Kufuor's "economic tightrope"

Washington (United States) -- One of the Ghana?s major development partners, the International Monetary Fund (IMF) has expressed grave concern about the unwillingness of President Kufuor?s Administration to increase the prices of petroleum products.

The Crusading Guide sources in Washington DC in the United States- the headquarters of the IMF- have indicated that a series of correspondences have been flying between the Fund and the government of Ghana in recent times which have raised a lot of burning economic issues and how committed the current regime is to the well-being of Ghanaians- as it had not yielded to some of its (IMF?s) conditionalities.

In one of such correspondences, which The Crusading Guide intercepted, the IMF noted in reaction to an earlier one that the government took decisive measures on energy and utility pricing, developed a strong budget for the year 2001 and gave the Bank of Ghana the independence it needed to begin bringing down inflation and stabilising the cedi.

It observed also that the 2002 programme sought to consolidate those initial gains, with a budget that would strengthen the country?s tax base and allocate resources (including the HIPC relief) toward priority areas identified in the Ghana Poverty Reduction Strategy (GPRS), while reducing significantly the burden on domestic debt.

According to the IMF, the programme emphasised improved public expenditure management, so as to ensure that the budget was implemented as envisaged, further pricing reforms that would put the finances of key public enterprises on a sustainable footing, launching of the divestiture strategy and continued progress on disinflation.

While lauding the government for the gains made in 2001, the Fund contended that several of those key objectives of the PRGF-supposed programmes had not been fully realised, ?Indeed, it is our assessment that the policy slippages this year put at risk the core goals of the government?s economic strategy,? the IMF submitted.

Expatiating further, it said budget execution had departed substantially from the approved budget underlying the programme. It noted, ?Weaknesses in expenditure management- especially control over the wage bill- which began in the late 2001 and worsened in 2002, are the main cause of the additional domestic government borrowing this year.?

The IMF then expressed concern about the fuel prices. ??the automatic adjustment formula for petroleum prices- a cornerstone of the programme? has been overridden, and pump prices kept fixed even as world oil prices rose and the cedi depreciated. As a result, the oil refinery is set to accumulate new debt during 2002 estimated at around 2 per cent of GDP, which the government will likely have to take over the service.?

The IMF pointed out however, that it was very much encouraged by the government?s stated intent to liberalise the oil sector by the end of the year and hoped it would include the abolition of administered pricing, which would provide helpful protection for Ghana?s public finances in the future.

??As a result of these and other policy deviations? including delays in the VAT increase, divestiture, and utility price adjustments- the staff estimate that the stock of government domestic debt (including the Oil Refinery?s back overdraft) may exceed 9? per cent of GDP,? the IMF stated, and stressed that it was a ?major departure from programme objectives, and the servicing of this debt will severely constrain the government?s ability to fund the spending priorities outlined in the GPRS.?

The IMF did not gloss over the International Finance Consortium (IFC) loan. It said given the scale and ?unusual character of this loan,? it was of great concern that the government had not so far shared with it (IMF) and the World Bank staff the detailed information (on the sources of funding, the terms and conditions and the modalities for managing the funds) needed to assess its potential impact on the country?s IMF-supported programmes.

To ensure that the collaboration between the Fund and the government was moved forward, it (the Fund) advocated two possible ways. The first option would be to seek an extension of the current PRGF arrangement (which would otherwise expire on 30 November 2002) for five months, to allow time for discussions on a policy programme for 2003 that would warrant completion of the final review under the arrangement.

The IMF proposed that to support the request for the five-month extension, the authorities would need to demonstrate that initial steps had been taken to address the recent policy slippages and allay concerns with respect to the IFC loan, through a host of measures.

These include an increase in petroleum prices, bringing them into line with the automatic adjustment formula, together with an announcement that future adjustments would be made according to the formula without further official review or authorisation; a Cabinet decision that, for 2003, the quarterly expenditure ceilings on personnel emoluments will be rigorously enforced by the Ministry of Finance; abolition of the direct debit system for executing expenditures and a Cabinet decision imposing a moratorium on the further wage increases for public servants in 2002.

The rest are confirmation that a transactions adviser has been appointed (with signed contract) for the divestiture of Ghana Commercial Bank and full disclosure to the IMF and World Bank regarding the IFC loan, including the sources of funding, the terms and conditions as well as the arrangements for managing the loan-financed expenditures. The government was given up to 19 November 2002 to notify the IMF whether or not it wished to pursue the option.