June 11, 2001

Dear Mr. Köhler:

1. On May 3, 1999, the Executive Board of the Fund approved a three-year arrangement for Ghana under the Poverty Reduction and Growth Facility (PRGF). The purpose of this letter is to inform you on the progress in implementing the second year economic program, and to request that the amount of the arrangement be increased from SDR 191.9 million to SDR 228.8 million, that the schedule of the remaining disbursements be rephased, and that the fourth loan under the arrangement be disbursed following the completion of the third review under the arrangement.

2. The attached Memorandum of Economic and Financial Policies (Attachment I) sets out the objectives and policies that the Government of Ghana intends to pursue during 2001. The Technical Memorandum of Understanding (Attachment II) provides explanatory notes to clarify the MEFP.

3. Ghana has suffered a severe terms of trade shock during 1999-2000 which was compounded by inappropriate policies and delays in donor disbursements. As a result many of the program targets for 2000 were not achieved. The new Government of Ghana believes that the policies it intends to implement in 2001, as described in the MEFP, will redress these slippages and, by restoring macroeconomic stability, will create the conditions for sustained economic recovery. On this basis, it requests completion of the third review under the arrangement and waivers for nonobservance of : (a) the end-August 2000 quantitative performance criterion on the net domestic financing of the government; (b) the end-August 2000 quantitative performance criterion on the contracting or guaranteeing by the government of new nonconcessional external loans with a 1-15 year maturity; (c) the end-September 2000 structural performance criterion on the appointment of a sales advisor for the divestiture of the electricity company; and (d) the continuous performance criterion on accumulation of new external payment arrears by the public sector.

4. In view of Ghana's increased balance of payments need, we also request an augmentation of access equivalent to 10 percent of quota. On completion of the third review, the Government of Ghana would request a disbursement under the PRGF arrangement of SDR 52.58 million. A fourth review under the PRGF arrangement will be completed by December 15, 2001.

5. The Government of Ghana believes that the policies and measures set forth in the memorandum of economic and financial policies are adequate to achieve the objectives of the program supported by the PRGF arrangement, but will take further measures if deemed necessary. During the remaining period of the arrangement, Ghana will continue to consult with the Managing Director on the adoption of any measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation.

6. The Government of Ghana will continue to provide the Fund with such information as the Fund requires to assess Ghana's progress in implementing the economic and financial policies described in the attached memorandum.

7. The Government of Ghana intends to make these understandings public and authorizes the Fund to provide this letter and the attached memorandum to all interested parties that so request, including through the Fund's external website.

8. We can assure you, Mr. Managing Director, that the Government of Ghana is determined to fully implement the program and we hope we can count on the continued support of the Fund in our endeavors.

Sincerely yours,

/s/ Hon. Yaw Osafo-Maafo, MP Ministry of Finance

/s/ Emmanuel Asiedu-Mante Acting Governor of the Bank of Ghana

Attachments:

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A

Memorandum of Economic and Financial Policies
of the Government of Ghana for 2001

I. Introduction

1. In January 2001, a new government took office in Ghana, the first democratic transfer of power in the nation's history. The incoming administration inherited a very difficult economic situation resulting from a major terms of trade shock during 1999/2000—a tripling of crude oil prices and a sharp reduction in cocoa prices—compounded by a lack of fiscal discipline and a weak monetary stance, especially during the pre-election period. The first order of business of the new government is to achieve macroeconomic stability in 2001 following the volatility of the past two years.

2. The government announced an interim budget in March 2001 that is being revised based on the policies set forth herein. Given the depth of the problems, the newness of the administration, and the need to build public support, the remainder of 2001 will be required to flesh out the new development and poverty alleviation strategy. Building on the momentum created by last year's democratic elections, work on the new strategy is already well underway, most recently in the context of the National Economic Dialogue which was held in May. It will culminate in late 2001 with the completion of the Ghana Poverty Reduction Strategy (GPRS), which will lay out the broad policy agenda for 2002-2004.

II. The Legacy from 2000

3. Ghana was brought to the verge of financial crisis in late 2000, with a rapidly depreciating currency, sharply rising inflation, burgeoning public debt, and a substantial depletion of foreign exchange reserves.

4. The primary cause was loss of control over public expenditure and government borrowing, especially in the second half of the year before the presidential elections. The fiscal deficit in cash terms reached 9.7 percent of GDP for the year. Given shortfalls in donor disbursements, the deficit was financed almost entirely by domestic borrowing.

5. The result was a destabilization of the economy: 40 percent growth in broad money, a 50 percent depreciation of the cedi, and a tripling of the inflation rate to over 40 percent at end-2000. The domestic government debt stock rose to almost 29 percent of GDP, and official reserves fell to only 3 weeks of imports.

6. A breakdown in expenditure management and control systems during 2000 also led to a build-up in new domestic arrears in addition to cash expenditure overruns. The full extent of these arrears remains to be verified, but is estimated at 1.4 percent of GDP. Delays in aid inflows further complicated the payment of government obligations and led to the creation of external payment arrears on debt service amounting to US$89 million by end-2000. Ghana's public and publicly guaranteed external debt stood at US$5.9 billion (about 119 percent of GDP) at end-2000.

7. The finances of several key parastatals deteriorated along with those of the central government. Failure to adjust petroleum prices fully for rising crude oil costs and a depreciating currency left the Tema Oil Refinery (TOR) with a total short-term debt of 2.5 trillion (9 percent of GDP) at end-2000. Almost half of this was debt to domestic banks, in particular to Ghana Commercial Bank (GCB), posing a major risk to the solvency of this bank. Similarly, electricity and water rates were kept artificially low throughout 2000, leaving the Electricity Company of Ghana (ECG), Volta River Authority (VRA, the electricity generator) and the Ghana Water Company Limited (GWCL) with sizeable additional debts.

8. Although Ghana has succeeded in privatizing over 200 companies since the inception of the divestiture program in the late 1980s, progress in this area was limited in 2000, in part owing to the deteriorating economic situation and the upcoming elections. The sale of government shares in Ghana Telecom (GT) was only partially completed owing to a request by the potential purchaser for a revaluation of GT following the currency crisis. The privatization bid for National Investment Bank was withdrawn by the bidder, and that for Ghana Oil was halted by the government after the merger of Total and Elf raised concerns about competition. The appointment of financial advisors for the sale of ECG and Ghana Railways was delayed, as was progress on the privatization of GCB.

III. Medium Term Strategy

9. The thrust of the government's medium-term macroeconomic strategy will be to take Ghana's economy out of the current debt trap and into a virtuous circle of reduced domestic debt as a ratio to GDP, a declining debt service burden, and lower inflation and interest rates. Once underway, this strategy, together with increased external official support, will help the government reconcile its dual ambitions to increase expenditures on priority public services while providing the stable macroeconomic environment needed for private sector-led growth and sustainable poverty reduction.

10. To this end, the government intends by 2002 to achieve domestic primary surpluses sufficient to cover all domestic debt service and to halve the ratio of domestic public debt to GDP by the end of 2003, from its end-2000 level. In making the targeted adjustment, the government will give emphasis to strengthening revenue mobilization, while protecting priority expenditures. Reduced reliance on the banking system for budget financing, combined with a return to positive real interest rates, will curtail monetary growth and bring inflation down into the single-digit range within three years. The government's current macroeconomic framework, which will be revisited and may be modified in the course of developing the GPRS, allows for a recovery in real GDP growth to 5 percent by 2002.

11. Notwithstanding the government's ambitious adjustment targets, Ghana's external financing needs will remain substantial. Since external debt service obligations over the next three years threaten to absorb 35-45 percent of domestic revenues, the government will be seeking a good part of the needed assistance in the form of debt relief, including under the enhanced HIPC Initiative. In addition to funding net imports and debt service, the country will need resources to rebuild official reserves from their current level of only 3 weeks of imports to at least 2 months of imports by the end of 2002 and to at least 3 months' cover over the medium term.

12. A key element in the restoration of macroeconomic stability will be reform in the public enterprise sector. This will involve, among other things, a review of the country's energy policies and modifications to the tariff structure of the public utilities, together with the formulation of a new divestiture strategy, all of which will need to be addressed with urgency, based on appropriate public consultation. The government will be working on these issues over the coming months, and will lay out its intentions in the GPRS.

13. Finally, the development of a vibrant and expanding private sector in Ghana will require further reform of the nation's financial system, including measures to ensure a strong and competitive banking sector and a well-functioning foreign exchange market.

IV. The Program for 2001

A. Macroeconomic Objectives

14. In line with its medium-term strategy, the government's economic program for 2001 is designed to achieve the following core objectives:

• Improve the standard of living of ordinary Ghanaians by raising growth to at least 4 percent and increasing social spending as a share of domestic primary expenditures;

• Reduce inflation from 41 percent at end-2000 to 25 percent by end-2001; and

• Rebuild gross official reserve holdings to 1.5 months of imports by end-2001.

Key policies needed to deliver these outcomes and lay the foundations for further gains in subsequent years include:

• Reducing the government's domestic debt as a share of GDP by increasing the domestic primary budget surplus to 4 percent of GDP, from 2.4 percent in 2000, as well as through the use of additional (unprogrammed) receipts from divestiture, program aid, or external debt relief;

• Regaining effective control and monitoring of public expenditures;

• Containing, and beginning to reduce, the indebtedness of the main parastatals through price adjustments and debt restructuring;

• Closely monitoring and protecting the health of the banking system; and

• Developing an effective interbank foreign exchange market to improve the allocation of external resources.

B. Financial Policies for 2001

Fiscal Policy

15. The targeted increase in the domestic primary surplus will be achieved through a combination of revenue measures and expenditure savings. On the revenue side, some measures were introduced in the March 2001 budget, while others will be submitted to Parliament in June, as part of the government's plan to close the fiscal financing gap for 2001. These measures, which are conservatively estimated to yield 2 percent of GDP in 2001 and 3½  percent of GDP in a full year, are as follows:

• A 15 percent excise duty and specific duties averaging 199 per liter on petroleum products, with effect from September 1, 2001, to recover petroleum taxation removed in the February 2001 price increase.

• A 2-year National Reconstruction Levy, at rates of 10 percent or 7.5 percent on financial institutions and 2.5 percent on all other companies.

• A $30 per person increase in the airport tax.

• A 5 percent import duty on certain items on the mining list and on materials for processing timber; a 1 percent customs processing fee on tariff-exempt imports; and a 10 percent levy on exports of lumber.

• A limitation of tariff exemptions on imports by NGOs.

• 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 user fees, licences, and other charges that have not kept pace with inflation in recent years.

16. In addition, the government has taken a range of measures to strengthen revenue administration. These include: pursuit of dividend collection and loan recovery from companies in which the government has an interest; automation of customs systems and improved control of CEPS warehouses; and creation of a National Tax Audit Team to assist the revenue collecting agencies. The government is confident these measures will generate additional receipts over time but, for reasons of prudence, no allowance for such receipts has been made in the revenue projections for 2001.

17. Domestic non-interest expenditure will be reduced from 15.3 percent of GDP in 2000 to 13.4 percent in 2001. The main savings arise from:

• freezing expenditure on goods and services at 2000 levels (except for the cost of higher government utility bills); and

• cutbacks in domestically-financed capital expenditures, owing in part to the willingness of some donors to forego the domestic counterpart for donor-funded projects.

The wage and salary bill will be held at 5.2 percent of GDP (as in 2000). To ensure achievement of this target, the government will keep any public sector wage increase in 2001 within the appropriation approved by Parliament, including by tapering the wage increases at the higher end of the salary scale. In addition, steps will be taken to eliminate undue wage payments, using employment audits. The allocations for health and education, by contrast, imply real per capita increases in spending on these priority public services (see below).

18. The government is undertaking comprehensive audits of the stock of domestic payment arrears by ministries, departments, government agencies, and district assemblies. These audits will be completed by end-August 2001, at which point a timetable for their liquidation will be announced. The stock of road arrears will also be audited by end-August 2001, and will be reduced to 190 billion by end-August 2001 and to 70 billion by end-December 2001, while a minimum of 200 billion in other domestic arrears will be paid in 2001. In addition, financial and management audits of at least 9 major public enterprises are being undertaken. These audits are expected to be completed by end-September 2001, at which time action will be taken to begin restructuring the management of the enterprises.

19. Net domestic financing of the government will not exceed 686 billion (1.8 percent of GDP) in 2001. The program assumes divestiture receipts of 391 billion (1 percent of GDP) this year from the sale of the government-held shares and incorporates committed program loans and grants totaling 2,436 billion. On this basis, there remains a projected financing gap of 1,881 billion (4.9 percent of GDP). The government expects this financing to be covered by the concessional rescheduling of external debt service, which it is requesting from bilateral and commercial creditors to fill Ghana's balance of payments gap.

20. To the extent that the sum of divestiture receipts, program loans and grants, and debt relief exceed the amounts assumed in the fiscal program, the additional inflows will be used to accelerate the process of domestic debt reduction, thereby making room for additional priority expenditures in the 2002 budget. If the aggregate receipts from program loans, program grants, and debt relief fall short of the program assumptions, the ceiling on net domestic financing will be increased to protect expenditures, up to the limit specified in the Technical Memorandum of Understanding (TMU). A number of other technical adjustments may be made to the fiscal ceilings, as defined in the TMU.

Public Expenditure Management

21. The government attaches high priority to the effective control and monitoring of public expenditure. Under the current system, there is insufficient capacity either to track how resources are being spent month by month, or to manage expenditures properly at the commitment stage. The result is potential misallocation of resources, arrears, and ultimately loss of control over aggregate cash spending. With technical advice from the Fund, the government has developed an immediate action plan to remedy the main weaknesses in the public expenditure management system over the next six months. The key elements are as follows:

• An Economic Policy Coordinating Committee (EPCC) has been established to oversee the forecasting and monitoring of expenditure commitments and cash transactions month by month. To ensure effective coordination, the Committee comprises officials of the Ministry of Finance, the Controller and Accountant General's Department (CAGD) and the Bank of Ghana (BOG) and the main revenue agencies.

• . Based on the cash flow forecasts prepared for the EPCC, a recommended set of quarterly expenditure ceilings for each Ministry, Department and Agency (MDAs) will be agreed by the Cabinet for the second half of 2001. A circular will be issued by the Ministry of Finance to each MDA informing them of the cash ceilings agreed by Ministers and notifying them that commitments are to be constrained within the cash ceilings. The ceilings will be managed flexibly--with monthly targets (which allow for small over- or under-shooting) and use of contingent reserves to finance unexpected shortfalls in revenue or emergency expenditure needs--in order to ensure that the government's aggregate net borrowing ceilings are respected.

• Performance against the ceilings will be monitored by the EPCC through specially developed reports prepared by the CAGD on budget outcomes, including cash expenditures and commitments. Two sets of monthly reports will be provided with a lag of four weeks after the end of the reporting period. First, there will be a report on aggregate budget cash revenue and expenditure outcomes and commitments within a broad economic classification. Second, there will be a report on cash expenditures and commitments by MDAs classified by function. Once these reports achieve a satisfactory quality, they will be published in the government gazette.

• The CAGD and the BOG will put in train action to reconcile the aggregate monthly budget reports with banking data by the end of 2001.

22. The government will also work over the coming months, with assistance from Fund and World Bank staff, on further enhancements to the expenditure management system that will enable closer tracking of the functional allocation of poverty-related expenditures, including those that are now funded by donors and those additional expenditures that may in future be funded by possible debt relief under the enhanced HIPC Initiative. These enhancements will commence during the second half of the year, and a firm timetable for development of comprehensive tracking of expenditures will be prepared by end-November 2001.

23. In addition, improved procedures have been put in place to ensure full and timely settlement of external debt service obligations. These new procedures are described in the TMU.

Monetary, Exchange Rate and Financial Sector Policies

24. To achieve the target rate of inflation for end-2001, the Bank of Ghana will use appropriate monetary instruments to control the growth of reserve money, which is not expected to exceed 29 percent for the year. Broad money is expected to grow by about 34 percent during the year, sufficient to accommodate a rebuilding of net international reserves (NIR) by at least US$132 million as well as the target level for credit to the government.

25. Given the low level of NIR and the need to keep a tight rein on domestic credit, the BOG intends to focus control on the net domestic assets in its balance sheet, particularly net credit to government and liquidity support to banks and/or public enterprises. Thus, the BOG has established ceilings on net domestic assets and floors on net international reserves, and will cease providing liquidity support to public enterprises, either directly or through banks, effective September this year (following the restructuring of TOR's debt in August).¹

26. In line with this strategy, real interest rates will remain positive to increase cedi savings, strengthen the foreign reserve position, and mobilize funding for the government. Accordingly, the BOG has brought about an increase in nominal treasury bill rates of almost 4 percentage points since the beginning of the year, and it will reduce them only as the inflation rate falls.

27. The BOG plans to create a functioning interbank foreign exchange market in 2001, with IMF technical assistance. The preparatory work will be carried out in the coming months with technical assistance from the Fund. Once TOR's debt is restructured so that the company can restore normal relations with commercial banks, foreign exchange transactions for oil, which are now undertaken by the BOG, can then be shifted in stages to the commercial banks. The BOG will eliminate direct sales to TOR beginning not later than November 1, 2001. The exchange rate will be allowed to move freely in response to market conditions, supported by strong macroeconomic policies.

28. The government remains concerned about the vulnerability of the banking system to nonperforming loans, particularly those of TOR and the public utilities. In parallel with government efforts to put TOR and other parastatals on a sound financial footing, the BOG has therefore entered into discussions with the banks on asset quality, risk monitoring and contingency measures for recapitalization. The outcome of these discussions, including any necessary remedial actions, will be discussed with IMF staff in the context of the next review under the PRGF arrangement.

29. The government will review the draft Bank of Ghana Law with a view to strengthening the independence of the BOG, and will submit the revised draft law to Parliament by end-August 2001. In addition, to remove any potential conflict of interest and thereby to strengthen its role as prudential regulator, the BOG will divest its shareholdings in all financial institutions that it supervises by end-2001.

External Sector Policies

30. Based on the debt sustainability analysis (DSA) carried out by IMF and World Bank staff in February 2001, the government has decided to request debt relief under the enhanced HIPC Initiative. On current estimates, Ghana could receive debt relief equivalent to over 50 percent of the value of its external debt at end-2000 owing to the high ratio of the net present value of debt to fiscal revenues. The government hopes that Ghana can reach a decision point in late 2001. It believes this will allow sufficient time to prepare the necessary documents, notably the poverty reduction strategy paper (the GPRS), and put in place an expenditure monitoring system that will permit effective tracking of anti-poverty expenditures.

31. Owing to the severe foreign exchange shortage in 2001, the government will request an interim rescheduling agreement from the Paris Club under Naples Terms, sufficient to fill the balance of payments financing gap for the year, taking into account donor pledges of aid received or confirmed during the mini-CG meeting in Accra on May 23.

C. Structural Policies for 2001

32. The government regards restoring the financial health of the public energy and utility companies as one of its highest priorities, and it will be working closely with the World Bank to achieve this goal. In order to halt the ongoing losses at TOR, the government raised ex-refinery gasoline prices by an average 91 percent in February 2001, with immediate effect. In April, the Public Utilities Regulatory Commission (PURC) allowed the Electricity Company of Ghana (ECG) to raise the retail price of electricity by 96 percent and Volta River Authority (VRA) to raise its wholesale electricity price by 100 percent. The Ghana Water Company (GWCL) was authorized to raise water prices by 95 percent. These increases took effect May 1, 2001.

33. Although the February 2001 increases in ex-refinery petroleum product prices now cover TOR's running expenses, they were insufficient to cover the financial costs of the company's 2.5 trillion stock of outstanding short-term debts. An estimated 2 trillion of this debt was accumulated as a result of below-market pricing during 1999-2000. This portion of TOR's debt will be restructured by mid-August 2001 and converted to a government obligation, on which the first debt service payment would be expected to fall due in early 2002. TOR will not contract any new medium- or long-term external debt in 2001. The government has also developed an automatic adjustment mechanism for regular future adjustment of petroleum product prices that will ensure full cost recovery for TOR, including finance charges. The mechanism will take effect on June 20, 2001, and will incorporate the new excise tax and specific duties from September 1, 2001.

34. Despite the increase in the tariffs for electricity and water, these utility rates still remain at about 65 percent of full cost recovery levels. In the wake of the recent increases, PURC is developing a revised plan to institute automatic tariff adjustment mechanisms, with phased attainment of full cost recovery, and expects to complete and begin implementing this plan by end-September 2001. Until cost recovery prices can be achieved, the government will assume responsibility for the losses of ECG, VRA and GWCL, and will develop a plan to restructure the utilities' debts to domestic creditors; meanwhile it will suspend any major new investment scheduled in those companies. The government is working closely with the World Bank to recast the nation's energy sector strategy. The new strategy will address, among other things, the future of TOR, ECG and VRA, and the development of the West African Pipeline project.

35. The government will relaunch the divestiture program this year after appointment of the new head of the Divestiture Implementation Committee's (DIC) governing board and the completion in September 2001 of a financial and managerial audit of recent and pending asset sales. During 2001, privatization efforts will focus on raising a minimum of US$50 million by divesting government-held shares in a number of companies for which ready buyers are believed to be available. The offer for sale of Ghana Commercial Bank was issued in May 2001, and preparations for several larger divestitures (including the Electricity Company of Ghana and Ghana Railways) are also continuing with World Bank assistance. A detailed progress report will be published at the time of the budget review in September.

36. The government intends to replace the special import tax that was put in place last year and replace it with anti-dumping measures that are consistent with WTO rules. As a first step, the top rate for this tax was reduced from 20 percent to 10 percent in the 2001 Budget, and the tax was removed for a number of products. The special import tax will be eliminated altogether in the 2002 Budget. By the end of 2001, the government will formulate its plans for broader tariff reform, so that implementation can begin with the 2002 Budget.

D. Social Policies for 2001

37. In line with the government's strategy to reduce poverty, the 2001 budget reallocates budgetary resources to priority social sectors. To improve access by the poor to social services, budgetary allocations for education and health have been increased to 36 percent of domestic primary expenditure from almost 32 percent in 2000. Although below 1999 levels, this represents a real increase from 2000 of almost 5 ½ percent, or 2 percent per capita. About 60 percent of budgeted social spending is earmarked for basic education, primary health care, and rural water programs.

38. The budget gives priority to a number of programs in the primary health sector to help increase child immunization rates and to reduce substantially infant mortality rates. Some 33 new health centers are to be built in rural areas to improve access to health care facilities, and free medical care is now provided for pregnant women, the elderly and other vulnerable social groups. With these targeted priority programs, the government seeks by end-2001 to increase child immunization rates to 68 percent, and to reduce infant mortality rates to 50 per 1000 live births by end-2001.

39. The government has also sought to alleviate the impact of the recent increases in petroleum and utility prices on poorer consumers through cross-subsidies and targeted tax relief. While average ex-refinery petroleum prices rose by 91 percent in February 2001, increases for kerosene and gas oil, which are used more intensively by lower income groups, were limited to 82 percent and 75 percent, respectively. Likewise, the increase in electricity and water tariffs for domestic consumers with usage below a prescribed minimum was about two-thirds of that for large industrial users, and this minimum usage continues to be VAT exempt.

40. The government's incomes policy is also designed to ensure that, within the limited resources available for pay increases this year, the lower paid benefit the most. In particular, the civil service wage settlement for 2001 will be skewed towards workers at the bottom end of the pay scale.

E. Governance and Transparency

41. The government came to office with a pledge of zero-tolerance for all acts of corruption. A new anti-corruption strategy is now being put in place, including development of Codes of Conduct, establishment of an Office of Accountability in the President's office and the Parliament, reform of the procurement system, and strengthening of anti-corruption agencies. Already the government has begun prosecuting a number of senior and mid-level officials for improprieties or abuse of office.

42. The government has made a commitment to increased transparency and accountability in public policy. The audits of district assemblies and public enterprises (see above) are a key element in this regard. In addition, the government has effected changes in the top management of all revenue collection agencies, a new Controller and Accountant General has been appointed, and a National Tax Audit Team has been created to improve compliance with the tax laws. At the same time, to protect the taxpayer, the government has established an office of complaints on tax malfeasance and related problems.

43. The government recognizes the importance of improving Ghana's statistical base and publishing official statistics from the Ministry of Finance, Bank of Ghana and the Ghana Statistical Service on a more timely basis. To this end, public data will begin to be made available using various media, including official internet websites, by March 2002. To enhance the statistical data base, steps will be taken to improve the quality and timeliness of the national accounts and balance of payments data. From June 2001, the Bank of Ghana will begin reporting the new accounting for gross foreign reserves, net international reserves and net foreign assets, based on IMF technical assistance recommendations.

F. Program Monitoring for 2001

44. Prior Actions. The government will undertake a number of actions prior to the IMF Board meeting on the third review under the PRGF in order to underscore its commitment to the economic strategy described in this memorandum (Table 2).

45. Performance criteria. Table 1 shows the quantitative performance criteria and benchmarks set for August 2001, with indicative benchmarks for December 2001 and March 2002; the latter will be converted to performance criteria at the next review under the arrangement. Structural performance criteria and benchmarks with corresponding dates are identified in Table 2. In addition, the nonaccumulation of external payments arrears (as defined in the TMU) will constitute a continuous performance criterion, as will the standard injunctions against imposing or intensifying restrictions on current payments, introducing or modifying multiple currency practices, concluding bilateral payments agreements that are inconsistent with Article VIII, or imposing or intensifying import restrictions for balance of payments reasons.

46. Provision of information. In order to ensure effective monitoring of the program, the government will make available to Fund staff all core data on a timely basis, as specified in the TMU.

47. Program review. A fourth review under the PRGF arrangement will be completed by December 15, 2001. This review will focus on (a) progress in restoring the financial viability of TOR and the major public utilities; (b) progress in developing a privatization strategy for ECG and GCB; and (c) implementation of the strengthened public expenditure monitoring and control system. The timing and focus of a fifth and final review under the arrangement will be established at the fourth review.

GHANA

Technical Memorandum of Understanding

1. This technical note contains definitions and adjustor mechanisms that are intended to clarify the measurement of items in Table 1, Quantitative Performance Criteria, PRGF Arrangement, attached to the Memorandum of Economic and Financial Policies. Unless otherwise specified, all quantitative performance criteria and benchmarks will be evaluated in terms of cumulative flows from January 1, 2001.

Provision of Data to the Fund

2. Data with respect to all variables subject to performance criteria and indicative benchmarks will be provided to Fund staff on a monthly basis with a lag of no more than eight weeks (two weeks for data on the net domestic assets and net international reserves of the Bank of Ghana). The authorities will transmit promptly to Fund staff any data revisions. For variables that are relevant for assessing performance against program objectives but are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on appropriate measurement and reporting.

Definitions

3. Government is defined for the purposes of this memorandum to comprise the central government, special funds (the Education Trust Fund, the Road Fund, the District Assembly Common Fund) and includes the various accounts of subvented and other government agencies that are classified as part of government in the Bank of Ghana Monetary Survey, as published in the Bank's Monthly Statistical Bulletin of December 2000. Public enterprises are excluded from the definition of government.

4. Government revenue comprises all tax and non-tax revenues of government, excluding foreign grants and divestiture receipts.

5. Net domestic financing of government is defined as the change in net credit to government by the banking system plus the net change in holdings of treasury bills and other government securities by the nonbank sector, but excluding divestiture receipts and government liabilities assumed in the restructuring of the domestic debts of the Tema Oil Refinery, the Electricity Company of Ghana, the Volta River Authority, and the Ghana Water Company Limited.

6. The domestic primary balance is defined as the difference between government revenue and noninterest government expenditure (excluding foreign-financed capital expenditure, for which data are reported by the Aid and Debt Management Unit), measured on a cash basis.

7. The program exchange rate for the purposes of this memorandum will be the end-March exchange rate of 7205 cedis per dollar.

8. Reserve money is defined as the sum of currency in circulation, commercial banks' deposits at the Bank of Ghana in cedis and private sector demand deposits at the Bank of Ghana in cedis. It will be measured by the indicated stock at end of month. If any bank fails to meet its legal reserve requirement, currently 9 percent of bank deposits, then reserve money will be adjusted upward to the extent of any shortfall in compliance with that reserve requirement.

9. Net international reserves of the Bank of Ghana are defined for program monitoring purposes as reserve assets of the Bank of Ghana net of its short-term external liabilities. Reserve assets are defined as convertible external assets readily available to and controlled by the Bank of Ghana and exclude pledged or otherwise encumbered external assets, including, but not limited to, assets used as collateral or guarantees for third party liabilities. Reserve assets include: gold, holdings of SDRs, reserves in IMF, foreign notes and coins, foreign securities, disposable balances with correspondent banks, and time deposits. Data are reported by Bank of Ghana, Treasurer's Department (Table 3). Short-term external liabilities are defined as foreign currency liabilities to residents and nonresidents contracted by the Bank of Ghana at original maturities of one year or less plus outstanding liabilities to the IMF. All values are to be converted to U.S. dollars at actual exchange rates prevailing at the test date.

10. Net domestic assets of the Bank of Ghana are defined as the difference between reserve money and the net foreign assets of the Bank of Ghana, converted from U.S. dollars to cedis at the program exchange rate. Net foreign assets comprise the reserve assets of the Bank of Ghana, as defined above, plus other Bank of Ghana claims on nonresidents, minus the Bank of Ghana's liabilities to nonresidents, including outstanding liabilities to the IMF.

11.The performance criterion on short-term external debt refers to the outstanding stock of external debt with original maturity of one year or less owed or guaranteed by the government or the Bank of Ghana.² Data are reported by the Treasurer's Department in the Cash Flow and Foreign Assets and Liabilities tables and should be converted into U.S. dollars at current exchange rates.

12. The performance criterion on nonconcessional medium- and long-term external debt refers to the contracting or guaranteeing of external debt with original maturity of more than one year by the government, Bank of Ghana, or the Tema Oil Refinery.³ Medium- and long-term debt will be reported by the Aid and Debt Management Unit of the Ministry of Finance and (as appropriate) the Bank of Ghana, measured in U.S. dollars at current exchange rates.

13. The stock of payment arrears in the road sector at the end of March 2001 is recognized to be 234 billion and is expected to be paid down according to the schedule in Table 1. Performance will be measured by the outstanding stock measured in cedis at the end of each quarter. Data on the stock of road arrears will be reported to the IMF staff monthly (with a lag of no more than 4 weeks) by the monitoring and evaluation department of the Ministry of Roads and Highways. An arrear is a duly certified expenditure commitment that was not paid during a period of 90 days after the date the bill was issued. Any conversion of amounts from U.S. dollars into cedis will be made at the program exchange rate. Conversion from other currencies into U.S. dollars will be made at the actual exchange rates at each test date.

14. External payment arrears occur when undisputed payments are not made within the terms of the debt contract. Debt service payments that may be subject to rescheduling agreements and are thus not paid are not considered arrears for program purposes. This is a continuous criterion.

15. Official external program support is defined as grants and loans provided by foreign official entities that are received by the budget, excluding project grants and loans. The amounts assumed in the program consistent with this definition are shown in Table 1.

16. Divestiture receipts are payments received by the government in connection with the sale of state assets. The programmed amounts consistent with this definition are shown in Table 1. Divestiture receipts in foreign exchange are those recorded as such in the Bank of
Ghana's Cash Flow.

17. The automatic adjustment formula for petroleum prices, which was implemented in June 2001 and will operate continuously during the pogram period, is defined to pass through to ex-refinery prices the net cedi cost of refined petroleum product imports to ensure full cost recovery at the Tema Oil Refinery (including financial charges, except charges on debt subject to assumption by the government in 2001).

Adjusters

18. Deviations in official external program support, external debt service payments, and divestiture receipts from the amounts programmed in Table 1 will trigger adjusters for domestic financing of government, net domestic assets of the Bank of Ghana and net international reserves as indicated below.

19. Ceilings on net domestic financing (NDF) of the government and net domestic assets (NDA) of the Bank of Ghana. Monthly differences between projected and actual official external program support, external debt service payments, and divestiture receipts in foreign exchange will be converted to cedis at the actual monthly exchange rate and cumulated to the test date. The ceilings on net domestic financing of government and NDA will be reduced by the sum of (i) excess official external program support; (ii) excess divestiture receipts; and (iii) the shortfall in external debt service payments; all measured cumulatively. The adjustment to the ceiling on the NDA of the Bank of Ghana with respect to deviations in divestiture receipts will apply only to foreign exchange receipts. The ceilings will be increased by 100 percent of any cumulative shortfall in official external program support or excess in external debt service, but will not be adjusted for a shortfall in divestiture receipts. The upward adjustment is capped at the equivalent of US$50 million, converted to cedis at actual exchange rates.

20. Floor on net international reserves (NIR) of the Bank of Ghana. Quarterly differences between projected and actual official external program support, external debt service payments, and divestiture receipts in foreign exchange will be converted to U.S. dollars at the actual exchange rates prevailing at the test date. The floor on NIR will be raised by the sum of (i) excess official external program support; (ii) excess divestiture receipts in foreign exchange; and (iii) any shortfall in external debt service payments. The floor will be lowered by 100 percent of any shortfall in official external program support or excess in external debt service payments, but will not be adjusted for any shortfall in divestiture receipts. The downward adjustment is capped at the equivalent of US$50 million.

External Debt and Debt Service

21. To improve the transparency and accountability of external debt management, the Minister of Finance has written to the Controller Accountant General (CAGD) and the Governor of the Bank of Ghana setting down the formal procedures for settlement of debt and specifying the functions that the CAGD and the Bank of Ghana are expected to fulfill in carrying out those procedures. In addition, the following measures have been initiated and will be maintained:

a) All Ministries, Departments and Agencies (MDA) have been informed that the Aid and Debt Management Unit (ADMU) in the Ministry of Finance is the only entity authorized to contract or guarantee external debt, and all leases with a total value above US$ 100,000 should be submitted to ADMU for authorization.

b) The Minister of Finance has sent a circular to all donor desks officers in the Minister of Finance requesting that arrangements be put in place to ensure that the ADMU is informed of all correspondence with creditors, including the latest information on disbursements and project financing developments and any notices of payment due. All new loan documents should also state clearly that the ADMU is the main initial point of contact for settlement of all debt obligations.

c) Formal procedures have been established requesting donors and creditors to confirm with ADMU debt payment obligations - including for government guaranteed obligations - in advance of payment due dates.

d) Formal delegations have been put in place in the Ministry of Finance and at the CAGD to ensure that an absence of sufficient signing authority does not delay payment requests. In addition, a register will be kept of the timing of formal debt payment actions. This register should be signed by the various institutions involved in the payment of external debt.

e) In the event that a shortage of foreign exchange results in a queuing of debt service obligations at the Bank of Ghana, delaying payments beyond their due dates, the Ministry of Finance is responsible for issuing any instructions needed to revise payment priorities and for maintaining a record of payment arrears. Formal reporting and follow-up procedures have been established for the Bank of Ghana to confirm the transactions to CAGD and the ADMU in the MOF on a daily basis. These reports contain information on the transactions completed as requested, transactions previously queued and paid and transactions added to the queue. These reports are copied to both the governor of the Bank of Ghana and the Minister of Finance and his senior officials.

f) The procedures for verifying data to the Fund have been formalized, so that a senior officer from the Bank of Ghana has been formally delegated with the responsibility for the compilation and verification of data on program conditionality to be reported to the Fund. Formal reconciliation procedures to verify both the derivation of data reported to the Fund and the Bank of Ghana internal audit procedures have been amended to include a periodic check that procedures are followed.