World Bank DocumentA-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Ghana - First and Second

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10686

PROGRAM PERFORMANCE AUDIT REPORT

GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS(CREDITS 1777, A-025, A-025-1-GH AND 2005, 2005-1, 2005-2-GH)

MAY 29, 1992

FILE COPY

Report No. 10686-GH Type: (PPR)WISE, G / X31679 / T9003/ OEDD2

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(annual averages)

Currency Unit = Cedi

1986 US$1.00 = Cedi 89.2 1989 USSI.00 = Cedi 270.01987 US$1.00 = Cedi 153.7 1990 US$1.00 = Cedi 326.31988 US$1.00 = Cedi 202.4 1991 US$1.00 = Cedi 362.8 (first half)

ABBREVIATIONS AND ACRONYMS

ASYCUDA - Automatic System of Customs Data Entry, Control and ManagementBOG - Bank of GhanaCA - Crown AgentsCAG - Controller and Accountant GeneralCFF - Compensating Financing FacilityCIDA - Canadian International Development AgencyCOCOBOD - Ghana Cocoa BoardCPMU - Central Project Monitoring UnitDIC - Divestiture Implementation CommitteeEFF - Extended Fund FacilityEMS - Economic Management SupportERP - Economic Recovery Program or Export Rehabilitation ProjectERPTA - Export Rehabilitation Technical Assistance CreditESAF - Enhanced Structural Adjustment FacilityFINSAC - Financial Sector Adjustment CreditGCMB - Ghana Cocoa Marketing BoardGIC - Ghana Investment CenterGOG - Government of GhanaIDA - International Development AssociationIERD - International Economic Relations DivisionIMF - International Monetary FundIPA - Investment Projects Analysis DivisionISAC - Industrial Sector Adjustment CreditKfW - Kreditanstalt fur WiederaufbauMFEP - Ministry of Finance and Economic PlanningMSD - Management Services DivisionNDPC - National Development Planning CommissionNPART - Non-Performing Assets Recovery TrustNRS - National Revenue SecretariatODA - Overseas Development AdministrationOECF - Overseas Economic Cooperation Fund (Japan)OED - Operations Evaluation DepartmentOHCS - Office of the Head of the Civil ServicePAMSCAD - Programme of Actions to Mitigate the Social Costs of AdjustmentPETA - Public Enterprise Technical AssistancePFP - Policy Framework PaperPIP - Public Investment ProgramPNDC - Provisional National Defense CouncilPPA - Program Performance AuditPPAR - Program Performance Audit ReportRIC - Reconstruction Imports CreditSAC - Structural Adjustment CreditSAF - Structural Adjustment FacilitySAIS - Structural Adjustment Institutional SupportSAP - Structural Adjustment ProgramSAPSEC - Structural Adjustment Program SecretariatSAPT - Structural Adjustment Program TeamSEC - State Enterprises CommissionSOE - State-Owned Enterprise

FISCAL YEAR

January 1 - December31

FOR OFCIAL USE ONLYTHE WORLD BANK

Washington, D C 20433U.S.A.

Office of Director-4GneralOperations Evaluation

May 29, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Program Performance Audit Report on Ghana - First andSecond Structural Adjustment Credits (Credits 1777,

A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)

Attached, for information, is a copy of a report entitled "Program

Performance Audit Report on Ghana - First and Second Structural AdjustmentCredits (Credits 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)" prepared

by the Operations Evaluation Department.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

I I II

FOR OFFICIAL USE ONLYPROGRAM PERFORMANCE AUDIT REPORT

GHANA

FIRST AND SECOND STRUCTURAL ADJUSTMENT CREDITS(CREDITS 1777, A-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH)

TABLE OF CONTENTS

Page No.

PREFACE ..................................................................... iBASIC DATA SHEET ........................................................ iiiEVALUATION SUMMARY ....................................................... xi

PROGRAM PERFORMANCE AUDIT

I. IN TRODUCTION I.......................................... 1

II. OBJECTIVES OF BANK SUPPORT 2 .............................. 2

III. IMPLEMENTATION AND IMPACT 3 ............................. 3

Foreign Exchange and Trade Liberalization 3 .......................... 3The Exchange Regime 3 ...................................... 3Trade Liberalization 4 ....................................... 4

Price Incentives S ........................................... 5The Stimulation of Private Investment 6 .............................. 6Domestic Resource Mobilization ................................. 12Management of Public Sector Resources 7 ............................ 7

Public Expenditure Management 8 ................................ 8Civil Service Reform 8 ....................................... 8State-Owned Enterprise Reform 9 ................................ 9External Support 9 .......................................... 9

IV. RECENT ECONOMIC PERFORMANCE ........................... 10

Overview 11 ............................................... I1

V. EVALUATION ........................................... 12

Program/Project Cycle Issues ................................... 12Design ................................................ 12Appraisal .............................................. 15Implementation ........................................... 16Supervision ............................................. 17

Specific Components ........................................ 18SOE Reform ............................................ 18Cocoa ................................................ 19Tax Policy and Administration ................................. 20

The Effect of Adjustment on the Poor and Other Vulnerable Groups ............ 21Overall Evaluation ......................................... 23

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (cont'd.)Page No.

VI. SUSTAINABILITY ..................................................... 26

VII. LESSONS ............................................... 27

PROGRAM COMPLETION REPORT

PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE ..................... 33

Background to the Bank's Involvement in Program Lending in Ghana ..................... 33The First Phase of Program Lending: Supporting Economic Recovery ..................... 33The Second Phase of Program Lending: Supporting Structural Adjustment ................... 36

(a) The First Structural Adjustment Credit ....................................... 36(i) Preparation of the Credit ............................................ 36

(ii) Design of SAC I ...................................................... 37(iii) Implementation of SAC I .............................................. 40

(b) The Second Structural Adjustment Credit ...................................... 45(i) Preparation of the Credit .............................................. 45

(ii) Design of SAC II ................................................... 46(iii) Implementation of SAC II ............................................. 48

Why Were Some Components of the Program More Successful than Others? . . . . . . . . . . . . .. . . 53

PART II - PROGRAM REVIEW FROM THE BORROWER'S PERSPECTIVE ............. 54

Economic Performance Under the Structural Adjustment Program ......................... 54Economic Reforms Under the Structural Adjustment Program ........................... 55

PART III - STATISTICAL DATA ................................................ 57

Basic Credit Sheets:SAC I (Cr. 1777-GH) ........................................................ 57SAC I African Facility (Cr. A025-GH) ........................................... 59SAC I African Facility Supplement (Cr. A025-l-GH) ................................ 61SAC II (Cr. 2005-GH) ......................................................... 63SAC II Supplement (IDA Reflows) (Cr. 2005-1-GH) ................................. 65SAC II Supplement (IDA Reflows) (Cr. 2005-2-GH) ................................. 67

ANNEX: Implementation Matrix ................................................... 69

ATTACHMENTS

1. Comments Received from KfW on the Draft PPAR .............................. 852. Comments Received from OECF on the Draft PPAR ............................. 873. Comments Received from Sweden on the Draft PPAR ............................ 914. Comments Received from the EEC on the Draft PPAR ............................. 93


GHANA


PREFACE

This is a Program Performance Audit Report (PPAR) on the First andSecond Structural Adjustment Credits in support of Ghana's structuraladjustment program, which reflects the shift in emphasis after 1985 of theEconomic Recovery Program started in 1983. The first of these credits --SAC I, Credit 1777-GH, African Facility A025 -- was approved in April 1987,became effective at the end of May 1987, and was closed in June 1990. Asupplementary credit from the African Facility A025-1-GH was approved inOctober 1987, became effective a month later, and was closed in June 1990. Thesecond credit -- SAC II, Credit 2005-GH -- was approved in April 1989, becameeffective in June 1989, and was closed in March 1991. SAC II Supplement (IDAReflows) Credits 2005-1-GH and 2005-2-GH were approved in October 1989 andNovember 1990 respectively, and were closed in March 1991. Cofinancing ofUS$60.1 million was linked to SAC I, and US$153.9 million to SAC II.

The PPAR consists of the Program Performance Audit (PPA) prepared bythe Operations Evaluation Department (OED) and the Program Completion Report(PCR) prepared by the Africa Region (Parts I and III) and the Borrower(Part II). The PPA is based on the attached PCR, the President's Reports, thecredit documents, on a study of Bank files, and on discussions with Bank staff.An OED mission visited Ghana in October/November 1991, and discussed theeffectiveness of the Bank's assistance with the Ministry of Finance andEconomic Planning, the Bank of Ghana, the Cocoa Board, the State EnterpriseCommission and other relevant ministries and agencies. The mission also metwith representatives of the private sector. Their kind cooperation andvaluable assistance in the preparation of this report is gratefully acknowl-edged.

The PCR provides a good account and assessment of the programexperience. The PPA elaborates on the strengths and weaknesses of the Bank'sperformance and on the lessons to be learned.

The draft PPAR was sent to the Government of Ghana and cofinancingagencies for comments. The comments received from the co-financiers (KfW,OECF, Sweden, and the EEC) are reproduced as Attachments to the report; nocomments were received from the Government.

I I

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GHANA

FIRST STRUCTURAL ADJUSTMENT CREDIT

(CREDITS 1777, A-025, and A-025-1-GH)

BASIC DATA SHEET

CREDIT POSITION

(Amounts in USS Million)

As of Mar. 31, 1992

Credit Oriainal Disbursed /a Cancelled Repaid Outstandinq /a

1777 34.0 35.2 - - 36.7

A-025 81.0 83.3 - - 87.4

A-025-1 15.0 15.2 - - 15.8

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a

Cr. 1777 FY87 FY88 FY89 FY90

Appraisal Estimate (US$M) 7.5 17.0 34.0 -

Actual (US$M) 10.2 11.0 33.7 35.2

Actual as % of Appraisal (%) 136% 65% 99% -

Date of Final Disbursement: May 31, 1990

Cr. A-025 FY87 FY88 FY89 FY90

Appraisal Estimate (US$M) 23.0 73.0 81.0 -

Actual (US$M) 16.5 16.5 63.4 83.3

Actual as % of Appraisal (%) 72% 22% 78% -

Date of Final Disbursement: August 31, 1990

Cr. A-025-1 FY88 FY89 FY90 FY91

Appraisal Estimate (US$M) n.a. n.a. n.a. n.a.

Actual (US$M) - - 15.0 15.2

Actual as % of Appraisal (%) - - - -Date of Final Disbursement: July 3, 1990

/a The credits were fully disbursed. Disbursed and outstanding totals

differ from the original amount of the credits in terms of USS because

of changes in the US$/SDR exchange rate.

- iv -

PROGRAM DATES

Cr. 1777 Actual

Initiating Project Brief 12/31/85

Initiating Memorandum 02/26/86

Letter of Development Policy 03/02/87

Negotiations 02/23/87

Board Approval 04/14/87

Signing 05/19/87

Effectiveness 05/29/87

Credit Closing 06/30/90

Cr. A-025 Actual


Signing 05/19/87



Cr. A-025-1 Actual


Signing 10/30/87



STAFF INPUTS

(staffweeks)

FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 TOTAL

Preappraisal 4.1 - 80.6 4.5 - - - - 89.2

Appraisal 6.7 - - 100.4 - - - - 107.1

Negotiations - - - 19.7 - - - - 19.7

Supervision - - - 11.7 66.8 12.5 2.9 4.9 98.8

Other - - 26.6 28.7 1.6 - - - 56.9

Total 10.8 - 107.2 165.0 68.4 12.5 2.9 4.9 371.7

MISSION DATA

No. of No. of Staff

Month/Year Weeks Persons Weeks

Appraisal 07/86 3.0 9 27.0

Supervision I 07/87 3.0 4 12.0

Supervision II 02/88 1.5 7 10.5

OTHER PROGRAM DATA

Borrower/Executing Agency: Republic of Ghana

Follow-on Operations:

Operation: Structural Adjustment Credit II

Credit No.: Credits 2005/2005-1/2005-2-GHAmount: US$134.0 million

Board Date: April 18, 1989

Operation: Financial Sector Adjustment

Credit No.: Credits 1911/1911-1-GHAmount: US$106.6 million

Board Date: May 31, 1988

Operation: Education Sector Adjustment II

Credit No.: Credit 2140-GHAmount: US$50.0 million


Operation: Private Investment Promotion



- vii -


GHANA

SECOND STRUCTURAL ADJUSTMENT CREDIT(CREDITS 2005, 2005-1, and 2005-2-GH)

BASIC DATA SHEET

CREDIT POSITION(Amounts in USS Million)

As of Mar. 31. 1992

Credit Oriqinal Disbursed /a Cancelled Repaid Outstandinq /a

2005 120.0 119.8 - - 121.8

2005-1 5.7 6.3 - - 6.3

2005-2 8.3 8.0 - - 8.2

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS /a

Cr. 2005 FY90 FY91

Appraisal Estimate (US$M) 60.0 120.0

Actual (US$M) 56.7 119.8

Actual as % of Appraisal (%) 95% 100%

Date of Final Disbursement: February 1, 1991

Cr. 2005-1 FY90 FY91

Appraisal Estimate (US$M) 2.0 5.7Actual (US$M) - 6.3

Actual as % of Appraisal (%) - 111%

Date of Final Disbursement: September 13, 1990

Cr. 2005-2 FY91

Appraisal Estimate (US$M) 8.3

Actual (US$M) 8.0

Actual as % of Appraisal (%) 96%Date of Final Disbursement: May 16, 1991

/a The credits were fully disbursed. Disbursed and outstanding totalsdiffer from the original amount of the credits in terms of USS becauseof changes in the US$/SDR exchange rate.

- viii -

PROGRAM DATES

Cr. 2005 Actual

Initiating Memorandum 05/23/88

Letter of Development Policy 11/23/88

Negotiations 11/21/88


Signing 05/01/89

Effectiveness 06/09/89Credit Closing 03/31/91

Cr. 2005-1


Signing 01/19/90Effectiveness 04/12/90


Cr. 2005-2Board Approval 11/06/90

Signing 12/21/90



STAFF INPUTS

(staffweeks)

Pre-

FY87 FY88 FY89 FY90 FY91 TOTAL

Preappraisal 2.6 77.6 - - - 80.2

Appraisal - 2.0 33.9 - - 35.9

Negotiations - - 39.8 - - 39.8

Supervision - - 1.9 28.2 9.7 39.8

Other - 8.0 1.2 - - 9.2

Total 2.6 87.6 76.8 28.2 9.7 204.9

MISSION DATA

No. of No. of StaffMonth/Year Weeks Persons Weeks

Appraisal 06/88 1.5 8 12.0Supervision I 11/89 2.5 7 17.5Supervision II 05/90 1.5 4 6.0

- ix -

OTHER PROGRAM DATA

Borrower/Executing Agency: Republic of Ghana

Follow-on Operations:

Operation: Financial Sector Adjustment

Credit No.: Credits 1911, 1911-1-GHAmount: US$106.6 million


Operation: Education Sector Adjustment II



Operation: Private Investment Promotion

Credit No.: Credit 2236-GH

Amount: US$120.0 million


t

I

I I

- xi -


GHANA


EVALUATION SUMMARY

Introduction cluding US$215 million in co-financing for IDA's Structural Ad-

1. In 1983, the Government of justment Credits I & II (SAC I &Ghana launched its Economic Recovery II).Program (ERP) to reverse the deteri-oration of the economy through The Objectives of World Bank Supportmacroeconomic measures to stabilizethe economy and through structural 4. World Bank program support foradjustments to correct serious dis- Ghana's SAP consisted of SAC I & II,tortions and disincentives. Sub- several sector adjustment, projectstantial progress was made in re- and technical assistance credits;ducing inflation and the deficit in and recently, one for a "Program tothe overall balance of payments by Promote Private Investment and Sus-the end of 1985. tained Development".

2. Following consultations with 5. The objective of SAC I was tothe IMF and the Bank, the Government support:decided in 1985 to shift the em-phasis of the ERP toward structural a) trade liberalization, by:adjustment. The objectives of thisStructural Adjustment Program (SAP) * merging the two-tiered marketwere to: for foreign exchange and

using the auction determineda) "establish an incentive frame- rate for all officially

work that would stimulate funded transactions thereby

growth, encourage saving and ending the exchange rate taxinvestment, and strengthen the against cocoa and the subsidybalance of payments; and of oil imports;

b) to improve resource use, par- . removal of quantitative re-ticularly in the public sector, strictions on imports, andand direct resources to key related tax and tariff re-areas of adjustment, while en- forms;suring fiscal and monetarystability." b) an incentive framework to stim-

ulate growth through:3. The SAP attracted Fund supportof over US$600 million during . the payment to cocoa growers1987-90, Bank support of about of a larger share of theUS$480 million, and substantial f.o.b. price, to be financedsupport from bilateral donors in- mainly by cost-cutting im-

- xii -

provements in the Cocoa Mar- discrimination against importsketing Board; and has been eliminated by the re-

moval of the 10% tax on specialc) improved resource use in the license imports and by equal-

public sector, through: izing the excises on importsand locally produced goods.

* changes in public expenditure Customs duties on goods other

and tax policy; than luxuries were reduced from30% to 25%. Some trade liber-

* state-owned enterprise re- alization pursued under the

form; and Industrial Sector AdjustmentCredit (ISAC) included the

* better public sector manage- elimination of export permitsment. and the redesign of the draw-

back to remove the tax element

6. SAC II supported a program with on exporters. Trade liberal-

essentially the same objectives, ization was accompanied by the

except that there was greater empha- gradual removal of price con-sis on tax reform and on the promo- trols.tion of private sector developmentthan under SAC I. * c. Price Incentives -- action

focussed on cocoa producer

Implementation Experience & Results prices. These increased innominal terms from Cedi 56,600

7. The implementation experience per ton in 1985/86 to Cedi

under SAC I & II was highly, though 224,400 in 1990/91; and pro-

not uniformly, positive. The main ducers' share of the f.o.b.measures were the following: price increased from 24% to 47%

during that period. In real

* a. The Exchange Regime and terms the price fell by over 6%

Rate -- the auction was widened between those dates due to theto include all current trans- sharp decline in internationalactions; foreign exchange cocoa prices and the resurgencebureaus were allowed; the re- of domestic inflation.tail auction was replaced by awholesale one in which eligible * d. Stimulation of Private

banks and bureaus can bid; Investment -- efforts compriseddealers may trade among them- improvements in infrastructureselves in an interbank market and the policy environment.and are free to retail at rates Among the latter, the signifi-

negotiated with buyers. The cant measures taken under theovervaluation of the exchange SAP were the updating of therate was corrected; the spread Investment Code, the setting upbetween the parallel market and of export financing facilities,the official rate fell from 87% the lowering of the corporate

in 1986 to 3% at mid 1991. tax rate, reduction in importduties on semi-processed goods,

* b. Trade Liberalization -- the the increasing of corporate tax

import license requirement for rebates to exporters, and theaccess to the foreign exchange increase in the retention rate

auction was discontinued, and of foreign exchange allowedthe system of licenses abol- exporters.ished in January 1989. Tax

-xiii -

* e. Domestic Resource Mobiliza- group of trained budgettion -- policies were aimed at preparation officers re-restoring confidence in the sulting in the timely prep-financial system and at in- aration of the annual budgetcreasing public sector resource statement;mobilization:

- civil service reform re-- Under the Financial Sector sulting in the retrenchment

Adjustment Credit (FINSAC), of an average of 12,000 staffthe Banking Law was amended per year over the periodto set capital adequacy and 1987-91 with the program con-reserve requirements, stipu- tinuing through 1992, andlate loan limits and formal- increased real pay and theize reporting requirements widening of the pay range tofor banks. The Non-Per- make high level positionsforming Assets Recovery Trust more attractive; andwas established to exchangefor GOG bonds the non-per- - the selling of 15 SOEs to theforming assets held by Banks. private sector and theBank supervision by BOG has closing of 23 others. Underbeen strengthened, and a a program of restructuring,Stock Exchange and a Credit performance monitoring andClearing House have been set evaluation 15 of 17 SOEs con-up. Banks have implemented stituting a core group torestructuring plans, reduced remain in the public sector,operating cost, and improved and which formerly losttheir efficiency. money, became profitable.

However, given the size of- Public sector resource the sector, the pace of SOE

mobilization has benefitted reform, particularly divesti-from a shift toward consump- ture, has been slow.tion based taxes and betteradministration. The budget Impact on the Poor and Otherdeficit has been eliminated Vulnerable Groupsand the GOG is no longer anet borrower from the private 8. The impact of the SAP at thesector and the monetary sys- household level depended primarilytem. on whether or not any or all of its

members lost their job and the ef-* f. Management of Public Sector fect of higher prices of output on

Resources -- emphasis was on money income and of higher prices ofpublic expenditure management, goods and services purchased on thecivil service reform and reform level of real consumption. Theof state-owned enterprises. impact of the SAP on the poorestAchievements included: groups appears to have been only

moderately negative in the early- improvements in public ex- stages and positive over the longer

penditure management term as the economy has grown, realinvolving the preparation of incomes have increased, the terms ofa detailed Public Investment trade have turned in favor of theProgram and its linkage to rural areas, and GOG has improvedthe regular Capital Budget, social services and oriented healthand the creation of a core

- xiv -

and education services more toward Sustainabilitythe poor.

11. The reforms under the SAP have9. In 1987 the Government of been so comprehensive and the GOG'sGhana, assisted by a secretariat commitment so firm that a reversalfunded by the Bank, prepared a "Pro- of policy directions is highly im-gramme of Actions to Mitigate the probable as long as this administra-Social Costs of Adjustment" tion remains in control. Moreover,(PAMSCAD). PAMSCAD was comprised of it is unlikely that a new government23 projects intended to generate could easily restore the regulatoryemployment, help those whose jobs and control mechanisms that havewere eliminated, meet the basic been removed. Therefore, the bene-needs (including education) of vul- fits from the SACs are likely to benerable groups, and promote com- sustained. The underlying assump-munity initiative projects. The tion is that Ghana is not faced withBank helped to organize a meeting of another severe shortage of foreigndonors in 1988, and US$85 million exchange which provokes non-marketwas pledged. Direct Bank/IDA sup- approaches to its allocation andport was in the form of a US$10 conservation. In practical termsmillion credit -- Priority Works this means that it is assumed thatProject (IDA Credit No. 1874-GH). Ghana will enjoy foreign inflowsRecent evaluation of PAMSCAD found adequate to bridge the gap betweenthat while it did mitigate the ef- Investment and National Savingsfects of adjustment on some vulner- mentioned above.able groups, it did not target thepoorest groups; and that design Evaluationweaknesses led to slow implementa-tion and limited effectiveness. 12. Ghana's structural adjustment

effort supported by SAC I & II hasEconomic Performance been highly successful. The major

factor was that the Government of10. The main macroeconomic indica- Ghana was highly committed to struc-tors of the effectiveness of the SAP tural adjustment and implemented ahave been positive. GDP grew at an wide range of measures promptly andaverage rate of 5% during 1986-90, wholeheartedly. Weakness of imple-in spite of unfavorable interna- mentation capacity, due to deficien-tional factors -- depressed price of cies in the structure and staffingcocoa on the world market, and sharp of institutions, and in managementincreases in the price of crude oil information systems in the publicand petroleum products. The Invest- sector, was the major constraint onment/GDP ratio rose from 9.7% to the structural adjustment process.16%; National Savings/GDP increased Facing this fact, the GOG set up thefrom 5.1% to 8.2%; exports grew at Structural Adjustment Program Secre-over 8% annually, and the level of tariat (SAPSEC) under the office ofgross international reserves in- the Chairman of the PNDC Secretariescreased by US$120 million notwith- to enable continuous high levelstanding a strong deterioration in political monitoring of the program,the terms of trade. However, this and to ensure that measures forpositive performance was accompanied decision by the Council were broughtby a resurgence of inflation in 1990 before it promptly. In addition,which showed signs of tapering off ten special units and task forces,in 1991. coordinated by SAPSEC, were set up

-xv -

to implement various parts of the SAP fostered an unambiguousprogram. sense of ownership of the pro-

gram by GOG;13. The pace of implementation wasmarkedly slower where adjustment * implementation -- arrangements,required changes in the structure of especially for SAC I, kept theinstitutions and the recruitment of political directorate andskilled staff rather than just senior officials informed, andchanges in rules. In addition, the provided for adequate coordina-paucity of up-to-date financial and tion and monitoring;other information for proper manage-ment decisions slowed the pace at . supervision -- Bank staff'swhich changes could be made, e.g. hands-on supervision facili-the divestiture of SOEs. The pace tated the work on the PIP,was also slower where adequate Budget, Tax Reform, Public Ex-studies had not been done, and a penditure Review, and to abasis for agreement at the technical lesser extent the Civil Servicelevel was lacking. Reform. Staff devoted twice as

much time to supervision as14. The main strengths of these SAC they have to the average Africaoperations lay in the following: Region SAL operation.

* timing -- they were the natural 15. Comparison of specific com-next steps in Bank support to ponents and interview results sug-Ghana's ERP, given the mutual gest that there were some weaknessesconfidence built up in the post in these generally successful opera-1983 period; tions. These include:

* consultations -- there were . ESW -- in cocoa marketing andextensive consultations within for SOE reforms, economic andBank, between Bank and GOG, sector work was inadequate tobetween Bank and Fund, and be- underpin the Bank' position intween Bank and other donors; its effort to convince the GOG

regarding the need for, and* complementarity -- the SACs and direction of, change;

rest of the Bank/IDA lendingprogram were mutually rein- * inexperience -- the Bank lackedforcing in support of the SAP; experience in the reform of SOE

sectors and in cocoa marketing* time frame -- an optimistic due to the small sample of

time frame conveyed a sense of countries of significance asurgency at the outset, but was cocoa exporters;flexible enough to permit moremodest targets under SAC II; * narrowness of perspective --

Bank insistence on specific* ESW -- a considerable amount of targets for divestiture of SOEs

high quality studies under- did not appear to take intopinned the success of the pro- account the policy and institu-gram; tional constraints facing pri-

vate investment at the time;* ownership -- the consultative other options were inadequately

approach to the design of the considered. Similarly, thefinancial implications of wide-

- xvi -

spread retrenchment in a public environment. They need to besector dominated economy were convinced that policy changenot sufficiently considered; will be permanent and compre-

hensive, and that the "offi-* institutions -- Bank study of cial" attitude to private

institutions and analysis un- profit and wealth will be con-derlying institutional reform sistent with the enhanced rolewas limited. Thus there was no envisaged for the private sec-definition of future roles of tor. Frequent consultationsinstitutions that would lose between the government and theregulatory functions as liber- private sector can be useful inalization proceeded; making the latter comfortable

with the policy changes and in* continuity -- frequent turnover identifying the continuing im-

of Bank staff, regarded by the pediments to their response.client as disruptive of theadjustment process, was an un- c) The structural adjustmentdesirable feature of the Bank's process in such an economy re-conduct of these operations. quires that in addition to pro-

viding incentives to stimulate

Lessons private investment, the insti-tutional arrangements for as-

16. The most important lessons from sisting the private investor inreview of these operations are the mobilizing resources need to befollowing: put in place, and the legal

basis and administrative proce-

a) Brainstorming sessions in- dures need to be clarified forvolving the political and offi- potential investors as well ascial levels of government at for bureaucrats. All threethe design stage of the struc- requirements have to be ad-tural adjustment program have dressed early in the adjustmentconsiderable merit as a means process.of enhancing the client's senseof ownership of the program and d) Ghanaian officials concur instrengthening the commitment to the view that the success ofimplement it. As the Ghana the adjustment program in manyexample shows, the inclusion of areas owes much to "hands on"the private sector, unions and supervision by Bank staff. Thisother interests in such ses- allowed Bank expertise to but-sions can foster greater under- tress Ghanaian efforts in crit-standing and acceptability of ical areas in a manner that isthe necessary policy measures. not possible with contract as-

sistance, and permitted flexi-

b) Where, as in Ghana, the public bility in resolving unforseensector has been the dominant and unforeseeable problems inoperator in the formal economy implementation. The norms offor over thirty years and the staff time provided for super-culture or tradition of private vision of structural adjustmententrepreneurship has been sub- operations should be reviewedstantially weakened, private in light of this experience.entrepreneurs should be ex-pected to respond cautiously toa partial change in the policy


GHANA


I. INTRODUCTION

1.01 Throughout the 1970s Ghana's economy was dominated by public sectorproduction and commercial activities, and was badly managed. Support for thepervasive, inefficient public sector led to large budget deficits, which inturn fueled high inflation. The fixed nominal exchange rate became grosslyovervalued, shifting relative incentives away from exports and leading todeterioration of export performance and in the capacity to import. Decliningexports, imports and economic activity eroded the tax base and forced severecutbacks in Government social services, maintenance, and capital investment;thereby undermining the once well developed social and economic infrastructure,and further reducing productive capacity. Meanwhile, the policy environmentwas distorted by the tendency of successive governments to 'respond to theforeign exchange crises by increasingly restrictive import regimes, rationingand price controls. The lack of economic opportunities and declining realwages led to an exodus of skilled Ghanaians and to the flight of capital. Inthe early 1980's the grave economic situation was exacerbated by prolongeddrought, deterioration in the terms of trade, and the forced repatriation ofover a million Ghanaians from Nigeria.

1.02 In 1983, the Government of Ghana launched its Economic RecoveryProgram (ERP) to stabilize the economy, restore creditworthiness, rehabilitatethe export sectors, and reverse the downward trend in GDP. Substantialprogress was made in stabilizing the economy by 1985, specifically in reducinginflation and the deficit in the overall balance of payments. In light of theprogress on stabilization issues during the first phase of the ERP, theGovernment concluded that it was time to emphasize the restoration of growth,for which further reform of the exchange rate regime, higher cocoa producerprices, and greater efficiency in the public sector were necessary.

1.03 The ERP shifted toward a Structural Adjustment Program (SAP) whichincluded a macroeconomic stabilization component essentially continuing thedemand management begun in 1983 and a growth component containing measures toexpand exports and to improve mobilization of and efficiency in resource use.Given the dominance of the public sector in resource use, the program calledfor the reform of taxation to reduce distortions associated with the protec-tionist policies of the past, reforms to improve public sector management --better planning, budgeting and monitoring of expenditures, and more efficientuse of manpower -- not only in its central administrative apparatus but in thelarge state-owned enterprise sector devoted to commercial and productivefunctions.

1.04 The SAP attracted IMF support resulting in purchases of over US$600million during 1987-90. Bank support was provided in the form of about US$250million in structural adjustment credits plus over US$150 million in sectoradjustment credits and another US$77 in project/technical assistance credits.

There was substantial bilateral support, including US$215 million of co-financing for the Bank's structural adjustment credits.

II. OBJECTIVES OF BANK SUPPORT

2.01 World Bank program support for Ghana's ERP took the form of twoReconstruction Imports Credits, an Export Rehabilitation Credit and associatedTechnical Assistance Project. The shift toward structural adjustment wassupported by an Industrial Sector Adjustment Credit, two Structural AdjustmentCredits, a Financial Sector Adjustment Credit, and a Program to PromotePrivate Investment and Sustained Development. Bank project lending forStructural Adjustment Institutional Support, Public Enterprise TechnicalAssistance, Cocoa Rehabilitation, and Economic Management Support also wasdesigned to assist the SAP. While this is an evaluation of the StructuralAdjustment Credits I & II, there was considerable overlapping of objectiveswith other operations in support of the SAP, and frequently the measuresdirected at any objective were not unique to any one operation. This in turnmakes it difficult to ascribe specific impact to any subset of operationswithin the group supporting the SAP.

2.02 In 1985, following consultations with the IMF and the Bank, theGovernment decided to reorient the ERP to :

* establish an incentive framework that stimulates growth, encourages

savings and investment, and strengthens the balance of payments; and

* improve resource use, particularly in the public sector, and direct

resources to key areas of adjustment, while ensuring fiscal andmonetary stability.

2.03 The objective of SAC I was to support the following aspects of thereoriented ERP, which was thence also referred to as the SAP:

a) trade liberalization, specifically:

* the merging of the two-tiered market for foreign exchange by using

the auction determined rate for all officially funded transactions,thereby ending the exchange rate tax on cocoa and the subsidy ofoil imports;

* the removal of quantitative restrictions on imports, and related

tax and tariff reforms;

b) an incentive framework that stimulates growth through:

* cocoa sector policies leading to the receipt by growers of a largershare of the f.o.b. price to be financed mainly by cost-cuttingimprovements in the efficiency of the Cocoa Marketing Board.

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c) improved resource use in the public sector, through:

* changes in public expenditure and tax policy;* state-owned enterprise reform;

* better public sector management.

2.04 SAC II (approved in FY89) supported a program with essentially thesame objectives, except that there was greater emphasis on tax reform and onthe promotion of private sector development than there was under SAC I.

2.05 One other objective of Bank support was to facilitate and coordinatesupport by other donors, by sponsoring meetings of the Consultative Group forGhana.

III. IMPLEMENTATION AND IMPACT

ForeiRn Exchange and Trade Liberalization

The Exchange Regime

3.01 Before September 1983 the foreign exchange regime pegged the exchangevalue of the Cedi to the US dollar at Cedi 2.75 = US$1.00. During the nextthree years a series of discrete devaluations brought the exchange rate toapproximately Cedi 90 = US$1.00. In September of 1986 a dual exchange ratesystem was set up, in which there was a fixed rate for cocoa exports and forimports of petroleum products and essential drugs and an auction ratedetermined by competitive bidding among holders of eligible import licenses.Importers of consumer goods were not allowed to bid in the auction but had toacquire foreign exchange in a parallel market where there was a premium of over80% compared with the auction rate.

3.02 Under the structural adjustment program access to the auction has beenwidened by the inclusion of additional categories of consumer goods and servicepayments and the exchange market has been unified. First, the fixed rate forcocoa, petroleum, etc., was abolished in February 1987 after which alltransactions through the banking system were settled at the rate determined inthe weekly auction. In 1988, the Government, on its own initiative, furtherwidened the exchange market by permitting the setting up of foreign exchangebureaus, thereby redefining the legal system in such a way as to encourage theabsorption of the parallel market into the formal one. Subsequently, thespread between the bureau rate and the auction rate converged almost to thepoint of disappearance. In April 1990, the retail auction was replaced by awholesale auction in which banks and licensed bureaus meeting the eligibilitycriteria could participate. These dealers freely determine their bids at theauction and sell to their customers and to other dealers at mutually agreedrates. In addition, in order to promote the development of an interbankmarket, dealers are authorized to trade among themselves. The Bank of Ghanamay participate as a buyer or seller in this market.

3.03 Under the unified exchange market the exchange rate of the cedi isdetermined freely in this two level market. The retail market rate is the

effective rate except for customs valuation and official purposes for which theauction rate is used. The official exchange rate between the cedi and the USdollar has gone from 89.2 in 1986 to 326.3 in 1990 and to 358.8 during thefirst half of 1991. The real effective exchange rate of the cedi depreciatedby 36% between August 1986 and December 1990. For all practical purposes thecedi is now convertible.

3.04 The changes in the exchange rate and regime have:

* improved economic incentives, especially the profitability of

investment in the export sector and contributed significantly tothe 8% rate of growth in exports of goods and non-factor servicesduring 1986-1990;

* permitted increased access to imported inputs and in turn helped

to rehabilitate the productive base;

* facilitated fiscal adjustment by maintaining the buoyancy of

revenues from taxes on international transactions;

* aided trade liberalization;

* depoliticized the exchange rate by eliminating government dominance

of the exchange market and making the rate in the public mind aprice like any other price; and

* stimulated flows of remittances from abroad through official

channels.

Trade Liberalization

3.05 Until October 1986 imports were controlled within the framework of anannual import program and licensing system dictated by foreign exchangebudgeting and exchange control considerations. There were two types of importlicenses -- specific and special. Recipients of the former were allowed toimport goods not on a negative list (which included consumer goods) and to buythe requisite foreign exchange from the banking system, while recipients of thelatter were allowed to import but could not receive foreign exchange from theofficial system. In general, exporters were allowed to retain only 20% offoreign exchange earnings, the remainder had to be surrendered for cedis at theexchange rate in the auction. Exceptions were mainly gold exporters which hadlarger retention rights and cocoa with lower retention rights.

3.06 Under the structural adjustment program supported by SACs I & IIconsumer imports were gradually made eligible for financing throuph the foreignexchange auction, and became 100% eligible by February 1988.- The importlicense requirement for access to the auction was phased out, and the systemfinally abolished in January 1989. Meanwhile, during 1987-89 steps were takento liberalize current payments for invisibles, and by the end of 1989 only a

1' Except for a small list of luxury items.

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few minor restrictions remained. Parallel with the liberalization of trade,fiscal reforms were introduced to reduce the distortions in trade taxation andprotection. For instance, the customs duty on consumption goods other thanluxuries was reduced from 30% to 25%; the 10% tax on imports under the "specialimports" license was abolished; and sales and excise schedules were merged andsimplified by setting a common rate of 20% for most commodities. The foreignexchange retention by exporters was raised from 20% to 35%.

3.07 Some aspects of trade liberalization were simultaneously pursued underthe sector adjustment program supported by the Industrial Sector AdjustmentCredit. These included (a) simplification of export documentation by abolishingthe permit to export; (b) redesign of the duty drawback scheme to remove thetax element from exporter's cost; (c) study of pre- and post-shipment exportcredit; and (d) reorganizing and strengthening of the Export PromotionCouncil.

3.08 Liberalization of exchange and trade was accompanied by the gradualremoval of price controls. The Prices and Incomes Board now only gets involvedin determining the price of wheat from the single importer to millers toprevent the former from taking advantage of monopoly power. The Board alsomonitors the cost components of cement in view of the lack of competition inthe cement market. While the Board continues to monitor price trends,generally price controls are no longer enforced.

Price Incentives

3.09 Action to improve price incentives to provide more remunerative pricesfor exports focussed on cocoa. The nominal price received by cocoa growers wasincreased from 56,600 cedi per ton in 1985/86 to 224,400 cedi in 1990/91. Theshare of the f.o.b. price at the official exchange rate increased from 24% to47% during the same period. Nevertheless, with the steep rise in the ConsumerPrice Index from 4,245 (1977=100) to 17,933 and the fall in international cocoaprice from US$2,434 per ton in 1986 to US$1,270 in 1990, the real price tococoa producers (cedis/ton in 1977 prices) increased from Cedi(1977) 1,333 in1985/86 to Cedi(1977) 1786 in 1987/88 but fell back to Cedi(1977) 1,251 in1990/91. Clearly, the fall in real producer price would have been more severebut for the increase in the share of export proceeds paid to the grower. Theexport of beans increased from 171,747 tons in 1985 to 260,001 tons in 1990.

3.10 It had been hoped that the larger share to the producers would havebeen financed through the reduction in Cocobod operating costs from anestimated 22% of the f.o.b. export price in 1987/88 to about 15% in 1988/89,which would not have involved the sacrifice of the share going to theGovernment. Indeed, significant effort has been directed at improving theefficiency of the Cocobod. The work force has been reduced from 79,000 in 1984to 46,000 in 1991, and effectively to 43,000 due to vacancies; input subsidiesvalued at about 9,000 cedi per ton of cocoa produced have been eliminated;corporate planning has been introduced; and there has been some rationalizationof functions, especially in haulage of cocoa through increased reliance on therailway and on the private sector.

3.11 However, in spite of these cost reduction efforts, Cocobod costs in1990 have been estimated at 28% of the f.o.b. value of exports. This reflects

the impact of the dramatic fall in price on the international market and thefact that costs are determined independently of the price. In the absence ofthe dramatic decline in price the cost ratio would have been nearer the target.However, some aspects of program performance militated against achievement ofthe 15% target. The divestiture of plantations has been slower than expected-- only 7 of the 52 targeted for divestiture were sold by 1990; and there hasbeen no significant progress in restructuring the cocoa processing company.Similarly, the pace of retrenchment of the labor force has been slowed, as thefinancial burden of the severance payments is particularly onerous given thedepressed state of international cocoa prices.

The Stimulation of Private Investment

3.12 Of the three sets of actions to stimulate private investment --rehabilitation of infrastructure, improvement in the attractiveness of thepolicy environment, and setting up joint ventures of selected state-ownedenterprises -- substantial progress was made in the case of the first two. Theoutstanding example of infrastructure rehabilitation was the improvement of theport at Takoradi.

3.13 Efforts to improve the policy environment included:

* the updating of the Investment Code in 1990 to include benefits to

existing enterprises;

* the setting up in July 1990 of export financing facilities for non-

traditional commodities;

* the lowering of the rate of the Corporate Tax applicable to

agriculture, manufacturing, real estate, construction and servicesto 35% in the 1991 Budget after having been lowered in the previousbudget from 55% to 50%, except for construction which had beenalready at 50% and was lowered to 45%;

* the reduction in the rate of import duty on semi-processed

intermediate goods to 10% from 15% in 1991;

* the raising in 1991 of corporate tax rebates on exports from a

range of 30-40% to 60-75% for agriculture depending on theproportion exported, and for manufacturing from 25% to 30%.

3.14 These efforts were only some of the many through which the Governmentof Ghana sought to address the constraints on investment residing in theuncertainty about the economy, and in concerns about taxation, the restrictiveand cumbersome regulatory framework, and access to credit and financing. Theconcern over access to credit and financing was addressed through a financialsector adj'ustment program (see below). In 1991, when it became clear that theweak link in the adjustment program was the inadequate response of privatedomestic investment, emphasis shifted to the re-examination of the legal,regulatory, and consultative framework in order to make it consistent witheconomic liberalization and the creation of a dynamic private sector. Thisreorientation is supported by an IDA credit for SDR 84.6 million (US$120million equivalent) which was approved by the Board in April 1991.

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3.1-5 Running counter to the positive measures that were taken is theperception in part of the business community that there has been a continuationof some anti-private sector biases in some parts of the Government, reflectedin vigorous pursuit of businessmen for alleged economic crimes, overzealous taxenforcement, and occasional direct intervention in private operations. Thesebiases were also reflected in slow processing of applications for registrationof new businesses, and the failure on the part of civil servants to showwillingness to clarify for new entrepreneurs the legal and administrativerequirements for doing business in Ghana. The predominance of officials in thearrangements for government/private sector consultations, and the slowness insetting up the consultative apparatus were also mentioned as negative factorsin the new economic environment.

Domestic Resource Mobilization

3.16 Saving and investment goals were pursued through policies to increasedomestic resource mobilization. These policies were to a) restore confidencein the financial system, and b) increase public sector resource mobilization.Accordingly, the Government of Ghana implemented during 1989-1990 a program,supported by an IDA Financial Sector Adjustment Credit (FINSAC), to improve theregulatory framework and provide better supervision of banks; to restructurefinancially distressed banks; and to improve mobilization of savings and theallocation of credit. In August 1989 the Banking Law was amended by the PNDCto set capital adequacy and reserve requirements, stipulate loan limits andformalize reporting requirements. In February 1990 the Non-Performing Ass-etsRecovery Trust was set up to receive the non-performing assets of banks inexchange for special GOG bonds. Simultaneously, bank supervision capabilityof the Bank of Ghana was strengthened. Subsequently, a Stock Exchange and aCredit Clearing House were established. Although the evaluation of the FINSACis outside the scope of this inquiry, it is fitting to point out that inresponse to these policies banks have begun to implement restructuring plans,have reduced operating cost and have improved their efficiency.

3.17 In order to improve the Central Government's contribution to domesticresource mobilization, the Government has made a fundamental change in its taxpolicy and has reduced the deficit in the recurrent budget. There has been adefinite movement away from taxes on production toward taxes on consumption,hence reducing the taxation of savings. Sales taxes have doubled theircontribution to revenue since 1986. At the same time there has been an attemptto widen the revenue base while trying to reduce the importance of taxes oncocoa exports. Taxation of petroleum has gained in importance, its contribu-tion rising from under 5% of revenue and grants in 1987 to nearly 22% estimatedin the 1991 budget. In order to improve the efficiency of tax administrationand reduce the costs of collection the National Revenue Secretariat has beenstrengthened and re-integrated into the Ministry of Finance and EconomicPlanning. The overall effect of these changes has been that revenue hasaveraged 12% of GDP during the 1987-90 period compared with 8% during thepreceding four year period. At the same time the deficit in the current budgethas been eliminated, with the result that the Government has been able to avoidborrowing(net) from the private sector and has been repaying its debt to themonetary system.

J1

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3.18 The objective of maintaining positive interest rates has generally notbeen achieved, except for the maximum lending rate in 1989, mainly because ofthe resurgence of high inflation and the slow take-off of the demand for creditand financing by private investors.

ManaRement of Public Sector Resources

3.19 The structural adjustment program focussed on three areas: a) publicexpenditure management, b) civil service reform, and c) state-owned enter-prises. The two areas of expenditure management targeted for attention werethe Public Investment Program and the Annual Expenditure Budget.

Public Expenditure Management

3.20 The GOG has made significant progress in developing its capacity toprepare a detailed Public Investment Program(PIP) and in substantiallyintegrating the current year's program with the annual budget. There is a 15%internal rate of return threshold for inclusion of any project, and an i.r.r.calculation is required for all projects costing over US$5 million. For socialsector projects there may be no i.r.r. but projects must be cost effective.The composition of the PIP is determined in accordance with guidelines set outunder the ERP, which require that more than 50Z be allocated to infrastructure.Typically, the allocation has been 62% infrastructure, 22% productive sectors,and the remainder to the social sectors.

3.21 The original objective was to automate the putting together of thebudget by 1989. A small Budget Task Force was set up, trained, and providedwith computers and technical assistance to do the initial study. Today thereis a core group of 16 trained officers plus support staff, all dedicated tobudget preparation. Compared with the situation four years ago when the budgetstatement was not available until five months into the budget year and detailssome months later, the basic budget statement covering recurrent and capital,and including subvented organizations is now ready in January -- the firstmonth of the financial year. Printed, detailed versions are generally readyby April, although by March most ministries have received advance copies. Theprocess now fully conforms with the guidelines on personnel emoluments, thewage bill falling from 5.1% of GDP in 1986 to 4.3% in 1990, and its share oftotal expenditure falling from 27% to 24%.

Civil Service Reform

3.22 Civil service reform involved the retrenchment of surplus staff, therecruitment of needed high level skills, and pay reform. Compared with a targetof 15,000 per year to be released from the civil and the education servicesover a three year period 1987-90, actual retrenchment was just over 12,000 pervear over a four year period, and the program has been extended through 1992.The net reduction in the service was somewhat smaller because inadequatelycontrolled recruitment initially eroded some of the gains from retrenchment.Still, there has been a cumulative net employment reduction of 3% annually.The achievements of the skills mobilization scheme were modest and mixed. Thescheme provided for the recruitment of local consultants, long term recruitmentof Ghanaians from the private sector, inducement of Ghanaians abroad to return,and the payment of special duty allowances to serving Ghanaians to do special

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tasks. Attraction of Ghanaians from overseas was particularly unsuccessfulsince some mechanisms were not used for fear of provoking resentment within theservice. The GOG has decided to explore the alternative of a fast trackdevelopment program for promising young officers. Pay reform objectives havebeen partially achieved -- real pay has increased by 8.7% between 1986 and1990, and the pay scale has been decompressed so that the ratio of highest tolowest pay scales has gone from 5.4 to 1 in 1988 to 9.5 to 1 in 19 9 0.!i

State-Owned Enterprise Reform

3.23 The main objectives of the state-owned enterprises reform were toreduce the size of the sector through divestiture and to improve the efficiencyof priority enterprises remaining in the public sector through restructuring,performance monitoring and evaluation (PME). As of January 1991, 15 smallenterprises with a total value of 2 billion cedis had been sold to the privatesector, and 23 had been liquidated. Seventeen SOEs were identified as coreenterprises to remain in the public sector and to be included under the PMEsystem. While in 1988 fifteen (15) of the core enterprises had a net lossbefore tax of Cedi 417 million, they realized a net profit of Cedi 19 millionin 1989 and Cedi 26.9 million in 1990. Under the PME system the SOEs arerequired to provide quarterly and annual performance reports to the StateEnterprises Commission but most have been unable to meet this requirement ina timely manner due to weak internal management information systems, especiallyup-to-date audited accounts.

3.24 As of the end of 1990 there were 97 SOEs in the SEC data base, notincluding the core group to remain in the public sector, employing a total of92,350. Of these SOEs, 60 were profitable and generated profits of the orderof Cedi 15 billion in 1989, while 33 loss makers recorded a total operatingloss of Cedi 12.5 billion. It has been estimated that the 114 SOEs in the SECdata base represents about one-half of the total number of SOEs and about two-thirds of employment in the SOE sector. When account is taken of the size ofthe SOE sector, it becomes apparent that the pace of divestiture has been slow.The GOG continues to face a financial burden reflected in a net current flowof subsidies and subventions of the order of Cedi 2 billion per year to theSOEs and in loan guarantees amounting to about Cedi 25 billion.

External Support

3.25 External assistance officially committed to Ghana by bilateral andmultilateral sources (not including the IMF) rose from US$437 million in 1986to US$749 million in 1987 and was nearly US$850 million during the next twoyears. Net disbursement were US$372 million in 1986, remained at that levelin 1987, but increased strongly in the next two years to reach US$553 millionin 1989. The average official commitments during 1987-89 amounted to US$815million compared with US$418 million during 1984-86. The corresponding figuresfor bilateral sources only were US$411 million and US$146 million. While notall of the increase in bilateral assistance was support for the SAP a

21 See Division Study Paper No.2, Africa Technical Department, WorldBank: "Civil Service Pay & Employment Reform in Africa: SelectedImplementation Experiences" by Louis de Merode.

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substantial portion was; the cofinancing for the SAC credits mentioned aboveis indicative. 3/

3.26 The above review of some of the main structural adjustment actions andachievements indicate the broad range and depth of changes in policy andadministration attempted by the GOG under the SAP. In the following sectionan attempt will be made to gauge, albeit roughly, the impact of this effort andof the associated stabilization program on the economy.

IV. RECENT ECONOMIC PERFORMANCE

4.01 GDP grew at an average rate of slightly more than 5% per annum -- theSAC target -- during 1986-89, and at 3.3% in 1990 due mainly to drought. Withpopulation growing at 2.6%, growth in real GDP per capita was positivethroughout the period. Underlying this growth in GDP was a significantresurgence in cocoa production of 26.7% between 1986 and 1990 notwithstandingthe decline in the export price of cocoa. Mining grew at 10% per year inresponse to renewed investments in gold; manufacturing continued to recoveralthough the impetus was provided by fuller capacity utilization and this wasbeing exhausted; utilities grew at about 10% and so did the private part of theservices sector. Agriculture (not including cocoa) was the weak performeramong sectors, with average GDP growth of just over 1% per annum during1986-90.

4.02 Investment improved during 1986-90, with the Investment/GDP ratiorising from 9.7% to 16%. While this means that the revised target of 16% setunder SAC II has been achieved, the growth of investment is still short of thatnecessary to meet long term GDP growth aspirations. Although the privatesector's contribution to the recovery of investment was significant, havingincreased from 2.1% of GDP to over 8% according to preliminary estimates, thiswas concentrated in mining and real estate and hence not indicative of a broad-based resurgence consistent with the intended shift from a public sectordominated to a private sector led economy. This has been recognized by the GOGand, with IDA support, a program to address the specific requirements for amore vigorous private response was put in place in 1991.

4.03 National savings increased during 1986-90 from 5.1% to 8.2% of GDP,reflecting the sharp rise in private saving from 3.4% of GDP in 1986 to 6.5%in 1990. Given that per capita income was increasing at about 2%, the impliedmarginal savings rate of over 30% is remarkable. This growth fell just shortof the revised target set for SAC II and substantially short of the moreoptimistic target of over 14% set under SAC I. Clearly, even if thesignificant capital inflows from overseas required to sustain the level ofinvestment consistent with growth targets do in fact materialize, a substan-tially greater fraction of incremental per capita income will have to be savedin future. This would seem to require that the rate of inflation fall and thatinterest rates become positive.

3/ OECD: "Geographical Distribution of Financial Flows to DevelopingCountries", Paris, 1991.

4.04 While CDP per capita rose at approximately 2% per year over theprogram period, private consumption per capita rose more slowly due to theincrease in the rate of saving. This explains the public perception in Ghanathat the adjustment program has brought less prosperity than the 5% per annumGDP growth rate would imply.

4.05 Exports of goods and non-factor services grew at an average rate ofover 8% annually during 1986-90, but the expected current account surplus ofUS$110 million per year was not realized due to deterioration in the terms oftrade, and especially the steep fall in the international price of cocoa.4These facts notwithstanding, Ghana was able to increase its gross internationalreserves from US$149 million at the end of 1986 to US$269 million at the endof 1990 and to reduce almost to the point of elimination the arrears on currentpayments. Repatriation of Ghanaian savings from overseas, estimated at overUS$200 million annually over the last two years, contributed significantly tothe recent improvement in the capital account.

4.06 As of the end of 1990 inflation had not been brought under control,the GDP deflator increasing at 34% in that year, approximately the averageannual rate of increase over the previous four years. The Consumer Price Indexshowed that up to 1989 inflation had been abating, albeit slowly, but thatthere was a resurgence in 1990. This resurgence has been attributed to higherfood prices due to poor crops resulting from drought and to a steep rise in theprices of petroleum products due to a sharp increase in world crude oil pricesas well as heavier excise taxes on the main petroleum products. There was asignificant reduction in inflation during 1991 partly in response to monetarypolicy aimed at reducing the excess liquidity that in 1990 had validated cost-push pressures.

Overview

4.07 Aside from the performance indicators mentioned above, there areothers indicative of the success of stabilization efforts. The fiscal balanceimproved, the broad fiscal deficit"' having been reduced from 3.3% of GDP in1986 to 2.4% in 1990. External debt service6/ as a percent of export of goodsand services was reduced from 47.8 in 1986 to 37.9 in 1990. The rate ofincrease in the supply of broad money fell from 53.7% in 1986 to 18.0% in 1990.Meanwhile, the overvaluation of the exchange rate was corrected, the spreadbetween the parallel market and the official rate fell from 87% in 1986 to 3%at mid 1991, and, for all practical purposes the cedi became a convertiblecurrency.

4/ Cocoa prices realized for Ghanaian exports fell by 46% between 1986and 1990.

5' Including capital expenditure financed through external project aid.

6/ Including the IMF.

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4.08 The question arises as to what extent the economic response notedabove was a byproduct of the substantial assistance received by Ghana after1986.1' It is difficult to separate the effect of aid on growth from that ofpolicy changes. However, it can be noted that a comparative study ofadjustment programs in seven African countries,-' showed that the aid percapita disbursed in 1987 to Ghana was slightly lower than the average forGuinea, Kenya, Madagascar, Malawi and Togo, and substantially lower than forSenegal, but that most of these countries did not match Ghana's growthperformance. Thus it would seem that while aid flows most likely assisted,this factor alone would not explain the growth rates achieved by Ghana.

4.09 While it can be stated with confidence that the performance of theeconomy outlined above broadly reflects the impact of the economic recoveryprogram, it is less clear how much is attributable to the effects of thestructural adjustment emphasis after 1985. The likely existence of lagsbetween implementation of policy change and the appearance of the effects oneconomic performance indicators suggests that the drawing of detailedconclusions regarding the effects of particular parts of the Ghanaian economicprogram should be approached with caution.

V. EVALUATION

5.01 The structural adjustment effort in Ghana has been successful in thatthe Government of Ghana has implemented a wide range of measures promptly andwholeheartedly, thereby achieving a substantial reorientation of the policyenvironment in a direction favoring greater efficiency in the use of resourceswithin the public sector and an enhanced role for the private sector in theeconomy. The macroeconomic indicators suggest that the economy continues itsrecovery from the negative growth, high inflation, and foreign exchange crisisof the early 1980s. However, the adjustment is an on-going process and furthermeasures are being introduced. So far, the private sector investment responsehas been slower than anticipated, and is now the subject of special attention.

5.02 The review of SACs I & II can serve to identify the strengths andweaknesses of the structural adjustment process and the Bank/IDA's role in it.The review is approached first from the point of view of program/project cycleissues. This is followed by a review of a sample of components to see whatfactors may have resulted in the differences in performance.

Program/Project Cycle Issues

Design

5.03 Several aspects of the design of SACs I & II stand out as having beenimportant in determining the generally positive outcome.

7/ See para. 3.25 above.

s' Robert H. Nooter & Roy A. Stacy, "Progress on Adjustment in Sub-Saharan Africa" dated October 15, 1990.

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* The structural adjustment program (SAP) and the supporting SAC Iwas timed to continue the natural progression of response to aneconomic crisis from the provision of emergency imports, rehabili-tation of the export sectors and the requisite infrastructure, andthe stimulation of recovery in the productive sectors to acomprehensive overhaul of the policy framework to serve areoriented economic strategy. This timing took advantage of thepossibility for policy dialogue in a context of mutual confidencebuilt up during the post 1983 crisis, and of the recognition by GOGthat more profound changes in the policy environment were neededto continue the recovery.

* There were extensive consultations:

a) within the Bank -- between Country Operations and Projects,Technical Divisions;

b) Bank/Fund -- several meetings to discuss coor-dination of support for Ghana's ERP, and acommon PFP;

c) Bank/GOG -- brainstorming sessions in July/August 1986served to identify the major adjustment issues and toagree approaches to them;

d) GOG/Private Sector -- brainstorming sessions also includedthe private sector, trade unions, and the press;

e) Bank/Donors -- meetings between the Resident Mission anddonors to discuss SAP details, and the inclusion of staff ofone donor in the appraisal mission.

* The SACs were an integral part of a lending program unified by theobjective of supporting Ghana's ERP. ISAC, SAIS, FINSAC, EMS,91although addressing particular aspects of adjustment, shared thecommon objective of adjusting the policy environment and institu-tions in the same direction as the SACs. This situation lentitself to the use of mutually reinforcing cross-conditionalitywhich would have increased Bank leverage had this been necessary.

* SAC I called for a wide variety of policy measures and institu-

tional changes to be accomplished within an optimistic time frame,especially given the capacity constraints imposed by the scarcityof skilled and experienced officials in the public service, and bythe available information base. SAC II was designed around moremodest targets.

91 Industrial Sector Adjustment Credit - ISACStructural Adjustment Institutional Support - SAISFinancial Sector Adjustment Credit - FINSACEconomic Management Support - EMS.

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* Considerable economic and sector work and project financed studies

were undertaken jointly with the GOG during 1985 and 1986. Thiswork included comprehensive reviews of public expenditures, and ofthe agricultural and industrial sectors. Attempts to study cocoamarketing and state-owned enterprises were not fruitful. Manycomponents of the structural adjustment program were designed onthe basis of this recent economic and sector work. This wasespecially true of the tax reform component which benefitted froma Trade Taxation and Tariff Review (1986), a Study of the Sales TaxCredit System, a Study of the Taxation of Investment, and a Studyof Income Taxation (1989).

5.04 The approach to the design of the SACs fostered an unambiguous senseof ownership of the program by the Government of Ghana and a high level ofcommitment to its implementation. The existence of recent studies were helpfulin providing convincing evidence of the need for action and of the potentialefficacy of certain measures. In some cases where such preparatory work hadnot been done, the Bank failed to convince the GOG of the merit of particularcourses of action, eg. in cocoa marketing reform and reform of state-ownedenterprises. The result was that the GOG was not fully committed initially tothese components. In any event, the absence of adequate information meant thateven if there had been total commitment, some necessary decisions could nothave been taken.

5.05 At the same time some aspects which negatively affected performanceof the SAP point to some areas of weakness in the approach to design of thepackage. Primary focus necessarily had to be on the measures to be implementedin order to change outcomes by changing procedures and/or institutions. Butthis focus should not preclude attention to side effects, for these can impedethe success of the program. Some categories of side effects were not givenadequate attention in the design of the structural adjustment process:

a) financial -- specifically the cost of severance benefits associatedwith the massive retrenchment in the SOEs. This is said to haveslowed retrenchment in the Cocobod and the divestiture of SOEs.This was partly addressed under SAL II by allowing retrenchmentcosts in'SOEs to be covered by grants from the budget of GOG, butit is not clear that firm targets were set and the fiscal implica-tions fully analyzed. Lack of up-to-date financial information onmost SOEs was also a factor in the absence of clear estimates ofretrenchment costs;

b) institutional -- little thought was given to revising the roles ofinstitutions made obsolete by the liberalization of the regulatoryframework. In the absence of ready programs defining their newroles, institutions such as the Ministry of Trade and the Pricesand Incomes Commission tend to search for new functions to justifytheir staffing and indeed their survival. This could result inoverlapping with other parts of Government and to continuedinefficiency of public sector resource use;

c) unemployment/underemployment -- the commitment of the politicaldirectorate in charge of the economy to a process of structural

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adjustment will depend on the extent to which the program issensitive to and addresses an existing or potential unemploy-ment/underemployment problem. It seems to have been assumed thatthe expansion of the economy would occur promptly and new jobswould be created, and/or the unemployed would be absorbed in theinformal sector. In the case of Ghana, which had just absorbedabout a million returnees from Nigeria, these assumptions shouldhave been carefully examined. Several reports suggest that the GOGperceived the existence of and was concerned about an unemploy-ment/underemployment problem especially among youth in urbanareas.- 10

d) temporary adjustment problems -- trade liberalization, thecenterpiece of Ghana's SAP, to push industries to become morecompetitive internationally and to develop export potential,involved the reduction of effective protection by the removal ofnon-tariff barriers and the reduction of tariffs. Some productiveactivities cannot survive in the atmosphere of internationalcompetition, but others can if given time and assistance to adjust.Attempts to address the interim adjustment problems of the latterreflected in phased reduction of protection and the provision ofspecial financing and technical assistance facilities are sometimesused in SAL operations, but were not initially considered in theGhana case. Advance planning for the interim problems can help toreduce the burden of adjustment by minimizing the loss of salvage-able activities. This is particularly important where productiveactivity is dominated by the SOE sector and the financial burdenof adjustment will be concentrated in the government budget.

Appraisal

5.06 The appraisal of SAL I did not follow the usual pattern in whichdiscussions and agreements are reached at the technical level and thenpresented to the political directorate for their approval. This approachfrequently puts the Ministry of Finance in the position of having to convincethe rest of the government of the merit of a package it had negotiated. TheGhanaian leadership reversed this process by introducing at the beginning ofthe appraisal a week-long brainstorming process involving members of the PNDC,ministers and senior civil servants, trade unions including the civil serviceemployees association, employers associations, representatives of the

°t See Report entitled - "Enhancing the Human Impact of the AdjustmentProgram" - prepared by the Government of Ghana for the Sixth Meetingof the Consultative Group for Ghana, Paris, May 14-15, 1991.

See also paper "Labor Markets in an Era of Adjustment: A Case Studyof Ghana" by P. Beaudry, Dept. of Economics Boston University, andN.K. Sowa, Dept. of Economics University of Ghana; August 1990.

See also "Trip Report of Assignment on Social Dimensions of Adjust-ment and Poverty Alleviation in Ghana" by James Bucknall and RobertMcKinnell, CIDA consultants; Feb/March 1991.

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committees for the defense of the revolution, and bank staff. This sessionsucceeding in developing a broad consensus on the main elements of the reformprogram. Once consensus was reached at this level, the outstanding technicalissues were resolved in a retreat attended by a sub-group of the cabinet,senior officials and technocrats, and officials of the Bank, Fund and onedonor.

5.07 This sequencing of events in the appraisal process did not find favoramong some officials, including some in the Ministry of Finance who felt theministry was losing control of subjects traditionally under its control. Someofficials elsewhere in the public sector were of the view that the politicaldirectorate was being led to agree on technical issues before of-ficials/technocrats had had an opportunity to study the issues and providetheir advice. Where studies which had been acceptable to the officials formedthe basis for Bank recommendations, the sequencing was not problematic. Butwhere there was not an accepted diagnosis and analysis of options based onadequate information, Bank proposals were regarded as deriving from Bank dogmarather than from technical expertise. Some issues which were agreed at thepolitical level, e.g. the recruitment of Ghanaians from overseas on specialterms, understandably provoked dissatisfaction among civil servants withadverse effect on implementation results.

5.08 The appraisal of SAC II did not follow in the manner outlined abovefor SAC I. Instead, the Ministry of Finance & Planning was left to play thelead role. Since the commitment of the political directorate to structuraladjustment had already been demonstrated, and given that no change in policydirection was involved, the issues to be resolved were essentially second ordertechnical details. However, some Bank staff are of the view that there mayhave been less attention to consensus building under SAC II and that littlewould have been lost and probably something would have been gained byexplaining further the Governments intentions.

5.09 The experience suggests that the momentum of implementation canbenefit from a consensus at political level at the outset. While this cannotensure success if there is disagreement at the technical level, it can ensurethat at least there are no obstacles to the adjustments requiring mainlydecision at political level.

Implementation

5.10 The arrangements for implementation of SAC I involved the setting upof a Structural Adjustment Program Secretariat (SAPSEC) reporting to theChairman of PNDC Secretaries who is equivalent to the Prime Minister. Aboutten special units and task forces were set up to implement various aspects.SAPSEC had the responsibility for coordinating the work of and providinglogistical support to these units and task forces, and for seeing thatappropriate documentation was prepared and submitted to the PNDC for necessarydecisions to be taken in keeping with the adjustment timetable. Thesearrangements were consistent with the priority of structural adjustment and theGOG's commitment to it, and with the need to alter the day to day administra-tion to serve the new priority. They permitted constant monitoring of actionsto satisfy conditionalities and facilitated the preparation of the necessaryinformation base for decision-making by the PNDC.

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5.11 Under SAC II the SAPSEC functions were transferred to the MFEP, whichthen became the focus for coordination of the SAP. This seems to have been anecessary first step in the transition from dramatic change in the policydirections and environment toward the absorption of the change in the regularadministration of government. While on cursory glance it may seem that thepace of adjustment has been slower under the new arrangements, this may in factreflect the passing to a more difficult phase involving fewer changes in rulesbut more institutional developments including the selection and training ofpersonnel in new and more sophisticated skills.

5.12 The arrangements for SAC I were short-term responses to Ghana's weakinstitutional capacity, which permitted the SAP to get underway and achievesignificant success but at the expense of the regular work of public adminis-tration. Many Bank staff concede that SAC I very probably over-burdened thelimited implementation capacity of the Ghanaian public sector, with the resultthat some aspects did not go well. Now that the program is well underway theGOG is moving away from the special units/task forces concept partly becausethe emergency approaches disrupted regular procedures and created uncertaintyamong regular civil servants regarding their roles and functions, partlybecause of the discontent associated with the system of special allowances thatwere paid to participants in these units, and partly because when these unitscome to an end institutional memory is lost. In retrospect it seems that froma sustainability point of view it might have been better to have used existinginstitutions, appropriately strengthened, to carry out adjustment policiesfalling within their area of responsibility than to have set up temporaryalternative structures. While the initial pace of adjustment would have beenslower, the loss of momentum at a later stage associated with the assimilationof special units into the regular structure might have been avoided.

Supervision

5.13 Ghanaian officials speak highly of the usefulness of Bank supervisionin facilitating the work on the PIP, Tax Reform, Budget Reform and PublicExpenditure Reviews. Special reference has been made to the flexibility of theBank in responding to emerging and unforseen problems and to the willingnessto help in devising innovative solutions. This detailed follow-up is alsoapparent from the trail of reports and background documents related to SAPimplementation. However, this work, which appears to be of consistently highquality, was not without a price as the staff time devoted to SACs I & IIexceeded the norms for adjustment lending in the Africa Region.

Adj. Lending Adj. LendingPreparation Supervision(staff weeks) (s.w./p.a.)

Africa Region Norms 144.7 19.7SAC 1 219.6 27.4SAC II 157.9 51.9

SACs c\f Norms 130% 201%

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5.14 Judging from the results achieved as well from the volume andquality of the work, the extra time devoted to the program seems to have beenmoney well spent. The norms may seem justifiable given the constraints on theBank's budget, but greater attention may need to be paid in SAL projectcompletion reports and audits to the issue of whether adequacy of investmentof staff time in supervision and to a lesser extent in preparation has been afactor in performance. It may well be that successful adjustment operationsare more expensive in terms of staff time than has been assumed.

Specific Components

5.15 The PCR specifically addresses the question of why some componentsof the program were more successful than others. It identifies the mainfactors responsible to be a) degree of commitment by the GOG to particularcomponent, b) the capabilities of the implementing agencies, and c) parallelcredits under which structural adjustment of some sectors was sought. Whileagreeing that these were important factors, this evaluation would suggest thata more detailed look at some components supports the view that inadequatepreparatory work explains in part the failure of the Bank to convince the GOGof the appropriateness of some prescriptions, which resulted in the lower levelof commitment to some components of the program. It also explains why eventhough the GOG agreed to the inclusion of these components, progress wasthwarted by the inadequacy of information for decision-making.

SOE Reform

5.16 Bank experience in the reform of SOE sectors was limited. Thislack of experience should have been compensated for by a careful study of thesector to develop a suitable information base for analysis of the options andthe likely effects of various types of intervention. The Bank pushed fordivestiture of enterprises, but in the absence of up-to-date information on theassets and liabilities, it was impossible to interest potential buyers and toenter into serious negotiations. There was little understanding of the roleof sector ministries under whose control many enterprises fall, and hence therewas no strategy for dealing with the natural response of those who felt thattheir power and influence was being threatened. The institutional arrangementsfor divestiture received little thought, with the result that this wasinitially assigned to the very agency whose reason for being was the monitoringof the SOE sector. Given that the ultimate concern was the efficiency of thesector, more thought should have been given to the possibility that manyfactories could not be privatized and should be closed. All of theseconsiderations make it easy to understand that the speed with which the Bankhoped that the privatization objective would have been achieved was notrealistic, and why there was failure to convince the client that the Bankreally knew how best to pursue the efficiency of the sector.

5.17 Ghana has achieved reasonable progress by focussing less onprivatization and by pursuing a wider set of options. It has sought to improveefficiency of those enterprises that will remain in the public sector; and hasidentified some to be closed, some to be sold, and some to be held as jointventures with the private sector. The necessary financial information aboutthe enterprises is being developed. Divestiture has been assigned to aDivestiture Implementation Committee, which is being provided a staff with the

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necessary skills to prepare a prospectus and to negotiate with potentialbuyers. Recent successes have come about partly in response to the improvedpolicy environment and political atmosphere, which can be seen as increasinglyfavorable to private entrepreneurs. It is doubtful that

Documents

World Bank DocumentA-025, A-025-1-GH and 2005, 2005-1, 2005-2-GH) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Ghana - First and Second