Money and Prices (bn cedis except as noted) 2/ Only data available for unemployment (1.9 Percent) and size of labor force (6,477 mn) are from 1987 Ghana Living Standards Survey. GHANA 3/ Exchange rates are given as: average annual rates for official auction, and actual range for the foreign exchange bureaus. Forex bureaus supplanted parallel market activity starting in mid-1988, when a unified exchange market was established. 4/ Data for aid flows converted to US$ at exchange rates prevailing at time of disbursements; data are for calendar year. 1. General Policy Framework Ghana has implemented a consistent structural adjustment program for seven years, with impressive results. Annual Gross Domestic Product (GDP) growth from 1984 to 1989 averaged 5.5 percent. Key reforms included greatly liberalized foreign exchange/trade controls, rehabilitated basic infrastructure, civil service restructuring, and incentives for agricultural and export sectors. Large inflows of foreign aid have helped rebuild infrastructure and restore basic services. Good rains (1987-89) and higher producer prices for cash crops boosted farm output while industry and mining benefitted from renewed access to foreign exchange, raw materials, spare parts and better transport. However, more could have been done to encourage private sector activity and foreign and domestic direct investment. Despite a strong record of achievement, Ghana's economic gains are still fragile, and obstacles remain in the struggle for sustainable growth. The economy is heavily reliant on the vagaries of the weather and on world prices for its exports (low rainfall in 1990 reduced food and cash crop output). Real GDP growth in 1989 was a solid 6.1 percent. It is expected to drop significantly in 1990 because of inflation, higher energy costs and lower agricultural productivity. Inflation is rising, pushed by large outlays to pay cocoa farmers in 1989-90, higher petroleum product prices and a mediocre food crop. Wage levels lag behind inflation and unemployment is high. Access to credit is limited by a bank restructuring program begun in 1989. Foreign exchange and trade liberalization have improved prospects for U.S. exports, but low purchasing power is suppressing demand. Liquidity remains a significant constraint for importers. Fiscal policy: The government uses its annual budget to channel resources to rehabilitate productive sectors and finance its reform program. Investment expenditure is targeted at public sector projects described in a rolling, three-year public investment plan. The government of Ghana raises civil service salaries annually, and attempts to raise remuneration for skilled and senior employees. Resource mobilization efforts include rationalization of the tax system and reinvigorated collection (income taxes and customs/excise taxes). Donor inflows form a large percentage of annual government capital expenditure. Private investors face problems of liquidity and tight credit as the government of Ghana restructures the banking system (with World Bank aid). Investment capital remains scarce. Ghana suffered a budgetary deficit of 5.7 percent of GDP in 1989. The precise source of the deficit is not known, but it has been suggested that capital spending may account for GHANA part of it. The 1989 deficit was financed with foreign grants and concessional aid inflows; similar methods would be used to cover a 1990 deficit. Monetary policy: The Central Bank utilizes credit ceilings and adjustment in reserve requirements to control the money supply. The annual level of financing for the cocoa sector is a significant factor the parastatal cocoa board pays out billions of cedis to producers over a four month period each season (22 billion in 1989/90). A weekly treasury bill auction sets the discount rate. In 1989-90, Bank of Ghana (BOG Central Bank) introduced new bills and instruments for sale to banks; BOG controls the volume of bills. Open market operations are not yet extensive enough to exert control over the money supply. - Ghana's present monetary policy has a limited effect because of a weak banking system. The government is working with the international financial institutions to refine and improve monetary policy. Private foreign exchange inflows (remittances) may be contributing more than had been realized to the growth of M2. Substantial amounts of currency circulate outside the formal financial system, partly because public confidence in the banks is not yet fully restored after government interventions of 1982-83. Interest rates are negative, discouraging mobilization of savings deposits. 2. Exchange Rate Policies Ghana operates two legal foreign exchange markets. The Bank of Ghana holds weekly foreign exchange auctions that determine the official exchange rate for the following seven days. The level of auction funding has stayed in the range of $6 million to $7 million since late 1989. To obtain foreign exchange from this "wholesale" auction, importers bid through their banks. Only designated banks or financial institutions are permitted to participate. Since 1988, almost any commodity may be imported using auction foreign exchange though there is an unwritten rule barring importation of luxury consumables with auction foreign exchange. Most requests for transfers of profits and dividends are eligible for funding through the auction. Foreign exchange controls have been virtually eliminated. The government of Ghana legalized private foreign exchange bureaus in 1988. They buy hard currency at market rates and sell it to importers or other customers with bona fide requests (personal travel, educational transfers, etc). The bureaus operate freely, without government of Ghana controls. Rates fluctuate seasonally or according to foreign exchange supplies in Accra. Since mid-1990, the spread between the auction and bureau rates has not exceeded 10 percent. The advent of foreign exchange bureaus has facilitated imports of consumer goods, luxury items and processed foods from the U.S. and Europe but local retail prices of such imports are fairly high, reflecting government import duties and sales taxes. Foreign exchange bureaus have virtually eliminated the parallel market. GHANA 3. Structural Policies Since 1983, the government of Ghana has progressively liberalized the market structure. From 1983-1986, price controls throughout the economy were dismantled. After years of artificial controls, prices of goods and services were permitted to reflect significant changes in the exchange rate and in administered prices. (Administered prices affect commodities such as cocoa, coffee and petroleum products. State owned enterprises try to set prices for agricultural products such as maize, but with waning success; supply and demand have strongly influenced food prices in recent years). Since 1985, the government has adjusted upward the producer prices for cocoa to reduce distortions implicit in the previously overvalued exchange rate and reverse excess taxation of farmers. Petroleum prices are adjusted by the government as needed to reflect crude oil price movements. 1990, petroleum product prices were raised four times. Gasoline prices at the pump increased 266 percent between January and November. Fuel prices are substantially above world market prices, incorporating an implicit tax. Since 1983, Ghana has eliminated price subsidies on hundreds of products and commodities but retains controls on a few items. Controlled goods and services include petroleum products, cement, utility tariffs, beer, cigarettes, machetes, fertilizers and selected pesticides. The impact of surviving subsidies affects cross-border trade in the West African sub-region, but has minimal effect on U.S. exports. In The annual budget statement in January 1990 announced several changes to the tax regime. The top corporate rate (for banking, trading, insurance and printing sectors) was lowered from 55 to 50 percent. For the construction sector, the rate dropped to 45 from 50 percent. The basic corporate tax rate (affecting manufacturing, farming, export sectors) remained constant at 45 percent, although it is viewed by many business persons as a disincentive to investment. The import duty structure was simplified in 1990, and new "super sales taxes" on large engine capacity passenger cars and luxury consumer goods were introduced (ranging from 50 to 500 percent). A sales tax clearance certificate is required from manufacturers before they clear goods from the port, to enforce payment of sales tax and excise duties. Data from the first half of 1990 show that excise duty receipts are below projected levels. However, any shortfall is likely to be made up in higher petroleum tax receipts. No major structural policy changes affecting direction or character of investment occurred from 1989-1990. 4. Debt Management Policies Ghana's structural adjustment program has been supported since its inception in 1983 by the World Bank/IDA and the International Monetary Fund (IMF). Ghana now has access to the Enhanced Structural Adjustment Facility (ESAF) and World Bank Structural Adjustment Loans. Ghana has not rescheduled official credits under the Paris Club and has not rescheduled commercial bank credits. At year-end 1990, Ghana's total external debt was estimated at $3.04 billion. GHANA A breakdown of external public debt as of 1990 follows (1) Ghana was scheduled to eliminate its remaining payments arrears in mid-1990. The maturity profile of Ghana's external debt has begun to improve with access to IMF resources on better repayment terms (ESAF) since 1987 and cancellation of portions of its bilateral debt. Debt service ratios have begun to drop from a peak of 68 percent (1988); the ratio is expected to fall from 57 percent (1989) to 38 percent in 1990. Relations with the international financial institutions are good and since 1983 Ghana has met scheduled obligations. However, the balance of payments remains very sensitive to changes in the external environment (e.g., cocoa and crude oil prices) and Ghana remains highly dependent on foreign assistance. Steady reduction in external arrears has helped to restore the country's reputation with external creditors, and Bank of Ghana is reluctant to incur fresh obligations at too rapid a pace. Foreign banks are not yet ready to commence significant lending in Ghana but they are watching the progress of economic recovery efforts. A debt management unit was established in 1988 at the Finance Ministry, including a computer program to analyze Ghana's external obligations. In January 1989, the last vestiges of Ghana's import licensing system were abolished. At present, importers are required to submit an import declaration form only, stating that import transactions will be conducted according to Ghanaian laws, and a current tax clearance certificate. Service barriers continue to exist in the following sectors, but do not necessarily affect all activities within the listed sectors: advertising; insurance; tourism/travel agencies. The following business and/or investment activities are prohibited for non-Ghanaian proprietors: commercial overland transportation; laundry/dry cleaning; wholesale/ retail operations of a certain size; taxi/car hire service; tire retreading; beauty/barber shops; real estate transactions; some agencies/distributorships; agricultural commodity brokerages. Standards: Ghana has its own standards for food and drugs, and conducts testing according to accepted international practices for imports with suspicious characteristics. Not only imports, but all locally manufactured goods, are subject to standards, testing, labeling and certification regulations. Investment barriers: The government has designated a list of priority sectors for investment (agriculture, |