Ghana - Industrial Sector Adjustment Credit Project

Document of The World Bank FOR OmCL USE ONIU Report N. 12137 PERFORMANCE AUDIT REPORT G.LANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (CREDIT NO. 1672-GB) JUNE 30, 1993 MICROGRAPHICS Report No: 12137 Type: PPAR Country Policy, Industry and Finance Division 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 Equivalent Currency Unit = Cedis US$1 = 386 Cedis S:R 1 = UD$ 1.08 at negotiations SDR 1 = US$ 1.43 at clos ng Abbreviations and Acronyms BOG = Bank of Ghana "BS = Central Bureau of Statistics DFD = Development Finance Departme-it, Bank of Ghana ERP = Economic Recovery Program FRI = Food Research Institute FUSMED = Fund for Small and Medium Enterprise Development GIC = Ghana Investment Centre GSB = Ghana Standards Board GSS = Ghana Statistical Service (formerly CBS) ISAC = Industrial Sector Adjustment Creat MFEP = Ministry of Finance and Economic Planning MIST = Ministry of Industries, Science and Technology PIB = Prices and Incomes Board PNDC = Provisional National Defense Council RIC = Reconstruction Import Credit SIP = Government Statement of Industrial Policy SUL = Special Unnumbered Import Licences UNDP = United Nations Development Program Fiscal Year January 1 - December 31 FOR OFFICIAL USE THE WORLD BANK Washinon, Dc 20433 U. s. A. Ofke of Director-Generl Operations Evaluation MEMORANDUM TO THE EXECUTIVE DIRECTORS ID THE PRESIDENT SUBJECT: Performance Audit Report on Ghana Industrial Sector Adiustment Credit (Credit 1672-GH) Attached is the Performance Audit Report on Ghana - Industrial Sector Adjustment Credit (Credit 1672-GH), prepared by the Operations Evaluation Department. The Performance Audit Report (PAR) agrees with the major findings of the Project Completion Report (PCR). Overall, the project outcome is rated satisfactory, with likely sustainability and satisfactory institutional development. The project had three objectives. First, to break the constraint on foreign exchange for import of industrial inputs. Second, to rehabilitate potentially viable manufacturing enterprises. Third, to strengthen key institutions in the public and private sectors involved in economic and finE icial analysis and restructuring. In addition, a studies component was designed to identify options with respect to enterprise and subsector restructuring programs. These objectives have been broadly met. The evaluation concludes that sustainining the progress achieved so far, requires a healthy environment for the promotion of private savings and investment and the development of private enterprise, as well as strong leadership in economic management. This document has a restricted distribution and may be used by recipients only in the perfornimance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-GH) Table of Contents Preface ............................................ I BasicDataSheet . ..................................... ill Evaluation Summary ................... ............. ..... vil I. INTRODUCTION .................................... 1 II. THEISACPROGRAM ..................... . .......... I A. Objectives of ISAC ............................... 1 B. Programimpact............... .. .............. 2 C. Social Impact of Adjustment Policies ........ ........ ... 4 D. EnvironmentConsiderations ......................... 6 III. PRINCIPALISSUESINISAC ........................... 7 A. Structure of the ISAC Loan .......................... 7 B. Complementarity: ISAC and SAC ..................... 8 IV. GHANA'S STRUCTURAL ADJUSTMENT: CONTINUING ISSUES .............................. 10 A. The Macroeconomic Policy Mix . . . .......... ......... .10 B. Private Saving and Investment .. . .......... . C. The Foreign Exchange Regime in Ghana ................. 18 D. Trade Structure and Trade Policy in Ghana ............... 20 This document has a restricted distribution and may be used by recipients only in the perforanace of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-OH) Table of Contents (Cont.) V. THE BANK'S ADJUSTMENT ASSISTANCE STRATEGY . . . ............. . . . . . . . . . .. 23 A. The Bank as Policy Advisor ......................... 23 B. The Bank as Resource Mobilizer .... ....................... 27 C. The Bank as Capacity Builder .............. ...... 29 D. Lessons and Agenda for the Bank ................... 30 ANNEX 1: ISAC Sub-Project Borrowers Performance ........ ... 32 ANNEX II: Aid and the Balance of Payments ................. 36 ANNEX III: ISAC - Evidence of Good Design - Synchronizing Policy Reform Mix and Technical Assistance with Problem Diagnosis .....37 ANNEX IV: IDA Credit Approvals ............. ....... . 38 ANNEX V: Key Economic Indicators .................... 39 PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-GH) PREFACE This Is a Performance Audit Report (PAR) of the Industrial Sector Adjustment Credit (ISAC) program to the Republic of Ghana. Credit 1672-GH in the amount of US$28.5 million and an African Facilities Credit for US$25 million were approved by tche Board on March 27, 1958. The credits were fully disbursed and closed on December 31, 1991, one year behind schedule. The PAR was prepared by the Operations Evaluation Department. It is based on the President's Report, sector and economic reports, Country Strategy and Policy Framework Papers, the credit documents, and discussions with Bank staff invlved in the program. An OED mission visited Ghana in February, 1993 and discussed the effectiveness of the Bank's assistance with Government officials and representatives of business and financial communities. Their kind cooperation is gratefully acknowledged. A draft Performance Audit Report was sent to the Government and comments were received and incorporated to this report, as appropriate. iII PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-GH) Basic Data Sheet PROJECT COSTS (US$ Million) Appraisal Estimate Actual Local Foreign Total Total Category Costs Costs Costs Costs Industrial Impets 0.0 40.0 40.0 45.9 Industrial Rehab. 0.0 10.0 10.0 9.8 Inst. Strengthening 0.7 4.1 4.8 5.2 Studies 0.9 1.0 1.0 0.5 TOTAL 0.7 55.1 65.8 61.4 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ Million) Cumulative Estimated Revised Actual Actual as % Fiscal Year Amount Amount Amount of Estimate 1986 0 0 9.35 0 1987 10.00 10.00 28.19 282.00 1988 26.00 26.00 '3.05 160.00 1989 42.00 52.85 52.85 185.44 1990 28.X0 44.40 57.71 202.49 1991 0 0 60.24 0 1992 0 60.96 60.96 0 iv PROJECT DATES Original Actual Identification 1984-85 1984-85 Project Brief July 1985 July 1985 Pro-Appraisal/Appraisal June 85/Aug 85 June 85/Aug 85 Post Appraisal December 85 Deceriber 85 Credit Negotiation February 3, 1986 February 3, 1986 Board Approval March 27, 1986 March 27, 1986 Credit Signature April 17, 1986 April 17, 1986 Credit Effectiveness June 6, 1988 June 6, 1986 Credit Closing December 31, 1990 December 31, 1991 Project Completion December 31, 1990 December 31, 1991 Last Disbursement Decamber 11, 1091 STAFF INPUTS FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Preparation 30.9 35.7 Co-financing 1.8 Appraisal 44.1 Negotiation 10.6 Board 3.4 Sepervision 7.4 32.4 23.8 13.5 17.4 7.4 0.4 TOTAL 30.9 103.0 32.4 23.8 13.5 17.4 7.4 0.4 MISSION DATA Mission Date Duration No. of Staff Date (Week) Persons Week of Report Pre-Appraisal 06/10-22/85 2.5 5 12.5 06/28/85 Appraisal 08/12-09/04/8' 4.0 6 24.0 09/10/85 Post-Appraisal 12/09-13/85 1.0 1 1.0 12/20/85 Supervision 1 07/14-25/86 2.0 2 4.0 08/20/86 Supervision 2 10/20-11/07/88 2.0 1 2.0 12/02/86 Supervision 3 01/21-25/87 1.0 1 1.0 02/10/87 Supervision 4 01/26-02/20/87 3.0 1 3.0 03/04/87 Supervision 5 03/20-25/87 1.0 1 1.0 05/29/87 Supervision 6 06/30-07/08/87 1.5 1 1.5 07/14/87 Supervision 7 10/19-11/06/87 3.0 1 3.0 11/23/87 Supervision 8 03/14-18/88 1.0 1 1.0 04/07/88 Supervision 9 11/18-15/88 1.5 1 ..6 12/12/88 Supervision 10 02/03-05/90 0.5 1 0.5 03/20/90 Supervision 11 05/15-06/01/90 2.0 2 4.0 07/13/90 Supervision 12 10/31-11/16/90 2.5 2 5.0 12/21/90 Supervision 13 05/19-29/91 1.5 1 1.5 06/28/91 V GHANA: ISAC Supervision Ratings (Form 590) Evaluation Development Legal Management Available Year Overall Objectives Covenants Performance Funds 86 1 1 1 1 8' 2 1 2 1 88 2 1 2 1 89 2 1 2 2 1 90 2 I 2 2 1 91 2 2 1 2 1 92 1 2 2 1 1 PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-GH) Evaluation Summary 1. Ghana took the first steps towards monetary and fiscal management; reversing the direc*Ion of Its command strategies for Improving private sector economy strategies for growth, In early participation and improving levels of 1983. The new program popularly savings and investment; providing for known as "The Economic Recovery greater control over the dynamics of the Program", was supported by the foreign exchange market; and International community and the Bank strengthening of Institutional capability with two Reconstruction Import Credits, to design economic policy and monitor beginning January, 1984. This was economic outcomes. The PAR also followed by further policy based loans, reviews the social Impact of adjustment the first of which was the Industrial operations In Ghana, and states the Sector Adjustment Credit of March, case for factoring explicit environment 1986, followed by two Structural safeguards Into the Bank's country Adjustment Credits, in later years. The assistance strategy. ISAC (US$28.5 million) and an African Facility Credit (US$25 million), were approved by the Board on March 27, 1 Program Ob19Wtivqs and Dgsign 1986. The credits were fully disbursed and the project closed on December 31, iv. The Industrial Sector Adjustment 1991. Credit was one component of a comprehensive operation designed to ii. Several supervision missions were assist Ghana In strengthening Its market undertaken during program oriented economic strategy. It had implementation. The missions assigned three objectives: First, to reak the satisfactory ratings to the several foreign exchange constraint on the parameters used for judging progress in Import of raw materials and essential implementation and impact (Basic Data industrial and agricultural inputs, with a Sheet). Based on OED's review, the view to improving capacity utilization. performance of this project In terms of Second, to rehabilitate economically Its overall Impact and sustainability, is viable enterprises, which were capable also rated as satisfactory. of earning or saving foreign exchange. Third, to strengthen the capacity of the iii. The PAR concurs in the general Ghanaian administration to administer findings of the PCR, but additionally, the program and to build Institutional focusses on such aspects as appropriate capability for longer-term development sequencing of stabilization, trade planning. Despite early difficulties, liberalization and rehabilitation policies; technical as well administrative, in the vill implementation of the loan, it was a about 7 percent over the same period, useful learning process, which led to moderating to some extent, the advrse good overall results. Impact of labor retrenchment alsewhere In the economy. Public confidence In the new set of policies was evident In II. PROGRAM IMPACT the modest rise In private investment from 8 percent in 1985 to an estimated 9 percent In 1992. Nevertheless, much (a) Canacity Utilization and Growth still remains to be accc;nplished on several fronts. v. Capacity utilization in tha manufacturing sector rose and if. Assessing the social impact of manufacturing output also expanded adjustment policies Is Inherently a substantially. Exports began to expand difficult task, since an evaluation of by an annual average of 10 percent benefits and costs In terms ot human (Tables 1.1 and 1.2) (1983-90), and resource development and economic export diversification occurred, both and social welfare, requires an up to with respect to commodities and foreign date social accounting framework. markets. Ghana's market share in the Household Living Standards Surveys European Economic Community rose however, reveal that the major brunt of from 40 percent in 1987 to almost 50 the burden of adjustment has been percent in 1992 and its share in regional borne by the "better off classes" (Box markets also increased. The institution 1), who consumed tradables, even building component provided for training though these same classes were also of public sector and private enterprise the beneficiaries of the new economic managers, as well as project staff in strategy. The losers were primarily commercial banks and the Bank of workers who were retrenched and did Ghana, in project evaluation and not receive compensation and the business and marketing practice. permanent pool of unemployed. Selected institutions such as the Ghana Targeted relief programs such as the Standards Board and the Ghana Program of Action to Mitigate the Social Statistical Board and the Ghana Costs of Adjustment (PAMSCAD), were Investment Center were also sensitive to these needs, providing strengthened. employment opportunities to vulnerable groups and assisting them to meet basic (b) Soial needs, in terms of health and nutrition. However, as described in Box 1 of the vi. The social impact of the main report, the longer-term deficits In adjustment policies was generally food and nutrition still exist. Their favorable. The income effects of the redressal requires action of a systemic adjustment benefitted the entire nature. community, as GDP grew at a sustained 5 percent annually, between 1985 and 1992. The labor intensive service sector expanded at an annual rate of ix (c) TheFy n (a) Timing and Sequencing of Adjustment PAIIe2 ix. The ISAC did not provide for environment safeguards in the design xi. 'With the wisdom of hindsight one and implementation of the adjustment might argue that the timing and policies. Considerinj that the sequencing of the reform policies and macroeconomic reforms were intended measures could have been better. to change the stroure of ielative Experience with structural adjustment prices and thereby, tne allocation of shows that the right sequence should resources, environmenta: Issues should have been: stabilize, liberalize, invest. have surfaced as an important variable. In the case of the ISAC, the sequence This focus is especia:Iy relevant in was reversed. As a consequence, some Ghana, since forestry products are resources were diverted to sectors or important in the export picture; hence enterprises that could not have survived the rate and nature of exploitation of the subsequent liberalization. It resulted Ghanaian forests becomes an issue. In non-performing loans In a number of Environment issues are being factored cases. It must be noted, however, that into the country ass'stance strategy, the state of the art on sequencing of notably through Forestry Resource adjustment operations was In Its Infancy Management and EnvironmentResource In the early 1 980s. Moreover, the ISAC Management projects and a Small-Scale was a device by which the Bank Mining and Environment Project, now exploited the first "window of under preparation. An environmental opportunitym In what was to be a longer action plan approved in 1991, is in the process of adjustment. More process of implementation, and Importantly, the credit was an Initial test environment sector work is planned for of the responsiveness of the economy the western region in FY94. to market-oriented economic stimull; judged by this criterion, there was overall a good pay off to the lit. PRINCIPAL ISSUES IN DESIGN investment. IMPLEMENTATION AND SUSTAINABILITY (b) The Enabling Framework for Privte x. An analysis of the principal issues associated with the Industrial Sector xii. The government has made Adjustment Credit cannot separate itself Important strides over the past decade from the larger perspectives of the In Improving the climate for private subsequent structural adjustment enterprise. The freeing up of the operations. Hence, this evaluation also foreign exchange market and the focused on the ongoing processes in liberalization of foreign trade have macroeconomic and microeconomic contributed to improved resource management that followed on the allocation and the promotion of program. domestic resource based exports. The Ghana Investment Center is being transformed from a regulatory body to x an Investment promotion organization. are major causes of public reluctance to Macroeconomiu management has save and Invest more. Of several generally been supportive of the new reasons adduced for the low key Private economic strategy. The Bank has also enterprise response, the major focus has provided support to the form of high been on the pervasive public sector quality economic and sector work and a presence In all forms of economic diversified mix of lending, to strengthen activity. The government legitimately the reform process (Annex IV). argues that without sufficient trained However, there are areas where managers and private capital, rapid stronger initiatives are needed to privatization may be a risky option. promote the goals of the reform However, without a clear signal from process. the government and the establishment of a transparent set of guidelines with xill. Ghana still has considerable respect to the role of the private sector, deficits In the production sectors (Box combined with safeguards for protection 3). The protracted approach in the past of private property, it seems unlikely to a redressal of thesG problems has that the private sector would participate accounted for the slow response of effectively In the growth process. The production to many of the incentives evaluation concludes that It Is time to provided by the reform program. Of the translate rhetoric Into action programs. several constraints hampering progress, The government needs to articulate Its the principal problems relate to the strategy on privatization and Identify weak financial Intermediation process priorities for future action through a and the high cost of credit. (he dialogue with the Bank. problem is most felt at the level of small and medium enterprises, a sector which (c) Improved Management could contribute to the alleviation of EgnoMy poverty and improvement of incomes of the poorest. In interviews given to the xv. While progress has been made mission, enterprises identified the over the past decade In overall deficits In trained workers, core macroeconomic management, there are infrastructure (especially power, several areas where further progress communications and transportation) and and refinement Is desirable. An technology transfer as causes of market essential question remains, the failure. These are legitimate claims. The government's ability to design, monitor, Bank's country assistance strategy and Implement stabilization and expects to focus on these issues development strategy and policy. The through its emphasis on investment ISAC credit and subsequent adjustment lending. operations envisaged the establishment of a unit in the Ministry of Finance and xiv. The evaluation of the ISAC credit Economic Planning, to undertake policy draws attention to the low level of analysis and monitor economic trends, private savings and investment. The Including the Impact of adjustment evaluation comes to the conclusion that policies and measures. The failure to fears of expropriation and harassment establish such a unit ieaves an xi important gap in the Government's Indicative, are relevant to the design ability to design and manage adjustment and mi UM evaluation of the benefits operations; it also raises questions of the program. They are useful In that about "borrower ownership" of the they sensitize the Bank, the Borrower, program and the credibility of the reform as well as the general public, to the process. The absence of a central unit costs and benefits involved, provide with capacity to undertake policy greater transparency to the reform research also reduces the Government's process, and facilitate borrower ability to attract high caliber Ghanaian ownership of the program. The economists to a central point in the existence of a set of indicative targets administration from which important may also serve to strengthen the policy decisions may emerge, on a day commitment of all parties to the to day basis. From the Bank's achievement of the goals, or at best to standpoint, it denies it the opportunity Increase awareness of unexpected for a continuum in its policy dialogue trends or factors which put the with the government, and the chance to economy off track, and signal the need detect unexpected or adverse policy for countervaiiing measures. side effects and to design mid-stream corrections, as appropriate. IV. EVALUATION FINDINGS xvi. Ghana's ability to design and xviii. A detailed analysis of the monitor its economic progress and the implementation and impact of the impact of reform policies also depends several policy measures connected With on the availability of an up to date set the ISAC and the adjustment credits in of key macroeconomic and where general is contained in the main text. possible, microeconomic statistics. The The principal findings as well as the evaluation mission found this ongoing agenda for the Bank are information hard to come by: the summarized below: Ghana Statistical Board as well as the Bank of Ghana were in considerable arrears in the preparation of key trade and macroeconomic data, which made The timing and sequencing of trade it harder to formulate opinions about the liberalization policies need to be efficacy of the reform policy measures designed in a way that adequately and more importantly, to understand the spaces GR relaxation and tariff impact on a day to day basis, of the conversion. management of the economy. *The timing of ISAC before trade xvil. The absence of a set of indicative liberalization reverses the normal IM 80 projections of expected sequencing of investment after economic outcomes, was a lacuna in liberalization, which may lead to the design of the ISAC program. It may Investment in firms that would be be symptomatic of the general paucity bankrupted by liberalization. of good economic data in Ghana at that time. But such projections, however xil * The processes involved in the choice data by the Bank of Ghana and the of borrowers for the Industrial Ghana Statistical Board. Rehabilitation Component of the Loan were protracted. The Bank of Sustainability Ghana did not have the expertise to execute the evaluation process. * Strong emphasis is needed to provide clear signals and an efficient * Close attention was necessary to enabling environment for promoting relieve aspects of market failure, savings and investment. especially with respect to credit intermediation and technology * Tight fiscal management is critical to transfer. maintenance of internal balance (low inflation). lmglem=lon* Financial markets and the processes for financial Intermediation need to * Improved emphasis on fiscal be strengthened and surveillance management could have enhanced procedures put In place. price stability and lowered interest rates, to promote investment. A stronger focus on strengthening core physical Infrastructure and * Stronger leadership from the Bank of eliminating bottlenecks In power and Ghana in the management of the transportation Is necessary. foreign exchange market could have prevented the large swing in the real The emphasis on education and exchange rate and he'ped to training to build up a literate labor strengthen and stabilize the market. force should be continued. Clearer signals to the private sector The assistance strategy should be and greater transparency in policy coordinated with donors, both with formulation could play a constructive respect to policy reform and financial role In stimulating private sector resource transfers, and with NGOs, activity. on the social dimensions of adjustment. *Capability to conduct policy analysis and formulate strategy would have A clear cut strategy for privatization been enhanced by establishmen and and policy dialogue with the support of the Policy Analysis Unit of government needs to be initiated. MFEP. *Tracking of the adjustment xix. The overall assessment of the operations would have been project shows It to be satisfactory, with facilitated by timely preparation of good Institutional Impact over the macroeconomic and microeconomic longer-term. Hence, the benefits are likely to be sustained. PERFORMANCE AUDIT REPORT GHANA INDUSTRIAL SECTOR ADJUSTMENT CREDIT (Credit No. 1672-OH) 1. The Industrial Sector Adjustment Credit (ISAC) to the Republic of Ghana In the amou it of US$28.5 million and an African Facility Credit for US$25 million were approved by the Board on March 27, 1986. The credits were fully disbursed and the project closed on December 31, 1991. 2. The Industrial Sector Adjustment was one component of a comprehensive economic recovery and macroeconomic and sectoral adjustment program, which commenced in 1983. It was underpinned by a robust economic and sector work program, a constructive policy dialogue and external resource transfers, which on a per capita basis rose from US$13 in 1981 to US$29 in 1990. II. THE ISAC PROGRAM. A. Objectives of ISAC 3. ISAC had three basic objectives. An Industrial Imorts Comoonent (US$40 million) was used to break the constraint on foreign exchange available for import of raw materials and spare parts and promote industrial capacity utilization. An Industrial Rehabilitation Commonent (US$10 million) was utilized for rehabilitation of enterprises deemed to be economically viable: those using domestic resources, producing basic consumer or exportable goods and those making full use of rehabilitated capacity (Annex 1). An Institutional Strengthening Component (US$3 million) was used to finance technical assistance to strengthen staff of the Bank of Ghana, commercial banks and relevant Government agencies in the areas of economic/financial analysis and restructuring. In particular, the capacity to do project evaluation analysis in Banks and Ministries was to be upgraded. A Studies Component (US$0.5 million) was designed to help identify options with respect to enterprise and subsector restructuring programs and other measures for achieving the medium-term objectives of the adjustment program. 4. The US$40 million Industrial imports component was tranched. The first tranche of US$25 million was available upon effectiveness and the second tranche of US$15 million was conditional on: (a) agreement on the size and composition of 2 the 1987 import program for industry; (b) the approval of a phased program of import liberalization, by government and (c) satisfactory Implementation of agreed export promotion measures during 1986. The second tranche was released on schedule. B. Proaram IMoact 5. At face value, the program seems to have achieved most of its objectives. As Table 1.1 shows, capacity utilization in the manufacturing sector rose dramatically and manufacturing output also increased substantially (Table 1.2), with the sole exception of iron and steel. A noteworthy feature, however, Is that with the exception of beverage industries and non-ferrous metal, none has come close to the levels of production of 1977. 1/ There are, however, a few caveats to this upbeat assessment (Boxes 2 and 3). Table 1.1: Manufacturing inbstries Estimated Rate of C4pacity LUWAbtion (Laspe and Medium-Scale Factories' Percentages Subsector 1984 1985 1986 1987 1988 1989 Textiles 17.3 19.7 17.0 24.0 33.0 45.0 Garments 20.2 25.5 27.0 25.0 35.0 22.0 Metals 20.1 16.2 - 42.0 45.0 45.0 Tobacco and tobacco products 19.5 39.6 40.0 45.0 58.0 63.0 Food processing 22.9 31.2 36.0 42.0 80.0 51.0 Wood processing 28.1 32.5 - 43.0 70.0 70.0 Source: Republic of Ghana, Quarterly Digest of Statistics, March 1992 J Tables are from Andrea Richter, "Republic of Ghana: Industrial Sector Adjustment Credit - Observations from the Regional Program for Enterprise Development" (December, 1992). 3 Ta6te 1.- Iadn Namer of MW4facturtg Peaeo * (97 = 100) Industry 1985 1986 1987 1988 1969 1990 Food manufacturing 41.8 40.6 50.5 53.6 48.0 57.5 Beverage industries 59.3 75.1 85.2 89.0 98.0 94.0 Tobacco and tobacco products 613 57.6 54.9 58.0 51.0 57.1 Textile, wearing apparel and leather goods 19.2 22.9 26.1 28.7 24.0 37.7 Sawmill & wood products 75.4 79.5 793 983 80.0 74.2 Petroleum refinery 80.6 76.6 62.7 67.7 87.2 70.5 Chemical products other than petroleum 31.8 38.0 51.9 67.5 62.0 57.6 Ion and steel products 46.2 38.8 42.9 183 12.1 5.2 Non-ferrous metal basic industries 28.4 72.5 903 97.3 100 103.8 All manufacturing industries 39.3 493 54.2 56.8 63.0 63.5 Source: Republic of Ghana, Quarterly Digest of Statistics, March 1992. * The data in this table differs from those constructed on a value added basis and they need to be scoonciled. 6. Exports are estimated to have grown at an annual average of 10 percent over the adjustment period (1983-90). Starting from a low base ($1 million In 1983), non-traditional exports are estimated to have grown at an annual average of 15 percent during 1986-89, increasing by a further 80 percent in 1990, with earnings of about $65 million in 1992, accounting for 7 percent of Ghana's merchandise exports. 2/ Regional diversification has also been good: the share of the EEC Market increased from 40 percent in 1987 to almost 50 percent in 1992. Another encouraging sign is the increase In the share of ECOWAS markets from 13 percent to about 30 percent over the same period, the principal increases being Nigeria, Togo and Cote d'Ivoire. 2/ P. A. Plesch, "Ghana, Strategy for Accelerated Growth' (undated). 4 7. The Institutional Strengthening Component has also performed satisfactorily. An estimated 200 staff from Bank of Ghana, the commercial banks and key ministries and government agencies involved in the ISAC project, as well as a number of key personnel from the private sector have benefitted from mid-level and refresher courses in project analysis and financial restructuring. In 1991, the Management Development and Productivity Institute (MDPI) offered 39 courses to 773 participants in such fields as General Management, Financial Management, Marketing, Industrial Engineering, Private Sector Development and Public Systems Management. In addition, the Ghana Standards Board, the Ghana Investment Center and the Ghana Statistical Service have all benefitted from the resources provided by the loan. C. Sclal Imoact of Adjustment Policies 8. Assessing the social impact of adjustment policies is inherently a difficult task. Rigorous evaluation of the benefits and costs in terms of human resource development and economic and social welfare requires an up to date social accounting framework. Such data are hard to come by, or to construct, for most countries. Certain broad inferences are nevertheless possible, especially at the macroeconomic level. 9. The income effects of adjustment have generally been favorable: overall GDP growth has been sustained at an annual rate of 5 percent between 1985 and 1992. The labor intensive service sector grew by an annual rate of about 7 percent over the same period, accompanied by somewhat lower, but essentially positive annual increases, in the case of agriculture and industry. The odo effects of the adjustment have been less encouraging in the early years of the adjustment: the CPI index reflected an annual increase of 30-35 percent, then declined to 18 percent in 1990 and an estimated 8 percent in 1992, despite substantial depreciation of the Ghanaian cedi, over that period. These improvements were made possible by a consistent acceleration in the growth of exports, combined with a reduction in Ghana's external debt service ratio from 68 percent in 1988 to about 25 percent in 1992. 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The ISAC did not provide for environment safeguards, in the implementation of the adjustment policies. The macroeconomic policy reforms that accompanied the credit changed relative prices, the trade Iberalization and exchange depreciation measures in particular, shifted the production focus towards domestic resource based goods and services. The industrial restructuring programs and the incentives for new private investment, both domestic and foreign, have implications for the environment. For example, agroindustrial food processing as well as the logging Industry received a boost from the incentive policy regime and feature prominently in the export drive. The environmental consequences resulting from such expansion, needed to be assessed, and appropriate safeguards instituted. The country assistance strategy shows an awareness of possible environmental problems resulting from indiscriminate growth policies. An environment action plan approved In 1991 is being Implemented and environment sector work is planned for the western region in FY94. 7 Ill. PRINCIPAL ISSUES IN ISAC. A. Structure of the ISAC Loan. 11. The Loan's rehabilitation component focused on existing firms. Some (Wahome Steel, S. Akim) used it to buy new machinery, and effectively became new firms. Others (Tema Textiles, Animens) updated old equipment. The Bank of Ghana and ALITEC had no analytical capacity at that time to target loans. 12. Was Bank of Gh;L to (BoG) the right choice for administration of the loan? Both the Ministry of Finance and Economic Planning (MFEP) and the Ministry of Industry, Science and Technology (MIST) noted that BoG had little analytical capacity for loan evalution. The composition of the technical committee, ALITEC, needed strengthening. The only loan criterion seemed to be completion of the application letters and evaluation reports by the participating financial institutions, which also had no project evaluation capacity. 13. Foreign exchange risk was allocated to the borrowers in the initial loan design. Initially loans were to be in hard currency, with risk on the borrower. This had to be renegotiated to get loans to move. IFC is still trying to get micro firms to borrow in foreign exchange. This requires careful thought on risk-bearing in an unstable foreign exchange market. 14. The coordination between the working capital and rehabilitation components of the loan could have been stronger. The working capital was exhausted quickly, In some cases, mainly paying existing debts. The rehabilitation firms that invested later in new machinery could not get working capital for inputs (S. Akim, Animens), and are operating well below capacity. 15. More thought was needed to determine the sequencing of stabilization, liberalization and investment. Normally we expect the sequence: stabilize, liberalize, invest. Here it was the opposite: Invest, liberalize, stabilize. Thus, much of the investment went into firms or sectors that were made unprofitable by the subsequent liberalization and stabilization. 16. The audit mission also carried away the impression that the Government is not giving clear signals about the "credible irreversibility" of the adjustment strategy. One of the leading indicators during the ISAC period of this lack of credibility was the failure to establish a working unit in the Ministry of Finance to undertake the requisite policy analysis and monitor economic trends. One result of this hiatus is that up to date macroeconomic data is hard to come by. The Ghana Statistical Service is well behind in its compilation of essential statistics: it has only just released its bulletin for the second quarter of 1992. 8 B. Comolementarity: ISAC and SAC. 17. ISAC, which was mounted in FY86, was followed by SAC I in FY87 and SAC II in FY88. While ISAC focussed primarily on rehabilitation and new investment in machinery and equipment based on a macroeconomic and trade regime that was still quite regimented, SAC I introdF 9d a new dimension to the incentive system: the exchange rate became increasik.gly market determined and the protectionist trade regimes began to be dismantled. Ghana, unlike other adjustors, did not move from ORs to tariffs and subsequently reduce the height and dispersion of the latter. It did both simultaneously under SAC 1, catching many enterprises by surprise. The sharp depreciation of the Cedi, combined with a (temporary) surcharge of 10 percent, did afford some relief for domestic resource based Industry. Industries that were import dependent for inputs still needed protection against finished imports. They were afforded protection through the imposition of a special tax averaging 10 percent ad valorem. One of the merits of the Ghanian tariff system Is Its simplicity: hardly any proliferation of rates or wide dispersion. 18. The consequence of the combination of unanticipated and quick import liberalization and devaluation is that at present reckoning, about 1500 private enterprises that had borrowed funds from commercial banks (including some recipients of IDA monies as well as bilateral and other multilateral aid credits) have been forced into receivership and their assets are in the hands of the Non-Performing Asset Recovery Trust (NPART), established by a law of the Provisional National Defense Council In 1990. It is difficult to determine how many of the bankruptcies were due to the new economic policies, or just bad management. NPART has experienced substantial delays in processing claims for bankruptcy adjudication; only 183 of 1500 claims for receivership have been processed for review. These delays send the wrong signal to the markets, especially commercial banks which shy away from further lending, as well as potential investors, about ease of entry and exit. 19. Of the twelve private enterprises that obtained assistance under the Industrial Rehabilitation Component of ISAC 4 had negative Financial Rates of Return (FRR) and 4 had negative Economic Rates of Return (ERR). The principal reasons aduced for adverse results are, in order of importance: (I) too rapid trade liberalization, especially with respect to textiles and garments and other consumer goods; (ii) rising domestic costs, principally due to increased charges for utilities; (iii) difficulty in securing working capital advances from banks; (iv) the high costs of loans, and (v) power shortages and the lack of skilled labor. 20. One policy question that emerges from the Ghanaian experience is the respective roles of trade liberalization, rising domestic costs, and market failure In constricting industrial growth. Enterprises argue that trade liberalization was factored In at too fast a pace. Some credibility is lent to this argument by the work 9 of Plesch. 3/ Should there have been transitory safeguards, and would such arrangements have forestalled the bankruptcies that occurred? Should the design of the structural adjustment credit have paid more attention to the domestic cost element, signalling a need for greater efforts to contain inflation and improve the fiscal position of the government? Finally, it was clear ti.at any marked restructuring of the industrial base and modernization of equipment would lead to added demands on infrastructure, especially power, communications and transport. These have tended to be binding constraints on output growth of many industries, e.g. steel. The other Issues: what kind of supporting policies (e.g. skill development, technological transfer) for industry are timely and appropriate still remain. 21. These issues lend credibility to the argument that IM AM projections of major macroeconomic and sector aggregates are a 810M Mua nm. of good program design. Such projections sensitize the Bank, the borrower and the public to the potential gains and losses, as well as the downside risks. When compared with A nM performance data they provide a good test of the quality and realism of program design. An exercise of this nature also helps program designers focus more strongly on the right mix between program relevance, program Intensity and absorptive capacity. I/ Plesch, op cit. 10 IV. GHANA'S STRUCTURAL ADJUSTMENT: CONTINUING ISSUES. A. The Macroeconomic Poliev Mix. 22. Aggregate macroeconomic Period YOU-on-year inflation performance improved substantially in the last two years of ISAC, 1990-91, 1990 33.0 and continued to improve until late Febrary 35.9 1992. The data on inflation, one March 36.1 measure of internal balance, are April 36.0 summarized in Table 4.1. Inflation was may 35.6 June 36.4 running in the range of 35-40 percent in July 39.0 1990. The rate was gradually reduced August 40.2 to around 10 percent by the end of September 41.4 1991, and remained below 10 percent Nober through June 1992. It then began to December 37.2 increase in the second half of 1992, 35.9 reaching 12 percent by October, the 1991 January 3. last available data point (as of May February 26.6 1993). March 24.9 April 22.3 23. Normally the policy instrument May 19.8 June 17.3 proximately assigned to internal balance July 15.3 is the fiscal balance.4/ The August 14.6 Government accounts since 1988 are September 13.2 summarized in Table 4.2. From 1988 October 14.0 November 12.9 to 1991 the fiscal balance showed a December 10.3 small surplus , rising to 1.6 percent of GDP in 1991. The surplus was 1992 essentially provided by foreign grants; Febrry 7.7 in their absence, the balance would March 7.3 have been about zero. With interest April 8.2 payments rising from 1.1 percent of May 8.9 June 8.4 GDP in 1988 to 1,8 percent in 1991, July 10.3 the primary domestic balance followed August 11.6 approximately the same path, showing September 11.5 a surplus of 1.7 percent in 1991. This October 11.9 relatively tight budget position can ' Each month index divided by same month index one year account for the reduction in the inflation previous. rate over this period. I/ See World Bank Structural and Sectoral Adjustment Operations: The Second OE Overview. Report No. 10870. June 30, 1992. Chapter 2 for the analysis. 11 24. This fiscal stance was relaxed in 1992, with a projected surplus of 1.8 percent of GDP turning into an estimated deficit of 5.2 percent. This may account for the increase in inflation in the second half of the year, and it may suggest that this problem will extend into 1993. The major items that account for the fiscal slippage are wages and salaries, which are estimated to be 1.7 percent of GDP higher than projected, capital expenditure, with an Increase of 0.9 percent of GDP, and tax revenues on international transactions, with a decrease of 1.3 percent of GDP.1/ The fiscal slippage Is probably due to the elections in late 1992. It Is projected to be reversed In the 1993 budget, mainly via increases in taxes on domestic goods and services and International transactions, and in non-tax revenue.2/ 25. The fiscal slippage in 1992 shifted the responsibility for inflation chart 4.1: money suppy and its conponents control and Internal balance C' I I to the Bank of Ghana. This proved difficult to manage. The background data on narrow money (Ml) and its components are shown in Chart 4.1. There is a clear seasonal component in the N- - data, with a peak each December. Thus 12-month comparisons should be most relevant. The data on M1 are shown in Table 4.3, with data to June 1992 taken from the Bank of Ghana Quarterly Economic Bulletin, April-June 1992, and later data from the IMF. The data through mid-1992 show tight monetary restraint. From December 1989 to December 1990, M1 increased by 17.2 percent, much slower than the rate of inflation. The increase for the same period in 1990-91 was reduced to 5.6 percent. Ml was essentially constant through the first half of 1992, and the programmed Increase from December 1991 to December 1992 was 9.4 percent. I/ This is an illustration of the potential conflict between trade liberalization and stabilization, noted in Report No. 10870, referenced earlier and in earlier OED Reports. 2/ An example was the tripling of highway tolls that was suddenly announced during the evaluation mission. Table 4.2: Gove«nnent Accounts, 1988-1993 (percent of GDP) 1988 1989 1990 1991 1992 191 Prog. Prov. Prej Total revenue. and gate . L,. A JU 2å 0.3 Re~an.. 13.5 13.6 12.6 14.7 14.9 11.9 19.2 Trm n and å~ ~P e~ty 3.9 3.2 2.9 2.6 2.6 2.2 2.3 Ta~a. en int~anl tranmaoties 4.8 5.4 4.9 4.9 5.3 4.0 5.2 Tmaesn doesti goeds and service 3.7 3.7 3.8 5.7 5.7 4.6 8.9 No-Sam *evu 8/ 1.2 1.3 1.0 1.4 1.3 1.1 2.8 70relan Srants 1.1 1.5 1.5 1.5 1.2 1.1 1.1 Total expenditare and It leadisa L j. j 14. 3 198 Cure t epemdturo 10.6 10.3 10.4 10.9 10.6 13.1 15.0 Wage and eslares 4.7 4.4 4.3 6.4 4.4. 6.1 6.9 !nterest 1.1 1.3 1.4 1.8 1.3 1.8 2.2 Otber goods and seviome 2.5 2.5 2.4 2.5 1.3 2.5 2.1 Subsidtes ad transe 2.2 2.2 2.3 2.3 2.5 2.6 3.8 c~pftal espmmdftmtos and net Lagdåna 3.4 3.2 3.0 3.3 3.2 4.2 3.3 Capitel G~m"teo / 2.8 2.7 2.5 .2.8 2.9 3.8 3.0 99 lending 0.6 0.3 0.5 0.5 0.3 0.4 0.2 äpecial ettieincy 1/ 0.3 0.7 0.4 0.4 0.5 1.0 1.5 Surplus or deficit (A LI Lä LI LA -5.. Fiacing-0.2 -0.5 toreiga (..t> 0.2 0.3 1.3 0.s 0.9 -0.5 2.1 Beroedin 4.0 3.8 3.1 2.2 2.3 1.1 3.6 Repa,ment -3.8 -3.5 -1.8 -1.6 -1.3 -1.6 -1.7 lanestic (mot> -0.6 -1.1 -1.5 -2.1 -2.7 5.7 -2.5 ~U.M1.ag systes -1.1 -1.5 -1.1 -2.1 -2.7 3.7 -3.1 Social security 0.7 -0.2 0.2 -- -- 0.4 -- Other -0.2 0.6 0.3 0.2 -- 1.5 0.6 Fiancial sector roe- -0.9 -0.2 0.0 0.1 0.0 udget dettelt. emoluding grant.s -0.7 -0.8 -1.3 0.1 0.6 -6.3 -0. c/ Sased o~ budget ad~pted Januay 6, 1993. 8/ ~acuding receipto tan divestoturo or public ontorprises in 1993. 2/ Exldes oapital expendtors flinanced by öaternel oid. 5/ Imledes and-ot-sevice benefits from 1992. Source: IMF. 13 However, the estimated outcome for December 1992 is an increase of 37.2 percent over December 19911 Thus it seems clear that the Demand fiscal burst in the second half of Currency Deposit Money Outside with Supply 1992 was at least partially End of Period Banks Banks (MI) accommodated by monetary 1989 expansion. The programmed December 82.9 102.2 185.2 increase in M1 from December 1992 to December 1993 is 8.2 1990 percent. This suggests that the March 80.5 92.0 172.5 June 76.7 101.8 178.5 leyal of M1 is not going to be September 78.8 108.2 186.8 adjusted, creating a "monetary December 80.0 136.9 217.0 overhang" that the Bank of Ghana is trying to neutralize. Jaur 81.0 135.7 216.8 February 80.4 130.3 210.7 26. The Bank of Ghana has March 80.1 126.6 205.7 reacted to the monetary expansion April 76.9 131.7 208.8 I May 76.2 130.4 206.6 of late 1992 by tightening, selling June 76.7 123.9 200.6 high-yield open-market instruments July 76.9 122.0 198.9 to the commercial banks and the August 77.4 115.0 192.4 public. The banks' holdings of September 77.7 118.7 196.4 October 77.8 125.6 203.4 cocoa bills has increased November 87.6 133.4 221.0 substantially, and the banks' December 90.0 139.2 229.2 aggregate non-cash liquid reserves are nearly twice the required level. 1992 The result of this monetary squeeze February 86.2 140.5 226.7 is tight credit to the private sector March 85.7 143.4 229.1 and persistently high nominal April 87.5 140.3 227.9 interest rates, even as Inflation is May 86.4 137.6 224.0 June 85.0 152.5 237.5 reduced. The data on nominal September 93.9 160.5 254.4 interest rates through mid-1992 are December O 133.3 192.7 326.0 summarized in Table 4.4, which o shows the Bank of Ghana's bank rate, and representative commercial Source: IMF. bank borrowing and lending rates. All three rates rose in early 1991h as monetary policy tightened. They began to fall at the end of 1991. Comparing the lending rate in Table 4.4 with the inflaVon rate in Table 4.1, one can see that the real lending rate was negative 14 until mid-1991, as the inflation rate came down.Z7 Since late 1991, real rates have been positive, becoming quite high as time passes. Toward the end of 1992, the real lending rate was in the 10-20 percent range. These high real lending rates undoubtedly contribute to the low level of private investment, discussed below. 27. Why are real interest rates so high? Part of the answer is the sudden Commercial Banks fiscal expansion in Bank of Ghana Savings Manufacturing 1992, adding to Period Bank Rate Deposit Rate Lon Rate domestic credit 1989 demand. This was March-June 26.00 16.00- 21.00 22.50- 30.25 only partially Sept.-Dec. 28.00 15.00-19.00 22.50-30.25 accommodated by 1990 monetary policy, Jan. - Aug. 26.00 15.00-19.00 22.50- 30.25 which subsequently Sept. - Oct. 26.00 14.00-18.00 22.50- 30.25 tightened, reactingto Nov. - Dec. 30.00 14.00-18.00 22.50- 30.25 the perceived monetary overhang. Janr 35.00 14.00- 22.00 22.50 - 35.00 However, as the Feb. - July 35.00 15.00- 22.00 26.00- 35.00 actual and the August 32.00 16.00-22.00 26.00-35.00 expected inflation September 32.00 16.00- 24.00 28.00 - 34.00 October 28.00 15.00- 22.00 24.00- 34.00 rate comes down, November 25.00 14.00- 22.00 24.00- 34.50 the demand for December 20.00 10.80- 19.50 18.25-31.50 money should 1992 increase, putting Januay 20.00 09.00- 20.20 18.25 - 31.50 further upward February 20.00 09.00-18.00 18.25-29.75 pressure on interest March - April 20.00 09.00- 16.00 18.25- 29.75 rates. The inflation May 20.00 09.00-16.00 18.25- 29.50 rtderaefrm June 20.00 09.00- 16.00 18.25 - 29.75 rate decreased from around 30 percent in early 1991 to 10 percent in late 1992, a reduction of two- thirds. If the semi- elasticity of money demand is 0.5, this would Indicate an increase in money demand of about one-third, close to the 37 percent increase in MI across 1992. Thus, as of the end of 1992 the monetary overhang may not have been a serious problem, and the monetary tightening In 1993 may have been overdone, raising real Interest rates more than necessary. V Exactly when the real rate became positive depends on how inflation expectations adjusted to the decline in the actual inflation rate. Nf expectations adjust with a lag, the real rate became positive sometime in the second half of 1991. 15 28. Another source of high real rates may be oligopoly in the banking system; Ghana has only five major commercial banks. This could make nominal interest rates rigid, or at least sticky, downward. This would be Figure 4.1: Oligopoly in the loan market consistent with the data of Table 4.4, with real rates Interest rate rising because inflation falls with sticky nominal rates. K rk ..&W curve Oligopoly can be described A by the "kinked" demand La I. . . . rate curve for loans, shown in r Cost Of Figure 4.1.f/ The demand curve is kinked at the "ate existing loan rate because Mrginal revenue each bank believes that (a) if it raises its loan rate the others will not, so it will lose Dwl uMl business to all of the others; (b) if it reduces the rate, the others will follow, so its gain in business will be small. In terms of the analysis of monopolistic competition, the upper part of the demand curve is the individual bank's demand and the lower part is the bank's share of market demand. With the demand curve kinked at point A, the marginal revenue curve is discontinuous, jumping from point B to point C below A. If the marginal cost of deposits passes through the discontinuity, the profit-maximizing loan rate will be at point A. If the deposit varies between 8 and C, the loan rate will remain at A. In particular, as the deposit rate falls, the loan rate will remain at A, increasing the spread. This may have been happening in Ghana in 1992, as deposit rates fell../ In this situation reduction of lending rates could require intervention by the Central Bank, with a credible threat in the background, to bring about a concerted reduction. 29. Thus a major policy issue is the mix of fiscal and monetary policy in Ghana. The Central Bank in its quest for price stability and a reduction of double digit inflation had imposed credit ceilings on the commercial banks until January 1992, which in turn led to credit rationing to the private sector and high interest rates, which in turn contributed to slowing down investment. The proper assignment of policy instruments would seek an improvement in fiscal policy through a reduction of the budget deficit of 5.1 percent of GDP (the program called for a surplus of 1.8 I/ The kinked demand curve comes from Paul Sweezy, "Demand under Conditions of Oligopoly,* Journal of Political Economy, Vol. XLVII (1939), pp. 568-73. I/ Another case where this analysis might apply is Indonesia in 1992. This is hinted at in the PAR on Indonesia PSDLs I and II, February 22, 1993, paras 40-41. It may generally apply in developing countries with few oligopolistic banks. 16 percent). This would have enabled the Central Bank to relax Its credit restraints and lower interest rates to promote private sector Investment. B. Private Saving and Investment. 30. A disturbing feature of the adjustment process in Ghana has been the persistently low levels of private saving and investment. The data on saving and Investment are summarized In Table 4.5. Private saving has been in the range of 5.5 to 6.5 percent of GDP since 1988. Private investment has been higher, in the range of 6 to 9 percent of GDP. These low numbers for private saving and investment are disturbing because the private sector is presumably going to provide future growth In Ghana. For this to be the case, private investment must be sufficient to support the development of a dynamic private sector. As external assistance is reduced, at least in proportion to GDP, private saving will have to provide an increasing share of the resources for investment. 31. Why has private saving and Investment been so low? For investment, one would normally look to high real Interest rates and crowding out by government deficits. However, real Interest rates became positive only in 1991, and the budget deficit was under control until 1992. So these variables could explain low private investment in 1992, but not earlier. They cannot explain the even lower level of private saving. The most common explanation for the low levels of bth private saving and investment that the evaluation mission heard was uncertainty about future Government actions. The fear of expropriation, based on earlier experience, and a failure to get clear signals from the Government about the role for private initiative and enterprise could be a major reason for both low saving and investment. The evaluation mission heard in interviews with both Government officials and private business and academic staff of the "mutual distrust" between the Government and private business. This seems to be one of the factors behind the difficulty the Government is having in privatizing public enterprises. 17 Table 4.5: Savings and Investment as Ratios to GDP Actual Prel. 1988 1989 1990 1991 Gross Investment/GDP 14.2 15.5 16 16.5 Domestic Savings/GDP 5.6 6.9 6 7.9 National Savings/GDP1 9.3 9.7 7.0 9.5 Public Investment/GDP2 \3 8 7.9 7.8 8.2 Public Savings/GDP 4 3.2 1.8 3.4 Private InvestmentlGDP 2 6.1 7.0 8.7 8.3 Private Savings/GDP 5.3 0.6 5.9 a Ratio of Public/Private Investment 1.31 1.08 0.83 0.98 1 Excludes grants. 2 Staff estimates. 3 Includes not lending and capital expenditure financed through external project aid. 32. The ratio of public holding of currency outside the banking system to deposits can provide an indicator of the public's fear or uncertainty concerning the potential exposure from large deposit holdings. This ratio is plotted for Ghana In Chart 4.2, and compared to the ratio for low-income and East Asian countries. Until 1988 the difference is striking. Ghana's ratio was around 100 percent, that is currency holdings equal to total deposits, while the other two averages were around 20 percent. The ratio in Ghana began to fall in 1988, but by Chart 4.2: Currency outside the banking 1992 it was still well above system as a ratio to total deposit the other two. The falling 140 ratio in Ghana since 1988 may signal a future increase in private saving and-- - - - ----------------- investment, although both ---------------- have increased somewhat ----------------- unevenly since 1988 in the data of Table 4.5. It may be that as the Government 20* restores fiscel discipline and provides clear signals of its 190198119821993198419851995199719881989199019911992 recognition of the role of the -Gta -Lm-icom countris - A cwntries private sector In growth that saving and investment will pick up. Otherwise It is difficult to see what would be the basis for more rapid future growth. 18 33. On the positive side of investment regulation, the Ghana investment Center has transformed itself from a regulatory body to a promotional institution and eased the paper work for new domestic and foreign investors. In particular, the minimum capital requirements for opening a business have been reduced for foreign investors and the conditions for repatriation cf profits have been made less onerous. investments have picked up in a modest "J Curve" after an initial dip coinciding with the SAC reforms. What is interesting is that there has been a distinct shift in investments into the labor intensive service sectors (building construction, tourism and services). Another aspect of the Investment picture is a shift towards Ghanaian- Foreign owned enterprises: the number of such enterprises increased from 52 in 1986 to 82 in 1991. Table 4.6 Ghana: Sector Distribution of Investments Processed by the Ghana Investment Center (No) No. of Building Projects Agriculture Manufacturing Construction Tourism Services 1986 152 23 118 - 6 5 1987 84 16 67 5 4 2 1988 74 8 54 2 5 5 1989 81 16 46 1 4 14 1990 108 20 63 4 5 16 1991 145 14 69 15 18 29 C. The Forelan Exchanae Realme in Ghana. 34. The foreign exchange regime in Ghana has been gradually liberalized. The Bank of Ghana (BOG) began with weekly auctions, then established an interbank market in foreign exchange and in the autumn of 1992 essentially withdrew from the market. The BOG now retains earnings from traditional exports (cocoa and gold) and leaves the rest of foreign exchange receipts to the interbank and Forex bureau market. This is described by the BOG as a free foreign exchange market. Interviews with businesses and banks, and the BOG as well, indicated that the foreign exchange market does not clear, that foreign exchange is rationed. The problem seems to be undercapitalization of the foreign exchange bureaus and lack of competition among banks. Essentially, the banks do not use the interbank market. The banks are reluctant to on-lend foreign exchange deposits by non-traditional exporters because they retain the right of withdrawal. The banks use their foreign exchange receipts from other sources to supply their favored customers in need of foreign exchange and ration the rest. The Ghana Commercial Bank, for example, 19 does not use the interbank market. Thus the interbank market is extremely thin. The Forex bureaus are sufficiently small that only small quantities of foreign exchange can be raised at any one of them.a/ This forces the individual customers to do the intermediation that the foreign exchange market would normally do. The BOG might want to consider releasing more of Its receipts to the market, to improve its liquidity and also take a more active role in the market, while encouraging banks to release more of their receipts to the market. This can be facilitated if the Bank is prepared to assume a stronger role as tender of last resort to the foreign exchange market. 35. One of the features of the foreign exchange regime during the adjustment process in Ghana has been the continued depreciation of the Cedi, despite a substantial increase in the volume of external assistance from 3 percent of GDP In 1981 to about 7 percent of GDP in 1990 and strong growth in exports.Q/ The available data for the Cedi-U.S. dollar exchange rate (Cedi per dollar) are summarized in Table 4.6. From March 1989 to June 1992, the Cedi depreciated by 58.4 percent against the dollar. This seems substantial, but it must be compared to inflation to obtain some sense of the movement of the real exchange rate. In the data underlying the inflation Table 4.1, from the end of 1989 to June 1992, the CPI increased by 70.5 percent. Over the same period to June 1992, in Table 4.6 the Cedi depreciated 37 percent. Thus as of June 1992, the Cedi had appreciated substantially in real terms. 36. This pattern was reversed in the second half of 1992. The inflation rate has been about 12 percent, annually, giving an eight-month inflation for June 1992 to February 1993 (the time of the evaluation mission) of 8 percent. Over the same period the Cedi went from 415 to the dollar to around 600, an increase of 45 percent. Over the entire period from end-1989 to February 1993 the Cedi depreciated by about 98 percent, as compared with an increase in the CPI of about 77 percent. Thus the recent depreciation since mid-1992 has reversed a real appreciation, leaving the Cedi depreciated in real terms by around 15 percent against the dollar from end-1989 to February 1993.11/ This large fluctuation in the real exchange rate, with a range of about 30 percent over less than a year, must create substantial uncertainty for both exporters and importers, especially firms importing inputs. A preferred policy, discussed below, may be to stabilize the real exchange rate at a level that maintains profitability in the traditional export sectors. j/ One business enterprise has quarterly payments of $70 thousand to make, and cannot raise that amount from a single source. Its solution is to establish a foreign exchange account and transfer about $6 thousand in Cedi weekly into it. .1,/ The terms of trade declined by almost 29 percent between 1988 and 1992. I/ This calculation allows for an inflation of around 17 percent in the U.S. across the period. 20 D. Trade Structure and Trade Policy in Ghana. 37. Ghana's economy has become much more open since the Economic Recovery Program (ERP) began in 1983. During recent years, despite the depressed price of cocoa, exports (U.S. dollar value) have grown by around 10 percent annually, with strong growth in non-traditional exports (NTEs). Strong export growth plus external assistance have permitted import growth at about the same pace, with a trade deficit running around $300 million. Since most of the imports are inputs to production, the import growth has supported overall growth In the economy. Despite this progress In opening the economy, there remain current issues, mainly on the export side, and questions about past policies, mainly on the import side. 38. Export structure and oolicy. The structure of Ghana's exports is summarized in Table 4.7. Total exports grew by around 10 percent in 1990 and 1991,,but than flattened out in 1992. Growth of about 8 percent is projected (by the IMF) in 1993. With the price of cocoa failing, the share of cocoa and cocoa products in total exports has decreased from about one-half in 1989 to one-third in 1991. NTEs doubled in value in 1990, but have remained flat since. This stagnation in NTEs points to several policy problems on the export side. Table 4.7: Export Structure In Ghana (exports in millons of US dollars) 1989 1990 1991 1992 est. Total Export, fob 808.0 895.0 995.0 983.0 (% change) (10.6) (11.2) (-1.2) Cocoa beans and products 408.0 361.0 347.0 304.0 Gold 160.0 202.0 304.0 323.0 Timber and products 80.0 118.0 124.0 131.0 Other 160.0 215.0 222.0 225.0 of which NTE 35.0 62.0 63.0 60.0 Source: IMF and Ghana Export Promotion Council. 39. Basically, Ghana lacks organization for exporting. There is no duty drawback scheme for imports of inputs into export production. There is very limited export credit facility or Export Bank equivalent. This especially hampers exports to the rest of the West African region, where Ghana could be a major player.12/The lack of internal organization for exporting is compounded by the ineffectiveness of the Economic Council of West African States (ECOWAS), which is meant to promote J2/ The evaluation mission heard the story of salt export consignments whose price gets renegotiated at the destination, partially because It Is a cash market. This problem seems acute in exporting into the CFA zone, which surrounds Ghana. 21 trade in the region. Ghana produces products that could find markets in the region. The evaluation mission saw examples in bottle caps, soap, and steel products. This trade faces ad hoc import barriers that seem to be in violation of ECOWAS agreements, which go without notice at some customs posts..l/ There seems to be a wide range of policy options aimed at Instilling an "export mentality" In Ghana. 40. Imgort liberalization and tariff structure. The current structure of import tariffs seems reasonable. The evolution of that structure is summarized in Table 4.8._/ The table shows a gradual reduction of tariffs to a gradually escalated structure by 1990. This structure remains in 1993. The problem with the liberalization process was that Quota restrictions were removed In the late 1980s without an interval in which equivalent tariffs were imposed. Thus protection was removed suddenly without a transfer of quota rents to the Government. This was unfortunate, since some of the ISAC funds went into investments in protected firms. This is an example of the backward sequencing in the ISAC. However, this is past, and the tariff structure in Table 4.8 seems reasonable. Tabe 4.8: impott Tara imana, y98e-so Product Category 1983 1984 1985 1986 1987 1988 1989 1990 Concessionary 10-20 10-20 20-25 10-20 10-25 10-25 0 0 Bale raw materials 25 25 25 10 15 10 10 It0 Other raw materials 30 30 30 20 20 15 15 10 Capitalgoods 30 30 30 20 25 15 15 10 Consumer goods 30 30 30 25 35 20 20 20 Luxury goods 30 30 30 80 30 26 25 25 Source: GATT, Trade Policy Review Mechanism - Ghana, Report C/RM/S/218, November 8, 1991, page 13. " As one example of the problem of "mutual mistrust* between the Government and the private busint a sector, it was pointed out to the evaluation mission that there Is no business representation on the Ghanaian delegations to ECOWAS. JW This table is taken from Phi Anh Plesch, *Ghana - Strategy for Accelerated Growth: Trade Policy, mimeo, World Bank, undated. 22 41. Trade inelasticity and exchanae rate oolicv.1/ An important Issue for exchange rate management is the degree of supply elasticity of exports and demand elasticity of imports. With a trade deficit, devaluation could increase the deficit, creating a "J-curve" effect that would last until long-run elasticities became effective. In this situation the exchange market could be unstable, requiring management by the BoG. In Table 4.7, about 75 percent of exports are cocoa, gold, and timber. In all of these, with little domestic consumption, export supply is total supply, so that the export supply elasticity is output supply elasticity. These commodities are likely to be supplied inelastically in the short run. Similarly, about 75 percent of imports are Inputs to production.1J/ With a given capital structure (a "putty-clay" technology), the demands for these imports are likely to be price- Inelasti in the short run. The less elastic are export supply and import demand, the greatur is the depreciation that is required to clear the foreign exchange market with a trade deficit. This is especially true in the absence of stabilizing short-run foreign exchange speculation. Thus the possibility of trade inelasticities in the short run may produce large and ineffective swings in the exchange rate, alerting the BoG to the need to more actively manage the rate. In this case an appropriate target may be long-run profitability in the traditional export sector, to generate growth in the medium run. j This para draws on the analysis in William H. Branson, "Economic Structure and Policy for External salance*, IMF Staff Pa 30, March 1983. I1& See Plesch, cited earlier, p.24. 23 V. THE BANK'S ADJUSTMENT ASSISTANCE STRATEGY 42. The Bank has three distinct roles to play In the context of the Country Assistance Strategy in Ghana. First, as a policy advisor. Second, as a resource mobilizer, to further the objectives of promoting growth and reducing poverty. Third, as capacity builder, to strengthen the borrower's ability to design growth strategies, to implement reforms, and to sustain the benefits. A. TI e Bank as Policy Advisor 43. The Bank's performance as policy advisor and the conduct of Its policy dialogue in the context of the Industrial Sector Aejustment Credit has been relevant and useful. Since early 1980, the Bank conducted a broad based strategy of indepth economic and sector work, focused on key sectors and macroeconomic problems. A special report on Industrial Policy Performance and Recovery (1985) accurately diagnosed the major problems in the manufacturing sector: lack of foreign exchange for imported inputs, a small domestic market relative to full capacity production, shortages in supplies of raw materials and Ineffective management of public sector enterprises. The supporting macroeconomic analysis in the Bank's report, Managing the Transition - Ghana (1984) identified the need for (i) an appropriate incentive framework; (11) a key role for the private sector; (liI) a medium-term development program, and (iv) Institutional reforms. 44. These reports set the tone for a policy dialogue on policies and measures to address the constraints to faster growth in the manufacturing sector and in GDP. The policy instruments were embodied in the ISAC and the subsequent SAC I and SAC II. ISAC provided for Import liberalization and export promotion, while SAC I and 11 focused on exchange rate reforms and macroeconomic stabilization. 45. The initiatives undertaken so far are commendable, but there are three areas where the focus needs to be sharpened. The first relates to the management of the foreign exchange market. The current practice of non-enforcement of foreign exchange surrender requirements has seriously restricted the flow of foreign exchange to orthodox channels, exposing the foreign exchange market to speculative forces. The commercial banks, deprived of an assured supply of foreign exchange have begun to ration these resources to their most favored customers (usually large clients), leading to non-optimal resource allocation, in some cases. The unwillingness/Inability of the Bank of Ghana to ensure a steady flow of foreign exchange to the market has led to progressive depreciation of the Cedi, with negative side-effects for Industry that is import input dependent. The Central Bank has through covert measures (moral suasion) sought to steady the decline in the 24 foreign exchange rate, by increasing its reliance on aid and foreign exchange borrowings. This is not a sustainable M longer-term strategy. 46. The second area of focus 0t wa4wo-Wa? Pim, *A al-private sector poliis tha supoea Ghai&6ln governmeMts follmWd for 20 concerns the promotion of private l p to dw a 1 enterprse and scaling down of the all vry few qmaa *4 am =pw md BM;,of thos pervasiva state presence in the bm 4 iWad-sM, may an Ebanew economy. The Country Assistance .ho- m yoW=Uy "we(fbe to t Gmvermet. Strategy correctly assigns priority to this problem. It identifies the main constraints to faster development of d iu Ma the private sector as: (I) continued 2 0" i e o t SO0st4U qw"br VeqMftt h"Dlafy siqkld dominance of state enterprises, (Ii) but Ai aiko Wed iof dog=ain ba* unclear signals about the role for the 06e.4d pibtons*unepesion shemes, private sector; (Mi1) weakness in the Y* d pbAWWm U"own, iwd Many had mmipt a~om nii i p lt In the oud, it-is likly financial sector, and (v) deficits in the technological capability of firms and - jnt auces sod w,mv. ftr futwn enterprises. The country strategy also O u4* O. h'biw *P no am he acknowledgedes that despite concerted efforts, the privatization program has not proceeded smoothly. bytheUS. In fact, apart from actions to privatize (March 1992). the internal marketing of cocoa, very little of significance has been accomplished in this area. 47. It Is now Important to substitute rhetoric with action, by addressing the systemic constraints, accounting for slow progress. Once Identified, appropriate strategies need to be developed to address them. The most important obstacle at this point Is the limited public sector confidence In the ability of the private sector to absorb privatized state enterprises and to manage them effectively 1.9ox 2). 48. A minimum strategy should, hence, address the systemic constraints to both private sector development as well as privatization of state enterprises. Inter alia, these Involve greater attention to expanded training facilities and programs for managers In private enterprises, Improved efforts to correct for market failure in the fields of banking and finance, access to technologies, skills and Inputs needed to foster competition, and upgrading of physical and human capital. A recent study of enterprise development In Ghana has identified the obstacles to the growth of private enterprise (Box 3). Any attempts to promote privatization without correcting for market failure Is likely to receive a lukewarm response - and at best rhetoric - from the government. 25 Mw& Tade Iheaaou ugsstat~ so far the sppy repns nmauatuigha en ek Ithl Vfw acivitie fbe improd thei øeioola perfoano4 an5asedterittaoalcmeiiees hD ayhv io those that alredy hiad * reouree-ase comaraive advantae werespeialized in mrke nihsmevr aîmlepadctifr lowindie o*nMts) or wer procedy igh traipt osomdretøeg competition. Som* ndoutriMs ....p ir ime Gn i øn ndd poߢy .. regime, akf nratio d ke(, d . .. . ... . . .. .. ... .... ~ . ..... on.. Fo0 ayidsdletrrsst fn fpoeto a mle h edt hn¢h opsdn thirOttt éontraddpout rcoeso. apeha h amnt nutypoiego Ths consdraios ris thsiblø tha imd øiberltt* by sel ntyødis%føleittoøv dyai tehnlcarense frmamoiyo anlco as ai xopøoipr øpti may, e the ontar, de urm emævstn înrseeuigta atstmt a i. To effiien retruturng nd rsouceuIcetio, crtai'coditonsmus bemet o h ctvte spotd utb eooicD ibl(htis betosriv ihutpoet .ni 26 . ox 3, Tra4e ransrdow . Supply Response and Market fare (Con) .. teu i the traMio perd ny thu be oe that gears the phaft qf Opswe to wor swmVefa loft# Waped a whiA baftiy ps achieve didW r fstructurkg and qNpadVa. While ev ok asit ng my be hpolble to achieve in pracdov, it i not diful to difftutiat te pace o blmi Wa b oup of acii0 accng to' ter toolmolost coupldty (more difM*cut 'btl *et$in:S longer pde", ear ac4ivitie a aboe o14 . th suche of this stey would depend, how, on th abu t of the enterprises concerned, with .pis ce i.to marshal and aidatlrze the adwr cuanti required in the astuturing: finance, due4tuent~ mae Wo,moalogisn and so on. 'hs a4 6sp~ sure Wi ose abUiotr d Government t ledy h .6t aw in th spply :d idan tmlntb and. plicatn* of solneae and toology industry. aaeln*60 Oid.Z*?epfLw DevekpnW In Ohm Rgpont pnpamid 6r te Mfica ToobufWa 49. In sum, a strateg, for promoting privatization should (i) remedy the systemic causes of market failure, (ii) strengthen the policy dialogue with the government, and (iii) articulate a program which identifies priorities and a sequenced program for the privatization of state enterprises. This work will necessitate careful coordination with and support from IFC. 50. The third area of concern relates to the availability of key statistics for policy formulation and analysis on a timely basis. Ghana is lagging behind most developing countries in the timeliness with which statistics are provided. The statistics on trade are generally available with a year's lag and monetary and fiscal statistics are unusually protracted. The Bank of Ghana has only released its bulletin for June 1992, in April 1993. It was hoped that the technical assistance provided in conjunction with the ISAC and subsequent adjustment operations would help to remedy deficiencies, by providing appropriate training and improvement in staff cadres. The failure of the government to establish the Policy Analysis Unit (discussed later in this chapter) is one among several reasons for the absence of a coordinated effort to remedy the problem. Accurate tracking of the impact of policy reforms and modification of policies and instruments to compensate for asymmetrical results, requires an up to date set of key macroeconomic and where possible, microeconomic data. This aspect needs more emphasis in the Bank's economic and sector work and policy dialogue. 27 B. The Bank as Resource Mobilizer 51. The Bank has been a major source of external financial resources to Ghana since 1983, when the Economic Recovery Program commenced, providing about $2.4 billion of IDA financing, of which $1 billion consisted of adjustment lending and slightly over $1 billion in investment lending. These resources have been supplemented by assistance from the IMF and other bilateral and multilateral donors. The Bank is expected to provide about two-fifths of the estimated foreign aid requirements of about $4 billion, over the 1994-98 period. 52. The foreign economic assistance received by Ghana over the adjustment period has undoubtedly contributed towards raising the consciousness of policy makers, in terms of efficient resource allocation, promoting economic growth, and alleviating poverty, despite a decline in Ghana's international terms of trade. Judged from several standpoints, foreign aid has had a good pay-off in Ghana during adjustment, but some caveats remain (Annex II). 53. Nevertheless, several questions arise as to the proper role foreign economic assistance might play in promoting Ghana's economic and social development In the future. The country assistance strategy for the rest of this decade is correct in Its stance that Bank assistance should focus more on investment lending which will help to correct for market failure and build up the capacity for an enhanced level of savings and Investment, on which future growth depends. A critical mass of infrastructure in the areas of power, transport and communications, as well as education and training is needed. The country strategy emphasis on strengthening primary education is justified, but it should not be at the expense of deficits in secondary (and tertiary) education.1J Equally, the emphasis on Institution building at the central and local government levels is entirely appropriate. Hybrid lending has also a role to play since it provides the Bank with the right degree of flexibility In determining the policy mix. 54. The Bank also needs to focus strongly on those aspects of domestic financial resource mobilization which could contribute directly to the achievement of the objectives of the ISAC as well as the Structural Adjustment Program, in general. The weakness in the banking system and the generally poor record of financial Intermediation is inter alia a consequence of the low level of savings, as well as the drain of financial resources to loss making public enterprises and financing of public sector budget deficits. It has contributed to "crowding out" the private enterprises and led to artificially high interest rates (Box 4). Banks have as a result, become rent seekers, satisfied with Interest income derived from the purchase of government paper. The banks are being recapitalized and strengthened in the context of the j]] Elizabeth King et al, Human Resource Development and Economic Growth: Ghana In the Next Two Decades. (June 30, 1992.) 28 Financial Sector Adjustment Credit, but the problem of promoting a high savings strategy in the light of an expected sharp rise in the level of Investment in the second half of the 1990s remains. This will require both institutional reforms to mobilize personal savings (urban and rural) and establishment of an enabling environment that instills confidence in potential savers. As a first step towards this end, the Financial Sector Review planned for FY95 could be brought forward. Box 4. Ghana: Constraints on Mture Growth: The Floaacial Squeeme Afthougl some fims have found market niches with good growth potential, many have not been able to isbon fully tho increased.costs of raw mateials and equipment to consumors in the form of higher prices, becausoof ai demand and an Inflow of competing imports. Most fims have experienced a fianclal trqueue,:neloditip those on sound financial, footing in the paLt. The survey coanrmed that, if produt deeaand ds sot siaid finance Is the binding constraint on future growth. In smm, the incentive slde of the adjustment p*ro V O Aess officient firms are being squecmd-but the flnauicial aide is dot fnctioning adequatey to "16 mot officient ones to grow. .& ii e aed to decrib the ths.most serious obstacles they wuld .ace should they decide to aod om ae,, under the assumption that they could sell e najority of fins. N.I i ilability of credit for raw materials and equipment as .biding cons(mtat on epvsikm, apit from Ienand. In many cases the financial difficulties stem from the inreased coat craw materials and. M In soue ce, weak liquidity reflets reduced profits in a more o atiive situatc, and I dedylgproblem may be inefficiency rather than lack of credit . In ingorviewa, many firm owners reported that they cope with lack of working capital mostly by raw Iaterials only in very small amounts because they cannot afford to purchase in.bulk . m tW iare rloultural implement producers who can buy only enough scrap motal to make one cassava at7 fvihe.. Only when one sells can they buy materialsfor another." The same holds true f1r wood . fitatmi wrkers who display one or two mode and cannot Make moro s cAtil pe slls. Many of bios.h~tervta w piwmased fustration with the Inefficiency and insecurity of their altuaions.. -.1t dWkt6d dieIr fianolal diffHulties somewhat differently according to their as. 'lU high pri . . Qaw apateials sn.dited more often by smaller firms, and lack of credit was emphasized mo e than larger 14 eany mi ntreprneursar trapped between the rising costs of raw materials that are cutting into tmrginf and the soft demand that has decreased their males. When asked whether they would accept a 0pa hom y bai at prevailing interest rates, most microenterprises daurred because they doubted that they 6(iodell.ceough to repay their loans. Less constrained by weak demand, small scale enterprises were quick I wkletodti ok of credit for raw materials and equipment as major constrainto to expansion and expressed. hiring interest.in loans at current interest rates. Many of these firms have customers for their products but : u letworking capital, due in part to slim profit margins and delays in collecting from customer. Price of raw iaterials were of concern but clearly secondary to the need for oredit. u:0* indication of lim.operaig margins is the common saysam of paying workets a bars mianmum of alary on a tegular basls and giving them a bonus when a product aslls. cona 29 Box 4. Constraints on Future Growth: The Financial Squeeze (ontJ . Table hajor Coastraints on Future Expansion by Firm Size (percentage of respondents to each category) Constraints Total Very McGhip to expanalon sample (Rank) Micro small Small . lare Can't got cradit for raw materials S6 (1) 52 64 54 cant et owedit for equipment38 40 62 .Local raw materials. are too expesve 36 (3) 41 36 I Imported Woputs. are too oocolve 29. (4) 41 20 . Equipmnent is d- and needs reploing 19 5 17 Taxes 12. -(6) 14 4 -51. Method of pAodction is out of dat. 14 (7)8 .(Number of Armis) . 3). (33) (2)16() . Fi ~ ~rms wern -asked -to dcribo'contraints to fiowr expasion on the assumPtion tAdmpnder* product wMs alMUO". Th%ey could Ust.uip to four consimiints; benoce the pm=040'agOan ad more than 100 p6rbent; Problems listed by less dhan 8 percent of firmis amQ uo istd .: - W. Steel and. Le Wedser, SisinU hvMErhes t&r Adj=MW n Ghanua, Worl-Bi Teuia". Numbr 18, nduitryn W Kunce. saw-ngwe 1991).. . C. The Bank as Cal2acbt Builder 55. The Bank has made a strong effort to strengthen the capacity of the Ghanalan administration to improve its policy analysis capability and implement a program of structural and sectoral adjustment. The ISAC provided technical and financial resources for the several ministries and agencies involved in the implementation of the credit, and for studies which would clarify policy options to achieve Ghana's medium term Industrial adjustment objectives. A subsequent Structural Adjustment Institutional Support Credit (US$10.8 million) initiated In April 1987, was Intended to support the Government's efforts to reform public sector management and strengthen the policy and management capacities of key government agencies. 30 56. The direction and thrust of the Bank's program to strengthen Institutional capability under the umbrella of the ISAC was entirely appropriate, and overall provided good results (Annex Ill). Technical assistance for training of staff of the Bank of Ghana and commercial banks as well as managers of private enterprises, in project analysis, will have useful long-term benefits for the economy. Support to the Central Bureau of Statistics and Ghana Standards Board was also timely and yielded considerable externalities for the economy. However, a key component relating to the building of staff capability in analyzing incentive policy issues, formulating appropriate policy measures, and monitoring impact, was delegated to the Ministry of Finance and Economic Planning (MFEP), was not implemented, since the Government showed little interest, due to "resistance to change from a traditionally highly centralized process of decision making."iJ/ 57. The failure to establish a properly staffed Economic Policy Analysis Unit in the Ministry of Finance and Economic Planning, has resulted in a lacuna in the government's capacity to design and manage adjustment operations, and its ability to track the course of a given range of policy instruments as they impact on the economy. The absence of a central unit with capacity to undertake policy research also reduces the government's ability to attract high calibre Ghanaian economists to a central point in the administration from which important policy decisions emerge on a day to day basis. From the standpoint of the Bank's operations it denies it the opportunity for a continuum In its policy dialogue with the government, and the chance to detect unexpected or adverse policy side effects and to design mid-stream corrections, as appropriate. Most importantly, however, the absence of an Economic Policy Analysis Unit reflects adversely on the credibility of "Borrower Ownership" of the program of stabilization and adjustment. The Bank needs to take a strobger stand with respect to the establishment of this Unit, since it is an important index by which to judge the commitment of the Government to the program of adjustment growth and poverty alleviation, as well as the guarantee that reforms will be sustained. D. Lessons and Aaenda for the Bank 58. The principal lessons of experience derived from the evaluation are summarized below. Ag? Project Completion Report: Structural Adjustment Institutional Project (March 1993). GHANA ISAC EVALUATION: LESSONS OF EXPERIENCE Design Implementation Sustainab::ity * The timing and sequencing * Improved emphasis on fiscal o Strong emphasis is needed to of trade liberalization policies management could have enhanced provide clear signals and an needed to be designed in a price stability and lowered interest efficient enabling environment for way that adequately spaced rates, to promote investment. promoting savings and investment. OR relaxation and tariff conversion. * Stronger leadership from the Bank of * Tight fiscal management is critical Ghana in the management of the to maintenance of Internal balance * The timing of ISAC before foreign exchange market could have (low inflation). trade liberalization reversed prevented the large swing In the real the normal sequencing of exchange rate and helped to * Financial markets and the processes investment after strengthen and stabilize the market. for financial intermediation need to liberalization, and may have be strengthened and surveillance led to investment in firms * Clearer signals to the private sector procedures put in place. that would be bankrupted by and greater transparency in policy liberalization. formulation could play a constructive * A stronger focus on strengthening role in stimulating private sector core physical infrastructure and * The processes Involved In activity. eliminating bottlenecks in power the choice of borrowers for and transportation is necessary. the Industrial Rehabilitation * Capability to conduct policy analysis Component of the Loan and formulate strategy would have * The emphasis on education and were protracted. The Bank been enhanced by establishment and training to build up a literate labor of Ghana did not have the support of the Policy Analysis Unit of force should be continued. expertise to execute the MFEP. evaluation process. * The assistance strategy should be * Tracking of the adjustment operations coordinated with donors, both with * Close attention was would have been facilitated by timely respect to policy reform and necessary to relieve aspects preparation of macroeconomic ad financial resource transfers, and of market failure, especially microeconomic data by the Bank of with NGOs, on the social with respect to credit Ghana and the Ghana Statistical dimensions of adjustment. Intermediation and Board. technology transfer. * A clear cut strategy for privatization and policy dialogue with the government needs to be Initiated. 32 ANNEX I ' AI4GA: adstrial Sector Adjustsent Credit Page 1 of 4 Subproject Borrowers Performance SU BORROWER Accra BMowelr FAucational Wahome Steel Ltd Press 1td Ltd (1) PERFORMANCE INDICATORS (a) Investment Cost (C '000) Projections 160,000 56.512 488,000 Actuals 227,000 19,779 563,000 (b) Implementation Delays none none none (c) Number of Jobs Created Projections nil 170 Actuals ail nil 22 (d) Investm't per Jobs Created (C'000) Projections not applicable data not yet 2.95 Actuals available 25.59 (e) Financial Rate of Return (%) Projections 49.5 47.0 >50.0 Actuals >50.0 n.a. negative (f) Economic Rate of Return (%) Projections 50.0 50.0 >50.0 Actuals >50.0 n.a. 10.7 (g) Capacity Utilisation (%) 1989 100.0 4.7 76.0 1990 1043 9.3 85.0 1991. 94.3 26.9 82.0 (2) STATUS OF IMPLEMENTTION (a) Subprojects in operation In Operation In Operat'n In Operat'n (b) Year of Implementation 1990 1989 1989 (c) Subproject That Failed nil nil nil (d) Causes of Implementation not not not applicable Delays applicable applicable (3) CURRENT LOAN REPAYMENT STUATION (C '000) (a) Loan Principal in Arrears nil nil nil (b) Loan Principal in Arrears fac. nil nil nil Capitalised Interest (c) Interest Charges in Arrears nil nil nil (d) Principal Affected by Arrears nil nil nil (e) Principal Affected by Arrears nil nil nil including Capitalised Interest (f) Total Principal Outstanding 105.564 22,082 326,712 incl. Capitalised Interest (C '000) (g) Age of Arrears nil nil al (h) Equity Affected by Arrears nRl nil nil 33 ANNEX I Page 2 of 4 SUa BORROW South AMe Polmes Id Golden Spoon Mfg. LAd Floor Mn (1) PERFoMANCE INDICATORS (a) Investment Cost (C '000) Projections 152,696 156,720 34,00011 Actuals 165,524 221,160 34,000 (b) Implementation Delays none none none (c) Number of Jobs Created Projections all 54 no data Actuals nil 61 74 (d) Investm't per Jobs Created (C'000) Projections not applicable 4.1 no data Actuals 3.63 2.49 (e) Financial Rate of Return (%) Projections 34.6 67.2 45.83 Actuals negative negative >50.0 (f) Economic Rate of Return (%) Projections 43.28 Actuals negative r 'gative not yet avail. (g) Capacity Utilisation (%) 1989 74.0 date yet to be 1990 51.7 made available 83.0 1991 51.5 77.0 (2) STATUS O' IMPLEMENTATION (a) Subprojects in operation In Operation In Operatn In Operat'n (b) Year of Implementation 1990 1990 1989 (c) Subproject That Failed nil nil nil (d) Causes of Implementation not not not applicable Delays applicable applicable (3) CuRRExT LOAN REPAYMENT SrUATION (C '000) (a) Loan Principal in Arrears anl nil all (b) Loan Principal in Arrears facl nl nil nil Capitalised Interest (c) Interest Charges in Arrears nil nil nil (d) Principal Affected by Arrears nil nil nll (e) Principal Affected by Arrears all all nil Including Capitalised Interest (f) Total Principal Outstanding 127,178 196,584 18,200 incl. Capitalised Interest (C '000) (g) Age of Arrears anl nil all (h) Equity Affected by Arrears all nil nil 34 ANNEX I *., a Page 3 of 4 SUB BORROWER AMens Ltd Metalware Ltd Al Helou & Marfo Ltd (1) PERFORMANCE INDICATORS (a) Investment Cost (C '000) Projections 21,824 96.118 168,813 Actuals' 40,660 106,851 205.760 (b) Implementation Delays none none none (c) Number of Jobs Created Projections data not 12 data not avail. Actuals available 27 37 (d) Investm't per Jobs Created (C'000) Projections data not 8.01 data not avail. Actuals available 3.96 5.56 (e) Financial Rate of Return (%) Projections 50.0 48.0 46.0 Actuals data not avail. negative 45.95 (f) Economic Rate of Return (%) Projections 47.37 19.0 50.0 Actuals data not avail. negative >50.0 (g) Capacity Utilisation (%) 1989 data not 80.0 1990 available 25.77 85.0 1991 48.08 85.0 (2) STATUs oF IMPLEMENTATION (a) Subprojects in operation In Operation In Operat'n In Operat'n (b) Year of Implementation 1990 1989 (c) Subproject That Failed nil nil nil (4) Causes of Implementation Delays not not not applicable applicable applicable (3) CURRENT LOAN REPAYMENT SrruATION (C'000) (a) Loan Principal In Arrears nil nil nil (b) Lan Principal In Arrears inc. nil ail nil Capitalised Interest (c) Interest Charges in Arrears all nil nil (4) Principal Affected by Arrears nil ail nil (e) Principal Affected by Arrears ail nil nil including Capitalised Interest (f) Total Principal Outstanding 756,689 605.350 125,110 incl. Capitalised Interest (C '000) (g) Age of Arrears nil nil nil (h) Equity Affected by Arrears all nil ail A NEX I 35AN I * Page 4 of 4 Sta BORROWER Tropical Metallic Tema Textile Ltd G.N.T.C Constr. Co. (1) PERFORMANCE INDICATORS (a) Investment Cost (C '000) Projections 106,313 306,800 Actuals 100,130 329,964 711,180 (b) Implementation Delays none machinery delivery some (c) Number of Jobs Created Projections 48 nil data not avail. Actuals 97 216 (d) Investm't per Jobs Created (C'000) Projections 2.09 - data not avaiL Actuals 1.03 1.53 (e) Financial Rate of Return (%) Projections 47.88 933 38.0 Actuals >50.0 negative data not avail. (f) Economic Rate of Return (%) Projections 60.02 28.0 57.8 Actuals >50.0 negative data ra. (g) Capacity Utilisation (%) 1989 13.7 24.0 1990 55.9 23.0 not applicable 1991 71.0 20.0 (2) STATus OF IMPLEmErTATtoN (a) Subprojects in operation In Operation In Operat'n Partial Oper'n (b) Year of Implementation 1990 1991 (c) Subproject That Failed nil nil partial implementation (4) Causes of Implementation Delays not applicable not applicable delays in constr. to house plant (3) CUtiNT LOAN REPAYMENT StUATION (CIM0) (a) Loan Principal in Arrears not due yet not due yet 2nd loan repaymt began 5/1992 (b) Loan Principal in Arrears ind. nil nil nil Capitalised Interest (c) Interest Charges in Arrears nil nil nil (d) Principal Affected by Arrears nil nil nil (e) Principal Affected by Arrears nil nil nil including Capitalised Interest (f) Total Principal Outstanding 130,630 316,742 654,047 Incl. Capitalised Interest (C '000) (g) Age of Arrears nil nil nil (h) Equity Affected by Arrears nil nil nil 36 Annex II GHANA: Aid and the Balance of Payments The provision of balance of payments support to Ghana to ensure the successful transition to macroeconomic stabilization, within the broader context of an adjustment program, has been fully justified. However, over the longer-term unless aid is appropriately synchronized with investments that yield growth in GDP/exports, or save imports, it could ultimately exacerbate the pressure on the foreign exchange market. The infusion of aid initially results in an expansion of supply of foreign exchange, which tends to appreciate the exchange rate. After the income multiplier works itself out, demand for foreign exchange increases, If the supply of foreign exchange to meet the enhanced demand does not increase, the exchange rate must depreciate to balance the current account. If the government insists on maintaining the old exchange rate, it must use its foreign exchange reserves or increase its dependence on new aid. In the diagram, P is the pre-aid exchange rate. With aid KL, the exchange rate appreciates Excang te to P1. As the income multiplier works itself out, demand for foreign exchange rises to D1 (LM). If no aid is forthcoming and the government wishes to hold the exchange rate at P1, the foreign exchange gap is RM. The optimal solution is an exchange rate depreciation to P2, which will induce some increase in exports (RL) and some reduction in ot absorption (LM), without recourse to external aid. A K L. M Quantity The lesson: an adjustment program must: (1) target aid towards policies that increase export earnings or Induce import savings, (ii) introduce efficient demand management policies, and (iii) increase the flexibility in the exchange rate mechanism. In their absence, the dependence on aid increases. In the case of Ghana, there has been some exchange depreciation, but insufficient reduction in absorption/increase in exports. To reduce the multiplier effect of aid on demand, the Bank of Ghana has relied on a tight monetary policy, driving interest rates up. The correct strategy should have been a tighter fiscal policy and greater reliance on investment lending. The country assistance strategy is correct in its stance in emphasizing investment lending as a major priority, in the context of Ghana's next stage in structural and sectoral adjustment. It should nevertheless be ready, when necessary, to provide flexible balance of payments support. 37 ANNEX III GHANA: ISAC - Evidence of Good Design - Synchronizing Policy Reform Mix and Technical Assistance with Problem Diagnosis The Ghana ISAC is a good example of the appropriate synthesis of Economic and Sector Work, Policy Dialogue and Technical Assistance, to achieve project objectives. Since early 1980, the Bank conducted a broad based strategy of indepth economic and sector work focused on key sectors and macroeconomic problems. A special report on Industrial Policy Performance and Recovery (1985) accurately diagnosed the major problems in the manufacturing sector; lack of foreign exchange for imported input requirements, a small domestic market relative to full capacity production, shortages in supplies of raw materials and ineffective management of public sector holdings. The supporting macroeconomic analysis in the Bank's report Managing the Transition - Ghana (1984) identified the need for (i) an appropriate incentive framework; (ii) a key role for the private sector; (iii) a medium-term development program, and (iv) institutional reforms. These reports set the tone for a policy dialogue on policies and measures to address the constraints to faster growth in the manufacturing sector and in GDP. The policy instruments were embodied in the ISAC and the subsequent SAC I and II. ISAC provided for import liberalization and export promotion, while SAC I and II focused on exchange rate reforms and macroeconomic stabilization. The absorptive capacity (implementation skill) constraint was May WOM iX addressed by a special Institutional Strengthening Component to finance training and provide inputs to T implementation agencies in Government, the Central Bank, commercial banks and the private sector. The combined strategy is illustrated in the figure. Point P represents the problem diagnosis in the manufacturing sector and T the policy reform mix. Une AA1 is the original implementation a f constraint line, relieved by new technical "'_" assistance. This enables Ghana to achieve Point C, where diagnosis, policy mix and implementation capacity are appropriately matched. EMEA# IDA CEPIT APMOVALS fo80 m81 PV82 a83 PT84 s 186 M87 n88 189 i90 91 n91 Adjustusnt leuding 0.0 0.0 0.0 40.0 76.0 60.0 80.5 164.5 100.0 132.3 50.0 140.9 180.0 REC 40.0 Export Rebab 76.0 tic 2 60.0 27.0 ISAC 53.5 Ed~eatio 8E0*. 34.5 SAC 130.0 ginancial SEC . 100.0 6.6 SAC 2 125.7 8.3 Education ~ECA1. 2 50.0 .Private i areotiou 132.6 ianMcial *CAL 2 100.0 Agriculture SWAM. 80.0 Project Landing 54.5 29.0 0.0 33.3 49.0 62.0 77.5 49.1 161.1 133.4 130.0 191.2 188.4 --- - -- - -- - -- - -- - -- - .. . e . -- -- -- -- -- - iebab - -aint 25.0 29.0 0.0 0.0 6.9 62.0 77.5 17.0 140.0 25.0 0.0 96.0 55.0 Tu 0.0 0.0 0.0 13.0 25.0 0.0 0.0 10.8 0.0 0.0 0.0 15.0 0.0 Other 29.5 0.0 0.0 20.3 17.1 0.0 0.0 21.3 21.1 108.1 130.0 80.2 133.4 Total 54.5 29.0 0.0 73.3 125.0 122.0 158.0 213.6 261.1 265.7 180.0 332.1 368.4 ee-- -... --... -- - . . ----- ----- _______ 1 39 AtNEX V Ghana Key Economic indicators Actual Preliminary Projected 1988 1989 1990 1991 1992 1993 1994 GDP Growth Rate 6.6 5.1 3.3 5.0 6.0 5.6 0.0 GDY Growth Rate" 6.1 2.9 2.5 4.7 5.3 5.7 6.1 GDY/Capltal Growth Rate tO* 2.3 0.2 -0.1 2.0 2.6 3.0 3.4 Total Consumpt./Capital Growth Rate 0.9 1.0 1.1 0.9 2.0 1.6 2.1 Private Cons./Capltal Growth Rate" 0.6 1.0 2.0 0.1 2.3 1.8 2.0 CPI Growth Rate w 31.4 25.2 37.2 18.0 0.0 5.0 5.0 Debt Service IUS$ min) l 651.2 616.6 372.6 32.'.5 290.9 298.4 325.8 Debt Se Ioe/XGS" 68.0 58.1 38.0 29.5 24.9 22.4 22.0 Debt ServicelmbP 12.5 9.8 6.4 5.1 4.3 4.0 3.9 Gross Investment GDP1 14.2 15.5 18.0 16.5 17.9 19.0 20.0 Domestic Savings/GDP 6.5 5.9 6.0 7.9 9.6 11.5 13.3 National Savings/GDP " 9.3 9.7 7.6 9.5 11.1 13.0 14.7 Publio InvestmerntGDP wI 8.0 7.9 7.3 8.2 8.6 9.1 9.2 Public Savings/GDP 4.0 3.2 1.8 3.4 3.8 4.4 4.5 Private investment/GDP 6.1 7.8 8.7 8.3 9.2 9.9 10.9 Private Savings/GDP 5.3 6.6 5.9 6.0 7.3 8.7 10.2 Ratio of Public/Private Investment 1.31 1.03 0.83 0.98 0.93 0.91 0.86 Government Revenues/GDP " 13.5 13.6 12.6 16.0 14.9 15.1 15.1 Government Expenditures/GDP" 18.9 18.9 18.1 19.8 19.7 19.8 19.8 Overall Deficit/GDP 5.3 5.3 5.5 4.8 4.7 4.7 4.7 Export Growth Rate i 6.4 11.6 6.1 10.2 8.3 6.7 5.8 Exports/GDPi 10.6 11.2 11.5 12.1 12.4 12.6 12.5 Import Growth Rate J' 0.2 2.0 7.8 2.6 8.3 4.5 3.0 Imports/GDPy" 13.4 13.0 13.6 13.3 13.7 13.5 13.2 Current Account (US$ min) -264.4 .314.3 -484.5 441.9 *454.9 441.3 -430.3 Current Account/GDPu -5.0 -6.0 -8.4 *7.0 -6.6 *5.9 -5.3 Terms of Trade findex) 94.0 78.0 71.0 68.0 67.0 71.0 71.0 NOTE: Figures are rounded. Growth rates and export and import ratios are shown In constant prices. I GDY =GOP adjusted for changes In the terms of trade. Yearly average. Based on Government of Ghana's population growth rate estimates. Includes IMF but excludes arrears payments. Exports of goods and services n The Implied Incremental capital-output ratio Is expected to rise during the projected period since undentilized capacities have diminished under the recent recovery. of grants. Includes not lending and capital expenditure financed through external project aid. u Staff estimates. Includes goods and nonfactor services. Using c.l.f. data. " Excludes official grants.