Ghana - Third Economic Reform Support Operation Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P 7471-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA PROPOSED THIRD ECONOMIC REFORM SUPPORT OPERATION CREDIT OF SDR 87.7 MILLION (US$110 MILLION EQUIVALENT) TO THE REPUBLIC OF GHANA June 29, 2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Cedi (0) US$1.00 =7200 (May 31, 2001) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS BOG Bank of Ghana BPEMS Budget and Public Expenditure Management System CAS Country Assistance Strategy CG Consultative Group COCOBOD Cocoa Board DIC Divestiture Implementation Committee EC Energy Commission ECG Electricity Company of Ghana ERSO II Second Economic Reform Support Operation GCB Ghana Commercial Bank GDP Gross Domestic Product GLSS Ghana Living Standard Survey GPRS Ghana Poverty Reduction Strategy GWCL Ghana Water Company Limited HIPC Heavily Indebted Poor Countries IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund LBC Licensed Buying Company LDP Letter of Development Policy MTEF Medium Term Expenditure Framework NIB National Investment Bank PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PUFMARP Public Financial Management Reform Program PURC Public Utilities Regulatory Commission SDR Special Drawing Rights TOR Tema Oil Refinery VRA Volta River Authority Vice President Callisto Madavo Country Director Peter Harrold Technical Manager Charles P. Humphreys Task Team Leaders Rene Bonnel/Rocio Castro This operation was prepared by a team consisting of Rocio Castro (Senior Economist, AFTM4), Rene Bonnel (Lead Economist, AFTM4), Joel Maweni (Energy Specialist, AFTEG), Eka Vashakmadze (Young Professional, AFTM4), Camille Nuamah (Economist, LAC) and K.G. Awunyo (Legal Counsel, LEGAF). Afef Haddad (Research Analyst, AFTM4) provided operational support.  FOR OFFICIAL USE ONLY REPUBLIC OF GHANA THIRD ECONOMIC REFORM SUPPORT OPERATION CREDIT TABLE OF CONTENTS Credit and Program Summary ................................................................i I. THE ECONOMY ................................................................1 A. Background ................................................................ 1 B. Recent Economic Developments ................................................................3 II. GHANA'S ADJUSTMENT PROGRAM ................................................................6 A. Budgetary Policies ................................................................6 B. Restructuring of Domestic and Foreign Debt .........................................................8 C. Eliminating Losses of Public Energy and Utility Companies .............. ..................9 D. Restructuring of Government Functions ............................................................... 10 E. Promoting the Private Sector ............................................................... 11 F. Human Development and Poverty Reduction ....................................................... 15 G. Monitoring and Evaluation ............................................................... 16 III. MACROECONOMIC FRAMEWORK ............................................................... 16 IV. THE PROPOSED CREDIT ............................................................... 18 A. Credit Rationale ............................................................... 18 B. Specific Actions Supported by the Credit ............................................................. 19 C Link to the CAS ............................................................... 21 D. Credit Amount, Disbursement Procedures and Implementation Arrangements ... 21 IV. BANK GROUP OPERATIONS AND COLLABORATION WITH OTHER DONORS ............................................................... 23 V. RECOMMENDATION ............................................................... 24 Annexes A. Macroeconomic and structural adjustment policies, 2001-2002 B. Ghana at a Glance C. Key Economic Indicators D. Selected Social Indicators E. External Financing Requirements F. Status of Bank Operations G. Impact Indicators H. Timetable of Key Processing Events I. Letter of Development Policy This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   REPUBLIC OF GHANA THIRD ECONOMIC REFORM SUPPORT OPERATION CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Ghana Amount: SDR 87.7 million (US$110 million equivalent) Terms: Standard IDA terms with a maturity of 40 years Description: The proposed Credit would support the restoration of macroeconomic stability and market confidence allowing the new Government to develop its agenda of reform for accelerated growth and poverty reduction over the longer term through a broad-based consultative process with the civil society and key stakeholders. The policy reform program embraces: * restoring macroeconomic stability and strict governance through the following measures: (i) reducing the domestic and foreign debt burden by curtailing the fiscal deficit and seeking debt relief under the enhanced HIPC initiative; (ii) strengthening the management and control of public expenditures; and (iii) eliminating the deficit of key public enterprises; * reinvigorating the reform process in the area of budgetary management, public enterprise divestiture, banking sector reform and cocoa export marketing; and, * supporting the preparation and implementation of the Ghana Poverty Reduction Strategy emerging in the context of a broad participatory consultation process. Benefits: The proposed Credit would allow the Government to: (i) restore macroeconomic stability with less adverse impact on the poor than otherwise; and (ii) reinforce the basis for growth and poverty reduction. Market confidence and growth would be restored by ensuring a sound macroeconomic framework, improving governance and increasing efficiency in the allocation of budgetary resources. At the same time, the credit would allow for phasing of tough reforms and permitting consumption levels to be smoothed. Over the medium term, the targeted reduction in the stock of domestic and foreign debt (including the potential debt relief from HIPC) is expected to result in a virtuous cycle of exchange rate stabilization, lower inflation and lower interest rates. This would help stimulate private sector growth and create the fiscal space needed for increasing expenditures for poverty-reducing activities. Continued improvement in the share of producer prices for cocoa farmers and the liberalization of export marketing will also reduce poverty as cocoa earnings remain an important source of income for about one million rural families.  ii Risks: The Government's reform program and this supporting credit are subject to considerable risks and uncertainties. First, this is a new Government and the political will to implement difficult decisions may dwindle, especially if visible improvements are not rapidly achieved. In the first few months in office, however, the Government has demonstrated its determination to reversing the situation by taking decisive up front action; gathering public support by making explicit its objectives to orient public expenditures to social priorities and to target vulnerable groups; committing only to what it perceives as politically " doable"; and launching a broad participatory process of dialogue and consultations to prepare the Ghana Poverty Reduction Strategy, which would outline the agenda of reform over the medium-term. Second, capacity constraints could delay implementation, especially given the staff turnover in most public institutions resulting from the Government's emphasis to address governance issues. To increase implementation capacity, the Government is seeking to recruit new staff and attract Ghanaians living abroad and it is relying on technical assistance in areas such as budgetary reform and privatization of state enterprises where domestic capacity may be lacking. The third risk stems from Ghana's vulnerability to terms of trade shocks that could create a balance of payments crisis. This risk is substantially mitigated by the strong donor support expressed in support of the program, the assistance that Ghana may receive as part of the HIPC debt reduction, and the rebuilding of reserves over the medium term. Disbursement: The Credit will be disbursed in one tranche, upon effectiveness. Map: IBRD 23606  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD ECONOMIC REFORM SUPPORT OPERATION CREDIT TO THE REPUBLIC OF GHANA 1. I submit for your approval the following report and recommendation on a proposed Third Economic Reform Support Operation (ERSO III) to the Republic of Ghana for SDR 87.7 million, an amount equivalent to about US$110 million, on standard IDA terms. The proposed Credit, to be disbursed in one-tranche, will assist in meeting Ghana's exceptional financing requirements for the year 2001. I. THE ECONOMY A. Background 2. Adjustment Record in the 1990s. Ghana made initial progress in implementing structural reforms, starting with the Economic Recovery Program (ERP) which was launched in 1983. By the early 1990s, the trade regime had been largely liberalized, the exchange rate was market-determined', macroeconomic imbalance had been narrowed, the majority of price and distribution controls had been lifted and domestic inflation had fallen to 10 percent. 3. In the 1990s, structural reform was uneven. In 1992 the reform process was interrupted by fiscal overspending and inflationary pressures. In 1995, the Government launched a new fiscal program accompanied by important structural reforms, but large fiscal slippage occurred again in 1996. During this period, several policy reversals took place; in particular, the VAT was repealed amidst social unrest. In early 1998, the reform program resumed. In the fiscal area, a VAT was successfully re-introduced and a medium term expenditure framework was adopted with the preparation of the 1999 budget. Reforms were also advancing in the cocoa, energy and financial sectors, while a program to overhaul the public sector was initiated (Box 1). 4. Economic Outcome. Despite periodic lapses in structural adjustment, economic growth averaged 4.5 percent per year compared with a sub-Saharan African annual average of 2.9 percent during the 1983-2000 period. Growth has been broad-based with services, mining, and construction taking the lead. In agriculture, which remains Ghana's dominant economic sector (40 percent of GDP), export activities such as cocoa and forestry expanded rapidly in the 1990s. On the demand side, growth has been led by a strong export performance despite depressed international prices for Ghana's main In April 1990, the spread between the bureau rate and the auction rate had narrowed to 8 percent. At the time, the Bank of Ghana unified both rates and introduced a weekly wholesale auction system.  2 commodities.2 Merchandise exports in dollar terms increased four times between 1985 and 1999 as a result of substantial volume increases in gold and timber while cocoa exports began to gradually recover form a sharp downfall in the early 1980s.3 By 1992, gold became Ghana's main export earner, taking the place historically held by cocoa. While traditional primar comnmodities continue to dominate the export sector in Ghana, non-traditional exports have increased nearly three-fold since 1994 and their contribution to total merchandise exports earnings has gone up to nearly 20 percent from just 1O percent in the early I 990s. Box 1: Major Macroeconomic and Structural Reforms - 1983-2000 Exchange rate regime: Fully flexible exchange rate introduced (1992); liberalization of the current account and capital inflows (1994). Trade and investment policies. Tariff regime progressively lowered to current top rate of 20% and simplified to 4 lines; majority of import and price controls relaxed (by 1986); trade in coffee and domestic marketing of cocoa liberalized (1992); new investment code and free zone program enacted (1995); and cocoa export trade partially opened to private firms (2001). Privatization and reform of state-owned enterprises: Privatization of 255 SOEs (or parts of SOEs) had been authorized by end-2000; state enterprise law enacted and performance contracting initiated in 1992; accelerated divestiture program launched in 1995 targeting significant SOEs including Ghana Ports and Harbours Authority, and Ashanti Goldfields. Fiscal reforms: Civil service reforms (1987, 1995); Value Added Tax introduced; price subsidies on agricultural inputs removed; independent utilities regulatory commission established (1998); Medium Expenditure Framework introduced for budget (1999). Decentralization: Creation of District Assemblies (local governments in 1988); District Assemblies Common Fund established with statutory contribution of 5% of budgetary revenues. Financial sector reforms: Private banks authorized to operate (1988); removal of credit controls and liberalization of interest rates and bank charges (1990); sale of government shares in large state- owned banks (1996); modern prudential regulations enacted (1992); and closure of three insolvent banks. 5. Poverty and Social Indicators. In line with increases in real GDP per-capita averaging 1.5 percent per year, the overall incidence of poverty has declined since the mid-1980s. According to the fourth Ghana Living Standard Survey (GLSS4), the incidence of poverty declined from 52 percent to just under 40 percent between 1992 and 1999. In the same period, extreme poverty declined from 36 to 27 percent. Poverty reductions were, however, unevenly distributed reflecting the impact of both regional growth patterns and government policies. The largest gains were concentrated in Greater Accra (which accounts for the bulk of industrial and service activities) and the rural forest 2 Notably, world cocoa prices plummeted from $2,100 to $950 per ton between 1988 and 1993; after a partial recovery they reached all time lows in 1999. 3 Ghana was the world's largest exporter of cocoa in the 1950s and 1960s with production levels around 700,000 tons. Currently, production is around 400,000 tons. Non-traditional exports include all exports except for cocoa beans, logs and lumber, and mining products.  3 (where exports such as cocoa, gold and timber are produced), while poverty increased marginally in the urban Savannah and remained basically unchanged in the rural Savannah (which relies mostly on subsistence agriculture). Poverty decreased most for export farmers and wage employees while food farmers experienced the least reduction. About 84 percent of Ghana's poor live in the rural areas, the majority of whom are food farmers. The reduction in poverty has been matched by broad improvements in social indicators. Life expectancy increased from 55 to 58 years; primary school enrollment rose from 75 to 79 percent; and infant mortality declined from 85 to 57 per 1,000 births during the same period. B. Recent Economic Developments 6. Macroeconomic developments. Macroeconomic stability remained elusive in recent years. Fiscal policy was tightened in 1997-98, but the improvement was short- lived. Starting in 1999, the economy was affected by a major terms of trade shock that intensified in 2000. As cocoa prices plunged to 27-year lows and oil prices tripled in 1999-2000, Ghana's suffered a terms of trade loss arnounting to 4.5 percent of GDP in 1999 and 6.9 percent of GDP in 2000.5 Real GDP growth gradually declined from 4.7 percent in 1998 to 3.7 percent in 2000, reflecting declining growth in agriculture and industry. Inflation (end-of-period) rose from 14 percent in 1999 to 40.5 percent in 2000 and the real effective exchange rate (average) depreciated by 33 percent. 7. The policy response to the terms of trade shock was weak. Fiscal measures were taken during the first half of 2000 (such as raising the VAT and petroleum taxes), but with some delay. Expenditure overruns in the latter half of the year prevented the fiscal deficit from declining as planned. In addition, shortcomings in controlling expenditures at the commitment stage and tracking payments led to an accumulation of arrears that reached nearly 2 percent of GDP in 2000. In total, the fiscal deficit (cash basis and after arrears clearance) rose from 8 percent of GDP in 1999 to 9.7 percent of GDP in 2000. 8. Difficulties were experienced in financing the deficit as planned. The divestiture of Ghana Telecom did not proceed as envisaged and privatization receipts were less than expected. In turn, delays in policy implementation delayed some donor disbursements. To finance the larger financing gap, the government resorted to domestic borrowing, which increased the domestic debt to 29 percent of GDP. 9. The overall result was to create a vicious circle of rising domestic debt and high interest costs leading to larger fiscal deficits. While government domestic debt climbed to 29 percent of GDP, external debt increased as a percentage of GDP due to the 45 percent exchange rate depreciation in 2000. The combination of high domestic interest The terms of trade loss due to cocoa is estimated by multiplying the GDP share of cocoa exports by the decrease in the export price of cocoa and similarly for the terms of trade loss due to oil.  4 rates and rising debt led to a rapid increase in budgetary interest payments.6 By 2001, interest payments are projected to reach a level (9.4 percent of GDP) nearly equal to the overall fiscal deficit (9.6 percent). Table 1: Ghana - Key Macroeconomic Indicators, 1996-2000 1996 1997 1998 1999 2000 Est. (Annual percentage change) Real GDP at market prices 4.6 4.2 4.7 4.4 3.7 Consumer price index (end of period) 32.7 20.8 15.8 13.8 40.5 (In percent of GDP, unless otherwise indicated) Domestic primary fiscal balance 0.3 3.2 3.6 1.4 2.4 Overall fiscal balance (cash basis, before arrears clearance) -9.5 -10.3 -8.1 -8.2 -7.9 Overall fiscal balance (cash basis, after arrears clearance) -9.6 -10.9 -8.7 -8.0 -9.7 Domestic debt of government 23.2 24.8 26.0 28.2 28.9 External current account (excluding official grants) -6.1 -16.7 -8.8 -13.4 -12.3 External current account (including official grants) -3.1 -14.4 -5.0 -11.5 -9.2 Gross official reserves (months of imports of goods and 2.0 1.8 1.6 1.5 0.8 nonfactor services) External debt outstanding (excluding short-term debt) 79.7 78.5 78.9 77.2 124.3 External debt service (percent of exports of goods and 21.7 23.7 22.1 21.0 23.3 nonfactor services) Sources: Ghanaian authorities and staff estimates and projections 10. Financial imbalances were further aggravated by government's decision not to adjust the prices of petroleum products to reflect the exchange rate depreciation and the increase in world prices.7 This translated into substantial operating losses for the four major public enterprises, and especially the Tema Oil Refinery (TOR). Although petroleum prices were increased by 30 percent in early 2000, further increases did not take place until February 2001 despite the rise in the dollar cost of imported oil and the substantial exchange rate devaluation. As a result, operating losses (excluding financial charges) by TOR reached 5.2 percent of GDP in 2000. Similar factors lay behind the losses of the main public utilities. Electricity and water tariffs, which are set by the Public Utilities Regulatory Commission (PURC), were kept fixed at 1998 levels as were tariffs for the water company. Taken together the operating losses of Electricity of Ghana (ECG), Volta River Authority (VRA) and Ghana Water Corporation (GWC) amounted to 2 percent of GDP in 2000. Most of these losses were financed by the accumulation of overdraft and bank loans with government guarantees. 6 While the GDP share of government domestic debt (29 percent) is less than the share of external debt (129 percent), domestic interest rates have remained high in real terms (15 percent on average in 1997-99) and much higher than on foreign debt due to its concessionality. As a result, budgetary interest payments on government domestic debt are much higher (7.0 percent of GDP) than on its external debt (2.5 percent). 7 The nominal effective exchange rate depreciated by 9.4 percent in 1999 and 40.5 percent in 2000 in foreign currency, and the dollar price of oil rose by 38 percent in 1999 and 66 percent in 2000.  5 11. In total, the increase in domestic financial imbalances, the terms of trade losses and shortcomings in policy responses led to balance of payments difficulties. Capital inflows were insufficient to cover the current account deficit. This led to a fall in external reserves to 0.8 months of imports by end-2000 and an accumulation of external payments arrears (US$89 million). 12. Political Transition. On January 7, 2001, a new Government headed by President- elect Mr. John A. Kufuor from the New Patriotic Party (NPP) took office in what constituted the first democratic transfer of power since Independence in 1957. The NPP won the presidential vote and parliamentary majority against the former ruling party, the National Democratic Congress (NDC) in Ghana's third multiparty elections held last December. The political transition has proceeded peacefully and is widely regarded as a major achievement for Ghana and for the region. 13. The new Government inherited an extremely difficult situation. Domestically, it faced the prospects of a debt trap with rising fiscal deficits caused by domestic debt build-up and high interest rates. But it was also confronted with the risk of another vicious circle of exchange rate depreciation and inflation. Given the low level of international reserves, there was a risk of further exchange rate depreciation leading to higher inflation and monetary expansion, which would fuel another round of depreciation and inflation. The new Government therefore decided to take immediate measures to restore macroeconomic stability. It invited the IMF and World Bank to send early missions to discuss the economic situation and the possible outlines of a new program for the year. This was followed by an "Enhanced Mini-Consultative Group" meeting in Accra on May 23, where donors expressed their support to the Government's economic program. 14. HIPC. In light of the deterioration in Government finances as well as the impact on external debt service of the large depreciation of the exchange rate, the Governnent announced in its budget speech that it had decided to avail itself of the debt relief possible under the HIPC. A revised debt sustainability analysis was carried out in the staffs of the Bank and the Fund in February and a Preliminary Document completed in May. The preliminary HIPC document will be presented to the Executive Directors on July 3, 2001, with a Decision Point expected to be reached by December 2001. 15. PRSP. While the immediate priority is to restore macroeconomic stability, the Government also launched an intensive participatory process to prepare a full PRSP, the Ghana Poverty Reduction Strategy (GPRS). Working groups from Government, academia, civil society, the private sector and development partners, were set up to define a reform agenda. A three-day National Economic Dialogue was then convened in May 2001 to review the recommendations of the working groups in six core areas: poverty reduction strategy; financial sector; education, labor and human resource development; economic policy; golden age of business; and resources for growth. This forum brought together some 450 people from Government academia, civil society, the private sector, the minority and think tanks, to debate about the economic situation. Based on the report of the National Economic Dialogue, a revised GPRS was subsequently prepared for further discussions at the regional level throughout the country in June/July 2001. The  6 Government's objective is to finalize the GPRS by September/October 2001 in time to influence the budget for 2002 and the Medium-Term Expenditure Framework (MTEF) of 2002-4. II. GHANA'S ADJUSTMENT PROGRAM 16. When the new Government took office in early 2001, it brought with it a new vision of Ghana. The economic philosophy of the new Government as set out in the President's "State of the Nation" address to Parliament, emphasizes the Party's commitment to democracy and the rule of law, "zero tolerance for corruption" along with transparent and well-managed public expenditures. The Government also pledged to "tackle the huge budget deficit with the aim of balancing the budget by the end of its first term in office" and to create a "golden age of business" noting that "the partnership of the private sector with the public sector is at the heart of our national strategy" as well as the Party's goal that "Ghana become a leading agro-industrial country in Africa by the year 2010". A strong commitment to creating equal access to education, tackling infectious diseases, especially HIV/AIDS, was also underscored. Finally, the Party's long-held commitment to decentralization and to strengthening democratic institutions at the local level was reiterated. A. Budgetary Policies 17. The Government's fiscal reform program is aimed at restoring macroeconomic stability and accelerating growth and poverty reduction over the longer term. The main elements of the reform program include: (i) tightening fiscal policy and expenditure management, including through better governance; (ii) reducing the government domestic and foreign debt; (iii) eliminating losses in the operations of key parastatals; (iv) restructuring goverrnment functions; (v) promoting private sector development; and (vi) increasing human development and poverty reduction, including strengthening the battle against endemic and infectious diseases. 18. Tightening fiscal policy is a critical challenge facing the new Government. The objective is to increase the domestic primary fiscal surplus from 2.4 percent of GDP in 2000 to at least 4-5 percent of GDP in 2001-04 on average, while limiting domestic borrowing to 1.8 percent of GDP in 2001 and eliminating it in 2002. Domestic payment arrears amounting to over 1 percent of GDP will be repaid in 2001 and the remaining stock (0.7 percent of GDP) will be eliminated by end-2002. These measures will ensure that the government domestic debt decreases from 28.9 percent of GDP in 2000 to below 7 percent of GDP by 2004. 19. In view of the acknowledged urgency of actions to reduce the fiscal deficit, taxes were first raised as part of the March Interim budget approved by Parliament. To close fully the fiscal gap projected for 2001, additional tax measures were submitted to Parliament (Box 2). The proposed increase in petroleum taxation will be submitted to Parliament by end-June 2001. In total, these measures would increase budgetary revenues by 2 percentage points in 2001 and 3.5 percentage points of GDP in latter years.  7 20. Measures were also taken to strengthen revenue administration. They include the appointment of new directors for all revenue collection agencies, the creation of a National Tax Audit Team to assist the revenue collection agencies; the appointment of a National Revenue Agencies (Governing Board) and the automation of customs systems. Box 2: 2001 Main Tax Measures * A two-year National Reconstruction Levy at rates of 7.5 or 10 percent on the income of financial institutions and 2.5 percent on all other companies * A 5 percent import duty on certain products for mining and timber * A 10 percent tax on exports of lumber * A percent customs processing fee on tariff-exempt imports * An increase in the withholding tax on suppliers of goods and services from 5 to 7.5 percent * Collection of arrears on company taxes, import duties and cocoa taxes * Increases in a number of fees and charges * A 15 percent excise duty and specific duties averaging 199 cedis per liter on petroleum products, with effect from September 1, 2001. 21. Budgetary expenditures. Firm limits are being set on budgetary expenditures. Expenditures on goods and services will remain at their 2000 levels (with the exception of utility bills to allow for the adjustment of utility prices), and expenditures on wages will be maintained at 5.2 percent of GDP in 2001 as in 2000. To meet this target, the Government will keep wage increases within the appropriation limit approved by Government by tapering off salary increase for the highest salaries. Employment audits are also on-going to remove "ghost workers" from the payroll and reduce undue wage payments. 22. To take stock of the current situation, comprehensive audits of the payment arrears by ministries, departments and agencies have been launched. These audits are to be completed by August 2001 at which time a schedule for the elimination of arrears over time will be prepared by Government. The objective is to reduce domestic arrears from 1.8 percent of GDP in 2000 to 1.2 percent of GDP in 2001 and to eliminate them in 2002. 23. Budgetary management. A critical component of the Government's program for controlling budgetary expenditures is to improve public expenditure management. To strengthen control at the commitment stage, a rolling cash flow forecast of receipts and payments has been established in June 2001. Under that system, ceilings on expenditure commitment have been set for the line ministries and monthly reports on expenditure commitments and cash expenditures will be produced to help ensure that the fiscal program remains on track. Key measures include: * The recently established Economic Policy Coordinating Committee (EPCC) will oversee expenditure commitments and cash transactions month by month. Based on the cash flow forecasts prepared for the EPCC, quarterly expenditure ceilings will be set for each Ministry, Department and Agency (MDAs) and agreed by the Cabinet starting from the second half of 2001. * Monitoring will be done by the EPCC on the basis of two monthly reports prepared by the Controller and Accountant General's Department (CAGD) with a  8 lag of four weeks after the end of the reporting period. The first report will concern aggregate cash revenue and expenditure outcome and commitments by economic classification. The second report will describe cash expenditure and commitment by MDAs classified by functions. 24. In parallel to the previous measures aimed at controlling expenditures, the Government is implementing a comprehensive reform of budgetary management to improve resource allocation. The reform includes three components: (i) an on-going budget reforrn aimed at implementing a three-year rolling budget (Medium-Termn Expenditure Framework); (ii) the introduction of a Budget and Public Expenditure Management System (BPEMS), under which the three different functions of budget preparation, budget implementation and budgetary accounting would be integrated into one system; and (iii) decentralization of government functions. Technical assistance was provided under an IDA project (FIMTAP). Additional assistance would be provided by an IDA Public Financial Management Reform Program (PUFMARP II) under preparation and by bilateral donor assistance. Over the long-term growth and poverty reduction would be further stimulated by the implementation of the agenda of reforms emerging from the Ghana Poverty Reduction Strategy (paragraphs 53-58). B. Restructuring of Domestic and Foreign Debt 25. Ghana's indebtedness has become a key constraint to the acceleration of economic growth and poverty reduction in Ghana. The Government's strategy is to reduce the stock of government domestic and foreign debt in order to create a virtuous circle of declining debt payments and lower fiscal deficits. Such a strategy would on one hand generate the fiscal space needed for financing poverty reducing activities and on the other hand allow real interest rates to fall, which would stimulate private sector development and long-term growth.8 The main elements of the government debt reduction strategy include: - Reducing and restructuring the debt of government. First, the Government has set up a technical committee to provide recommendations on the restructuring of its short-term debt. The objective is to convert at least 50 percent of its current short- term debt into three-year bonds by end-2001. Second, the Government debt would fall over time due to the reduction and elimination of net domestic borrowing by Government and the increase in the domestic primary fiscal surplus (paragraph 18). Third, Ghana's foreign debt would be reduced with assistance provided under the enhanced HIPC initiative (paragraphs 63-64). * Reducing the operating losses of the major public enterprises by about 7 percentage points of GDP in 2001 and eliminating them in 2002 (paragraphs 26- 30). 8 The high level of interest rates in real terms was identified as the main constraint in a survey of firms done in 2000 as part of the joint Government/NGOs review of Ghana's experience with structural adjustment (SAPRI).  9 * Restructuring the debt of nine public enterprises (including the four major ones). The Government has launched a thorough financial and management audit of nine public enterprises in order to improve transparency, minimize corruption and ensure accountability.9 After completion of the financial audits, the Government will appoint a committee to restructure the debt of these public enterprises. C. Eliminating Losses of Public Energy and Utility Companies 26. Faced with the prospect of mounting losses, the Government took immediate measures to restore the financial viability of the four major public enterprises that are experiencing losses. These concern TOR (Tema Oil Refinery)--which accounts for most of the losses, ECG (Electricity of Ghana), GWCL (Ghana Water Company Limited) and VRA (Volta River Authority). 27. Tema Oil Refinery. In order to halt the operating losses (amounting to an estimated 5.2 percent of GDP in 2000), the new administration raised ex-refinery prices in early 2001 and an automatic price adjustment formula for subsequent adjustment was adopted in June 2001. The 91 percent increase in TOR's ex refinery prices, effective from February 2001, covers the firm's operating costs, but not the finance charges on its large domestic debt. The Government plans to assume the amount which is attributable to the non-adjustment of prices during 2000 (about p1.9 trillion out of