Joint assessment of Ghana`s macro economic policy and

Joint assessment of Ghana’s macro economic policy and management in 2010 Multi Donor Budget Support Annual Review, May 2011

•Macroeconomic outcomes (GDP, prices, etc.) result from initial conditions (e.g. arrears, ongoing investment plans, contracts), exogenous factors (e.g. rains, terms of trade) and policy implementation (e.g. budget execution 2010, budget law 2011, banking supervision) . • We focus on effectiveness and efficiency of policy implementation, even if a difficult task (attribution problem and conclusions tainted by outcomes; multiplicity of actors in Government: MoFEP, Bank of Ghana, SOEs, etc.)

QUESTIONS

•Was policy conducive to shared economic growth (crowding in private investment; improved quality of public expenditure)? • Was policy conducive to improved macroeconomic stability (reinforced safeguards against shocks)? • What public finance sustainability (capacity to honor commitments without major policy reversal) maintained? •Has fiscal and monetary reporting been effective for stakeholders to assess the fiscal situation and develop consensus around management policy?

PROMOTING SHARED GROWTH •Growth acceleration in 2010: 7.7 %, up from 4.0% in 2009. Following the strong (but necessary) compression in public demand in 2009 (costing 2.7 percentage points of GDP growth, source: WB), fiscal expansion in 2010, compounded with growing private demand (FDI, private sector credit resumption, high export receipts; private transfers) and supply side factors (rains for agriculture, thermoelectricity, mining, banking, ICT). • Government contribution to accelerated demand: higher public investment and consumption (+18% and +17 % in real terms); Oil exploitation secured, fostering anticipations of higher growth (investment, stocks). Utilities operational capacity improved. Exchange rate stability and inflation maintained – favorable to investment (oil, construction). But continued high public deficits affect long term outlook (LT investments in tradable). Projects disbursements low (opportunity cost).

PROMOTING SHARED GROWTH •Crowding out private sector investment: cash deficit/financing needs higher; arrears higher (GHc2.9 billion in 2009 to GHc3.8 in 2010 (combination of new and discoveries) – down to GHc1.7 billion in April 2011, including SOEs) – contributing to NPL increase, firms viability and operational capacity, and possibly affecting the quality of public expenditure (value for money, off-budget appropriation); inability to secure important budget supports (crowding out) •Pro poor expenditure maintained (29% of Gov expenditures; utilities tariffs raised (pro-poor; improved operations); arrears/debt cleared (improved operations). Petroleum prices also raised (reducing implicit subsidies to non poor) • Link with GSGDA to be improved: GSGDA late in 2010; budget deviations affect MTEF execution; huge gap between costed program and available resource. Program prioritization/coordination across MDA to be improved. •Inflation (tax on poor) reduced(below 10 %).

SAFEGUARDING AGAINST SHOCKS and PROTECTING PUBLIC FINANCE SUSTAINABILITY •Price stability. Inflation rate reduced to below 10%. Lagged impact of monetary and fiscal tightening, exchange rate stability and supply side effects. •Foreign reserves higher (US$4.7 billion, up from 3.2 in 2009). Improved capacity to absorb external shocks, sustain policy stances. •Debt Sustainability better than previously thought because of rebased higher GDP. But public (36 to 39 % of GDP) and external debt (19 to 20% of GDP) rose in 2010, the result of higher borrowing needs (6.8 % of GDP, up from 5.8 % in 2009). Debt composition (interest rate, maturity) suffered from lower than expected concessional budget support and need to clear SOEs arrears; but non concessional external borrowing limited in 2010 (US$216 million, down from US$448 million in 2009). Debt management strategy adopted.

SAFEGUARDING AGAINST SHOCKS and PROTECTING PUBLIC FINANCE SUSTAINABILITY •Slight deterioration in basic primary balance from 0.2 to -0.7 % of GDP: +1.6% of GDP in revenue (tax in particular); +2.5% of GDP in public expenditure (wages, transfers, domestically financed investment). But higher cash deficit as a result of low grants/high foreign financed capital expenditures, growing domestic debt service and arrears liquidation (1.5 %of GDP). •Lack of contingency fund in budget to absorb shocks. • Earmarking arrangements entail rigidity. Statutory Funds new mandate to finance commitments previously financed by the consolidated fund increases Government ability to absorb shocks through more flexible resource allocation. •Financial stability. Banks balance sheets expanding; NPL go down (from 20 to 16 % of gross loans). Capital requirements fulfilled. But public expenditure arrears play a role in NPL. Private sector credit resumed (but NPL provision down).

SAFEGUARDING AGAINST SHOCKS and PROTECTING PUBLIC FINANCE SUSTAINABILITY •Arrears liquidation (TOR/GCB) reduced stability risks. FINSP II adopted. Supervision strengthened (regional cooperation, risks management). •Arrears reflect Government difficulty to honor its financial commitments: affect financial stability, firms viability, and agents ability to forecast. •With oil, increased risks of real exchange appreciation, inflation, boom and bust cycles. This risk is compounded with observed electoral cycles, whereby fiscal deficits are significantly higher during election years. • Oil revenue management law adoption to mitigate risks when implemented. Implemented automatic tariff adjustment mechanisms to reduce oil price – related budget volatility. • Macroeconomic stability will ultimately depends on successful fiscal consolidation. Figures up to end March 2011 are consistent with fullyear plans.

FISCAL AND MONETARY POLICY REPORTING •Monetary Policy Committee conclusions are regularly posted, along with detailed and timely reports on financial sector and balance of payments developments and prospects. • The rebasing and revision in methodology for of national accounts and their quarterly publication provides a better understanding of real sector developments. •Government communication on structural reforms, plans is improving (GSGDA); progress made on transparency (EITI compliant; oil and gas inclusion) in natural resource management. • Unavailability of timely / regular reports on fiscal outcomes affect economic monitoring, quality of expectations, policy dialogue with citizens and external observers, and the identification of possible solutions. Surprises can exacerbate shocks (2008). Stocktaking of arrears improves the information base, but there is a need to improve communication on fiscal developments.

CONCLUSION •Principle of sound macroeconomic management upheld. •Positive contribution to growth and poverty reduction. • Safeguards against shocks strengthened • Reporting improved in some domains. • Fiscal sustainability recognized as the biggest challenge: deficit to be brought down (resource mobilization, PPP), clearing arrears and preventing their re-occurrence, quality of expenditure to be improved (public sector reform). • Proposed formalization of a macro SWG to foster dialogue.