Ghana - First and Second Structural Adjustment Program Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10686 PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS (CREDITS 1777, A-025, A-025-1-GH AND 2005, 2005-1, 2005-2-GH) MAY 29, 1992 FILE COPY Report No. 10686-GH Type: (PPR) WISE, G / X31679 / T9003/ OEDD2 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (annual averages) Currency Unit = Cedi 1986 US$1.00 = Cedi 89.2 1989 USSI.00 = Cedi 270.0 1987 US$1.00 = Cedi 153.7 1990 US$1.00 = Cedi 326.3 1988 US$1.00 = Cedi 202.4 1991 US$1.00 = Cedi 362.8 (first half) ABBREVIATIONS AND ACRONYMS ASYCUDA - Automatic System of Customs Data Entry, Control and Management BOG - Bank of Ghana CA - Crown Agents CAG - Controller and Accountant General CFF - Compensating Financing Facility CIDA - Canadian International Development Agency COCOBOD - Ghana Cocoa Board CPMU - Central Project Monitoring Unit DIC - Divestiture Implementation Committee EFF - Extended Fund Facility EMS - Economic Management Support ERP - Economic Recovery Program or Export Rehabilitation Project ERPTA - Export Rehabilitation Technical Assistance Credit ESAF - Enhanced Structural Adjustment Facility FINSAC - Financial Sector Adjustment Credit GCMB - Ghana Cocoa Marketing Board GIC - Ghana Investment Center GOG - Government of Ghana IDA - International Development Association IERD - International Economic Relations Division IMF - International Monetary Fund IPA - Investment Projects Analysis Division ISAC - Industrial Sector Adjustment Credit KfW - Kreditanstalt fur Wiederaufbau MFEP - Ministry of Finance and Economic Planning MSD - Management Services Division NDPC - National Development Planning Commission NPART - Non-Performing Assets Recovery Trust NRS - National Revenue Secretariat ODA - Overseas Development Administration OECF - Overseas Economic Cooperation Fund (Japan) OED - Operations Evaluation Department OHCS - Office of the Head of the Civil Service PAMSCAD - Programme of Actions to Mitigate the Social Costs of Adjustment PETA - Public Enterprise Technical Assistance PFP - Policy Framework Paper PIP - Public Investment Program PNDC - Provisional National Defense Council PPA - Program Performance Audit PPAR - Program Performance Audit Report RIC - Reconstruction Imports Credit SAC - Structural Adjustment Credit SAF - Structural Adjustment Facility SAIS - Structural Adjustment Institutional Support SAP - Structural Adjustment Program SAPSEC - Structural Adjustment Program Secretariat SAPT - Structural Adjustment Program Team SEC - State Enterprises Commission SOE - State-Owned Enterprise FISCAL YEAR January 1 - December31  FOR OFCIAL USE ONLY THE WORLD BANK Washington, D C 20433 U.S.A. Office of Director-4Gneral Operations Evaluation May 29, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Ghana - First and Second Structural Adjustment Credits (Credits 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Ghana - First and Second Structural Adjustment Credits (Credits 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I I I I  FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS (CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) TABLE OF CONTENTS Page No. PREFACE .....................................................................i BASIC DATA SHEET ........................................................ iii EVALUATION SUMMARY ....................................................... xi PROGRAM PERFORMANCE AUDIT I. IN TRODUCTION I.......................................... 1 II. OBJECTIVES OF BANK SUPPORT 2 .............................. 2 III. IMPLEMENTATION AND IMPACT 3 ............................. 3 Foreign Exchange and Trade Liberalization 3 .......................... 3 The Exchange Regime 3 ...................................... 3 Trade Liberalization 4 ....................................... 4 Price Incentives S ........................................... 5 The Stimulation of Private Investment 6 .............................. 6 Domestic Resource Mobilization ................................. 12 Management of Public Sector Resources 7 ............................ 7 Public Expenditure Management 8 ................................ 8 Civil Service Reform 8 ....................................... 8 State-Owned Enterprise Reform 9 ................................ 9 External Support 9 .......................................... 9 IV. RECENT ECONOMIC PERFORMANCE ........................... 10 Overview 11 ............................................... I1 V. EVALUATION ........................................... 12 Program/Project Cycle Issues ................................... 12 Design ................................................ 12 Appraisal .............................................. 15 Implementation ........................................... 16 Supervision ............................................. 17 Specific Components ........................................ 18 SOE Reform ............................................ 18 Cocoa ................................................ 19 Tax Policy and Administration ................................. 20 The Effect of Adjustment on the Poor and Other Vulnerable Groups ............21 Overall Evaluation ......................................... 23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (cont'd.) Page No. VI. SUSTAINABILITY ..................................................... 26 VII. LESSONS ............................................... 27 PROGRAM COMPLETION REPORT PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE ..................... 33 Background to the Bank's Involvement in Program Lending in Ghana ..................... 33 The First Phase of Program Lending: Supporting Economic Recovery ..................... 33 The Second Phase of Program Lending: Supporting Structural Adjustment ................... 36 (a) The First Structural Adjustment Credit ....................................... 36 (i) Preparation of the Credit ............................................ 36 (ii) Design of SAC I ...................................................... 37 (iii) Implementation of SAC I .............................................. 40 (b) The Second Structural Adjustment Credit ...................................... 45 (i) Preparation of the Credit .............................................. 45 (ii) Design of SAC II ................................................... 46 (iii) Implementation of SAC II ............................................. 48 Why Were Some Components of the Program More Successful than Others? ................ 53 PART II - PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE ............. 54 Economic Performance Under the Structural Adjustment Program ......................... 54 Economic Reforms Under the Structural Adjustment Program ........................... 55 PART III - STATISTICAL DATA ................................................ 57 Basic Credit Sheets: SAC I (Cr. 1777-GH) ........................................................ 57 SAC I African Facility (Cr. A025-GH) ........................................... 59 SAC I African Facility Supplement (Cr. A025-l-GH) ................................ 61 SAC II (Cr. 2005-GH) ......................................................... 63 SAC II Supplement (IDA Reflows) (Cr. 2005-1-GH) ................................. 65 SAC II Supplement (IDA Reflows) (Cr. 2005-2-GH) ................................. 67 ANNEX: Implementation Matrix ................................................... 69 ATTACHMENTS 1. Comments Received from KfW on the Draft PPAR .............................. 85 2. Comments Received from OECF on the Draft PPAR ............................. 87 3. Comments Received from Sweden on the Draft PPAR ............................ 91 4. Comments Received from the EEC on the Draft PPAR ............................. 93  PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS (CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) PREFACE This is a Program Performance Audit Report (PPAR) on the First and Second Structural Adjustment Credits in support of Ghana's structural adjustment program, which reflects the shift in emphasis after 1985 of the Economic Recovery Program started in 1983. The first of these credits -- SAC I, Credit 1777-GH, African Facility A025 -- was approved in April 1987, became effective at the end of May 1987, and was closed in June 1990. A supplementary credit from the African Facility A025-1-GH was approved in October 1987, became effective a month later, and was closed in June 1990. The second credit -- SAC II, Credit 2005-GH -- was approved in April 1989, became effective in June 1989, and was closed in March 1991. SAC II Supplement (IDA Reflows) Credits 2005-1-GH and 2005-2-GH were approved in October 1989 and November 1990 respectively, and were closed in March 1991. Cofinancing of US$60.1 million was linked to SAC I, and US$153.9 million to SAC II. The PPAR consists of the Program Performance Audit (PPA) prepared by the Operations Evaluation Department (OED) and the Program Completion Report (PCR) prepared by the Africa Region (Parts I and III) and the Borrower (Part II). The PPA is based on the attached PCR, the President's Reports, the credit documents, on a study of Bank files, and on discussions with Bank staff. An OED mission visited Ghana in October/November 1991, and discussed the effectiveness of the Bank's assistance with the Ministry of Finance and Economic Planning, the Bank of Ghana, the Cocoa Board, the State Enterprise Commission and other relevant ministries and agencies. The mission also met with representatives of the private sector. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowl- edged. The PCR provides a good account and assessment of the program experience. The PPA elaborates on the strengths and weaknesses of the Bank's performance and on the lessons to be learned. The draft PPAR was sent to the Government of Ghana and cofinancing agencies for comments. The comments received from the co-financiers (KfW, OECF, Sweden, and the EEC) are reproduced as Attachments to the report; no comments were received from the Government.  I I I i I  PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDITS 1777, A-025, and A-025-1-GH) BASIC DATA SHEET CREDIT POSITION (Amounts in USS Million) As of Mar. 31, 1992 Credit Oriainal Disbursed /a Cancelled Repaid Outstandinq /a 1777 34.0 35.2 - - 36.7 A-025 81.0 83.3 - - 87.4 A-025-1 15.0 15.2 - - 15.8 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a Cr. 1777 FY87 FY88 FY89 FY90 Appraisal Estimate (US$M) 7.5 17.0 34.0 - Actual (US$M) 10.2 11.0 33.7 35.2 Actual as % of Appraisal (%) 136% 65% 99% - Date of Final Disbursement: May 31, 1990 Cr. A-025 FY87 FY88 FY89 FY90 Appraisal Estimate (US$M) 23.0 73.0 81.0 - Actual (US$M) 16.5 16.5 63.4 83.3 Actual as % of Appraisal (%) 72% 22% 78% - Date of Final Disbursement: August 31, 1990 Cr. A-025-1 FY88 FY89 FY90 FY91 Appraisal Estimate (US$M) n.a. n.a. n.a. n.a. Actual (US$M) - - 15.0 15.2 Actual as % of Appraisal (%) - - - - Date of Final Disbursement: July 3, 1990 /a The credits were fully disbursed. Disbursed and outstanding totals differ from the original amount of the credits in terms of USS because of changes in the US$/SDR exchange rate.  - iv - PROGRAM DATES Cr. 1777 Actual Initiating Project Brief 12/31/85 Initiating Memorandum 02/26/86 Letter of Development Policy 03/02/87 Negotiations 02/23/87 Board Approval 04/14/87 Signing 05/19/87 Effectiveness 05/29/87 Credit Closing 06/30/90 Cr. A-025 Actual Board Approval 04/14/87 Signing 05/19/87 Effectiveness 05/29/87 Credit Closing 06/30/90 Cr. A-025-1 Actual Board Approval 10/13/87 Signing 10/30/87 Effectiveness 11/24/87 Credit Closing 06/30/90 STAFF INPUTS (staffweeks) FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL Preappraisal 4.1 - 80.6 4.5 - - - - 89.2 Appraisal 6.7 - - 100.4 - - - - 107.1 Negotiations - - - 19.7 - - - - 19.7 Supervision - - - 11.7 66.8 12.5 2.9 4.9 98.8 Other - - 26.6 28.7 1.6 - - - 56.9 Total 10.8 - 107.2 165.0 68.4 12.5 2.9 4.9 371.7 MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Appraisal 07/86 3.0 9 27.0 Supervision I 07/87 3.0 4 12.0 Supervision II 02/88 1.5 7 10.5  OTHER PROGRAM DATA Borrower/Executing Agency: Republic of Ghana Follow-on Operations: Operation: Structural Adjustment Credit II Credit No.: Credits 2005/2005-1/2005-2-GH Amount: US$134.0 million Board Date: April 18, 1989 Operation: Financial Sector Adjustment Credit No.: Credits 1911/1911-1-GH Amount: US$106.6 million Board Date: May 31, 1988 Operation: Education Sector Adjustment II Credit No.: Credit 2140-GH Amount: US$50.0 million Board Date: May 24, 1990 Operation: Private Investment Promotion Credit No.: Credit 2236-GH Amount: US$120.0 million Board Date: May 7, 1991  I I  - vii - PROGRAM PERFORMANCE AUDIT REPORT GHANA SECOND STRUCTURAL ADJUSTMENT CREDIT (CREDITS 2005, 2005-1, and 2005-2-GH) BASIC DATA SHEET CREDIT POSITION (Amounts in USS Million) As of Mar. 31. 1992 Credit Oriqinal Disbursed /a Cancelled Repaid Outstandinq /a 2005 120.0 119.8 - - 121.8 2005-1 5.7 6.3 - - 6.3 2005-2 8.3 8.0 - - 8.2 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a Cr. 2005 FY90 FY91 Appraisal Estimate (US$M) 60.0 120.0 Actual (US$M) 56.7 119.8 Actual as % of Appraisal (%) 95% 100% Date of Final Disbursement: February 1, 1991 Cr. 2005-1 FY90 FY91 Appraisal Estimate (US$M) 2.0 5.7 Actual (US$M) - 6.3 Actual as % of Appraisal (%) - 111% Date of Final Disbursement: September 13, 1990 Cr. 2005-2 FY91 Appraisal Estimate (US$M) 8.3 Actual (US$M) 8.0 Actual as % of Appraisal (%) 96% Date of Final Disbursement: May 16, 1991 /a The credits were fully disbursed. Disbursed and outstanding totals differ from the original amount of the credits in terms of USS because of changes in the US$/SDR exchange rate.  - viii - PROGRAM DATES Cr. 2005 Actual Initiating Memorandum 05/23/88 Letter of Development Policy 11/23/88 Negotiations 11/21/88 Board Approval 04/18/89 Signing 05/01/89 Effectiveness 06/09/89 Credit Closing 03/31/91 Cr. 2005-1 Board Approval 10/12/89 Signing 01/19/90 Effectiveness 04/12/90 Credit Closing 03/31/91 Cr. 2005-2 Board Approval 11/06/90 Signing 12/21/90 Effectiveness 03/21/91 Credit Closing 03/31/91 STAFF INPUTS (staffweeks) Pre- FY87 FY88 FY89 FY90 FY91 TOTAL Preappraisal 2.6 77.6 - - - 80.2 Appraisal - 2.0 33.9 - - 35.9 Negotiations - - 39.8 - - 39.8 Supervision - - 1.9 28.2 9.7 39.8 Other - 8.0 1.2 - - 9.2 Total 2.6 87.6 76.8 28.2 9.7 204.9 MISSION DATA No. of No. of Staff Month/Year Weeks Persons Weeks Appraisal 06/88 1.5 8 12.0 Supervision I 11/89 2.5 7 17.5 Supervision II 05/90 1.5 4 6.0  - ix - OTHER PROGRAM DATA Borrower/Executing Agency: Republic of Ghana Follow-on Operations: Operation: Financial Sector Adjustment Credit No.: Credits 1911, 1911-1-GH Amount: US$106.6 million Board Date: May 31, 1988 Operation: Education Sector Adjustment II Credit No.: Credit 2140-GH Amount: US$50.0 million Board Date: May 24, 1990 Operation: Private Investment Promotion Credit No.: Credit 2236-GH Amount: US$120.0 million Board Date: May 7, 1991  t I I I  - xi - PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS (CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) EVALUATION SUMMARY Introduction cluding US$215 million in co- financing for IDA's Structural Ad- 1. In 1983, the Government of justment Credits I & II (SAC I & Ghana launched its Economic Recovery II). Program (ERP) to reverse the deteri- oration of the economy through The Objectives of World Bank Support macroeconomic measures to stabilize the economy and through structural 4. World Bank program support for adjustments to correct serious dis- Ghana's SAP consisted of SAC I & II, tortions and disincentives. Sub- several sector adjustment, project stantial progress was made in re- and technical assistance credits; ducing inflation and the deficit in and recently, one for a "Program to the overall balance of payments by Promote Private Investment and Sus- the end of 1985. tained Development". 2. Following consultations with 5. The objective of SAC I was to the IMF and the Bank, the Government support: decided in 1985 to shift the em- phasis of the ERP toward structural a) trade liberalization, by: adjustment. The objectives of this Structural Adjustment Program (SAP) * merging the two-tiered market were to: for foreign exchange and using the auction determined a) "establish an incentive frame- rate for all officially work that would stimulate funded transactions thereby growth, encourage saving and ending the exchange rate tax investment, and strengthen the against cocoa and the subsidy balance of payments; and of oil imports; b) to improve resource use, par- . removal of quantitative re- ticularly in the public sector, strictions on imports, and and direct resources to key related tax and tariff re- areas of adjustment, while en- forms; suring fiscal and monetary stability." b) an incentive framework to stim- ulate growth through: 3. The SAP attracted Fund support of over US$600 million during . the payment to cocoa growers 1987-90, Bank support of about of a larger share of the US$480 million, and substantial f.o.b. price, to be financed support from bilateral donors in- mainly by cost-cutting im-  - xii - provements in the Cocoa Mar- discrimination against imports keting Board; and has been eliminated by the re- moval of the 10% tax on special c) improved resource use in the license imports and by equal- public sector, through: izing the excises on imports and locally produced goods. * changes in public expenditure Customs duties on goods other and tax policy; than luxuries were reduced from 30% to 25%. Some trade liber- * state-owned enterprise re- alization pursued under the form; and Industrial Sector Adjustment Credit (ISAC) included the * better public sector manage- elimination of export permits ment. and the redesign of the draw- back to remove the tax element 6. SAC II supported a program with on exporters. Trade liberal- essentially the same objectives, ization was accompanied by the except that there was greater empha- gradual removal of price con- sis on tax reform and on the promo- trols. tion of private sector development than under SAC I. * c. Price Incentives -- action focussed on cocoa producer Implementation Experience & Results prices. These increased in nominal terms from Cedi 56,600 7. The implementation experience per ton in 1985/86 to Cedi under SAC I & II was highly, though 224,400 in 1990/91; and pro- not uniformly, positive. The main ducers' share of the f.o.b. measures were the following: price increased from 24% to 47% during that period. In real * a. The Exchange Regime and terms the price fell by over 6% Rate -- the auction was widened between those dates due to the to include all current trans- sharp decline in international actions; foreign exchange cocoa prices and the resurgence bureaus were allowed; the re- of domestic inflation. tail auction was replaced by a wholesale one in which eligible * d. Stimulation of Private banks and bureaus can bid; Investment -- efforts comprised dealers may trade among them- improvements in infrastructure selves in an interbank market and the policy environment. and are free to retail at rates Among the latter, the signifi- negotiated with buyers. The cant measures taken under the overvaluation of the exchange SAP were the updating of the rate was corrected; the spread Investment Code, the setting up between the parallel market and of export financing facilities, the official rate fell from 87% the lowering of the corporate in 1986 to 3% at mid 1991. tax rate, reduction in import duties on semi-processed goods, * b. Trade Liberalization -- the the increasing of corporate tax import license requirement for rebates to exporters, and the access to the foreign exchange increase in the retention rate auction was discontinued, and of foreign exchange allowed the system of licenses abol- exporters. ished in January 1989. Tax  -xiii - * e. Domestic Resource Mobiliza- group of trained budget tion -- policies were aimed at preparation officers re- restoring confidence in the sulting in the timely prep- financial system and at in- aration of the annual budget creasing public sector resource statement; mobilization: - civil service reform re- - Under the Financial Sector sulting in the retrenchment Adjustment Credit (FINSAC), of an average of 12,000 staff the Banking Law was amended per year over the period to set capital adequacy and 1987-91 with the program con- reserve requirements, stipu- tinuing through 1992, and late loan limits and formal- increased real pay and the ize reporting requirements widening of the pay range to for banks. The Non-Per- make high level positions forming Assets Recovery Trust more attractive; and was established to exchange for GOG bonds the non-per- - the selling of 15 SOEs to the forming assets held by Banks. private sector and the Bank supervision by BOG has closing of 23 others. Under been strengthened, and a a program of restructuring, Stock Exchange and a Credit performance monitoring and Clearing House have been set evaluation 15 of 17 SOEs con- up. Banks have implemented stituting a core group to restructuring plans, reduced remain in the public sector, operating cost, and improved and which formerly lost their efficiency. money, became profitable. However, given the size of - Public sector resource the sector, the pace of SOE mobilization has benefitted reform, particularly divesti- from a shift toward consump- ture, has been slow. tion based taxes and better administration. The budget Impact on the Poor and Other deficit has been eliminated Vulnerable Groups and the GOG is no longer a net borrower from the private 8. The impact of the SAP at the sector and the monetary sys- household level depended primarily tem. on whether or not any or all of its members lost their job and the ef- * f. Management of Public Sector fect of higher prices of output on Resources -- emphasis was on money income and of higher prices of public expenditure management, goods and services purchased on the civil service reform and reform level of real consumption. The of state-owned enterprises. impact of the SAP on the poorest Achievements included: groups appears to have been only moderately negative in the early - improvements in public ex- stages and positive over the longer penditure management term as the economy has grown, real involving the preparation of incomes have increased, the terms of a detailed Public Investment trade have turned in favor of the Program and its linkage to rural areas, and GOG has improved the regular Capital Budget, social services and oriented health and the creation of a core  - xiv - and education services more toward Sustainability the poor. 11. The reforms under the SAP have 9. In 1987 the Government of been so comprehensive and the GOG's Ghana, assisted by a secretariat commitment so firm that a reversal funded by the Bank, prepared a "Pro- of policy directions is highly im- gramme of Actions to Mitigate the probable as long as this administra- Social Costs of Adjustment" tion remains in control. Moreover, (PAMSCAD). PAMSCAD was comprised of it is unlikely that a new government 23 projects intended to generate could easily restore the regulatory employment, help those whose jobs and control mechanisms that have were eliminated, meet the basic been removed. Therefore, the bene- needs (including education) of vul- fits from the SACs are likely to be nerable groups, and promote com- sustained. The underlying assump- munity initiative projects. The tion is that Ghana is not faced with Bank helped to organize a meeting of another severe shortage of foreign donors in 1988, and US$85 million exchange which provokes non-market was pledged. Direct Bank/IDA sup- approaches to its allocation and port was in the form of a US$10 conservation. In practical terms million credit -- Priority Works this means that it is assumed that Project (IDA Credit No. 1874-GH). Ghana will enjoy foreign inflows Recent evaluation of PAMSCAD found adequate to bridge the gap between that while it did mitigate the ef- Investment and National Savings fects of adjustment on some vulner- mentioned above. able groups, it did not target the poorest groups; and that design Evaluation weaknesses led to slow implementa- tion and limited effectiveness. 12. Ghana's structural adjustment effort supported by SAC I & II has Economic Performance been highly successful. The major factor was that the Government of 10. The main macroeconomic indica- Ghana was highly committed to struc- tors of the effectiveness of the SAP tural adjustment and implemented a have been positive. GDP grew at an wide range of measures promptly and average rate of 5% during 1986-90, wholeheartedly. Weakness of imple- in spite of unfavorable interna- mentation capacity, due to deficien- tional factors -- depressed price of cies in the structure and staffing cocoa on the world market, and sharp of institutions, and in management increases in the price of crude oil information systems in the public and petroleum products. The Invest- sector, was the major constraint on ment/GDP ratio rose from 9.7% to the structural adjustment process. 16%; National Savings/GDP increased Facing this fact, the GOG set up the from 5.1% to 8.2%; exports grew at Structural Adjustment Program Secre- over 8% annually, and the level of tariat (SAPSEC) under the office of gross international reserves in- the Chairman of the PNDC Secretaries creased by US$120 million notwith- to enable continuous high level standing a strong deterioration in political monitoring of the program, the terms of trade. However, this and to ensure that measures for positive performance was accompanied decision by the Council were brought by a resurgence of inflation in 1990 before it promptly. In addition, which showed signs of tapering off ten special units and task forces, in 1991. coordinated by SAPSEC, were set up  -xv - to implement various parts of the SAP fostered an unambiguous program. sense of ownership of the pro- gram by GOG; 13. The pace of implementation was markedly slower where adjustment * implementation -- arrangements, required changes in the structure of especially for SAC I, kept the institutions and the recruitment of political directorate and skilled staff rather than just senior officials informed, and changes in rules. In addition, the provided for adequate coordina- paucity of up-to-date financial and tion and monitoring; other information for proper manage- ment decisions slowed the pace at . supervision -- Bank staff's which changes could be made, e.g. hands-on supervision facili- the divestiture of SOEs. The pace tated the work on the PIP, was also slower where adequate Budget, Tax Reform, Public Ex- studies had not been done, and a penditure Review, and to a basis for agreement at the technical lesser extent the Civil Service level was lacking. Reform. Staff devoted twice as much time to supervision as 14. The main strengths of these SAC they have to the average Africa operations lay in the following: Region SAL operation. * timing -- they were the natural 15. Comparison of specific com- next steps in Bank support to ponents and interview results sug- Ghana's ERP, given the mutual gest that there were some weaknesses confidence built up in the post in these generally successful opera- 1983 period; tions. These include: * consultations -- there were . ESW -- in cocoa marketing and extensive consultations within for SOE reforms, economic and Bank, between Bank and GOG, sector work was inadequate to between Bank and Fund, and be- underpin the Bank' position in tween Bank and other donors; its effort to convince the GOG regarding the need for, and * complementarity -- the SACs and direction of, change; rest of the Bank/IDA lending program were mutually rein- * inexperience -- the Bank lacked forcing in support of the SAP; experience in the reform of SOE sectors and in cocoa marketing * time frame -- an optimistic due to the small sample of time frame conveyed a sense of countries of significance as urgency at the outset, but was cocoa exporters; flexible enough to permit more modest targets under SAC II; * narrowness of perspective -- Bank insistence on specific * ESW -- a considerable amount of targets for divestiture of SOEs high quality studies under- did not appear to take into pinned the success of the pro- account the policy and institu- gram; tional constraints facing pri- vate investment at the time; * ownership -- the consultative other options were inadequately approach to the design of the considered. Similarly, the financial implications of wide-  - xvi - spread retrenchment in a public environment. They need to be sector dominated economy were convinced that policy change not sufficiently considered; will be permanent and compre- hensive, and that the "offi- * institutions -- Bank study of cial" attitude to private institutions and analysis un- profit and wealth will be con- derlying institutional reform sistent with the enhanced role was limited. Thus there was no envisaged for the private sec- definition of future roles of tor. Frequent consultations institutions that would lose between the government and the regulatory functions as liber- private sector can be useful in alization proceeded; making the latter comfortable with the policy changes and in * continuity -- frequent turnover identifying the continuing im- of Bank staff, regarded by the pediments to their response. client as disruptive of the adjustment process, was an un- c) The structural adjustment desirable feature of the Bank's process in such an economy re- conduct of these operations. quires that in addition to pro- viding incentives to stimulate Lessons private investment, the insti- tutional arrangements for as- 16. The most important lessons from sisting the private investor in review of these operations are the mobilizing resources need to be following: put in place, and the legal basis and administrative proce- a) Brainstorming sessions in- dures need to be clarified for volving the political and offi- potential investors as well as cial levels of government at for bureaucrats. All three the design stage of the struc- requirements have to be ad- tural adjustment program have dressed early in the adjustment considerable merit as a means process. of enhancing the client's sense of ownership of the program and d) Ghanaian officials concur in strengthening the commitment to the view that the success of implement it. As the Ghana the adjustment program in many example shows, the inclusion of areas owes much to "hands on" the private sector, unions and supervision by Bank staff. This other interests in such ses- allowed Bank expertise to but- sions can foster greater under- tress Ghanaian efforts in crit- standing and acceptability of ical areas in a manner that is the necessary policy measures. not possible with contract as- sistance, and permitted flexi- b) Where, as in Ghana, the public bility in resolving unforseen sector has been the dominant and unforeseeable problems in operator in the formal economy implementation. The norms of for over thirty years and the staff time provided for super- culture or tradition of private vision of structural adjustment entrepreneurship has been sub- operations should be reviewed stantially weakened, private in light of this experience. entrepreneurs should be ex- pected to respond cautiously to a partial change in the policy  PROGRAM PERFORMANCE AUDIT REPORT GHANA FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS (CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) I. INTRODUCTION 1.01 Throughout the 1970s Ghana's economy was dominated by public sector production and commercial activities, and was badly managed. Support for the pervasive, inefficient public sector led to large budget deficits, which in turn fueled high inflation. The fixed nominal exchange rate became grossly overvalued, shifting relative incentives away from exports and leading to deterioration of export performance and in the capacity to import. Declining exports, imports and economic activity eroded the tax base and forced severe cutbacks in Government social services, maintenance, and capital investment; thereby undermining the once well developed social and economic infrastructure, and further reducing productive capacity. Meanwhile, the policy environment was distorted by the tendency of successive governments to 'respond to the foreign exchange crises by increasingly restrictive import regimes, rationing and price controls. The lack of economic opportunities and declining real wages led to an exodus of skilled Ghanaians and to the flight of capital. In the early 1980's the grave economic situation was exacerbated by prolonged drought, deterioration in the terms of trade, and the forced repatriation of over a million Ghanaians from Nigeria. 1.02 In 1983, the Government of Ghana launched its Economic Recovery Program (ERP) to stabilize the economy, restore creditworthiness, rehabilitate the export sectors, and reverse the downward trend in GDP. Substantial progress was made in stabilizing the economy by 1985, specifically in reducing inflation and the deficit in the overall balance of payments. In light of the progress on stabilization issues during the first phase of the ERP, the Government concluded that it was time to emphasize the restoration of growth, for which further reform of the exchange rate regime, higher cocoa producer prices, and greater efficiency in the public sector were necessary. 1.03 The ERP shifted toward a Structural Adjustment Program (SAP) which included a macroeconomic stabilization component essentially continuing the demand management begun in 1983 and a growth component containing measures to expand exports and to improve mobilization of and efficiency in resource use. Given the dominance of the public sector in resource use, the program called for the reform of taxation to reduce distortions associated with the protec- tionist policies of the past, reforms to improve public sector management -- better planning, budgeting and monitoring of expenditures, and more efficient use of manpower -- not only in its central administrative apparatus but in the large state-owned enterprise sector devoted to commercial and productive functions. 1.04 The SAP attracted IMF support resulting in purchases of over US$600 million during 1987-90. Bank support was provided in the form of about US$250 million in structural adjustment credits plus over US$150 million in sector adjustment credits and another US$77 in project/technical assistance credits.  There was substantial bilateral support, including US$215 million of co- financing for the Bank's structural adjustment credits. II. OBJECTIVES OF BANK SUPPORT 2.01 World Bank program support for Ghana's ERP took the form of two Reconstruction Imports Credits, an Export Rehabilitation Credit and associated Technical Assistance Project. The shift toward structural adjustment was supported by an Industrial Sector Adjustment Credit, two Structural Adjustment Credits, a Financial Sector Adjustment Credit, and a Program to Promote Private Investment and Sustained Development. Bank project lending for Structural Adjustment Institutional Support, Public Enterprise Technical Assistance, Cocoa Rehabilitation, and Economic Management Support also was designed to assist the SAP. While this is an evaluation of the Structural Adjustment Credits I & II, there was considerable overlapping of objectives with other operations in support of the SAP, and frequently the measures directed at any objective were not unique to any one operation. This in turn makes it difficult to ascribe specific impact to any subset of operations within the group supporting the SAP. 2.02 In 1985, following consultations with the IMF and the Bank, the Government decided to reorient the ERP to : * establish an incentive framework that stimulates growth, encourages savings and investment, and strengthens the balance of payments; and * improve resource use, particularly in the public sector, and direct resources to key areas of adjustment, while ensuring fiscal and monetary stability. 2.03 The objective of SAC I was to support the following aspects of the reoriented ERP, which was thence also referred to as the SAP: a) trade liberalization, specifically: * the merging of the two-tiered market for foreign exchange by using the auction determined rate for all officially funded transactions, thereby ending the exchange rate tax on cocoa and the subsidy of oil imports; * the removal of quantitative restrictions on imports, and related tax and tariff reforms; b) an incentive framework that stimulates growth through: * cocoa sector policies leading to the receipt by growers of a larger share of the f.o.b. price to be financed mainly by cost-cutting improvements in the efficiency of the Cocoa Marketing Board.  -3- c) improved resource use in the public sector, through: * changes in public expenditure and tax policy; * state-owned enterprise reform; * better public sector management. 2.04 SAC II (approved in FY89) supported a program with essentially the same objectives, except that there was greater emphasis on tax reform and on the promotion of private sector development than there was under SAC I. 2.05 One other objective of Bank support was to facilitate and coordinate support by other donors, by sponsoring meetings of the Consultative Group for Ghana. III. IMPLEMENTATION AND IMPACT ForeiRn Exchange and Trade Liberalization The Exchange Regime 3.01 Before September 1983 the foreign exchange regime pegged the exchange value of the Cedi to the US dollar at Cedi 2.75 = US$1.00. During the next three years a series of discrete devaluations brought the exchange rate to approximately Cedi 90 = US$1.00. In September of 1986 a dual exchange rate system was set up, in which there was a fixed rate for cocoa exports and for imports of petroleum products and essential drugs and an auction rate determined by competitive bidding among holders of eligible import licenses. Importers of consumer goods were not allowed to bid in the auction but had to acquire foreign exchange in a parallel market where there was a premium of over 80% compared with the auction rate. 3.02 Under the structural adjustment program access to the auction has been widened by the inclusion of additional categories of consumer goods and service payments and the exchange market has been unified. First, the fixed rate for cocoa, petroleum, etc., was abolished in February 1987 after which all transactions through the banking system were settled at the rate determined in the weekly auction. In 1988, the Government, on its own initiative, further widened the exchange market by permitting the setting up of foreign exchange bureaus, thereby redefining the legal system in such a way as to encourage the absorption of the parallel market into the formal one. Subsequently, the spread between the bureau rate and the auction rate converged almost to the point of disappearance. In April 1990, the retail auction was replaced by a wholesale auction in which banks and licensed bureaus meeting the eligibility criteria could participate. These dealers freely determine their bids at the auction and sell to their customers and to other dealers at mutually agreed rates. In addition, in order to promote the development of an interbank market, dealers are authorized to trade among themselves. The Bank of Ghana may participate as a buyer or seller in this market. 3.03 Under the unified exchange market the exchange rate of the cedi is determined freely in this two level market. The retail market rate is the  effective rate except for customs valuation and official purposes for which the auction rate is used. The official exchange rate between the cedi and the US dollar has gone from 89.2 in 1986 to 326.3 in 1990 and to 358.8 during the first half of 1991. The real effective exchange rate of the cedi depreciated by 36% between August 1986 and December 1990. For all practical purposes the cedi is now convertible. 3.04 The changes in the exchange rate and regime have: * improved economic incentives, especially the profitability of investment in the export sector and contributed significantly to the 8% rate of growth in exports of goods and non-factor services during 1986-1990; * permitted increased access to imported inputs and in turn helped to rehabilitate the productive base; * facilitated fiscal adjustment by maintaining the buoyancy of revenues from taxes on international transactions; * aided trade liberalization; * depoliticized the exchange rate by eliminating government dominance of the exchange market and making the rate in the public mind a price like any other price; and * stimulated flows of remittances from abroad through official channels. Trade Liberalization 3.05 Until October 1986 imports were controlled within the framework of an annual import program and licensing system dictated by foreign exchange budgeting and exchange control considerations. There were two types of import licenses -- specific and special. Recipients of the former were allowed to import goods not on a negative list (which included consumer goods) and to buy the requisite foreign exchange from the banking system, while recipients of the latter were allowed to import but could not receive foreign exchange from the official system. In general, exporters were allowed to retain only 20% of foreign exchange earnings, the remainder had to be surrendered for cedis at the exchange rate in the auction. Exceptions were mainly gold exporters which had larger retention rights and cocoa with lower retention rights. 3.06 Under the structural adjustment program supported by SACs I & II consumer imports were gradually made eligible for financing throuph the foreign exchange auction, and became 100% eligible by February 1988.- The import license requirement for access to the auction was phased out, and the system finally abolished in January 1989. Meanwhile, during 1987-89 steps were taken to liberalize current payments for invisibles, and by the end of 1989 only a 1' Except for a small list of luxury items.  -5- few minor restrictions remained. Parallel with the liberalization of trade, fiscal reforms were introduced to reduce the distortions in trade taxation and protection. For instance, the customs duty on consumption goods other than luxuries was reduced from 30% to 25%; the 10% tax on imports under the "special imports" license was abolished; and sales and excise schedules were merged and simplified by setting a common rate of 20% for most commodities. The foreign exchange retention by exporters was raised from 20% to 35%. 3.07 Some aspects of trade liberalization were simultaneously pursued under the sector adjustment program supported by the Industrial Sector Adjustment Credit. These included (a) simplification of export documentation by abolishing the permit to export; (b) redesign of the duty drawback scheme to remove the tax element from exporter's cost; (c) study of pre- and post-shipment export credit; and (d) reorganizing and strengthening of the Export Promotion Council. 3.08 Liberalization of exchange and trade was accompanied by the gradual removal of price controls. The Prices and Incomes Board now only gets involved in determining the price of wheat from the single importer to millers to prevent the former from taking advantage of monopoly power. The Board also monitors the cost components of cement in view of the lack of competition in the cement market. While the Board continues to monitor price trends, generally price controls are no longer enforced. Price Incentives 3.09 Action to improve price incentives to provide more remunerative prices for exports focussed on cocoa. The nominal price received by cocoa growers was increased from 56,600 cedi per ton in 1985/86 to 224,400 cedi in 1990/91. The share of the f.o.b. price at the official exchange rate increased from 24% to 47% during the same period. Nevertheless, with the steep rise in the Consumer Price Index from 4,245 (1977=100) to 17,933 and the fall in international cocoa price from US$2,434 per ton in 1986 to US$1,270 in 1990, the real price to cocoa producers (cedis/ton in 1977 prices) increased from Cedi(1977) 1,333 in 1985/86 to Cedi(1977) 1786 in 1987/88 but fell back to Cedi(1977) 1,251 in 1990/91. Clearly, the fall in real producer price would have been more severe but for the increase in the share of export proceeds paid to the grower. The export of beans increased from 171,747 tons in 1985 to 260,001 tons in 1990. 3.10 It had been hoped that the larger share to the producers would have been financed through the reduction in Cocobod operating costs from an estimated 22% of the f.o.b. export price in 1987/88 to about 15% in 1988/89, which would not have involved the sacrifice of the share going to the Government. Indeed, significant effort has been directed at improving the efficiency of the Cocobod. The work force has been reduced from 79,000 in 1984 to 46,000 in 1991, and effectively to 43,000 due to vacancies; input subsidies valued at about 9,000 cedi per ton of cocoa produced have been eliminated; corporate planning has been introduced; and there has been some rationalization of functions, especially in haulage of cocoa through increased reliance on the railway and on the private sector. 3.11 However, in spite of these cost reduction efforts, Cocobod costs in 1990 have been estimated at 28% of the f.o.b. value of exports. This reflects  the impact of the dramatic fall in price on the international market and the fact that costs are determined independently of the price. In the absence of the dramatic decline in price the cost ratio would have been nearer the target. However, some aspects of program performance militated against achievement of the 15% target. The divestiture of plantations has been slower than expected -- only 7 of the 52 targeted for divestiture were sold by 1990; and there has been no significant progress in restructuring the cocoa processing company. Similarly, the pace of retrenchment of the labor force has been slowed, as the financial burden of the severance payments is particularly onerous given the depressed state of international cocoa prices. The Stimulation of Private Investment 3.12 Of the three sets of actions to stimulate private investment -- rehabilitation of infrastructure, improvement in the attractiveness of the policy environment, and setting up joint ventures of selected state-owned enterprises -- substantial progress was made in the case of the first two. The outstanding example of infrastructure rehabilitation was the improvement of the port at Takoradi. 3.13 Efforts to improve the policy environment included: * the updating of the Investment Code in 1990 to include benefits to existing enterprises; * the setting up in July 1990 of export financing facilities for non- traditional commodities; * the lowering of the rate of the Corporate Tax applicable to agriculture, manufacturing, real estate, construction and services to 35% in the 1991 Budget after having been lowered in the previous budget from 55% to 50%, except for construction which had been already at 50% and was lowered to 45%; * the reduction in the rate of import duty on semi-processed intermediate goods to 10% from 15% in 1991; * the raising in 1991 of corporate tax rebates on exports from a range of 30-40% to 60-75% for agriculture depending on the proportion exported, and for manufacturing from 25% to 30%. 3.14 These efforts were only some of the many through which the Government of Ghana sought to address the constraints on investment residing in the uncertainty about the economy, and in concerns about taxation, the restrictive and cumbersome regulatory framework, and access to credit and financing. The concern over access to credit and financing was addressed through a financial sector adj'ustment program (see below). In 1991, when it became clear that the weak link in the adjustment program was the inadequate response of private domestic investment, emphasis shifted to the re-examination of the legal, regulatory, and consultative framework in order to make it consistent with economic liberalization and the creation of a dynamic private sector. This reorientation is supported by an IDA credit for SDR 84.6 million (US$120 million equivalent) which was approved by the Board in April 1991.  -7- 3.1-5 Running counter to the positive measures that were taken is the perception in part of the business community that there has been a continuation of some anti-private sector biases in some parts of the Government, reflected in vigorous pursuit of businessmen for alleged economic crimes, overzealous tax enforcement, and occasional direct intervention in private operations. These biases were also reflected in slow processing of applications for registration of new businesses, and the failure on the part of civil servants to show willingness to clarify for new entrepreneurs the legal and administrative requirements for doing business in Ghana. The predominance of officials in the arrangements for government/private sector consultations, and the slowness in setting up the consultative apparatus were also mentioned as negative factors in the new economic environment. Domestic Resource Mobilization 3.16 Saving and investment goals were pursued through policies to increase domestic resource mobilization. These policies were to a) restore confidence in the financial system, and b) increase public sector resource mobilization. Accordingly, the Government of Ghana implemented during 1989-1990 a program, supported by an IDA Financial Sector Adjustment Credit (FINSAC), to improve the regulatory framework and provide better supervision of banks; to restructure financially distressed banks; and to improve mobilization of savings and the allocation of credit. In August 1989 the Banking Law was amended by the PNDC to set capital adequacy and reserve requirements, stipulate loan limits and formalize reporting requirements. In February 1990 the Non-Performing Ass-ets Recovery Trust was set up to receive the non-performing assets of banks in exchange for special GOG bonds. Simultaneously, bank supervision capability of the Bank of Ghana was strengthened. Subsequently, a Stock Exchange and a Credit Clearing House were established. Although the evaluation of the FINSAC is outside the scope of this inquiry, it is fitting to point out that in response to these policies banks have begun to implement restructuring plans, have reduced operating cost and have improved their efficiency. 3.17 In order to improve the Central Government's contribution to domestic resource mobilization, the Government has made a fundamental change in its tax policy and has reduced the deficit in the recurrent budget. There has been a definite movement away from taxes on production toward taxes on consumption, hence reducing the taxation of savings. Sales taxes have doubled their contribution to revenue since 1986. At the same time there has been an attempt to widen the revenue base while trying to reduce the importance of taxes on cocoa exports. Taxation of petroleum has gained in importance, its contribu- tion rising from under 5% of revenue and grants in 1987 to nearly 22% estimated in the 1991 budget. In order to improve the efficiency of tax administration and reduce the costs of collection the National Revenue Secretariat has been strengthened and re-integrated into the Ministry of Finance and Economic Planning. The overall effect of these changes has been that revenue has averaged 12% of GDP during the 1987-90 period compared with 8% during the preceding four year period. At the same time the deficit in the current budget has been eliminated, with the result that the Government has been able to avoid borrowing(net) from the private sector and has been repaying its debt to the monetary system. J1  -8- 3.18 The objective of maintaining positive interest rates has generally not been achieved, except for the maximum lending rate in 1989, mainly because of the resurgence of high inflation and the slow take-off of the demand for credit and financing by private investors. ManaRement of Public Sector Resources 3.19 The structural adjustment program focussed on three areas: a) public expenditure management, b) civil service reform, and c) state-owned enter- prises. The two areas of expenditure management targeted for attention were the Public Investment Program and the Annual Expenditure Budget. Public Expenditure Management 3.20 The GOG has made significant progress in developing its capacity to prepare a detailed Public Investment Program(PIP) and in substantially integrating the current year's program with the annual budget. There is a 15% internal rate of return threshold for inclusion of any project, and an i.r.r. calculation is required for all projects costing over US$5 million. For social sector projects there may be no i.r.r. but projects must be cost effective. The composition of the PIP is determined in accordance with guidelines set out under the ERP, which require that more than 50Z be allocated to infrastructure. Typically, the allocation has been 62% infrastructure, 22% productive sectors, and the remainder to the social sectors. 3.21 The original objective was to automate the putting together of the budget by 1989. A small Budget Task Force was set up, trained, and provided with computers and technical assistance to do the initial study. Today there is a core group of 16 trained officers plus support staff, all dedicated to budget preparation. Compared with the situation four years ago when the budget statement was not available until five months into the budget year and details some months later, the basic budget statement covering recurrent and capital, and including subvented organizations is now ready in January -- the first month of the financial year. Printed, detailed versions are generally ready by April, although by March most ministries have received advance copies. The process now fully conforms with the guidelines on personnel emoluments, the wage bill falling from 5.1% of GDP in 1986 to 4.3% in 1990, and its share of total expenditure falling from 27% to 24%. Civil Service Reform 3.22 Civil service reform involved the retrenchment of surplus staff, the recruitment of needed high level skills, and pay reform. Compared with a target of 15,000 per year to be released from the civil and the education services over a three year period 1987-90, actual retrenchment was just over 12,000 per vear over a four year period, and the program has been extended through 1992. The net reduction in the service was somewhat smaller because inadequately controlled recruitment initially eroded some of the gains from retrenchment. Still, there has been a cumulative net employment reduction of 3% annually. The achievements of the skills mobilization scheme were modest and mixed. The scheme provided for the recruitment of local consultants, long term recruitment of Ghanaians from the private sector, inducement of Ghanaians abroad to return, and the payment of special duty allowances to serving Ghanaians to do special  -9- tasks. Attraction of Ghanaians from overseas was particularly unsuccessful since some mechanisms were not used for fear of provoking resentment within the service. The GOG has decided to explore the alternative of a fast track development program for promising young officers. Pay reform objectives have been partially achieved -- real pay has increased by 8.7% between 1986 and 1990, and the pay scale has been decompressed so that the ratio of highest to lowest pay scales has gone from 5.4 to 1 in 1988 to 9.5 to 1 in 1990.!i State-Owned Enterprise Reform 3.23 The main objectives of the state-owned enterprises reform were to reduce the size of the sector through divestiture and to improve the efficiency of priority enterprises remaining in the public sector through restructuring, performance monitoring and evaluation (PME). As of January 1991, 15 small enterprises with a total value of 2 billion cedis had been sold to the private sector, and 23 had been liquidated. Seventeen SOEs were identified as core enterprises to remain in the public sector and to be included under the PME system. While in 1988 fifteen (15) of the core enterprises had a net loss before tax of Cedi 417 million, they realized a net profit of Cedi 19 million in 1989 and Cedi 26.9 million in 1990. Under the PME system the SOEs are required to provide quarterly and annual performance reports to the State Enterprises Commission but most have been unable to meet this requirement in a timely manner due to weak internal management information systems, especially up-to-date audited accounts. 3.24 As of the end of 1990 there were 97 SOEs in the SEC data base, not including the core group to remain in the public sector, employing a total of 92,350. Of these SOEs, 60 were profitable and generated profits of the order of Cedi 15 billion in 1989, while 33 loss makers recorded a total operating loss of Cedi 12.5 billion. It has been estimated that the 114 SOEs in the SEC data base represents about one-half of the total number of SOEs and about two- thirds of employment in the SOE sector. When account is taken of the size of the SOE sector, it becomes apparent that the pace of divestiture has been slow. The GOG continues to face a financial burden reflected in a net current flow of subsidies and subventions of the order of Cedi 2 billion per year to the SOEs and in loan guarantees amounting to about Cedi 25 billion. External Support 3.25 External assistance officially committed to Ghana by bilateral and multilateral sources (not including the IMF) rose from US$437 million in 1986 to US$749 million in 1987 and was nearly US$850 million during the next two years. Net disbursement were US$372 million in 1986, remained at that level in 1987, but increased strongly in the next two years to reach US$553 million in 1989. The average official commitments during 1987-89 amounted to US$815 million compared with US$418 million during 1984-86. The corresponding figures for bilateral sources only were US$411 million and US$146 million. While not all of the increase in bilateral assistance was support for the SAP a 21 See Division Study Paper No.2, Africa Technical Department, World Bank: "Civil Service Pay & Employment Reform in Africa: Selected Implementation Experiences" by Louis de Merode.  - 10 - substantial portion was; the cofinancing for the SAC credits mentioned above is indicative. 3/ 3.26 The above review of some of the main structural adjustment actions and achievements indicate the broad range and depth of changes in policy and administration attempted by the GOG under the SAP. In the following section an attempt will be made to gauge, albeit roughly, the impact of this effort and of the associated stabilization program on the economy. IV. RECENT ECONOMIC PERFORMANCE 4.01 GDP grew at an average rate of slightly more than 5% per annum -- the SAC target -- during 1986-89, and at 3.3% in 1990 due mainly to drought. With population growing at 2.6%, growth in real GDP per capita was positive throughout the period. Underlying this growth in GDP was a significant resurgence in cocoa production of 26.7% between 1986 and 1990 notwithstanding the decline in the export price of cocoa. Mining grew at 10% per year in response to renewed investments in gold; manufacturing continued to recover although the impetus was provided by fuller capacity utilization and this was being exhausted; utilities grew at about 10% and so did the private part of the services sector. Agriculture (not including cocoa) was the weak performer among sectors, with average GDP growth of just over 1% per annum during 1986-90. 4.02 Investment improved during 1986-90, with the Investment/GDP ratio rising from 9.7% to 16%. While this means that the revised target of 16% set under SAC II has been achieved, the growth of investment is still short of that necessary to meet long term GDP growth aspirations. Although the private sector's contribution to the recovery of investment was significant, having increased from 2.1% of GDP to over 8% according to preliminary estimates, this was concentrated in mining and real estate and hence not indicative of a broad- based resurgence consistent with the intended shift from a public sector dominated to a private sector led economy. This has been recognized by the GOG and, with IDA support, a program to address the specific requirements for a more vigorous private response was put in place in 1991. 4.03 National savings increased during 1986-90 from 5.1% to 8.2% of GDP, reflecting the sharp rise in private saving from 3.4% of GDP in 1986 to 6.5% in 1990. Given that per capita income was increasing at about 2%, the implied marginal savings rate of over 30% is remarkable. This growth fell just short of the revised target set for SAC II and substantially short of the more optimistic target of over 14% set under SAC I. Clearly, even if the significant capital inflows from overseas required to sustain the level of investment consistent with growth targets do in fact materialize, a substan- tially greater fraction of incremental per capita income will have to be saved in future. This would seem to require that the rate of inflation fall and that interest rates become positive. 3/ OECD: "Geographical Distribution of Financial Flows to Developing Countries", Paris, 1991.  4.04 While CDP per capita rose at approximately 2% per year over the program period, private consumption per capita rose more slowly due to the increase in the rate of saving. This explains the public perception in Ghana that the adjustment program has brought less prosperity than the 5% per annum GDP growth rate would imply. 4.05 Exports of goods and non-factor services grew at an average rate of over 8% annually during 1986-90, but the expected current account surplus of US$110 million per year was not realized due to deterioration in the terms of trade, and especially the steep fall in the international price of cocoa.4 These facts notwithstanding, Ghana was able to increase its gross international reserves from US$149 million at the end of 1986 to US$269 million at the end of 1990 and to reduce almost to the point of elimination the arrears on current payments. Repatriation of Ghanaian savings from overseas, estimated at over US$200 million annually over the last two years, contributed significantly to the recent improvement in the capital account. 4.06 As of the end of 1990 inflation had not been brought under control, the GDP deflator increasing at 34% in that year, approximately the average annual rate of increase over the previous four years. The Consumer Price Index showed that up to 1989 inflation had been abating, albeit slowly, but that there was a resurgence in 1990. This resurgence has been attributed to higher food prices due to poor crops resulting from drought and to a steep rise in the prices of petroleum products due to a sharp increase in world crude oil prices as well as heavier excise taxes on the main petroleum products. There was a significant reduction in inflation during 1991 partly in response to monetary policy aimed at reducing the excess liquidity that in 1990 had validated cost- push pressures. Overview 4.07 Aside from the performance indicators mentioned above, there are others indicative of the success of stabilization efforts. The fiscal balance improved, the broad fiscal deficit"' having been reduced from 3.3% of GDP in 1986 to 2.4% in 1990. External debt service6/ as a percent of export of goods and services was reduced from 47.8 in 1986 to 37.9 in 1990. The rate of increase in the supply of broad money fell from 53.7% in 1986 to 18.0% in 1990. Meanwhile, the overvaluation of the exchange rate was corrected, the spread between the parallel market and the official rate fell from 87% in 1986 to 3% at mid 1991, and, for all practical purposes the cedi became a convertible currency. 4/ Cocoa prices realized for Ghanaian exports fell by 46% between 1986 and 1990. 5' Including capital expenditure financed through external project aid. 6/ Including the IMF.  - 12 - 4.08 The question arises as to what extent the economic response noted above was a byproduct of the substantial assistance received by Ghana after 1986.1' It is difficult to separate the effect of aid on growth from that of policy changes. However, it can be noted that a comparative study of adjustment programs in seven African countries,-' showed that the aid per capita disbursed in 1987 to Ghana was slightly lower than the average for Guinea, Kenya, Madagascar, Malawi and Togo, and substantially lower than for Senegal, but that most of these countries did not match Ghana's growth performance. Thus it would seem that while aid flows most likely assisted, this factor alone would not explain the growth rates achieved by Ghana. 4.09 While it can be stated with confidence that the performance of the economy outlined above broadly reflects the impact of the economic recovery program, it is less clear how much is attributable to the effects of the structural adjustment emphasis after 1985. The likely existence of lags between implementation of policy change and the appearance of the effects on economic performance indicators suggests that the drawing of detailed conclusions regarding the effects of particular parts of the Ghanaian economic program should be approached with caution. V. EVALUATION 5.01 The structural adjustment effort in Ghana has been successful in that the Government of Ghana has implemented a wide range of measures promptly and wholeheartedly, thereby achieving a substantial reorientation of the policy environment in a direction favoring greater efficiency in the use of resources within the public sector and an enhanced role for the private sector in the economy. The macroeconomic indicators suggest that the economy continues its recovery from the negative growth, high inflation, and foreign exchange crisis of the early 1980s. However, the adjustment is an on-going process and further measures are being introduced. So far, the private sector investment response has been slower than anticipated, and is now the subject of special attention. 5.02 The review of SACs I & II can serve to identify the strengths and weaknesses of the structural adjustment process and the Bank/IDA's role in it. The review is approached first from the point of view of program/project cycle issues. This is followed by a review of a sample of components to see what factors may have resulted in the differences in performance. Program/Project Cycle Issues Design 5.03 Several aspects of the design of SACs I & II stand out as having been important in determining the generally positive outcome. 7/ See para. 3.25 above. s' Robert H. Nooter & Roy A. Stacy, "Progress on Adjustment in Sub- Saharan Africa" dated October 15, 1990.  - 13 - * The structural adjustment program (SAP) and the supporting SAC I was timed to continue the natural progression of response to an economic crisis from the provision of emergency imports, rehabili- tation of the export sectors and the requisite infrastructure, and the stimulation of recovery in the productive sectors to a comprehensive overhaul of the policy framework to serve a reoriented economic strategy. This timing took advantage of the possibility for policy dialogue in a context of mutual confidence built up during the post 1983 crisis, and of the recognition by GOG that more profound changes in the policy environment were needed to continue the recovery. * There were extensive consultations: a) within the Bank -- between Country Operations and Projects, Technical Divisions; b) Bank/Fund -- several meetings to discuss coor- dination of support for Ghana's ERP, and a common PFP; c) Bank/GOG -- brainstorming sessions in July/August 1986 served to identify the major adjustment issues and to agree approaches to them; d) GOG/Private Sector -- brainstorming sessions also included the private sector, trade unions, and the press; e) Bank/Donors -- meetings between the Resident Mission and donors to discuss SAP details, and the inclusion of staff of one donor in the appraisal mission. * The SACs were an integral part of a lending program unified by the objective of supporting Ghana's ERP. ISAC, SAIS, FINSAC, EMS,91 although addressing particular aspects of adjustment, shared the common objective of adjusting the policy environment and institu- tions in the same direction as the SACs. This situation lent itself to the use of mutually reinforcing cross-conditionality which would have increased Bank leverage had this been necessary. * SAC I called for a wide variety of policy measures and institu- tional changes to be accomplished within an optimistic time frame, especially given the capacity constraints imposed by the scarcity of skilled and experienced officials in the public service, and by the available information base. SAC II was designed around more modest targets. 91 Industrial Sector Adjustment Credit - ISAC Structural Adjustment Institutional Support - SAIS Financial Sector Adjustment Credit - FINSAC Economic Management Support - EMS.  - 14 - * Considerable economic and sector work and project financed studies were undertaken jointly with the GOG during 1985 and 1986. This work included comprehensive reviews of public expenditures, and of the agricultural and industrial sectors. Attempts to study cocoa marketing and state-owned enterprises were not fruitful. Many components of the structural adjustment program were designed on the basis of this recent economic and sector work. This was especially true of the tax reform component which benefitted from a Trade Taxation and Tariff Review (1986), a Study of the Sales Tax Credit System, a Study of the Taxation of Investment, and a Study of Income Taxation (1989). 5.04 The approach to the design of the SACs fostered an unambiguous sense of ownership of the program by the Government of Ghana and a high level of commitment to its implementation. The existence of recent studies were helpful in providing convincing evidence of the need for action and of the potential efficacy of certain measures. In some cases where such preparatory work had not been done, the Bank failed to convince the GOG of the merit of particular courses of action, eg. in cocoa marketing reform and reform of state-owned enterprises. The result was that the GOG was not fully committed initially to these components. In any event, the absence of adequate information meant that even if there had been total commitment, some necessary decisions could not have been taken. 5.05 At the same time some aspects which negatively affected performance of the SAP point to some areas of weakness in the approach to design of the package. Primary focus necessarily had to be on the measures to be implemented in order to change outcomes by changing procedures and/or institutions. But this focus should not preclude attention to side effects, for these can impede the success of the program. Some categories of side effects were not given adequate attention in the design of the structural adjustment process: a) financial -- specifically the cost of severance benefits associated with the massive retrenchment in the SOEs. This is said to have slowed retrenchment in the Cocobod and the divestiture of SOEs. This was partly addressed under SAL II by allowing retrenchment costs in'SOEs to be covered by grants from the budget of GOG, but it is not clear that firm targets were set and the fiscal implica- tions fully analyzed. Lack of up-to-date financial information on most SOEs was also a factor in the absence of clear estimates of retrenchment costs; b) institutional -- little thought was given to revising the roles of institutions made obsolete by the liberalization of the regulatory framework. In the absence of ready programs defining their new roles, institutions such as the Ministry of Trade and the Prices and Incomes Commission tend to search for new functions to justify their staffing and indeed their survival. This could result in overlapping with other parts of Government and to continued inefficiency of public sector resource use; c) unemployment/underemployment -- the commitment of the political directorate in charge of the economy to a process of structural  - 15 - adjustment will depend on the extent to which the program is sensitive to and addresses an existing or potential unemploy- ment/underemployment problem. It seems to have been assumed that the expansion of the economy would occur promptly and new jobs would be created, and/or the unemployed would be absorbed in the informal sector. In the case of Ghana, which had just absorbed about a million returnees from Nigeria, these assumptions should have been carefully examined. Several reports suggest that the GOG perceived the existence of and was concerned about an unemploy- ment/underemployment problem especially among youth in urban areas.- 10 d) temporary adjustment problems -- trade liberalization, the centerpiece of Ghana's SAP, to push industries to become more competitive internationally and to develop export potential, involved the reduction of effective protection by the removal of non-tariff barriers and the reduction of tariffs. Some productive activities cannot survive in the atmosphere of international competition, but others can if given time and assistance to adjust. Attempts to address the interim adjustment problems of the latter reflected in phased reduction of protection and the provision of special financing and technical assistance facilities are sometimes used in SAL operations, but were not initially considered in the Ghana case. Advance planning for the interim problems can help to reduce the burden of adjustment by minimizing the loss of salvage- able activities. This is particularly important where productive activity is dominated by the SOE sector and the financial burden of adjustment will be concentrated in the government budget. Appraisal 5.06 The appraisal of SAL I did not follow the usual pattern in which discussions and agreements are reached at the technical level and then presented to the political directorate for their approval. This approach frequently puts the Ministry of Finance in the position of having to convince the rest of the government of the merit of a package it had negotiated. The Ghanaian leadership reversed this process by introducing at the beginning of the appraisal a week-long brainstorming process involving members of the PNDC, ministers and senior civil servants, trade unions including the civil service employees association, employers associations, representatives of the