Press Release No. 03/66

Press Release: IMF Approves US$258 Million PRGF Arrangement for Ghana

May 12, 2003

The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) amounting to SDR 184.5 million (about US$258 million) for Ghana, which will support the government's economic reform program for 2003-05. The decision will make available to Ghana an amount equivalent to SDR 26.35 million (about US$37 million) from the PRGF Trust immediately. The Executive Board also agreed to provide Ghana additional interim assistance under the enhanced HIPC Initiative of SDR 15.15 million (about US$22 million).

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

In commenting on the Executive Board's decision, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following statement:

"The Fund welcomes the recently completed Ghana Poverty Reduction Strategy (GPRS), which sets out a broad array of structural measures to address the underlying causes of poverty, and establishes future spending priorities. Within this strategy, the authorities have formulated and begun implementing a new three-year program designed to promote private sector led growth and reduce poverty further. New revenue measures will help ensure that the spending priorities established by the GPRS are achieved, and have been designed to avoid unduly impacting the poor. Tight public expenditure control and firm action to maintain energy prices at full cost recovery levels will be key to avoid the recurrence of recent budget slippages associated with a rising civil service wage bill and financial losses by state-owned energy companies.

"Monetary policy is designed to reduce inflation to single digits by next year. Given the recent pick up in inflation associated with the adjustment in petroleum product prices, steadfast implementation of the authorities' tighter monetary policy stance, together with strict fiscal discipline, will ensure that inflation resumes its downward trend.

The challenge facing Ghana is to create conditions for steady and sustainable growth that is pro-poor. This will require the achievement and maintenance of macroeconomic stability, determined implementation of a broad range of institutional and structural reforms, and technical and financial support from development partners. A key area, to be monitored and supported under the country's PRGF arrangement, will be efforts to develop the financial sector's participation in private sector development.

"The authorities are firmly committed to take the necessary steps to ensure that the GPRS is fully operational and effective, including through further improvements in the quality and timeliness of statistics to allow for effective monitoring of GPRS outcomes," Mr. Sugisaki said.

ANNEX

Recent Economic Developments

Performance under the 2002 program was mixed. There were further gains on inflation and the rebuilding of foreign reserves, and progress on parts of the structural reform agenda, but significant weaknesses persisted in budget implementation and parastatal finances. The inflation rate began to rise from the fourth quarter of 2002 and accelerated to 29.4 percent in February following a sharp upward adjustment in petroleum product prices in January. On the structural front, progress was made in 2002 in the areas of tax administration, financial sector reform, and governance. However, the broad objectives were undermined by fiscal slippages and associated weaknesses in public expenditure management.

Program Summary

The macroeconomic framework for 2003 assumes real GDP growth of 4.7 percent, a reduction in 12-month inflation to 22 percent by year's end, and a buildup in gross international reserves to 2.3 months of imports. Monetary policy during 2003 will aim at achieving the program's inflation and growth targets while making room for further accumulation of net international reserves.

Fiscal policy will aim for a zero flow of net domestic financing in 2003 to support the monetary objectives and begin reducing the burden of domestic debt on the budget.

On the expenditure side, the major objective will be to bring the wage bill under control. The 2003 budget provides for a substantial increase in capital expenditures to fund the priority programs identified and costed in the GPRS. Total capital expenditures are expected to rise to almost 9 ½ percent of GDP in 2003, from over 6 percent of GDP in 2002. Poverty-related expenditures are projected to rise to 6 percent of GDP, up from 4 ½ percent of GDP in 2001 (the last year before the HIPC Initiative decision point).

The reforms center around measures to substantially raise revenue to make room for increased poverty-related spending and development needs, strengthen public expenditure management, further reform energy and utility pricing, and use appropriate monetary policy to achieve single-digit inflation by 2004. A major objective of the program will be to bring about a fundamental change in the petroleum pricing regime. The modernization of Ghana's financial sector will require an extensive overhaul of the relevant legislative framework, and the government's priority for 2003 is to move forward on several important draft bills to that end.