Ghana—Letter of Intent
April 24, 2003

Dear Mr. Köhler:

1. With regard to our requests for a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) and additional interim assistance under the enhanced HIPC Initiative, we wish to amend our Letter of Intent dated March 31, 2003 (EBS/03/42) to account for a sharp increase in prices in early 2003. The rise in prices resulted from the positive shock of a 90 percent increase, on average, in domestic petroleum product prices and further adjustment in utility tariffs toward full cost recovery. Our policy orientation will ensure that this surge in prices is temporary. Nevertheless, the general price level in 2003 is now expected to be substantially higher than assumed in our original program.

2. Accordingly, we have modified the macroeconomic framework underlying the 2003 program. The revisions are aimed at (i) setting monetary targets to continue to apply firm downward pressure on inflation, without risking economic growth prospects, and (ii) avoiding the disruption to our priority public expenditure programs that would result if expenditure ceilings were left unchanged in nominal terms, while retaining our goal of no recourse to net domestic financing of the budget in 2003. These assumptions and policies are incorporated in a revised set of quantitative performance criteria and benchmarks for 2003 which are attached to this letter (Table I.1). All other aspects of the medium-term program set out in our March 31 letter, but not amended in this letter, continue to apply.

3. The facts regarding recent inflation are as follows. In February 2003, the consumer price index (CPI) jumped by 12.8 percent from the previous month. This increase was almost 10 percentage points higher than had been assumed in the program for that month, and took the 12-month inflation rate to 29.4 percent. The largest increases were recorded in the categories of the CPI directly or indirectly affected by petroleum prices, which had been increased by an average 90 percent in January 2003. But larger-than-expected price increases were also observed in other categories, as suppliers of goods and services across the economy realigned their prices. In March 2003, the monthly inflation rate dropped sharply back toward the program path. The CPI rose by 2.5 percent over the February level (compared to 1.4 percent programmed), bringing the cumulative impact of the shock to 15 percentage points, while the 12-month inflation rate increased only slightly to 29.9 percent. This confirms our belief that the rise in prices has been largely a one-time increase.

4. In light of the above, our target for the 12-month inflation rate has been raised. Instead of bringing inflation down to single digits (9 percent) by end-2003, we aim to reduce the rate to 22 percent by December 2003. Reflecting the largely one-time nature of the price level increase, we expect inflation to fall to single digits in early 2004, and hence our end-year inflation targets for 2004 and the medium term remain as set out in the memorandum of policies attached to the letter of intent of March 31, 2003.

5. Consistent with our disinflation strategy, broad money (M2) and reserve money will be programmed to increase by 25 percent in the year to December 2003, compared to around 21 percent in our original program. The required tightening of monetary conditions (in real terms) has already been initiated by the Bank of Ghana, which increased its prime lending rate from 25.5 to 27.5 percent at end-March, on top of a one percentage point rise in January 2003. The Bank of Ghana has also been using open market operations to withdraw liquidity from the banking system, contributing to a sharper decline in reserve money during the first quarter of 2003 than originally programmed, and bringing the 12-month growth rate for reserve money down from almost 43 percent at end-2002 to 30 percent at end-March 2003. This combination of interest rate policy and open market operations will continue to be used to keep reserve money growth in line with the revised program target.

6. The targeted accumulation of net international reserves during 2003 remains unchanged at US$130 million, and the increase in the central bank's net domestic assets (calculated at the program exchange rate) will be limited to ¢494 billion at end-June 2003 and ¢318 billion at end-December 2003 (Table I.1). The revised monetary program allows for an expansion of bank credit to the private sector of 16 percent in real terms during 2003, down from 20 percent in our original program.

7. The revised macroeconomic framework retains the assumption that real GDP growth will rise to 4.7 percent in 2003, as in the original program, but we will reassess this assumption at the time of the first review under the PRGF arrangement.

8. On March 28, parliament approved a 2003 budget with expenditure plans and revenue measures consistent with the assumptions of the original program. With the higher level of prices now expected for 2003, however, the budgeted nominal expenditure allocations will be inadequate to implement the spending programs that underpin the Ghana Poverty Reduction Strategy. The government will therefore seek supplementary appropriations from parliament at the time of the mid-year review of the budget in September 2003. Our revised expenditure plans are based on the following assumptions:

• Fiscal revenue in 2003 will be higher than in the 2003 budget, but by less than the upward revision to nominal GDP, owing to taxes which are fixed in cedi terms or based on imports; we expect total tax revenues to reach 18.4 percent of GDP, compared to 18.9 percent of GDP in our original program.



• There will continue to be no recourse to net domestic financing of the budget for 2003 as a whole. An increase in donor support of US$10 million (0.1 percent of GDP) is assumed, as a result of a slightly larger external financing gap.



• Government purchases of goods and services, domestic capital expenditure, and total poverty-related expenditures will be maintained at broadly the same levels in real terms as in our original program.

9. The government of Ghana considers that the revisions to the 2003 program strike an appropriate balance between maintaining downward pressure on inflation and protecting Ghana's poverty reduction and growth objectives. In accordance with paragraph 5 of our March 31 letter of intent, the revisions have been made in consultation with Fund staff, and we stand ready to take any further corrective actions that may be needed to achieve the objectives of the program, including at the time of the first review of the PRGF arrangement.

Sincerely yours,

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

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