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

June 15, 2004

Mr. Rodrigo Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Rato:

The government of Ghana has been implementing a financial and economic program with support from the Fund's Poverty Reduction and Growth Facility (PRGF). Progress under this arrangement has been satisfactory, and we are requesting completion of the second program review and the disbursement of the third loan in an amount equivalent to SDR 26.35 million. In this regard, we are seeking waivers of a quantitative and two structural performance criteria, based on program adjustments and additional measures as described in the attached Memorandum of Economic and Financial Policies (MEFP) for 2004-05.

Specifically, the quantitative performance criterion on net domestic bank credit (ceiling) to the Tema Oil Refinery was not observed at end-December 2003 because of a commercial decision to repay some high-interest short-term external debt that the program assumed would be rolled over; by mid-2004, we expect the refinery's net position with the domestic banking system to be better than was programmed in our December 3, 2003 letter of intent. The structural performance criterion on utility price adjustments was not observed at end-January and end-April 2004 because of favorable changes in the electricity generation mix that allowed full cost recovery to be maintained without the need for higher electricity or water tariffs. With regard to the structural performance criterion on petroleum pricing, we seek a waiver on the basis of replacing the current regime, which has not functioned as intended, with a commitment to establish a new institutional framework for price setting, in the context of comprehensive petroleum sector deregulation legislation. We understand that completion of this review is conditioned upon observance of the five prior actions set forth in Table I.2 of the MEFP.

Macroeconomic performance strengthened significantly during 2003, and we believe that the policies specified in the MEFP provide the basis for sustaining strong growth, lowering inflation, and reducing poverty. We believe that the policies and measures described therein are adequate to achieve these objectives, but stand ready to take additional actions if required. The government will provide the Fund with the information needed to assess progress in implementing the program, and will consult with the Fund on the adoption of any measures that may be appropriate, at the initiative of the government or whenever the Fund staff requests such a consultation.

The government intends to make the contents of this letter and those of the attached MEFP, technical memorandum of understanding, and the staff report for this review available to the public. In this regard, it authorizes the IMF to arrange for them to be posted on the Fund's website, subsequent to Board completion of the review.

Yours sincerely,

/s/ Hon. Yaw Osafo-Maafo, MP Minister of Finance and Economic Planning

/s/ Hon. Paul A. Acquah Governor, Bank of Ghana

Memorandum of Economic and Financial Policies
of the Government of Ghana for 2004-05

I. Introduction

1. In May 2003, the IMF confirmed its support for Ghana's Poverty Reduction Strategy (GPRS) and approved a new arrangement under the Poverty Reduction and Growth Facility (PRGF). We have made satisfactory progress in implementing the program, and this has been reflected in improved macroeconomic performance.

2. Real GDP registered 5.2 percent growth in 2003, slightly higher than previously projected, and above the outcome for 2002. The 12-month inflation rate of 23.6 percent at end-2003 exceeded slightly the program target, but dropped to 11.2 percent in April 2004, and is on track to meet the end-2004 target of 7 percent. The cedi-dollar exchange rate has been relatively stable since mid-2003, and this has helped dampen inflation expectations. Strong foreign exchange inflows from buoyant cocoa and gold exports, as well as personal remittances, allowed for a substantial buildup of gross international reserves to almost 4 months of imports at end-2003, up from less than 2 months' coverage the previous year.

3. Macroeconomic policies have been supportive of rising business confidence. We observed all of the quantitative performance criteria at end-December 2003, except for the ceiling on net domestic bank credit to the Tema Oil Refinery (TOR), the latter due entirely to a commercial decision to repay some high-interest short-term external debt that the program assumed would be rolled over (Table I.1). The domestic primary surplus was 2.1 percent of GDP (compared with 1.8 percent programmed), and there was a modest net domestic debt repayment last year. Fiscal discipline and increasing confidence in monetary policy implementation have helped to lower policy-controlled and other short-term interest rates.

4. Progress has also been made on structural reforms, in particular, in enhancing public expenditure management, strengthening the operating framework of the central bank, and through the adoption of several important pieces of legislation (notably the Banking, Internal Audit, Financial Administration, and Procurement Laws). We have also announced and begun implementing our strategy to strengthen the management of Ghana Commercial Bank (GCB). However, reform of the state-owned utility companies has lagged, and utility and petroleum price adjustments that were called for by the program's automatic pricing formulas — structural performance criteria — were not made as planned in January 2004. In the former case, favorable water conditions in the Akosombo Dam altered the hydro-thermal generation mix, obviating the need for a price increase in electricity or water tariffs. In the latter case, the government decided to refrain from increasing petroleum prices to avoid potential social unrest and instability ahead of the general elections in December. This decision will result in unplanned petroleum subsidies, and we are taking offsetting fiscal measures to maintain the program's domestic debt reduction objective (see below). In addition, we announced the key elements of a new petroleum pricing regime for early 2005, that will give oil marketing companies the freedom to set prices according to a prescribed formula, without prior authorization by any authority or agency. In light of these technical factors and remedial actions, we are seeking waivers for the non-observance of one quantitative and two structural performance criteria.

II. Economic Policies in the Period Ahead

5. Given the favorable outcomes over the past year, we are able to retain or improve upon the medium-term macroeconomic objectives set out in the GPRS. We aim to sustain the pace of economic growth, reduce inflation, and make further inroads against poverty. To this end, we envisage:

• Furthering efforts to consolidate public expenditures, strengthen revenues, and lower domestic debt, with the goal of "crowding-in" private investment;
  
  
• Maintaining the stance of monetary policy to achieve the targeted reduction of inflation and build on the improved external reserve position;
  
  
• Deregulating the petroleum sector and establishing a pricing regime that will credibly remove government influence over (and, hence, responsibility for) such decisions;
  
  
• Accelerating public enterprise reform and encouraging private sector development; and
  
  
• Making further refinements to our poverty reduction strategy, based on the recommendations contained in the first annual GPRS progress report that was completed in May 2004.

A. Fiscal Policy

6. The fiscal stance remains anchored to the goal of reducing domestic debt in 2005 to roughly half the level at end-2002. We have made progress in this regard, and the strategy is already paying dividends in terms of lower interest rates and domestic debt service. The 2004 budget that was approved by parliament is consistent with this objective, and with our commitments under the PRGF arrangement. It provided some modest tax relief, which will have only a marginal impact on the fiscal position this year, including an increase in the minimum tax thresholds for individual tax payers; a reduction of corporate tax rates, effective in 2005; tax holidays for new agro-based enterprises; and a reduction in import duties and value-added tax deferral for some imported raw material and capital goods.

7. Within the overall fiscal framework, we are undertaking some adjustments to accommodate the decision to maintain retail petroleum prices at their current level for the rest of this year. The key elements of the modified fiscal program are as follows:

• The targeted net repayment of domestic debt has been reduced from 2.2 to 1.4 percent of GDP. Higher GDP has made possible some relaxation of the planned fiscal effort without compromising our underlying target for the domestic debt-GDP ratio.
  
  
• The tax revenue ratio will rise to 21.3 percent of GDP this year, which is higher than budgeted, largely on account of a better cocoa harvest and higher projected consumption of petroleum products. We also expect to boost non-tax revenue by as much as 0.5 percent of GDP this year by ensuring that several strong-performing public enterprises (in particular, Cocoa Board, Ghana Ports and Harbors Authority, and the National Communications Authority) remit profits to the budget in line with the requirements of the recently adopted Financial Administration Act (FAA).
  
  
• The public sector wage bill will be limited to ¢6,632 billion (as in the budget), resulting in a small decline as a share of GDP compared with last year. The 15.8 percent wage settlement (effective March 1, 2004) granted to civil servants under the GUSS is consistent with this ceiling; and the settlements with other groups later in the year will likewise be kept within the budget allocation.
  
  
• In light of the need to make room in the budget for an estimated 1.4 percent of GDP in petroleum subsidies, we plan to cut expenditure on goods and services by ¢300 billion, and domestic capital expenditure by ¢223 billion, relative to the 2004 budget. Half of these cuts have been incorporated into the Ministries, Departments, and Agencies (MDAs) cash ceilings that will be issued for the third quarter.
  
  
• If the cost of petroleum price subsidies for the third and fourth quarters of 2004, as calculated using the automatic price adjustment formula specified in the technical memorandum of understanding (TMU), exceeds the programmed amount, the ceilings on net domestic financing for end-September and end-December 2004 will be raised by half of the first ¢200 billion in excess cost, and by the full amount of any excess cost beyond
  ¢200 billion. If the subsidy cost is less than programmed, the net domestic financing ceilings will be unchanged until the subsidy shortfall reaches ¢523 billion, which will allow the spending cuts to be fully reversed; beyond that point, the net domestic financing ceilings will be reduced pari passu. Expenditure ceilings for the fourth quarter of 2004 will be set consistent with the modified financing limits, and monthly expenditures will be monitored closely throughout the remainder of 2004 and adjusted as necessary to ensure that the program limits are observed.
  
  
• Poverty-related expenditures are budgeted to rise to 7 percent of GDP this year, up from 4½ percent of GDP during our first year in office (2001), and we intend to protect these expenditures against any cuts that may be needed to meet the financing ceilings. Reflecting this commitment, we have introduced into the program quarterly indicative floors on poverty-related expenditure for 2004.
  
  
• The revised program provides for interest payments related to a ¢670 billion recapitalization of the Bank of Ghana (BOG), one year ahead of schedule; the aggregate domestic interest bill is expected to remain in line with the budget, however, thanks to lower projected interest rates.

8. By June 15, 2004 we will lay the legislative instrument before Parliament to implement the National Health Insurance Levy (NHIL), which will become effective on August 1, 2004, so as to begin accumulating resources for the successful launch of the new health insurance scheme. The 2004 budget provides adequate resources to finance expected health expenditures this year, but we expect that these resources will need to be augmented in coming years to achieve the Millennium Development Goals (MDGs). In consultation with development partners, we plan during 2004 to review our medium-term health expenditure strategy, taking into account ongoing work on the costing of the MDGs, and reflect the results of this review in the 2005 budget. On current projections, there will be scope gradually to increase domestically financed expenditures (including from the National Health Fund) by around 1 percent of GDP a year over the medium term without compromising our objectives for domestic debt reduction. We would also hope to receive additional donor resources to support our efforts to meet the MDGs.

B. Public Expenditure Management

9. We have undertaken a number of measures to reform public expenditure management that have enhanced the transparency and accountability of government outlays. Indeed, a recent assessment of Ghana's capacity to track poverty-related expenditures (HIPC Initiative Assessment and Action Plan, HIPC AAP) shows significant improvement over the past two years. Nonetheless, there is substantial room for further improvement. In the year ahead, we intend to:

• Address weaknesses identified in the HIPC AAP, in particular by: increasing the coverage of fiscal information provided in the budget; disclosing fiscal information of all entities that carry out public services or activities; improving the ex-post integration of donor flows in the financial reports of MDAs; launching an appropriate and cost effective strategy to implement the new Internal Audit Act and improve the effectiveness of internal audit; and establishing and making operational institutions created by the new Procurement Law;
  
  
• Monitor the operation of the cash planning and commitment control systems that were rolled out to all MDAs in October 2003, ensuring that reports are produced on schedule and ceilings respected;
  
  
• Require all MDAs to submit to the Ministry of Finance and Economic Planning (as required under the FAA) a quarterly financial report detailing receipts of all internally-generated funds, grants, and loans; the first such reports, for the first quarter are expected by early June 2004, after which they will be required with a lag of no more than eight weeks;
  
  
• Extend the budget and expenditure management system (BPEMS) to three line ministries by end-June 2004 (Ministries of Health, Education, and Roads and Transport), and a further four ministries by early 2005;
  
  
• Continue to close all overdraft accounts at the Bank of Ghana, as well as government accounts that have been dormant for more than one year;
  
  
• Replace the current wage-payment monitoring module (IPPD1) with the resource based, IPPD2, and add in wage payments to subvented agencies (with automatic deductions for social security and income tax) by the first half of 2005; and
  
  
• Enforce a cut-off date of December 15, 2004, for issuance of checks for discretionary expenditures, so as to prevent a recurrence of the large float that arose in 2003.

C. Monetary and Exchange Rate Policies

10. The goal of monetary policy continues to be the reduction of inflation, with a target of 7 percent for CPI inflation at end-2004. The BOG will use open market operations and adjustments to the prime rate to achieve its objectives, implying annual growth of reserve and broad money (excluding foreign-currency deposits) of about 21 and 19 percent, respectively, during this year.

11. With gross international reserves now approaching comfortable levels, BOG will temper the pace of reserve accumulation in the face of strong inflows, and step up market sales of foreign exchange surrendered to it. This could allow for some nominal exchange rate appreciation that could mitigate market pressures and help further dampen inflation expectations. The new computerized interbank foreign exchange market is on schedule for launch by the fourth quarter of this year, and once the BOG is satisfied that the market is functioning smoothly, the surrender requirement for foreign exchange will be gradually phased out. The BOG will continue to allow the cedi's external value to be market-determined, limiting interventions to smoothing short-term fluctuations in the foreign exchange market and ensuring attainment of the program's targets for reserve accumulation.

12. The BOG has taken steps to strengthen its operating framework, in line with the recommendations made in the context of the Fund's safeguards assessment. At this stage, BOG has addressed all of those recommendations, including:

• The adoption of international accounting standards;
  
  
• The issuance of government securities to cover accumulated balances in the Revaluation Account;
  
  
• Establishing, in collaboration with external auditors, a task force to review and recommend changes to the central bank's financial statements and disclosure practices; and
  
  
• Establishing formal procedures for frequent reconciliation of registers and account balances maintained by BOG departments, in particular, the Issue and Treasury Department, and for verifying program data reported to the Fund.

D. Financial Sector Reform

13. The improved fiscal situation is intended to provide opportunities to expand credit growth to the private sector. For some major banks, however, secondary reserve requirements are beginning to constrain this shift in resources. The BOG envisages a two-phase approach to address this problem. In the first phase, which will begin in the third quarter of this year, the central bank will aim to strengthen its indirect instruments for controlling liquidity by introducing central bank paper at shorter maturities than the treasury bills currently used for open market operations. It will also establish, by September 2004, a central securities depository, which should encourage the development of the secondary market. After a transition period to ensure the smooth functioning of the central bank bill market, and integration with the existing treasury bill and auction system, the BOG will consider a gradual reduction of the secondary reserve requirement.

14. The passage of the Banking Act in December 2003 has enhanced the central bank's supervisory powers over the commercial banks. The BOG will use these powers to ensure that commercial banks meet the strengthened fiduciary and prudential requirements and to apply sanctions for non-compliance.

15. With regard to GCB, the 2004 budget statement announced the plan for (a) flotation of new shares on the stock exchange to bolster its capital resources, and (b) to seek bids by competitive tender for a management contract, following completion of the share issue. At an extraordinary shareholder meeting expected to be held in September 2004, the proposed share flotation will be tabled for acceptance, and scheduled for the first quarter of 2005. With regard to the management contract, GCB intends to appoint a transactions advisor by end-September 2004, with a view to putting a contract to competitive tender by June 2005.

E. External Policies and Debt Management

16. The government is developing a comprehensive trade policy for Ghana, to be finalized by the end of 2004. The policy would, inter alia, aim at gaining greater access to external markets for its products. In this regard, an important objective would be to promote the successful implementation of the Economic Community of West African States (ECOWAS) trade liberalization scheme to facilitate regional integration, through the harmonization and reduction in tariff and non-tariff barriers to trade.

17. We hope that Ghana will reach the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative around mid-2004. This will bring the country's debt to sustainable levels, reduce its external vulnerability, and allow us to redirect fiscal resources toward poverty reduction. We are aware that, after the completion point, we will need to strengthen further our debt management capacity and adopt a policy of assessing our domestic and external debt sustainability on an annual basis (beginning in 2005) through in-house and independent analysis. We also reiterate our commitment to avoid contracting or guaranteeing nonconcessional debt, as defined in the TMU. In this context, we have decided not to sign a recently proposed loan agreement from a private company, unless grant support for this loan from official sources can be secured.

F. Public Enterprise Reform

18. Progress to date on public enterprise reform has been limited, and we are taking a range of measures that we hope will have greater success in enhancing the efficiency of the key public enterprises, and reducing the direct and indirect burden they impose on the budget.

19. The petroleum sector has traditionally been dominated by state institutions, and this has made it extremely difficult to depoliticize petroleum pricing. We are committed to addressing this problem through a fundamental deregulation of the sector, allowing the private sector to undertake the procurement, financing, distribution and pricing of petroleum products.

20. We have already taken several steps in this direction. From the beginning of 2004, TOR ceased to have a monopoly on the importation of petroleum products, and in March 2004 the private oil marketing companies (OMCs) participated in the first competitive tender for gasoline, with financing from a syndicate of commercial banks. Beginning in the third quarter, we will widen the tender process to include the importation of crude oil, for processing at TOR for a fee.

21. Cabinet has approved a petroleum sector deregulation plan as announced in the Budget Statement presented to Parliament on February 5, 2004. On June 10, 2004, Cabinet further endorsed the details of our plans for a new pricing regime for petroleum products with the following key features:

• Oil marketing companies (OMCs) will be given the right to set retail prices for petroleum products according to a prescribed formula, without prior review or approval by any national authority or agency;
  
  
• An independent oversight body, on which the government will be represented, will monitor application of the formula to ensure its full and timely implementation. This entity will be empowered to intervene only in the event that the formula has not been applied appropriately, in which case it could insist on corrective actions, and possibly sanctions;
  
  
• The pricing formula calculations will be published on a regular basis (and at the time of a price adjustment); and
  
  
• The pricing formula will be specified along similar lines to that currently monitored by the National Petroleum Tender Board, with parameters set to ensure full cost recovery of all costs and taxes, and to avoid the need for further budget subsidies. The parameters of the pricing formula would be subject to periodic review, and could be modified by mutual consent of the oversight body, the government and the OMCs.

22. The new pricing regime will come into effect no later than February 15, 2005, at which time the responsibilities of the National Petroleum Tender Board will be restricted to conducting the competitive tender process for imported petroleum products and facilitating arrangements for sharing access to the storage and distribution infrastructure. Meanwhile, TOR has ceased all involvement in the importation of petroleum products, and will phase out its importation of crude oil, moving instead towards refining crude oil that is imported by the private sector, on a fee basis.

23. These and other detailed elements of the petroleum sector reform will be embodied in legislation, which we intend to present to Parliament in late 2004. This legislation will define and circumscribe the roles of the key institutions, including the OMCs, NPTB, TOR, and relevant government agencies.

24. The government will continue to be concerned that the poor should have access to essential petroleum products (especially kerosene) on relatively favorable terms. This objective will be more effectively achieved through careful structuring of petroleum duties and flexible formula-based pricing than it has been under the variable cross-subsidization inherent in TOR's pricing regime. The duty structure to be applied at the launch of the new pricing regime will take into account the findings of a poverty and social impact assessment that is currently underway, and will be implemented with the 2005 budget.

25. We have reduced TOR's debt (and GCB's exposure to the refinery), by issuing a government security in the amount of ¢800 billion in May 2004. To help ensure that TOR's debt remains sustainable, we will maintain a ceiling on TOR's net borrowing from the banking system throughout 2004.

26. We have also embarked on a program to reduce costs, trim losses, and improve the efficiency of other major public utility companies: the Volta River Authority (VRA), the Electricity Company of Ghana (ECG), and the Ghana Water Company Limited (GWCL). As a first step in this process, we have audited all the cross-debts of these companies to each other and to the government of Ghana that were outstanding as of December 31, 2003. These debts will be settled and cleared by end-June 2004, together with liabilities associated with on-lending from the government, making transparent the true cash flow position of the companies, and permitting the establishment of realistic and monitorable financial performance plans. By the same date, each company will be required to present such plans for review and subsequent monitoring by the Ministry of Finance and Economic Planning. We expect the companies to achieve tangible improvements in financial performance during 2004, based on efficiency measures already underway, including:

• At Volta River Authority: to reduce expenses, VRA will secure fuel through competitive tender and search for new sources of financing to reduce capital costs. VRA is also seeking additional financing to convert a simple cycle turbine to a combined cycle plant, so as to increase efficiency and further reduce generation costs.
  
  
• At Electricity Company of Ghana: to stem commercial losses (nonpayment), the company is stepping up efforts to collect arrears, making payment easier (opening more cash collection points), and disconnecting non-paying customers.
  
  
• At Ghana Water Company Limited: the ratio of metered customers (both commercial and domestic) will be raised from the current level of below 50 percent; prepayment metering will be expanded; non-paying customers will be disconnected; house-to-house collections will be halted, to reduce fraud and theft; the number of collection points will be increased, to encourage payment; and internal cost control systems will be enhanced.

27. To support these efforts, full cost recovery will be ensured in electricity and water pricing through implementation of the formulas for automatic adjustment of these tariffs. The tariff rates applicable for the quarter beginning May 1, 2004 were established in April. Given a further improvement in the hydro-thermal generation mix, no increase in electricity tariffs was required. Water tariffs were raised by 15 percent to full cost recovery levels, in line with the formula, and the Ghana Water Company Limited has confirmed that the new tariffs are being charged to customers with effect from April 1, 2004. The Public Utilities Regulatory Commission will continue to be responsible for approving tariff adjustments based on the formulas, and the government will refrain from intervening to prevent prompt implementation of such adjustments by the utility companies.

28. The government will continue to divest its holdings in a number of joint venture companies. By the end of this year, the Divestiture Implementation Committee is projecting revenues from the sale of shares in seven joint venture companies of just over ¢400 billion (equivalent to 0.5 percent of GDP). The government is seeking a strategic investor to take control of and rehabilitate Ghana Airways, and does not intend to provide financial support to the company in 2004.

29. We are currently undertaking due diligence to explore options for government involvement in the potential sale of the Volta Aluminum Company (VALCO) by its private owners. The information and analysis on which our final decision will be based is expected to take several more months to compile, following which the options will be considered by cabinet and in parliament. The government will not make any commitment of financial resources to invest in the project until this process is completed, and will consult with the Fund on its decision.

G. Private Sector Development

30. We believe that enhancing private sector development is critical to achieving sustained growth and poverty reduction. In this context, deepening the financial sector will also play a key role. To guide government policy in this area, a Medium-Term Private Sector Development Strategy has recently been established. This strategy envisages three main outputs: growth of Ghana's exports in regional and global markets; a business-friendly economic and regulatory environment, based on market principles and private property rights; and increased entrepreneurial skill at the firm level. While the strategy will be implemented over time, a number of high priority measures will be pursued this year:

• A further strengthening of the supervisory and regulatory framework of the financial sector, through the passage of an Insolvency Bill, Companies Code, Insurance law, and Anti-Money Laundering Bill;
  
  
• Developing credit information legislation which will provide a framework for regulating consumer (credit bureau) and business (credit reference agencies) credit information;
  
  
• Reducing regulatory red-tape (the current complex system of fees, fines and permits) both at the local and national level;
  
  
• Completing a diagnostic study on the legal and institutional mandates of anti-corruption agencies, and implement agreed recommendations by March 2005; and
  
  
• Strengthening the Land Administration Project by accelerating the process to secure property rights, enforce land use rights, and make operational the adjudication board of the Land Title Registry.

H. Statistics

31. We are committed to improving the quality and timely delivery of economic statistics upon which macroeconomic policies and program monitoring are based. We have agreed to participate in the General Data Dissemination System, and while progress in re-estimating the consumer price index and re-basing the national accounts is slower than anticipated, we now plan to complete this work early in 2005. The work will be facilitated by the recent appointment of a new Government Statistician for the Statistical Service, who comes with significant international experience, and ongoing technical assistance from an STA advisor. In addition, to ensure accurate and comprehensive monitoring of the fiscal position, BOG circulated to the commercial banks in May 2004 its definition of government, to facilitate consistent reporting of these accounts.

III. Program Monitoring

32. Prior actions for the second review, together with quantitative and structural performance criteria, indicative targets, and structural benchmarks for the third review, are set out in Tables I.1 and I.2. The third review of the program will take place by May 31, 2005, with December 31, 2004 as the test date for the quantitative performance criteria. The review will focus, among other issues, on implementation of the petroleum sector deregulation strategy, and on the nature of government involvement in VALCO. At the time of this review, performance criteria, structural conditionality, and the phasing of disbursements will be established for the fourth program review, based on a program of policies for 2005. Detailed definitions, reporting requirements and adjustors for all performance criteria and structural conditions are contained in the TMU attached to this memorandum. The government will make available to Fund staff all core data, appropriately reconciled and on a timely basis, as specified in the TMU.

Table I.2: Prior Actions Structural Performance Criteria and Benchmarks
for 2004-05

Prior actions for completion of the second review under the PRGF arrangement

• Issuance of a press release announcing Cabinet endorsement of the details of a new regulatory/pricing regime that gives oil marketing companies the right to adjust retail petroleum prices according to a prescribed formula, without prior review or approval by any national authority or agency; the press release will describe the key elements of the new regime and specify that it will take effect by February 15, 2005.
  
  
• Bring electricity and water tariffs into line with the automatic adjustment formulas, based on calculated values through end-March 2004.
  
  
• Settle the revised structure of civil service (GUSS) wages for 2004 consistent with keeping the wage bill within the budgeted amount (¢6,632 billion).
  
  
• Introduce a legislative instrument in parliament to ensure the effective implementation of the National Health Insurance Levy on August 1, 2004.
  
  
• Issue maximum cash ceilings to ministries, departments and agencies totaling ¢2,402.5 billion for the third quarter of this year.

Structural performance criteria

• Implement the new petroleum pricing regime, with the features described in paragraph 21 of this memorandum by February 15, 2005.
  
  
• Ensure that electricity and water tariffs are in line with their respective automatic adjustment formulas as specified in the technical memorandum of understanding (August 15, 2004, November 15, 2004 and February 15, 2005).

Structural benchmarks

• Introduce Bank of Ghana Bills by September 30, 2004.
  
  
• Complete the share flotation for Ghana Commercial Bank by March 31, 2005.
  
  
• Hire a transactions advisor for a management contract of Ghana Commercial Bank by September 30, 2004.
  
  
• As required under the Financial Administration Act (2003) all ministries, departments and agencies will submit to the Ministry of Finance and Economic Planning a quarterly financial report detailing receipts of internally generated funds, grants and loans with a maximum lag of eight weeks (June 30, 2004, September 30, 2004, and December 31, 2004).
  
  
• Settle all cross-debts as of December 31, 2003, of the Electricity Company of Ghana, Ghana Water Company Limited, Tema Oil Refinery, Volta River Authority, and the government, together with liabilities associated with on-lending from the government; and establish and submit to the Ministry of Finance and Economic Planning, monitorable financial plans to improve the performance of these companies (by June 30, 2004).

Use the free Adobe Acrobat Reader to view Tables I.1, I.4, and I.5 (28 Kb PDF file)

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 and Benchmarks, PRGF Arrangement, 2004, 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, 2003.

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 the National Health Insurance 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. With regard to government deposits in commercial banks, BOG's definition of government, circulated to commercial banks in May 2004, will apply for program purposes.

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). 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). Funds placed in escrow for the potential investment in the Volta Aluminum Company Limited (VALCO) will be classified as a government domestic asset for the purposes of calculating NDF so long as they continue to be the proprty of the government of Ghana. 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). 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 non-interest 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 9,012 cedis per dollar, which was the average interbank transaction rate prevailing at end-March 2004.

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, and funds placed in escrow relating to VALCO) 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 resident 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 cedis 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-December 2003, the stock of road sector arrears was recognized to be ¢30 billion, and is expected to be paid down according to the quarterly schedule in Table I.1 (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 performance 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. The National Petroleum Tender Board will use the current formula to determine cost recovery prices, which will be compared with actual prices to determine the magnitude of the implied subsidies to TOR and the oil marketing companies. These prices will be determined once a quarter, on or before July 31 and October 31, 2004, and January 31, 2005. Cost recovery prices will reflect the full pass through of all taxes, levies, and distributor margins as indicated in Table I.4. The NPTB will inform TOR, the oil marketing companies, and the IMF of the results of the formula's calculations as set out in Table I.4 on the above test dates.

22. The electricity and water tariffs for the August 1-October 31 quarter will be announced publicly and implemented at the latest by August 15, 2004, based on data compiled for May 1-July 31, 2004. The tariff rates for subsequent quarters will be implemented in a similar manner by November 15, 2004, and February 15, 2005. The electricity tariffs will be calculated according to the formula in Table I.5, and the water tariffs will be calculated according to the formula in Table I.6, using data from the specified sources. The public utility companies will ensure that the weighted average tariff rates charges to consumers are not lower than the rates derived from these formulas, from the specified dates. 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 70 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 end 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; (iii) any shortfall in external debt service payments; and (iv) the unblocking of escrow deposits relating to VALCO. 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 March, the adjuster will be computed as the difference (if positive) between the average actual and forecast prices during the fourth quarter (2003), times a coefficient of 20/4; for June, 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 20/2; for September, the adjuster will be computed as the difference (if positive) between the average actual and forecast prices during the first half of 2004 times a coefficient of 20*(3/4); and for December, the adjuster will be the difference (if positive) between the average actual and forecast prices during the third quarter, 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.

27. The budgetary cost of petroleum subsidies. If the cost of petroleum price subsidies for the third and fourth quarters of 2004, as calculated using the automatic price adjustment formula specified above, exceeds the programmed amounts shown in Table I.1, the ceilings on net domestic financing for end-September and end-December 2004 will be raised by half of the first
¢200 billion in excess cost, and by the full amount of any excess cost beyond ¢200 billion. If the subsidy cost is less than programmed, the net domestic financing ceilings will be unchanged until the subsidy shortfall reaches ¢523 billion, which will allow the spending cuts to be fully reversed; beyond that point, the net domestic financing ceilings will be reduced pari passu. Expenditure ceilings for the fourth quarter of 2004 will be set consistent with the modified financing limits, and monthly expenditures will be monitored closely throughout the remainder of 2004 and adjusted as necessary to ensure that the program limits are observed.

Reporting of Data to the IMF

28. 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.

29. 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

30. 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) At the same time, procedures instituted in early 2003 relating to prior authorization and fiscal booking of external and other payments by direct debit will be maintained.

f) 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.

g) The procedures for verifying Bank of Ghana 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.

h) 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.

Table I.3. Data to be Reported to the IMF

Table I.6. Ghana: Water Tariff Formula

Item Number	Variable	Source	Symbol	Nov-20031	Jan-20042	Jan-2004 Calc.	Apr-20042	Apr-2004 Calc.
6	Average water tariff for previous period, t-1 (cents/m³)	Gazetted 26 July 2002	PT-1	50.0	52.4	52.4	53.0	51.5
7	Average end-user tariff for next period t (cents/kWh)	Electricity Formula	ET	8.30	8.42	8.15	8.51	8.07
8	Average end-user electricity tariff for pervious period t-1 (cents/kWh)	Electricity Formula	ET-1	7.92	8.30	8.30	8.42	8.15
9	CPI of the USA	The changes in the US CPI during the latest three-month period for which data is available as reported by the International Financial Statistics	CPI	1.1%	1.2%	1.2%	1.3%	1.3%
10	Base CPI of the USA	Gazetted 26 July 2002	CPIo	2.0%	2.0%	2.0%	2.0%	2.0%
11	Average end-user electricity tariff coefficient	Gazetted 26 July 2002		0.84	0.84	0.84	0.84	0.84
12	CPI coefficient	Gazetted 26 July 2003	ß	0.16	0.16	0.16	0.16	0.16
13	Average water tariff for next period t (cents/m³)	Sum of 6 x ((11 x 7/8)+12 x (1+9)/(1+10))	PT	52.4	53.0	51.5	53.3	51.0
14	Average exchange rate in the next period t	The interbank transaction rate quoted by the Bank of Ghana for the last day of the second month in the preceding quarter, multiplied by the percentage change in that rate from the last day of the second month in the quarter before that.	EXCHt	8,900	8,846	8,846	9,152	9,152
15	Average water tariff for next period t (cedis/m³)	Sum of 13 x 14 x 0.01		4664	4689	4560	4876	4664
1 The average tariff was authorized by the PURC beginning Novermber 2003, but not implemented until May 1, 2004. 2 Assuming the percentage of the hydro-contribution capped at 50 percent as specified in the TMU (EBS/03/161).

Hon. Yaw Osafo-Maafo, MP
Minister of Finance and Economic Planning

Hon. Paul A. Acquah
Governor, Bank of Ghana