Monday, 15 April 2013

MAIN POLICIES OF ECONOMY RECOVERY PROGRAM (ERP) AND STRUCTURAL ADJUSTMENT PROGRAM (SAP) IN GHANA



ACRONYM'S

IMF
ERP
GDP
SAP
VAT
MTEF
BOG
GCB
SSB
GNPC
PUFMARP
IRS
CEPS
EPA


International Monetary Fund
Economic Recovery Program
Gross Domestic Product
Structural Adjustment Program
Value-Added Tax
Medium-Term Expenditure Framework
Bank of Ghana
Ghana Commercial Bank
Social Security Bank
Ghana National Petroleum Corporation
Public Financial Management Reform Program
Internal Revenue Service
Customs, Excise and Preventive Services
Environmental Protection Agency  


"Structural adjustment" is the name given to a set of "free market" economic policy reforms imposed on developing countries by the Bretton Woods institutions (the World Bank and IMF) as a condition for receipt of loans, and SAP's are designed to improve a country's foreign investment climate by eliminating trade and investment regulations, to boost foreign exchange earnings by promoting exports, and to reduce government deficits through cuts in spending. The World Bank and the IMF argue that SAPs are necessary to bring a developing country like Ghana from crisis to economic recovery and growth. Economic growth driven by private sector foreign investment is seen as the key to development.

Following a severe drought in 1983, the government accepted stringent IMF and World Bank loan conditions and instituted the ERP which aimed at reversing a protracted period of serious economic decline characterized by lax financial management, inflation rates well over 100 percent, and extensive government involvement in the economy. The ERP, which adopted a market-oriented approach, made considerable progress in reducing macroeconomic imbalances and liberalizing the external sector. Inflation was lowered from 142 percent in 1983 to 10 percent by the end of 1991. The balance of payments registered sizable overall surpluses throughout the period. Real GDP growth averaged about 5 percent a year, resulting in appreciable increases in real per capita incomes. Private investment and economic growth were also hampered by the slow implementation of critical structural reforms in the financial, paternal, and agricultural sectors.

OBJECTIVES OF ERP/SAP

  1. Encouraging Private sector involvement and foreign investment.
  2. Rehabilitation of the physical infrastructure.
  3. Lower the rate of inflation through the pursuit of prudent macro-economic policies.
  4. Increase in production particularly on food, industrial raw material, and export through an improvement in the structure of incentive.
  5. Increase in the availability of consumer goods and improvement the distribution system.
  6. Increase the overall availability of foreign exchange and improve it allocation. 
Some of the main economic policies that were strategized by the government of Ghana, and the IMF and World Bank in achieving and sustain the ERP/SAP are categorized in the following policies;

A.  Financial Policies

Macroeconomic framework

The government recognizes that higher rates of economic growth can be achieved in the medium term by restoring financial discipline and bringing inflation under control quickly. To this end, the domestic primary surplus will be increased and monetary policies will be tightened. This will help lower interest rates, reducing domestic interest payments, increasing public savings, and reducing crowding out.

Fiscal policy

The overall budget deficit on a commitment basis is projected to decline from its estimated level of 8.6 percent of GDP in 1997 to less than 4 percent in 2000. The macroeconomic framework targets the domestic primary balance and improvement in the primary balance will be supported by tax and expenditure reforms.
A substantial part of this increase comes from greater reliance on taxation of consumption, mainly through the implementation of the VAT and it was passed into law on February 17, 1998, but with a standard rate of 10 percent rather than 15 percent as proposed by the government. Government commitment to fiscal discipline, intends to implement compensatory revenue measures by improve incentives for private savings and investment through adjustment of income tax brackets for inflation and harmonization of the withholding tax on dividends and interest.
The MTEF incorporated the government's public investment program and will concentrate on completing ongoing projects and undertaking new projects with rates of return in excess of 15 percent, maximizing the leveraging of donor funds, and ensuring that recurrent costs can be met within the budget. Priority sectors for investment are infrastructure, health, and education. Although the domestic primary surplus will improve to 3.3 percent of GDP in 1997, domestic borrowing was 5.2 percent of GDP owing to large external amortization payments that exceeded program loans and high real Treasury bill rates. In 1998, the domestic primary surplus is projected to improve further to nearly 4 percent of GDP, which is expected decline in external amortization payments, and reduction in domestic financing.

Monetary policy                         

The main objective of monetary policy is to consolidate and extend the progress made thus far in reducing inflation. In 1997, monetary policy continued to be dominated by the government's large financing requirements, with broad money increasing by an estimated 41 percent. In 1998, reflecting the projected lower domestic financing needs of the government, broad money is expected to grow by 18 percent and by 11-12 percent thereafter. Thus, the average inflation rate is expected to decline from 28 percent in 1997 to 16 and 8 percent in 1998 and 1999, respectively.
The BOG applied a uniform reserve requirement of 8 percent to all deposits (cedi and foreign currency deposits) as of March 27, 1997. This action has resulted in uniform treatment of foreign currency and cedi deposits, and effectively has tightened overall reserve requirements. Government paper is instead being issued in wholesale auctions and the BOG is developing a network of primary dealers. The soundness of the banking system was adversely affected in late 1996 and early 1997 by the emergence of bad debts linked to a case of check fraud of a magnitude in the range of 0.6-1.0 percent of GDP. Although the largest bank in Ghana, the GCB, had sufficient provisions in its balance sheet to withstand the losses from these bad debts. The BOG took measures to help recover some of the bad debts and to safeguard the soundness of the banking system by significantly strengthening its banking supervision department. As a result, a budgetary burden is not expected to arise.

External sector policy

Ghana's external situation is projected to remain vulnerable owing to relatively small cocoa crops, depressed gold prices, and reduced grants from bilateral donors. In 1997, tight financial policies have stemmed a further deterioration in the external accounts. The current account deficit including official transfers is targeted to improve gradually to about 4.5 percent of GDP over the next three years. Gross international reserves declined to the equivalent of about 2 months of imports at the end of 1997, but are targeted to improve steadily to more comfortable levels through 2000. Adherence to the program's fiscal and monetary targets should permit the exchange rate to stabilize at a level that will help preserve Ghana's external competitiveness.
Ghana maintains some capital account restrictions. In general, all outgoing capital movements need approval from the BOG, loans and overdraft facilities to resident companies controlled by non-residents requires approval of the BOG, and regulations stipulate that private sector and commercial bank borrowing abroad should be approved by the BOG. Ghana's debt burden increased in 1996 by almost US$150 million due to no concessional borrowing, resulting in a deterioration of debt indicators. External financing requirements over the 1998-99 period would total about US$1.6 billion. Concessional assistance pledged by donors at the Consultative Group meeting in November 1997 together with World Bank disbursements are expected to cover Ghana's financing requirements in 1998-99.


B.  Structural and Sectorial Policies

The central focus of the structural and sectorial policies as articulated in the Government's document "Ghana: Vision 2020" is to reduce poverty through an acceleration of economic growth, investment in human resources, and the implementation of direct poverty alleviation measures, and promoting private sector activity, improving agriculture and the environment, strengthening infrastructure, and developing human resources.

Promoting the private sector

The government has continued implementing significant structural reforms to promote the private sector. The dialogue between the public and private has been broadened and foreign investment promotions launched, and also reforming the regulatory framework, accelerating the divestiture program, and liberalizing the financial sector and petroleum sector.
Regulatory Framework: Significant legislation to provide the framework for private sector participation in the economy was enacted was passed in 1995. These legislative developments contribute to a clearer definition and enforcement of property rights, and deterrence of abuse of authority, providing a more transparent structure for contract enforcement.
Accelerated Divestiture: An acceleration and expansion of the divestiture program lies at the core of the government's efforts to establish a climate conducive to private investment. During 1993-97, the government divested a total of 48 state-owned enterprises from a pre-determined divestiture list of 110.
Financial Liberalization: The government has also sought enhanced competition in commercial banking through a program of divestiture of publicly-owned commercial banks SSB and GCB.
Petroleum DeregulationIn response to problems in the petroleum sector, the government initiated a program of deregulation. Under this program, the government removed in mid-1996 GNPC's monopoly over the importation of crude oil and adopted a system of open bidding for oil procurement contracts.

Rationalizing government operations

The government plans to adopt measures to introduce public service reforms, improve public expenditure management, and implement revenue reforms.
Public Service Reforms: Reforming the public service to achieve greater efficiency and a sustainable wage bill is essential for fiscal stability, higher private investment, and efficient delivery of social services.
Public expenditure management: The government has also initiated steps to improve the management of public expenditures under its PUFMARP which was launched in July 1995 and is being supported by the World Bank, the IMF, and donors.
Tax administration: In additional to the implementation of VAT, the government will strengthen and modernize tax administration as part of its revenue reform program. Currently, coordination among the revenue agencies is difficult as the IRS and CEPS function as separate subverted agencies with their own Board of Directors, and report directly to the Minister of Finance.

Improving agriculture and the environment

Ghana's program of accelerated growth depends critically on faster agricultural growth, especially in agricultural exports. A new agriculture growth strategy has been developed which places particular emphasis on rural infrastructure, improving access to technology for sustainable natural resource management, enhancing human resources and institutional capacity, providing food security, and jump-starting private investment in agricultural exports.
Cocoa Liberalization: There remains an important structural constraint on agriculture: high taxation of cocoa production and state control over cocoa marketing. After four years of domestic liberalization, about 30 percent of total crop is now procured by the private sector.
Environmental Management: Ghana was among the first countries in Africa to draw up a comprehensive National Environmental Action Plan. EPA was formed to monitor developments and policies, including those governing wildlife, forest areas, and mining activities.
Strengthening infrastructure: The government's strategy in infrastructure is to co-opt private participation in the expansion and maintenance of the nation's infrastructure in most sub-sectors. In the telecommunications sector, the government has moved the farthest through the enactment of the 1996 National Communications Act which set the basis for the divestiture of 30 percent of Government shares in Ghana Telecom to an international consortium led by Telekom Malaysia, and the grant of license for a second national network to another international consortium, African Communications Group.
Developing human resourcesBroad-based social development is critical to faster growth and a better quality of life for all Ghanaians. Two-thirds of Ghana's poor live in rural areas and most have little access to basic social services, wider access to which is a pre-condition for broad-based growth. The government's strategy for social development, therefore, focuses on increasing the efficiency and targeting of public social spending.

C.  Statistical Issues                                                                       

The quality and timeliness of reporting of core economic statistics will be improved. The government is undertaking steps to facilitate provision of fiscal data. This includes strengthening the Policy Analysis Division in the Ministry of Finance, the Office of the Accountant General, and the Ghana Statistical Service. An important step in improving statistical reporting is the completion of a compilation of domestic payment arrears, outstanding government loans, and loans guaranteed by the government and the BOG.

D.  Technical Assistance

Ghana's program of macroeconomic adjustment and structural and sectorial reforms will be supported by technical assistance from the World Bank, IMF, and several bilateral and multilateral agencies. The World Bank will assist the authorities in the following areas: implementation of an expenditure control system; revaluation of spending priorities in the social sectors; development of a public service restructuring plan, including identifying areas for downsizing of functions and employment, and specifying structural benchmarks; implementation of the VAT; banking supervision; divestiture and privatization of parastatals; concessioning of rail transport services and reform of the road network management and maintenance.

ACHIEVEMENTS AND ITS SUSTAINABILITY

  1. The Reform Programs reverse the negative growth rate and ushered in a period sustain positive growth rate, the longest in Ghana Post-Colonial experience. The GDP growth rate shot-up 8.6% in 1984. Decline in real GDP has been arrested and reversed; with the result that annual GDP growth rate averaged about 5 percent (5%) between 1983 and 1993; and an average of four percent (4%) between 1994 and 1998.
  2. The trends in investment rate, export and import volume became positive after 1983. The trade balance recalled surplus in 1984 and 1986. Export value increase from 439.1 million US Dollars in 1983 to 773.4 million US Dollar in 1986.
  3. Consumer benefited from a decline in real food price whiles producer will come worse-off. Despite the decline in real wholesale prices and food production increase from 1984 to 1986.
  4. Average monthly real earning is declined continuously in 1980. In 1983, it was at it lowest level since 1960. This declined was reversed in 1984 with the upward adjustment in nominal rate of wages and salaries. The decline in inflation rate, also contributed to increase in real earning.  The inflation rate drop from 123% in 1983, 40% in 1984 and 10% in 1985, but increase 24%, thus, the ERP did make significant dent on inflation.

THE IMPACT OF THE REFORM PROGRAMS ON VARIOUS SECTORS OF THE ECONOMY;

  • There has been an improvement in export earnings and a significant growth in the tourism industry.
  • The banking sector has been restructured to respond more positively to the needs of the productive sector. Incentive package have also been introduced to enable various sectors of the economy increase production, while public investment strategies have helped to rehabilitate the physical infrastructure on a large scale.
  • The industrial production growth rate is positive and the mining sector is booming, an indication that confidence has been restored in commerce and other tertiary activities. 

References;

http://www.mofep.gov.gh/
http://www.statsghana.gov.gh/
http://www.imf.org/external/country/gha/index.htm
http://www.mongabay.com/reference/country_studies/ghana/ECONOMY.html

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