Ghana - Second Financial Sector Adjustment Program Project

Documut of The World Bank FOR OMCIAL USE ORY Repurt No. P-5659-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 74.0 MILLION TO THE REPUBLIC OF GHANA FOR A SECOND FINANCIAL SECTOR ADJUSTMENT PROGRAM NOVEMBER 15, 1991 This document has a restricted distribution and may be used by recipients only ia the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CUR (as of November 11, 1991) Currency Unit = Cedi US$1 = C383 (Auction Rate) 01 = US$0.0026 ADB = Agricultural Development Bank AEF = Africa Enterprise Fund ART = Aggregate Recovery Target BCCG = Bank of Credit and Commerce Ghana BHC = Bank for Housing and Construction BOG = Bank of Ghana CCH = Credit Clearing House CDH = Consolidated Discount House, Ltd. COOP = Cooperative Bank CRP = Corporate Restructuring Program ERP = Economic Recovery Program ESAF = Enhanced Structural Adjustment Facility GBA = Ghanaian Bankers Association GCB = Ghana Commercial Bank MPEP = Ministry of Finance and Economic Planning NIB = National Investment Bank NIC = National Insurance Commission NBFI = Non-Bank Financial Institutions NPART = Non-Performing Assets Recovery Trust NSCB = National Savings and Credit Bank ODA = Overseas Development Administration PFS = Professional Financial Services PFP = Policy Framework Paper PVE = Potentially Viable Enterprises SCB = Standard Chartered Bank of Ghana SOE = State-Owned Enterprises SSB = Social Security Bank SSNIT = Social Security and National Investment Trust FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY REPUBLI OF GRANA ODFIANCIL S O AD. nT~ PR Tabm of C~nets CEDM ANDi PROGRAM SUMMAR . ... . ...,. . ,.. .. . .. . .. .... .. ..... .1- ii PART I- COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY ... 1 A. The Economy ........................................ . 1 B. The Goverment's Policy Agnda andssues ..................... 3 C. Bank Group Assistance Strategy ............................... 3 D. Aid Coordinati ........................................ 6 E. Bank Group Activities ..................................... 6 F. Reltions with the M .................................... 7 0. Summary Ass ge e ..............................,..... . 8 PART-T FNANCIALR ................................ 8 A. BadR ........................................... 8 B. Progress Under the Financial Setor Adjustment Credit, 1988-1991 ........ 10 PART I - THE SECOND FINANCIAL SECTOR ADIUSTMENT PROGRAM. 2 ~ ................................................14 A. Oriin, Ob tes and Prog Out e ......................... 14 B. Macroeo ni Program .................................. 15 C. Owner p of B ks ...................................... 16 D. Iterm diation Costs ...................................... 17 E. Bank of n ......................................... 18 F. Bank Restuc g ....................................... 19 0. Recovery of Non-Per g Assets ............................ 20 H. Non-Bank Financial Institutions and the Capita M~ ................ 21 I. Informal Finan~ial M s .................................. 22 J. Train g of I Profe ............................. 23 K. PINSAC Imn Secr ............................. 23 Ihis report Is based on the f~dings of an appraisal misson which visited Ghana in Jun/uly 1991. The mission, led by Mr. K. K. Framji (Task Manager), comprised Messrs./Mmes. Connolly (AF4IE), Dinh, Paulson (AFTEP), Karaoglan (CCMDR), Leechor (AF4CO) and Malyon (Consultant). Mr. Ajay Chbber (AF4DR) participated in the mission. Secretarial and administrative support was provided by Mrs. Leila S. Crez. Me. Mary Oakes Smith (AF4IE) and Mr. Edwin Lim (AF4DR) are the managing Division Chief and Department Director. Thi documnt has a restrictad distribution and may bo used by recipients only In the performncea of their official duties. its contents may not otheruse be discosed without Mord sank authortation. RREBLI OF GRANAA SECDOND FINANCIAL SETO ADIUSTNM-RGA Table of Contents (cont'd) EsNo PARTIV-THEPROPOSEDCREDT .....................................24 A. CrediHistory .............................................. 24 B. ExternalFinancingRequirements ................................. 24 C. Description .................................................25 D. SectorReformComponent .......................................25 B. TechnicalAssistanceComponent ....................................26 F. Credit Administration, Procurement and Disbursement ...................... 26 0. Monitorable Actions and Tranche Release Conditions ....................... 29 H. Risks ....................................................30 PART V-R OMMEN-DATION ........................................31 L Key Economic Indicators II. Balance of Payments Iii Financing Needs and Availabilities IV. Bank Group Operations V. Financial Information on the Banking Sector VI. Statement of Financial Development Policy VI. Technical Assistance Program VI. Supplementary Data Sheet MAP: IBRD 18112R1 REUBLIC OF GHANA SECON FINNCIA SECTO ADJUMN CREDI CREDI AND PROGRAMSUMR 2anir C: Republic of Ghana Amount: SDR 74.0 million (US$100 million equivalent) 'IaM Standard IDA with 40 years maturity DesIt: The reform program supported by the first Financial Sector Adjustment Credit (INSAC I) in 1988 was designed to address urgent structural and Institutional problems facing the financial sector. The Government intends now to consolidate its achievements as well as move towards the second phase of sector adjustment with an enhanced program of policy and 4is"onal reforms aimed generally at further deepening, diversifying and strengthening the finanial sector. The second financial sector adjustment program would: (a) complete the program initiated under FINSAC I to restructure the formerly distressed banks and further improve their financial and operational performance and pursue the recovery of non- performing assets taken over by the Non-Performing Assets Recovery Trust (NPART); (b) further strengthen competition and efficiency within the banking sector through divestiture of public ownership in all banks and rationalization of taxation on bank profits; (c) improve the capacity and efficiency of the Bank of Ghana (BOG) through a reorganization of its structure, strengthening of its procedures and capabilities and improving its financial condition; and (d) prepare for the further development of the financial sector by developing an appropriate institutional framework for non-bank financial lastitutions, study the informal markets and upgrade the professional skills of bankers and accountants. The Government's Letter of Financial Development Policy and the accompanying matrix outline the actions designed to achieve these aims. eIts The policy and institutional reforms under the second phase of financial sector adjustment in Ghana are expected to result in a broader-based, deeper and more diversified financial sector, with a stronger, more efficient and responsive banking system at its core. This in turn will improve the flow of funds to the productive sectors of the economy, thus facilitating the supply response to the ongoing structural adjustment efforts. The divestiture of government shareholdings in %anks will lead to increased competition and efficiency in the banking system and, together with other initiatives help lower intermediation costs. Strengthening the financial, analytical and operational capacity of the BOG will enhanc its effectiveness in policymaking and banking supervision. Building on the restructuring initiated under FINSAC I, the bank restructuring program would help improve the efficiency, transparency, as well as help sustain the viability of the formerly distressed banks. Improved performance by the banks would make them more attractive candidates for local or international private sector participation. The recovery of non-performing assets by NPART would help the Government mitigate the cost of the financial restructuring of banks. The establishment of an appropriate legal, regulatory and policy framework to supervise and foster the development of non-bank financial institutions will increase their contribution to Ghana's capital markets. The reform program also provides for the upgrading of the banking, accounting and insurance professions. E: The main risk entailed by FINSAC H, just as with its predecessor program FINSAC I, would be the slow pace, relative to the agreed timetable, in the implementation of a reform program of considerable complexity, novelty and comprehensiveness. Drawing lessons from the past, the Government and IDA, therefore, will endeavor to minimize the risk by strengthening implementation capacity through the establishment of the FINSAC Implementation Secretariat. The latter will be appropriately staffed and equipped to enable it to discharge its mandate to generall,l guide, oversee, coordinate and monitor all activities pertaining to the financial sector adjustment program. By helping the Ghanaian authorities internalize the various skills brought to bear in implementing the reform program, the Secretariat is also expected to help enhance the long-term sustainability of the program. Another major risk would arise should the Governmant become unable in the years ahead to successfully implement the macroeconomic framework as agreed with IDA, in particular the measures for controlling inflation. Such a risk would be mitigated through regular monitoring by IDA of the macroeconomic program. Possible difficulties in attracting reputable international banks as shareholders of the government- owned banks to be privatized will be mitigated by employing experienced financial consultants to develop a strategy and assist the government in the divestiture of government shareholding. : RNot applicable D u ne : The sector reform component of the Credit will be disbursed in three tranches: US$25 million upon effectiveness, and US$29 million and US$28 million following performance reviews to be held around October 1992 and April 1993, respectively. The technical assistance component which would not be tranched is expected to be fully disbursed by the first quarter 1995. INTERNATIOA DEVLMENT ASSOITON REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF GHANA FOR A SECON FINANCIAL SECTO ADJUSTNMRGA 1. I submit for your approval the following report and recommendation on a proposed development credit to the Republic of Ghana for SDR 74.0 million (US$100.0 million equivalent) on standard IDA terms with 40 years maturity to support the Governments Second Financial Sector Adjustment Program. 2. The Country Economic Memorandum, entitled "Ghana: Progress on Adjustment" (Report No. 9475-GH), was issued to the Executive Directors in April 1991. Key economic indicators appear in Annex 1. PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. T Eomy 3. Ghana once enjoyed a relatively high standard of living compared with other West African countries, but poor economic management during the 1970s and the early 1980s led to protracted economic decline. Expansionary fiscal and monetary policies, high inflation, and an overvalued nominal exchange rate, caused a substantial real appreciation of the currency, leading to external payments imbalances. Policymakers imposed a range of administrative controls on prices, imports, foreign exchange use and the distribution of goods and services. This policy mix contributed to a downward economic spiral from 1970 to 1982. 4. In 1983 the Government adopted an Economic Recovery Program (ERP) and has since devalued the currency, dismantled most price and distribution controls, eliminated many subsidies, broadened the tax base, improved tax collection, and provided more adequately for maintenance and capital expenditure. Under the ERP, economic growth has averaged about 5 percent a year. The current emphasis on ensuring macroeconomic stability to continue economic progress includes development of the foreign exchange market to maintain a free and flexible exchange rate, fiscal policies designed to increase public savings, and monetary policies to reduce inflation. This recovery effort has been supported by five adjustment credits to Ghana: an Industrial Sector Adjustment Credit, Structural Adjustment Credits I and II, a Financial Sector Adjustment Credit, and a Credit to support a Program to Promote Private Investment and Sustained Development. 5. Inflation remains a concern, notwithstanding significant progress in reducing the rate of inflation during 1991. Having fallen from 40 percent in 1987, to 31 percent in 1988, and 25 percent in 1989, inflation rose to 37 percent in 1990, partiallj because of higher oil prices and a shortfall in agricultural output, as well as continuing high liquidity in the economy. To combat this rise, in late 1990 and early 1991 the Government undertook measures to restrict monetary growth, including the sale of Bank of Ghana (BOG) bills to mop up excess liquidity in the economy, and a sharp increase in the discount rate. Results to -2- date have been impressive, with the end of period annual Inflation rate down from 20 percent in May 1991 to 13 percent in September 1991. One of the fundamental macroeconomic obiectives of Ghana's medium-ten 2 program, supported by both the IMF and the Bank in the context of the Policy Framework Paper (PFP), is to sharply lower inflation on an annual average basis from 37 percent In 1990 to 20 percent in 1991, 8 percent in 1992 and 5 percent in 1993. With the sharp decline in Inflation in recent months, it appears that the target for 1991 will be achieved. 6. Continued efforts to lower inflation rates will be essential to sustain positive real interest rates. As part of the effort to curb inflation, the BOG rediscount late was increased from 26 percent in October 1990 to 35 percent in January 1991. Nomo : money market Interest rates, led by the active marketing of BOG bills available to the banks and the non-bank public, rose by 8-9 percentage points between September 1990 and August 1991 to a range of 31-38 percent. As a result of these measures, commercial bank interest rates also rose markedly. During the period August to November 1991, the BOG lowered the discount rate in stages to 25 percent, inducing a downward adjustment in money market interest rates to a range of 23-31 percent. Deposit rates now range from 13-29 percent and lending rates from 23-35 percent. With the decline in the rate of inflation, most bank interest rates are now positive in real terms. 7. The overall fiscal deficit including external assistance has been above 3 percent of GDP since 1987. It rose to 4.4 percent in 1990, with a shortfall in revenues from direct and indirect taxes and some unanticipated outlays, although expenditures declined as a share of GDP. In 1991 the overall fiscal deficit is expected to drop to 3.1 percent of GDP. Throughout the period of the ERP the Government has shifted to long-term concessional foreign borrowing as the main source of deficit financing, to reduce the burden on the domestic banking system. There has been a net repayment from the Government to the domestic banking system every year since 1987, and the Government became a net creditor to the system in 1989. 8. The current account deficit widened from about 5 percent of GDP in 1987 to about 8 percent in 1990, reflecting a significant deterioration in the terms of trade. Nevertheless, because net aid disbursements rose and non-concessional debt amortization obligations declined, a sizable overall balance of payments surplus has been maintained between 1987 and 1990. The current account deficit is projected to decline from 7 percent of GDP in 1991 to about 5 percent in 1995. Most of this improvement needs to come from increases in the volume of exports, changes in export composition towards higher value-added products, continued prudent aggregate demand management, and maintenance of a competitive exchange rate. After peaking in 1988 at 67 percent of exports of goods and services, the debt service ratio, including IMF and arrears payments, dropped to about 39 percent in 1990. The debt service burden is projected to decline further, from about 30 percent of exports of goods and services in 1991 to 21 percent by 1993. Annexes II and provide balance of payments and financing needs and availabilities data. -3- B. ] ovnmns'A eGAglasan s 9. Ghana has made significant progress in recent years in restructuring the economy and restoring macroeconomic balance. Early in 1991 the Goverment reaffirmed its commitment to maintain the course of economic adjustment, by introducing a set of initiatives designed to create a more enabling environment for productive investment, especially from the private sector. Within a macroeconomic framework consistent with stability, the Government has introduced a series of tax reforms to broaden the tax base and improve general incentives. Efforts to make the regulatory framework and .he financial system more consistent with a liberalized economy are underway, with the assistance of a newly created Private Sector Advisory Group. Public sector management is being upgraded along several dimensions, including reform of stateowned enterprises, further decompression of civil service pay, and continuing improvements in budgetary planning and control. These adjustment measures are being implemented along with a longer term agenda for human resource development, environmental protection and poverty alleviation. On the political front, the Government has taken major steps toward democratization. A Consultative Assembly has been set up to draft a new constitution. A national referendum on the constitution is scheduled to be held in February 1992, to be followed by parliamentary and presidential elections in the last quarter of the year. 10. The Government recently embarked on the development of a new strategy and program to achieve and sustain more dynamic growth over the next decade. The rationale is to shift focus from economic recovery to policies and investments needed to stimulate a more dynamic supply response, especially from the private sector. A high-level steering committee within the Government has been formed to map out a strategy to achieve this objective, building on the achievements of sustained adjustment and improved macro-economic stability over the last 8 years. A fairly major increase in domestic private savings and investment is required to support this strategy over the next years, supplemented by direct foreign investment and a return of flight capital. Public investment for social and physical infrastructure is also expected to grow under this strategy, but in a way that does not generate inflation, nor crowd out the private sector. There are two Important concerns that are being kept in mind in the build-up towards faster growth - the potential risks of macro-instability and the likelihood of increasing inequities in the system. A broad range of already completed or ongoing works will be used to guide this strategy, including the Medium Term Agricultural Development Strategy, the work of the National Population and Human Resource Commission, a recent study of the manufacturing sector *Towards a Dynamic Investment Response0, and a new National Environmental Action Plan. The Government has requested Bank assistance in evaluating policy and investment options needed to achieve sustained growth. C. Bak roup Asistnce Strato 11. The main objective of the Bank's assistance strategy is to help the Government in achieving its goals of economic growth, macro-economic stability, and poverty alleviation. There are three strategic elements in the Bank's assistance program. The first is an emphasis on how to achieve and sustain enhanced growth in Ghana, including an expanded role for the private sector, and to achieve thus in a way that preserves macro-economic stability. Secondly, more emphasis on effective management of public sector resources is required, which would allow the Government to be an effective partner in promotitr growth. Thirdly, -4- to sustain the achievements envisaged, improved efforts in human resource development and physical resource preservation are needed. The Bank's economic and sector work Is aimed at examining the policy, institutional, and Infrastructure constraints to Implementing this strategy, and modifying strategic assistance options, as necessary. 12. Sustained Growth. The Bank's economic and sector work and lending program reflect the high priority given to assisting the Government to put in place the policies and investments needed to stimulate sustained higher levels of economic growth, including an enhanced role for the private sector. An Accelerated Growth Study to be carried out this year will ";n the springboard for identifying potential Bank operations targeted to supporting this strategy. Bank assistance will likely focus on the bottlenecks to development of the indigenous private sector, including the informal sector. Linkages between larger and smaller firms will be looked at, as will the roles of trading, financial and other services. Drawing from the results of this study, the Bank's lending program over the next few years is expected to include one or more operations to support more dynamic enterprise development. Additional economic and sector work will likely also be identified during the study, for example, on decentralization of decision making for key functions of Government, and on sub-contracting of public services. In agriculture, a particular concern is the lack of competition in domestic marketing of cocoa, as well as the need for further trade liberalization, and removal of remaining infrastructure and institutional bottlenecks. Policy and institutional reforms will be supported through an upcoming sector adjustment operation, complemented by investment lending to increase smallholder access to strengthened support services and infrastructure. These activities would pay careful attention to preserving the natural resource base. 13. Based on a review by the Bank, in collaboration with the Govermnent, of the constraints to more dynamic entrepreneurial growth, comprehensive reform of the taxation and regulatory environment is under way. This is being supported by an adjustment credit - a Program to Promote Private Investment and Sustained Development. To complement this effort, the proposed second Financial Sector Adjustment Credit addresses outstanding institutional and policy reforms needed to increase the efficiency of the financial system, building on the assistance provided under the first Financial Sector Adjustment Credit. 14. Public Sector Magme and Im Mtio a . The Governments economic management capacity will be stretched over the coming years, particularly in a scenario of moving to sustained higher levels of growth. The need for efficiency and effectiveness in public expenditures, both recurrent and capital, as well as in revenues, will become more pronounced. Meanwhile the delivery of key Arvices, supplied by either parastatals or sub-contracted to the private sector, will need to improve - notably electricity, telecommunications, and some infrastructure (ports and roads). Through the Bank's sector and project lending, the intention is to continue to help improve the Governments overall Implementation capacity. The public expenditure program and public enterprise reform are major vehicles for the Bank to give advice and assistance, for example on the composition of expenditures, and on institutional and sustainability issues. 15. A critical role of Government in support of economic growth is the provision of public goods and services, particularly infrastructure. To Improve infrastructure delivery, the Bank's economic and sector work and lendig in transportatoe, power, telecommunications, water supply, etc., is geared to assist the Government in: (I) continuing -5- to focus public expenditures on high priority infrastructure investments; (1) introducing sound maintenance practices to prevent the existing capital stock from deteriorating; (ili) reducing the budgetary costs of infrastructure investments through increased commercialization of state owned enterprises, cost recovery, and local taxation reforms; and (iv) facilitating, as necessary, the private provision of public goods and services. 16. Better public sector management will be critical to the sustained success of the Government's economic strategy. Sector-wide as well as project-specific investments would continue to focus on improving the capabilities, performance and financial autonomy of relevant agencies, as would free-standing technical assistance projects. Further support for additional civil service and public enterprise reforms may also be required to support the scenario of higher economic growth. 17. HuM Reor DVeoMet Poey and Sainability These are among the Government"s central concerns. The Bank's strategy incorporates these concerns, as follows: by helping to increase the demand for labor through higher economic growth and some labor-intensive development; increasing the availability and efficiency of capital to raise labor productivity; increasing the productive assets of the poor through improved health and education programs; providing a social safety net for those hardest hit by reforms through carefully targeted public expenditures; aim, in our policy advice and lending, addressing sustainabiity issues from rapid population growth, rapid economic development, and natural resource depletion. 18. In the area of human resource development, building on a first and second education sector adjustment operation, the Bank intends to address a broad range of policy and institutional issues, including tertiary education, functional literacy, and formal and non- formal skills training. To support women in development, the Bank's strategy is first to understand the main implications of gender Issues, and support a range of pilot programs targeted to Ghanaian women, including, for example, a pilot labor-intensive feeder road construction program in the north, implemented by local NGOs, with women expected to comprise some 70 percent of the work force. 19. Bank support to date in health and family planning services has had limited success, mainly because of weak Implementation. Recently, the Gvo-vernmant has endorsed the findings of Bank work on population which lays out the consequences of alternative strategies and has started to implement an approach to reduce population pressures. Bank assistance also aims to increase access to quality primary health care, improve the availability of essential drug supplies, and improve hospital services. At the policy level, the emphasis is on adequate cost recovery and the development of a maintenance capability to improve the sustainability of health services. At the institutional level, the focus is on strengthening the Ministry of Health. 20. Envinmnt. In the area of environment, the Bank is working closely with the Government to help implement the Environmental Action Plan (EAP). A s6bstantial proportion of the environmentally-related investments and policy and irstitutional measures will be incorporated into the design of ongoing and planned programs and projects. In addition, direct interventions which do not lend themselves to integration with other activities would be included in a free-standing operation, to develop the Environmental Protection Council's capacity to provide policy guidance and effective oversight on environmental issues. -6- D. Aid Coordinat 21. The Bank Intends to continue in its efforts to mobiliza adequate s.,als of concessional aid for Ghana. Over the next few years, the focus of donor financial assistance is expected to shift increasingly to investment activities, with declining levels of balance of payments support to be provided within the framework of the Special Program of Assistance. The most recent Consultative Group meeting for Ghana secured US$970 million in pledges for 1991. For the future, the main aid coordination challenges will be to make the public expenditure program the vehicle for determining investment priorities, for the Government and donors alike, and to minimize coordination requirements on the Government. This is being done to a limited extent already by, for example, joint missions, thus minimizing duplication in donors' appraisal and supervision activities and taking advantages of opportunities for cofinancing. Further efforts in this regard, under the umbrella of the public expenditure program, are being developed. E. Bank Gru AcivtE 22. The Bank has worked very closely with the Government of Ghana in designing its economic and sector work and lending activities in the country. This collaboration is continuing with the Government's request for Bank assistance in helping with formulating the issues and options for faster growth in the country over the next decade. Much of the Bank's economic and sector work will be directed towards supporting this effort. During the period FY86-91, IDA's lending program was heavily oriented to adjustment lending, some 40 percent, including three Structural Adjustment Credits. The composition of FY86-91 lending program is shown below. 0&HANA; p iff)N~ OPIDA LENDING, Y$-9 Total Leduj Naes of Amount * Prjects Acrfutnwd leding 544.1 40. 5. Apimdinre and ruralvdelopnent 154.9 11.4 . 6.. Populaoad human reoutce 141.2 . 10.4 . Urbin aid wate supply . 105.6 . . 7.7 Transpostaticif .. 180.5 13.3 . 3 Powertedtleommuications . 113.3 . 8.3 5 Idy mndiergy 85.0 . .2 . 3. Teemial sitne.,d.1 ...,, .. -7- 23. Within the four-year period FY92-95, the IDA lending program envisages phasing out of adjustment lending. In the short-term, adjustment lending will shift from broad-based to sector adjustment operations, focussing first on the financial sector, to be followed by an agricultural sector adjustment operation. These proposed operations would firther deepen policy and institutional reforms designed to transform finance and agriculture into competitive sectors with a major role for the private sector. The intention is to complement them with sector investment leading, with a major focus on sector policy and institution-building. At both the sector-wide and project-specific investment levels there will be increased attention to longer term issues, including human resource development, population and environment, as well as on ways to improve the efficiency and effectiveness of delivery of economic infrastructure. 24. IFC has played an important role in the development of the private sector since the initiation of the reforms and played a catalytic role in mobilizing direct foreign investment. IFC will continue to support the rehabilitation and expansion of gold mining, and locally-based firms in the manufacturing and agro-processing sectors. Support for small and medium scale enterprises will be provided through the Africa Enterprise Fund (AEF) and the Africa Project Development Facility. The response of Ghanaian entrepreneurs to the AEF has been strong. MIGA would be an important partner in helping build confidence among the business community. A statement of Bank Group operations in Ghana is presented in Annex IV. F. Relations with the IMF 25. Since the inception of the reform program in 1983, the IMF has maintained a close policy dialogue with the Ghanaian authorities. Since 1988, IMF support has been through the Enhanced Structural Adjustment Facility (ESAF) under a 3-year arrangement equivalent to SDR 388.6 million, or 190 percent of quota. As of end-September 1991, Ghana's outstanding use of IMF resources amounted to SDR 557.5 million. The IMF has also provided substantial technical assistance to the Government, most recently on capital income taxation, systems for public expenditure control and monitoring, and monetary management, "nd is expected to be involved in technical assistance to the Bank of Ghana. 26. As the program supported by the third annual ESAF arrangement will expire by the end of 1991, the Government has requested the continuation of the Fund's assistance in the design and monitoring of Ghana's overall macroeconomic and structural policies, in the contewt of an arrangement for enhanced consultation as well as the preparation of the PFP for a transitional period. Repayments to the IMF over the period of 1992-95 will average US$80 million per annum. 27. There continues to be good collaboration between the Bank and Fund staff, both in the field, where there have been parallel missions and regular contact between the respective Resident Representatives and visiting staffs, and at headquarters. Staffs of the two institutions have worked closely with the authorities in designing the structural adjustment program, monitoring performance of FINSAC I, and the preparation of the proposed second financial sector adjustment program. The Fund staff have focused in particula on exchange and trade policy, monetary policy, fiscal and domestic resource mobilization issues, and external debt management, while the Bank staff focused on incentive policies, and public sector reform, including public expenditre policy, state enterprise reform and public sector -8- management. In a collaborative process, the Government, jointly with the IMF and the Bank, has prepared four PFPs, used to inform donors, through both the local aid coordination group and the Consultative Group, of the Governments future macroeconomic and sectoral policies programs. G. SUMMar Asessment 28. As Ghana begins the move from stabilization and adjustment to self-sustained development, a new set of issues for the Bank's assistance strategy is emerging at center stage: the first is the need to manage the transition to enhanced growth in a way that preserves macro-stability and emerging investor confidence, taps more effectively than hitherto the resources of the private sector, and encourages domestic savings and investment; secondly, the need for the Government to strengthen further its own implementation capacity; and finally, the requirement to address human resource development, poverty and environmental issues, that will ultimately determine the economic and social sustainability of the Government's economic program. PART U - THE FINANCIAL SECTOR A. Bakrond 29. In addition to the central bank, the Bank of Ghana, there are six commercial banks, three specialized banks, three merchant banks, a cooperative bank and over a hundred rural banks. The six commercial banks, including Ghana Commercial Bank (GCB), Standard Chartered Bank of Ghana (SCB), Barclays Bank of Ghana (Barclays), Social Security Bank (SSB), National Savings and Credit Bank (NSCB), and the Bank of Credit and Commerce Ghana (BCCG), have over 80 percent of the total assets and deposits in the system. Ghana Commercial Bank continues to dominate the system with over 50 percent of the assets and deposits but the GCB market share of net loans has declined to about one-third and is expected to decline further with growing competition and the entry of new banks in the market. The three former development finance institutions, Agricultural Development Bank (ADB), National Investment Bank (NIB), and Bank for Housing and Construction (BHC), have introduced commercial banking services. Deposits as a share of outstanding liabilities for these three banks rose from one-third at the end of 1989 to 55 percent at the end of 1990. With the exception of BCCG, all banks are either partly or wholly owned by the Government. The aggregate assets and liabilities of the banking system and other data on bank loans and advances and deposits is provided in Annex V. 30. Two private merchant banks, Ecobank Ghana Ltd. and Continental Acceptances, were established in 1990. These institutions and the existing Merchant Bank, take corporate deposits, finance trade and industry, provide advisory services and manage money and capital market activities such as underwriting, trading on the Stock Exchange, privatization, mergers and acquisitions and debenture issues. The three merchant banks have about 7 percent of the total assets and 5 percent of the deposits in the system. 31. Owned and managed by their local communities, the 122 unit rural banks were established to mobilize resources and extend credit locally in rural areas. BOO has -9- contributed to the initial capital of most rural banks with the intention of divesting holdings to private owners at a later stage. Despite the large number, the rural banking sector accounts for only about 3 percent of the total deposits and 4-5 percent of the assets of the I-anking system. Many of the unit banks are in very weak financial condition and will be closed or merged as part of the on-going program to restructure the rural banks (para. 49). 32. The Consolidated Discount House Ltd. (CDH), was opened in November 1987 to support the development of a money market. Owned by a consortium of banks and insurance companies, CDH acts as an interbank agent dealing in treasury bills, short-term government securities, bankers' acceptances, cocoa bills, negotiable short-term certificates of deposit and commercial paper. After some initial problems, CDH is operating with a limited but profitable business. A second discout house, Securities Discount House, has been established with IFC assistance. 33. There are a number of significant non-bank financial institutions in Ghana that are not regulated by the Banking Act. The non-banking financial system is comprised of a stock exchange, 21 life and non-life insurance companies with some 3,000 insurance brokers and agents, the Social Security and National Investment Trust (SSNIT), two discount houses, and building societies. Several non-bank financial institutions, life insurance companies and pension/provident funds in particular, are potential sources of long-term investment capital. 34. The capital market is in its embryonic stage, as yet unable to make a substantial contribution to the mobilization of long-term resources. Until very recently, the few private placement transactions were usually in long dated government stocks and shares of private companies. A newly formed Stock Exchange commenced trading in November 1990. Trading volume is still small with only 18 listed securities. However, the volume is expected to grow with the divestiture and privatization initiatives being pursued by the Government. 35. Financial Policy under ERP. Like other sectors, the banking system of Ghana was adversely affected by the deterioration of the economy and high inflation during most of the 1970s and the early 1980s. Inappropriate monetary and financial policies and loss of confidence in the system led to financial disintermediation. The authorities controlled interest rates and played a major role in directing the allocation of credit. Banks were instructed by the Government to fund inefficient public and private enterprises. The financial condition of these enterprises deteriorated with the necessary adjustment in the exchange rate after 1983. This policy mix led to pervasive financial distress with huge non-performing loan portfolios, inadequate provisions for portfolio losses, artificially inflated profits, excessive foreign exchange exposure, high operational costs, weak internal management, and the insolvency of several banks. 36. Since 1987 there has been a gradual liberalization of the financial system. All sectoral credit allocation targets were phased out with the last target, for agriculture, abolished in November 1990. Interest rate controls were gradually relaxed and full liberalization was achieved in February 1988. In November 1990 the BOG completed decontrol of all bank charges and fees. The Central Bank is now promoting rather than repressing interest rate competition in the system. From May 1991 foreign companies are no longer required to seek prior approval from the BOG for overdraft facilities at the commercial banks. Liberalization of financial policies complemented the liberalization of foreign exchange market. A foreign - 10- exchange auction was introduced in 1986 with coverage expanded gradually. In 1988 the government permitted the establishment of foreign exchange bureaus. In April 1990 the government introduced an interbank foreign exchange market supported by weekly wholesale auctions. The government has also liberalized payments and transfers for current international transactions. 37. The BOG is laying the groundwork for a system of indirect monetary control. Bank credit ceilings are still used for monetary control given the high liquidity in the economy. Reserve requirements are high and until recently were not remunerated. In early 1991 the BOG started paying 3 percent interest on required reserves held by commercial banks and this was recently raised to 5 percent. The BOG has introduced new monetary instruments, including BOG bills, to improve liquidity managemewd Ultimately, it is expected that open market type operations, with other indirect instruments, will replace credit ceilings as the principal means of managing liquidity in the economy. B. Progress Under the Financial Sector Adjustment Credit. 1988-1991 38. IDA's work on Ghana's financial sector began in 1985. As the structural adjustment process was under way, a broadly based and well functioning financial system was critical for ensuring continued progress in the reform effort and for growth in the real sectors. This work culminated in a major review in April 1987 by a joint working group of Ghanaians and Bank staff, which identified key problems and proposed a number of wide ranging measures aimed at improving substantially the regulatory and supervisory framework, restructuring distressed banks, developing financial markets, and more generally improving the efficiency of financial resource mobilization and credit allocation. These general objectives were articulated in an Action Program that was supported by IDA through a Financial Sector Adjustment Credit of US$100 million equivalent. The Credit was approved by the Board in May 1988, declared effective in August 1988 and the second and third tranches of the Credit were released in June 1990 and December 1990, respectively. 39. The main objectives of FINSAC I were to: (i) enhance the soundness of banking institutions by improving the regulatory framework and strengthening bank supervision by the BOG; (ii) restructure financially distressed banks following the formulation of specific restructuring plans; and (iii) improve resource mobilization and increase the efficiency of credit allocation by the banking system. In addition, other initiatives in the financial sector supported by the Credit included initiating the development of money and capital markets, supporting a study for corporate restructuring, strengthening of the accounting and auditing professions and training of bankers. IDA also provided support for a technical adviser to the BOG to assist in the management of the program. The following paragraphs summarize progress to date under the program. 40. LecandRelat During preparation work for the program it was noted that the Banking Act of 1970 did not provide sufficiently clear guidelines to banks and the banking authorities on, inter alia, minimum capital requirements, risk exposure and prudential lending limits for banks, provisions for possible loan losses and methods of Iaterest accrual on non-performing loans. Accordingly, the Government undertook a comprehensive examination of the Act during 1988. To provide early guidelines for banks and to underpin the bank restructuring process, an interim Legislative Instrument was enacted on December 30, 1988. The authorities continued to develop a comprehensive legal and - 11 - regulatory framework for banking activities through extensive consultations with banking, accounting and other professional bodies in Ghana and abroad, as well as with IDA. This process culminated in the enactment of the Amended Banking Law on August 8, 1989, replacing both the Banking Act of 1970 and the Banking and Financial Institutions Decree of 1979. 41. The new Act provides a sound prudential and regulatory base for the country's banking system. Banks are required to maintain a minimum capital base equivalent to 6 percent of a net asset base adjusted for risk assets, and to limit secondary capital. Penalties include restrictions on dividend payments for banks that do not achieve prescribed capital adequacy ratios. Uniform accounting and auditing standards are established, and guidelines are provided for determining provisions for bad and doubtful loans, and for the treatment of related accrued interest. The Act also sets limits on bank risk exposure to a single financial group or individual to a percentage of net worth, and sets limits on loans and advances to directors and employees of banks. Restrictions are placed on the extent of direct exposure in commercial, agricultural, industrial and real estate activities. Improved reporting requirements for all banks considerably strengthen the BOG's ability to effectively regulate and manage the banking sector, and to take remedial measures if banks are not being managed in the interest of depositors and/or creditors. 42. Baning Suervision. The BOG is required under the Amended Banking Law to examine each bank at least once a year. Since the introduction in late 1988 of standard auditing and accounting principles (which follow international auditing guidelines and international accounting standards), the accounting records of banks are required to be audited by qualified external auditors at least once a year. Both statutory and long-form auditors' reports are also required for all banks, and are to be promptly submitted to BOG. These revised standards and procedures are now being enforced by BOG's Banking Supervision Department. At the same time, substantial effort has been made to strengthen the supervision capacity of BOG. Two high level advisors from the Reserve Bank of India have been retained to provide both formal as well as on-the-job training to staff working on bank supervision, and the Department's bank inspectors have all now participated in basic training courses. Manuals for both on- and off-site inspection have been substantially revised and expanded. The Supervision Department is continuing to build up its capacity in order to comply with the Act's requirement that all banks be examined at least once a year. To this end, BOG is reviewing the Supervision Departments management structure with a view to strengthening it and is considering further increases in the number of professional staff, as well as an expanded staff training program. 43. Bak Re t . An acceptable framework for restructuring distressed baks was outlined in the General Framework document approved by the Government in July 1989. The Framework established a one-time package of measures for each of the seven distressed banks to restore solvency, and to provide sufficient capital and adequate liquidity to enable them to operate in a self-sustained manner following their restructuring. The measures are tailored to the requirements of individual banks and the degree and nature of distress experienced by them. The financial restructuring of banks has been achieved by removing from the banks' portfolios all non-performing loans and other Government-guaranteed obligations to state-owned enterprises (SOEs), which totalled £31.4 billion at the end of 1989. The non-performing loans to the private sector for the six major distressed banks amounting to C21.9 billion at the end of 1989 have been redeemed through offsets and the issuance of - 12 - bonds. As a result of the financial restructuring and some Injection of new capital, banks were able to meet the capital adequacy requirements by end-1990. For the remaining small cooperative bank, which accounts for only four percent of the non-performing loans of the banking system, validation and redemption of its non-performing loans will be completed in 1991. The non-performing assets of distressed banks have been transferred to a newly created and wholly-owned Government agency, the Non-Performing Assets Recovery Trust (NPART), whose mandate Is to realize such assets to the extent possible. The 1989 law establishing NPART requires that NPAPT should carry out its mandate within a finite, 6-year timeframe, i.e., by end-December 1995. To facilitate NPART's work, a special judiciary tribunal has been appointed and given the necessary powers to speed up the asset recovery process. With its board of directors and the necessary technical assistance now in place, NPART is recruiting and training Its professional staff, and has commenced operations. As at end-October 1991, NPART's recoveries from private sector and state-owned enterprises amounted to about C3 billion. 44. Individual restructuring plans for six distressed oanks have been formulated and reviewed by IDA. A draft restructuring plan for the remaining small cooperative bank has also been prepared. Together, these seven banks account for 100 percent of the assets and of the non-performing loans and contingent liabilities of development banks and about 85 percent of the assets and 95 percent of the non-performing loans of the commercial banks at the end of 1989. These plans include appropriate proposals for addressing the management, financial and operational problems of the distressed banks and focus on the turnaround strategy required to return them to profitability and financial viability. Since late 1989, the Government and the banks have increased their efforts to hasten progress in the implementation of the bank restructuring program, and implementation of a number of the required measures is underway. Early in 1990, the Government changed the top management and reconstituted the boards of directors for all banks being restructured. To assist the restructuring process, twinning arrangements with suitable foreign financial institutions have been established for some banks and turnaround management teams of banking and financial experts have been put in place for others. All banks are implementing their restructuring plans, including adoption of their new organizational structures, reducing staff, closing unprofitable branches, reducing operating costs and making good progress in improving their operating efficiency. 45. Copa Restructuring. Massive devaluations, high rates of inflation, and structural shocks resulting from necessary adjustment policies have been among the major factors accounting for the extensive distress of Ghanaian enterprises in both the private and public sectors. The impaired capacity of such enterprises to service their debts in turn led to the heavy accumulation of non-performing assets in the books of Ghanaian banks, and to the financial distress of the banks themselves. The Government, therefore, recognized that banking restructuring, in erder to be successful on a sustained basis, would need to be complemented by the restructuring of enterprises in the corporate sector. To that end, the Governme commissioned under FINSAC I a study to assess the magnitude and nature of corporate distress, and to recommend a program to facilitate the restructuring of potentially viable enterprises. The first phase of the study was completed in late 1989 and reviewed the condition of a sample of 214 enterprises identified by Ghanaian banks as possible candidates for restructuring. It concluded that a significant proportion of these enterprises have good prospects for viable operation, If suitably restructured from a financial, tecnical and managerial standpoint. The second phase of the study, completed in mid-1990, examined the - 13 - alternative institutional arrangements for carrying out the enterprise restructuring process. Following its review of the consultants report, the Government has formulated a preliminary draft proposal for implementing the corporate restructuring program (CRP). The proposal envisages, j=c al, the establishment of a new corporate entity with private sector ownership to provide 9Mtture capital and other financial, managerial and technical services for the restructuring of distressed but potentially viable enterprises, together with a broad range of activities pertaining to a specialized financial institution. IDA's role under the proposed FINSAC H would be to help ensure that Government would adhere to appropriate modalities in proceeding with the corporate restructuring program, in particular, with the establishment of the above-mentioned corporate entity (para. 68). 46. Resource 1pilitio and Credit Allo By 1988 the Government had liberalized interest rates as part of its structural adjustment program. With the establishment of two discount houses, a money market in which banks can invest surplus short-term resources is emerging. Its progress, and the regulatory framework within which it operates, will continue to be monitored by the BOG and IDA. Studies on suitable instruments and institutional arrangements for the promotion of a more active money market were completed in 1988 and 1989 with the cooperation of the Overseas Development Authority (ODA) of the U.K. and the IMF. The Government intends to take measures to encourage the development of primary and secondary money markets as part of a package of monetary policy reforms that would include phasing out the credit ceiling system. The Government is gradually putting in place the requisites for indirect tools of monetary policy and improvements have been made to open market operations. The availability of short- and medium-term securities in a money market, combined with the freedom to increase lending to productive enterprises in industry, agriculture and services, are expected to provide powerful incentives for banks to mobilize additional resources and to result in a range of market-determined interest rates that would reflect differences in risk and maturity, with consequent improvements in the allocation of credit. To enable banks to obtain credit information on borrowers, a Credit Clearing House (CCH) has been established. With technical assistance from the Central Bank of Malaysia,the CCH has been established as an affiliate of the Ghanaian Bankers Association (GBA). 47. Training of Accountants ad Bankers. Plans to strengthen auditing and accounting skills and improve the infrastructure for those professions were included under the program. A comprehensive review of the training and professional development needs of the accountancy profession was completed in early 1989. Progress is being made by the Institute of Chartered Accountants in implementing the recommendations of the report. It has reorganized its Secretariat, made several key appointments, and completed the rehabilitation of its premises and facilities. The Institute has also conducted its first examinations in London and in other centers in Ghana, and improved delivery of continuing professional education courses. With assistance from the Chartered Association of Certified Accountants, UK, technical assistance support for the key member and student services functions is in place. 48. The need to introduce modern banking methods, upgrade banking skills, and recruit and develop new talent was emphasized during preparation of the program and included in the technical assistance component of the Credit. Accordingly, BOG recruited a senior training specialist who at the end of 1989 completed an assessent of the training needs and formulated training programs and preliminary course curricula for the banking - 14- sector. Simultaneously, BOG staff has been trained in various areas of banking operations. Specialized courses have also been conducted for commercial banks with attendance of about 200. Efforts are under way to bring three external training experts to conduct urgently needed banking courses in core disciplines. Progress is being made in establishing a professional banking college, with assistance from external training experts and bank training staff. External assistance is being sought to strengthen the Ghana Institute of Bankers to develop professional and ethical standards, as well as certification requirements, and to provide more effective oversight of the banking profession. 49. Other Operations of Relevance to the Financial Sector. A study was commissioned in 1989 to examine the nature, structure and issues of the rural financial sector. The findings of this study formed a major input into the Rural Finance Project, currently under implementation. The Rural Finance Project is consistent with the Bank's lending strategy in the financial sector which emphasized the restructuring of financial institutions to enable them to mobilize increased domestic resources and provide increased credit to productive resources. The project, therefore, complements the overall financial restructuring by focussing on the remaining institutions comprising rural banks and credit unions and informal savings and loans institutions. Since the formulation of the financial sector program, there has been close coordination by the BOG and IDA between the FINSAC I and Rural Finance Project. A Private Small and Medium Enterprise Development Project is also under implementation. The project is an integral part of IDA's assistance to Ghana for structural adjustment of its economy. Its objectives are, inter alia, to finance the development of small and medium enterprises in the private productive sectors to generate a supply response, increase employment, output and income; and, to improve the availability of technical assistance and entrepreneurial training to smaller enterprises. The implementation of the project is generally satisfactory. PART III - THE SECOND FINANCIAL SECTOR AD.USTMENT PROGRAM. A. Origin. Objectives and Program Outline 50. The Government, supported by IDA, has made considerable strides in placing the financial system on a firm footing since 1987, when the wide ranging program of financial sector reforms was launched. The comprehensive reform program supported by FINSAC I was designed to address the more fundamental and urgent structural and institutional problems then facing the financial sector. The Government intends now to consolidate its achievements as well as move towards the second phase of sector adjustment with an enhanced program of policy and institutional reforms aimed generally at further deepening, diversifying and strengthening the financial sector. The second financial sector adjustment program would: (a) support policy measures designed to strengthen the institutional framework in the financial sector, and improve the financial condition of the BOG; (b) increase competitiveness in the banking system through encouragement of new entries and through a program of divestiture of government shareholdings in banks; (c) lower Intermediation costs, by aligning taxation on bank profits with levels applicable to other sectors; (d) Improve the operational capacity and institutional efficiency of the BOG through a reorganization of its structure and Strengthening of its procedures and capabilities; (e) support the ongoing bank restructuring program to - 15 - further improve the financial and operational performance of formerly distressed banks; (f) help pursue the recovery of non-performing assets taken over by NPART; (g) design the arrangements for the rehabilitation of potentially viable enterprises in the corporate sector; (h) develop a healthy and stable institutional framework and enhance the effectiveness of non- bank financial institutions which can be expected to play an important role in financial Intermediation in Ghana; (I) study the informal financial markets to foster linkages with the formal financial sector; and (j) upgrade the professional skills of bankers, accountants and insurance professionals. The Statement of Financial Development Policy for FINSAC II, outlining the Government's objectives and reform proposals for the second phase of financial sector adjustment is shown in AnnexI. 51. The continued development of an efficient, sound and diversified financial system for Ghana in the 1990s will depend crucially on two sets of factors. The first relates to remaining policy distortions in the financial system that affect the conduct of monetary policy and Impede the efficiency of financial intermediation and system stability. The second relates to the strengthening of the financial system by continuing the process of institution building, including institutional strengthening of the banks, money and capital markets, and non-bank financial intermediaries. The Central Bank has a crucial role in leading financial sector development in both areas, centering on its ability to formulate and conduct monetary, credit and foreign exchange policies, manage the payments system and supervise the financial system and nurture its development. B. Macroeconomic Progrm 52. The deepening and further strengthening of the financial system will be necessary to promote higher levels of and more productive investment in Ghana. Two issues are of particular importance for the continuing recovery of the banking system: controlling Inflation and reducing implicit and explicit taxation of the banking system. The previous progress made in financial deepening has periodically been reversed owing to high and variable inflation and negative real deposit rates. After rising from 13 percent in 1984 to 18 percent in 1988, the ratio of M2 to GDP fell to 15 percent in 1990 (Annex). There are several factors accounting for this trend, including the slow recovery in confidence in the banking system, but negative real deposit rates have been a contributory factor. A deceleration of inflation, thereby sustaining positive real interest rates is critical to restore willingness of the public to hold domestic financial assets. The most recent information shows a considerable deceleration in the rate of inflation from around 41 percent end-October 1990 to about 13 percent end-September 1991. Most interest rates are now positive in real terms and sustaining these will involve broader aspects of monetary and other policies, in particular the monetary program agreed to with the IMF to bring down inflation further to around 10 percent by end-December 1991 as outlined in the PFP. This program is important for the containment of inflation and for the success of the financial sector adjustment program, and will be kept under review during the course of the Credit. 53. Improvements in the implementation of monetary policy would also increase the efficiency of financial intermediation. The Government is gradually putting in place the requisites for switching to indirect tools of monetary policy. Improvements have been made on open market operations, but additional efforts are needed to improve the systems, quality and timeliness of data, and the analytical capacity of the BOG before such a switch can be fully effective. Another requirement is that the financial position of the BOG be strong - 16- enough so that it can carry out monetary policy without considerations of its own financial position. A step towards strengthening the financial position of BOG was taken in this regard by formally transferring to the Government the revaluation losses (amounting to about C311 billion at the end of September 1990), which had built up in the BOG, inter alia, because of the depreciation of the exchange rate, and replacing them with long-term Government bonds bearing at present a yield of 4 percent. Provision for the payment of interest on these bonds (equivalent to about 0.5 percent of GDP annually) has been made in the Government's budget for the medium term. Also. it was agreed in the context of the PFP that any revaluation losses accumulated in the future will be transferred in a similar fashion on an annual basis at an interent rate set at an appropriate level to ensure that the Central Bank has sufficient income to conduct its liquidity management operations without being impeded by considerations about its own profitability. IDA has ascertained that the large changes in the revaluation account of the monetary authorities in recent years reflected almost entirely the counterpart of valuation adjustments and as such they have not contributed to an increase in money supply or to an inability to meet established monetary targets. Information provided by the authorities, and reviewed by IDA d-ring appraisal, showed that any future foreign exchange losses would be a liability of the government and as such reflected in the Budget. The same is true for the interest on the C311 billion Government bonds issued against the losses accumulated to September 1990. C. Ownership of Banks 54. The Government considers the preponderant public sector ownership in Ghanaian banks (para. 29) to be a major remaining issue, which now needs to be addressed, in line with the ongoing liberalization of the Ghanaian financial sector and the Governments policy objective of reducing its direct involvement in the operation of the banking system and concentratig on its more important regulatory and supervisory functions. That issue was not addressed under FINSAC I in view of the need, felt both by the Government and IDA, to first proceed with the restructuring of distressed individual banks as a prerequisite for their subsequent privatization. While the bank restructuring is now well under way, the Government is envisaging a program, to be implemented under FINSAC II, for the privatization of the seven banks presently majority-owned and controlled by Government. It is expected that wider private sector ownership in the banking system will promote greater competition, thus improving efficiency and lowering intermediation costs. 55. The Government has formulated an acceptable action plan for the reduction of public sector shareholding in Ghanaian banks. The Government intends for the divestiture program to be pursued on a sectorwide basis, across-the-board, with the ultimate objective of effectively transferring ownership as well as managerial responsibility in each bank to the private sector. As an interim target, the Government envisages, through divestiture, reducing public sector ownership (i.e., by Government and publit sector entities) in each bank to a level of not more than 40 percent by end-1993. In a number of banks (including Barclays and Standard Chartered Bank of Ghana), the public sector is presently in a minority position, and these banks are effectively being managed by their private sector shareholders, thus requiring no further divestiture. In those seven Ghanalan banks wholly-owned or majority-owned by the public sector, (GCB, SSB, NSCB, NIB, BIC, ADB and COOP Bank), the Government would attempt to reduce public sector shareholding to a minority position of no more than 40 percent, leaving the majority of shares to be subscribed by private shareholders, both Ghanaian and foreign. To the extent that the participation of Ghanaian private shareholders in - 17 - a given bank would not suffice to achieve the objective of majority ownership by the private sector, the participation of foreign partners will be sought. Wherever appropriate, the Government will seek out the participation of those foreign partners (e.g., foreign banks, bilateral and multilateral institutions) with a potential for contributions in *rms of managerial and technical know-how apart from financial resources. 56. Following discussions with IDA, the Government will appoint a team of financial consultants to carry out, in accordance with IDA-approved terms of reference, a review aimed at designing a specific proposal for implementing the divestiture program as outlined above. Invitations to consultants for proposals for assisting the Government in this task have been issued by the Government. The consultants' review will spell out a strategy, including rationalization of the banking system, sequencing, valuation, marketing and other implementation steps, for the divestiture program. The first ph of the action plan, will cover the four largest banks (GCB, NIB, SSB, BHC) which together account for over two- thirds of the total assets of the banking system. The consultants' proposal for privatization of the four above-mentioned banks (first phase) will be reviewed jointly by the Government and IDA; its implementation will commence before October 1992 and will be completed by April 1993. The sendg ase of the consultants' review, covering the remaining smaller three government-controlled banks, namely the NSCB, ADB and COOP, is to be completed by April 1993 for implementation before end-1993. 57. Furthermore, in line with its objective of fostering greater competition in the banking system, the Government will continue its present policy of encouraging the entry in the market of new banks, including foreign banks, subject to the necessary process of examination prior to licensing, so as to ensure the adequacy of financial standing as well as managerial qualifications on the part of sponsors of new ba,JAs. There are presently in Ghana no regulatory barriers to the acquisition of shares in banks by private sector investors, foreign or domestic. In 1990, two new privately-owned banks opened for business, and one was licensed in 1991. D. In iation Costs 58. High intermediation costs in Ghana continue to have a negative impact on the financial system. The reasons for this have included inefficient operations of the banks, large non-performing loans, high reserve requirements generating little or no return, high tax rates and little competition. The removal of non-performing loans under the bank restructuring program and the improvements in the efficiency of the banks initiated under FINSAC I ind continued under the proposed program, and improvements in the payments system (para. 62) should result in lowering these intermediation costs. Nevertheless, some factors remain that continue to account for the high cost of financial intermediation. a. Taation of Banks 59. Financial institutions are still subject to the highest rate of corporate income tax. The corporate tax rate applicable to financial institutions (50 percent) is currently higher than the standard rate (35 percent) applicable to other sectors. The Government is aware that this differential could have a negative impact on the cost of intermediation, mobilization of financial savings and the growth of the financial system. Under the third structural adjustment program, the Government decided to unify corporate income tax at the current - 18 - standard rate (of 35 percent), in a phased manner. Consistent with these overall adjustment objectives, the Government is planning for a phased reduction of the tax rates applicable to financial institutions so as to align them with those applicable to other sectors, and is consulting with the IMF on the related budgetary implications. The Government will commence this phased alignment of taxation rates on financial institutions in 1992, and will complete it under the program b. Rer Rqimn 60. Another factor which contributes to implicit taxation of banks has been the lack, until recently, of remuneration on bank reserve requirements. The BOG has taken steps to address this issue. Until recently, it paid interest at a rate of 3 percent on the primary reserve requirements imposed on the banks. An increase in this rate to a rate which is closer to the average cost of funds of the banking system would help reduce the implicit taxation of banks. To strengthen BOG control of the money supply primary cash reserves will be restricted to cash and deposits at the BO0. Previously acceptable call money lodged at the Discount House, which earns about 25 percent, will no longer be eligible. To moderate the impact on bank profits the cash reserve requirement is being lowered from 22 percent to 18 percent and interest on balances with the BOG raised from 3 percent to 5 percent. However, secondary reserves will be raised from 20 percent to 24 percent. The changes in the reserve requirements, on balance, will increase the implicit taxation of banks. Based on banks' holding of call money at the end of March 1991, of about 24 billion cedis, the loss in revenue to be incurred by the banking system would be about C4 billion per year following these changes. The loss would be smaller if the rates of inflation and interest rates were to decline during the next 12 months. The Government has agreed that the interest rate on bank reserve requirements will be kept under joint, periodic, review by itself and IDA, with a view to future adjustments as appropriate. B. Bank of Gh 61. The Government recognizes that as a central bank, the BOG must play a decisive role in: controlling the money supply, in order to promote and maintain the stability of the value of the currency; stimulating the mobilization and efficient utilization of financial resources; and regulating and directing the banks and other institutions of the f.iancial system as appropriate, in order to protect their stability without unduly affecting their autonomy, development and efficiency. The second financial sector adjustment program has the objectives of reducing the difficulties faced by BOG in discharging its responsibilities through arrangements designed to help its recapitalization and to reduce its losses in foreign currency, thereby strengthening its financial condition; and improving the operational capacity of BOG with technical assistance to reorganize its structure and to strengthen its operational procedures and capabilities. The achievement of these objectives will help to: (i) improve the conduct of monetary, credit and foreign exchange policies; (ii) improve the effectiveness of control over money supply; (iii) replace gradually the existing system of monetary policy based on credit ceilings by a system in which open market operations will play a more important role; (Iv) reduce the spread between deposit and lending rates in the banking system; (v) create conditions that will stimulate the interest of the banks to mobilize deposits and to pay higher interests rates on such deposits, thus contributing to financial deepening; and (vi) cabance the effectiveness of the supervision and guidance role of BOG over -19 - commercial banks and other financial institutions. The measures for strengthening BOG under the proposed operation will be carried out in collaboration with the IMF. 62. The BOO has commenced taking actions necessary to achieve the above objectives. It has revised the Bank of Ghana Act of 1963, to more adequately reflect its role, responsibilities and autonomy and to give effect to the necessary organizational and procedural changes. A draft of the revised Bank of Ghana Act, which has been reviewed by IDA, has been submitted to the Provisional National Defence Council (PNDC) for approval and enactment. Its enactment is a condition of effectiveness of the Credit. A new organizational and management structure has been developed together with an implementation schedule and a manpower plan to address staff development and training needs. The BOG, in consultation with the Government, is addressing ways of enhancing its autonomy in recruitment, training for its personnel and the payment of performance-related salaries. More immediately, the BOG has been addressing critical needs to strengthen its Research, Foreign Exchange Management and Bank Supervision operations. In the latter case it is recognized that both on- site and off-site operations need to be sharpened and made more timely. The BOG has in place a program under which within the next twelve months BOG will have complied with the Banking Act requirement that all banks be examined at least once a year. It is recognized that achieving strong supervision is a critical task for the BOG. A Committee has been appointed to guide the computerization of the BOG and to prepare a work program and implementation timetable to improve through computerization, the operational efficiency in the payments system, open market operations, reserves management, supervision, research, accounting, MIS and other central bank activities. The Committee's work has resulted in development of an acceptable 3-year computerization work program (Information Technology Program) covering accounting, the creation of an integrated economic database, reserve management, foreign exchange, money and bond market functions. Commencing with publishing its annual accounts for the year ended June 1990, the BOG will publish its annual accounts and economic information in subsequent years in accordance with the Bank of Ghana Act. 63. Development Plnance and Other Activities of the BOG. The BOG's profitability can also be protected by phasing out its quasi-fiscal activities. Like many central banks in developing countries, BOG has taken on a range of non-traditional activities such as development finance, subsidized lending, direct participation in rural banks, and the absorption of foreign exchange losses on behalf of the Government. Direct or indirect involvement of BOG in developmental and quasi-fiscal activities on behalf of the Government, however, has come into conflict with the objectives of its basic regulatory and supervisory roles. In consultation with IDA, the BOG has carried out a review of its development and rural financing activities with the objective of determining their financial implications and options for phasing them out. The BOG's Board of Directors has approved the divestment of non-central banking functions by the BOG. It has been agreed that the Government will consult IDA on steps for implementing this decision. F. Bank Rest 64. The implementation of the bank restructuring program initiated under FINSAC I is well under way and needs to be sustained and reinforced to ensure the successful turn-around of formerly distressed banks. Subsequent to their flancial restructuring, Ghandian banks have been implementing their turnaround plans which involve, inter alia, rationalizing the branch network, reducing surplus staff, streamlining operating costs, -20- strengthening loan collection and internal controls, and generally improving operational efficiency. In order to sustain viability and further improve efficiency, the Ghanaian banks require further management reform and institutional strengthening including: (i) elaboration of a strategy and business plan addressing both qualitative and quantitative performance objectives and targets (based on a set of performance indicators including liquidity, profitability, loan collection ratios, portfolio arrears and operating costs); (ii) revision of the organizational and corporate structure to better delineate accountabilities and responsibilities and to provide for management functions which are not currently addressed; (iii) development of policies and procedures for the majo- functional areas such as credit risk management, financial management, human resource management; (iv) introduction of streamlined operating procedures to provide for improved customer service and efficiency and greater confidence in the banking system; (v) development of a commercial orientation toward both bank customers and financial management of the bank itself; and (vi) information systems technology to support the delivery of bank products and for financial management and reporting. 65. The Government considers that monitoring the performance of formerly distressed banks prior to their privatization is critical under the second phase of the adjustment program to ensure both system stability and efficiency. Accordingly, the Government has decided to set up a system for monitoring the future performance of these banks, based on a set of performance indicators. The first and fundamental indicator is the consistent compliance of the individual banks with prevailing banking law and prudential regulations, in terms of capital, reserves and liquidity. In addition, a number of specific indicators of the efficiency and soundness of tba banks are to be used. These will include: (a) ratio of operating costs to average total assets; (b) ratio of arrears (principal and interest) as a percentage of total outstanding portfolio; (c) percentage of non-performing portfolio (i.e. loans affected by arrears) in relation to total outstanding portfolio; (d) ratio of actual loan collections as a percentage of scheduled collections; (e) return on shareholders equity; and (t) return on average total assets. The responsibility for implementing the monitoring system is to be entrusted to BOG's Banking Supervision Department, which will act in liaison with the FINSAC Implementation Secretariat referred to in para. 75. G. Recv of Non-Performing Assets 66. NPART's mandate requires it to exercise every reasonable effort to recover funds expended by the Government in acquiring the non-performing assets from distressed banks. With the recent commencement of its operation, NPARTs first major task was to evaluate and categorize enterprises as non-viable or potentially viable, the latter group being candidates for restructuring under the CRP. In exercising its mandate, NPART will commence the liquidation or sale of the non-viable enterprises. For the recovery of non- performing assets to be effective, it is necessary that some of the larger non-viable enterprises (accounting for a greater share of non-performing assets) be liquidated early in the process. The special judicial tribunal, created to facilitate NPARTs recoveries, has been legally established and its membership constituted. 67. The Government, in consultation with IDA, has formulated an action program to achieve an appropriate level of recovery of non-performing assets by NPART, taking into account the 6-year timeframe set in the 1989 taw establishing NPART. The action program is summarized as follows: (a) NPARTs recovery efforts will be focused on the 250 largest -21 - accounts (more than C20 million each) representing C44.3 billion or 89 percent by amount of aggregate non-performing assets (NPAs) of C49.5 billion; (b) NPART has screened these accounts for classification into 4 categories (foreclosure, sale, workouts/restructuring and write-oft); (c) following this classification of the individual accounts, NPART has assigned a recovery estimate (both in percentage and amount) to each individual account; (d) the end result of the above has produced an Aggregate Recovery Target (ART), initially estimated at about C18 billion, that has been reviewed by the Government and IDA for its reasonableness; and (e) NPART will attempt to recover the total amount of the Aggregate Recovery Target, which itself will be subject to subsequent periodic adjustments, in accordance with the following annual recovery targets: 12 percent in 1991, 22 percent in 1992, 26 percent in 1993, 23 percent in 1994, and 17 percent in 1995. 68. The Government is envisaging several initiatives to help the restructuring of distressed but potentially viable enterprises (PVEs). The initiatives include: (a) financial work-out arrangements for selected PVEs, by NPART with the voluntary participation of Ghanaian banks. NPART's role would generally consist of debt moratoriums, debt reschedulings, and conversions into subordined debts, to the exclusion of new lending, in accordance with its Charter and operati guidelines. The participation of the banks could consist of the infusion of additional credits and/or equity finance, while the enterprise owners would be expected to make financial contributions within their capacity; and (b) the encouragement to the private sector, both foreign and domestic, to set up new venture capital companies, which could play an active role in rehabilitating PVEs. In this regard, the Government is looking Into preliminary inquiries by some private sector groups, with the sponsorship of bilateral donor organizations, for setting up new venture capital companies. 69. Following discussions with the Government, it has been agreed that a consultant review will be expeditiously initiated to carry out further preparatory work on the CRP, and focussing on: (a) updating and expanding the database on PVEs (including their re- classification) previously compiled by the consultants and collection of additional relevant data; (b) recommending appropriate modalities for financial work-outs and other financial relief measures for PVEs, by NPART and the banks; and (c) examination of the prospects and modalities for setting up new venture capital companies in Ghana (with the possibility that these could be supported under subsequent Bank Group operations). The terms of reference for the consultant'S review have been prepared and agreed by the Government. H. Non-Bank Financialnstiution and the Capta Markets 70. There are a significant number of financial institutions in Ghana which are not regulated by the Banking Act though some of them come under other regulatory or statutory control. These comprise the stock exchange, Insurance companies, insurance brokers and agents, the discount houses, a building society, an export finance company plus unquantified numbers of credit unions, thrifts and saings and loan institutions. The insurance companies and pension/provident funds are major potential sources of long-term investment capital, and an analysis of their status and constraints is a key consideration in the development of Ghana's capital markets. 71. Regulation of the insurance industry has been shifted to the National Insurance Commission (NIC) which will require technical assistance in its new supervisory role, which includes market supervision, monitoring premium levels and payment, competition and -22- solvency. Capital adequacy, solvency and credit standards are all in need of reform and better regulation. Competition has been circumscribed by the Government which, under a 1972 law still requires the Government-owned State Insurance Corporation of Ghana to be allocated all Government and state-run business underwriting, resulting in over 75 percent of the non-life business going to one company. The life insurance sector is still somewhat under-developed and its nurturing because of the actuarial significance of its premium base will be an important factor to the developing capital markets. Until late 1986, SSNIT was required to invest in goverment paper with yields of 6-7 percent, causing considerable mismatch in its asset/liability management given the high inflation environment. SSNIT has recently embarked on a more focussed earnings-related pension scheme. Continued attention to appropriate investment rates to achieve a balanced asset/liability position will be necessary. With contributions currently at about 1 percent of GNP, SSNIT is potentially the dominant investment fund in the country. The possible over-concentration of assets is an issue requiring further consideration. The Government has initiated a review of the legal and regulatory framework applicable to all non-bank financial institutions to develop and enact, as appropriate, new legislative proposals for their licensing, regulation and supervision, as well as appropriate accounting, financial and prudential reporting requirements. The review is being carried out by a Committee established for this purpose and is proceeding satisfactorily. This review will include de-emphasizing Government mandated deposit and underwriting activities. The Government will also carry out a diagnostic study of the major insurance companies to review their capital adequacy, profitability, credit standards and competition in the market place, and a study of SSNIT's management of its asset/liabilities position, including an actuarial assessment of its new pension plan, and its future role in the capital markets. The terms of reference for these studies have been agreed with the Government. I. Informal Financial Markets 72. A large portion of currency - estimated at about 30 percent of M2 in March 1991 - in Ghana is held outside the formal banking sector, creating a significant informal financial sector. This is due, inter alia, to: (i) the slow recovery in the public's confidence in the banking system; (i) negative real interest rates; and (ii) the inadequacies of banking services. The deficiencies of the formal financial system have led to a situation where large parts of the population continue to prefer traditional forms of savings and financing and where myriads of financial agencies, including moneylenders, thrift groups, credit unions and trusts have developed all over the country. This informal financial sector is important in the Ghanaian context, first, because the high portion of currency outside the banking system means it may actually be quite significant compared with the operations of banks, and second, because it fills a gap left by the formal sector and may therefore hold important lessons for future Bank policies. 73. Lower information and transaction costs, and a greater ability to avoid losses, make the Informal sector attractive relative to the formal sector. Moveover, the informal sector does not suffer from financial repression (e.g., negative real interest rates), which has been a major constraint on organized finance. Therefore, as long as the formal financial system in Ghana is repressed, moneylenders, thrift groups and credit unions will continue to play an important role in financial intermediation and a large part of money supply will remain beyond the control of the monetary authorities. Since Informal sector operations are mostly conducted in secrecy, no estimates are available on the scope of such activities, their significance notwithstandin. A study will be undertaken on the informal sector to explore -23- prospects and modalities for its interaction with the formal financial system. Terms of reference for the study have been agreed with the Government. J. Trnib Of Fia Professionals 74. Building on the achievements made under FINSAC I, further measures will be taken for capacity building and training in the banking sector and in the accountancy and insurance professions. FINSAC II would support further training in urgently needed areas such as credit analysis and risk management, finance, financial management of financial institutions, money and capital markets, foreign exchange, marketing, and basic management skills. Such subjects would comprise the core curriculum of a training program for financial professionals in Ghana. Other components of the program would include the establishment of the hanking college, management of training by a foreign banker's training institute, the development of training materials and assessment of training needs, and support for the work of the Ghana Institute of Bankers. The program would also support the strengthening of accounting and auditing capabilities of the Auditor General's office, continue to support the strengthening of the Institute of Chartered Accountants (Ghana), provide training for the new National Insurance Commission, and assist the further development of the Ghana Stock Exchange. K. PINSAC IMplementation at 75. To ensure continued effective implementation of the ongoing FINSAC I as well as the new FINSAC I programs/activities, there is a need to institutionalize and strengthen the implementation arrangements currently in place. A FINSAC Implementation Secretariat will be set up, with organizational arrangements and staffing acceptable to IDA, as the focal point to provide guidance, oversight, coordination and monitoring for all activities pertaining to the proposed financial sector adjustment program. The Secretariat will also be responsible for periodic reporting to IDA on program activities. It has been agreed that the Secretariat will have a light structure organized along the following broad lines: (a) it will be headed by an Executive Director backed up by an expatriate advisor; (b) initially it will comprise 3 sections, each headed by a Section Chief: Banking Restructuring and NPART; Corporate Restruturing; Non-Bank Financial Institutions and Administration and Legal Affairs; (c) subsequently, if the workload warrants it, Non-Bank Financial Institutions may be split Into a Section separate from Administration and Legal Affairs; (d) the Secretariat will have a support staff, office facilities and other equipment as necessary. Matters relating to broad financial sector policy issues as well as the BOG strengthening component of FINSAC R will continue to be the responsibility of the Governor of the BOG. The Government proposes to set up within the Ministry of Finance and Economic Planning (MFEP) a small Desk to liaise with the FINSAC Implementation Secretariat. Technical assistance will be provided to the Secretariat and to MPEP under the program. -24- PART IV - THE PROPOSED (REDIT A. CredhBit ry 76. Preparation of the proposed Credit commenced at the time of the successful third tranche review for FINSAC I in November 1990. Appraisal was carried out in July 1991 and negotiations were held in November 1991. B. External Financing Requirements 77. Strict management of aggregate demand and a market-determined exchange rate will contribute towards maintaining a manageable external payments position in the face of the decline in the terms of trade and only marginal recovery expected after 1990. The current account deficit is expected to decline from 8.2 percent in 1990 to 5 percent in 1995. The average growth in exports of goods and non-factor services will slip from 9.2 percent in 1987-90 to about 6 percent in 1991-95, mainly because of the expected response to low cocoa and gold prices. On the other hand, non-traditional products, particularly pineapple, coffee, furniture, and fishery products, are projected to grow strongly in the 1990s. Imports are expected to grow at about the same rate as GDP. This assumes continued foreign exchange savings through greater efficiency brought about by higher prices and taxes on petroleum products, and import substitution of food and other consumer goods as a result of increased agricultural production and manufacturing investment. 78. The average current account deficit over 1992-94 is projected to be 12 percent lower than the average level of the last two years. Amortization of official medium-term debt has shrunk as non-concessional debt incurred to finance oil imports has been replaced by concessional sources; repurchases from the IMF will diminish now that the Stand-By and Extended Arrangements have been replaced by the Enhanced Structural Adjustment Facility; and the Government has paid off all external arrears. As a result, total foreign exchange requirements for the period 1992-94 will on average be slightly lower than in 1990-91. Requirements include provision for a build-up in international reserves. 79. In view of the existing pipeline of concessional assistance and anticipated new commitments, disbursements of official grants and long-term loans from both bilateral and multilateral sources are expected to average about US$613 million a year during 1992-94, inclusive of resources mobilized through the Special Program of Assistance. A slow, but steady, decline in the real level of concessional commitments is projected. IDA disbursements would amount to about US$580 million during 1992-94. 80. In 1990 total external public debt is estimated at US$3.1 billion, equivalent to 53 percent of GDP, after taking into account the cancellation of outstanding bilateral debt by the United Kingdom, Canada, Denmark, France, the Federal Republic of Germany, and the United States. With declining repurchase obligations to the IMF and lower levels of commercial debt, the debt service ratio fell from 67 percent in 1988 to 39 percent in 1990. A further decline In the debt service ratio to 21 percent is expected by 1995. In addition, the share of debt outstanding and disbursed from commercial sources is expected to decline from 7 percent in 1989 (already down from 12 percent in 1987) to 2 percent in 1995, and that from non-concessional bilateral and multilateral sources from 14 percent to 10 percent. -25 - C. Desription 81. The US$100 million equivalent IDA Credit will be made to the Government on standard IDA terms with 40 years maturity. It would be comprised of a sector reform component and a technical assistance component. D. Set RefrComponen 82. New and ongoing policy and institutional reforms to be carried out in the financial sector between 1992 and 1994 will be supported by the sector reform component of US$82 million equivalent. Its major objectives, are summarized as follows: (a) support the removal of remaining poliy distortions in the financial system by: (i) addressing the disintermediation in the financial system caused by negative real interest rates through a policy of encouraging positive real deposit and lending rates through the payment of adequate interest on required commercial bank deposits with BOG and of promoting open market operations; (ii) increasing competition in the banking system through the divestiture of public sector shareholdings in banks; (ii) reducing the high cost of financial intermediation; Qv) lowering the rate of corporate tax on financial institutions to the level applicable to other sectors; (b) enhance the effectiveness of the Central Bank to lead the continuing financial sector reform program through: (i) development of a sound legal framework for the financial system including legislation for central banking; (ii) strengthening the financial condition of BOG by the phasing out of its non- central banking, quasi-fiscal activities; (iii) realigning the organizational structure of the BOG to enhance its capacity to formulate and implement monetary policies and financial sector reforms; and (iv) improving operational efficiency in the payments systems, open market operations, reserves management, bank supervision, research and other central bank activities through computerization and changes in operating procedures and staff training. (c) c bnrMrjn& started under FINSAC I through: (i) preparation for the divestiture of public sector shareholding in banks; (ii) formulation of an appropriate program for monitoring the performance of restructured banks; and (iii) improving the efficiency of management, accounting and information systems of the Ghana Commercial Bank (GCB) in view of its importance in the banking system. (d) pursue the recovery of non-performing assets by NPART throuh: an action program to achieve an appropriate level of recovery of non-performing assets, including monitorable targets and a timetable; (e) enhance t effectveness of oon-ba financial at io by strengthening the prudential regulation function and encouraging competition, through: (i) review of the legal and regulatory framework applicable to all non-bank financial institutions and develop, as appropriate, new legislative proposals for -26- their regulation and supervision; (ii) the development of uniform accounting requirements and prudential regulations; and (iii) a review of the linkages and prospects for closer Interaction between the formal and informal financial systems. (t) upgrade the professional skills of bankers accountants and the insurance proeso th : (i) training programs for bankers, development of the management and operations of the national banking college; (ii) strengthening national accounting and auditing capabilities and upgrading the standards and skills of the Auditor General's Office and of the accounting and insurance professions. E. Techakal AssistanceC 83. The Technical Assistance Program is outlined in Anne VII. This component of US$18 million equivalent will finance: (i) an extensive program of technical assistance for restructuring and institutional strengthening of the BOG, including purchases of hardware, software and services for computerization (US$2.6 million), training, technical assistance and advisory services in economics research, banking supervision, monetary policy and foreign exchange (including reserve management), organizational restructuring, clearing house, development of market operations, financial systems development and data coordination (US$2.6 million); (i) computer hardware, software, services and training for the computerization of management information and accounting systems of GCB (US$2.8 million); continuing technical expertise for the institutional restructuring of seven banks, including an assessment of the computerization needs of the remaining banks (US$4.00 million) and for the operations of NPART (US$1.1 million), these costs include the cost of foreign bankers and experts and twinning arrangements with banking institutions; review of the legal/regulatory framework for non-bank financial institutions and development of new legislation, diagnostic study of the insurance Industry, training and technical assistance for the new National Insurance Commission, the study of SSNIT's new pension scheme and its role in the capital markets, and the study of informal financial markets (US$0.7 million), consultancy services and preparatory work for CRP (US$0.2 million); capacity building and training for bankers and accountants, including technical assistance in establishing the banking college, teaching materials and books, faculty development and cost of foreign instructors (US$2.2 million), and upgrading skills and improving the effectiveness of the Auditor General's Office through technical advisory services, training and logistical support, and continuation of the strengthening of the Institute of Chartered Accountants (US$0.7 million); establishing the FINSAC Implementation Secretariat (US$0.7 million); equipment and training for a small FINSAC H liaison unit within the MPEP (US$0.1 million). A small amount has been left to be allocated as the program progresses (US$0.3 million). A Project Preparation Facility advance of US$600,00, approved by IDA to enable the commencement of key technical assistance activities, will be refinanced under the Credit upon effectiveness. F. Credit Administration. Prouement and 84. The proposed Credit of US$100 million equivalent would support the second phase of the Government's financial sector adjustment program. As with FINSAC I, the BOG would administer the Credit on behalf of the Government. The credit administration, -27 - procurement, disbursement and auditing procedures that were developed for FINSAC I are well established and have operated satisfactorily, and will be followed for FINSAC H. These procedures are summarized below for the sector reform and technical assistance components. a. Sector Reform Component 85. The proceeds of the proposed sector reform component (US$82 million equivalent) would be used exclusively to finance the foreign exchange cost of eligible imports through the foreign exchange auction of the BOG. Except for military equipment, luxury goods and environmentally hazardous products, any imports would be eligible for financing. Not more than US$20 million equivalent of the proceeds of the Credit would be used for petroleum imports. Up to US$15 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 parastatals would be procured in accordance with established commercial practices which have been reviewed and generally involve competitive procurement. Quotations from at least two eligible countries would be sought, except for propriety procurement or standardized equipment required for reasons of compatibility. Imports by the government sector below US$2 million would be procured according to its procedures which have been reviewed and are acceptable to IDA. For contracts between US$500,000 (SOE limit) and US$2 million, a minimum of three quotations will be obtained except for proprietary spares or where compatibility with existing equipment requires use of standardized equipment. Imports exceeding US$2 million, by the public and private sectors would be subject to ICB, according to Bank guidelines, using standard documents acceptable to IDA. Import of commodities such as petroleum and foodstuffs by any purchaser will be packaged for bulk procurement following simplified ICB procedures. In isolated cases, where such procurement is less than US$2 million, competitive bids will be invited with a minimum of three quotations. IDA will assist the Government, if necessary, by providing sample bidding documents for simplified ICB for these products. 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. Preshipment inspection on quality, quantity and price verification of imports will be done by an external independent agency already in place. Contracts valued less than US$50,000 equivalent would not be eligible for IDA financing. 86. To facilitate procurement and disbursement, two special accounts would be established in U.S. dollars at commercial banks, on terms and conditions acceptable to the Association. Initially, US$16 million of the IDA credit will be deposited 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 (including final invoices, bills of lading/shipping documents and evidence of payment) with respect to payment against contracts of more than US$500,000 equivalent. Reimbursements for payments against contracts below US$500,000 will be made on the basis of statements of expenditure certified by the BOG. All supporting documents (including final Invoices, bills of lading/shipping documents and evidence of payment) will be retained by BOG for review by visiting IDA missions and the external auditors. 87. The proceeds of the proposed sector reform component would be disbursed in three tranches as follows: -28 - (a) a first tranche of US$25 million would become available -*-nediately upon effectiveness (January 1992). (b) a second tranche of US$29 million would be made available following a review of performance, about nine months after effectiveness, that would determine that the reform program is being implemented satisfactorily (October 1992). (c) a third tranche of US$28 million would be made available following a review of performance, about six months after second tranche release (April 1993). 88. Cofinancing of US$100 million equivalent is being sought for the program. Approaches have been made to the Swiss Government and to the Government of Japan (OECR), both of which were cofinanciers of FINSAC I. The Swiss Government participated in the appraisal of the program and has recently signed an agreement with Ghana, to contribute Swiss Francs 15 million (about US$10 million equivalent) to the cofinancing of the program. The Government of Ghana is seeking cofinancing from OECF of Japan. To the extent possible, cofinancing funds will be tranched in a manner that ensures balanced tranche disbursements. b. Ihncal Assistancempn t 89. Consultancy services for the various technical assistance subcomponents will be obtained as per the Bank's guidelines. Small packages of computer equipment and software not exceeding a value equal to or less than US$75,000 per contract, up to an aggregate limit of US$250,000, and office equipment (amounting in total to US$150,000) and vehicles (amounting in total to US$200,000) will be procured through shopping on the basis of comparison of price quotations from at least three qualified suppliers eligible under the Bank's guidelines. Packages for the procurement of computers and software in excess of US$75,000 will be procured under ICB procedures according to Bank guidelines. The threshold for prior review of documents for such procurement will be US$75,000. The Credit would finance 100 percent of the costs of technical assistance and studies under the program. Disbursement under the technical assistance component will not be subject to the tranche release conditions, and the technical assistance component is expected to be disbursed by the end of the first quarter 1995. Accordingly, the closing date for the program is March 31, 1995. Statement of expenditures would be used for expenditures not exceeding US$75,000. A special account of US$2,000,000 representing about four month's xpenditues would be established at a commercial bank to expedite disbursements. C. iting and Regorn 90. Present accounting and auditing arrangements for project expenditures are satisfactory. The BOG maintains separate accounts to record project-related transactions (disbursements, repayments, expenditures, etc.) and has these accounts audited by auditors acceptable to IDA. The auditors' report includes an opinion on the adequacy of procedures in operation at BOG for the use of Statements of Expenditures (SOEs). Certified copies of audited accounts have been submitted to IDA within six months of the end of each fiscal year, as required under FINSAC I. These arrangements will be continued under the proposed project and certified copies of audited project accounts and SOEs will be submitted to IDA -29- within six months of the BOG's fiscal year end. In addition, the audited financial statements of the BOG will also be submitted to IDA within six months of the BOG's fiscal year end. 91. To enable IDA to monitor the fulfillment of program objectives, during Implementation, the FINSAC Implementation Secretariat would, through inputs from the BG, the concerned banks, NPART, the non-bank financial institutions and other beneficiary agencies under the program, prepare semiannual status reports on key conditions and monitorable actions under the sector reform component, and quarterly progress reports on the technical assistance and training activities and the studies under the program. These reports will be sent to IDA within one month of the end of the agreed reporting period. G. Monitorable Actions and Tranche Releas Conditions 92. The Letter of Financial Development Policy (Annx V outlines the specific measures that have been or will be undertaken during the second phase of financial sector adjustment. These measures are summarized in the matrix of reforms and actions also shown in Ann VI. Credit effectiveness and tranche releases will be conditional upon the completion of the following actions in a manner satisfactory to the Association: Condition for Eftve (a) Enactment of the Bank of Ghana Act (para. 62). Conditions of Secos Tranchie Reles (a) Satisfactory progress in the implementation of the financial sector adjustment program and consistency of the macro-econo-'c policy framework with the objectives of this program (para. 52). (b) Commencement of implementation of consultants' proposals for Phase I of the action plan for the divestiture of public sector shareholdings in banks as reviewed and agreed with IDA (para. 56). (c) Implementation of the alignment of tax rates on financial institutions with levels applicable to other sectors in accordance with the modalities confirmed by the Government (para. 59). (d) Compliance with requirements for annal inspection of banks in accordance with the Banking Law (para. 62). (e) Satisfactory implementation of new BOG organization and management structure (para. 62). (f) Implementation by NPART of the action program for the recovery of non- performing assets and for liquidations, including achievement of the agreed annual recovery target (para. 67). (g) Submission to IDA of draft regulatory legislation for non-bank financial nstitutin(para. 71). -30- (h) Commencement of the review of SSNIT's management of its asset/liability position and the actuarial assessment of its new pension scheme and of its role in the capital market (para. 71). Condito of Thid-Trnhe Rele (a) Satisfactory progress in the implementation of the financial sector adjustment program and consistency of the macro-economic policy framework with the objectives of this program (para. 52). (b) Completion of implementation of consultants' proposals for Phase I of the action plan for the divestiture of public sector shareholdings in banks, and completion of review by consultants of the remaining banks under Phase II of the action plan (para. 56). (c) Completion of the alignment of tax rates on financial institutions with levels applicable to other sectors (para. 59). (d) Implementation by BOG of its computerization program and satisfactory progress in the strengthening of BOG's operational efficiency (para. 62). (e) Implementation by NPART of the action program for the recovery of non- performing assets and for liquidations, including achievement of the agreed annual recovery target (para. 67). (f) Enactment of legislation for non-bank financial institutions and adoption of uniform accounting requirements and prudential regulations (para. 71). (g) Establishment of the banking .Jege and acce..able p-ogress in the programs for the training of bankers, accountants and insurance professionals (para. 74). H. Elaks 93. Actual experience gained so far with the implementation of financial sector reforms in Ghana suggests that the main risk entailed by FINSAC II, just as with its predecessor program FINSAC I, would be the slow pace, relative to the agreed timetable, in the implemeDtSto Of a reform program of considerable complexity, novelty and comprehensiveness. Such a slowness would be on account, not of any slackening in Governments commitment to reforms, which remains steadfast, but of the strain the program will place on the country's implementation capabilities and of practical difficulties inherent in building up the requisite capacities within the large number of Government agencies and other entities (e.g., Ministry of Finance, BOG, NPART, the banks) Involved in the reform process. Drawing lessons from the past, the Government and IDA, therefore, will endeavor to minimize the risk by strengthening implementation capacity through the establishment of the FINSAC Implementation Secretariat. The latter will be appropriately staffed and equipped to enable it to discharge its mandate to generally guide, oversee, coordinate and monitor all activities pertaining to the financial sector adjustment program. By helping the Ghanaian authorities internalize the various skills brought to bear in Implementing the reform program, the Secretariat is also expected to help enhance the long-term sustainability of the program. - 31 - Furthermore, to minimie implementation las in specific program components, care will be exercised to ensure the timely recruitment of key consultants andlor expatriate experts. Another major risk would arise should the Government become unable in the years ahead to successfully implement the macroeconomic framework as agreed with IDA, in particular the measures for controlling inflation. Such a risk would be mitigated through regular monitoring by IDA of the macroeconomic program. Possible difficulties in attracting reputable international banks as shareholders of the government-owned banks to be privatized, will be mitigated by employing experienced financial consultants to develop a strategy, value, package and assist the government in marketing the divestiture of government equity to potential groups of shareholders, foreign and local, who can bring the required expertise and talent to the banking system. PART V - RECOMMENDATION 94. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executivs Directors approve the proposed Credit. Lewis T. Preston President Washington, D.C. November 15, 1991 Attachments -32- SEOND FINAkCIAL SECTOR ADJUSTME1T PROGRAM KEY ECONOIC NDICATORS Atual PM. Projectd 1987 1988 1989 1990 1/ 1991 1992 1993 1994 1995 GDP Growth Rate 4.8% 5.6% 5.1% 3.3% GDY Growt Rate a 4.7% 5.1% 3.0% 2.0% GDYlCapita Growth R.t~ b/ 2.0% 1.9% 0.0% -1.0% TalCvnmption/Capta GrowfthfRat 2.1% 1.5% -1.9% -0.5% PrivateCenJCapitGowt Rat bil 2.8% 1.3% -2.2% 0.3% CPGrowthRate e/ 40% 31% 25% 37% Debt S&v (US$ mIn) d/ 560 643 517 372 Debt Servlo/X0S e/ 61.8% 67.0% 58.3% 39.3% Debt S~rvicO/GDP 12.2% 12.4% 9.8% 6.3% Gross vetmantGDP 10.4% 11.3% 13.6% 15.8% Domeutic Savingu/GDP 4.2% 5.4% 6.0% 6.1% National Savings/GDP 5.8% 6.2% 7.6% 7.6% Publis InveamWa~t/GDP fl 7.9% 8.0% 7.9% 7.4% Pubic SavingsGDP 2.9% 2.7% 2.5% 1.1% Privat Investmnt/GDP g/ 2.5% 3.3% 5.7% 8.4% Privat. Savingu/GDP 2.9% 3.5% 5.1% 5.9% Rato of PøbUic/Private Invesment 3.16 2.42 1.39 0.88 Govun~ent RevuOsGDP 14.1% 13.5% 13.6% 12.2% Governmast Expedture GDP 19.1% 18.9% 19.1% 18.0% Ovral" DfcIWGDP bl -3.1% -3.7% -3.1% -4.4% Domesti Fnaning/GDP -0.4% -0.6% -1.1% -1.4% Export Growtate 7.5% 12.1% 10.1% 7.3% Exports/GDP 19.7% 18.2% 16.7% 16.4% p 0 GowthRat 15.1% 0.9% 2.1% 7.4% 1mportsGDP -24.1% -22.4% -22.7% -24.4% Current Amount (US$ min) -224 -264 -314 -480 Curre t ACcount/GDP -4.6% -5.1% -6.0% -8.2% Tams of Trado (de) 104 94 79 71 NOTE: Figur. are raunded. a/ GDY -DP adjuted for dhanges in the twrms of trade. b/ Assu~ed population growth (U.N. cuimats) diffr lightly from Governmmnt oftWcal edim~a. C4 Yoaly av~ps. d/ Inal and arrear paymnt , but excluds privat. debt. e/ E of good and services; debt ~svice incud arrears and DU. u b~ Af aad ant lading. giSifamatma rd Innludas extmnal amianns; gantsar a fa~ansing *wm. il Infaires for 1990 ret the effects of poor ranfall and term*-of-tadø detrloraton1 rgely owing to tho Gulf rial. OURCE: Government of Ghana and World Bank Staff edbma AP4CM: 30-Sep-91 -33 - EODFINANCIAL SE~O ADiSm~ENTQPORA BAANCE OF PAYMENTS (MiOa of U.S. Doars) Anuak EL Proeced 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Export of Good ad NFS 903 964 891 973 1. Mornha~m (fob) 824 881 808 897 of which: Coco 495 462 408 361 2. No-Fator Reipta 79 83 83 76 3. Imports of Good and NPS -1200 -1269 -1292 -1542 1. Merhan~ ci) -953 -991 -1006 -1233 of wh1k: P~trloum -144 -148 -160 -210 2. Non-actor Payments -174 -171 -184 -215 D. Resurco Balarn -297 -305 -401 -569 E. NetFactor Paym~nts -129 -131 -115 -113 1. Intrst Paymenta -122 -126 -109 -107 P. Not Private Transfers 202 172 202 202 0. Current Account Dalanas -224 -264 -314 -480 H. ExtåraCapitalInlow 363 364 442 556 1. Grants (Net) 122 175 219 223 2. Public Foreig Borrowing~ M&LT (Net) 218 187 192 276 ~ GrosInnowo (LT&MT) 413 409 378 414 * Amordatn (LT&MT) -195 -222 -186 -138 3. Direct Foreig Invetmmnt 5 5 15 15 4. Other Captal (Net) 18 -3 16 42 L Errors & OdIn -1 25 0 9 . OveraU ancane 138 125 128 85 K. Pnancng, ofwhch: -138 -125 -128 -85 1. Not Use ofMP Resouresm -25 -45 4 -48 2. Chann ~ SDRHoldngs -12 13 0 0 3. Change in Groas Rserve -49 -18 -52 -20 4. Payments Amers -72 -35 -48 -17 5. Othors 20 -40 -32 0 Shares of GDP gourrent US$b 1. Reourc Blance -6.1 -5.7 -7.5 -9.1 2. Total h~terst PymUnts -2.5 -2.4 -2.1 -1.8 3. Curroft Accunt uatac -4.6 -5.1 -6.0 -8.2 4. LT CapitW Inow 6.3 5.8 5.8 5.3 5. Net Cuedit from the MP -0.5 -0.9 0.1 -0.8 1. Int~rn'1 Reserv . (US$ Mia) a/ 194 201 269 290 2. Groas Rusmrvec ta Month Import 2.3 2.2 3.0 2.7 1. Nomina10ffical Rua<lPS) 154.0 202.0 270.0 330.0 - NOTE: Figre ar rounded. Data differ from PPP iMndas because of Govrnment revision la national acount and a downward r~visin aol priks aunagg=~ ~ubsequent to PFP negotiatlons in lata 1990. al Projected rsvms do not r~oat pom~bl1 r~~aluution du. to chang n exchange ratos. SOURCE: Bank of Ghana and World Bank taff coa-.a. nteraaomal remrv and nominal official rate from [up, ntmrnad Fne~ s ~ -34- ANNEX m SECOND BEACIAL SECTOR ADUSTMENT PROGRAM PROJECTED FINANCING NEEDS AND AVAILABILITIES (Milions of U.S. dim) Aetaaal Pradimnnexy Retme Projections PMNANCING TEMS 1987 1988 1989 1990 1991 1992 1993 1994 1995 A. Curent Acount D~Oet 224 264 314 480 a. Ofnetal M&.T Amortfzatio 195 222 186 138 12 i19 l .09 C. MP Rpurhase 174 264 175 113 St ' D. Arress 72 35 17 E. Oth Li^tu -13 -2 38 -24 I. ReservaRquremmnts 49 18 52 20 To~a 701 801 813 744 A. Grants (Net) 122 175 219 223 B. Long-trm Borrowing 304 307 344 349 5 3 a. IDA~( na.SPA) 191 203 170 204 - Proet 80 97 73 73 4t,r -Program 112 106 97 131 b. Other MultiatemI Bateral 113 104 174 145 42 < 8 9 C. I n~tionm Monetary Pund . Stand-by Arragemat 59 0 0 0 ' b. rea Pund Facity 35 101 0 0 ... c. SAP/ESAF (190% ofquoma) 56 113 179 655 D. NetPuivatøForeigaBorrowing 16 -2 37 42 3- i. N on e~ Ln 109 102 34 65 7 Total 701 801 813 744 8 63 5 4 Not: Figros aro rounded. Data diffor from PFP because of Government rvsioff il national account and a dowaward revsia l ol prise assumptions subsquent to PPP nØgotiatlons in late 1990. Souo: World Bank Stffstima 999999p9999p9999PPRppPPpppppppopp 99PPP>91*» 0 tili trirrrirrt rri irrtrirt rrrtriir 111 Il tfil li~ . 110 1iiiiiiig -36- ANNEX IV Page 2 of 2 fTATM~N OF =F RNEMENTS (AS of taebr 3, 1991) Amount in Uss minion Date Borrowr Type of b ~l an Lan Equity Total 1984 Ashati Goldfield Mining 55.0 - 55.0 1> Coij, 1986 Keta - in Oil Oil - 4.5 4.5 2> Explora ia 1988 Canadian Bogomu Mining - 0.6 0.6 sourcs Ltd. 1989 Caain Bogosu Mining - 0.4 0.4 Resources II 1989 Wabom Steel Ltd. Sted Mfg. 3.2 - 3.2 1989 C ia n ogosu Mining 47.5 0.5 48.0 3> RUsources III 1989 Continental Merchaät Banking - 0.9 0.9 Acceptancms Ltd. 1990 Asbati Goldfield Mining 70.0 - 70.0 4> corp. H1 1990 Iduapriem Mining - 3.0 3.0 1991 Alugan (AEF) Aluminum 0.3 - 0.3 1991 Plastic Lamites (AEF) Plastic 0.6 - 0.6 1991 Hotel Investment, Ltd. Tourism 4.2 - 4.2 1991 Dimples in (AB) Tourism 0.2 - 0.2 1991 Canadian Bogos Mining 0.8 0.4 1.2 Rsources IV 1991 Continental Merchant Banking 3.0 0.0 3.0 Acceptances H 1991 Ohanal Aluminium - 0.6 0.6 1991 Securities Discount Housm - 0.2 0.2 Discount House 1991 Appiah-Nenkah Soap Mfg. 0.9 - 0.9 1991 Idupriem Mining 48.0 - 48.05> Total Grass ConMitment 233.7 11.1 244.8 Lm repay s and write,-offs 14.1 4.5 18.6 Total Cammitu~n Nowdb219.6 6.6 b C6.2 Total Undisburs d 40.6 0.7 41.3 1> Includs a US$27.S million purticipaion. 2> Amount was filly witten off. 3> In~cudes a US$29.0 million participatio . 4> Includes a US$35.0 million participatin. 5> Includs a US$30.0 milion participation. -37- ANN V Page 1 of 3 SECOND FINANCIAL SECTOR ADJUSTMENT PROGRAM ASSETS AND LIABIUTIES OF COMMERCIAL BANKS at (Mflion of Cedis at End Peiod) 1985 186 1987 1988 1989 1990 ASillEll Cash Reserves: 19796.7 16210.9 26712.8 46038.9 45042.4 35651.1 Ghana Currency 9193.3 4440.2 14439.8 19246.2 8571.1 8584.7 Balance at Bank of Ghana 10603.4 11770.7 12273.0 26792.7 36471.3 27066.4 Foreign Assets 449.0 383.4 4785.6 5557.5 69189.2 102800.4 Claims on Government: 5880.4 7619.0 8241.2 5856.7 8072.9 2947.7 Stocks and Bonds 3893.9 4888.0 4886.0 4156.8 7534.8 2947.7 Treasury Bills 1986.5 2731.0 3355.2 1699.9 538.3 0.0 Claims on Public Institutions: 11617.1 18840.1 29955.8 51468.7 17973.2 34840.1 Bills Discounted: 1784.3 537.6 860.5 7429.1 21372.8. 13178.4 Cocoa Bills 1594.0 0.0 0.0 2982.3 293.2 13178.4 Other Bills 190.3 537.6 860.5 4446.8 21079.6 0.0 Loans and Advances 9832.8 18302.5 29095.3 44039.6 -3399.6 20059.8 Others 0.0 0.0 0.0 0.0 0.0 1607.9 Claims on Private Sector: 15453.5 26585.5 32182.0 37408.5 79341.2 80201.0 Loans and Advances 12666.0 22673.4 28291.7 33782.8 79341.2 80005.0 Other (Investment) 2787.5 3912.1 3890.3 3625.7 0.0 196.0 Other Assets 11514.4 42660.1 75471.4 84476.9 67161.0 137891.7 TOTAL ASSETS 64711.1 112299.0 177348.8 230807.2 286779.9 394338.0 Private Sector Deposits 35015.4 56331.7 89021.7 105969.9 103012.2 140117.6 Demand Deposits 23367.1 36271.2 52081.5 61698.3 56970.4 80443.1 Savings Deposits 8820.3 14125.2 22179.0 31643.9 42228.9 54824.7 Time Deposits 2822.0 5935.3 14761.2 12627.7 3812.9 4850.1 Public Sector Deposits* 3527.7 4399.7 7309.1 8982.7 39759.4 47015.4 Demand Deposits 3501.4 4338.8 7028.2 8418.5 33888.1 40405.9 Savings Deposits 5.9 15.6 59.9 98.4 397.2 895.9 Time Deposits 20.4 45.3 221.0 465.8 5494.1 5713.6 Government Deposits 989.4 1309.9 1847.4 3032.4 12511.8 16521.8 Foreign Liabilities 2298.4 2566.5 8657.0 13013.1 34420.0 38475.3 Credit from Bank of Ghana - 0.4 - - 3375.9 1074.3 Paid-up Capital, Reserves 6361.9 11503.8 17946.9 22632.2 17091.1 47977.5 Other Liabilities 16518.3 36187.0 52566.7 77176.9 76609.5 103155.8 TOTAL LIABILITIES 64711.1 112299.0 177348.8 230807.2 286779.9 394338.0 Note: at Includes secondary banks. Source Bank of Ghana. Monetary Accounts. (Audited financial statements for each bank are available av Ia&.te-rdr fil- % -38- ANNEX V Page 2 of 3 SECOND FINANCIAL SECTOR ADJUSTMENT PROGRAM BANK LOANS AND ADVANCES al BY PURPOSE (M~ of~ &~~C0diaatEndP.riod) 198 1986 1987 1988 1989 190 Agriculture, Forestry, Fishing 5207.9 7476.3 10713.0 10350.C 11476.6 12645.2 Mining and ouarylng 960.2 1437.3 2831.2 1254.1 1927.6 1074.2 Manufacturing 6048.4 10800.4 15472.2 20963.9 26847.2 27099.4 Construction 2017.8 3899.4 6267.4 729.5 8868.4 11012.2 Electricity, Gas and Water 37.8 46.1 169.5 62.9 326.7 297.6 Commerce and Finance Import Trade 990.7 2931.4 3503.8 4325.3 4407.8 4306.1 Export Trade 490.0 1451.2 2658.6 2612.0 3259.7 3512.1 Other 2820.3 5042.0 4317.2 7923.4 9010.2 5806.1 Transport and Communcatlons 1154.3 2021.5 2527.0 4778.6 5810.9 4304.5 Sevices 1224.6 2611.5 3137.6 5218.6 5738.6 6563.3 Mscellanous 450.9 939.0 2088.7 1028.9 1632.1 2780.6 Total 21400.9 38656.1 53488.2 65747.8 79305.8 79401.3 Note: al excludes staff loans, unpaid Interect, cocoa marketing advances, and consottum loans. Source Bank of Ghana. -39- ANNE~ v Page 3 of 3 GHA SECOND FINANCIAL SECTOR ADJUSTMENT PROGRAM GDP/MONEY SUPPLY (M~*iwoD of Cedi at Rad Pariod) 1985 1986 1987 1988 1989 1990 1991 1. Curreny with Publi 17241.2 31240.2 46116.5 65036.9 82916.7 80044.7 80125.6 2. D~nd D~posits 26708.8 34575.5 48925.5 73994.1 102236.4 130913.4 125603.2 3. Money SuPply (1+2) 43950.0 65815.7 95042.0 139031.0 185153.1 216958.1 205728.8 - Primary Commarcial Banks a/ a a 4. Time Mcl. Certiacat Depouits 1510.8 2997.1 5628.2 7323.8 10722.2 10563.7 10321.4 5. saving Depoa 6894.3 10954.4 17572.8 21058.1 44195.9 55720.6 60379.6 -swc Bans 6. Time Depos s 1331.6 2983.5 9354.0 8969.5 bl b/ bl 7. Savng Depo~ta 1937.9 3186.4 4666.1 12804.4 b/ b/ b/ 8. Total Saving [4+5+6*7] 11674.6 20121.4 37221.1 50155.8 54918.1 66284.3 70701.0 Mony +~MQuaa-Mony (M2) [343 a/ 55624.6 85937.1 132263.1 189186.8 240071.2 283242.4 276429.8 Me1o lt~s: - Cuur/Mi Ratio 39.2 47.5 48.5 46.8 44.8 36.9 38.9 - Curr/M2 Rato 31.0 36.4 34.9 34.4 34.5 28.3 29.0 - M1/M2 Rae 79.0 76.6 71.9 73.5 77.1 76.6 74.4 - M1/GDP Ratio 12.8 12.9 12.7 13.2 13.1 11.5 10.2 - QM/GDP Rato 3.4 3.9 5.0 4.8 3.9 3.5 3.5 - M2/GDP Raio 16.2 16.8 17.7 18.0 16.9 15.0 13.7 - Gros Domeat~o Produ t (Cdls Min) 343048.4 511372.7 745999.8 1051140.0 1417158.0 1893530.0 2010497.5 Nota: a.Inaluded nday bans from 1989. b. nelude in camm~rlal banks from 1989; no longer avaable s~parately. . Money and quai-mony inoluding aondary banks. Source: Bank of Ghana and Saisal Service. -40- ANNE Page 1 of 17 "...a,Mds Of t& MINISTRY Of FINANCE AND k a ew ;ECONOMIC PLANNING *******~ E..8ELFPIOa7 'P.O. BOX M.40 ACCRA rNUSUC 15th November 91 Mr. Lewis T. Preston President International Bank for Reconstruction and Development 1818 H Street NW Washington, DC USA Dear Mr. President: SECOD FNANCIAL SECTOR ADIUSTMENT PRO.TECT - STTEENT OF FINANCIA DEVEOPnTOLC As you may recall, as part of its Economic Recovery Program, the Government of Ghana, with technical assistance from IDA, began preparatory work In 1987 and embarked upon a Financial Sector Reform Program (PINSAC 1) in 1988, supported by an IDA credit (Credit 1911-GR) and aimed generally at priority policy and institutional reforms. The main objectives were: (i) to enhance the soundness of the banking system through an improved regulatory and supervisory framework; (ii) to undertake the restructuring of financially distressed banks; and (iii) to improve the mobilization and allocation of financial resources, including the development of money and capital markets. In addition, other initiatives in the finanqal sector included the initial development of money and capital markets, the initiation of a study on corporate restructuring, the strengthening of the accounting and auditing profession, and the training of bankers. As indicated in my earlier letter, the need to keep the FINSAC I reform program within manageable dimensions and within our Implementation capacity, meant that a number of . major areas and issues, of a medium or long term nature, had to be left out, to be addressed at a later stage. These include notably the reduction of public sector ownership in the banks, the Institutional and financial strengthening of the Bank of Ghana (BOG), the strengthening of non- bank financial institutions through an improved regulatory framework, the further upgrading of the performance and efficiency of the restructured banks, the measures for ensuring the satisfactory recovery of non-performing assets taken over by NPART, the rehabilitation of distressed but potentially viable enterprises, and a study on the informal financial markets. The purpose of this letter is to apprise you of progress so far made under FINSAC 1 (1988-91) and our plans and policy objectives for the second phase of the program (FINSAC II), 1992-94. -41- Page 2 of 17 A. Proram Achivements (1988 throuh 1991 Despite some initial delays due in part to the complexity of the program, FINSAC I has progressed well overall, and the remaining implementation actions are continuing in a number of areas. Highlighted below are some of the key areas of achievements, details of which are already on record with IDA. B. Reulatoyanod Sauedro Framewok With a view to more effectively protecting the integrity and soundness of the banking system, a new Banking Law (PNDCL.225) came into force on August 8, 1989, following a process of detailed review and consultations. The new law established prudential guidelines for the operations of banks and enhanced the supervisory capacity of the Bank of Ghana. Specifically, the law provides, inter alia, for minimum paid-up capital and capital adequacy ratio requirements of banks, sets prudential limits on credit exposures, establishes a uniform basis for loan classification and provisioning, issues accounting standards and audit guidelines for banks, consistent with international norms. The BOG is now required to examine each bank at least once a year. Its Banking Supervision Department (BSD) has been strengthened to enable it effectively to carry out its supervisory functions and to enforce the new prudential regulations. C. Reuctung of Financially Distressedank Based upon the findings of diagnostic studies and subsequent audits, the basis of a General Framework document, agreed with IDA, and on restructuring plans have now been completed and implementation is under way for each of the seven distressed banks. The restructuring plans address financial, institutional and managerial deficiencies, and were phased to ensure that resource injection would go hand-in-hand with management improvements. To date most of the distressed banks have received external technical assistance, either through institutional twinning arrangements or the direct recruitment of experienced bankers. The Boards of Directors of the banks have been reconstituted and strengthened. On the whole, the individual bank restructuring plans have been implemented satisfactorily. The banks have reduced staff, closed unprofitable branches, cut down on operating costs and improved their operating efficiency. The balance sheets of the banks have been cleaned of their non-performing SOE and government-guaranteed loans, and the bulk of their private sector non-performing assets have also been redeemed, primarily in exchange for bonds or a mixture of bonds and limited infusion of cash, where necessary. Notwithstanding the foregoing, substantial efforts are still required to introduce necessary measures (both policy and institutional) inter alia to reduce the continuing high cost of financial intermediation, and to further upgrade managerial capacity and efficiency and staff training of the formerly distressed banks. D. Recvy0 cf LPerorminLAmets In order to provide for a mechanism for the recovery of the non-performing loans acquired from the distressed banks, the Government has established a special agency, the Non- Performing Assets Recovery Trust (NPAR1). With the necessary technical assistance now in place, and a recently appointed Board of Directors, NPART is in the process of building up its -42- ANNEX Page 3 of 17 professional staff, and has now commenced operations. The mandate of the Trust is to exercise every reasonable effort to recover all funds expended by Government in acquiring the non- performing assets from the formerly distressed banks. A Special Tribunal has been established to expedite the legal processes associated with loan recovery by NPART. In the exercise of its mandate, NPART will engage In re-schedulings, debt work-outs, sale of enterprises as *going concerns", and liquidations, to the exclusion of new lending. Where potentially viable but currently distressed enterprises are identified, these may be candidates for work-out andlor restructuring under the corporate restructuring initiative. E. MMproved ResourceMobilization and Allocation A mnber of key initiatives have been taken in this area. Interest rates and charges have been liberalized, thereby substantially enabling the banks to apply market-based deposit and lending rates, which represents a meaningful step in increasing competition and improving financial intermediation. Sectoral credit ceilings have also been abolished. With the establishment of two discount houses - the Consol tdated Discount House (CDR) and the Securities Discount House (SDH), a Stock Exchange, Hor . Finance Company (HFC) and an Export Finance Company (EFC), all of which providih, avenues for more efficient management of short- term excess liquidity of banks, Ghana now has an emerging and functional money market in which the banks can invest their surplus funds. Furthermore, with the help of the Overseas Development Authority (ODA) of the UK and the IMF, a primary and secondary money market is being established as part of a policy reform package aimed at phasing out the current system of bank-by-bank credit ceilings. It is our belief that a vibrant money market could provide strong incentives for banks to mobilize more savings for lending as well as investment in short-term bills. A Stock Exchange Company was incorporated in early 1990 and commenced business In November, 1990. The Stock Exchange should provide a means for mobilizing long-term resources, through issues of equity and long-term debt instruments predominantly by the private sector. These initiatives represent significant steps in broadening and deepening financial latermediation. F. Croa Resuting As a consequence of years of low levels of production up to mid-1980s and the effects of subsequent economic recovery measures, including necessary exchange rate adjustments, a large number of enterprises both in the private and public sector have found themselves in financial distress and thus unable to service their obligations to the banks. Recognizing the need to protect potentially viable enterprises in the real productive sector, a study was conducted by a reputable international firm in 1989, under FINSAC I. The findings of the study, based on an examination of a sample of some 214 distressed firms, indicated that a significant number of them could be considered as potentially viable enterprises (PVEs), and thus possible candidates for restructuring. On the basis of these findings, and in consultation with IDA, the Government is envisaging a Corporate Restructuring Program which will, inter alia, provide the technical framework for identifying potentially viable enterprises, determine the nature and extent of their distress and provide, where appropriate, the necessary financial relief to arrest their deterioration and preserve their prospects, pending more substantive restructuring and financial work-outs. One element of this program involves the encouragement to the private sector to establish venture capital firms (i.e., financial institutions with risk orientation, -43- AWM YX Page 4 of 17 management and entrepreneurial know how) which will be willing to participate in the rehabiitation of these firms. G. Professonal Tranin for Accoutats and Bankers A major constraint Identified under FINSAC I was the lack of adequate professional skills In the fields of accountancy and banking. To rectify this situation, the Government is to implement, In consultation with the Ghana Institute of Chartered Accountants, a professional training program. To that end, the Institute Is being re-organized and strengthened, with assistance from The Chartered Association of Certified Accountants of the UK. The sound development of the financial sector, in particular the successful Introduction of modern banking methods, requires the upgrading of professional skills of managers and officers of banks. Accordingly, a comprehensive assessment of the training needs of the banking sector was undertaken In 1989, resulting In the formulation of training programs and preliminary course curricula. A professional banking college will soon be established with the assistance of external training experts. At the same time external assistance has been sought to strengthen the Ghana Institute of Bankers (GIB) to set professional and ethical standards for the banking profession as well as its certification requirements. EINAC II1 A. Qie an d Proram Ontine The experience gained and progress made so far under FINSAC I has convinced Government of the need to sustain and build upon these gains and the lessons already learned and experiences acquired. I trust you will agree with me as to the need for a follow-up operation - FINSAC II, which would support critical on-going as well as new policy and Institutional reforms in the financial se-tor between 1992 and 1994. In general, the objectives of FINSAC It would be: - to continue the ongoing bank restructuring begun in 1988; - to reduce public sector shareholding In Ghanaian banks in line with our policy of liberalizing the financial sector and increasing competition in the banking system; - to intensify the recovery of non-performing loans by NPA.T; - to strengthen the capacity of Bank of Ghana to discharge more effectively its functions particularly in monetary and supervisory areas, policy formulation and implementation, as well as its operational capabilities in other related central banking activities, while shedding Its involvement in non-traditional, quasi-fiscal functions; Page 5 of 17 - to correct remaining structural imbalances in the financial system; - to enhance the effectiveness of non-bank financial institutions in playing their role as an integral part of the emerging more dynamic financial system, with the establishment of an appropriate regulatory framework including prudential regulations; - to assist in the development of a program to restructure potentially viable but temporarily distressed enterprises; - to undertake a study of the informal financial sector with a view to exploring prospects for strengthening Its linkages with the formal sector. The attached matrix contains the specific actions which we will take under the reform program. B. Bank The bank restructuring exercise which began in 1988, is progressing satisfactorily and the formerly distressed banks are responding to the new legal and regulatory environment as well as prudential supervision instituted under FINSAC I. It will, however, take the banks some more time to adjust fully and fine-tune their operations for a successful turn-around as expected. In order to ensure sustained viability and continued efficiency, the banks require further management reform and institutional strengthening. Accordingly, it is expected that FINSAC II will provide the needed momentum for the on-going management reforms and institutional strengthening including: I) elaboration of business plans and operational strategies to achieve both quantitative and qualitative performance objectives based on a set of monitorable performance Indicators including profitability, liquidity, loan collection ratios, portfolio arrears and operating costs; ii) revision of organizational and corporate structure to better delineate accountability and responsibilities and to provide effective decision-making; liI) development of policies and procedures for the major functional areas such as credit risk management, debt recovery, financial management, human resource management iv) introduction of new operating procedures to generate improved public confidence, customer service and greater efficiency; v) development of a commercial orientation both towards bank customers and on the part of management of the banks themselves; vi) informational systems technology to support the delivery of bank services and for financial management and reporting, Including in particular the computerization of -45- ANNE.Y Page 6 of 17 the information system of Ghana Commercial Bank (GCB), in view of its importance in the banking system; and vii) formulation and implementation of an appropriate system for monitoring the future performance of the formerly distressed banks, based on a set of monitorable performance indicators. C. Divestiture of Public Sector Shareholding in Banks The preponderant public sector ownership in Ghanaian banks, which has historical origins, is a major issue which the Government now intends to address, in line with the ongoing liberalization of the financial sector and the Governments policy objective of reducing its direct involvement in the operation of the banking system and concentrating on Its more important regulatory and supervisory functions. That issue was not addressed under FINSAC I because of the need, at that time, to first proceed with the restructuring of distressed individual banks, in order to restore their viability, as a prerequisite for their subsequent privatization. With the bank restructuring program now well under way, the Government is envisaging a program, to be implemented under FINSAC II, for the phased divestiture of public sector ownership in banks. Among other benefits, it is expected that greater private sector ownership, control and management in banks will promote greater competition among them, thus enhancing their efficiency and lowering their intermediation costs. To that end, in collaboration with IDA, the Government will formulate an action plan, with a phased time schedule, for divestiture and privatization. The Government intends to pursue the divestiture program across-the-board, with the ultimate objective of transferring to the private sector ownership as well as management of the banks. As an interim target, to be achieved by end-1993, the Government envisages reducing public sector ownership (i.e., by Government and public sector entities) to a minority position of not more than 40 percent in each bank. In a number of banks (including Barclays, Standard Chartered Bank of Ghana), the public sector's shareholding is presently at that level of 40 percent or below, and these banks are effectively being managed by their private sector shareholders, thus requiring no further divestiture. In those other Ghanaian banks wholly-owned or majority-owned by the public sector, (including GCB, SSB, NSCB, NIB, BHC and ADB), the Government would attempt to reduce public sector shareholding to a maximum of 40 percent, leaving the balance to be subscribed by private shareholders, both Ghanaian and foreign. The Governments preference is to divest to Ghanaian private shareholders. However, to the extent that their participation in a given bank does not suffice to achieve the 60 percent level, the participation of foreign partners will be sought. Wherever appropriate, the Government will seek the participation of those foreign partners (e.g., foreign banks, bilateral and multilateral institutions) with a potential for contributions in terms of managerial and technical know-how apart from financial resources. In consultations with IDA, under FINSAC II, the Government intends to commission a team of investment banking consultants to carry out a review aimed at designing a specific proposal for implementing the divestiture program. That review will spell out a strategy, including sequencing, marketing and other implementation steps, for divestiture. The first phase of the implementation of the divestiture program would cover the four largest banks (GCB, NIB, SSB, BHC) which together account for over two-thirds of the total assets of the banking system, -46- ANNEX Page 7 of 17 leaving the remaining smaller three government-controlled banks (NSCB, ADB, COOP bank) to be addressed In the second phase. Furthermore, in line with Its objective of fostering greater competition in the banking system, the Government will continue Its present policy of encouraging the entry into the market of new banks, Including foreign banks, subject to the necessary process of examination prior to licensing. D. Recyg -of N -eming f As NPART's mandate requires it to exercise every reasonable effort to recover funds expended by the Government in acquiring the non-performing assets from distressed banks. With the recent commencement of its operation, NPART's first major task is to evaluate and categorize enterprises as non-viable or potentially viable, the latter group being candidates for restructuring under the CRP. In exercising its mandate, NPART will commence the liquidation or sale of the non-viable enterprises. For the recovery of non-performing assets to be effective, recovery efforts by NPART will focus on the 250 largest accounts (each above C20 million) accounting for about 89 percent of the aggregate amount of non-performing assets, and some of the larger non- viable enterprises including wilful defaulting borrowers will be liquidated early in the process. The Government is developing an action program to achieve an appropriate level of recovery of non-performing assets by NPART, including monitorable annual targets and a timetable, taking into account the timeframe set in the 1989 law establishing NPART. Furthermore, the Government has constituted the Special Tribunal provided for under the NPART law. E. ngthning The Bank of Ghana The Government recognizes that as a Central Bank, BOG must play a decisive role in controlling money supply, in order to promote and maintain the stability of the value of the currency; stimulating the mobilization and efficient utilization of financial resources; and regulating and supervising the banks and other institutions of the financial system as appropriate, in order to protect their viability without unduly affecting their autonomy, development and efficiency. FINSAC II will have the objective of reducing the difficulties faced by BOO in discharging its responsibilities through arrangements designed to help its recapitalization and to protect it against losses in foreign currency, thereby strengthening its financial condition; and improving the operational capacity of BOG by technical assistance to re-organize its structure and to strengthen its operational procedures and techniques. Action has already started on some of these problem areas. The Bank of Ghana Act, 1963 is being revised to give effect to the necessary changes. At the same time, the Exchange Control Act, 1961 is being reviewed in line with the liberalization of the foreign exchange market. A new organizational and management structure is being developed together with an implementation schedule and a Manpower Plan to address staff development and training needs. BOG is reviewing the management structure and capabilities of its Supervision Department to further strengthen it, in order to enable It to comply with the Banking Act's requirement that all banks be Inspected at least once a year. The BOG is also addressing the need to strengthen the critical research and foreign exchange management functions. To improve through computerization the operational efficiency in the payments system, open market operations, reserves management, supervision, research and other central . 47 - ANE V Page 8 of 17 bank activities, a Committee has been appointed to guide the computerization of the BOG and to prepare a work program and implementation timetable. The implementation of the above measures should result in considerably enhancing the effectiveness of BOG's supervisory and guidance role over the commercial banks and other financial institutions. F. Correcting Remaining Structural Imbalances and Addressir Policy Issues Like many central banks in developing countries, BOG has taken on a range of non-traditional activities such as development finance, equity participation in rural banks, and borrowing or guaranteeing external loans on behalf of the Government. BOG's involvement in these activities was in the past necessary because of the general scarcity in Ghana of human, technical and financial resources. Direct or indirect involvement of BOG in developmental and quasi-fiscal activities on behalf of the Government, however, has come into conflict with the objectives of its basic monetary and supervisory roles, and therefore is to be phased out. BOG's past financial condition, in particular the large revaluation account losses, has also constrained the Its ability to conduct open market operations, and forced it to impose comparatively high non- interest earning primary liquidity reserve requirements on the deposits of banks. The Government, following the advice of the IMF, continues to work towards the resolution of these structural problems. Another policy issue affecting the Ghanaian financi` system is the negative real deposit and lending rates (although recently some rates have become positive with the decline of the Inflation rate), which has been a major cause of disintermediation. It is recognized that the attainment of positive real interest rates is a necessary condition for the long-term sound development of the financial system. The BOG intends to work towards an early attainment of that objective, inter alia, through the payment of more adequate interest on bank reserves. The Government and BOG recognize the drawbacks of the current system of bank-by-bank credit ceilings as a tool for monetary control, because It tends to discourage competition and mobilization of deposits, and are therefore gradually putting in place the requisites for switching to indirect tools of monetary policy including notably open market operations. Additional efforts will be made to further improve the system of open market operations, including the strengthening of BOG's analytical capacity for undertaking such operations. High intermediation costs in Ghana continue to have a negative impact on the financial system. The improvements in the efficiency of banks and the removal of non-performing assets under the bank restructuring program and increased competition in the future should lead to lower intermediation costs. The Government also intends to gradually align the rate of corporate income tax on financial and banking institutions with the levels of corporate tax rates applicable to other sectors, which should also indirectly result in lowering intermediation costs. The BOG has already initiated actions to divest itself of most of its developmental activities. The measures proposed above for strengthening the BOG and its supervisory role including recapitalization and removal of revaluation losses from its books should make a major contribution towards the removal of these structural impediments to the proper functioning of the financial system. -48 - AN M Page 9 of 17 G. Enhancing the Effectiveness of&No-Bak Finacial Instuion and Capta Market Notwithstanding the general supervisory authority of BOG ove the overall financial system under the Bank of Ghana Act, 1963, a number of significant financial Institutions were not regulated by the 1970 Banking Act. These institutions comprise 21 insurance companies, some 3,000 insurance brokers and agents, the Social Security and National Insurance Trust (SSNIT), all of which are under the control of a Commissioner of Insurance. Also included in this category are two discount houses, a building society, an export finance company, other small finance companies and an unquantified number of credit unions, thrift societies as well as savings and loan associations. The insurance sector, in particular, is a potential source of long- term investment capital, thus their course of development will significantly affect that of our capital markets. The key relevant issues to be addressed with regard to the non-banking financial sector and capital markets under the proposed FINSAC II are: (i) establishment of a sound legal and regulatory framework for the effective supervision of non-bank financial institutions; (ii) lastituting prudential regulations, uniform accounting and stricter supervision over Institutions, and groups; (III) ensuring competitive market conditions to promote consumer choice and efficient operations of institutions; (iv) achieving a measure of integration between the informal and formal non-bank financial sectors; and (v) expanding and deepening the capital market, with intensified public education, to provide an outlet for savings, equity and risk capital for enterprises. H. tu of t Informal Eiaca Set It has long been observed that a significant portion of currency in Ghana is held outside the banking system for various reasons, including: (i) inadequate access to the services of the banking system; (ii) unattractive real interest rates; and (iii) inconvenience of certain banking practices. The deficiencies of the formal financial system have led to a situation where large parts of the population continue to prefer traditional forms of savings and financing and where myriads of financial agents, including moneylenders, thrift groups, credit unions and trusts have developed all over the country. The informal financial sector is Important in the Ghanaian context, first, because the high portion of currency outside the banking system means it is actually quite significant compared with the operations of banks, and second, because it fills a gap left by the formal sector and may therefore provide important lessons for future financial sector policies. Under FINSAC II, this important informal sector will be studied in order to explore prospects for its interaction with the formal financial system. I. Copa Restructu Parm (C Acting on the recommendations of the consultant study carried out in 1990, the Government, in consultation with IDA, is envisaging a number of initiatives for implementing a Corporate Restructuring Program (CRP). Among these, one alternative, subject to further examination of its feasibility, would call for the establishment of a new corporate entity, the First Finance Corporation (FFC), to operate as a venture capital company and take the lead in restructuring distressed but potentially viable enterprises in the corporate sector. To ensure its viability, the concept of the proposed FFC would adhere to the following main principles: i) FFC -49- ANEXRUN Page 10 of 17 should have predominantly private sector ownership, with public sector shareholding not exceeding 25 percent and to be divested subsequently to private investors; (ii) it would include among its foreign shareholders a number of investment banks and international institutions, so as to facilitate access to managerial and technical expertise; (iii) it will have strong and independent management reflecting its private sector ownership; and (iv) FFC will operate on the same competitive footing with other Ghanaian banks and/or financial institutions performing similar functions. In parallel, the Government will also seek the voluntary participation of existing Ghanaian banks, in particular the three investment banks, in selectively restructuring potentially viable enterprises in the context of the CRP, and to that end will encourage these banks to upgrade their technical expertise. Furthermore, the Government is looking into preliminary inquiries by some private sector groups, with the sponsorship of bilateral donor organizations, for setting up new venture capital companies, which, if established, would also be potential participants in the CRP. In the meantime, pending the eventual establishment of the FFC or in the event of its non-establishment, the Government will formulate, with technical assistance from IDA, an action program to initiate work-outs and provide other short-term relief measures for selected private sector enterprises, that are currently distressed but potentially viable. The implementation of this program would involve the participation both of NPART and, on a voluntary basis, of selected Ghanaian commercial and investment banks. NPART's intervention would generally consist of debt moratoriums, reschedulings, and/or conversions into quasi-equity, to the exclusion of any new lending, in accordance with its Charter. The participation of the banks would consist of the provision of working capital, other credits as needed and/or equity finance, while the owners of the enterprises assisted would be expected to contribute their own financial resources to the extent of their capacity. Care will be exercised to ensure that implementation of the CRP will be selective, limited to those enterprises whose potential viability will have been clearly established, and in conformity with sound banking principles. J. Training of Professiona On the foundations laid by FINSAC I, we have taken further measures for capacity building and training in the banking and accountancy professions. FINSAC II would support the process in urgently needed areas such as credit analysis and risk management, financial and institutional management, money and capital markets, foreign exchange marketing and basic management skills. Such subjects would comprise the core curriculum of the training program for professionals in Ghana. Other components of the program would include development of training materials, assessment of training needs, arranging for sponsorship by a foreign bankers' training institute and financial assistance to further the work of the Ghana Institute of Bankers (GIB). They would also support the strengthening of the auditing capabilities of the Auditor General's office. K. FINSAClpementation Arrangments To ensure effective implementation of the on-going activities under FINSAC I, as well as the new FINSAC II, a FINSAC Implementation Secretariat will be set up with appropriate -so- ANNEI Page 11 of 17 leadership, staffing and organization, as a focal point to provide guidance, oversight, coordination and monitoring of all activities pertaining to the financial sector adjustment programs. L. Expected Outcome of the Second Program The Government believes that the Ghanaian financial sector, with the support of IDA and the IMP, has made considerable progress since the inception of FINSAC I in 1987, when the initial reform program was launched, and is now on a reasonably firm footing. However, as you know very well, the task of fully reforming and revitalizing a country's financial sector requires a medium-term time frame, stretching beyond the 2-3 years implementation period of PINSAC 1. It is therefore the Governments belief that it is important now to move towards a second phase of sector adjustment, to be implemented during 1992-94. This phase is aimed at consolidating past achievements as well as introducing the additional policy and institutional reforms, outlined above, for further deepening, diversifying and strengthening the financial sector. It is our expectation that the Ghanaian financial sector, during the implementation period of FINSAC II, will achieve further gains in efficiency, depth and scope, thus contributing more effectively to growth in the productive sectors. M. Financial Rqieet In view of the significant benefits deriving from the implementation of the first financial sector adjustment program, and those to be expected from the enhanced second program, the Government requests your favorable consideration for a Credit of not less than US$100 million equivalent. Such an amount would help cover the residual financing requirements of, including continuing technical assistance to, the financial sector and banking system. It would also help enable the Government to cover the current account deficit for the period 1992-94, repay external debts and replenish foreign exchange reserves. The Government would also appreciate IDA's assistance in arranging cofinancing from other multilateral and bilateral sources to support the program. .West ot'wy PNDC Swicay for Finance and Min Planning1 - 51 - A XV Page 12 of 17 GAsN SECOMD FINANCIAL SECTOR ADJUSTMENT CREDIT PROO RMS AND ACTIONS (1992-1994) I. POLICY DISTORTIONS AND ISSUES IN THE FINANCIAL SECTOR Objective: Removal of policy distortions in the financial system to improve the conduct of monetary policy and the efficiency of financial intermediation and system stability; reduce intermediation costs and increase competition in the banking system. Performance Under FINSAC I FINSAC II Nonitorable Actions Implications for FINSAC II Action Program and Schedule 1. Interest rates were liberalized 1. Reduce the implicit taxation of 1. Before Negotiations: in early 1988. banks by renumerating required reserves at a rate of interest *(a) The Government has agreed to 2. All sectorat credit targets were closer to the average cost of keep interest rates on bank reserve phased out, the last target, for deposits of the banking system, in requirements under joint review with agriculture, was abolished in the context of the overall liquidity IDA, and to make future adjustments November 1990. management policies. as appropriate. 3. At bank charges and fees have 2. Lower the high cost of financial 2. Before Board Approval: been decontrotLed. intermediation through towering corporate tax rates for financial (a) Confirmation of the reduction 4. A new Banking Law was enacted institutions to levels applicable to in tax rates on financial providing a sound prudential and other sectors (presently 35%). Institutions to levels applicable to regulatory bases for the banking other sectors, with implementation system. It establishes, inter alta, 3. A program for the phased commencing in 1992. capital adequacy requirements, divestiture of public sector *(b) Submission of an acceptable penalties for non-compliance, and ownership of banks to promote proposat for the divestiture of limits on risk exposure. Uniform competition throug increased public sector shareholdings in accounting and auditing standards private sector ownership. banks, and issuance of invitation and improved reporting requirements for proposals by consultants. for banks have been introduced. 3. Bef ore Second Tranche: S. Policy distortions -* negative reat deposit and tending rates; and (a) Satisfactory progress in the high intermediation costs *- have implementation of the macroeconomic undermined the efficiency of program as outlined in the PFP. financial Intermediation and system (b) Implementation of the alignment stability, and the conduct of of tax rates on financial institu- monetary policy. tions to Levels applicable to other sectors, in accordance with the modalities confirmed by the Government. (c) Commencement of implementation of consultantse proposal for Phase I of the action plan for the divesti- ture of public sector shareholdings in banks, as reviewed and agreed by the Government and IDA. 4. Before Third Tranche: (a) Satisfactory progress in the implementation of the macroeconomic program as outlined in the PFP. (b) Completion of implementation of consultants' proposal for Phase I of the action plan for the divestiture of public shareholdings in banks, and completion of review by consul- tants of the remaining banks under Phase II of the action plan. (c) Completion of Implementation of alignment of tax rates on financial institutions to levels applicable to other sectors. * Conditions it s already met. -52- Page 13 of 17 -HAm SECOND FIllMCIAL SECIOR AJUSitERT CREDIT PAOD EBIS AND ACTIONS (1992-1994) Ii. THE BANK OF GHANA Objective: Enhance the financial condition and operetional effectiveness of the Central Bank to enable it to more effectively discharge its responsibilities in the areas of monitoring monetary, credit and foreign exchange pcficies, and the supervision and guidance of banks. Performance Under FINSAC I FINSAC II Nonitorable Actions Iaplications for FINSAC II Action Program and Schedule 1. The capacity of the 8OG'S Super- 1. Develop sound legal framework 1. Before Negotiations: vision Department to effectively for the financial system. supervise banks has been strength- *(a) The draft Bank of Ghana Act ened and it is enforcing the revised 2. Strengthen the financial condi- has been submitted to IDA. accounting and reporting standards. tion of 80 by removal of the revat- *(b) The O has completed a review Procedures for both on-and-off site uation losses and non-central bank- to determine the financial Iaplica- inspection have been developed. Ing activities. tions of its development and rural However, it is still not able to financing activities and the appro- compty with the new Banking Act's 3. Institutional strengthening by priate options for phasing them out. requirement for the annual (on-site) realigning BOG's organizational *(c) The new O organizational and inspection of all banks. Also, the structure to enhance its capacity. management structure, including a proposed establishment of a comput- schedule for implementation, has erized system for prudentilet returns 4. Improve operational efficiency been submitted to IDA. from banks remains to be implement- through computerization, changes in NCd) An acceptable 3-year computer- ad. operating procedures, training to ization work program and timetable upgrade staff skills and technical covering accounting, the creation of 2. BOG's xupervision and guidance assistance. an integrated economic database, roles over comnercial banks and reserve management, foreign ex- other financial institutions need to change, money and bond market func- be enhanced in order to maintain tions has been developed by the Do stability in the financial system. and reviewed by IDA. 3. The BOss financial condition 2. Before Board Approval: has been adversely affected by its quest-fiscal activities such as de- *Ca) Publication of the DOG's audit- velopment finance, subsidized tend- ad annual accounts for the fiscal Ing, direct participation in rural years ended June 1990. banks and the absorption of foreign exchange losses on behalf of the 3. Before Credit Effectiveness: Government. (a) Enactment of the Bank of Ghana 4. BOG's operational efficiency in Act. payments systems, open market opera- tions, reserves management, bank 4. Before Second Tranche reteses supervision, payments system, research accounting and other activ- (a) Satisfactory Implementation of Bities need to be improved. new BO0 organization and management structure. (b) Satisfactory progress in the implementation of the recommends- tions of the study to determine the financial implications for BO of its development and rural financing activities and the options for phas* Ing them out. (c) Completion of annual inspection of banks in accordance with the Banking Law. S. Before Third Tranche release: (a) implementation by DOG of its computerzation program and satis- factory progress in the strengthen- ing of 8oG's operational efficiency. * Conditions and actions alreadV met. -53.. ANNEX VI Page 14 of 17 sGNAN SECOND FINANCIAL SECTOR ADJUSTNENT CREDIT PROPOSED REMN AND ACTIONS III. BANK RESTRUCTURING/MPART Objective: Enable formerly distressed banks to operate in a self-sustained manner following their restructuring; improve the operational efficiency of banks; commence to recovery of non-performing assets by NPART. Performance Under FINSAC I FINSAC II Nonitorable Actions Implications for FINSAC II Action Program and Schedule 1. Diagnostic studies of the major 1. Commence Liquidation of non-via- 1. Before Negotiations: banks were carried out. ble enterprises in accordance with NPARTIs action program. *(a) The membership of the special 2. A framework specifying the me- judicial tribunal, to facilitate daLfties and timetable for restruc- 2. Consolidate, deepen and stream- NPART's recoveries, has been constf- turing was developed. It estab- Line the ongoing bank restructuring tuted. tfshed measures for dealing with program started under FINSAC 1. *(b) The Government, in consultation banks portfolio of non-performing with IDA, has developed an action Loans (including Lans to state- program for the recovery of non-per- owned enterprises). forming assets and for liquidations, including agreed annual recovery 3. Sieific proposals and targets targets. for the reduction of bank's non-per- *(c) The Government has agreed to forming assets were developed and establish L program including per- implemented to complete the finan- formance indicators for monitoring cal restructuring of distressed performance of banks. banks. 2. Before Board Approval: 4. Restructuring plans for commer- ciat and development banks have been *(a) Development of a program and formulated and are under implementa- timetable for the computerization of tion. GC8. 5. Formerly distressed banks need 3. Before Second Tranche release: further institutional strengthening, to enable them to operate in a self- (a) Implementation by NPART of ac- sustained manner fotLowing their tion program for the recovery of financial restructuring. non-performing assets and for tiquf- dations, including achievement of 6. The recovery of non-performing the agreed annual recovery target. assets by NPART needs to be expedit- ad. 4. Before Third Tranche release: (a) Implementation by NPART of the action program for the recovery of non-performing assets and for tIqu- dations, including achievement of the agreed annual recovery target. * Conditions and actions already met. _54-ANNE VI -54- Page 15 of 17 Gm SECO1D FIAMCI& UCM AJUSUMiT CEDIT PtoPOSM MMIIS AW ACTIlS (1992-19154) IV. NON-BANK FINANCIAL INSTITUTIONS AND CAPITAL MARKETS objective: Enhance the effectiveness of nan-bank financial institutions in mobilizing tong-term capital. Performance Under FINSAC I pIuSAC II Monitorable Actions Iaplications for FINSAC II Action Program and Schedule 1. The Consolidated Discount Nouse 1. Strengthen the legast/regulatory 1. Before Negotiations- has been strengthened and is operat- framework, prudential regulation, Ing profitably. and the supervision of non-bank Na) The review of the legal frame- financial Institutions, work for non-bank financial institu- 2. The feasibility study for the tions has been initiated. estabishment of a Stock Exchange 2. Iprove competition in the *(b) Terms of Reference for a diag- was completed and the stock Exchange insurance Industry. nostic study of the financial condi- was incorporated. Trading commenced tion, capital adequacy, profitabiti- late-1990. ty, and copetitive position of the insurance sector have been agreed 3. Amendents were made to the ta- with IDA. Itations on SSUITIs ability to in- vest and it is now able to invest in 2. Before Second Tranche release: assets of its on choosing. (a) Commencement of the review and 4. A credit clearing house for actuarial assessment of SSNIT1s new banks has been established. pension scheme and of its role in S. The effectiveness of non-bank the capital market. financial institutions in mobilizing (b) Sutbmission to IDA of draft regu- tong-term capital and thus in pro- tatory Legislation for non-bank moting the developent of capital financial institutions. merkets needs to be enhanced. 2. Before Third Tranche release: (a) Enactment of legislation on non- bank financial institutions. (b) Review with IDA the results of the diagnostic study of the finan- cial condition, capital adequacy, profitability and competitive post- ' tion of the insurance industry. * Conditions and actions alrea* Met. -55. -l Page 16 of 17 esAN SECOID FINANCIAL SECTOR AJUSTMENT CREDIT PROPOSED REFORNS AN ACTIONS (1992-1994) V. TRAINING OF BANKERS AND ACCOUNTANTS Objective: Develop capacity in the banking and accountancy professions at att Levels. Performance Under FINSAC I FINSAC II Monitorable Actions Iptications for FINSAC II Action Progra and Schedule 1. A study on the needs of the ac- 1. Upgrade the professfonal skills 1. Before Second Tranche release: countancy profession in Ghana was of bankers through the continuation completed and its reccomendations of training program, and the devet- (a) Identify and complete contractu- are being faptemented. opment of the national banking cot- at arrangements with an acceptable lege. foreign bankers training institute 2. The Institute of Chartered Ac- or equivalent entity to assist in countants (Ghana), as the focal 2. Strengthen national accounting the establishment, management and point to upgrade/strengthen the ac- and auditing capabilities and help operations of the banking cottege. counting profession has received upgrade the standards and ski(s of (b) Complete recruitment of techni- technical assistance support. As a the Auditor Generat's office. cat adviser to help upgrade the ca- result of deLays in the recruitment pabilities of the Auditor-Generat's of two key technical advisors, prog- office.. ress in development of the important members and student services func- 2. Before Third Tranche release: tions has been limited. (a) Establishment of the Banking 3. A senior training specatist was Cottege and acceptable progress the recruited by the 800 and an assess- training of bankers. ment of training needs, formutation (b) Satisfactory progress in the of program and course curricula for training of accountants and insur- the banking sector have been con- ance professionals pleted. 4. Progress is being made in estab- tishing a professional banking cot- toge. 5. Speciattzed courses have been conducted for banks but there remains an urgent need for banking courses in core disciptines, and external training experts are being sought. 6. Further measures need to be taken for capacity buitlding and training in the banking sector and in the accountancy profession. 56 . ANNEX3VI Page 17 of 17 WCON FINANCIAL SECTOR MJUSIEMT CREDIT PRAPOSED RF DAS A ACTIONS (199-1994) VI. INFORMAL FINANCIAL SECTOR Objectivet Explore prospects of integrating the informat financial sector in the format system. Performance under FINSAC I FINSAC II Nonitorable Actions Imptications for FINSAC II Action Program and Schedule 1. Despite its significance in fl- 1. Study the informal financiat 1. Before Negotiationss noncial intermediation, and its markets in order to investigate potentiy important lessons for prospects for closer interaction *(a) Terms of Reference for the ftr policies, little is between the format and informal ff- Study on the Informal financial mar- knoun about the informal ffnancial nancial systems. kets have been agreed with IDA. sector. 2. Before Second Tranche release: (a) Comptetion of study and submis- sion of draft report to IDA for com- ients. 3. Before Third Tranche releases: (a) Review with IDA the recomumenda- tions of the study on the informal financial sector. VII. INPLEMENTATION ARRANGEMENTS Objective: Ensure effective ioptementation of the financial sector adjustment program. Performance Under FINSAC I FINSAC II Nonitorable Actions Imptications for FINSAC II Action Program and Schedule 1. The FINSAC imptementation 1. Establish the Program Imptemen- 1. Before Negotiations: arrangements currently in place heed tation Unit as focal point to pro- to be institutonalized and streng- vide guidance, oversight, coordina- *(a) The Government has agred to as- thened. tion and monitoring for att FINSAC tablish a FINSAC Implementation Sec- related activities. retariat with organization and staffing satisfactory to IDA. 2. Before Board Approvat: (a) Confirmation of the establish- ment of the FINSAC Imptementation Secretariat and appointment of the Head of the Secretariat. * Conditian actlons already Net. .5- AN V- Pag 1 of 24 GHANA: SECOND FNNIA SECTO AD.IUSMnT PROgRA eHIA ASSSAC PROGA 1. Introducion: The techiical assistance component of the second financial sector adjustment operation alms to help the Government strengthen the sector's capacity by Improving the capabilities of key fnancial sector institutions through appropriate institution building, techncal assistance and tn programs, and to consolidate and make irther progress on institutional development prograns Initfaled under FINSAC L The Central Bank's ladersip in this second phase of the reform program Is critical to ensure that the financial system Is prepared to meet the dha~lenge of the 1990s, and Its restructuring and operational strengthening is, tiherefore, an important objective of the program. In addition to the Bank of Ghana, the principal institutona beneficiarles to be supported by the Credit are: the formerly distressed banks, for which the bank restructuring program initlated under FINSAC I needs to be sustained and reinforced to ensure their successfd turnaround and future viability; NPART, whch requires expert assistance In order to be more effectve in recovering the funds expended by the Government for the acquisidon of non-performing assets from the formerly distressed banks; the proposed Banking College as part of the overall program of capacity building and training for bank~rs non-bank financial institutions inciuding the new National Insurance Commission, the Social Security and National Insurance Trust, the Auditor General's Office, the Stock Exchange and the Institute of Chartered Accountants. Teclnical assistance support is also to be provided to establsh the FINSAC Implementation Secretariat to guide, coordinate and monitor all activities pertaining to the ffnlncal sector adjustment program, and to the smal linn dek in MFEP, which the Government proposed to esinblib to ensure coordination between the Secretariat and MFEP. 2. The Table below provides a snmary of costs of technical assistance. The project will finance 100 percent of total expenditures. SIMAYÔPCOT OFTCNCA.SiTAC.N.TANN USS Ced US$1I Cedb UJS$ Cedh~ USS Cedis etanacomm Suk ,'ss 788 MPAKr , f¢ .625& ./ 1115.$0 O00..84..0 Beiniç inacia -58- ANNEXYV Page 2 of 24 3. The total consultant services under the program are est~ated at about 965 man monhs, of which 140 man months would be for local and 25 man months for foreign consultamnt. The estimated total man months of consultancy services for the prncipal beneficiary Institutions to be supported by the Credit are as follows: 0212 arrangements and privat*ztin 205.~ . 154 7 6 andth GhanaStd uag)42731 CopraeRstrulctrn ndPofestia FianaSrvcs (nldn te AitorGnera's *ISA hupemnido Scrtaia 1 .4 Ja t5® 4. Detailed cost tables are in the project file. The descriptdon of various components of the technical assistance program and the related detailed budgets are provided in pages 2 through 23 of this Annex. A. Technical Assistance Pro,ram for the Bank of Ghana 1. B 5. The second financiat sector adjustment program H is aimed at: Initiating policy and institutional reforms directed at stil further deepening, diversifying and strengihening the iancia1 system, so that it will support both higher levels of and more productive savings mobilization and investment in Gihama; and continning and consolidating the restructuring of the fminta system and institution building started nder FINSAC I. 6. Strengthening the performance of the Bank of Ghana (BOG> is a critical element of FINSAC I. 'The Central Bank should be the focal point of the financial system. The financial change to be made in Ghana require the support and encouragement of the Bank of Ghana. At the ame ine, the BOG must be in a position to ensure that the developments are both cnsisent with overall financiat stability and provide effective means for the implementation of monetary policy (including foreign exchange policy). -59- ANNEX VU Page 3 of 24 7. In this situation, the manner and implementation of financial policy in general and monetary and supervisory policy In particular will be extremely Important since it must nurture an environment conducive to financial development. The effectiveness of the BOG's own internal operations, such as those associated with the cheque clearing system are also important, since they are a basic Ingredient of the financial services offered to the community generally. Consequently as financial development progresses, Improvements must be made in the formulation and Implementation of monetary, foreign and supervisory policy with more reliance being placed on market-based mechanisms that has been the case to date. Some changes in the means of Implementing monetary policy have been made. The process must be continued. It must be supported by Increased analytical capacity in the Bank of Ghana, as well as Improvements In the quality and timeliness of data. Much work needs to be done in the research area, and in foreign exchange area to develop the Bank of Ghana's capacity to deal in foreign exchange and to manage the countries reserves. Considerable work has been put into Identifying the supervisory policy needed, but much work must be done to make its operation adequate and effective. 8. To properly fulfill its role, the Bank of Ghana needs to make major changes to the resources available to it and in their organization. Its structure needs to be changed. Management tools, including Budgets, work plans and manpower and computerization plans need to be developed and put into effect. These must deal with the needed development and training of staff at the management and professional levels, as well as improvements to the quality and timeliness of the management, business and economic data derived from its operations. 9. The needed changes will Involve critical changes in the work of virtually all areas of the BOG, but in particular, the Research, Monetary and Foreign Exchange Policy, Supervision and Prudential Oversight and Banking functions of the BOG. The Computer and Systems and Accounting and Budget Departments will need to upgrade their operations to support the work of the BOG and to produce timely data and management information. 2. ad Tcaa Need 10. To achieve the needed changes in the performance of the BOG, a technical assistance program involving a range of advisors/consultants, increased technology in the form of computer hardware and software, as well as assistance in training is required. (a) CpMUutn and Mode:rniztion Of QOim 11. The BOG has a rudimentary computerization operation under way, utilizing hardware and software which has limited functionality and effectiveness. The BOG uses an 8-year old IBM mainframe system together with a recently acquired IBRD 9370 system. The existing computers and basic procedural software, human resource and control elements of the overall program need to be considerably enhanced to improve the BOG's effectiveness in carrying out Its various monetary man ment fmctions as well as for its internal operations. 12. The modernization program Includes: (a) ft- initial review and streamlining of the procedural framework with the assistance of technical expertise; (b) a definition of the information processing and reporting needs of each major functional area (Including foreign exchange operations, external debt, domestic operations, accounting, research, banking supervision, secretariat, exchange controls, etc.) In order to investigate and select a responsive application software package; (c) formulation of an automation strategy and Implementation plan; (d) financing .60- AN= E xY Page 4 of 24 the procurement of additional hardware and software; (e) supporting the contracting of local expertise to implement a comprehensive MIS and streamlining of internal operations; (f) substantial training in support of the program; and (g) establishing efficient and timely linkages with commercial banks to facilitate clearings, settlements, and compliances with the regulatory and prudential frameworks. 13. It is expected that several application packages will be purchased for the use of the BOG. These include packages to handle: accounting and banking applications for domestic operations; foreign exchange and reserve management; Integrated economic database; money/bond market and securities; statistical packages for analysis; interbank funds transfers and settlements/clearing house operations; monthly/weekly reporting from all financial institutions; management information system for monitoring financial position of major accounts. Some of the application programs will be develop at the BOG or by a local software house. 14. A Computerization Steering Committee has been established by the BOG. With consulting assistance, the Steering Committee has developed an Information Technology Program for the BOG which has been reviewed by IDA and found to be acceptable. A six-stage approach is proposed for the upgrading of the information technology resources at the BOG. Each stage of the computerization program is divided into several phases so as to provide a sound framework to facilitate quality control and effective project management. Each phase will be made up of several tasks and subtasks. The work carried out for each stage will be documented in a report. The first stage pertains specifically to the identification of domestic banking operations application systems requirements and comprises the design of a new system for banking applications following an evaluation of the existing general ledger package. 15. Staged covers the development of the information technology plan, and comprises: evaluation of existing Information technology system at the BOG; specification of user requirements; propose new information technology system; development of the proposed information technology system; review Implementation, and the recruitment of information technology specialists for BOG. Stage3 is establishing the procurement of hardware and software: evaluation criteria for tenders; preparing and issuing tender documents; evaluating bid offers; attending demonstrations and reference site visits; finalizing selection of bids and award contracts; placing order for equipment and software. StagcA is manpower development and training, covering local and foreign training in computer appreciation; management information systems; systems analysis; computer programming skills; advanced systems analysis; programming (systems and software development). Sag5 is systems development installation and testing of hardware and systems software; preparation of systems specification for application software enhancement and customization; implementation of new controls and manual procedures; systems design and development; modification and enhancements of application packages; and software development. The final Se is testing, training and review, testing software packages; conduct parallel runs; train BOG personnel on the new application software; conducting a post implementation review. 16. Under the Information Technology program, computerization/modernization is scheduled to be accomplished within three years of credit effectiveness, i.e., by end-December 1994. The BOG is already Implementing recommended remedial measures and Improvements In procedures and controls in preparation of the program. The investment costs over the next three years of the FINSAC I program are about US$2.6 million comprising US$1.4 million in hardware, microcomputers and other equipment and US$1.2 milon in software. To help the B0 develop systems and software and other requirements, substantial assistance will be needed from consultants -61- ANNEX VR Page 5 of 24 and computer experts. This is estimated at 60 man months from 1992 through 1994, comprising about SO man months of local and 10 man months of foreign consultants services. Provision Is made for introductory courses (local) and advanced and specialized courses (foreign) in computer appreciation and management, systems development and analysis, programming and software development and systems maintenance and support. Foreign courses costs Include fees, travel and subsistence expenses budgeted at US$10,000 per person for a total of 11 persons. Estimates of foreign and local courses are based on the Information Technology program. (b) Regh and Poliev Dii 17. The proposed Research and Policy Division is to be responsible for the BOG's economic research activities, as well as the formulation (and to a degree implementation) of monetary (incuding foreign exchange) policy. At present, its role is heavily statistical and its research and analytical activities less extensive than is appropriate for such a unit in a Cantral Bank. The statistical work itself needs to be upgraded so that the information available is more timely, accurate and comprehensive. Along with these changes, the formal outputs of the Department's work, in terms of papers for the Board and the Government and its publications, need to be expanded. 18. The present department has a basic core of professional staff, but experience in economic analysis and the policy activities envisaged for the unit is extremely limited. Recent attempts to recruit a head of the department were not successful. Efforts to recruit the head of the department need to be actively pursued. 19. The advisors/consultants as needed to have the department fulfill its role and to train staff for the future are: (i) An adviser on contract to help strengthen the capabilities and procedures of the Research area of the Bank for two years; (ii) An expert to assist for one year in the development of market instruments to assist In the Implementation of monetary policy; (iii) A consultant on contract for two years to assist develop the BOG's expertise in reserves management and foreign exchange trading; (iv) An expert on data coordination to ensure data preparation and use is timely and appropriately coordinated both within the Bank and between the Bank and other areas of government. This exercise, which is expected to take six man months, would extend the work of an expert currently in Ghana. 20. The fundamental role of the Supervision Department is to safeguard the soundness and stability of the banking system with a view to protecting depositors. The department should also be responsible for financial stability generally with a view to generating and maintaining confidence in the overall financial systems and savings Institutions, in particular. As an aspect of this, the department should monitor Institutional developments and ensure all nn-bank financial Institutions are appropriately supervised. -62- AM=A..I Page 6 of 24 21. The supervisory framework (logislation, statistical requirements, etc.) in Ghana has been Improved In recent years. It is basically sound although it would benefit from still further development. There Is an immediate need to substantially strengthen current operational practices and the Supervision Departmenes capacity in order to comply with the Banking Act's requirement dat all bank's be Inspected at least once a year, and to develop the Department's resources for the future. 22. Work is needed to develop and implement more timely and stronger on-site examination practices (including follow-up requirements), and off-site monitoring. In particular, an early warning system, even if of limited scope, needs to be operating with minimum delay. There is a need to develop expertise in and operational arrangements to handle distressed or failing banks, including their restructuring. Work is also needed to upgrade work manuals, staff training, and oderwise improve the work of the department which also must continue its program of local recruitment. 23. To help upgrade this area of the Bank of Ghana's operations, the BOG needs: () A senior advisor, experienced in supervisory practices in a number of countries to guide the Department's work. It is anticipated that the Advisor would have direct access to and report to the Governor of BOG. The BOG will need expert oversight of its Supervision work for most, if not all, of the three years of the FINSAC II operation. The advisor would be recruited on a contract for an initial period of two years, with an option for extension. (II) A consultant on short-term contract for about one mouth to assist in developing a framework to ensure that appropriate supervisory arrangements are developed to cover the full spectrum of financial institutions. le task would involve assessment of the adequacy of both current and proposed legislation, as well as institutional arrangements to put necessary supervision into effect. (d) 24. Banking and clearing arrangements are not timely in Ghana. The BOG itself has to upgrade Its associated account keeping arrangements. Similar improvements are needed to account keepin arrangements within the commercial banks. Beyond this, basic clearing operations need to be streamlined in order that the time taken to clear cheques in Accra and outer cities/regions is brought down from 3 days and 21 days, respectively, to 2 working days and a maximum of 8 working days, respectively. This should not be difficult because cheque volumes are not large. A consultant familiar with banking practices in a range of countries should review operations of the clearing house and the associated account keeping in commercial banks and the BOG and advise on changes necessary to achieve a more timely operation. The task would require a well qualified expert for about 2 man months allowing for the need to review fundamental banking operations in the Read Offices and some branches of banks involved in clearing. -63- ' ANNSX II Page 7 of 24 (e) Accmnting and Jnt n Auding 25. As a matter of priority, the accounting and auditing procedures with the BOG need to be upgraded. At present, the accounting and expenditure approval processes are split between a number of Departments. The Accounting and Budget Department must have full responsibility for the preparation of the Bank's accounts In conformity with appropriate accounting standards and for ensuring that Budget processes are complied with. Expenditure processes need to be modified to ensure they are effective but not operationally cumbersome. The Internal Auditing processes need to move to being less reliant on extensive pre-checking and detailed verification of accuracy, etc. (which should be the responsibility of operational departments) to greater reliance on verification that the Bank's systems and procedures have been followed. 26. The BOG will require an accounting adviser to help with the upgrading of accounting and budgeting. Provision has been made for such an adviser for two years. While in Ghana, !we could also be required to help establish appropriate accountin' standards for the commercial banks in conjunction with the upgrading of the BOG's supervision work. 27. Provision has also been made for about 9 man months of expert assistance to help improve the BOG's internal auditing function. The expert would help the Internal Auditing Department make the transition to a predominantly systems-based auditing approacL, enhance L usefulness of the function as a tool for management, train staff (on-the-job) and develop appropriate training program for their professional development. He would also assist in the area of appropriate financial systems development. 28. The BOG recognizes that It must undertake a substantial program to: (i) Fill some critical gap a its staff structure (some of which have been discussed above), (i) Strengthen the performance of its staff, and (iii) Introduce suitable technology. It has been working with local consultants to develop both manpower and information technology plans. 29. The manpower plan might as an immediate task identify critical gaps in the senior levels of the Bank and the recruitment and training requirements to alleviate them. It then could move on to a more comprehensive audit of job requirement and skills of present staff. It is clear that many changes should be made to organizational arrangement and operational procedures in the BOG. An external consultant could work in parallel with the management consultants to coordinate an enhancement program. An expert with experience in central banking would not only help the BOG Improve its operational performance in the short run, but would also provide an additional and useful dimension to the manpower plan and the associated identification of staffing needs. The expert would be needed for about 6 man months. It is expected that he would need to spend an Initial period of 3-4 months in Ghana and then visit on occasions to advise oz progress. Provision has been made for two trips to Ghana in 1992. -64- ANNEX Page 8 of 24 30. raining. The manpower plan will be an important ingredient In clearly documendng the extensve truining needs of the BOG. The training to be undertaken will Involve a fll range of arrangements, including extension of present on the job and in-house traiunig, as well as participation in training courses at international bodies and secondments to other Central banks. As noted above, many advisorsexperts arte to be employed by the BOG. In ali cases, their contracts should include the need to pas onto BOG staff expertise relevant to their connuing work. 31. BOG's training includes provision for an external instructor to upgrade the general ~n.house training for senior and middie managment (six man months), the attcndane at overseas seminars, including fees, travel and subsistence for six persons each year, and computer tran.ng 一65。州啞望邁逐韭 h爭，of24 〕！〕〕，！〕〕！〕〕！。〕〕．! -66- A~ _va Page 10 of 24 -67- ANNEX U page 11 of 24 i0 nIi if i Oij. 4 mim -68- ANXV Page 12 of 24 B. Tech~a Ass~ac Prowra for Ban Rescturing jndNPR 1. 1. BkguDnd 32. The implementadon of the bank restructuring and the non-performing asset recovery program initiated under FINSAC i are wel under way but need to be continu and reinforced to ensure the successful turnaround of these formerly distressed banks, and effetveness in the recovery of non-performing assets by NPART. In order to sustan the viabilty of the commercial banks and further improve their operational and technical efficiency, tey require futher management reform and insdtutional strengthening including, (a) Elaboration of strategies and buines plans addressing both qualtave and quan tive performance objectives and targets (based on agreed performance Indicators); (b) Revision of the organizational and corporate structures to better dellneate accountabilties and responsibilides, and to provide for mangement fin~ons which are not curreny addressed; (c) Development of policies and procedures for the major func0onal areas incuding credit risk, financial and human resource management; (d) Improved operating procedures and customer service to foster greater con5dence in the banMng system; (e) Improved informaton systems through computerization of Ghana Commercial Bank and a computer needs assessment for the commercial banks as a whole. (f) The continuation of external advisory support to assist in the complex and sensitive task of loan chisification, asset evaluation and recovery management for NPART. 2. Contnution Of te Prora for Man~een Impoveen And Resrutuin of the Commercial Bak 33. The technical assistance portion for these insdtutions will encompass te 7 formerly distressed commercial banks and NPART: (a) the present expatriate baning staff involved in the twinning arrangements and technical assistance teams plus additions for the three banks which do not yet have in full the required support is calculated at 42 man-years, and (b) the program is tapered off over the period of FINSAC H on the basis that as banks acquire private shareholders te govermn commitment to fin iy aist them will diminieh, resulting in about 28 man years funde under the credit. 3. C~netf T cal and Instat 34. With the acceptance by the Government of a reduction its overall abareholdings in the commercial baning sector to a minority posilion, the Government is in the process of developig an acdon plan for the successful priva tion of the banks. This will require investment -69- ANNEXZLYB Page 13 of 24 banking expertise for assessment, valuation, packaging and marketing of the banks to both domestic and international investors. The Government has agreed to appoint a team of financial consultants to carry out a review aimed at designing a specific proposal for implementing the divestiture program. The time required for this effort for the seven banks to be privatized is estimated to be 26 man months over the duration of the FINSAC II program. 4. Coe for Tedmica Assistance for CoM rization Prora for gC and Needs Assessment for the Remaining Banks 35. Ghana Commercial Bank has a nation-wide network of over 150 branches and has approximately 60% of the private sector current and savings deposits. GCB's computer-based system is considered to be unreliable and inefficient It currendy has computerized only its Accra branch (out of a total of 16 branches in the greater Accra urea), and is dependent on outdated equipment inadequately supported by the supplier. This often results in lack of spares to maintain the hardware and extended periods where manual operations supersede the computerized process. In view of its importance in the banking system, the Government wishes to support GCB in its efforts to modernize its operations, and improve service levels and its competitiveness. The proposed technical assistance will support GCB in its efforts to modernize its operations to improve Its customer service. This will be achieved through the implementation of a mini computer hardware and packaged banking software for back-office operations. In addition, the use of microcomputers at the sixteen branches in Greater Accra area and nine regional branches will act a focal points for inter and Intra settlements in their respective regional area. There will be close coordination with the BOG to ensure timely financial supporting through electronic linkages. GCB plans to complete its computerization program in about 5 years at a total investment cost of US$4.5 million. However, the proposed Credit will provide about US$2.8 million for procurement of hardware and software and training during 1992 and 1993. 36. In addition, the government wishes to carry out a computerization needs ament study on the remaining commercial banks being restructured preparatory to bringing their information and technical systems into line with the overall upgrading of the banking sector. 5. Coiut of Technical Assistance forN 37. NPART is now duly constituted and carrying out its mission to recover the non- performing assets (NPA's) transferred from the formerly troubled commercial banks. In order to enable NPART to adequately fulfil its role of asset recovery from the 1332 transferred accounts with an aggregate value of C49.5 billion, there is a continuing need for external advisors to aid in and expedite the process of recovery and liquidations. 6. Technical ASisanc m M CoQ Estima (a) Bank Continuing technical expertise for the commercial banks including the cost of foreign bankers, banking experts and twinning arrangements with banking institutions $3,900,000. Cost and man year estimates (total of 28) are based on the actual costs of ongoing arrangements for four banks plus additions for the free banks which do not yet have the full technical support requirements. (b) GCILCOMU and.Needs.Aeme Std Costs of computer hrdwar, microcomputers, peripheral equipment and software for the computerization ’〕〕〕、〕〕〕 寫 ’〕〕誚‘〕〕！〕’〕〕！ 館胛飾婦M 觀萬叉廈襼叩·弘－ 自 _72- AN= Vn Page 16 of U C. I&dwkdAMhW= ft=2m Ez Awkinff andXmidal 1. The Need ft Trai 38. Financial sector development prompa the need for radically different methods of Managing banks, marketing and delivering banking services, financing investment, controlling risk, ensuring banks' financial viability and performance, and carrying out basic baWring operations- The govenunent of Ghana has undertaken a program of liberalization of its financial markets and bank restructuring. Competition in banking services has increased and greater emphasis Is now placed on efficiency and prudent bmking practices. These changes in the banking system create a need for stronger banking skdls aW expertise at all levels, a more professional approach to the management of financial inswations and greater depth. in the rob of management. To respond tD &m needs, FINSAC H proposes to finnoe a comprehensive training prograni for bankers. 39. Building on the achievements made under FINSAC 1, further measures will be taken for capacity building and training in, the baoking and financial sectors. FINSAC H would support further training in urgently needed areas such as credit andysis and risk management, finance, financial management, money mid capital markets, foreign exchange marketing and other basic skdls. Such subjects would comprise the core curriculum of a training program for financial professionals in Ghana. Other components or the program would include development of training materials; assessment of training needs; assistance in the establishment of the banking college and nwapment of training by a foreign bankers' training institute; and Winical. suppm to further the work of The Ghwu Institute of Bankers and the Stock Exchange. 2. 3k CgUgM of TwImical Assistance to-Enhance the JMjMWg N2WI in the &aft 40. The project would provide financing for the establishment of a Bankers' Training Institute. The Instituft would conduct training In basic bah1ang disciplines with the objectives of t) strengthening banking skills in the bode fimcdons of management, lending, planning, financial and internal audit, H) introducing recent instruments and techniques in banking and financial markets; (iii) developing a more professional approach to management and management systems; and, (1v) upgrading the quality of training conducted within banks in Ghana through the transfer of skills, Wmiques and knowledge from abroad. 41. In order to bring the necessary technical expertise and experience to ben on the development of banking skills in Ghana, a foreign institute with relevant experience in training bankers in developing countries would be contracted to provide technical assistance. The foreign institute would be byGMMM COunterpartstDcasure sustainability and sensitivity to national mues and pmcdces. The tole of the fiwelp tratrung institute would consist of: " EMMA* and initially managing the training institute; " Training natimalStAff to 2SUMmanagement of the institute; " Providing selected instructors and course materials from own repertory; -.73 - ANNEX VR Page 17 of24 S Selecting courbs to be taught from other sources: commercial firs providing traning courses, professors, bank training institutes; • Supervising the development of oas. matrals based on Ghanalan experienco. 42. A program of coore skills development would be introduced. The core curriculum has been doveloped and is in the project file. In sunmary, it coins of: (a) credit training (prnciples of credit and redit risk assesument, forecasting client needs, Mnylng problem oans, collateral valuadon, portfolio evaluation and foan administratin and supervision; (b) financial accounting (accounng standards, inancial analysis, budgeting, corporate finaMne, cashno analysis, etc.); and (c) specialised lending to small and medium enterprises and corporate restructurng). Additol courses In inancial management (planning, foreign exchange internal audit, etc.), money, capital markes and financial instrmmne, branch nh~m res managment marketing and information tchnology would be integrated into the program primarily through short seminars and courses. Posseeson of thes. slls would permit bankers to partcipate effectively with foreign technical exper in the elaboration of instutiona development as wel as In the evolving financia markets. 43. In order to enhane the capacity building and the training needs in the bankng sector, detailed plans are being developed covering such issues as expatriate support, professional and administrative training and the necessary capital investinenis to support thes efforts. The estimates below allow for some cost recovery from users beginning in 1993. 3. Ghaa Insn of ~Banker 44. The Ghana Insdtute of Bankers provides bankug education in fundamental bankng skils and in the theory of banicng. It performs an imporat role In diffusing baning educaon. It administers the Part I exam of the British Insttute and is embarking on a program to adapt and administer Part 11 in Ghana. Part is now given in the U.K. Financial assis~ace to furter tho work of the Insttute in taloring their sylabus to Ghanaian requirements and to carry out traning in more remot areas would be included under the project. 4. Sc Ex 45. There is a need to promoe greater public awareness in Ghana on the role and operations of th newly formd Ghana Stock Exchange, and to build capacity In the area of finanni rumens, bond market operations and the use of information technology. 5. un 46. In conformlty with the Banks approach toward education projects In Ghana FINSAC It would provide financing for training exprs, course materials, books, teaching ads, equipment and administeative vehices. It would also finance a service contract with a forign bankors' training bnstute and training abroad both for trainers and for professional staff reqring specialised trad~g in limited demand Attachment U provides a preliminary estimate of cost which would be eligible for uch financing. -74- A TE PH Page 18 of 24 6. Techical Assisanc PrEm Cost Esimates (a) The capital costs of books, reference materials, instructional aids and motor vehicles are estimated to be $375.000. (b) Costs of financial training includes management of training at the banking college by a foreign bankers training institute. Provision has been made for trainers' fees, travel and subsistence for seminars and faculty development and for external instructors. In total they are estimated to cost $1,725,000. The program provides for about 58 man months of specialist instructors and other technical assistance. (c) Consultancy costs related to the assistance to be provided for tha Ghana Institute of Bankers are budgeted at US$40,000 for about 4 man months of work in developing the examination syllabus. A small provision of US$10,000 has been made to assist in training and course delivery in areas presently not served by the Institute. (d) Estimated costs related to the Ghana Stock Exchange for promotional activities and training total $100,000. -75- å~ HKiI Page 19 of 24 iiI H Ii 1 1 1 1 1 0 -76- ANN VU Page 20 of 24 D. Technical Assistance Program for The Non-Bank Financial Institutions. Corporate Restructuring Proram. and Professional Financial Servics 1. (a) Non-Bank Financial Sector 47. There are a significant numbers of financial institutions in Ghana which are not regulated by the Banking Act though some of them come under other regulatory or statutory control. These include: insurance companies and brokers, credit unions, thrift and savings and loan institutions, the stock exchange, discount-houses, an export finance company and other institutions. Issues pertaining to the sector include: the capital adequacy, solvency and credit standards of the major insurance companies, the management of SSNIT's assets and liabilities given the high inflation environment and limited investment opportunities, and the need for the regulation, supervision and appropriate accounting, financial and prudential reporting in the sector. (b) Technical Assistance to the Non-Bank Financial Sector 48. The Ghanaian government has made it a clear policy objective to broaden and deepen the capital markets to enable it to more effectively implement its fiscal and monetary policies. In order to support that policy through the technical assistance program, a number of key reviews have been agreed. They are as follows; (i) Review of the legal/regulatory framework for non-bank financial institutions presently being drafted by the government as the Financial Services Act; (ii) A diagnostic study of the insurance industry to evaluate its financial position, performance, profitability and competition; (iii) A study of SSNIT's asset/liability management, its forecasted growth projections and their potential impact and importance to the future of the capital markets. (iv) There is a need, in the context of broadening the capital market, to investigate the informal financial markets and assess the linkages and interactions between the formal and informal sectors 2. Bakrod (a) Coate Restructuring am 49. The distress of the Ghanian Corporate sector was evident under FINSAC I, as a substantial portion of the banking system's loan portfolio was non-performing. The successful rehabilitation of the potentially viable distressed enterprises is an important step in restoring the productive capacity of the Ghanaian economy, particularly in the mining and manufacturing sector. -77- A XII Page 21 of 24 (b) Technia As e for C oa c 50. The Government is envisaging several initiatives to help the restructuring of distressed but potentially viable enterprises (PVEs). These initiatives include: (a) financial workouts for selected enterprises, by NPART with the voluntary participation of banks, (b) the encouragement to the private sector to set up new venture capital companies which could participate in the CRP, and (c) continuation of the preparatory work to establish a new corporate entity to be called First Finance Corporation (FFC) with predominantly private sector ownership to provide venture capital along with other financial, managerial and technical services for the restructuring of distressed but potentially viable corporate enterprises. In the meantime, a temporary program will be formulated and implemented, with a view to proving financial relief measures for distressed but potentially viable enterprises (PVEs) to arrest their further deterioration and preserve their prospects for subsequent rehabilitation. The first steps in this temporary program are to update the database on PVEs and examine and develop modalities to achieve these objectives. In this regard, an expert consultant team is being sought to assist the Government. It is expected that this task would require about 16 man months of consultant expertise. The terms of reference for the consultant's review have been agreed with the Government. 3. Professioal.Fnacl Services 51. Upgrading of skills and improving the effectiveness of the Auditor-General's office through technical advisory services, training and logistical support. 52. Continuation of capacity building and training for accountants through technical assistants the Institute of Chartered Accountants, Ghana. Provision is made for the extension of the services of the two advisers appointed under FINSAC . Costs are based on their existing salaries, travel and subsistence expenses. 4. Technica Assistance Prorm Cost Estimates (a) Expert consultancy fees for the review of the legal and regulatory framework for non-bank financial institutions, the diagnostic study of the insurace industry, training for the new National Insurance Commission, the study oA SSNIT and the study of the informal sector are estimated in total to be $700,000 for a total of about 68 man months. (b) Specialist consultants for corporate restructuring are estimated to cost $200,000 (c) Expert for two years to help develop the capabilities of the Auditor-General's office, $225,000, and books, reference materials, computers, and travel for overseas training of staff from the Auditor-General's office are estimated to be $75,000 (d) The continuation of the services of the two advisers to the Institute of Chartered Accountants, Ghana, for two more years are estimated on the basis of their present costs to amount to US$400,000. � Я 9� > � З���э � � � ��� �� � � ��� $ � а л � � Р� 91 � � � � ��� � � � �� О �� � � � р � � г � � � �г �и л �л__ r v_�, �го о � ZS S� 9io� р �ffi� � � о� + � � � � � ��� �� � ����� � о г �о � ��� �� Wл ��©л С�О� � � + + � + _ и��л � � � ��� � �� � ����� � т и � ��� �� т�ол т �С� � � � � � � � � Я4 � � � � �� � �� � �� �� � г 3 л �� р �о � , �� � �,� � ж�,� + �� � � � ��� � �� � ����� � � �� OZ до ZZ а�д л X�Nhi - 8t� - _79- ANMMX Page 23 of 24 E. AKhWUCe PCOMM for IMMMOUfm &MdAdP& and WEP jW:gM JLnlj 53. To ensure effective of the ongoing FINSAC I as well as the new FINSAC 11 program and activities, there is a need to institutionalize and strengthen the informal )n amaigements currently in place. A FRISAC Secreta&t will be set up, with and swffing acceptable to IDA, as the focal point to provide . oversight, coordmation,. monitoring and reporting all activities pertaining to the proposed financial sectu adjustment program. -The Secretariat will have a light structure organized along the following lines: (a) It will be headed by an Executive Director baclmd by an expatriate advisor. M It will convise initially 3 sections each to be headed by a Section Chief- (1) Banking Restructuring and NPART;(2) Corporate Restructuring;(3) Non-Bank Financial Institutions, Administration and Legal Affairs (c) 7he Secretariat will be supplied with the necessary support staff, office equipment and transportation. 54. 1"e MFEP is to establish a small Liaison Desk to ensure coordination between MFEP and the FINSAC Implementation Secretariat. 2. Technical Assistam Progm Cost Estimates (a) Salaries of the head of The unit for three years and an expatriate advisor for two years. office equipment, and three motor vehicles for the Secretariat are estimated to be $750,000. (b) Office and equipment and logistical support for the MFEP liaison unit are estimated to amount to $100,000. - во - �лпv�;к vп� Fage Z4 of �4 �� � � �� �в ж # �� � � � � � �� � ш¢ �� �� �vZ �� � . � tWf� ' � � � � ��� � �� ��� �� ��а � °�� � �$ � _ � . �/� � �/ Ф Z � � г � � �� � � а • � � � � �� � � �� � � -81- ANNEX VM SECOND EMS&NOM SECTOR ADHISINEM PROGRAM &gqjmLqAW Data Sheet JLMdawa of KU EMW (a) Time taken to prepare the program 13 months (November 1990-November 1991) (b) Appraisal mission July 1991 (q) Negotiations November 1991 (d) Planned date of effectiveness January IM b@M MA RhMIMMOn ACtAM (a) Around October IM and April 1993, or other agrec4 date, IDA will review the Government's progress in implementing the program and the status of actions to be completed for the release of the second and third tranches of the Credlt respectively. M. DQUMIfflft In the ftWect F1 (a) Bank of Ghana: program and timetable; audited financial acc3unts for the fiscal years ended 1988 through 1990, structure, and the draft Bank of Ghana Act. (b) Terms of rehrence including action plan for pnvatzation of government owned banks. (c) Categorhation of enterprises for recovery, NPARTs action program and Aggregate Recovery Target (ART). (d) Various terms of reference for studies pertaining to the CRP, non-bank fimcial institutions, SSNIT and informal financial markets. (e) Detailed cost tables for the technical assistance component. MAP SECTION 婦BRD 18112RI 江