Ghana Economic Governance and Poverty Reduction Credit
PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: 49021-GH
Project Name
Ghana Economic Governance and Poverty Reduction Credit
Region
Africa
Sector
Gen. Public Adm.(60%), Energy (20%), Social Protection (20%)
Project ID
P113301
Borrower(s)
Ghana Government
Implementing Agency
Minister of Finance
Date PID Prepared
June 5, 2009
Estimated Date of Appraisal Authorization
May 15, 2009
Estimated Date of Board Approval
June 30, 2009
1. Key development issues and rationale for Bank involvement
Ghana recorded significant achievements in terms of governance, growth and poverty reduction in the recent years. The Country Performance and Institutional Assessment ranked Ghana 5th among all 75 low-income countries, second in Sub-Saharan Africa and above several middle-income countries in 2007. Between 2001 and 2007, this index went from 3.4 to 4.0. The successful democratic transition from December 2008 is another important expression of the maturity of Ghanaian institutions at their highest level. Growth accelerated, to average 6 percent in the last five years. The proportion of people living with less than PPP US$1.25 a day declined from 39 percent in 1999 to 30 percent in 2005, and to probably less afterwards.
The new Government inherited a difficult macro-economic situation, the result of a series of shocks in 2008 which exacerbated a structural trend of widening fiscal imbalances. Rapid fiscal expansion in 2008 coincided with a sudden closure of access to international capital markets in September, and as a result, the Ghanaian economy was hard hit by the combination of a widening current account deficit and a contracting capital account surplus. While fiscal expansion was prolonging trends observed since 2005, it was also the result of a combination of important exogenous shocks, including floods and droughts in late 2007 and a rise in world food prices, prompting Government to introduce food tax exemptions, and in oil prices which led the Government to purchase oil on behalf of utilities, in the absence of effective tariff adjustment mechanisms. The electoral cycle which culminated in the successful Presidential and Legislative elections of December 2008 also contributed to the fiscal expansion, as observed during previous elections.
The newly elected President, in his address to the Nation committed to take bold austerity measures in 2009 and 2010 to bring Ghana’s fiscal stance onto a sound and sustainable track and protect the development objectives set forth in Ghana’s Second Growth and Poverty Reduction Strategy. The budget law, which was passed in March 2009, foresees a reduction of the fiscal deficit from 14.5 percent of GDP in 2008 to 9.4 percent in 2009, as the first step in a medium-term fiscal consolidation strategy aimed at stabilizing the debt to GDP ratio in 2010 to put it on a downward path from 2011 onwards. To do this, the Government is targeting a deficit of 6.0 percent in 2010 and 4.5 percent in 2011. The Government strategy comprises immediate actions in 2009 to restore control over expenditures and pave the way for structural reforms in the public sector and energy in 2010. But this will not be sufficient. Without important external support, the financing of the deficit internally will crowd out private investors, generate further currency depreciation and inflation and lead to an unsustainable accumulation of high interest debt. Slower growth, rapid inflation and reduced ability to finance social programs now threaten to reverse the very significant developmental gains recorded in the last decade, and to weaken Ghana’s ability to generate broad-based benefits from significant oil revenues in the near term.
The new Government has asked for exceptional and urgent support from the Bank and the IMF. A rapid announcement of an adjustment and reform package, backed by adequate financing from the international financial institutions, is now urgently needed to stabilize the financial and foreign exchange markets and serve as a partial bridge to the onset of oil production. Parallel to IMF support under the Poverty Reduction and Growth Facility (PRGF) to stabilize the balance of payment (which is in preparation), the proposed two-tranche front-loaded IDA-financed development policy operation in CY09 would support government’s actions to bring the budget under control, start addressing the structural causes of fiscal imbalances through public sector and energy reforms, and protect the poor.
2. Proposed objective(s)
The proposed operation aims to support the authorities’ efforts, in the midst of the current global crisis, to bring their fiscal stance on a sound and sustainable track and to protect the development objectives set forth in Ghana’s Second Growth and Poverty Reduction Strategy (GPRS II) for the period 2006-2009.
The GPRS II emphasizes the centrality of private-led growth to reduce poverty, along with human development and governance efforts to promote equity. While the EGPRC would translate primarily into funding for the GPRS II implementation, particular attention is given to policies and actions aimed at (i) restoring budgetary discipline, and (ii) tackling long-standing public sector and energy issues, while (iii) protecting the poor. The proposed operation is aligned with the World Bank Group’s Country Assistance Strategy objectives for FY08-11 and with the World Bank’s Africa Action Plan.
The proposed operation follows a programmatic series of six Poverty Reduction Support Credits (PRSCs) successfully completed over the period 2003-2008. Both the urgent need for financial assistance, and the current focus of policy makers on fiscal issues make a stand-alone operation a more appropriate instrument for Bank support to the authorities at this juncture than an originally planned (seventh and last of a series) Poverty Reduction Support Credit (PRSC-7). Recent and unforeseen developments call for supporting a selected set of actions not considered as priorities before the crisis to address crisis-induced imbalances. The two-tranche approach would provide strong signaling to the markets and development partners of the new Government’s intentions and commitment to restore fiscal sustainability and protect critical developmental objectives at a time when the authorities must cope with the impact of the global crisis. This approach would also provide adequate time to the authorities in order to design the next PRSP, which could be supported under the next series of PRSCs.
The operation is being processed under the IDA Financial Crisis Response Fast-Track Facility. The proposed DPO is part of a program of support to Ghana during FY09 that currently implies a 27 percent front-loading of IDA assistance. This operation would be complemented by a sector (natural resources) development policy operation (US$10 million), and two investment projects in transport (US$225 million) and rural water (US$15 million). Other operations being prepared for FY10 include an IBRD enclave for the gas sector, a sector development policy operation (agriculture), support for the development of safety nets, a project in support of the water and sanitation sectors, and a joint initiative with partners to support public sector reforms and capacity development.
3. Preliminary description
The proposed Economic Governance and Poverty Reduction Credit (EGPRC) aims to support the authorities’ three-pronged efforts to restore budgetary discipline and tackle long-standing public sector and energy issues, while protecting the poor. Efforts supported by the EGPRC concentrate on measures to:
a. establish a treasury single account, improve compliance with the public procurement law, correct any budget deviations (fiscal deficit, pro-poor expenditures) through new fiscal measures, publish fiscal accounts, and submit to Parliament the Freedom of Information Bill;
b. reconstitute the boards of energy related utilities and regulatory authority, adopt an electricity sector financial recovery plan, adopt draft legislation on the Ghana Petroleum Regulatory Authority and oil and gas fiscal regime, designate a leader in Government for the Public Sector Reforms agenda, eliminate ghost workers in health and education services, and classify at least half of subvented agencies in preparation for their rationalization, divestiture, or commercialization;
c. extend the number of LEAP beneficiaries and review the effectiveness of pro-poor expenditures by revising their classification.
There is a strong macro-economic rationale for providing swift counter-cyclical external financing against demonstrated progress on key actions and reforms and a credible adjustment plan. Ghana’s medium term development prospects remain bright, building on past records, strong institutions and the promises of oil and democratic dividends. But a pre-requisite is macroeconomic stability, which is being hurt by the combination of the current global crisis with inherited pre-existing imbalances. Against demonstrated progress on critical actions and a credible adjustment and reform plan, the proposed front-loaded assistance would help maintain the development momentum by making the needed adjustment less abrupt and more credible, before the expected arrival of oil and the recovery of the global environment in 2010-11.
Measures supported by the proposed operation are expected to have a significant positive and direct effect on poverty reduction. These include: (i) the protection of pro-poor public expenditures in the 2009 budget; (ii) the strengthening of social protection through scaled up and better targeted cash transfer programs; and (iii) policy actions aimed at restoring the financial viability of the energy sector, which are critical for economic growth and employment creation. The strengthening of public financial management is also expected to enhance the effectiveness and efficiency of public resources in the delivery of social and development services. The envisaged public sector reforms supported by the operation do not consider any downsizing (but the elimination of ghost workers) but may affect real wages in the public sector. The Government is involving stakeholders (unions in particular) in the design of the reform, to which the Bank is providing policy advisory services through the mobilization of high-level experts. More broadly, the proposed operation will support the macro-economic stabilization program, thus reducing the poor’s and near poor’s exposure to macro-economic shocks.
The proposed operation comprises significant risks, namely:
§ Potential downside risks from the global macro-economic situation, with implications for GDP growth, macro-economic stability and financing prospects (from public and private creditors) for Ghana. Delayed oil revenues beyond 2011 would also affect the medium term macro-economic framework. Combined with an IMF program, the proposed operation would help mitigate these risks by supporting fiscal consolidation measures, providing needed financing and sending a strong signal to markets and Development Partners of Ghana’s commitment to bring its fiscal stance to a sound and sustainable track;
§ Political feasibility risks related to the fiscal adjustment given the absence of a solid majority in the Parliament, and an electoral platform emphasizing the need to improve and broaden public services, at a time of fiscal stabilization requirements. The proposed operation would help mitigate some of these risks by supporting actions to protect pro-poor expenditures, and generate efficiency gains through better procurement and the elimination of ghost workers in the public sector. In addition, the operation supports broader sharing of information and consulting with stakeholders to build consensus on the design of a fiscally sustainable program of reforms;
§ Budget execution risks if the public sector wage bill cannot be effectively contained and public financial management shortcomings cannot be addressed rapidly. The proposed operation would mitigate some of these risks by supporting efforts to improve public financial management, implement fiscal contingency measures if required in 2009 and tighten expenditures and hiring controls.
§ Energy-related risks of various natures, including higher oil prices than budgeted and lower rains than expected, inducing resort to higher subsidies to the energy sector to cover thermal generation costs. The design and rapid adoption of a financial recovery plan in the electricity sector as supported by the proposed operation would reduce such risks.
4. Environment Aspects
The specific reforms supported by the proposed operation are not likely to have a significant negative effect on the country’s environment and natural resources. The supported reforms aim primarily at strengthening public financial management and budgetary discipline, raising social accountability, and protecting the poor. The electricity sector financial recovery program will look at options to restore financial sustainability, without considering expanding generation capacity. More generally, the GPRS II builds on Ghana’s robust environmental institutional framework and considerable capacities to set environmental management standards. The institutional framework is defined by the 1991 National Environmental Policy, the 1992 National Environmental Action Plan, and the 1994 Environmental Protection Agency (EPA) Act. The Government’s agreements under the 2008 Natural Resource and Environmental Governance (NREG) program build on this framework, and are supported by a World Bank programmatic Development Policy Operation.
The NREG Program supports institutional reform, including strengthening the budgetary and financing arrangements for environmental protection by the Environmental Protection Agency (EPA), further decentralization of services and greater engagement of civil society and local communities in natural resource and environmental governance. The EPA has since the late 1980s adopted Environmental Impact Assessments (EIAs) as a management tool to screen undertakings likely to pose adverse impact on the environment. EIAs became legal in 1999 and are applied to all development projects and programs that have the potential to give rise to significant social and environmental impacts. EIAs are mandatory for seventeen types of activities classified as critical, including mining, petroleum and gas field development and exploration, construction of dams, harbors and roads, and logging and disposal of timber. In addition the EPA has been one of the leading users in Africa of Strategic Environment Assessment (SEA) as a tool for the assessment of major policies, programs and investments.
5. Tentative financing
Source
($m.)
IDA
Total
US$300.0
Contact Point: Sebastien Dessus
Title: Lead Economist, AFTP4
Telephone: 202-458-5075
Fax: 202-473-8136
Email: sdessus@worldbank.org
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Ghana Economic Governance and Poverty Reduction Credit
Source: World Bank Ghana Office
