Ghana's leading economic think tank has warned the government that the economy slowed further during the first half of this year after generous pay rises for public sector workers led to a ballooning budget deficit and the consequent failure by donors to disburse promised aid money.

The Centre for Policy Analysis (CEPA) urged the government to agree to more realistic economic performance targets with foreign donors. It cautioned the government not to go on a spending spree in the run-up to presidential and parliamentary elections due in December 2004.

"As at now, we see signals that suggest that the growth cannot be the same as what was originally projected," Joseph Abbey, CEPA's Executive Director told IRIN after a survey was published on Tuesday.

The economic health check noted that the economy grew by 4.5 percent last year, undershooting the government's target of 6.0 percent. Ghana's foreign currency reserves meanwhile were only sufficient to pay for 1.9 months of imports, much less than the three months projected.

CEPA linked the disappointing economic performance to the government's failure to meet targets set in a three-year loan agreement with the International Monetary Fund (IMF), which ran until November 2002.

It said public spending had overshot as a result of generous pay settlements for civil servants, teachers and health workers over the past four years, whereas the anticipated additional revenues from the privatisation of state enterprises had failed to materialise because of delays in selling off loss-making companies.

CEPA noted that the government had so far failed to deliver on its promises to complete the sale of Tema Oil Refinery, Ghana Airways, Ghana Railways and the Electricity Corporation of Ghana.

As a result, donors including the World Bank and the IMF failed to disburse loans worth about US $147 million last year. Ghana also failed to qualify for the full amount of debt relief anticipated under an agreement signed with its main creditors in 2001, it noted.

CEPA said public sector domestic debt had risen sharply to 29 percent of gross domestic product (GDP) because the government was having to borrow money on local financial markets and allow arrears to accumulate on its debts in order to meet its spending commitments.

Abbey urged the government of President John Kufuor to negotiate an economic programme with donors that set more realistic targets which it had a real chance of meeting. "If we stick to it stringently, we receive more aid from our donors. That is the only way we can come out of our economic difficulties," he stressed.

He demanded that the government tackle the root cause of major national problems, such as malaria, instead of implementing palliative measures that achieved short-term results, but were not sustainable.

"We should be careful not to be locked in by our concerns just to contain inflation," he said . "We need to ensure that our poverty reduction programme has achievable targets in terms of health, education and the provision of social services."

One bright spot in the economy was a strong export performance. CEPA said Ghana was benefiting from favourable world prices for gold and cocoa.

Gold, sought as a safe haven investment by those fearful of a slow world economic recovery, currently fetches over US $370 an ounce. Cocoa prices have meanwhile been kept high at around $1,000 per tonne by concerns over the possible disruption of supplies from Cote d'Ivoire, the world's biggest producer.

The strong export performance and a fall in imports enabled Ghana to slash its trade gap by nearly half in 2002 to its lowest level for five years. The deficit shrank to $641 million last year from $1.1 billion in 2001.

CEPA predicted a further improvement in the balance of payments this year and said Ghana's currency, the cedi, could start to gain in value against other major currencies if the government maintained financial discipline.

But the widely respected think tank warned that as Ghana approached an election year there would be enormous pressures on government to boost spending in order to win favour with voters.