Ghana - Second Economic Reform Support Operation

Report No. PID7399 Project Name Ghana-Second Economic Reform Support (@) Operation (ERSO II) Region Africa Sector Structural Adjustment Lending Project ID GHPE40557 Implementing Agency Ministry of Finance Date PID Prepared April 30, 1999 Appraisal/Negotiations Date April 8-21, 1999 Board Date May 27, 1999 Background 1. After years of gradual reform and successful performance, Ghana's adjustment process suffered setbacks during 1992-96. Increased fiscal spending in the run-up to the 1992 and 1996 elections led to the re-emergence of large fiscal imbalances and high inflation. Ghana's macroeconomic performance, however, improved considerably in 1997 and 1998. Budgetary discipline was restored, inflation brought under control, and external imbalances were narrowed. The Government also made progress in implementing important structural reforms including the re-introduction of a Value Added Tax, the adoption of a Medium Term Expenditure Framework (MTEF) for budget formulation, and substantial increases in electricity tariffs. In 1998, economic growth reached 4.6 percent despite the adverse impact of the energy crisis, and inflation was brought down further to 16 percent at the end of the year. Objectives 2. The Second Economic Reform Operation (ERSO II) seeks to support the Government's reform agenda as outlined in the Policy Framework Paper (PFP) for 1999-2001 which was distributed to the Board in mid April 1999. The agenda targets increases in per-capita GDP of 3 percent annually during this period and a continued reduction in external imbalances. The Government aims to achieve these objectives through increased macroeconomic stability, good governance, balanced social and regional development, private sector-led growth and export orientation. Within this broad agenda, the proposed ERSO II will focus on structural reforms needed to sustain private-sector led and poverty reducing growth. Description 3. The proposed credit follows up on the one-tranche Economic Reform Support Operation (ERSO) approved by the Bank's Board in June 1998. ERSO supported the recent turnaround in Ghana's macroeconomic stance and laid the foundations for the next generation of difficult reforms in the areas of privatization, public sector management, as well as the energy and cocoa sectors. ERSO II will build on satisfactory implementation of reforms under the preceding credit. In particular, it will pursue fiscal policies aimed at improving efficiency and supporting stabilization efforts to bring inflation  down to single-digit levels; it will target the divestiture of strategic enterprises in the energy and banking sectors; and most importantly, it will support major reforms in the cocoa and power sectors where progress, until recently, has been limited. By providing budgetary funds during 1999-2000, the Credit will help reduce government's borrowing requirements and thus support a continued decline in inflation and interest rates. Environmental Aspects 4. The recommended environmental assessment category is C. The proposed credit does not have direct environmental impact. Implementation 5. The credit will be disbursed through the Bank of Ghana in two tranches upon compliance with specific actions yet to be defined. Simplified disbursement procedures under adjustment credits will apply. The Ministry of Finance will be responsible for coordinating the implementation of the reform program agreed upon under the credit. Financing 6. The credit amount is currently proposed at US$180 million. The credit is a balance of payments operation and the proceeds of the foreign exchange sales will go to the budget. Benefits and Risks 7. The operation will assist in meeting Ghana's financing requirements in 1999 and 2000. In addition, it will support the implementation of key structural reforms needed to promote sustained economic growth and poverty reduction. Potential risks are linked to weak implementation capacity, potential resistance to reform from some interest groups, and renewed political pressure in the wake of general elections in the year 2000. The Government has taken actions to mitigate these risks by informing the general public on the benefits of reform and by consulting with relevant stakeholders. Contact Point: The InfoShop The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Rocio Castro Task Manager (202) 473-4331 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending October 15, 1999. - 2 -