Document of

The World Bank

FOR.OFFICIAL USE ONLY

Report %O. P-5499-CH

RPORtT AND RECOMMEDATION

OF THE

PR}SIDENT OF THE

INTEpNATIONAL DzVELOPM ASSOCIATION

TO THE

* G~~~~~XECUTIVE DIECOR

ON A

PROPOSED CREDIT OF SDR 84.6 MILON

TO THE

RPCUBLC OF GUANA

FOR A

pROGRA TO PROMOTE PRIVATE INVESTMEN

AND SUASRANED DEVEWNMENT

APRML S, 991

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CURRENCY EQUIVALENTS(as of March 31, 1°91)

Currency Unit - CediUS$1 ¢361 (Auction Rate)¢1 - US$0.0028

ABBREVIATIONS

AEF - African Enterprise FundASYCUDA - Automatic System of Customs Data Entry,

Control and ManagementBOG - Bank of GhanaCEPS - Customs, Excise and Preventive ServiceRAP - Environmiental Action PlanEMS - Economic Management Support (Project)ERP - Economic Recovery ProgramESAF Enhanced Structural Adjustment FacilityQIC - Ghana Investment CenterGLSS - Ghana Living Standards SurveyIPA - Investment and Project Analysis

(Division)iRS - Internal Revenue ServiceMFEP - Ministry of Finance and Economic

PlanningMSD - Management Services DivisionNRS - National Revenue SecretariatNPART - Non-Performing Assets Recovery TrustODA - Overseas Development Administration

(U.K.)OHCS - Office of the Bead of Civil ServicePAS - Public Agreements Board.PAMSCAD - Program of Actions to Mitigate the

Social Costs of AdjustmentPIB - Prices and Incomes BoardPIP - Public Investment ProgramPFP - Policy Framework PaperPPMD - Personnel Policy and Management

DivisionSAP - Structural Adjustment ProgramSEC - State Enterprise CommissionSOB - State-Owned Enterprise

FISCAL YEAR

January I - December 31

FOR OMCIL USE ONLY

PROGRAM TO PROMOTE PRIVATE INVESTMENS AND SUSTAINED DEVELOPNENT

Table of Contents

Paxe Nos.

CREDIT AND PROGRAM SIR .................. . . i-ii

PART I - INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . 1

PART II - COUNTRY POLICIES AnD M GROUP SSISTACEST G . .. 2

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 2The Economic Recovery Program ..... ........... . 2Impact of the Structural Adjustment Program 1987-1990 . . . . . 3Financial System . . . . . . . . . . . . . . . . . . . . . . . . 5The Government's Policy Agenda and Issues . . . . . . . . . . . 5Bank Group Operations . .................... 7The Lending Program - Level and Composition . . . . . . . . . . 10Relations vith the IMF . . . . . . . . . . . . . . . . . . . . . 12Summary Assessment . . . . . . . . . . . . . . . . . . . . . . . 12

PART III -POLICYA-NDl 1991-92 . . . . . . . . . . . . . . . . . .12

Policies to Promote Private Investment . . . . . . . . . . . . . 13Public Resource Management . . . . . . . . . . . . . . . . . . . 17

PART IV - THE PROPOSED CREDIT . . . . . . . .. .a . . . . . . . . .21

Credit History . . . . . . . . . . . . . . . . . . . . . . . . . 21External Financing Requirements . . . . . . . . . . . . . . . . .22Credit Administration, Procurement and Disbursement . . . . . . 23Monitoring and Tranche Release Conditions . . . . . . . . . . . 24

PART R .E . .N. . . . . . . . . . . . . . . . . . . . . . . . .. 26

I. Economic Information ....... .. .. .. .. * * . 27II. Letter of Development Policy . . . . . . . . . . . . . . . . . . 32III. Supplementary Data Sheet . . . . . . . . . . . . . . . . . . . . 57

This document has a resticted distibution and may be used by recipents only in the perfWizeof their oWial duties Its contents may not otherwise be disclsed vithout World Bank at thorizatin.

RPPUBLIC OF GlWt

PlIOGlM TO PROMOTE PRIVKTE INVESMT AJND SUSTASiND DEVELOPET

CREDIT AND PROGRM S Y

Borrower: Republic of Ghana

Amounts SDR 84.6 million (US$120 million equivalent)

Terms: Standard IDA with 40 years maturity

Descrintion: The Government's program of actions to promote higherlevels and more efficient investment in the economyaims to achieve an average growth rate of about 5percent a year, raise investment to 18 percent of GDPby 1992, and raise national savings to 12 percent ofGDP. To achieve these targets, the program aims tocreate an enabling environment for private investmentby: maintaining macroeconomic stability; undertakingtax reform so as to improve the incentives for privateinvestment and savings; taking steps to make theregulatory framework in Ghana more consistent with theliberalized economy; and making further progress onstate enterprise reforms. The Government also willmaintain the momentum of reforms designed to increasethe efficiency with which public resources are usedand, thereby, enhance their support of private sectordevelopment. Measures to alleviate poverty are alsoincorporated into the program. The Government'sLetter of Development Policy (LDP) and theaccompanying matrix of policy actions outlines theactions designed to achieve these aims. Also attachedti the LDP is a table summarizing the expected trendsi; _ey economic variables resulting fromimplementation of the program.

Benefits: The program to promote private investment andsustained development, would build on the gainsachieved since the introduction of the EconomicRecovery Program in 1983. The projected real GDPgrowth rate of about 5 percent a year will allow percapita consumption to increase by about 1 percent peryear. Higher investment will lay the foundation offuture growth, and the projected rise in nationalsavings will lower Ghana's dependence on foreignsavings in the future. The maintenance ofmacroeconomic stability will help to build theconfidence of the private sector. The commitment to amarket-determined, competitive exchange rate andcontinued reforms in trade policies will encouragenon-traditional exports and stimulate new importsubstitution activities. Reforms in the structure andadministration of taxes will improve the incentivesfor private savings and investment, while

(ii)

strengthening public finances. Changes in theregulatory and administrative framework wouldencourage more dynamic economic activity by theprivate sector. State enterprise reforms would openup opportunities for private investors, while alsoimproving the provision of public goods and servicesand increasing the contribution of parastatals to thepublic savings effort. Better public expendituremanagement will concentrate resources on high priorityareas in infrastructure, health, education, andagricultural research and extension and improve thefocus on poverty alleviation. Changes in the size andmanagement of the Civil Service will increase themotivation and effectiveness of Governmentdepartments.

Riskst Two principal risks could threaten the achievement ofthe program's objectivess an inadequate privateinvestment response and insufficient implementationcapacity within the Government. The Government isaddressing the former issue by: maintainingmacroeconomic stability, reforming the tax system,creating a legal and regulatory framework moreconducive to private investment, improving theprovision of public services, and taking other relatedactions which would demonstrate the Government'sdesire for an active role by the private sector. Inorder to minimize this risk the Government'scommitment to private sector development must beunambiguous. Nevertheless, it is difficult to judgewhen these actions would bring results. Regarding thelatter issue, several programs are in place tominimize this risk. Technical assistance and trainingprograms financed by IDA and other donors areavailable to support a wide range of measures tostrengthen public sector management, particularly inthe areas of budget preparation and execution andcivil service and state enterprise reform. TheGovernment intends to streamline contract approvalprocedures in order to reduce delays in projectimplementation.

Economic Rateof Return: Not applicable.

EstimatedDisbursements: The credit will be disbursed in two tranches: US$60

million upon effectiveness and US$60 million after aperformance review to be held around March 1992.

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED

DEVELOPMENT CREDIT TO THE REPUBLIC OP GHANATO SUPPORT A PROGRAM TO PROMOTE PRIVATE INVESTMENT

AND SUSTAINED DEVELOPMENT

1. I submit the following report and recomendation on a proposeddevelopment credit of SDR 84.6 million (US*120 million equivalent) onstandard IDA terms with 40 years maturity to the Republic of Ghana tosupport the Government's program of actions to promote private investmentand sustained development.

2. An economic report, entitled Ghanas Progress on Adjustment(Report No. 9475-GH), will be issued simultaneously to the ExecutiveDirectors. Annex I gives selected economic information for the country.

PART I - INTRODUCTION

3. The Economic Recovery Program (ERP) launched by the Governmentin April 1983 was a dramatic break with Ghana's previous policies and isone of the most sustained reform efforts in Sub-Saharan Africa. Itsinitial objectives were to stabilize the economy, remove important economicdistortions, and reverse the serious deterioration of the country'sinfrastructure. The ERP has attracted the support of both the Bank and theInternational Monetary Fund, as well as other donors. Since 1987, the Bankhas provided three adjustment credits to Ghana - Structural AdjustmentCredits I and II and a Financial Sector Adjustment Credit. The economicconsequences of the reform program have been positive. Growth has averagednearly 5 percent per annum since 1984 in spite of a deterioration in theterms of trade of about 30 percent since 1987. External arrears, sizablein 1983, have been eliminated. Stronger fiscal performance has enabled theGovernment to repay its debt to the banking system.

4. These positive signs notwithstanding, the Government intendsto accelerate the adjustment effort so as to sustain these improvements andto promote higher growth, while maintaining macroeconomic stability. Inorder to accomplish these objectives, the most serious weakness of theadjustment program - the inadequate level of domestic investment andsavings - must be addressed. There is not enough private investment tofuel the growth needed to raise living standards and generate sufficientemployment, and a large share of savings comes from external sources. Inspite of the implementation of the structural adjustment program, therewards for savings and investment are not attractive enough to inducelarge private flows. In spite of significant liberalization of manyaspects of the economy, excessive controls and unnecessary regulationdiscourage a broad-based supply response. The role of the private sectorin influencing policy is minimal. Against this background, the Governmenthas developed a program to be supported by a propossd fourth adjustmentcredit with the aim to promote more dynamic private investment andsustained development.

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PART Tl - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY

Background

5. The deterioration of the Ghanaian economy in the 19709 andearly 1980s stemmed from a combination of inappropriate policies andexogenous shocks. Large budget deficits, in part supporting an extensiveand inefficient public sector, caused inflation to rise. Given areluctance to adjust the nominal exchange rate, the real rave appreciatedsignificantly. The resulting decline in the output of exports and importsubsditutes, combined with disenchantment amongst aid donors, caused aprolonged foreign exchange crisis. The Government responded with foreignexchange and import controls which in turn further constrained growth. Thedecline in the tax base due to the reduiction in exports and imports and therelated drop in economic activity forced major cuts in governmentexpenditures. The resulting deterioration in the once well-developedinfrastructure further lowered productive capacity. The response toshortages was additional price controls and rationing, which worsened theproblem by eroding production incentives and creating a vast parallelmarket with its related corruption, smuggling and tax evasion. Decliningreal incomee and reduced economic opportunities caused many skilledGhanaians to leave the country.

6. These problems were exacerbated in the early 1980s by a severedrought and by a sharp deterioration in the terms of trade. The cumulativeeffect of the downward spiral can be seen in the trends in economicindicators between 1970 and 1982: per capita real income declined by 30percent, import volumes dropped by a third, real export earnings fell by 52percent, domestic savings and investment declined from 12 percent and 14percent of GDP respectively in 1970, to almost insignificant levels, whileinflation averaged 44 percent per annum.

The Economic Recovery Program

7. The major objectives of the Economic Recovery Program (ERP)were to: (a) shift relative prices in favor of production, particularlyexports; (b) restore fiscal and monetary discipline; (c) initiaterehabilitation of the country's productive base and infrastructure; and (d)restore incentives for private savings and investment. The main actionstaken under the ERP are summarized below.

8. The Government devalued the cedi in stages. A foreign exchangeauction covering almost two-thirds of external transactions was establishedin September 1986. Administered prices were increased to reflect theimpact of the new exchange rate and most price and distribution controlswere removed. The Government reduced fiscal subsidies and mobilizedresources through improved tax collection and higher consumption taxes.Public sector salaries and the statutory minimum wage were raised to offsetpartially the massive erosion in real incomes. Civil service paydifferentials were widened to improve incentives for senior staff.

9. In addition to improvements ir. the Incentives framework, theGovernment restructured public expenditures. Provisions for operations andmaintenance, as well as for health and education were increased.Preparation of a rolling, three-year capital expenditure program wasinitiated in 1986. Major rehabilitation programs were started,particularly for transport, other infrastructure, and the key productivesectors of cocoa, timber and mining.

Impact of the Structural Adiustment Program 1987-1990

10. Macroeconomic Conditions. The first and second StructuralAdjustment Credits supported the move to a market-determined exchange rate.Access to the foreign exchange auction was expanded gradually and in 1988the Government permitted the establishment of foreign exchange bureaus. InApril 1990, the Government introduced an interbank foreign exchange marketsupported by weekly wholesale auctions. Ghana's foreign exchange marketoperated smoothly in the face of these reforms. The real effectiveexchange rate depreciated by slightly over 20 percent in 1987, by about 5percent in 1988 and 1989, and was unchanged in 1990. The differentialbetween the two rates has disappeared from a peak of 50 percent in early1989 and foreign exchange is now easily available. These reforms have beencomplemented by liberalization of payments and transfers for currentinternational transactions.

11. The improvement in Ghana's external competitiveness hasstrengthened the incentives for exports, resulting in a notable expansionin cocoa and gold. During the period 1987-1990, exports grew on average by9 percent a year. However, primarily because of lower prices for cocoa,the main export, and the recent increase in petroleum prices, the currentaccount deficit has grown from 5 percent of GDP in 1987-88 to 8 percent in1990. Most of the deficit has been covered by concessional assistance.

12. After moderating from 40 percent in 1987 to 31 percent in1988, inflation began to accelerate in late 1989. Several factors seemedto be involved. Growth in money supply was higher than programmed becauseof overperformance on the net foreign assets target. A large liquidityoverhang and administrative, structural, and technical weaknesses made itdifficult for Bank of Ghana to execute monetary policy. The impact of poorweather conditions on agricultural output and the increase in theinternational price and excise taxes on petroleum played a role in 1990.During the last quarter of 1990 price pressures began to subside, in part aresult of more forceful and effective implementation of monetary policy.On an end of period basis, the inflation rate dropped from a peak of 41percent in September to 36 percent in December.

13. Incentives. The main actions which the Government took weresraising cocoa producer prices; eliminating most restrictions on trade; andreforming the tax system. The share of the fob price received by cocoafarmers rose from 23 percent in the 1986/87 crop season to an estimated 47percent for the 1990191 crop season. The increase reflected the adjustmentto a more realistic exchange rate; reduction in the high costs of the GhanaCocoa Board, a parastatal which has a virtual monopoly on domestic

purchases and external sales of cocoa; and a decrease in the excessivetaxation of the farmer. The impact on production was significant. Outputrose sharply from 228,000 tons in 1986/87 to about 300,000 tons in 1988/89and 1989/90, reflecting in part the virtual cessation of smuggling.

14. By the beginning of 1987, Ghana's impor.. tariff levels weremoderate by developing country standards, and except for a few products,quantitative restrictions had been removed. However, differences in importand domestic sales taxes accentuated variations in effective protection.In 1988 the Government realigned import and domestic sales taxes andfurther compressed the tariff structure. The import licensing system wasabolished in early 1989. Currently Ghana's tariff structure generallyprovides for a relatively uniform level of protection, with most duty ratesranging from zero to 25 percent. Special mport taxes raise nominalprotection to 25-60 percent for some products. With the introduction ofthe super sales tax in 1990, however, some backsliding on tariff reformoccurred. The rates originally applied were high and, since in practiceapplied only to imports, raised effective protection for some productssignificantly. The definition of luxury goods was also very broad. Areduction In these rates was announced in the 1991 budget (para. 47).

15. Vhen the Economlc Recovery Program began in 1983, revenueswere only 5.5 percent of GDP. The tax structure was also costly from anefficiency standpoint due to excessive reliance on internationaltransactions, particularly cocoa, and high rates of company and personalincome tax levied on a low base. The move to a more realistic exchangerate improved revenue performance. In addition, the Government began toreform the tax structure. Over the period 1987-1990, the Governmentexpanded consumption taxation (petroleum and motor vehicles), consolidatedtax rates, and improved administration. Relief was raised for personalincome taxes and some of the loopholes relating to allowances were closed.The Government also lowered the implicit tax on cocoa and corporate taxes(from 55 percent to 45 percent for manufacturing, construction, farming,and exports and to 50 percent for all other sectors). The unequal taxtreatment of dividends and interest on savings began to be addressed byconverting the 30 percent withholding tax on dividends into a final tax.The Government also examined, with IMP technical assistance, the structureof taxes on capital and investment income with a view to identifying waysto stimulate private savings and investment and increase the efficiency ofresource allocation.

16. Public Resource Management. Measures focused on three areas -public expenditures, the civil service, and state-owned enterprises. Inthe area of expenditures, the Government strengthened its capacity toprepare the rolling, three-year Public Investment Program (PIP). Plannedpublic sector investment in 1990 continued to concentrate on physicalinfrastructure (58 percent). Outlays on social sectors accounted fornearly 20 percent of the program. Expenditure data for 1989-90 showed thatprogress was being made in developing the capacity to implement theprogram. Expenditures from budgetary resources were 95 percent of theplanned level, and the magnitude of sectoral over- or under-expenditure waslower than in the past.

17. Progress was made in reforming the Civil Service and GhanaEducation Service pay structure and in reducing overstaffing. TheGovernment videned the pre-tax ratio between the compensation of thehighest and lowest paid civil servant from about 5.5:1 in 1988 to 9.4*1 in1990. After retrenching slightly over 12,000 excess staff (including non-

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teaching staff of the Ghana Education Service) in each of 1987 and 1988,the Government laid off almost 14.000 in 1989. and by end 1990, a further12,000, cumulatively representing about 16 percent of total employment.The Government also has introduced measures to control and monitorrecruitments more carefully.

18. The main objectives of state-owned enterprise (SOB) refotmswere to reduce the size of the sector through divestiture and to improvethe efficiency of priority enterprises through the monitoring of agreedtargets based on corporate plans and associated performance agreements.Initial progress on the former has been slow mainly because most of theearly efforts focused on preparing the framework for privatization,including buildti. more support within the Government, creating aninstitutional arrangement for implementing the program and developingoperating policies and procedures. Initial delays adversely affectedprivate sector confidence. As of the end of January 1991, a total of 38enterprises had been divested, of which 23 were liquidations ofnegligible, inactive companies and 15 were privatizations (including jointventures, management contracts, leases, and sales of shares) since theprogram began in 1987. On the other hand, capacity to use the corporateplans and performance agreements as one instrument to improve theoperations of state enterprises has increased. For eight state-ownedenterprises, out of the group of 13 preparing corporate plans for whichfinancial results are available. the value of profits (after interest andtaxes) rose from .5 percent of GDP in 1988 to 1.5 percent of GDP in 1989.

Financial System

19. As the Government began to implement the structural adjustmentprogram it recognized that the weak financial system was an obstacle. Inparticular, it was hindering the ability of investors to respond toimproved incentives aud the mobilization of domestic savings. Banks inGhana had been adversely affected by the deterioration in the economy. Thesystem also had been distorted by interest rate controls, selective creditpolicies, lack of competition, and weak supervision by the Bank of Ghana.This led to pervasive financial distress which was characterized by hugenon-performing loan portfolios. The financial reforms which began to beimplemented in 1988 included: enactment of a new Bankin8 Act whichestablished prudential banking provisions, introduced uniform accountingand auditing standards and improved reporting requirements to the Bank ofGhana; a strengthening of Bank of Ghana's supervision capacity: and aphased program of bank restructuring Involving the replacement of non-performing assets with performing assets, primarily bonds, which wascompleted in early 1991. Now that the banking system is on a strongerfooting, its ability to respond to the demands for credit from the privatesector is improved.

The Government's Policy Agenda and Issues

20. The commitment to stay the course of reforms, determinedmacroeconomic policy decisions and the willingness to tackle difficultissues have enabled Ghana to make significant progress in stabilizing andrestructuring the economy. Yet, the Government's economic vision entails astill extensive agenda. The improvements thus far largely reflect progresstowards restoring macroeconomLc balance, but much more remains to beaccomplished. Economic recovery has beeu driven by higher publicinvestment and now needs to shift to private sector led growth. Servicesremain well below past standards, state-owned enterprise reforms have moved

w 6 -

slowly, human resource development, poverty and environmental issues needto be addressed, and the limitations in the Government's implementationcapacity have been magnified by the increased demands of the reformprogram. Efforts also are underway to widen local participation indecision-making through elected district assemblies and to draft a newconstitution.

21. Private Sector. The share of investment in GDP is estimatedto have reached 16 percent and the share of national savings 8 percent in1990. These shares are much lower than the 22-23 percent investment rateand 19 percent savings rate in countries which have consistently achieved3-7 percent per annum overall growth.l1 This gives cause for concernbecause, as excess capacity in the economy shrinks, maintaining evencurrent rates of growth will require more investment. Since 198Sinvestment has risen; in the early years, this was driven largely by publicinvestmint. In the future, public investment is expected to grow moreslowly than in the past. Therefore, it is estimated that privateinvestment would have to grow at an average of about 15 percent a year inreal terms to maintain a GDP growth rate of about 5 rercent a year.

22. Ensuring that adequate resources, particularly credit, areavailable to support a rapid growth of private investment is an importantpolicy objective of the Government. To achieve this, Governmentexpenditures will be managed carefully to avoid crowding out the privatesector. Tn each of the laet four years, the Government has contributedresources to the banking system averaging 1 percent of GDP, which haspermitted increased credit to the private sector in spite of tight monetarypolicies. This will continue to an even greater extent over the next fsvwyears. In addition, the Government will persevere with the financialrestructuring of banks, Including the Bank of Ghana, and the overhaul oftheir management systems. Private savings will be encouraged to growsteadily through higher corporate profits, the restoration and maintenanceof positive interest rates, the availability of an increased array offinancial instruments, sharper competition between banks for domesticdeposits, and a growing range of investment opportunities.

23. Private investors are still reluctant to commit themselves tonew investments. Among the factors responsible for this reluctance arepoor infrastructure and the large number of public enterprises. Inaddition, some officials still iistrust the profit motive and believe incontrols. More generally, private investors are not convinced that thereforms are permanent. 6hana recognizes that it will take more than goodeconomic management to transcend these legacies from the past. It requiresa shift in attitudes towards greater openness in Government, lessintervention in private economic decisions, a more transparent legal andregulatory system, and better information on the economy and Governmentpolicies and operations. Regulations need to be clearer and subject toless discretion by government officials and businessmen must be confidentthat disputes will be handled through due process. Furthermore, to beperceived by the business comunnity as welcoming, rather than justtolerating a larger private sector, the leadership is taking the initiativeto demonstrate its support for private sector development.

24. Mana_ement and Imlementgtion Capacity. With the deepening ofthe adjustment process and the build up of livestment activities,

l/ World Bank, World Develoment Reort, 1989, Table 2.1.

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absorptive capacity is being challenged. The Government has made someprogress in invigorating the civil service -- a major challenge afterdecades of deterioration in discipline and salary levels. However, thestill low pay and compressed wage scales between higher and lower gradesmakes it difficult to attract many professionals to the civil service. Thequality of information is poor and the ability to analyze data requiresconsiderable improvement. Decision-making processes are overlycentralized, cumbersome and slow. Procurement procedures need to beupdated and streamlined urgently to reduce long intervals between tenderingand receipt of goods and services. Mindful of the excesses of previousregimes, the Government has installed complex systems of checks andbalances which cause delays. Prompt accounting and publication of auditsand clearer guidelines would reduce the need for such systems, and permitdelegation of some decisions.

25. Lonu-Term Issues. Human capital development and povertyalleviation continue to be central concerns. The Government recognizesthat Ghana's development prospects depend not only on restructuring theeconomy but also on developing the human, and preserving the natural,resource base. First, progress in lowering the population growth rate isessential if the gains from economic recovery are to translate intoimproved incomes and living standards. A continuation of current fertilitylevels will triple the population by the year 2020, with seriousrepercussions for health and education services, water supplies, housing,employment and the environment. Second, the progress in drawing up acomprehensive environmental action plan needs to be followed by effectiveinitiatives to stem environmental degradation and measures to ensure thatenvironmental costs are taken Into account in economic decision-making.Third, adequate and quality health care and education must be provided todevelop a healthy and skilled vork force and to increase productivity.

26. The Government believes that the real test of the success ofeconomic reforms is the extent to which they lead to an enduring reductionin povert, in the country. The strategy for alleviating poverty comprisesfour components: first, increasing the demand for labor through highlevels of growth and * labor-intensive pattern of development; second,increasing the availa&Ility and efficiency of capital to raise theproductivity of labor; third. increasing the productive assets of the poorthrough improved health and education services and rural mobility; andfourth, allocating public expenditures to programs which particularlybenefit the poor. Although the program of actions to mitigate the socialcosts of adjustment (PAMSCAD) took time to gain momentum, implementation ofsome components is underway. These include community initiative projects,support to women's groups, hand-dug wells and low-cost sanitation, prioritypublic works and non-formal education. As experience is gained, thesuccessful components will be integrated into the investment program as wasintended at the outset.

Bank Grout Operations

27. The objective of the Bank's operational strategy for the next3-5 years is to assist the Government to sustain macroeconomic stability,while shifting emphasis to sectoral improvements. Three elements providethe basis of the program proposed. First, facilitating private sectordevelopment is central to achievement of the country's growth objectives.Second, improved management and administrative capacity will be essentialto the Government's ability to effectively utilize the resources which havebeen mobilized and to create an enabling environment for investment.

Finally, increased efforts on longer term development issues such aspopulation growth and environmental pressures will be key to sustaining theprogress of the program.

28. Private Sector. The Bank's program reflects the high priorityof private sector development. In agriculture, the strategy is designedto increase its contribution to rural incomes and employment and toencourage higher output of commodities, in addition to cocoa, for whichGhana has a comparative advantage. Reforms to eliminate subsiaies andprivatize marketing of fertilizer and other inputs are taking hold.Furthermore, a medium term agricultural development strategy (MTADS) whichdefines the measures needed to promote growth has been prepared jointlywith the Ministry of Agriculture. Policy and institutional reforms wouldbe supported through a sector adjustment operation, complemented byinvestment lending to increase smallholder access to strengthened supportservices and infrastructure. These activities would pay careful attentionto preserving the natural resource base.

29. The Bank also collaborated with the Government in anexamination of the constraints to more dynamic private investment. Thestudy identified possible reforms in tax structure and the legal andregulatory framework. Implementation of these reforms would be supportedby the proposed credit. The Bank will continue assistance to helpstrengthen the financial system. The next phase of financial sectoradjustment would encompass the strengthening of the Bank of Ghana, measuresto develop capital markets, and further reform of the banking system,including measures to lower intermediation costs and increase competition.The impact of these measures, coupled with lower inflation, should increasethe availability of longer-term financing for investors.

30. Support for private sector development also calls forstreamlining the role of the public sector In the economy. An importanttheme in the Bank's dialogue with the authorities is the disengagement ofGovernment from the production of goods and services which could be moreefficiently provided by the private sector. Acceler.ating the divestitureprogram is important for several reasonss to send a strong signal that theGovernment does not intend SOEs to crowd out the private sector and toallow the Government to focus its limited resources on activities where ithas a comparative advantage. The divestiture of some state-ownedenterprises and improvements in the operations of other 803E providingessential public goods or services would be supported under the proposedfourth adjustment credit.

31. A critical role of Government in support of the privatesector, and one that Ghana has played well in recent years, is theprovision of public goods and services, particularly infrastructure. TheBank has assisted with rehabilitation of transportation, power, and urbanservices. Major programs to improve telecomunications and water suppliesare also underway. The strategy for the future is to assist the Governmentins (i) continuing to focus public expenditures on high priorityinfrastructure investments; (ii) introducing sound maintenance practices toprevent the existing capital stock from deteriorating; (iii) reducing thebudgetary costs of infrastructure investments through increasedcommercialization, cost recovery, and reforms in local taxations and (iv)encouraging the private provision of public goods and services,particularly urban services.

32. Manatement and Imolementation CayacitX. Better implementationwill be critical to the sustained success of the Government's economicstrategy. Improvements in public sector management are an importantelement of the Bank's lending activities. Almost all investment projectswould continue to include support to improve the capabilities andperformance of relevant agencies. A technical assistance credit issupporting improvements in economic management. It would help strengthenbudget preparation, execution and monitoring and aid and personnelmanagement. In addition, sector work on management training andimplementation capacity is being carried out in FY91. Civil service reformis central to the strengthening of implementation capacity and would besupported under the proposed operation. A streamlining of contractapproval procedures would also be supported under this credit.

33. Long-Term Issues. Because of weak implementation, Banksupport to health and family planning services has had limited success.More recently, the Government has endorsed the findings of Bank populationsector work which lay out the consequences of alternative strategies andrecommends an approach. Assistance for family planning has beenincorporated in a health and population project recently approved by theBank. Decisive Government action on program and institutional issues wouldbe supported by additional assistance. The recent project aims to increaseaccess to quality primary health care, improve the availability ofessential drug supplies, and improve hospital services in underserved areasof the north. At the policy level, the emphasis is on adequate costrecovery and the development of a maintenance capability to improve thesustainability of health services, and adequate provision for non-wagerecurrent expenditures. At the institutional level, the focus is onreorganizing and strengthening the Ministry of Health.

34. With Bank assistance, the Government has implementedimpressive education reforms, improving the quality, effectiveness andrelevance of education, expanding and improving access, and makingfinancing more efficient and equitable. The primary enrollment ratio hasrisen from 65 percent in 1987/88 to 72 percent in 1989190, and increasedbudgetary allocations have helped rehabilitate schools and provide teachingmaterials. Primary and secondary curricula have been revised, subsidies atthe secondary and tertiary levels are being eliminated, and excess staffare being retrenched. A second operation to support the next phase of theprogram has been approved by the Bank. It would consolidate the reformsinitiated at the primary and junior secondary levels and extend them tosenior secondary schools. In addition, based on sector work and drawing onpilot programs being carried out under PAMSCAD, the Bank is proposing tosupport a functional literacy program. Sector work also has been initiatedto analyze the constraints and potential for formal and non-formal skillstraining to help meet some of the public sector's needs for technical andmanagerial manpower. Finally, Bank assistance is planned in response torecent requests from tertiary education institutions, particularlyuniversities, indicating a willingness to adopt the reforms necessary.

35. Much of the Bank's proposed strategy discussed above supportsthe Government's objective of alleviating poverty. The support, throughthe Bank's macroeconomic and sector operations, of policies which emphasizethe efficient use of capital and foreign exchange avd encourage the growthof such relatively labor-intensive activities as smallholder agriculture,labor-intensive road works and small scale manufacturing encourages thedemand for labor and promotes higher productivity. In designing anapproach to support women in development, the Bank's strategy is to ensure

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gender sensitivity in our overall country work; bring services physicallycloser to women; involve women in the formulation and management ofprograms benefiting them; and work with and strengthen women's groups sothat they are better placed to take advantage of economic opportunities.The Bak is supporting several pilot programs targeted to women. Forexample, agricultural extension services are being geared to women farmerswho will account for the majority of farmers at the turn of the century.In addition, the participation of women in road work under roadrehabilitation projects would increase their off-farm income. The Bankwill continue to support biannual household expenditure surveys which areproviding information to analyze the distributional consequences of variouspalicy measures. The survey data will help to design public expenditureprograms which are more sensitive to poverty concerns and the needs ofwomen, for example, by ensuring that the spatial distribution of recurrentexpenditures in health, education, and agriculture address inequalities inthe availability of public services.

36. In the area of environment, the Bank is working closely withthe Government to help complete the Environmental Action Plan (EAP). It isexpected that a substantial proportion of the investments and policy andinstitutional measures in the EAP will be incorporated into plannedprograms in the respective sectors. Direct investments, institutionalstrengthening, and policy actions, which do not lend themselves tointegration with other activities, would be included in the design of afree-standing operation to develop the capacity of the EnvironmentalProtection Council to provide policy guidance and effective oversight onenvironmental issues.

37. With respect to aid coordination, the Bank would reinforce itsefforts to mobilize ads!quate levels of concessional aid to finance bothadjustment lending (within the framework of the Special Program ofAssistance) and investment activities. Through the vehicle of t4eConsultative Group meetings, an average of US$760 million in commitmentsper annum was mobilized to support the reform effort in Ghana between 1987and 1990. While the challenge of aid coordination in Ghana was initiallymanageable because most aid was funneled through the Bank's adjustmentlending, as donor interest has shifted to sectoral programs, theinstitutional weaknesses of the Government are being magnified. The Bankwould, therefore, together with other donors and the Government, help putmeasures into place to improve donor coordination and ease theadministrative burden on the Government, for example, by minimizingduplication in donors' appraisal and supervision activities and takingadvantage of opportunities for cofinancing. The Bank would also helpensure that donor assistance is guided by the public investment program anddoes not undermine the Government's efforts to rationalize publicexpenditures.

The Lending Program: Level and Composition

38. In the past four years, IDA's lending program has beendominated by adjustment lending, including two Structural AdjustmentCredits and a Financial Sector Adjustment Credit (Table 1). For the three-year period FY91-93, planned IDA lending is estimated to total about US$830million, with about five operations annually. In order to continue supportfor major policy actions, three adjustment credits are planned early in theprogram - the proposed operation, a second financial sector adjustmentcredit, and an agricultural sector adjustment credit. This timing ispredicated on commensurate acceleration of policy actions, the maintenance

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of appropriate macroeconomic policies, and the expectation that theGovernment will improve its implementation capacity. The composition ofthe lending program reflects Ghana's evolving needs and the opportunitiesfor the Bank to maximize its impact. Starting with the proposed Program toPromote Private Investment and Sustained Development, the focus is shiftingfrom broadly-based to more focused adjustment operations. These would becomplemented with investment lending to achieve important efficiency gainsand institution-building objectives. The sectoral distribution of projectlending would continue to emphasize the rehabilitation and expansion ofeconomic infrastructure to support private sector growth, and a greaterfocus than in the past on longer term issues, including human resourcedevelopment, population and environment. After the current fiscal year,the share of adjustment lending is expected to drop to about a quarter ofthe lending program (FY92-95). The overall allocation and the proportionsof quick-disbursing adjustment lending and investment lending will be keptunder review taking into account macroeconomic performance, particularlythe balance of payments position, performance under ongoing projects, andthe availability and composition of assistance from other donors.

Table 1: Ghana -- Distribution of Lending, FY86-90

(US$ million)

Amount 2 Number ofProiects

Adjustment Lending 415.8 39.9 4Agriculture and rural development 116.4 11.2 4Population and human resources 99.5 9.6 3Urban and water supply 105.6 10.1 3Transportation 84.5 8.1 2Power and telecommunications 113.3 10.9 5Industry and oil/gas 85.0 8.2 3Technical assistance 21.3 2.0 2

Total 1041.4 100.0 26

39. IFC has played an important role in the development of theprivate sector since the initiation of the reforms, in particular in goldmining. It has played a catalytic role in mobilizing direct foreigninvestment. IFC will continue to support the rehabilitation and expansionof gold mining, and locally-based firms in the manufacturing and agro-processing sectors. Support for small and medium scale enterprises wouldbe provided through the Africa Enterprise Fund (AlF) and the Africa ProjectDevelopment Facility. The response of Ghanaian entrepreneurs to the AEFhas been strong. HIGA would be an important partner in helping buildconfidence among the business coammunity. Ghana is the first country whereMIGA helped organize a conference to promote direct foreign investment.

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Relations with the DMF

40. Since the inception of the reform program In 1983, the IMP hasmaintained a close policy dialogue with the Ghanaian authorities. As ofend-December 1990, Ghana's outstanding use of IMF resources amounted to SDR524 million. Since 1988, Ghana has received support from the IMF throughthe Enhanced Structural Adjustment Facility (ISAP) under a three-yeararrangement equivalent to SDR 388.6 million, or 190 percent of quota. Thethird year of the arrangement covers the period January-December 1991.Reflecting the substantial support provided at the start of the reformprogram, net transfers from the IMF are expected to be negative after 1991.For the 1992-95 period, the negative transfer would average US$80 millionper annum. The IMF has provided substantial technical assistance to theGovernment, most recently on capital income taxation, systems for publicexpenditure control and monitoring, and monetary management. In a processthat has become increasingly collaborative, the Government, jointly withthe IMF and the Bank, has prepared four Policy Framework Papers (PFPs).The PFP is used to inform donors, through both the local aid coordinationgroup and the CG, of the Government's future macroeconomic and sectoralpolicies and programs.

Summary Assessment

41. As Ghana begins to build on the economic gains fromstabilization and adjustment to promote self-sustaining growth, a new setof issues needs to take center stage in its strategy. The first is theneed to tap more effectively than hitherto the resources of the privatesector. The second is the need for the Government to strengthen itsimplementation as the adjustment program matures. Finally, the Governmentneeds to address human resource development, poverty, and environmentalissues, which will ultimately determine the economic and socialsustainability of the program.

PART III - POLICY AGENDA 1991-92

42. In order to promote higher and more efficient production fromthe economy, the Government must ensure the existence of an enablingenvironment for private investment. Beginning in 1991, the adjustmentprogram will emphasize to a greater extent than before measures toencourage higher levels of private savings and investment. Macroeconomicstability is key and will be maintained through appropriate exchange rate,fiscal and monetary policies. Reforms of incentives affecting privatesector decisions on investment and savings will be consolidated in the areaof tax policy and administration. The Government also will make theregulatory framework more consistent with the liberalized economy. Majorinitiatives are required in tax policy and regulatory framework in order tobring about the desired expansion of investment and its correspondingImpetus to growth. The Government also will make further progress on stateenterprise reforms. The Government will maintain the momentum of reformsdesigned to increase the efficiency with which public resources are used,including improvements to public expenditure management and civil servicereforms. Measures to alleviate poverty are incorporated in the program.

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Policies to Promote Private Investment

43. Macroeconomic Stability. Macroeconomic conditions have apervasive influence on the private sector through their effects on theproduction and investment climate in which private producers operate.Ghana has made considerable progress in this area but additional effortsare needed to sustain these improvements and to ensure that inflationarypressures are brought under control. The Government has set out itsmacroeconomic objectives and corresponding policies for the period 1991-93in a Policy Framework Paper.2/ A table showing the expected trends inkey economic indicators, consistent with the PPP, is attached to the Letterof Development Policy (Annex II). 31

44. The Government will ensure macroeconomic stability bymaintaining a free and flexible exchange rate determined by a wholesaleauction and backed by an extended interbank market. It will modifygradually the present scheme for the surrender of export proceeds tochannel a larger proportion directly through commercial banks (includingdevelopment banks) instead of the Bank of Ghana. By June 1991 thesurrendering of export proceeds from goods other than cocoa and gold willbe shifted from the Bank of Ghana to the commercial banks. Fiscal policywill be designed to increase public savings and to ensure that the publicsector will not crowd out the private sector. The Government intends totake the actions necessary to restore and maintain positive real interestrates and to implement monetary policy so as to reduce inflation. Effortsby the Bank of Ghana to mop up excess liquidity sharply lowered the growthof money supply in 1990, which is beginning to dampen inflationarypressures. Taken together, the impact of these actions and the furtherstrengthening of the banking system would improve investors' confidence andincrease the capacity of lending institutions to provide longer-termfinancing. Over this period, any other actions required to maintainmacroeconomic stability would be determained in consultation with the IMF,as well as the World Bank.

45. Tax policies and administration. While tax policies willcontinue to address the need for efficient revenue mobilization, the focuswill be on ensuring that the tax regime promotes economic growth through amore favorable climate for investment. The 1991 budget announced severalmajor tax initiatives designed to improve the investment climate. Thereform of capital income taxation was the most extensive. The corporatetax rate was lowered to 35 percent from 45 percent for all sectors, excepttrading, finance, and printing (which remain at 50 percent). The dividendwithholding tax was lowered from 30 to 15 percent. Capital gains taxationwas reduced to a maximum of 5 percent and exempted in the case of publiclytraded shares, mergers and acquisitions. The use of capital allowances formanufacturing firms was extended. On personal income taxation, the top

2I GHANAs Policy Framework PaDer, January 1991-December 1993.

31 Since the PFP was finalized in late 1990, the Ghana StatisticalService has revised national accounts estimates (1987-90) and oilprices have declined. The President's Report refers to the datapresented in Annex I which takes into account the most recentinformation. Future trends as shown in the PFP indicators and thedata in Annex I are broadly consistent.

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marginal rate was lowered from 55 percent to 25 percent, while the personaldeduction was raised to a level closer to international norma. Severalmajor allowances which were previously not taxed have been consolidatedinto the tax base.

46. The Government intends to continue its efforts to rationalizethe system of income taxation. An important part of these efforts will beto negotiate and complete double taxation agreements with capital exportingcountries. The tax treaties would lower the additional tax burden thatmight be levied by the home countriest they would also enhance foreigninvestors' confidence in doing business in Ghana. The Government also willattempt to narrow the current discrepancies in: (a) the tax rates andallowances across sectors; and (b) the top personal tax rate (25 percent)and the lowest corporate tax rate (35 percent). Better alignment of thevarious taz rates would limit potential abuses in the form of incomeshifting across firms and individuals. The aim would be to lower the rateof corporate tax from the current range of 35-S0 percent to 30-40 percent.The Government also will consider a further reduction in the tax ondividends as well as an extension of the carry-over period for losses,particularly for manufacturing. Indications are that the revenue effectfrom the adjustments in company income taxes will not be significant asreceipts from taxes on dividends, capital gains, and manufacturing profitsare small, less than 1 percent of total revenue in 1989. However, thedeterrent effect on new investment is strong. In addition, the changeswould be offset with revenue enhancement measures such as the higher excisetax on petroleum.

47. On indirect taxation, the principal sales tax rate was loweredfrom 22.5 to 17.5 percent in the 1991 budget. The Government will completea comprehensive review of the design options and feasibility forimplementing a value added tax (VAT) and will decide by June 1992 whetherto replace the current sales tax by a VAT. Implementation of a VAT wouldcontribute to revenue generation. The super sales tax (para. 14) wassignificantly revised with a set of new rates ranging from 10 to 100percent compared to the previous 75 to 500 percent.

48. The Government will further restructure import duties toachieve a lower and more uniform level of protection and eliminate specialimport taxes in 1992, except for beer, spirits, and tobacco products, whichwill have their special import taxes reduced to 10 percent. In addition,the government will reduce the scope of duty exemptions, and streamline theduty drawback system to encourage non-traditional exports. To informfuture policies the Government will complete by June 1991 a study on theeffect of trade liberalization on domestic industry, and will establishprocedures and criteria to review rates of duty on particular products.

49. Upgrading tax administration remains a priority objective ofthe NRS. To improve tax administration, the Government will extend theunique identification number for companies to individual taxpayers byDecember 1991. A computerized customs data base (ASYCUDA) has been inoperation and its extension to other indirect taxes is underway. A taxappeals tribunal has been set up and has been in operation since December1990. In order to speed up the customs clearance process to agreedstandards two actions will be taken. One, physical inspection of imports,currently conducted separately by customs, the port authority and securitypersonnel would be combined into a single stage. Also processing ofdocuments would be allowed to start before the arrival of goods in order toalleviate congestion and delays. As tax administration improves, the

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authorities would reduce the requirements for tax clearance certificateswhich now add to the cost of doing business in Ghana. In early 1991 theGovernment streamlined the use of tax clearance certificates by deletingthe requirement on nine categories of transactions.

50. Regulators Framework. Although Ghana has deregulated theeconomy in several areas, it has not progressed to the extent warranted bythe increasing importance of market forces under the Economic RecoveryProgram. Remaining problems, as outlined in the joint IDA/Gov-rrment ofGhana report, Towards a Dynamic Investment Resnonse, relate to businessestablishment and investment licensing procedures, expatriate quotas,technology transfer, foreign exchange transactions, labor laws andregulations, customs and tax administration, the approval process under theInvestment Code, and foreign investment regulations. Collectively, theseregulations sustain an image of Ghana as a country with excessivegovernment intervention in private business. The aim of reforms over thenext two years would be to shift from regulation through direct controls toregulation and protection of consumer Interests through the discipline ofthe market and competition.

51. Several laws, most of which were enacted prior to the ERP andrun counter to the spirit of revived support for investors, would bereviewed and then amended or repealed. These include the Exchange ControlAct, the Industrial Relations Act, the Labor Decree, the ManufacturingIndustries Act and the Investment Code. Although some provisions of theselaws are no longer enforced, changes in the laws are necessary in order toestablish a transparent and unambiguous legal framework. Revisions in thelaw will be guided generally by the need to reduce delays in the investmentapproval process and the number of Government agencies involved. To openup the process of change and to bring in the expertise available in theprivate sector, as well as to benefit from an understanding of the concernsof the private sector, the Government has appointed an advisory group toprovide guidance and review changes in the various laws and regulations.The members of the group are from a wide spectrum of the private sector andlegal profession. The government also has established a technical supportteam (with members from various public agencies) to review and preparedraft proposals for amending or repealing existing laws. The terms ofreference and implementation schedule for revising the legal framework havebeen finalized.

52. The revised Exchange Control Act will incorporate simplifiedprocedures for foreign exchange transactions and a primary role forcommercial banks in the routine handling of foreign exchange transactions.In the case of the Labor Decree, consideration will be given to providingmore flexibility for businesses regarding the formal requirement to usepublic employment centers when hiring employees. The experience of severaldeveloping countries indicates that fiscal incentives are unimportant inattracting investment. What is important is the general level of taxationon companies (para. 46) and a positive, stable enabling environment. Animportant objective of the revision of the Investment Code would be toconsider the elimination of most fiscal incentives, thereby permittinglower overall company taxes, and removing the need for economic approval byGIC of investments. Any remaining fiscal incentives would be incorporatedinto the tax and tariff codes and granted automatically to all investors onthe basis of documentary evidence. Regarding technology transfer, theGovernment would revise the guidelines to make them clear, listing standardclauses to be included and restrictive clauses which would not beacceptable. The revised guidelines are expected to be issued to the public

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no later than mid-1992, and would make clear that the choice of technologyis left to the entrepreneurs and that Government agencies are not to beinvolved in assessing the technical know-how to be imported.

53. In addition, preparations are underway to consolidate theexisting application forms for business registration and, in the case ofsmall businesses, to simplify it. Better exchange of information betweenGovernment agencies as well as the liberalized economy is expected to leadto the elimination of remaining licensing requirements of the Ministry ofScience, Industry, and Technology and the Ghana Investment Center shortly.The need for prior GIC approval to remit interest, dividends and technicalfees will be abolished. Payments associated with technology transferagreements no longer require prior approval from the Bank of Ghana.Immigration procedures for expatriate technical and managerial personnelwill use eased and made more automatic. Implementation of the previousGovernment decision to decontrol all but a few prices will be strengthened.The measures outlined above will be important to encourage a more dynamicinvestment response from both domestic and foreign investors. TheGovernment will also take steps to improve the timeliness and accessibilityof important economic information such as price data, output trends, andother statistics in order to provide the information businesses need tooperate in a market economy. The Economic Management Support Project isassisting the Ghana Statistical Service in this area.

54. State-Owned Enterorise Reforms. Critical elements of theprogram will continue to be measures to increase the efficiency of stateenterprises producing public goods and services and to promote aprogressive disengagement of the Government from the production of goodsand services which can be provided more efficiently by the private sector.In addition, state enterprises need to contribute more to the efforts toincrease public savings. The objective is that sufficient savings shouldbe generated to cover operating costs, service debt, and finance anincreasing share of investment.

55. One tool which the Government will continue to use ispreparation of annual corporate plans and performance agreements for 13priority state enterprises. Performance agreements based on corporateplans will be signed by all relevant parties by May 1 of each year. Aprerequisite for this effort is timely availability of audited statementsfor these enterprises (i.e., no later than nine months after the end of therespective financial year). Review of the performance agreements isexpected to highlight critical factors which may adversely affectperformance, such as constraints posed by the mechanism for adjustingtariffs, which would need to be addressed by the Government. Other issuescould include the autonomy of enterprises in pricing, staffing, andprocurement, and any cross-debts among enterprises and between theenterprise and the Government. The performance agreements will includefurther cost savings measures, retrenchment of excess staff, andconsideration of contracting out services to the private sector. The StateEnterprise Commission (SEC) will monitor and evaluate implementation ofthese agreements on a semi-annual basis. The evaluation report will besubmitted to the SOB Boards of Directors, the relevant sector ministries,and MFEP. Summaries of the financial accounts of the 13 priorityenterprises will also be published more widely.

56. In addition, the SEC would continue to undertake work toidentify complementary actions to improve the policy and legal frameworkfor state enterprises and to improve their efficiency. This would include

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the completion of an exercise to classify all state enterprises. Theguidelines designed to ensure financial discipline in the relations betweenthe Government and state-owned enterprises will continue to be enforced

57. The Government intends to broaden and to accelerate theprogram to divest state enterprises by focusing on larger, more profitableenterprises and others which are attractive to private investors. A workprogram for divestiture has been agreed with IDA for 1991, focusing on keysteps which need to be undertaken by the Government. The critical actionsinclude preparation of a list of state enterprises to be divested, updatingfinancial statements, valuation, preparation of company dossiers,advertising and identifying investors, evaluation of investors' proposals,negotiations with selected investors, approval of divestiture by DIC andconclusion of transaction. The work program is sufficiently large(covering about 40 enterptises) to allow the Government some flexibility inreaching agreements on the sale of particular enterprises, while at thesame time ensuring meaningful progress. Implementation will be closelymonitored by the Government and IDA. Agreement on the 1992 divestmentprogram will be reached between IDA and the Government no later than theend of March 1992. New avenues for divestiture will be explored, includingpublic share issues, buy-outs by management and employees, managementcontracts, and debt-equity swaps. The implementation of complementaryGovernment measures to improve the enabling environment for privateinvestment is a prerequisite to achieving significant progress. Actions todevelop capital markets - for example, the recent establishment of a stockexchange - would also make a positive contribution. For all stateenterprises, regardless of whether they are slated for divestiture orcovered by corporate plans, the Government will encourage their operationon commercial principles by avoiding resource transfers from the budget aswell as loan guarantees.

Public Resource Management

58. Other actions related to the public sector would contributeto the creation of an enabling environment for private investment.Measures to improve the efficiency of the public sector would enable theGovernment to be more effective in improving economic and socialinfrastructure. This is necessary in order to lower the costs of doingbusiness in Ghana which are high, in part because of still inadequateinfrastructure and poor services such as teleconmmunications. Efforts alsowould be made to improve information flows to tho private sector and toincrease the accountability and transparency of Government operations bypublishing data more widely on the budget and central government accounts.

59. Public Zxpenditure Management. Preparation of a rolling 3-year Public Investment Program in consultation with IDA will continue to bean important component of the adjustment program. More attention will begiven to the recurrent cost implications of the investment program byimproving information and better integrating hearings on the developmentand recurrent budgets. Public investment will continue to emphasizeimprovements in economlc and social infrastructure. To guide thepreparation of the expenditure program, the Government will continue toupdate the macroeconomic framework at least twice a year.

60. Emphasis will be given to improving budgetary procedures andstrengthening expenditure monitoring and control and implementation. Tostreamline the preparation of the budget, the budget circular will includeindicative sectoral ceilings for recurrent and capital expenditures. By

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1992, the Government will expand the budget presentation from the current*narrow' basis (excludes external project financing) to a *broad' basis(includes external project financing). The budget will also Integrate thedevelopment budget more completely. Both of these objectives will befacilitated by improvements in the computerized budget information systemin the NPEP, to be supported under the Economic Management Support project.Sector ministries will include In the public investment program (PIP)submission a summary project and financing table to ensure that they makethe critical intra-sectoral trade-offs within the allocated ceilings. Aspart of the efforts to increase the transparency of Government operationsand the flow of information on the economy, the Government has begun topublish the budget in summary format in a document made widely available tothe public and is speeding up the publication of the complete budget andinvestment program.

61. In order to strengthen expenditure monitoring and control, theGovernment will implement a commitments-based monitoring system. Thiswould enable MPEP to project the timing and cost of contractual claims onthe budget and to ensure that new contracts are not signed if they wouldsurpass budgetary allocations and that domestic arrears do not build up.Management of the recurrent budget is hindered by the lack of detailed dataan actual expenditures. The efforts of the Expenditure Monitoring Unit(EMU) in NFEP to collect and analyze this information will be strengthened,supplemented by improvements in the timeliness and format of theinformation supplied by the Office of the Controller-Accountant General.In order to monitor implementation of the public expenditure program,reports on actual expenditure will be prepared twice a year - one coveringthe first six months (no later than September) and the other the full year(by March).

62. As part oi its efforts to improve implementation capacity andto increase the pace of project execution, including the drawdown of donorfunds, the Government intends to tackle bottlenecks. Approval of contractsis centralized at the Public Agreements Board (PAB) which has causedlengthy delays. As a first step, the Government has decided that the PABwill meet more frequently. Technical support is also being provided inorder to help speed up its review. In addition, a review is beingundertaken of implementation procedures and approval processes for publ.cprocurement and supply of materials. It is being financed by a SpecialProject Preparation Facility (SPPF), provided by IDA and would be completedby the end of 1991. The study would identify actions to improveimplementation procedures and procurement in order to reduce delays.

63. Poverty Alleviation. Since the inception of the UP, theGovernment has been concerned about (i) minimizing any adverse impacts ofthe adjustment process on poor and disadvantaged members of society and(ii) ensuring that the gains from adjustment and growth are equitablydistributed, and used to improve the well being of the poor. Publicexpenditures will play a key role in influencing and encouraging economicactivities and social investments that benefit disadvantaged Ghanaians.The Government intends to extend and expand the information on the povertycharacteristics of the nation, disaggregated by region. There are variousexercises underway in the Ministry of Pinance and Economic Planning, basedon information generated by the Ghana Statistical Service through annualhousehold expenditure surveys (the Ghana Living Standards Survey or GLSS),and in the Ministry of Local Government. Initially the focus will be onthe regional composition of expenditures. A comparison of povertycharacteristics by region with the flow of public expenditures to regions

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would guide actions to influence the composition of expenditures in thebudget. Another dimension along which the poverty focus will be monitoredand Improved will be that of program categories. Ongoing efforts -- whichhave achieved some success -- to improve the provisions for basic educationand primary health care will be continued. Programs to improve health andeducation services will not only have a direct impact on the standard ofliving of the poor, but also will increase their productivity. Inaddition, there will be an emphasis on agricultural extension services.

64. The regional and programmatic composition of the 1991 budgetis being analyzed, as well as the expenditures returns for 1989 and 1IWO,by a working group in MPEP. The analysis would be used as an input toformulate guidelines for the 1992 budget. In September-October 1991, theguidelines would be applied to assess budget submissions and determineallocations. An evaluation of the process would be undertaken as part ofthe Public Expenditure Review in late 1991. On the basis of the review,the strategy for the following year would be decided in early 1992.

65. Civil Service Reform. Improving the effectiveness of thecivil service remains an important objective. The ongoing reform aims atreducing overstaffing, raising remuneration, increasing salarydifferentials, and modifying the pay and grading framework to establish abetter basis for a performance-oriented civil service. Current efforts,'Sased on job inspections and functional reviews, will be continued to trimexcess employment. The Government intends to retrench at least 12,000employees (from the civil service, Ghana Education Service, and statutoryagencies) in 1991 and will set appropriate objectives for 1992. Morerigorous controls on manpower levels have been established to prevent newrecruitments in overstaffed occupational categories. Based on decisionsmade by the Committee of Secretaries in May 1990, the Management ServicesDivision (lMSD) and the Personnel Policy and Management Division (PPND) ofthe Office of the Read of the Civil Service (OHCS) have conducted manpowerhearings. The hearings resulted in more accurate staff lists and inmanpower targets for the end of 1990 which are the basis for the 1991budget estimates. The Government has set a year-end emloyment target forthe civil service for end-1991 of 107,000, compared to the actual level atthe end of 1990 of 109,500. This target is well within documentedoverstaffing levels of 15-20 percent and is consistent with the need torecruit for critical skills. Achievement of the target will be monitoredon a monthly basis by PPMD. Quarterly manpower hearings will be held withany organizations which fail to achieve meaningful progress towards theyear-end target. The Government also will set a target level of civilservice employment to be reached by the end of 1992. The introduction of aunique staff number in the payroll system in early 1991 will facilitatebetter control over staffing levels.

66. The salary adjustment announced in the 1991 budget continuedprogress to increase pay relativities by raising the ratio between thelowest and highest paid from 6.7:l to 9.1:1 on an after-tax basis, and from9.4:1 to 10.1s1 gross of taxes. Target relativities will be revised for1992 when a simpler grading structure is introduced. The new gradestructure will: (i) improve equity by removing anomalies existing in thecurrent system (1i) better relate pay to skill levels; (iii) establish aunified cadre of managers with special pay and career provisions; (iv)reduce the number of occupational groupings and thus simplify managewrntand improve mobility; and (v) provide a better foundation for careerdevelopment generally. Fully costed proposals for grading at senior levelshave been prepared. Job evaluations of junior posts were completed in

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early 1991, and fully costed proposals for grading of junior posts would beready by mid-1991. A detailed implementation program has been prepared,with a view to introducing the new grading structure at the start of 1992.By mid-1991, building on the new performance appraisal process introducedat the beginning of 1991, the Prices and Incomes Board (PIB) will prepare aproposal for the introduction of performance-related pay for implementationin 1992.

67. Efforts underway to strengthen civil service management willcontinue. The Management Services Division (MSD) of the Office of the Readof the Civil Service (OICS) will play an essential role in bringing aboutefficiency Improvements. In addition to ongoing job inspections, it willput increasing emphasis on management reviews, with a view to streamliningorganixations and reducing duplication of functions. The possibility ofcontracting out some services now provided by the public sector will beexplored. The capacity to manage staff will be considerably enhanced bythe development of an integrated personnellpayroll management informationsystem. The Overseas Development Administration (ODA) of the UnitedKingdom is funding consultancy services to undertake a users requirementstudy and to develop and implement the system. IDA will cover other costs(i.e. hardware and software) under the MEM project. Work will commence inmid-1991 on the users requirement study with a view to installation of thesystem by the end of 1992.

68. Economic Benefits. The main macroeconomic objectives of theGovernment's program laid out in the most recent Policy Framework Paper(PFP) are the following: (a) to achieve an average annual rate of real GDPgrowth of about 5 percent; (b) to reduce the average annual inflation ratefrom 37 percent in 1990 to 20 percent in 1991 and to 8 percent by 1992; and(c) to continue to generate sizeable overall balance uf payments surplusesaveraging about US$100 million a year.

69. The Government is concerned with the acceleration In inflationin late 1989 and the first half of 1990 and has taken measures to lowerprice pressures. Steps are being taken to eliminate the excess liquidityin the banking system by expanding open market operations. In addition,the IMF is assisting the Government to improve the effectiveness ofmonetary policy. These began to have a positive effect in late 1990 andearly 1991. Some of the actions to be supported under this adjustmentcredit vould contribute to these efforts. Improvements in taxadministration would help to increase public savings. Further improvementsin the operation of the banking system supported under the proposedFinancial Sector Adjustment Credits would also help to strengthen theimplementation of monetary policy. The Government also intends to put inplace a flexible pricing mechanism for petroleum during 1991.

70. The need for private sector efforts to assume the dominantshare In both investment and savings is crucial for the achievement of thegrowth targets. Total investment is expected to rise from an estimated 16percent in 1990 to about 22 percent by 1995. Most of this growth wouldneed to come from the private sector because public investment ti notexpected to expand as sharply as it did in the early years of the program.The pace at which the composition of investment between public and privateshifts will depend on whether the reforms supported by this credit increaseinvestor confidence and create new investment opportunities for the privatesector to the extent required to sustain an annual average real growth inprivate investment of 15 percent over the period.

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71. Sources of savings are projected to undergo a simllarstructural change. In 1990 the external current account deficit grew as ashare of GDP because of the decline in international cocoa prices andincreases in oil prices. Only modest improvement is expected in 1991. Theexternal shock of lower cocoa prices and higher oil prices has meant thatthe speed with which domestic savings would replace foreign savings hasbeen slowed. However, while official external financing will continue toplay a significant role in financing investment, its importance willdiminish as improved public resource management and financial sectorreforms contribute to higher public and private savings. With regard topublic savings, tax revenues should rise as a share of GDP as improvedadministration, a broader tax base, and better compliance will more thancompensate for the Government's strategy to reduce direct and indirect taxrates. The major increase in the excise tax on petroleum in late 1990 hassignificantly improved revenue mobilization. Coupled with continuedrestraint on recurrent expenditures, revenue growth would be sufficient toraise current savings of the central government from less than 2 percent ofCDP in 1990 to 6.0 percent in 1995. Private savings, which grew stronglyin 1989, but stagnated in 1990, are expected to regain momentum in responseto the restoration of positive interest rates, financial sector reforms,lower direct and indirect tax rates, and increased investmentopportunities, rising to about 11 percent of GDP by 1995.

72. Assuming that private savings and investment reach theselevels, real GDP growth should average at least 5 percent per year, leadingto an increase in per capita income of about 2 percent a year. Asubstantial proportion of the growth in the economy is expected to comefrom expansion in industry; its contribution to GDP is projected to growfrom 14 percent in 1989 to 18 percent In 1995. Mining is expected to growdramatically, especially gold production, which could reach twice itscurrent level by 1995. The rate of expansion of manufacturing will beincreasingly sensitive to levels of private investment. Growth ofagriculture for the next decade is likely to be higher on average than inthe past. Cocoa should continue to respond favorably to reductions inimplicit taxation and slightly higher international prices, but at lowerrates than during the initial period of reform. Production of food andindustrial crops is expected to be brighter. Better research andextension, increased availability of credit and fertilizer, and improvedinfrastructure should lower production and marketing costs and improvefinancial rewards to farming. In services, transportation will continue tobenefit from better roads and increased economic activity, therehabilitation of the railways would permit higher haulage, and therecently completed port rehabilitation would support greater shippingactivity. The financial sector would improve its growth prospectssubstantially as a result of the adjustment program and better resourcemobilization. Retail and wholesale trade is expected to grow in line withthe rest of the economy.

PART IV. THE PROPOSED CREDIT

Credit History

73. Preparation of the proposed Credit comenced after thesuccessful second and third tranche reviews for the second StructuralAdjustment Credit in July 1990. Appraisal was carried out in November 1990

- 22 -

and negotiations were held in March 1991. Dr. J.L.S. Abbey, Ghana'sAmbassador to the United States, led the Ghanaian team.

External Financing Reauirements

74. Strict management of aggregate demand and a market-determiaedexchange rate will contribute towards maintaining a manageable externalpayments position in the face of the decline in the terms of trade and onlymarginal recovery expected after 1990. The current account deficit isexpected to decline from 7 percent in 1990-91 to about 5 percent in 1995.The average growth in exports of goods and non-factor services will slipfrom 10 percent in 1985-90 to about 6 percent in 1990-95, mainly because ofthe expected response to low cocoa and gold prices. On the other hand,non-traditional products, particularly pineapple, coffee, furniture, andfishery products, are projected to grow strongly in the 19908. Imports areexpected to grow at about the same rate as GDP. This assumes continuedforeign exchange savings through greater efficiency brought about byhigher prices and taxes on petroleum products, and import substitution offood and other consumer goods as a result of increased agriculturalproduction and manufacturing investment.

75. The average current account deficit over 1991-92 is projectedto be about 14 percent higher than the average level of the last two years.Some of the deterioration in the current account will be offset by lowerr-quirements for foreign exchange for some elements in the capital account.Amortization of official medium-term debt has shrunk as non-concessionaldebt incurred to finance oil imports has been replaced by concessionalsources; repurchases from the IMF will diminish now that the Stand-By andExtended Arrangements have been replaced by the Enhanced StructuralAdjustment Facility; and the Government has paid off all external arrears.As a result, total foreign exchange requirements for the period 1991-92will on average be only 2 percent higher than in 1989-90. Requirementsinclude provision for a build-up in international reserves.

76. In view of the existing pipeline of concessional assistanceand anticipated new commitments, disbursements of official grants and long-term loans from both bilateral and multilateral sources are expected toaverage about US$580 million a year during 1991-92, inclusive of resourcesmobilized through the Special Program of Assistance. Over 60 percent ofthe drawings of official grants and long-term loans is expected to comefrom commitments made as of end-December 1990. A slow, but steady, declinein the real level of concessional commitments is projected. IDAdisbursements vould amount to about US$390 million during 1991-92.

77. In 1990 total external public debt is estimated at US$3.1billion, equivalent to 53 percent of GDP, after taking into accougt thecancellation of outstanding bilateral debt by the United Xingdom, Canada,Denmark, France, the Federal Republic of Germany, and the United States.With declining repurchase obligations to the IMP and lower levels ofcommercial debt, the debt service ratio fell from 67 percent in 1988 to 39percent in 1990. A further decline in the debt service ratio to 21 percentis expected by 1995. In addition, the share of debt outstanding anddisbursed from csmiercial sources is expected to decline from 7 percent in1989 (already down from 12 percent in 1987) to 2 percent in 1995, and thatfrom non-concessional bilateral and multilateral sources from 14 percent to10 percent.

_ 23 -

Credit Administration, Procurement and Disbursement

78. It is proposed to support the Government's efforts to promoteprivate investment and sustained development with a fourth adjustmentcredit of US$120 million. The Bank of Ghana (BOG) vould administer theCredit on behalf of the Government and disburse the funds through theweekly foreign ezchange auction. BOG would t (a) maintain separateaccounts to record disbursements and repayments: and (b) arrange for anaudit of such accounts by auditors acceptable to IDA, and submit certifiedcopies of the relevant audited accounts to IDA within six months after theend of each fiscal year. The auditors report would include an opinion onwhether satisfactory procedures are in operation at BOG regarding the useof statements of expenditure.

79. The proceeds of the proposed credit would be used exclusivelyto finance the foreign exchange cost of eligible imports through theforeign exchange auction in the BOG. Except for military equipment, luxurygoods and environmentally hazardous products, any imports would be eligiblefor financing. Up to US$24 million could be financed retroactively forimports paid for up to four months prior to loan signing. Importsexceeding US$2 million by the public and private sectors could be subjectto simplified ICB procedures using standard documents acceptable to ID.Tc speed up disbursements, imports below US$2 million by private entitiesand parastatals would be procured in accordance with established commercialpractices and whenever possible quotations from at least two eligiblecountries would be sought. Current commercial practices of the privatesector are acceptable to IDA. Imports by the government sector below US$2aillion vould be procured according to its procedures which have beenreviewed and are acceptable to IDA. These usually include seeking threequotations. Direct contracting could be used for proprietary stores orwhere compatibility with existing equipment requires use of standardizedequipment. International suppliers are well represented in Ghana; this,together with the ongoing auction system and trade liberalization, shouldensure an internationally competitive market in which Importers can berelied on to procure their goods and services from the least costly andmost reliable sources. Preshipment inspection oan quality, quantity andprice verification of imports will be done by an external independentagency already In place. Contracts valued less than $10,000 equivalentwould not be eligible for IDA financing.

80. To facilitate procurement and disbursement, an amountequivalent to US$30 million of the IDA credit will be deposited initiallyin a special account. Applications for replenishment of the specialaccount will be submitted monthly, or when withdrawals equal one-sixth ofthe amount advanced. Applications will be fully documented with respect topayments against contracts of more than US$1 million equivalent.Reimbursements for payments against contracts below US$1 million will bemade on the basis of statements of expeaditure certified by the BOG. Allsupporting documents (final invoice, bill of lading/shipping documents, andevidence of payment) will be retained by Bank of Ghana for review byvisiting supervision missions and the external auditors. Annual auditreports will include a separate audit of amounts withdrawn on the basis ofstatements of expenditure and on the special account.

- 24 -

81. The proceeds of the proposed credit would be disbursed in twotranches as follows:

(a) a first tranche of US$60 million would become availableimmediately upon effectiveness (July 1991); and

(b) a second tranche of US$60 million would be made availablefollowing a mid-term review of performance to determine thesatisfactory implementation of the adjustment program (March1992).

Monitorina and Tranche Release Conditions

82. The Letter of Development Policy (Annex II) describes thespecific measures that have been or will be taken during this phase of theadjustment program. These measures are summarized In the matrix of policyactions, also shown in Annex II. A second tranche review would take placeroughly 8 months after release of the first tranche. Release of the secondtranche will depend upon overall satisfactory progress of the adjustmentprogram and the completion of the following actions in a mannersatisfactory to the Associations

Conditions of Second Tranche Release

(i) Changes in the tax structure have been introduced and arereflected in the 1992 budget.

(ii) Progress has been made in the revision of the legal andregulatory framework governing private sector activities,including the Investment Code, the fEchange Control Act,the Manufacturing Industries Act, the IndustrialRelations Act, and the Labor Decree.

(tit) Agreement with IDA on the 1992 allocation for recurrentexpenditure and the 1992-94 public investment program.

(iv) Implementation of measures to revise contract approvalprocedures, including the role of Public AgreementsBoard.

(v) Progress in the implementation of the 1992 program of payreform for the Civil Service, including a revisedgrading structure.

(vi) Satisfactory progress on implementation of the integratedpersonnelipayroll management system.

(vii) Satisfactory completion of the 1991 divestment programand agreement on the 1992 divestment program.

(viii) 1992 performance agreements for 13 priority state-ownedenterprises finalized.

- 25 -

83. The Government will submit to the Association a reportevaluating the progress made in implementing the adjustment programstarting from the date of credit approval, which will provide the basis forthe mid-term review of the program scheduled for March 1992 and the releaseof the second tranche. The Association has the option to cancel all orpart of the second tranche if the conditions for its release have not beenfulfilled within 90 days after the mid-term review. The Government wouldsubmit to the Association a final report on the implementation of theadjustment program within six months of the full disbursement of thecred.t.

Risks

84. Two principal risks could threaten the achievement of theprogram's objectives: inadequate response of private investment andinsufficient implementation capacity within the Government. Inadequateprivate investment to achieve the growth targets could become a problem inthe future. Liquidity constraints, infrastructure bottlenecks, residualpolicy impediments and continued uncertainty over the Government's view ofthe role of the private sector in the economy could cause inveators toremain reluctant to invest in Ghana. The Government is addressing theseissues by maintaining macroeconomic stability, reforming the tax system,creating a legal and regulatory framework more conducive to privateinvestment, improving the provision of public services, and taking otherrelated actions which would demonstrate the Government's desire for anactive role by the private sector. Further steps also will be taken tostrengthen the financial system. To minimize this risk the Government'scommitment must be unambiguous and appropriate macroeconomic policiesmaintained. In order to give a strong positive signal to the privatesector, the Government took several measures up-front. The 1991 budgetannounced a major reduction in taxes on corporate profits. In addition,many requirements for tax clearance certificates have been reduced and aprivate sector advisory group has been established. Nevertheless, it isdifficult to predict when these actions would bring results.

85. Another possible constraint to the pace of economic adjustmentis the still weak implementation capacity of the Government. Related tothat is the increasing demands of a market economy - the need for timelyinformation on Government policies and programs and economic trends andcontinued improvements in infrastructure and basic services. Recruitmentof skilled staff into the public service has improved, but there are stillshortages. Several programs are in place to minimize this risk. TheEconomic Management Support Project will support several measures tostrengthen public sector management, particularly in the area of budgetpreparation and execution and civil service reform. Training programs aregeared to reducing dependence on external technical assistance. TheGovernment intends to streamline contract approval procedures in order toreduce delays in project implementation. Technical assistance is alsobeing provided to support state enterprise reforms through the PublicEnterprise Project.

- 26

PART V - RECOMMENDATION

866 I am satisfied that the proposed Development Credit wouldcomply with the Articles of Agreement of the Association. I recouiend thatthe Executiv* Directors approve the proposed Development Credit.

Barber B. ConablePresident

Washington, D.C.April 5, 1991

Attachments

-27- AnI

GHANA: KEY ECONOMIC INCATORS

Aca L M_P d

198S 1986 1987 1988 1989 1990 1991 1992 1993 1994 199S

GDP Gwowth Rate 5.1% 5.2% 4.8% 3.6% 5.1% :3.0%~t.

.. ,~ ~ ~ ~ ..

Debt S-ere (US$ mn) d 415 388 560 643 317Debt Servio/XGS dI 61.5% 48.3% 61.8% 67.0% 58.3%39%I P ~ 4 ,.*p7Debt Senice/GDP 6.5% 8.0% 12.2% 124% 9.8%

Gross InvstPni/ODP 19.6% 9.4% 10.4% 11.3% 13.6% s I.8%2 % 1 I .4 Domesti Savin/GDP 6.6% 5.8% 4.3% 5.5% 6.2% 6.74# '

National SavingulGDP 5.4% 5.1% 5.9% 6.3% 7.8% 8.2% #4 % *;i.Margina National Savipps Rate 39.2% 2.0% 4.0% 13.0% 69.0% -17.0%~W~~~~H~4IPublic P _vstmetDP 1/ 4.2% 7.3% 7.9% 8.0% 7.9% 71.4%Public Savigs/GDP 0.1% 1.7% 2.9% 2.7% 2.5% 137%Private InvestmentDP f/ SA% 2.1% 25% 3.3% 5.7% - s4% *Private SavYingsIGDP S.3% 3.4% 3.0% 3.7% 5.4% 6 .54Ratio of Publi/Prvate Inveasn_t 0.78 3.48 3.16 2.42 1.39 0.8

Govermnent Rexeniure DP 15.4% 19.2% 19.1% 18.9% 13.1% 180%Governmnut RxpeniureslGDP 11.A% 13.2% 14.1% 13.9% 13.6% 0*:% zSOverall DeficiIGDP gI -3.8% -3.8% -3.1% -3.7% -3.1% -4A4%~'Domestic Financing 1.2% 1.0% -0.4% -0.6% -1.1% -1.4% & *

Export Growth Rate 22.0% 12.4% 9.8% 6.6% 12.7% 6:3%:ExportsGD? 10.7% 16.6% 19.7% 18.4% 16.9% 10 ~~\~linport Growth Rate 8.9% 16.6% 19.8% -0.4% 2.2% SAS4 '~ ~S ImportsGDP -13.6% -20.1% -26.1% -24.1% -24.4% -25.1%Current Account (US$ reI) -264 -204 -224 -252 -305 -450Current AccountlGDP 4.42% -4.2% -4.9% -4.9% -5.8% -7.6% #4O

NOTE: Figuresre rounded. Dafta differ fiom PFP IntdicatorsI Annex II bcoams of Govenment revwiss n natonal accountsand a downward reviswioIn oil priceasopd subsequen to PPP negotlatos in late 1990.

a/ ODY - GDP adjuste for chage in do tems of tradeb/ Assumed popuation growth (U.N. estmate) differ slihty frma Goverment offiia estimatesel nwhudes IMP and arrar paymtents, but exicludes privte debtdI Expots of goods and vies.i/Includes foreign bad and net lending.f Staff estimas.gI inlud etrad asance; grants ae a financing _tm

SOURCE: Governmet of Ghm and World Rak Staff esZtimAP4CO: IS-Apr-91

-U- hANNJO16NA: RI ,ACCE P4V2U1S~~ hgof 2Sof 5S

Atdsl PL EL _1984 11985 1986 1987 1988 1989 1990 1991 19 19 1994 1995 2000

A. Exports of Goods and NPS 605 672 797 906 9%I 8 47~ ~~1. Merchandises (fob) 567 633 749 827 878 83 81~~ 4

Of W1ich: Coca. 382 412 S3 495 461 4l 355 jj2. Nonw-Factor Receipts 38 39 48 79 83 83 76 ~

B. Imorts of Goods and NFS -81t -78 -98 -1202 -1255 -1278 1 l1. Maerdi (ci) -l -729 - -128 -1064 -1094 -(

Of wbiclu Petroleum -161 -200 -125 -144 -148 -160 -210' 2. Non-Factor Payments -129 -129 -163 -174 -171 -184 -215

D. Resor Bal c -206 -185 -171 -296 -294 -39 51

E. Not Factor Paymnts -81 -111 -106 -129 -131 11I 11. Interet Payments -79 -108 -102 -122 -126 -109-17 ~A4

F. Net Private Transfs 73 33 73 202 172 202 202

G. crent Accont Balance -214 -263 -204 -224 -252 -305 -450

H. Extern Capital dflow 19 137 179 362 377 431 SD29..

1. Grants (Net) 103 83 118 t22 195 2

2. Publc Foreign Borrowingp 172 26 123 218 180 1747 25S3 " ~ ~- IMLT (Net) 173 34 134 230 19 158 256

* Gros Infows (LT&MT) 288 281 385 413 402 335 392* Awmortizaio (LT&MT) -116 -2S5 -262 -195 -22 -188 -139 ~ $

3. Direc Foreip INvestmnt 2 8 4 5 5 15 15is4 4. Other Capial (Net) -81 20 -66 18 -3 48 42 _

L Errrs &Omissions S5 10 -33 10 4 2 6..

3. Ovemfi Balance 37 -116 -0 138 125 128 8 '

K. Fbmina g,u of which: -37 116 57 -138 425 -In -85 g *. *~~

1. Not Use of BeP Resources 214 122 16 -25 -45 4 -48

2. Changes in WR Holdings 2 0 16 -12 13 0 3. Change inGrossReswrve -35 9 15 -50 -18 -3 -20 D.,

4. Payment~ Arreas -20 -57 -4 -72 -35 4 -7 S. Othr -10 41 13 20 -40 -32

hs of GDP (current US$ (n pece)

1. Resource Balance -2.7 -2.9 -3.0 -6.1 -5.7 -7.5 -9.12. Total Iboredt Payments -1.1 -1.7 -1.8 -2.5 -2.4 -2.1 -1.8 4

3. Current Account Balance -2.8 -4.2 -3.6 -4.6 -4.9 -5.8 -7.6 ~4 . 4 ~$~4. LT Capital Inflow 1.6 2.0 4.5 6.3 5.8 5.8 5.3 $'~A

5. Not Credit fiomthe lMF 2.8 1.9 0.3 -0.5 -0.9 0.1 -0.8 d

1. Iatocs' Reavs (US8$ Min) a/ 132 145 149 194 201 269 290__. 2. GaRoss en= in Mouths Impost 2.3 2.4 2.2 2.3 2.2 3.0 2.7

1. NoululOffida RawS(amS 36 54 89 154 202 270 330 - - - - - -

.1?tdsdun adaes 'a3s wlutm dr I hina Insluds stn%9DU= uk 3*tohMmand Woelod Rn afelas Iiemtalsfis and neetnal m.iiatsfn

AIdOO-12-Anm4U

- 29- am I

QHM, EB C FIANIGN M AVAUTJ Pp3 dSaD8io of U.S. do11")

Actu x M .& . JcFINANCING ITE3M 1987 1988 1989 1990 1991 1992 1999 1994 1995

FINACIN NED

E. Od 91abt - 2 4

-30- AEIN

STATU8 OP BANlK OU OP1ON8I MAMSTATEMENT OF BANK LOANS AND IDM&C ED

(As ofDecmbr 3l, 1990)

AMOwit n US$ MioLoa or ecmlso

Niumbi ______ IRok A iltbnd10 loan and 31 cat fully disbured 189.72

of which SAIand Prram Loans [ a

Cr. 1393 83 Ghana Rooen mpo 40.00 0.00P-O90 84 Ghana EXPOlt . 35.89 0.00

Cr. 1435 84 Ghba Export Rels. 40.10 0.00Cr. 1573 85 Ohm Roe mport 60.00 0.00

A-0030 86 ohm Rocss. lmport 26.97 0.00Cr. 1777 87 h*na SAC l 34.00 0.00

A-50 87 Ohm SAC I 81.00 0.00A-0130 86 Ohm Indurial Sectot. AdjuL 2S.00 0.00A-Ml5 88 Ghana SAC I 15.00 0.00

Cr. 1911-1 89 Ghana Fnania Secr Adjw. 6.60 0.00Cr. 200S-1 90 Gha SAC H 5.70 0.00

Sub-Tot3l NM2 MCr. 1342 83 Ghana Water Sply TA 13.00 0.32Cr. 1373 83 Ohm Ener Poject 11.00 4.59Cr. 1498 84 Ghana Second 0i Pam 25.00 10.34Cr. I564 85 Ghana Acrn nDitret Rehab. 22.00 5.93Cr. 1601 85 Ghana Road Rehlb. & MInnance 40.00 5.40A-O01O 85 Ghana Road Rehib. & Mainteunac 10.00 1.30

Cr. 1628 86 Ohma Pbwer Sysm Rehab. 28.00 0.53Cr. 1653 86 Ghana Heodth & Education RPihb. 15.00 4.25Cr. 1672 86 hana Idudril Sector Adjtu 28.50 3.25Czr. 1674 86 Ghana Prs Rehabhtedon 24.50 1.19C Cr. 1744 87 Ghana Education Setor MjusL 3450 7.00Cr. 1759 87 Gabna Nortmrn Grid Extenion 6.30 0.43Cr. 1778 87 GOhna Sbtc. AdjusL Ins S 10.80 3.12Cr.1801 87 CGhra Agricultal Svcs. Reib. 17.00 11.47Ct. 1819 87 GaSn Petroleum Rdf. & DisL 15.00 13.02Cr. 1847 87 Ghna Public ElaerprloTA 10.50 8.71Cr. 1854 88 Ghana Cocoa RehabliItat 40.00 40.81Cr. 1858 88 Ghana Transport ReAbi on I 60.00 45.5Cr. 1874 88 Ghana Porty Wodrs 10.60 5.15Cr. 1921 88 Gohna Miing Sodeorehab. 40.00 27.57

* Cr. 1911 88 Ola Fnancal SectAw MjusL 100.00 16.68Cr. 1946 89 GOhna Telecmunkctkrsll 19.00 14.82Cf. 1976 89 Ohana Forex Pks. bOagemant 39.40 33.43Cr. 1996 89 Ghana khwatelS . 30.00 27.97Cr. 2039 89 GOhna Water Secor Rehab. 25.00 25.85Cr. 2040 89 GOhna Rurad Finan 20.00 19.55

* Cr. 2005 89 Gana SAC H 120.00 10.00Cr. 2061 90 Ghana Fifh Power MECM) 40.00 37.68Cr. 2109 90 Ghna VRA/Sbdth Power 20.00 21.34

* Cr. 2140 90 Ghana Educaion Seacr AdjusLt H 50.0 53.21Cr. 2157 b/ 90 Ghana Urban I 70.00 75.39

* Cr.2005-2 b/ 91 Ghana SAC n 8.30 8.42Ct. 2180 h 91 Ohms Agric. Diverdation (Tre) 16.50 17.55Cr. 2192 bh 91 Ghna Transpot Rehabilitation H 96.00 96.87Cr.2193 b/ 91 Gohna Hea" & PopulioAlo n 27.00 27.38

of which repai 108.89 11.59

TOTAL now held by Dbnk and IDA 80.83 1744.52

Amownt ld 0.38of which repd 0.38

TIMAL nuiSnwod 0.00 68607 686.07

NOTEat Affrevedmda or saft FM6hi Ncysaffesllwt SMACDOA

-31-

SATIME OFAMA(AsfD.mubv 31, 1990)

Amount i US$ willion

Dade Borower TBpe of Bius LM so& 2m

1984 Ashanti Goldfie mining 55.0 - SS.0 a/CoWp.

1986 Ket Basin Oil Oil - 4.5 4.5 blEploration

1988 Candian Dogos Mining - 0.6 0.6Resource Ltd.

1989 Candian Bogosu Mining - 0.4 0.4Resourcs

1989 Wahome Steel Ltd. Stel Mfg. 3.2 - 3.2

1989 Canadian Bogosu Miing 47.S 0.5 48.0 cl

Resourmes M!

1989 Conti t Mrcbat Bking - 0.9 0.9Acceptanc,es Ltd.

1990 Asbanti Goldfields Minig 70.0 - 70.0 d/Corp.!!

1990 Iduapriem Mining - 3.0 3.0

Total Gr Coms itmet 17S. 91

Less epaymets and wrie-off 6.3 1.6 7.9

Total Now Held by IFC 169.4 8.3 177.7

Total Undisbursed, 66.5 3.9 70.4

NOTE:a/ nludes a US$27.S milion pu**l*pd.b/ US$1.6 -mlon was wrtte off.c/ncludes a US$29.0 m-ilion Pagcpetlod/ Inludes a US$35.0 mion pszloptln

- 32 -Annex IIPage 1 of 25

PROGRAI TO PROMOTE PRIVATE INVESTMENT AND SUSTAINED DEVELOUPENT

LETTER OF DEVELOPNENT POLICY

Mr. Barber B. ConablePresidentThe World BankWashington, D.C.U.S.A

Dear Mr. Conables

Res Ghana's Program to Promote Private Investment andSustained Develonment

1. *As part of its Structural Adjustment Programme (SAP), theGovernment of Ghana is implementing a wide range of economic reforms in theeconomy. By this letter, the Government of Ghana requests from theInternational Development Association an adjustment credit to support aprogramme to promote private investment and sustained development. To thisend, let me briefly recapitulate our experience with the reforms that wehave introduced, and then describe in some detail the objectives andfurther actions that we intend to implement in 1991-92. Accompanying thisletter is a matrix that presents a timetable for these actions.

BACKGROUND

2. Ghana's Economic Recovery Programme (ERP) has, since 1983, ledto considerable improvements in economic growth and development. We havemade progress on many of the broad objectives set out at its inception.The country's economic and social infrastructure have been rehabilitated;fiscal sad monetary discipline have been largely restored; and investmenthas increased substantially, although the response from the private sectorso far has been disappointing.

3. The major policies underpinning the efforts since 1983 haveincluded the achievement of a more realistic exchange rate, prices havebeen deregulated across a wide range of product markets, accompanied bytrade liberalization which increasingly enabled international competitionto discipline the price setting behaviour in domestic markets.Improvements in government revenue mobilization and the removal ofsubsidies in many areas contributed to a movemert of the government budgetfrom large deficits into surpluses. Public sector employee-incomes haveincresaed, though modestly, funded in part by savings from the redeploymentprogramme. Improved development spending contributed to rehabilitation in

Annex II- 33 - Page 2 of 25

several areas including transport infrastructure, and the cocoa, timber andmining sectors. Increased budgetary support has also been provided foreducation and health.

4. Since 1987, the ERP has been implemented through a StructuralAdjustment Program (SAP), supported by two IDA credits and cofinancing frombilateral and multilateral sources, that sought to consolidate the gains ofthe initial phase of the ERP. The adjustment reforms have focused onstimulating growth, savings and investment; strengthening the balance ofpayments position; and improving resource mobilization and utilisation.

5. The structural reforms initially focused on macroeconomicpolicy issues relating to trade and exchange rate management andrestoration of fiscal and monetary discipline. From about 1986, however,emphasis has shifted to growth oriented structural initiatives. Programmesand projects have been implemented within the productive areas ofagriculture and industry and the social sectors of health and education.

6. Economic performance over the reform period has generally beensatisfactory. While the annual growth of real GDP per annum has averaged5.3 percent in the period to date, it has not been even, besides inflationrates and current account deficits remain high. Domestic savings andinvestment levels, particularly from the private sector, are, however,still inadequate to sustain growth at even current rates.

7. Under the ERP, the problem of poverty has been addressedthrough increased growth, improved rural terms of trade, and more efficientallocation of public expenditures. While the impact of the EP on the poorhas been by and large beneficial, there is still some cause for concern.Further efforts are also required to maintain and further enhance the ruralterms of trade. It has to be recognized that increases in revenue as ashare of GDP will now naturally taper off, once the large gains fromimproved administration are exhausted. This means that prospects forpublic expenditure growth will be more limited, and greater attention willhave to be paid to the growth focus of these expenditures.

8. The fundamental objective of macro-economic policy isattainment of sustainable growth with development through commitment tomarket-based resource allocation. Fluctuations in production have alsoexposed the fragility of the economy and underscore the need for continuedstructural reforms and investment to improve the ability of the economy toadjust to changes in the internal or external environment. Within themedium term framework specific objectives for 1991-92 includes ensuring areal GDP growth of about 5 percent per annum; reducing the average annualinflation rate to 8 percent by 1992t generating sizeable overall balance ofpayments surpluses; and ensuring the improvement of living standardsthrough poverty alleviation measures.

9. The maintenance of real GDP growth rates at 5 percent per annumcalls for increased savings and investment efforts. While public effortmust be maintained at the relatively high current levels, the need for

- 34 ~~~~~Annex Il- 34 - Page 3 of 25

private sector efforts to assume the dominant share in both savings andinvestment is crucial for the achievement of these targets. Incentives toencourage savings and investment must include maintenance of a market-determined exchange rate system, positive real interest rates and flexibleagricultural producer prices.

10. Increased availability of investment opportunities wouldprovide incentives for holding cedi-denominated assets. Revived supportfor the productive sectors should be visible in the implementation of thecorporate restructuring programme and the on-going Small and Medium-ScaleEnterprises (SME) project. In addition, the increasing budgetaryallocation for rehabilitating and expanding economic and socialinfrastructure and support for agricultural extension and research wouldprovide an impetus to private sector activities.

11. To achieve the inflation targets, continued tight fiscal andmonetary policies and supply enhancing policies will be pursued. Fiscalpolicy will be directed at further increasing government savings. Monetarypolicy will be implemented within the framework of increased reliance onopen-market liquidity management.

12. The external payments position still remains weak. The thrustof policy will shift from reliance on receipts from traditional exports tonon-traditional exports. Development efforts will increasingly focus onour capacity to diversify production and exports, based on efficientproduction practices and maintenance of a realistic, competitive exchangerate. Private sector initiatives will be supported to achieve the intendedInvestment and production goals.

13. The sustainability of the programs crucially depends on theequitable distribution of the benefits of the reform programs. Whilephysical infrastructure has been improved significantly over the period,there is a need to enhance the quality of human capital. Parallel sectoralprogrammes in agriculture, health, population and education will beimplemented and, together with the specific PAMSCAD progra ues incorporatedin the PIP, will help alleviate poverty.

14. The next phase of the reforms consists of continuedimplementation of macro-economic policies that strengthen the incentiveframework for savings, investment and production and ensure macroeconomicstability. We will emphasize measures to improve the enabling environmentfor private investorn through tax reform and revisions in the legal andregulatory framework. Further progress will be made on state enterpriseand civil service reforms. Public expenditure will support activities inkey productive sectors and social services.

XXCUANGE RATE POLICIES

15. Exchange rate policy has been driven by the need to deal withthe severe price distortions and the inadequate foreign exchange supply.In the wake of the unification of the foreign exchange markets achieved inthe second quarter of 1990, the policy focus will seek to ensure the

Annex II-35- Page 4 of 25

maintenance of a realistic excha4ge rate in the evolving inter-bank system.

16. Policy actions during the programme period will, therefore,include further widening of the market to accommodate more participants,and deepening through the complementary development of flexible open marketoperations in domestic currency. Monetary policy will continue to bereinforced by fiscal policy.

17. Over the medium term the focus will be on increased privatecapital inflows and production for exports; although we will continue toneed concessional loans and grants. In furtherance of development of aunified foreign exchange market, the surrender of export proceeds fromgoods other than cocoa and gold will be shifted from Bank of Ghana to thedeposit banks by the middle of this year.

PRIVATE SECTOR

18. The private sector's role in achieving the growth targets ofthe economy is crucial. Increased activity will satisfy three keyobjectives - higher investment, production, and employment generation.Limited government budgetary resources for increased public investment andthe continuing modest response to date of the private sector underscore theneed for fresh and expanded efforts.

19. Further economic incentives will include the commitment tomaintain a flexible exchange rate system. In addition, supportive policiesthat will ensure a stable macro-economic environment will continue to beimplemented. This will include maintenance of low rates of inflation,higher budget surpluses and a sustainable balance of payments position.The banking restructuring exercise currently under implementation willimprove the effectiveness of the financial intermediation process, lead toreduction in costs of credit and provide greater access to longer termfinancing for investment.

20. Tax policies will also be employed to stimulate a morevigorous savings and investment effort. Efforts will therefore be made torationalize taxation of capital and investment income to remove the biasagainst equity investment, and reduce the marginal effective tax rates onnew investment. Mergers and acquisitions will also be encouraged. Theburden of high company tax, the dividend income tax and capital gains taxhas been lowered in the 1991 budget.

21. Delays in the approval process, caused by multiplicity ofinstitutions, overlapping jurisdiction, and other procedures, practices andprovisions that run counter to the spirit of liberalization will beaddressed. Reconumendations made relating toa improvements in financialintermediation$ necessity to revise laws vhich do not facilitate privateinvestment; harmonization of business establisbment procedures; anditprovements made to tax administration processes aimed at promotingefficiency and equity, have been accepted by Government for implementation.

22. The Laws to be revised will include the Exchange Control Act(1961 as amended in 1966), the Industrial Relations Act (1965), the Labour

Annex II

-36- Page 5 of 25

Decree (1967), Manufacturing Industries Act (1971), the Investment Code(1985) and amendments to it. Government will be guided by the need toreduce delays and the number of steps in the investment approval processand to achieve transparency in the general body of laws. It is envisagedthat most of the technical work for revising the relevant laws andprocedures will be completed by the end of 1991, for Government approvalduring the early part of 1992. Measures will also be taken to streamlineadministrative requirements relating to transfer of foreign exchange,importlexport procedures, technology transfer, granting of expatriatequotas and reducing restrictions on foreign ownership of business.

23. The Ghana Investments Center (GIC) will shift its emphasis fromapprovals to investment promotion. It will produce a manual of benefitsand requirements for potential investors to enhance ready accessibility ofinformation. Furthermore the Ghana Statistical Service will bestrengthened to ensure production of current economic and statistical datafor the general public.

24. The Government has set up an Advisory Group on Private SectorDevelopment. Its members are drawn largely from the private sector andinclude the current presidents of the Association of Ghana Industries andthe Ghana Chamber of Commerce. The group is supported by a team of expertswith backgrounds in law, banking and finance.

TAX POLICY AND ADIINTSTRATION

25. The thrust of government's tax policy has been to improve themobilisation of adequate local resources to finance higher levels ofexpenditures. Declining commodity prices, and the unfavourable prospectsfor mobilising concessionary resources externally, make local resourcescrucial for sustaining the momentum of the recovery programme. Vhile taxpolicy will continue to address the need for efficient revenuemobilisation, in the future the focus will be on ensuring that the taxregime promotes economic growth through a more favourable climate foriuvestment. The strategy will be to strengthen the implementation ofexisting policy while seeking ways to introduce new measures based onrecent studies.

26. The agenda as relates to direct taxes includes broadening ofthe tax base, reducing the tax rate on personal income, dividends,corporate income and capital gains; and initiating the process ofinternational tax harmonization. The implementation of the policy tobroaden the tax base through inclusion of allowances and in-kind benefitsin total income will be strengthened. The valuation of in-kind benefitswould be improved to provide the basis for realistic assessment.

27. The 1991 budget statement addressed some of these byintroducing a number of tax measures as part of a renewed effort torevitalize the private sector. The corporate tax rate, applicable toagriculture, manufacturing, real estate, construction and services, wasreduced from 45 percent to 35 percent; the withholding tax on dividends wasreduced from 30 percent to 15 percent; the capital gains tax was reduced toa maximum of 5 percent, while incaone from publicly traded shares and

Annex II~ 37 - Page 6 of 25

mergers and acquisitions is exempted from tax Capital allowances providedunder the Investment Code have been extended to all enterprises in themanufacturing sector.

28. The Government intends to take additional actions in this areahaving regard to the overall objective of stimulating a strong investmentresponse and achieving a high growth rate. The company income tax rateapplicable to financial intermediaries and the printing sector and alldividend income taxation, albeit reduced to 15 percent, have beencriticized as unduly high and Government is giving this matter closeattention. The range and types of allowances to be permitted for taxpurposes and the whole question of fiscal incentives as investmentpromotional devices is under active consideration.

29. In the area of indirect taxes, the policy focus will continueto be on encouraging greater tax compliance and broadening the tax base.The credit system (a limited form of value added tax, VAT) which has beenunder study as a pilot project is expected to provide the basis fordetermination of an appropriate VAT system for the country. Continuedefforts would be made to reduce the variation in incentives acrossindustries and to eliminate any anti-export bias of protective taxes. Thegovernmet will also reduce the scope of duty exemptions, and streamlinethe duty drawback system to encourage non-traditional exports. The studyon the effect of trade liberalisation on domestic industry will becompleted by June 1991 and its recommendations studied for earlyImplementation.

30. Much progress has been made in the area of tax administration,a lot, however, remains to be done in areas of manpower development andinstitutional strengthening. Expanded in-country training programmes forstaff of IRS and CEPS will be implemented side by side with publiceducation campaigns. As part of the general scheme to improve taxadministration, a unique tax identification number for individuals will beintroduced this year.

31. To speed up customs clearance processes, CEPS will implementthe decision to merge into one exercise the physical inspection of importsnow conducted separately by CEPS, the Ghana Port and Harbours Authority andthe security services. In addition, in order to minimize the problem ofcongestion at the ports, CEPS will encourage the processing of documents tostart before the arrival of goods. On computerization within CEPS, effortswill be made to expand the ASYCUDA system to the other ports of entry, andwith the appropriate modifications, if necessary, to cover all the directand indirect taxes, by December 1991.

32. The IRS will streamline procedures for filing returns andpayment of arrears, particularly for the self-employed. Steps have beentaken to address the concern of the private sector arising from customsclearance procedures and from the use of tax clearance certificates. Asignificant relaxation of the TCC was announced in January 1991, with onlyfour categories of transactions remaining on the required list. TheGovernment intends to continue to review the requirements for ?CC.

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PUBLIC EXPENDITURE POLICY

33. Public expenditure policy will continue to be guided by theneed for increased efficiency in resource use. In the medium term, theobjectives are to increase domestic savings; to pursue prudent wage policywhile ensuring that the professional classes are adequately remunerated.Public investment programmes will continue to be directed towards therehabilitation of infrastructure guided by the needs for the prioritysectors of agriculture, health and education.

34. Considerable efforts have been made to improve resourceallocation through the three year rolling public investment programmingprocess and the development of norms for non-wage recurrent expenditures inkey ministries. Continuing efforts will be made to improve budgetaryprocedures and strengthen expenditure monitoring and control. Activitieswill focus on timeliness of budget preparation, improved budget formulationand coverage and strengthening of the Audit Service and the Controller andAccountant General's Department to discharge their responsibilities moreefficiently. In addition, the quest for increased cost-effectivenessrequires that social infrastructural needs of the poor are carefullyintegrated in the public expenditure progranne.

35. In order to enable implementation to commence early in January,it is planned to announce the budget in the last week of December. Thebudget document will be more comprehensive and will incorporate moreinformation on external aid commitments and disbursements. In thisconnection, improvements will be sought to enable implementation of a broadbased budget by 1992. Preparatory work on systems development will beundertaken in 1991, to facilitate full implementation in 1992. in themeantime, in order to enhance implementation capacity, more attention willbe paid to establishing a commltments-based budgeting system.

36. The inadequate costing of services and other costs associatedwith project implementation have contributed to higher realised costs.Besides, until recently, returns on actual costs were not systematicallyanalyzed. These weaknesses will be remedied through improved budgeting andaccounting procedures. In addition, budget information on planned andactual expenditures will be fully computerized to facilitate analysis. Inaddition, the Government intends to review the contract approval processwith the view to reducing delays.

37. The three-year PIP will continue to be prepared annually withina macro-economic framework which will be updated periodically. The PIPwill also continue to emphasize the rehabilitation and expanslon ofeconomlc and social infrastructure to support private sector activities aswell as addressing the needs of the poor. The recurrent cost mplicationsof the PIP will be given serious consideration. In order to Improve thepoverty focus, analyses by region and programme (basic education, primaryhealth care, agricultural extension) of the distribution of current andcapital expenditure have begun. On the basis of these, budget guidelineswill be developed to increase the relative share of expenditure goLng topoorer regions; and to programmes benefitting the poor.

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38. Budgetary allocations for agriculture will support work mainlyin extension and research. Problems of low productivity, high post harvestlosses, and inadequate and inefficient infrastructure have plagued thesector. Activities of both applied and basic research at the agriculturalresearch institutions and of extension services will, therefore, beadequately supported by increased supply of physical inputs to provide theimpetus and enabling environment for sustained growth and efficient andcompetitive agriculture. The details of agricultural policy measures andactivities outlined above are contained in the IDA supported AgriculturalSector Adjustment Programme (AGSAP) and the government's medium termagricultural development programmes (MTADP).

39. For the industrial sector, the strategy requires therehabilitation of potentially viable enterprises in processing especiallyin the agro-based (including forestry) sector. In this, however,Government intends to play a limited direct role and consequently willencourage the growth of a vigorous private sector. Government's intentionof stimulating private sector development is to be advanced throughminority participation with the private sector. This will help toestablish the proposed Enterprise Restructuring Fund envisaged under theERP. In addition, government will support management and technicalmanpower development institutions. These institutions will be expected toprovide extension-type support in industry.

40. Like most developing countries, systematic analysis of ourenvironmental problems began only recently. Problems of deforestation,poor sanitation in urban areas, industrial pollution and soil degradationare quite common. In order to address these, a National EnvironmentalAction P.-an (NEAP), a National Plan of Action to Combat Desertification anda National Conservation Strategy are being prepared. The recentlycompleted draft of the NEAP envlsages proposals to improve the quality ofnational life. These proposals cover such areas as a land use plan.environmental education programmes, community forestry programmes, and anenvironmental impact assessment mechanism in the country and implementationof an industrial waste management programme.

41. While the EPC is to provlde overall coordination of thiseffort, several institutions such as the Forestry Commission, FactoryInspectorate Department and the National Energy Board, will be directlyinvolved in the implementation of the proposed programmes. In addition,district environmental management committees will be set up for monitoringand coordinating activities at the district level.

POVUITY ALLEVITION

42. As indicated in the earlier sections of this letter, theGovernment's economlc management policies will be driven by the concernsfor improving private sector development and reducing poverty. Thefollowing section will address issues related to poverty alleviation underthe headings of health and population, education and other social sectorissues.

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43. The main thrust of government's health policv is to increaseaccess to quality health delivery services through the implementation of aneffective primary health care programe. The strategy is to consolidatethe programme under implementation through better delivery of services andto expand the coverage.

44. This commitment to expand health delivery services entailsconsiderable provision of infrastructure, at all levels. To meet thisneed, including rehabilitation requirements, the government will matchresources and manpower mobilised at the comnunity level. Government villprovide for a regular maintenance of buildings, plants and equipment toimprove health services. Measures to ensure efficient and equitable use ofdrugs and dressings through a cash and carry system: institutionalrestructuring, involving reorganisation of the health system leading todecentralisation of operational responsibilities, activities and control ofresources; and, in addition, manpower improvement plans, will beimplemented.

45. The government's Dopulation policy aims at securing higherliving standards for the people. The inmediate aim is to reduce thepopulation growth rate of about 3 percent. Current activities aretherefore geared towards strengthening the institutional capaclty foreffective coordination of population programes. The recently establishedPopulation Policy Implementation Assessment Committee (PPIAC) will help toput in place, by the end of 1991, a National Population and Human ResourcesCommission (NPHRC) which will be responsible for advising government andmonitoring population programmes. The health and population sectorproject, which will be implemented during 1991-95, will promote greatersectoral consistency in population programmes and projects. In addition,the 1969 policy programme will be revised to incorporate emerging issuessuch as youth problems, teenage and adolescent pregnancies, drug addiction,the problems of the aged and environmental issues.

46. Institutional restructuring measures being taken to complementthe physical improvements in the sector include Zecentralization andmanpower Improvement plans. The Ministry of Health is being reorganizedwith a view to decentralize its operational responsibilities, activitiesand control of resources. In order to provide qualified staff to managesuch plans, the strengthening of hospital management teams has becomeurgent. The recent appointment of Boards for the two teaching hospitals isthe first step; and this will be replicated over the system. The need forqualified managers will be met from Health Services administrators'upgrading courses which will be mounted through seminars and formalcourses. The government's efforts will be aided by effective co-ordinationof NGOs involved in health service delivery activities.

47. By the middle of this decade on-going programmes involvingimmunizations will aim at reducing infant mortality rates from the currentlevel of 77 per 1000 births to 67 per 1000. Pre- and post-natal serviceswill be geared to reducing the maternal mortality rate from 10 per 1000deliveries to 8 per 1000. Increased use of modern contraceptives will bepromoted to double the current usage rate for women aged 15-49.

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48. The first phase of the educational reform Rrogramme which wasImplemented in 1987-89 focused on the implementation of the JuniorSecondary school (JSS) programme which reduced the length of pre-universityeducation, reformed the curriculum, and provided more textbooks andimstrictional materials. Teacher training facilities expanded to supportthe programme.

49. In the second phase the restructuring and expansion of SeniorSecondary Schools (SSS), is being emphasized. The objectives are toimprove access, quality and relevance of education; diversify schoolcurriculum to cater for different talents and skills; and ensuresustainability of the reforms through cost-effectiveness and cost-recoveryschemes.

50. The curriculum broadening and deepening processes will beimplemented to prepare students for a wide range of occupations. Toimprove efficiency, the frequency and quality of classroom supervision willbe raised; while efforts will be made to ensure increasing use ofprofessionally qualified tutors. Quality of educational staff will beimproved through a continuing programme of massive in-service trainingcourses for teaching, management, and supervisory staff. In order tosecure a sustainable programme, cost recovery measures and costeffectiveness of expenditures would continue to be pursued. Such measureswould include increased utilization of local materials where appropriate,operating a revolving fund for book replenishment based on collections frombook user fees, eliminating the direct subsidy for school feeding, reducingthe number of non-teaching staff and close monitoring of procurement anddisbursement procedures to minimize waste.

51. The efforts made and the successes achieved under ERP have ledto a lessening of the extent of economic hardships experienced in theperiod immediately preceding ERP. Supply of goods and services includingsocial infrastructure and facilities in health, education and housing havebeen improved. However, the search for a lasting reduction in povertycontinues. This is because continuing hardships are being faced byvulnerable groups such as non-cocoa, small-scale farmers, retrenchedworkers, underemployed and unemployed workers in the urban informel sectorand children.

52. Securing higher living standards in our environment essentiallymeans increased generation of productive employment. in this connection,the efforts to improve savings and investment will support improved livingstandards through higher production. Well coordinated support for small-scale agriculture and other small-scale economic ventures, mainly in miningand manufacturing, will be provided through the PIP with credit in the formof revolving funds and extension-type technology diffusion support. Otherfunding sources including IFAD's small-holder programme facilities, IDAsponsored rural finance and SME credits, together with the improvedservices expected from restructured rural banks will be geared tostimulating small-scale production and income generating activities.

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53. The short term benefits of the ERP will continue to be securedthrough PAMSCAD. While these programmes have come to be seen asSt-vernment's immediate response to the plight of the poor, they have also,in a number of cases, become major sources of local resource mobilization.Several lessons have been learnt from PAMSCAD; and projects and programmessuch as the community initiative projects (CIP), small-scale agriculturalprogrammes, hand-dug wells, low cost sanitation and non-formal educationthat have proved successful will be incorporated in the PIP.

STATE UTERPRISE REORPS

54. The objectives of the state-owned enterprises reform programmehave been to improve efficiency and profitability; reduce the financialburden on the government budget; increase managerial autonomy andaccountability; and mobilize additional financial and entrepreneurialresources. In the medium term the activities of the reform programme willcontinue to be geared toward strengthening management and financialperformance, and streamlining the sector through restructuring anddivestiture. In this context, the programme vill ensure expansion of theprivate sector role in commercial activities, while government concentratesits resources and efforts on providing basic services.

55. In order to accelerate the pace of divestiture, severaloptions, namely outright sale, public or employee share issue, leasing,management contracts and liquidation are being actively adopted. ByJanuary 1991, 37 SOEs had been divested. The programme also envisages adivestiture of 25 enterprises in 1991. Progress on implementation will bemonitored on the basis of nine identified key action steps. These includepreparation of a list of SOEs to be divested, updating financialstatements, valuation, preparation of company dossiers, advertising andidentifying investors, evaluation of investors' proposals, negotiating vithselected investors, approval of divestiture by DIC and conclusion oftransactions. Subsequently, yearly targets will be set within the contextof government's policy for raising additional equity capital, infusing newmanagement expertise, and/or technology. In any particular year, thenecessary provision for liabilities of divested enterprises will be made inthe budget after off-setting resources gained from previous divestment.The allocation for 1991 is ¢3.5 billion. Liquidations have accounted for afairly large proportion of divestment until 1989 since then, however, thefocus has shifted to privatizations.

56. For the SOEs, mainly utilities, which remain in thegovernment's portfolio, strengthening of management capabilities andfinancial and operating performance is of prime concern. Apart fromspecific manpower development programmes to improve professionalism ofstaff, institutional restructuring vill be accelerated. Selectedenterprises which now prepare Corporate Plans will continue to update theirplans yearly. In addition associated performance agreements vill beprepared and signed yearly for 13 priority enterprises. 6overnment'sfinancial support to enterprises which are reflected in the budget willalso be explicitly captured in the enterprise corporate plan andperformance agreement. The outcome of these agreements will be closely

Annex IIPage 12 of 25

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monitored. To support this and generally aid the management process,preparation and publication of timely audited financial accounts will beensured.

BLIC SECTOR MANA¢EM?

57. The increasing demands of the reform programme on themanagement expertise of the public sector, especially the Civil Service,has Imposed strains. The shortage of skills has not only affected typicaladministrative personnel but also the technical professional classes. Thecurrent programme seeks improved efficiency by the creation of betterincentives.

58. As part of the efficiency and productivity increasing drive,reduction of excess labour, particularly at the lower echelons, will becontinued and at the same time skill shortages in critical areas will berelieved. The Management Services Division (MSD) will continue itssystematic job inspection exercises and define optimum staffing levels forministries, GES and subvented organizations through annual manpowerhearings, as was done during the 1991 budget preparations.

59. Meanwhile the redepljyment programme is being extended tosubvented organizations. For - 91, the Government will maintain aredeployment target of 12,000. The year-end net redeployment for the civilservice will be at least 2500 and would permit selective recruitment tofill vacancies at higher levels. Achievement of the target will bemonitored on a monthly basis through PPMD'S manpower data base. For 1992,the Government will set appropriate new year-end targets for redeploymentand for employment levels.

60. Provision of incentive wageslsalaries has remained a thornynational issue but particularly so in the civil service. Government policyis to provide a pay structure that generally ensures that efficiency andproductivity are duly rewarded. The Prices and Incomes Board will preparean Incomes Policy and Guidelines which will form the basis of thetripartite discussions on salaries. The 1991 pay package combined ageneral pay increase and a further stretching of pay relativities.Progress was made from the 1990 level of 9.4s1 to achieve 10.1ls grossrelativities for 1991. However, this understates the progress made. Aftertaking into account the impact of the consolidation of major allowancesinto the basic wage and revisions in the personal income tax structure, theafter tax ratio rose from 6.7s1 in 1990 to 9.2sl in 1991. Governmentremains committed to the medium term target of 13.4:1 (pre-tax), theestablishment of a uniform incremental date and regrading of all civilservice posts into a reduced number of occupational classes.

61. Current plans are to develop a 12-grade structure for seniorstaff and a much reduced number of job classes at junior levels, all basedon systematic job evaluations. When the processes of job evaluations andcosting proposals are also completed for the junior levels by mid-1991, itwould be possible to detail an implementation programme for introducing thenew grading structure at the start of 1992. Performance appraisal systems

Annex IIPage 13 of 25

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which are being developed will be finalised to serve as the basis forintroducing a system of merit pay by 1992.

62. Efforts underway to strengthen civil service management willcontinue throughout the programme period. MSD will continue to play anessential part in helping to bring about efficiency improvemente. Inaddition to ongoing job inspections, it will put increasing emphasis onmanagement reviews, with a view to rationalize organizations and reducewasteful duplication of functions. As a further means of improvingefficiency, the possibility of privatizing services such as security,cleaning and facility maintenance will be explored. This will be done onan experimental basis at first.

63. PPMD will pursue its efforts to reinforce its ability tomaintain data on manpower levels and flows, and carry out manpower planningexercises, for which its Manpower Planning Unit will play an Increasinglyimportant role. A focused effort will be made to address the needs andsuccession planning requirements at management levele In the Civil Service.PPMD will also assist Ministries seeking to establish manpower planningunits. PPMD and Ministerial capacities will be considerably enhanced inthis respect with the development of an integrated personnelipayrollinformation management system.

64. The Training and Manpower Development Division (TMDD), inaddition to managing ongoing training activities, will produce a civilservice training strategy which will serve as a basis for the planning oftraining activities in the next few years.

FINANCIAL SECTOR POLICIES

65. The need to strengthen the financial sector so that itdischarges effectively its responsibility of facilitating theimplementation of business activities under ERP/SAP, led to the design of aFinancial Sector Adjustment Programme, (FINSAP). The broad objectives ofFINSAP have been to establish a well functioning and broadly basedfinancial sector with a viable and effective banking system at its core;and to design a financial system that remains sensitive and responsive tonational development priorities. In line with these, measures such asliberalization of interest rates and removal of sectoral credit ceilingshave been undertaken. As part of the overall measures to enhance thesoundness of banking institutions, the legal and regulatory framework hasbeen improved and supervision strengthened, while management, institutionaland financial restructuring of the banks is being implemented. The two-prong strategy now is to strengthen implementation of the on-going reformsin the commercial banks, as well as to diversify and strengthen thefinancial sector.

66. The turn around plans specific to each bank, which addressmanagement, institutional and financial weaknesses, are being implementedwith positive results. Apart from internal development of, and search forcompetent managers, external recruitment within the context of twinningarrangements with reputable international financial institutions have been

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organized. Where twinning arrangements were not possible, individualexperts and professionals are being recruited to fill key posts.

67. A Non-Performing Assets Recovery Trust (NPART) has been set uptogether with its special judiciary tribunal: and is now fully operational.Side by side with NPART a corporate restructuring programme for potentiallyviable enterprises will be launched to revive real sector activities. TheNPART activities in terms of work-outs for distressed enterprises willcomplement the corporate restructuring programme and provide the bankingsector with healthier clients. The activities in the corporate sector andprivate sector development, in general, are expected to be furtherstrengthened by the operations of the newly established stock exchangewhich commenced trading business in November 1990.

68. To facilitate the implementation of the financial sectorreforms, the Bank of Ghana will be recapitalized and its foreign currencylosses reflected in revaluation losses are being transferred to thegovernment. Its operational capacity in terms of procedures and techniqueswill be improved to enhance its effectiveness in the supervision ofcommercial banks and other financial institutions and in implementingmonetary policy. A healthy and stable non-bank financial sector will bedeveloped.

69. The reforms in the financial sector especially those relatingto the commercial banks and the programme for strengthening BOG should leadto greater availability of resources for the private sector, higherefficiency in financial intermediation and help to reduce costs therebycontributing to a reduction in the spread between lending and depositrates.

MONITORING

70. Implementation and monitoring of the reform activities arebecoming more and more challenging over time. This is partly due to theincreasing number of activities and programmes and the growing complexitiesof project design requiring installation of new systems and procedures.This has meant an increasing input of technically sound professionals andexperienced management teams.

71. Ensuring effective implementation and monitoring of programmeswill involve strengthening of institutions, and streamlining of proceduresand processes. In addition, availability of timely and adequateinformation/data will be important for close and effective monitoring.Institutionally, the co-ordinating role of Ministry of Finance in themanagement of World Bank projects will be further strengthened. In thisrespect, the recently established World Bank Desk will serve as a linkbetween the implementing agencies and IDA and its resident mission. Theimplementing agencies will establish a systematic reporting format andliaise with the World Bank Desk. At least once in every quarter thereshall be a project review exercise and implementing agencies will report ontheir activities. In between, the SAP Monitoring Unit at Ministry ofPinance and Economic Planning will collect monthly reports on the status of

Annex IIPage 1S of 25

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implementing agencies' activities. The World Bank Desk will also serve msthe Secretariat of the SAP team which will continue to oversee themanagement of the progralms.

COII,CLISMt

72. In view of the Initiatives taken by Government In theformulation and Implementation of the next stage of reforac, the Governmentof Ghana requests your favourablo consideration for the extension of anadjustment credit in the amount of at least US$120 million to support aprogram to promote private investment and sustained development.

- _^,sr fo774M

-47- E.APa 16 f 25

OHANA: KEY ECONOMIC INDICATORS

Actual Zak N1Pojce

1987 1988 1989 1990 1991 1992 1993

GDP Growth Rate 4.8% 5.6% S1% 2.7 % 4 . 4A% 14GDY Growdt Rate a/ 4.7% 5.1% 2.9% 1.1% 4 M .%ODY/Capita Grwth Rate 2.0% 2.3% 0.2% -1.S% 4 t *Total ConumpoC*apit Growth Raft 0.7% 0.9% 1.0% -0.5%f Y %*Private Comumption/Capita Growth Rate 1.2% OSS 1.0% 0.3%

CPI Gowth Raft 39.8% 31.4% 25.2% 37.2%2 XM

Gross Ilvestment/GDP 13.4% 14.2% 15.5% 16.0%Domestic Savhg,sGDP 7.0% 8.5% 8.0% 6.2%~NaDonal SavinsGDP 8.5% 9.3% 9.7% 7.9%Public Investment/GDP b/ 7.9% 8.0% 7.9% 7.4%9 6 _Public SavinsGDP 2.9% 2.7% 2.S% 1.8%Private snltm/GDP c/ S.5% 6.1% 7.6% 8.6%Private Savings/GDP 5.7% 6.6% 7.2% 6.1%Ratio of Publi/Privat /Iv_estm ct 1.44 1.31 1.04 0.86

Ooveient RevensGDP 14.1% 13.5% 13.6% 12.7% ,

Goverment ExpmdftursGDP 19.1% 18.9% 19.1% 18.33_Overal Deficit/GDP d/ -3.1% -3.7% -3.1% -4.4%.Domwetic Finning -0.4% -0.6% -1.1% -1.4% .

Export GrowthlRate 9.8% 6.6% 12.7% &3%~1E=lorts/GD 19.7% 18.4% 16.9% 16.4%I4ml rGwwthhRte 19.8% -0.4% 2.2% 2.9%~Imports/GDP -26.1% -24.1% -24.4% -26.2% Current Accouat (US$ mln) -224 -252 -306 -468 _Curent Accoumt/GDP -4.9% -4.9% -5.8% -8.2%Debt Service/XGS o/ 61.8% 67.0% S8.3% 36.4%S

NOTE: Figu are rounded. Data r r d ie I eca of n_ rvdc i a acand a dovwagd rvW in d pdo a _ud wbqat to PPt _odto hIn 1990I.

u/ ODY = GDP adjue for clan in th tem of rdeb/ Includes fg aid and na leading.c/ Staff estimat. Private Insumet Is calaulad adu a takitg Ito acount publc Iniestet.

estmatd an eo bass of budget and dIsbument of oceeeona assitanc Recn misos ofnatoa accounts havewresuted in the estiates dso In Anem L

d/ Inudes etrad gaistace;p ant a finacing m.df Debt sevice Inlde W and arrears pants, but ededB pdvat dft XGS - Export ctgSods and srvie.

SOURCE Gonmet of Ghan, Policy Famewok Paper, nuay 1991 - Decbe 1993.

-48 - Annex IIOAHA Page 17 of 25

ACTIONS UNDER THlE PROGRAM TO PROMOTE PRIVAME VESTET AND SUSTAINED DEVELOPMENT

ACTIONS TO BE TAKEN (1991-1992)

I. PROMOTION OF PRIVATE SAVMS AND IVlESTMENT

Objectives: To maintain a stable macroeconomic environment that facilItates privete Investment andsavings; to improve Incentives for private Investment and savinp; to promote a more dynamicsupply response to tho program; and to expand economte opportunities for private Initiative.

Performance Under ------------ Aetlon Progra--------------------Structural Adjustment Weor B ore BedoreProgram 19087-190 Mrch 1991 may 1994 March 1092

1. use n _ l Agreed on PFP covering Continueds_________----- 1091-98. Inflation Implementation ofSignificnt progs deelerated to 27 macroeconomle programIn restoring pereent by February as outlined In PFP,macroeconomic 1901, ln par owing to adjusted as neessarystabilIty, In spite of ioplementtion of In conwsltation wIthsharp deterioration In several monetary IDA and World Bank.term of trade. policy asures.Public savings Thse Included anoveragd 2.5 percent lnereas In theh Bankof GOP, compared to .1 of Ghana rediscountpercent in 1986. rate and IntensifiedExternal arrears open marketeliminated and debt oprstlons. As aservice ratio has result, severalfallen from 67 percent londing rates turnedIn 1688 to 89 percent pooltlve In realIn 199B. However, terms.after dbeeloratingfrom 142 percent (endof period basis) In19938 to 27 percent In1068 lnflationaccelorated to 41percent In September1lo9.

2. 55!DMR pj Maintenance of market-Retail forTegn Maintenance of mrket- detrmi ned exchangoexchange auction and determi nd oxchang rate sstem.bureu market rate system. Incr ea the share ofuniftod. Most export proceedsremaining exchange surrendered to therestrictions on commrcial banks.current aCCounttransactions lifted.Spread between bureauand wholoesle vuctionrates eliminated.Auction expanded toInclude servicepayment. on approvedprivate externalborrowing.Transforation ofauction from retail towholesal, market withexpanded role forcoamerclal banks.However, limited basefor Interbank exchangemarket because ofsurrender requirementsto the Centrol Bank.

NotoI UnderI1ne action are condition of second tranch releouo.

-49- mex IIPage 18 of 25

Perforance Undwer -A-c-- -ction Prosgr-Structural Adjstmen Botors "form BEtoreProgram 1997-1991 March 1991 Vey 1991 March 1992

S. kE5hb _ 1" Rates of suprales tomplet tudy onrroees o nction tax redued from range efect of tradoof tax rates aGros of 7C-600 percent to Ii beraliation oncomprable Imported Is-l percnet. desetic Industry.and domest ic lly Estaisoh procedure.produced goods *nd criteria to reviewcoomploted. mport rates of duty onduty rate on semi- particular producs.procesed Intermediate Eliminate specialgoods and special tax lmport taxes xcepton textile imports for beer, spirits, andlowered. However, tobacco products, forvariation In effectlv which special Importprotection remain taxes will be reduedmainly becauso of to 19 percnt. Reducespecial Import taeO Scope of dutyand duty exemptions. exemptions and

stre mine dutydrwbck system.

Reduce the differenc4. Ot c XxeReduced corporate (a) beten the topLevel ofpersonal income and personal "mrgtinl tax rats onlncome tax relief incoe tax, dividend personal income andrnisd. Som tax and caital gains corporate incoO taxloopholes with reopect tax furthe ralsed rate; andto non-taxable level of relief on (b) beteen tax ratesallownam closed, pronal Ineo taxe4. on differentWithholding tax on Distinction betwoen industiefo moanly bydividend payment. *slary and non-taxable lowering the ratesconvert d to final allowances reoed, appiae ble to finoncetax. Company income Implemen*ed other and printing.tax rate lowered a measures to decreascapital gains taxatlon the tax burden on Make furthor proresmodified. equlty finance. on double taxation

eroent neoationswith principal tradingpartners.

Implement furtherstep to rationalizebase, rate, andbrackoe structure.

Exten the limit oncarry-over period forloe_ nd furtherreduc dilvidendtaxtion.

Expend bus to Includecash and in-kindbenfite that rerminta xexept or under-value.

Notes Underitned actions ar conditions of second trancho release.

-50 - Annex IIPage 19 of 25

Prtormance Under ------------------ ction Progr--Structural Adjustmnt Betor BBeor 8eforeProgram i9w7-i, March 1M may 1991 March 192

S. 4AdircT x Reduced sales tax rate Further reductions InReductlon In side tax from 22.5X to 17.51. sales tax rote If arate from 26 to 22.6 VAT to Introduced,porcent. ncon- otherwise as rosourcessistencies eliminated permit.In determination ofbase for excse and Ith ID onsales taxes. Taxation In toxon petroleum products *nouncsand vehicles n uos incresed.

6. Tax SWmIlstroteaeoInsfti1Iion of Continued Installation Complete aASYCUDA system to ot ASYCUDA for customs comprehensiv reviewimprove colloction of tax"s. Commened of design options andcustoms taxes begun. operation of Tax feasibility of a VAT.Unique taxpayer Appeals Tribunal.Identifieation number Improved admInistra- Complete instalotionIntroduced for tton prmitte d of ASYCUDA for customscompaniso. Study elimination of 9 out taxes nd extend tocompleted on sales tax of a tot a of 18 TCC other direct andadministration. Pilot re qIrements. tndtrect taxe.effort to test Streamlined customs Introduce uniquefeaotbiIlty of proceduren. txpyForreplaisng current identification numbersystem with a VAT. Tax for Individuals.Appeals Tribunal set Continue reform toup. Tax Clrce ecoura voluntaryCertifticate comline, includingIntroduced to improve further review of thetax collections, but need for TCCs.requirement are wide-ranging and thus amdto cost of doingbusines In Ghana.

Notes Underlined actions are conditione of second tranche rtlo .

- 51 - Annex IIPage 20 of 25

Performance Under ----- --- Action Progra m--- -----Structure I Adj ustment Before Before eforeProgram 1987-1900 March 1991 may 1991 March 1992

. Rbsultor Proces underway to Prrose I n r IolaFr;aor harmonize diverse or revlips In vCov ra mnt xp and d business registration manner *atd acto todlalogue with private forms which Is the Exchngg*ector. Conforence expected to tead to roitrIlct. theheld to promoto direct the elimination of I ut Relationsforign investment. requirement to obtain ct the Labor Dcree.Foreign direct manufacturing and ta ManuFncurinsInvestment In mialng Iavestment polIcy ThdutrieAct ikigrowing. Reforms of lIcense. Policy groc n nrevisinbanking system Advisory Group drawnstarted. However, from private sectorlevel of private established to guide InInvestment Inadequate review of legalto support growth re ulations affectingobjectives. prvate Investors emRegulatory frameork Agreed on principles,has not been modifld proces andto reflect Implementationliberalization of schedule for review ofeconomy which has legal regulations _taken place under ERP. affecting private Covernent to fiilzeFiscal Incentives not investorso guldelines oneffective In technology transferattracting Investment. agreemento. Ese and

make more automtitcimmigration proceduresfor expatriatetechnical andnagertial stff.

Note: Underlined actions are conditions of second tranche relean.

- 52 - Annex IIII. STATE-OWNED ENTERPRISES Page 21 of 25

Objectives: To lmprove officioncy and financlil perforanc.l to Increase accountability; and to reduceslae of s*ctor.

Performance Under ------------ Action Program--------------Structural Adjustment Befor, Bore 8efor.Program 1987-1990 March 191 may 1991 March 1992

1. Ettics nd Finalized performanco- Corporate plans updated YW*to coro rt plansfinnucl-l rorioernor based lncentive system. and performnce risrilUilFPrformance a mr _ts greements signed for roric andfor 18 priority 18 priority f lij 'ror nceenterprise, based on enterprien. .ii rBelntoupdated corporate Imple_et p rt nc -plans, signed based Incentive system.Performanc,%-b aedincentive systedoveloped by SEC.

Studies on pricing, Completed review of Implement oction plan.stffing, remuneration, studi and prepared Compte study ofand procuremt action pln, icludin legoisative andpractices of SOEs rationalization of Institutional frameworkcompleted. collective bargaining of state enterprise

agreements. relative to that forprivate sector.

Cross debt study Ensure that performancecompleted and arrer agreemont take intobetween Government and account steps to cloermajor utility companies any cros debts betwensettled. governmAnt and SQEs.

2. R duo S.iz o_f 10 additional Sfacory 60"lWonsector enterprise divs*tdo. 1991_d_ _ _t_nt

fA*nterprlose Agrement on work ogn 4PnsEr entliquidated (in additlon program for divestmentto 19 enterpris in 1991.effectively liquidatedIn 1988) and 5enterprise sold.

Moratorium on creation Moratorium to remaln Inof now SOEs In effect. effect for duration of

program except asagreed with IDA, andsubject to xTistinglaws.

Note: Undrlilned action are conditions of *scond tranche release.

- 53 Annex II

III. PMUC EXE URES AD POER ALEVIATIN Page 22 of 25

Objectives: To ensure that public expenditures are conistent with maero.conomtc framwork; to improvallootione for operation and maintentne ; to increas efficioney of public spending ndlmprove focus on poverty alloelation; and to strengthen budget proe dure, and expendlturecontrol and montoring.

Performnco Unde -Actilon Program--------------------Structural Adjustment Before Before BEforeProgram 1967-1996 March 1991 may 1991 March 1992

1. 111ocon MMI Updbte mecroeconomicFramework framework twice a year.gacroeconomic fr_amorkupdated for PFP androview of the 199-92public expenditureprogram.

2. ff1loR2 of Agre d with IDA on Eudget document tobubo to OUdIIree torms of refrence for Include Itformation onDraft gul lsn on design of budget developmentrecurrent expendttur information system expenditures, Includingallocations for helth, which would link foreign financing.education, and Information on PIP andagriculture used to ald flows with the Acreement with IDA onprpare 1989 and 1990 budget. 1 currentbudgets. PIP noeds to Asreemet with IDA on sijndifurse and l1-better ddre 1991 recurrent 94 _bil_ Inv_s_s_n_trecurrent cost allocations and 1991-98 aroeroa.mplicatlans of pubitc expenditure

project. prorm.

PIP Task Forceincorporsted Into theInvestment ProjectoAnalysis Division ofWEP. Work undertakento match classifice-tion of PIP and budgetacounte. Neod to morefully ineorporste PIPInto the budgt.

Adjust spatial*. Pob yAihxhkIln Work underway to distribution of eocialP SCO being evaluate poverty focus meeor expenditures Inimplemented. Budget of public exp_diture. publ e *xpenditureallocations for ocial program to take Intosectors have risen. acount nds ofNed to use pubiIc poorest *reas. Ensurexpenditur more focus on servicon which

effectively to have most benotft foralloviate powvrty. the poor. Reviow

peogress onIncorporating povertyconcerne Into publicexpenditure program byanalyzing dietr buttonof actual xp ndituresIn 191 and bassessng enxporince Inthe us of theguidelim. makeproposals for necessry

dif tlat ona ndpossible extenion.

Notet Underlined actions *re conditions of second tprnche rpolese.

i I S

§~~~~~~~~~~~~~11 1 i

W ls-W!'lti'ls¢20 X§*0*

-55 - Annex IIIV. CIVIL SERVICE 1M Page 24 of 25

Obje*tlve.: To IMproVe effectiveness of publie administration; to enable the Govornmnt to attract andretain qualIfled staf; ond to etrengthen personnel and payroll management.

Performance Under - -- Actlon Progr r- - ----------- -Structural Adjustment Before Before beforeProgram 187-190 IMrch 1991 May 1991 March 1992

1. Econontc PollewConission consult ncy Tak step toEstzbllahaent ofPol icy to develop the strengthn the PoliCyAnalysis Division In organiantion and Analysis Division.MFEP. Incorporation of opration of the PolicyStructural Adijustmn t Analyls Division.Program ScretrlatInto MFEP *nda*signment of staff tocoordinato economicreform and related

ctoe prog rams.However, economicpolI making stilIweak because of lock oftralned staff anduncertainty onPriorities.

2. vltlons Completed job fl

cI;vlI * rvT pa vend sonlor posts.In udc-Incre in 989 and Implemented pay99 lncreased salary restructuring todifferentlI betwoen further deompreshighest and lowest selary structure.paid. Job evaluation implementation prormof senior and junTor ppostt In proroos. ot new

grading structur.

14,010 staff redeployed Redeployment targets Implementation of 1991In 199 and 12 _In oet for 1991. redeploymt program1990 Mngemnt Preparatlon by and tre ts e forServices Division of aovrnment of report 19. Further *xpanutonOHCS carelos out job analyzing imact of of a mnt reviews,inspectton. and redeplom ent progrI including closr linksmanagement rv Iwso. through 1990. with udget Divson.Average of i*,010 job Agreement on additionallnspectlon being *enament revlowe tocarried out par annum. be lncluded in workTwo mnagneent revietw proroo of MID.carried out.

Note: Underilned actions are conditio of gecond trance release.

-56 - Annex lpage lof 25

Performnce Under -------------- *on---Act-o -Program----Structur l Adjustment Beooro Bfor Btor*Program 1987-19O March li may 1901 March l2

8. Personncl nd System of manpower Approval of contract su ficient oror t onPJ c o mnameme ilings and other for requirement. study nota ion eoF*iibillty study measures to lnereao for lnterated rcomploted for control over personnel/peyroll InI ntgrated recruitment 8000a=Wt *YOn opersonnol/payroll established. I p nmanagemnt system. perforannC smoralCovernment approval to setem throInstall *yste. civil servc e.Payroll date lmproved Preparation andto provide more Implementatlon of mrltInformation on Staffing paY syst4m.lovols. Pilot testingof new performanceappralal ystem.

Nots: Underlined actions are conditions of second tranche release.

- 57 - Annex III

GHANA

PROGRAM TO PROMOTE PRIVATE INVESTMENT AND SUSTAINED DEVELOPMENT

SuoDlementary Data Sheet

Section I - Timetable of Key Events

(a) Time taken to prepare the program 8 months(b) Appraisal mission November 1990(c) Completion of negotiations March 1991(d) Planned date of effectiveness July 1991

Section II - Special Bank Implementation Actions

Prior to March 1992, or other agreed date, IDA willreview the Government's progress in implementing the program(para. 81)

Section III - Special Conditions

(a) Conditions of Second Tranche Release (para. 82)

(i) Changes in the tax structure have been introduced andare reflected in the 1992 budget.

(ii) Progress has been made in the revision of the legaland regulatory framework governing private sectoractivities, including the Investment Code, theExchange Control Act, the Manufacturing IndustriesAct, the Industrial Relations Act, and the LaborDecree.

(iii) Agreement with IDA on the 1992 allocation forrecurrent expenditure and the 1992-94 publicinvestment program.

(iv) Implementation of measures to revise contract approvalprocedures, including the role of Public AgreementsBoard.

(v) Progress in the implementation of the 1992 program ofpay reform for the Civil Service, including a revisedgrading structure.

(vi) Satisfactory progress on implementation of integratedpersonnel/payroll management system.

(vii) Satisfactory completion of the 1991 divestment programand agreement on the 1992 divestment prugram.

(viii) 1992 performance agreements for 13 priority state-owned enterprises finalized.