context, and if found suitable, will be introduced by 1990. 29. While vigorously implementing the measures outlined above, the Government also takes a longer view of Civil Service management and is rapidly rebuilding capacities in this critical area. The Office of the Head of the Civil Service's three divisions of Management Services, Personnel Management, and Training and Manpower Planning and Development, are being staffed and trained, and are developing and will carry out medium-term action programmes in their respective areas. An integrated payroll and personnel information management system will be put in place over the program period. Finally, special emphasis will be put on strengthening Civil Service training institutions and on making training more cost-effective and more relevant to job performance. Sectoral Actions 30. Greater attention is being given to strengthening the links between the macroeconomic and sectoral programmes in this next phase of structural adjustment. For the key productive sectors of agriculture and industry, effective programmes will be pivotal in achieving overall growth targets as well as in creating new jobs. The two social sectors, health and education, form another locus of our strategy, where we are mounting significant reforms to bring urgent improvements to the wellbeing of our people, to allow them to contribute more productively and meaningfully to the development of our country. Our sectoral strategies will need to undergo continued elaboration and refinement, but it is our intention to use them to improve the use of public expenditures in a manner consistent with the macroeconomic strategy described previously. Agriculture 31. Our objectives in the agricultural sector are several, reflecting its size and diversity, and its importance in providing productive employment for over half the labor force. The goals are to improve food security through increased agricultural productivity and incomes, to diversify and expand agricultural exports and to improve management of natural resources. Among the principal sectoral policy instruments will be prices, including the cocoa producer price, which is to be agreed annually with IDA, and fertilizer prices, which will be completely liberalized by 1990. Our fertilizer input policy also includes ensuring establishment of adequate pre-planting stocks  - 47 - ANNEX IV Page 11 of 14 for 1989 (40,000 tons) and 1990, concurrent with phased privatization of fertilizer marketing from initial imports to final distribution. The seed industry will also undergo reorganization. Privatisation will also play a role in increasing the efficiency of resource use in the cocoa sector, where the preparation for divestiture of COCOBOD's remaining 40 plantations will be pursued vigorously and feasibility studies finalized on rehabilitation of its cocoa processing factories. As far as cocoa producer incentives are concerned, our objective will be to increase the ratio of the cocoa producer price to the FOB export price for cocoa from the present 50 percent to an indicative target of 55 percent. We will consult with IDA on the producer prices to be set for the 1990191 and 1991/92 crop years within this framework. Forestry policy is being reformed to improve management and price incentives so as to discourage waste and to control better the volume of cutting. In addition to forestry policy, the agricultural sector will contribute to the comprehensive Environmental Action Plan that is under preparation through proposals for land management, water resource development and coastal zone management. Finally, the Government is preparing a program to improve credit services to agricultural activities through strengthening rural banks and credit unions, and other financial intermediaries. 32. Initiatives are underway to improve translation of these sectoral objectives and policies into a well-focussed and balanced public expenditure programme. Improving food crop yields will depend on adequate budgetary allocations being provided for basic services, especially extension and research and rehabilitation of rural infrastructure. A major orientation of the extension system will be towards replication of existing technologies that have been proven effective by small-scale farmers. As a first step, priorities for a short-term rehabilitation program affecting extension, research. and animal health services have been costly, and in conjunction with expenditure norms that are being prepared, will serve to guide establishment of the recurrent budget beginning in 1989. Progress has also been considerable in establishing strategies and expenditure priorities in favor of post-harvest losses, roots and tuber research, rural infrastructure, and small-scale irrigation projects for rice production, and these are already being reflected in public expenditure. To incorporate these elements in a comprehensive medium term agricultural development programme, the Ministry of Agriculture is engaged in detailed subsector reviews for the development of seed, tree crops, livestock, fisheries, irrigation, research, extension and input distribution. This work will be integrated into a rolling 3-5 year programme of expenditure priorities. Industry 33. Growth of the industrial sector is expected to contribute to our economic development by transforming local resources, adding to export earnings, and generating new jobs. One part of our strategy is to continue improving incentives for efficient and internationally competitive production, both in the public and private sector, through adjustment in trade taxation and a flexible exchange rate. Rother than investing resources directly in manufacturing, the Government will instead concentrate its resources in the provision of public goods useful to the industrial sector. Generation of information, improvement of suppart services, and provision of infrastructure  -48 - ANNEX IV Page 12 of 14 such as ports, electricity, water, roads and telecommunications, are becoming the main vehicles by which the Government will promote industrial development. The special focus in the provision of these services will be for export- oriented industries and efficient import-substitution industries based on domestlec raw materials. Allocation of Government resources for investment in manufacturing SOEs, whether through equity participation or net lending, be eliminated altogether within five years. Health 34. To improve the quality, coverage and management of the health services, the Ministry of Health (MOH) is undertaking a far reaching programme to reorganize and decentralize its operations, to strengthen management and to install management systems and incentives. The agenda was given additional impetus at an important public symposium in June, 1988, which reaffirmed our commitment to pursue pragmatic solutions to broad-based delivery of essential health services. As part of the programme, MOH will restrict its drug purchases to items on an essential list, speed up procurement, and improve inventory management. Health institutions will retain 1002 of their drug sales proceeds to finance their drug purchases which in turn will increasingly finance MOH drug replenishment. Service targets attainable through 1990 will be identified. It is expected that MOH will retain its share of the recurrent budget, and within this will spend higher proportions on primary health care, transport and maintenance, via savings to be achieved through redeployment of excess non-technical staff, better drug supply management and discontinuing institutional feeding. Within the health investment programme the focus will be on completing ongoing projects, especially for primary health care with a particular emphasis on speeding up use of already committed foreign aid. Education 35. As an integral part of -.ts economic strategy, the Government is implementing a wide-ranging reform of the educational system. The overall objectives are to improve pedagogic effectiveness and relevance; to make education financing more efficient and equitable; and to ensure that the reformed system can be sustained within budget constraints, assuming a modest growth in the share of education in public expenditures. Other elements of the reform include reduction in the length of pre-university schooling from 17 to 12 years; an acceleration in the growth of primary school intakes and enrollments; and a restructuring and rationalisation of tertiary education. Implementation of this reform, expected to take six years, is receiving support from the World Bank under the first Education Sector Adjustment Credit. The reform programme will be further strengthened by focusing on overall public expenditure planning and implementation. Development and application of recurrent expenditure norms, and improved cost recovery and savings, will result in a better allocation of the operational budget between wage and non-wage expenditure and an increased allocation to basic education. Investment will focus on rehabilitation of facilities. With this programme, the education system should effectively contribute to a reduction in illiteracy, to retraining of redeployed workers, and to the development of appropriate skills in new entrants to the job market, such that our work force becomes more productive and adaptable.  -49 - ANNEX IV Page 13 of 14 Social AsRects of the Structural AdJustment ProEramme 36. Ultimately, the justification for the structural adjustment programme will need to be based on its contribution to an improved standard of living for our people. Our efforts so far have been rewarded with increasing per capita income, greater economic opportunities, and improved access to basic social services such as health and education. These advances are not negligible in contrast to the prolonged contraction of income, scarcity of consumer goods, and breakdown of infrastructure and social services that preceded our Economic Recovery Programme. 37. While continuing to pursue macroeconomic policies which we judge will make the largest contribution of income growth and the long-run alleviation of poverty, we remain keenly aware of the immediate consequences of the daily confrontation with poverty still facing many of our people. Nutritional deficiencies persist, and the quality and level of services in health, education, clean water and sanitation remain inadequate. Moreover, some groups are facing deterioration in living standards during a transitional period of structural adjustment. As we proceed with our macroeconomic programme, it is our conviction that we must balance a structural approach to employment creation and poverty alleviation with some measure of relief for those amongst us who carry the largest burden of poverty. 38. To establish this balanced sipproach, we are re-establishing effective public expenditure programs in health and education as previously described, and are with IDA preparing a number of initiatives which will benefit the poorer segments of our society. To improve the provision of credit in rural areas, we are completing initial steps to support a rural finance project that will be a key link in improving productivity and income opportunities for our rural population. A separate project under review wil3 provide institutional and financial support for the development of small and medium enterprises in agriculture, industry and the service sectors; these will have particular potential in generating new jobs. 39. We are also implementing a special, short-term Programme of Action to Mitigate the Social Costs of Adjustment, for which we have already organized donor support. This action programme has the dual objective of cushioning the impact on those vulnerable groups who have been adversely affected by the adjustment programme as well as developing quick, targetted interventions for those groups in poverty and economic hardship who will not benefit from the adjustment programme in the short run. We are relying in part on community initiatives to identify and implement projects, and have prepared projects to generate employment, meet basic needs (water and sanitation, health, nutrition and shelter) of vulnerable groups, and support non-formal education and primary school enrollments. The Priority Public Works Project, for instance, is intended to support a programme of urban infrastructure development that will generate 10,000 productive jobs over a two-year period. Special counselling and training services are being provided to assist redeployed workers to re-enter the productive work force. Finally, we are also undertaking a living standards survey that will improve our ability to identify and target vulnerable groups, and to monitor the impact of  - 50 - ANNEX IV Page 14 of 14 the adjustment programme on income levels and distribution, employment, health and nutrition. Monitoring of the Structural Adiustment Progra e 40. The Government is taking steps to ensure effective monitoring of the Structural Adjustment Programme (SAP). The Structural Adjustment Programme Team, headed by the Chairman of the Committee of Secretaries, will continue as the highest body to coordinate economic policy decisions. Other institutional responsibilities are being reorganized in light of the anticipated establishment of a National Development Planning Commission. The Structural Adjustment Programme Secretariat, which was created to monitor implementation of policies and programmes under the first Structural Adjustment Credit, is also to be brought into the Ministry of Finance, and will become the main agency to monitor SAP implementation and act as the secretariat to the SAP Team. 41. Monitoring and implementation systems for crucial parts of the structural adjustment programme are being strengthened. Information on aid flows is being improved in the International Economic Relations Department of the Ministry of Finance, particularly of counterpart funds and World Bank disbursements. Terms of reference for a debt management unit and a monitoring system within the Ministry of Finance have been prepared and are ready for implementation. Also being instituted are systems to monitor and report periodically of actual public expenditure and key economic indicators, as described above in para. 22. To improve project selection for the Public Investment Programme, the Investment Project Analysis Division in the HOF is being strengthened. The National Revenue Secretariat is now producing up-to- date, monthly tax revenue reports and analysis. Identification and monitoring of the effects of structural adjustment on households will improve with the first results of the Ghana Living Standards Study which was recently initiated. The Government of Ghana will provide the Association with such information the Association requests in connection with the progress made in implementing the structural adjustment programme and achieving its objectives. Conclusion 42. In view of the initiative taken by Ghana in the formulation and implementation of the next phase of the structural adjustment programme, the Government requests your favorable consideration for the extension of a second Structural Adjustment Credit for not less than US$120 million. The Government would also appreciate IDA's assistance in organizing cofinancing from other multilateral and bilateral sources to support the programme. r. Kwesi Bothwey\ nanc~~~~~~~e - -_ and EcVi. a.. an. n November 23, 1988  ACTIONS TO BE US PORW BY THE #E=0 STM1ClRA ADABIT aRDIT Nto: Underlined *ction in the colum mrked a/ end b/ arcondit;oneof *econd and third troncho release rePetively. ACTIONS TO BE TAB (1988-1990) oai)8wE d KEY ISS ACYZIbS TAKEN PRIM IIB iEE BeORE TO S04ER8 1908 JA#ARY 109 JANARY IM9 */ END OF PROOAW PEIII b/ TRADE AND EOUNOE RATS. RE49IW A. Pursue a flexible Significant differential Auction mrket for All bonofido rcquest for Expand auction to Include All current transaction exchange rate policy and betwen auction exchange foreign exchange tranafer of profit. nd service paymnt. on to be included in further lib elize the rate aNd parallel rate. functioning _oothly. dividends to be mde approved private external foreign exchange auction trade and exchange All goode now evailable eligible through the borrowin. Introduce the by June* 190. sy tem, through the auction, auction. Introdbce third stage of reform in F1 rat stage of trade tax the second etage of the trado tax and rationalization complete. refora in the trade tax tariffs structure In the Foreign exchange burc u *nd tariff structure in 1990 budget. established, the 1989 budget. Strem line duty drawback and euspension echem. Abolisth import licensing. TAX POLICY AM AflIINISTRTION OF~ A. Indirect txtion - Variation In effective 1988 budget includc Introduce the seond Undertake a joint review Prepre and review with MA rationslitr and loser protection remaine firet stage reforms In stage of reform In thb with IDA of protection propo le for further effective protection. significant; substantial the structure of sale structure of salee taxee, and unfaIr trade change in special import Broaden indroet tax potential for tax"e and itport Import duties, and practices. Introduce the tsxse on boeor other bae. Establish sale. increaeing indirect tax dutie. Soe tariff snd special import tau" In third stage of reform alcoholic beverages na major revenue raising col lction. sales tax exemptions and the 190 budget. in the structure of "eal textiles. and Instrument. concesions *liminated. Rationaxie valuation taxe* and Import duttoi ctgarettes. baeis for indirect taxe In the 190O budget. and complet unification Eliminate mt Special of tax rates for all Import taxe and teport. and doeetic teporary adjutment goods. Increase tariffs. Further taxation of care and increase taxation of petrol. Further reduce care and petrol, tax concessions. incom taxation. snd further simplification Rag of non-wage surcr Into tax bse" be, rate, and bracket x rfom tho structure of end loering of tax rsunerationo (including untaxed al los- Structure. direct taxes to enhance structure. inorporatd Into the ances. in-kind benefit., vertical and horizontal definition of taxable and r l capital gaint), euity, increase inome. Marginal tax adjueting exemptions, compiance, and brciketa brodened, rate and bracket rationalize incentives Basic tax xmptione structure, and in affecting work. eavingcs incrased, reducing dividend Ine and inveetmnt. taxation.  Pae 2 ACTIOt TO E8 SIWPORT8 BY THE SeOO STRU tAL AODASTMEW CrT Note: Underlined actiona in the column marked ----- - --------------------------------------- - ------------------ a/ and b/ are conditions of second and third trnahe reln"e respectively. ACTIOS TO BE TAKNB (1988-19Ol) O9JE1IVS KWV ISSUES ACTIOI TWD4N PRIOR BWOS BEFORE BFR TO SEPTE 1981 JAMRY 199 JANY 1990 a/ DO OF PROOAN PERICO b/ Coepany tax Zapleent Initial *tp Agree with IDA an Prepare next phase of ta to unify eorporate tax further *teps to unify reforms f*r lapleantatian Reduc gawel and rate. co rote ta rPate and In 1191-42. caree range of lIplenmnt in 1990 budet. eoapny too rate. Initiate atudy of Incorporate Inveeteent taxation with recomendtionr of etudy a focu on dIvId nd, of taxation of Investmnt Interest and capital In 1990 budget, Including gea. taxation, "eVison of tnvet_ant unifIetion of company code If nec eary. to tax rate, trat_nt of prwide IN ditterted capta l allowance", Incentives. lntere5t deduction., and incentive for non- traditional exports andI thio provided under the Inveatmant Code. Ns .I Agre n Ith MA on tax aee *ith IDA on tax proposalo in the 1989 p In the 19W9 budget b t C. Strengthen tax Weal. tax administration Crention of Reactivat tea court and Introduce unique Continue with impleanettion ndminietration. and tax policy analysie National Revenue appale _echabtim. taxpayer nuhber systaa. of thu atIon plan capability. Applicatoen Secretariat (N!S); Adept hermonized tariff Agree with IMA on a plan recewandd in the of too laws In mett es restrucuring of nomenclature. Initiate of action for ltpleamnt- Sale Tox Study. arbitrary. Internal Rvenue (IM) fes ibIlity study of ng racmandations of *nd Cueto_ (CETS) replcifng sales tax ring Sale. Tax Study by ServIcea. systes with credit August 11989. Start system. Prepare work and implementation of *ction training progra. for 1989 plan by Octer 1989 for acceptable to IMA. introduction In the 1990 budget. Prepar* annua work and training progre_m acceptable to '0  - 53 - AU V Pa-ge 3 o f 9 soclI ! :tt s X * S 1 I | ;*SXi1|i