Ghana—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding


December 3, 2003

Memorandum of Economic and Financial Policies of the Government of Ghana for 2003–04

December 3, 2003

I. Introduction

1. The Ghana Poverty Reduction Strategy (GPRS), which was finalized in February 2003, defined the government's economic objectives and policy agenda for 2003-05. The implementation of this strategy is receiving broad-based support from the international community. Consistent with the goals established in the GPRS, this memorandum updates our macroeconomic framework and structural reform agenda for the remainder of 2003, and outlines a fiscal framework for the 2004 budget, which is currently under preparation. Our detailed policy agenda for 2004 will be set out at the time of the second review under the PRGF arrangement, together with our annual progress report on implementation of the GPRS. Subject to continued satisfactory performance under the PRGF arrangement and implementation of other applicable conditions, we hope that Ghana will attain the completion point under the enhanced HIPC Initiative around mid-2004.

II. Program Performance During 2003

2. Macroeconomic policy implementation during the first half of this year was strong, and all quantitative and structural performance criteria through end-June 2003 were observed:

• Although there were some delays in implementing the new measures approved by Parliament as part of the 2003 budget, underlying fiscal revenues exceeded expectations, while expenditures were kept within budget ceilings. This contributed to a net repayment of domestic government debt equivalent to 0.8 percent of GDP during the first half of the year (2½ percent of GDP better than programmed).
  
  
• Following the jump in inflation in early 2003, associated with a 90 percent increase in petroleum prices, monthly inflation subsided in line with program expectations. The 12-month CPI inflation rate was 26.8 percent in September, down from a peak of 30 percent in April. During the first half of 2003, broad money expanded at an annual rate of only 9 percent, while reserve money contracted.
  
  
• At end-June, the Bank of Ghana's net international reserves exceeded the program target by US$211 million, even after adjusting for larger-than-expected donor inflows, thanks in part to a bumper cocoa crop.

3. On the structural reform agenda:

• In the face of strong public opposition, the government announced on August 15 that it had suspended the sale of a majority interest in Ghana Commercial Bank (GCB) to a strategic investor, to allow time to consider other possible options.

a. The prices of domestic petroleum products, electricity, and water remained in line with the established automatic formulas through end-June 2003, without need for adjustments. Beginning in August (July in the case of electricity and water), the pricing formulas indicated the need for upward adjustments in these prices, but the adjustments were temporarily delayed, pending an examination of continuing losses by the Tema Oil Refinery (TOR) and the public utilities.

b. The new cash management system has contributed to improved expenditure control in 2003. Expenditures were held within budget ceilings, and the monthly "fiscal early warning" reports—which were produced on schedule—served their intended purpose in flagging to Cabinet an incipient overrun in the education sector's wage bill. Technical problems, however, were encountered in the rollout of the automated budget accounting system (BPEMS), which contributed to continuing difficulties in producing fully reconciled budget outturn data within eight weeks of month's end.

c. Progress was made with regard to the planned divestiture of government stakes in a number of joint venture enterprises, with collection during the first half year of about half of the proceeds targeted for 2003.

III. The Program for 2003-04

A. Growth and Inflation Objectives

4. The government is maintaining its objectives for real GDP growth in 2003 (4.7 percent) and 2004 (5.0 percent). We also remain committed to bringing 12-month CPI inflation down to 22 percent by end-2003, and to single digits in 2004, while raising our goal for the buildup in net international reserves at the Bank of Ghana.

B. Monetary Policy

5. To achieve the inflation objective, the Bank of Ghana intends to keep the pace of monetary expansion within the original program targets. This implies bringing the 12-month growth rate of broad money (excluding foreign currency deposits) down from 44 percent at end-June 2003 to around 25 percent by end-December 2003. The intermediate goal of 24 percent growth in reserve money (excluding banks' foreign currency deposits) during 2003 will be adhered to in support of this objective.

6. In order to secure a desired buildup in net international reserves of at least US$378 million in 2003 (up from a previously targeted US$130 million), the central bank's net domestic assets, calculated at the program exchange rate, will be reduced by not less than ¢1,857 billion in the year to December 31, 2003. The corresponding quarterly targets are shown in Table I.1. The Bank of Ghana will use open market and repurchase operations, and adjustments in its prime rate as necessary, to achieve its monetary objectives.

C. Fiscal Policy

7. The medium-term framework underlying the GPRS and the PRGF-supported program aims at halving the domestic debt-GDP ratio by end-2005 from its end-2002 level. To achieve this, the medium-term fiscal program envisages zero net domestic financing in 2003, consistent with the original program, and net domestic debt repayments of 2-2½ percent of GDP in 2004 and 2005.

8. Despite lower-than-programmed yields from some of the new revenue measures introduced in the 2003 budget, and the expectation of a modest overrun on the government wage bill, the outlook for this year's fiscal program remains broadly on track:

• Improved underlying tax revenue performance, reflecting in part intensified efforts to strengthen compliance, is expected to broadly outweigh lower receipts from the new revenue measures and the adverse impact on petroleum-related revenues of lower-than-expected demand for petroleum products. Consistent with the revised revenue assumptions, we intend in November 2003 to begin the new timber auctions that were envisaged in the 2003 budget.
  
  
• The wage bill is projected to overshoot its target by just under 2½ percent (0.1 percent of GDP), most of which is attributable to salaries for some 30,000 staff in the education sector who were not covered in the budget calculations but who were subsequently validated. The revised nominal wage target for 2003 is ¢5,576 billion, up from ¢5,450 billion in the original program.
  
  
• Delayed adjustment of petroleum product prices and electricity and water tariffs will require additional budget subsidies to TOR and the utility companies totaling ¢574 billion, while VRA requires additional government assistance totaling ¢396 billion to clear the company's external arrears. Of these amounts, ¢638 billion will be paid in 2003 and the remainder in 2004.
  
  
• Expenditures on goods and services and domestically financed capital projects are expected to be broadly in line with the original program, to ensure funding of the government's GPRS priorities. Payments into the Ghana Education Trust Fund are now being made with a one month rather than a one quarter lag, implying an additional ¢130 billion in transfers to this fund in 2003.
  
  
• Based on a verification of domestic payments arrears outstanding at end-2002, the government now expects to clear more arrears in 2003 than planned at the time of the budget. These comprise settlement of (i) ¢240 billion in road sector arrears (¢20 billion more than planned); (ii) ¢97 billion cedis to the District Assembly Common Fund and the Ghana Education Trust Fund, in line with the budget assumption, and (iii) ¢294 billion in nonroad nonstatutory fund arrears, up from ¢100 billion planned in the budget.
  
  
• Current estimates suggest that total poverty-related expenditures are likely to reach almost ¢4,500 billion (6.9 percent of GDP) in 2003, slightly above the program target.

9. The budget appropriation approved by Parliament in March 2003 was based on a lower inflation assumption than the fiscal framework underlying the program. The government therefore submitted to Parliament a request for a supplementary appropriation that is in line with the fiscal framework set out in this memorandum, so as to ensure that the expenditures envisaged in the program for 2003 can be executed, and Parliament approved this appropriation on November 5, 2003. The government will continue to monitor budget implementation closely, and if necessary will adjust non-poverty-related expenditures to ensure that the target of zero net domestic financing in 2003 is not exceeded.

10. The fiscal outlook for 2004 and the medium term should allow the government's expenditure needs, as envisaged in the GPRS, to be met in full, while adhering to the GPRS target path for domestic debt reduction:

• The targeted ratio of revenues (excluding grants) to GDP in 2004 remains in line with the GPRS, at around 22 ½ percent. The projections assume implementation of the NHIL in June 2004, via legislative instrument.
  
  
• The 2004 budget will incorporate a wage bill of ¢6,632 billion, which is equivalent to 8½ percent of projected GDP. If the timing of the 2004 salary increase for government workers is similar to that in 2003, this would allow for an average salary increase of about 19 percent.
  
  
• Budgetary subsidies to public enterprises in 2004 will be limited to ¢392 billion, including ¢60 billion needed to cover the cost of preferential utility tariffs for the poorest consumers.
  
  
• Consistent with spending plans under the GPRS, domestic capital expenditure will increase by around 0.7 percent of GDP in 2004, to 6 percent of GDP.
  
  
• The government will remain current on all transfers to the GETF and the DACF, as well as on other expenditure commitments, and will pay the ¢97 billion due under the medium-term plan for eliminating arrears to the statutory funds.
  
  
• The 2004 budget will incorporate a further increase in poverty related expenditure as a share of GDP.

11. On August 26, 2003, Parliament approved the legislative framework for a new national health insurance scheme (NHIS). The scheme is intended to provide basic health service to all Ghanaians, while replacing the "cash and carry" system of user fees at the point of delivery. It will be funded through premium payments to mutual health organizations (MHOs) to be established in each district, and subsidy payments from a national health insurance fund (NHIF) to reimburse MHOs for the cost of exemptions granted to the poor. The NHIF, which is expected to begin operations in July 2004, will receive funds from a National Health Insurance Levy of 2½ percent on goods and services, and 2½ percent of workers' salaries out of their current contribution of 17½ percent to SSNIT. The NHIS legislation stipulates that the council administering the fund shall annually submit to Parliament the formula for distributing subsidies to MHOs.

12. The new scheme is projected to result in a net addition to aggregate budgetary health sector expenditure of around ¢50 billion per year, relative to the amounts assumed in the medium-term fiscal framework underlying the GPRS. In elaborating the details of the scheme over the coming months, the government will work, together with donors participating in the health sector wide approach (SWAP), to ensure that its design will be consistent with the program's expenditure assumptions, and will incorporate adequate safeguards to manage the budgetary impact on a continuing basis.

13. The government stands ready during 2004 to (i) take appropriate measures, as and when necessary, to preserve the program's revenue objective; and (ii) curtail nonpoverty-related expenditures if needed to stay within the program target for net domestic financing.

D. Public Expenditure Management and Tax Administration

14. An enhanced commitment control and cash management system, designed with technical assistance from the IMF and run on a pilot basis in a number of ministries, departments and agencies (MDAs) this year, will be put in place in all MDAs by January 1, 2004. This system should reinforce hard budgets constraints at the MDA level and guard against the buildup of arrears.

15. The government will also act on the results of the recently completed public sector census, and remove any irregular names from the payroll by March 31, 2004. Other public expenditure management reforms expected in 2004 include:

• alignment of the functional classification of expenditure with GFS;
  
  
• simplification of the medium-term expenditure framework (MTEF);
  
  
• further efforts, especially within the Multi Donor Budget Support (MDBS) framework, to incorporate all donor project resources and MDAs' internally generated funds into the budget;
  
  
• improved and more timely reconciliation of treasury and banking data to allow for the production of accounts 8 weeks after the end of the month;
  
  
• rollout of the budget and public expenditure management system (BPEMS) to three further MDAs (health, education, and roads and transport); and
  
  
• the closure, by January 1, 2004, of all overdraft accounts at the Bank of Ghana, as well as government accounts that have been dormant for more than one year.

16. The Large Taxpayers' Unit (LTU) will be fully operational in early 2004, administering the tax accounts of more than 350 large taxpayers on a unified basis. This will contribute to further efficiency gains in revenue administration which are expected to be on the order of 5 percent.

E. Public Enterprise Reform

17. Petroleum pricing over the years has resulted in an underrecovery of costs by TOR, as a result of which, by end-2002, the refinery had incurred debts of over ¢3.5 trillion (7 percent of GDP). The indebtedness of TOR has imposed a heavy burden on the budget, in the form of subsidies and interest on debt assumed by the government. This has had adverse distributional implications, by absorbing resources that could have been devoted to the poverty reduction priorities in the GPRS. Furthermore, over 90 percent of TOR's current debt (i.e., excluding the portion taken over by government) is owed to GCB, posing a systemic risk to the banking system. Against this background, the government has decided to accelerate the program for deregulation of the petroleum sector that was previously approved by Cabinet. The program will:

• promote competition in petroleum product marketing, including by providing scope for new entrants;
  
  
• allow private sector operators to import crude oil and/or refined petroleum products on their own account; TOR will stand ready to refine its own crude oil or that of other registered importers (on a fee basis), for the domestic market or for export; and
  
  
• allow petroleum prices to be market determined, through free competition among the oil marketing companies (OMCs).

18. The first phase of the deregulation process will involve the liberalization of the import of finished petroleum products by the OMCs in April 2004. The plans for the deregulation program will be announced in the 2004 budget, and petroleum prices will be liberalized by end-July 2004. Government has started negotiations with the OMCs on new operating arrangements that will apply under deregulation. A National Petroleum Planning Committee has been established with representation from the OMCs, Ministry of Energy, Ministry of Finance and Economic Planning, National Petroleum Tender Board, and Bank of Ghana to advise on the process of deregulation. Government will also undertake a comprehensive program of public education and awareness. During the transition period, government will ensure that domestic petroleum prices converge to international market levels, to avoid large adjustments immediately after deregulation. To this end, prices will be aligned with the automatic adjustment formula, as specified in the TMU, by January 30, 2004, and realigned by April 30, 2004.

19. The government remains committed to achieving and maintaining full cost recovery in electricity and water pricing, as well as to improving the efficiency of the utility companies. Accordingly:

• Effective October 1 and November 1, 2003, electricity and water tariffs were increased in cedi terms by 6 percent and 10 percent, respectively. These adjustments were in line with the automatic pricing formulas, and passed through the effects of higher world prices for petroleum products, the depreciation of the cedi, and changes in the generation mix for producing electricity from hydro and thermal sources.
  
  
• Ghana's state energy companies have been in discussions with the Ministry of Energy and the World Bank on ways to improve their financial and operating performance. These will include: (i) technical improvements to raise plant efficiency, reliability, and utilization; (ii) collection improvements, including by restricting customer lines of credit, better monitoring of bulk customers, and prosecuting nonpayers; and (iii) stricter enforcement of performance targets contracted with company managers.
  
  
• Cross debts among the entities—the Volta River Authority, the Electricity Company of Ghana, the Ghana Water Company Limited, and Tema Oil Refinery—and with government have obscured the true financial picture of the companies and inhibited the development of a viable operating plan. Accordingly, the Auditor General's Department undertook and completed a study to determine the size of all cross debts, and with, approval from the Ministry of Finance and Economic Planning, these debts will be settled by end-December 2003.
  
  
• Work is under way to install prepayment meters, to help reduce nontechnical revenue losses in the electricity and water sectors.

20. The pricing formulas for electricity and water will continue to be administered directly by the Public Utilities Regulatory Commission (PURC). The PURC has the mandate and independent authority to make quarterly price adjustments according to the formulas without further approval from government ministries, and this independence will henceforth be strictly observed. Electricity and water tariffs will be fully aligned with their respective automatic pricing formulas, which are specified in the TMU, as of January 30, 2004 and April 30, 2004.

21. The government remains committed to bringing new capital and strengthened management to GCB in order to improve the bank's efficiency and enhance its contribution to the Ghanaian economy. Cabinet has approved in principle a strategy that aims at: (i) raising additional resources through a flotation of new shares in GCB on the Ghana Stock exchange; and (ii) putting out to competitive tender a management contract for the bank, with terms that require the managers to improve GCB's financial performance and service delivery. We will announce further details of this plan, including a broad timetable for implementation, in the 2004 budget statement. In the interim, to contain the impact of TOR's finances on GCB's balance sheet, a program ceiling (performance criterion) has been established on net bank borrowing by TOR.

22. By the end of 2004, the government intends to complete action on the divestiture of state holdings in joint venture companies. These and other asset sales are expected to yield around ¢425 billion in 2004.

F. Financial Sector and Land Reform

23. In the course of 2003-04, the government will strive to obtain Parliamentary approval for:

• the Banking Bill, to reinforce the central bank's powers to conduct effective supervision of the banking system;
  
  
• the Payments System Bill and the Bills and Cheques Bill, to modernize the legal framework for the payments system; and
  
  
• the Insurance Bill, to strengthen the regulatory framework for insurance companies operating in Ghana.

We will also submit to Parliament an Anti-Money Laundering Bill, seeking its enactment before end-2004, and will initiate legislation in the following areas:

• establishment of a legal framework for credit rating agencies, to enhance the access of individuals and small businesses to credit; and
  
  
• corporate insolvency and a new Companies Code.

24. If, as envisaged, the supply of treasury bills is sharply curtailed over the medium term, commercial banks will be looking to expand their lending to the private sector. In this environment, while banking supervision may need to be enhanced to ensure that banks are adequately managing their additional balance sheet risk, the level of secondary reserve requirements (35 percent) could become a binding constraint. The Bank of Ghana will consider what steps may be needed in these areas, and its plan of action will be assessed at the time of the second review under the PRGF arrangement.

25. The lack of an adequate land registry system impedes foreign investment and limits the contribution which the financial system can make to growth. Improvements in this area call for centralization, simplification, and improvement in the efficiency of land titling services; timely adjudication of the backlog of land disputes; and introduction of land auctions and title insurance to alleviate corruption, reduce delays in land procurement, and enable the use of land for collateral purposes. In consultation with the World Bank, the government will draw up a concrete plan to address land registration issues, for implementation beginning in early 2004.

26. Work is under way on the establishment of a computerized real-time interbank market for foreign exchange. The FIRST Initiative has agreed to provide technical assistance, under IMF auspices, to help the Bank of Ghana complete preparations for launch during 2004.

G. External Sector Policies

27. The government will strive to ensure that all necessary actions are fully implemented, notably in the areas of public expenditure management and reform of the civil service, to facilitate timely donor disbursements under the PRSC and MDBS. The government will continue negotiations aimed at securing relief under the enhanced HIPC Initiative from non-Paris Club creditors and completing bilateral agreements with Paris Club creditors.

28. The Bank of Ghana will continue to allow the cedi exchange rate to be market determined, limiting interventions to smoothing short-term fluctuations in the exchange market and ensuring achievement of the targeted buildup of net international reserves.

29. The government reiterates its commitment not to implement the tariff measures proposed in the 2003 budget during the period of the PRGF arrangement.

H. Good Governance and Statistical Transparency

30. During 2003-04, the government will:

• take steps to ensure full staffing of internal audit positions (a HIPC completion point trigger);
  
  
• seek passage of the Procurement Bill, to pave the way for establishment of a regulatory and oversight body to implement the new code (also a HIPC completion point trigger);
  
  
• provide regular government reports to Parliament on the implementation of the budget and GPRS, and strengthen Parliament's capacity to exercise oversight; and
  
  
• provide adequate resources in the 2004 budget to ensure the continued operation of the Fast Track Court, and reestablish commercial courts with donor assistance.

31. The government notes that the Bank of Ghana has conducted and published an external audit of its 2002 financial statements in accordance with International Accounting Standards. In response to a full safeguards assessment by the IMF in mid-2003, the Bank of Ghana intends to implement the recommendations contained in the safeguards assessment report. These include formal adoption of IAS as the Bank's accounting framework, and review by the internal audit department of data reported to the Fund.

32. The government is committed to the production of timely and accurate statistics in support of transparency and to allow a better assessment of developments in the economy. In the context of work to rebase the CPI, a number of data corrections are being made with the aim of publishing the revised series (using 2002 weights) beginning in January 2004. Work has been proceeding in parallel to re-base and revise the national accounts, and the new data are expected to be published during the first half of 2004.

IV. Program Monitoring

33. Technical memorandum of understanding. The program will be monitored using the definitions, data sources, and frequency of monitoring set out in the accompanying TMU. The government will make available to Fund staff all core data, appropriately reconciled and on a timely basis, as specified in the TMU.

34. Prior actions. The government will undertake a number of actions prior to the IMF Board meeting to consider the completion of the first review under the PRGF arrangement, in order to ensure effective implementation of the economic program described in this memorandum (Table I.2).

35. Performance criteria. Table I.1 shows the quantitative performance criteria and benchmarks for end-December 2003, with quarterly indicative benchmarks for March, June, September, and December 2004. The end-June 2004 targets will be converted to performance criteria at the time of the second review. Structural performance criteria and benchmarks with corresponding dates are identified in Table I.2. In addition, the nonaccumulation of external payment 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. The phasing and conditions for further disbursements during the second year of the arrangement shall be established at the time of the second review.

36. Program review. The second review under the PRGF arrangement will be completed by May 14, 2004. This review will focus on: (i) implementation of the public expenditure management and control system; (ii) the design and implementation of the energy and utility pricing formulas; (iii) measures to strengthen the finances of key public enterprises; and (iv) the next phase of reforms of the financial sector.

GHANA
Technical Memorandum of Understanding

1. This technical note contains definitions and adjuster mechanisms that are intended to clarify the measurement of items in Table I.1, Quantitative Performance Criteria, PRGF Arrangement, 2003, 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 December 31, 2002.

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 (except for select data for which the data reporting lag is explicitly specified in Table I.3). 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 as well as all special funds (the Education Trust Fund, the Road Fund, the District Assembly Common Fund) and various subvented and other government agencies that are classified as government in the Bank of Ghana (BOG) Statement of Accounts (SOA). SSNIT and public enterprises, including Cocobod, are excluded from the definition of government.

4. Government domestic revenue comprises all tax and non-tax revenues of government (in domestic and foreign currency), excluding foreign grants and divestiture receipts. Revenue will be measured on a cash basis as gross inflows to government uncommitted treasury collections accounts (as reported by the BOG).

5. Government domestic expenditure comprises all spending from uncommitted accounts for Items 1-4, as captured by the accounts of the Controller Accountant General's Department (CAGD). Reporting will be based on the current NETS accounting system, and its associated 15-digit chart of accounts, and will be fully reconciled with BOG bank statements on spending (outflows) from the 42 newly created MDA Operational Accounts (plus any residual use of existing Treasury Drawing/overdraft accounts, with these latter accounts to be closed by end-2003). Expenditure will also be verified by comparing it to accounts produced by the BPEMS accounting system, until such time as the latter system becomes fully operational.

6. Within the above total, poverty-related expenditures refer to those expenditures identified in Table 6 of the Decision Point Document for the Enhanced Heavily Indebted Poor Countries Initiative. Budgeted poverty spending for these categories will be taken from each year's final appropriations bill, and will include spending financed by government, donors, and internally generated funds. Actual poverty-related spending will be identified using the last three digits of the 15-digit chart of accounts of CAGD's current NETS system, and the sub-component which is financed by HIPC relief. These data will be supplemented with that proportion of transfers to the District Assembly Common Fund, Ghana Educational Trust Fund, and Road Fund which are deemed by those entities to be poverty-related. Accordingly, actual poverty spending will exclude some donor-supported expenditure not currently captured by CAGD (including, among others, the pooled donor health fund).

7. Net domestic financing (NDF) of government is defined as the change in net credit to government by the banking system (i.e., the Bank of Ghana plus deposit money banks) 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, the Ghana Water Company Limited, and/or in connection with the recapitalization of the Bank of Ghana. Such credit will also exclude Treasury bills issued for Open Market Operations purposes from January 1, 2003 onward (the holdings of which are excluded from the BOG Treasury Department's Debt Registry of central government securities, and the proceeds of which are sterilized in deposits held as other BOG liabilities, as defined in the Monetary Template provided to the IMF on December 3, 2003). Outstanding net credit to the government by the Bank of Ghana is comprised of the sum of claims on government (SOA codes 0401 and 050101-4) less government deposits (1101 including the main HIPC receiving account, and 1202) as defined in the Monetary Template). Outstanding net credit by deposit money banks is comprised of DMB holdings of government securities at cost of purchase value, as reported by the BOG Treasury Department's Debt Registry, plus overdrafts less government deposits as reported by DMBs in the revised BSD2 report forms (and defined in the Monetary Template, which also contains the revised reporting format for DMBs). Nonbank financing will be the difference between total net cash receipts to the Treasury Main Cash Account (issues/redemptions account when it becomes operational) from the sale/repurchase of government securities, less the corresponding net cash value received from the BOG and DMBs as indicated on the Debt Registry by holder at discount value. For each test date, any adjustment by the BOG to the data reported by individual DMBs, on account of their misclassification of government or for other reasons, will be reported to the Fund.

8. The domestic primary balance is defined as the difference between government domestic revenue and noninterest government expenditure as reported by the CAGD (i.e., payment vouchers issued for expenditures on items 1-4). It will exclude foreign-financed capital expenditure, for which data are reported by the Aid and Debt Management Unit. The measurement will be on a cash basis, with any positive (negative) discrepancy between the above- and below-the-line measure of the overall balance being added to (subtracted from) the measure of the domestic primary balance (including unspent balances remaining in committed accounts).

9. Net domestic credit to Tema Oil Refinery (TOR) from the banking system will be defined as total advances to TOR by deposit money banks, less TOR's deposits with deposit money banks, and will be reported by the Research Department of the Bank of Ghana.

10. The program exchange rate for the purposes of this memorandum will be 8504 cedis per dollar, i.e., the simple average of the buying and selling interbank transactions rates for December 31, 2002.

11. Reserve money is defined as the sum of currency in circulation (BOG statement of accounts codes 901 plus 902), plus cedi denominated currency deposits at the Bank of Ghana (excluding accounts which are overdrawn, blocked, or owned by banks in liquidation) of the following entities: commercial banks, other financial institutions, private sector entities, public institutions, and public enterprises. A more detailed listing of accounts to be included in the measure of reserve money is contained in the Monetary Template referred to above. If aggregate reserves fall below the legal reserve requirement of 9 percent of bank deposits (as reported in the quarterly STCRBB), then reserve money will be adjusted upward to the extent of any shortfall in compliance with that reserve requirement.

12. Net foreign assets (NFA) are defined in the monetary survey as short and long term foreign assets minus liabilities of the Bank of Ghana which are contracted with non-residents. Short-term foreign assets include: monetary gold (valued at the spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserve position and HIPC trust investment in the IMF, the HIPC umbrella SDR account (all as reported by the IMF), foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, and other positive short-term or time deposits. Short-term foreign liabilities include foreign currency liabilities contracted by the Bank of Ghana at original maturities of one year or less (including overdrafts), outstanding liabilities to the IMF, and deposits of international institutions at the BOG. Long-term foreign assets and liabilities are comprised of: other foreign assets (303), investments abroad (a subset of 60201), other long-term liabilities to nonresidents (a subset of 1103), and bilateral payment agreements (305). All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. A more detailed listing of accounts to be included in the measure of NFA is contained in the Monetary Template referred to above.

13. Net international reserves (NIR) of the Bank of Ghana are defined for program monitoring purposes and in the balance of payments as short-term foreign assets of the Bank of Ghana, minus short-term external liabilities. To the extent that short-term foreign assets are not fully convertible external assets readily available to and controlled by the Bank of Ghana (i.e., they are pledged or otherwise encumbered external assets, including, but not limited to, the HIPC umbrella SDR account, and assets used as collateral or guarantees for third party liabilities such as the two identified encumbered accounts held abroad totaling US$9.3 million as of June 2003) these will be excluded from the definition of NIR. Net international reserves are also defined to include net swap transactions (receivable less payable), and exclude all positive foreign currency deposits at the BOG held by deposit money banks, public institutions, nonfinancial public enterprises, other financial institutions, and the private sector. All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. A more detailed listing of accounts to be included in the measure of NIR is contained in the Monetary Template referred to above.

14. Net domestic assets of the Bank of Ghana are defined as the difference between reserve money and net foreign assets of the Bank of Ghana, excluding the HIPC Umbrella SDR account, converted from U.S. dollars to cedis at the program exchange rate.

15. The performance criterion on short-term external debt refers to the outstanding stock of external debt with original maturity of one year or less, including overdraft positions and debt owed or guaranteed by the government or the Bank of Ghana.¹ Data on the Bank of Ghana's short-term external debt are those reported from the statement of accounts template as short-term liabilities to non-resident commercial banks (1201 plus 301 overdrafts plus Crown Agent). The limit on short-term external debt will exclude US$5.5 million in overdrafts with correspondent banks which are in dispute, until such time as these assets are re-classified.

16. The performance criterion on nonconcessional medium- and long-term external debt (Table I.1) refers to the contracting or guaranteeing of external debt with original maturity of more than one year by the government or Bank of Ghana.² 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.

17. The stock of payment arrears in the road sector will include any arrear on a duly certified expenditure commitment that was not paid during a period of 90 days after the date the bill was issued. Any arrear in foreign currency will be converted into cedi at the actual exchange rate prevailing at the end of period date. Data on the stock of road arrears will be reported to the IMF staff monthly (with the lag specified in Table I.3) by the monitoring and evaluation department of the Ministry of Roads and Highways. At end-October 2002 the stock of road arrears was recognized to be 219.8 billion, and is expected to be paid down according to the quarterly schedule in Table I.1, which will be an indicative benchmark under the program.

18. External payment arrears occur when undisputed interest or amortization payments of the government of Ghana are not made within the terms of the debt contract, or in conformity with the terms for interim relief provided under the enhanced HIPC Initiative and the deferral agreed with the Paris Club on December 10, 2001. This is a continuous criterion.

19. 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, and other exceptional financing. Amounts assumed in the program consistent with this definition are shown in the memorandum item entitled "external program support" of Table I.1.

20. Divestiture receipts are payments received by the government (in domestic and foreign currency) in connection with the sale of state assets. The programmed amounts consistent with this definition are shown in Table I.1. Divestiture receipts in foreign exchange are those recorded as such in the Bank of Ghana's Cash Flow; domestic receipts are the difference between total divestiture receipts received by the budget, and receipts in foreign exchange.

21. Automatic adjustment formulas for the pricing of petroleum, electricity and water are defined to ensure full cost recovery at Ghana's state-owned oil refinery (TOR) and utilities by passing on to consumers changes in the costs of exogenously determined inputs including crude oil, exchange rates, and the electricity generation mix. In the case of petroleum products, the formula (see Table I.4) will be calculated by the tenth of each month, using an average of representative petroleum product prices (fob Mediterranean, from Platt's Oilgram) for the previous three calendar months for each of the following products─premium gasoline, kerosene, gas oil, residual fuel oil, and liquefied petroleum gas. The formula will then add TOR's shipping, insurance, and related charges, to arrive at a set of ex-refinery prices at full-cost recovery levels. Premix will be computed as a weighted average of premium gasoline (96.67 percent) and engine oil (3.33 percent) at full cost recovery prices. All full-cost recovery prices, and the prices currently charged by TOR, will each be multiplied by TOR's sales volumes for those products for the previous month, and the resulting actual and full-cost recovery sales values summed across products. A price adjustment will be deemed to be triggered, either upward or downward, when the sum of actual values differs from the sum of full-cost recovery values by more than 2.5 percent. If an adjustment is triggered, prices will need to be raised or lowered such that the summed value of the new prices times their volumes equals the summed full cost recovery value. The National Petroleum Tender Board will bring the ceilings on ex-refinery and ex-pump prices in line with the formula at a minimum once a quarter, on or before January 30 and April 30, 2004. Maximum ex-pump prices will be set to reflect new ex-refinery prices plus the full pass through of all taxes, levies, and distributor margins as indicated in Table I.4. Whether or not price changes are triggered, NPTB will inform TOR, oil marketing companies, and the public, including the IMF, of the results of the formula's calculations as set out in Table I.4 on the above test dates.

22. The quarterly electricity and water tariffs will be announced publicly at the latest by the end of the first month of each quarter, starting January 2004, and implemented retroactively to the beginning of the month. The electricity tariffs will be calculated according to the formula in Table I.5, and the water tariffs will be calculated subsequently according to the formula in Table I.6, using data from the specified sources. Projected variables in the formulas will be calculated as follows:

(i) for the price of Nigerian Bonny Light crude oil in the coming quarter, the futures prices on the last working day of the current quarter will be used, as quoted on the NYMEX, for deliveries of Light Sweet Crude in each month of the coming quarter, averaged across the three months, plus US$0.15 for the premium of Bonny Light over Light Sweet.

(ii) for the U.S. inflation rate in the coming quarter, the recorded change in the U.S. consumer price index during the latest three-month period for which data are available in International Financial Statistics will be used.

(iii) for the U.S. dollar-cedi exchange rate in the coming quarter, the interbank transaction rate quoted by the Bank of Ghana for the last day of the second month in the preceding quarter will be used, multiplied by the percentage change in that rate from the last day of the second month in the quarter before that.

(iv) the percentage contribution of hydro power to the generation mix will be assumed not to exceed 50 percent.

Adjusters

23. Deviations in official external program support, external debt service payments, and divestiture receipts from the amounts programmed in Table I.1 will trigger adjusters for domestic financing of government, net domestic assets of the Bank of Ghana and net international reserves as indicated below. These and other adjusters as set out below will be measured cumulatively from the beginning of 2003.

24. 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. 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. Both 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$75 million, converted to cedis at actual exchange rates.

25. 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$75 million.

26. Oil price adjuster. NIR floors will be adjusted downward, and NDA ceilings upward, when world oil prices exceed the baseline price path assumed in the program. The floor on NIR will be reduced by the cumulative quarterly difference (if positive) between actual oil prices and projected prices as defined in Table I.1, multiplied by a coefficient of 20 (a multiplier which quantifies the approximate impact that a US$1 rise in oil prices has on the value of oil imports in Ghana) on an annual basis. For September the adjuster will be computed as the difference (if positive) between the average actual and forecast prices during the first quarter, times a coefficient of 20*(3/4); for December, the adjuster will be the difference (if positive) between the half-year actual and forecast prices, times a coefficient of 20. The adjuster at all test dates will be capped at US$30 million. The ceiling on the NDA of the Bank of Ghana will be raised by the same adjuster amounts as for NIR, converted to cedis at actual exchange rates, up to a cap equivalent to US$30 million.

Reporting of Data to the IMF

27. The Ministry of Finance, Bank of Ghana, Ministry of Roads and Highways, and Ghana Statistical Service will provide to IMF staff the fiscal, monetary, balance of payments, and real sector data indicated in Table I.3, with the reporting lags set out in that table.

28. Beginning with this technical memorandum, the aggregated balance sheet for deposit money banks is being reported in accordance with the revised BSD2 Report Form, as set out in the Monetary Template referred to above. This new format, among other things, better differentiates banks' reported foreign exchange holdings as between those held with residents (mostly at the BOG) and those held with nonresidents abroad. The first submissions based on the new form were for July 2003. Comparable data from December 1998 to June 2003 have been taken from the 20R report form to provide a comparable back series.

External Data, Debt and Debt Service, and HIPC Relief

29. 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. ADMU will report to the IMF with a lag of not more than one month on the concessionality of all new loans contracted.

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, and to the IMF staff on a monthly basis.

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.

g) Two HIPC accounts have been established at the BOG for the receipt and disbursement of HIPC relief. When each debt service payment falls due, the Government of Ghana (or the BOG for IMF repurchases) will transfer to the HIPC account that proportion of the amount due which, under the terms of the HIPC Initiative, does not have to be paid to the creditor. For debt owed by public enterprises under the HIPC Initiative, the Government of Ghana will transfer to the HIPC account the debt-relieved portion of the debt service payment if the enterprise fails to do so on the due date. ADMU will issue, in advance of the due date, a request for payment to the CAGD indicating the portions due to the creditor and the HIPC account. ADMU will prepare a monthly report indicating for the coming month (i) the total debt service due by creditor, (ii) the amount of HIPC relief on each transaction, as well as (iii) the debt service paid and the transfers to the HIPC account by creditor for the previous month. This report will be provided within 2 weeks of end-month to the CAGD and to the IMF.