The Palavar says it has laid hands on a document which tells certain fundamental truths about the economy but which unfortunately are being kept secret from the people of Ghana. The paper states that, it is a letter to the IMF Managing Director, Mr. Kohler, jointly signed by Mr. Yaw Osafo-Maafo, Minister of Finance, and Dr. Paul Acquah, Governor of the Bank of Ghana. According to the paper, the letter seeks to amend the earlier “Memorandum of Economic and Financial Policy” dated March 31, 2003, from the two gentlemen to the IMF Managing Director. The paper says in the letter, the NPP Government explains that the amendment is to account for the sharp increase in prices in early 2003, resulting from the positive shock of a 90% increase in domestic petroleum product prices and further adjustment in utility tariffs towards full cost recovery. http://www.imf.org/external/np/loi/2003/gha/01/index.htm

Ghana?Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding March 31, 2003

Dear Mr. K?hler:

1. On behalf of the government of Ghana, we hereby transmit an attached memorandum of economic and financial policies (MEFP) that sets out the objectives and policies that the government intends to pursue in 2003-05. The MEFP is consistent with the finalized Ghana Poverty Reduction Strategy, which was forwarded separately to you and the President of the World Bank on February?20,?2003. Our reforms center around measures to substantially raise revenue to make room for increased poverty-related spending and development needs, strengthen public expenditure management, further reform energy and utility pricing, and use appropriate monetary policy to deliver on the single-digit inflation target. The government intends to make the contents of this letter and those of the attached MEFP and technical memorandum of understanding (TMU), as well as the staff report on the request for the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), available to the public and authorizes you to arrange for them to be posted on the IMF website, subsequent to Board approval.

2. The prior actions, performance criteria, and benchmarks under the program are set out in Tables I.1 and I.2 of the MEFP. The first review under the PRGF arrangement is expected to be completed by November 14, 2003.

3. In support of these objectives and policies, the government of Ghana hereby requests a three-year arrangement under the PRGF, in an amount equivalent to SDR 184.5?million (50.0?percent of quota), including a disbursement equivalent to SDR?26.35?million upon Board approval of the PRGF arrangement, and an additional disbursement of interim assistance under the enhanced HIPC Initiative in an amount equivalent to SDR?15.15?million covering the next 12 months commencing with Board approval. We understand that the provision of the additional interim assistance would be conditioned on the accuracy of the information provided by Ghana with respect to the prior actions set forth in Table I.2 of the MEFP. In support of its overall economic program, the government will also be requesting support from bilateral and multilateral donors and creditors.

4. The government of Ghana will provide the Fund with such information as the Fund may request in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

5. The government of Ghana believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of the program supported by the PRGF arrangement, but will take further measures to that end if deemed necessary. With respect to inflation, in particular, we note that the rate recorded in February 2003 was substantially higher than expected under our program. If this jump in inflation is not promptly reversed toward the trend underlying the program, we stand ready to take additional appropriate policy measures, in consultation with Fund staff. During the implementation of the arrangement, Ghana will consult with the Managing Director on the adoption of any measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation.

6. We can assure you, Mr. Managing Director, that the government of Ghana is determined to fully implement the program and we hope we can count on the support of the Fund in our endeavors.

Yours sincerely,

/s/ Hon. Yaw Osafo-Maafo, MP Minister of Finance

/s/ Hon. Paul A. Acquah Governor of the Bank of Ghana

Memorandum of Economic and Financial Policies of the Government of Ghana for 2003?05

March 31, 2003

I. Introduction

1. Following broad discussions held with public and private stakeholders, the Government of Ghana in February 2003 finalized and published its comprehensive Ghana Poverty Reduction Strategy (GPRS). The donor community has expressed its intent to support the GPRS, including through a Multi-Donor Budget Support (MDBS) package to be launched in early 2003, that will be coordinated and aligned with a medium-term financial program from the World Bank.

2. This memorandum presents a brief summary of developments under the government's 2002 program, outlines the medium-term objectives and policy framework through 2003-05, and sets out the economic and financial policies of a program for 2003 for which we are seeking support under a new three-year PRGF arrangement with the Fund. Policies described in the memorandum are consistent with the GPRS framework, and the 2003 budget which has been presented to parliament for passage in March 2003. Following satisfactory performance under the PRGF arrangement in 2003 and implementation of other applicable conditions, we hope that Ghana will qualify for completion point status under the enhanced HIPC Initiative in the early part of 2004.

II. Program Performance During 2002

3. Against a background of strong efforts in 2001 to stabilize the economy from the effects of a severe terms of trade shock the year before, the 2002 program (our letter of intent dated January 31, 2002) aimed to further consolidate the gains and achieve a continued reduction in inflation and a strengthening of economic growth. The budget sought to strengthen Ghana's tax base, allocate resources (including HIPC relief) toward priority areas identified in the GPRS, and reduce significantly the burden of domestic debt. The program emphasized improved public expenditure management, to ensure that the budget was implemented as envisaged, further pricing reforms to place the finances of key public enterprises on a sustainable footing, the launch of the divestiture strategy, and a continued reduction in inflation.

4. Notable progress was made in 2002 on a number of fronts. Twelve-month inflation, which had been cut by half in 2001 to 21.3?percent, continued to fall to 15.2?percent at end-2002. The Bank of Ghana strengthened its gross international reserve position from the equivalent of 1.2?months of import cover at end-2001 to 1.9?months of imports at end-2002, in line with program objectives. Prices for electricity and water were raised by 60 percent and 40?percent respectively from August?1,?2002, substantially improving the finances of the utilities and containing their subsidy burden on the budget. Considerable progress was made on our program to modernize the legal framework for Ghana's financial sector. The divestiture process began to move forward in late 2002, with the offer for sale of the Cocoa Processing Company and substantial completion of the preparatory work for the sale of other "targeted" assets, although the proceeds will not be realized until 2003-04.

5. Audits of the key public enterprises were completed, and cross arrears with the government were settled. Similarly, road arrears were liquidated as they were verified. Progress was less than satisfactory in other areas relating to the execution of the budget and operation of public enterprises. A particular challenge related to higher-than-anticipated payments for wages and salaries (especially to teachers and doctors), commencing in late 2001, that exceeded the budget target in 2002 by 1.8?percent of GDP. Among the factors contributing to the wage bill overrun were (i) unbudgeted wage increases to select groups of staff, notably in the Ministries of Health and Education, in part to stem a mass exodus of staff and service disruption; and (ii) unbudgeted increases in allowances, mostly to doctors and nurses. Ministries, departments, and agencies (MDAs) did not universally apply the established procedures for controlling wage and salary expenditures. Domestically financed capital expenditure was curtailed by 1.7?per cent of GDP to almost offset the higher wage payments.

6. Unbudgeted expenditures incurred in late 2001 but paid in 2002 necessitated net additional financing of 1?percent of GDP. There were also large unplanned payments to utilities (including the Volta River Authority) in settlement of cross-public enterprise arrears. The postponement of the new revenue measure (for timing considerations) entailed a fiscal revenue loss of 0.7?percent of GDP, more than offsetting an underlying improvement in revenue collections. In these circumstances, the domestic primary balance in 2002 was 2.0?percent of GDP (compared with the 3.1?percent of GDP programmed). Delays in the divestiture program to allow for better asset valuations and to achieve greater transparency and efficiency meant that the programmed 0.8?percent of GDP in divestiture proceeds were not realized. External program support also fell short of the expected amount, by about 1.4?percent of GDP, and only half of the planned foreign-financed capital expenditures could be executed, reflecting in part delays in donor disbursements. Moreover, the nonadjustment of retail petroleum prices in the face of rising world oil prices and depreciation of the cedi led to an accumulation of further substantial financial losses (of around 2?percent of GDP) by the Tema Oil Refinery (TOR).

III. Medium-Term Objectives and Policy Framework

7. In light of developments in 2002, the government has revised the medium-term macroeconomic framework, and recast the policy matrix and program costings contained in the GPRS. The framework will bring about a halving of the ratio of domestic debt to GDP (from its end-2000 level) by 2005. In addition to updating the medium-term envelope for fiscal operations and poverty spending, the improved GPRS is intended to provide a more direct correspondence between the assessment of the poverty situation, the identification of key measures to address poverty, and the prioritization and costing of government programs, all of which were developed with broad public consultation. This facilitates the incorporation of the GPRS into the budget and the identification of those additional spending programs that could be implemented, should additional external resources become available.

8. As highlighted in the GPRS, Ghana's basic infrastructure continues to remain in very poor shape. The building of roads, ports, and communication networks to open the country, as well as the provision of reliable energy to fuel the modernization process and improve the lives of the Ghanaian people at a more rapid pace than was previously possible, have been driving forces behind the government's efforts to secure a predictable flow of external financing for infrastructure development. Accordingly, it is hoped that domestic stakeholders as well as international partners will be supportive in raising the additional resources that will be needed to fund Ghana's poverty reduction strategy.

9. In line with the medium-term objectives laid out in the revised GPRS, the government's economic program for 2003-2005 is intended to: improve the standard of living of ordinary Ghanaians by raising real growth to at least 4.9?percent on average per year; increase poverty spending, financed in part through debt relief under the HIPC Initiative; reduce inflation from 15?percent at end-2002 to single digits in 2003 and beyond; and rebuild gross official reserve holdings to three?months of imports of goods and services by 2005.

Key policies needed to deliver these outcomes, and to lay the foundations for further gains in subsequent years, include: reducing the government's domestic debt as a share of GDP, from 29?percent at end-2002 to around 15?percent at end-2005, by maintaining domestic primary budget surpluses, and using any unprogrammed receipts from divestiture or program aid, as well as a portion of HIPC relief, to retire domestic debt; reinforcing effective monitoring, control, and transparency in public expenditure operations, in particular the tracking of poverty spending and the wage bill; containing the losses and indebtedness of the main parastatals, through full implementation of the automatic adjustment formula for petroleum prices, phased adjustments to achieve and maintain full cost recovery in utility pricing, implementation of the divestiture program, and further restructuring of parastatal debt; removing the source of quasi-fiscal financing of state enterprise debt, and improving overall banking soundness, through the sale of the largest state-owned bank; Continued development of the financial sector, including improved banking supervision and policies to facilitate increased credit by the banking system in support of private sector development; and Improving the quality and timeliness of economic statistics.

10. The government's medium-term plan has benefited from discussions with representatives from civil society and business (including the new Ghana Investors' Advisory Council) on the constraints to growth and private sector investment in Ghana, and especially on ways in which the contribution of the financial sector can be strengthened. A number of consistent themes have emerged from these discussions, including: the importance of macroeconomic stability; the need to curtail excessive government domestic debt and public enterprise borrowing, so as to reduce crowding out and lower real interest rates; the problem of infrastructure deficiencies, especially in telecommunications and energy; inefficiencies in customs and ports; the need for legal reforms and improved land title registration to enable banks to enforce loan contracts and obtain collateral for lending; and the need to develop equity finance in Ghana.

The medium-term program is designed to take concerted action in all of these areas.

11. It is envisaged that the medium-term measures described in this memorandum would be complemented by additional policy reforms to be supported under a Multi-Donor Budget Support (MDBS) program, aimed at enhancing the effectiveness of the civil service, the budgetary process, public sector accountability, governance, and decentralization. Assistance is also being sought from the World Bank in the areas of power sector reform, development of a strategic plan for agriculture, road

construction, civil service reform, and implementation of a computer-based public sector financial management system. All measures defined under these programs will be drawn from the GPRS, or elaborate on broad GPRS objectives.

IV. The Program for 2003

A. Growth and Inflation Objectives

12. The main challenges for 2003 will be to encourage a continued strengthening in economic growth, while ensuring effective implementation of the poverty reduction programs in the budget, and reducing inflationary pressures further. In light of the deterioration in the outlook for the world economy, the government has revised downward its projection for real growth in 2003, to about 4.7?percent (compared to an earlier GPRS projection of 5.0?percent). Ghana's economy is also subject to risks associated with the ongoing crisis in neighboring C?te d'Ivoire, and the uncertainties involved strengthen the case for caution in projecting growth for the year ahead.

13. The government aims to bring CPI inflation down to below 10?percent by end-2003. This will represent a challenge, given recent increases in petroleum product prices, the need for enacting revenue measures, and the scheduled utility price increases, all during the first few months of 2003 (see below). However, we view the targeted reduction in inflation as an important factor underpinning continued economic growth and poverty reduction.

B. Monetary Policy

14. To achieve the inflation target, monetary policy will need to be prudently tight. We estimate that the growth of broad money (excluding foreign currency deposits) will need to be reduced from 50?percent at end-2002 to around 21?percent by end-2003. A primary intermediate target is reserve money growth (excluding banks' foreign currency deposits) of 21?percent during 2003. In order to secure a desired buildup in net international reserves of at least US$130 million, the central bank's net domestic assets (calculated at the program exchange rate) will be increased by no more than ?92?billion in the year to December?31,?2003. The corresponding quarterly targets are shown in Table?I.1. The Bank of Ghana will use open market operations and adjustments in its prime rate, as necessary, to achieve its monetary objectives.

15. Given the support of a strengthened fiscal position, as outlined below, the targeted slowdown in money growth is assumed to be consistent with some decline in real interest rates during 2003. This will help promote expansion in bank credit in real terms to the private sector of about 20?percent in 2003, with further real increases projected in outer years.

C. Fiscal Policy

16. The principal fiscal policy objective is to stabilize and cut the domestic debt stock in order to stem the increase in interest payments and to achieve the desired easing in real interest rates. The 2003 budget is framed to achieve the elimination of reliance on net domestic financing. This will be a challenging goal in view of the ratcheting up of the wage bill in 2002, the burden of servicing the accumulated TOR debt (see below), and the continued objective of maximizing social and development spending.

17. To offset these factors and place public finances on a permanently sound footing, we have proposed to parliament two substantial new revenue measures: A new broad-based tax, the National Health Premium, at a rate of 2??percent on expenditures and transactions. We expect that this tax will be introduced in March 2003, effective from May 1 with speedy passage of an accompanying legislative instrument. It will yield an estimated 0.5?percent of GDP in 2003, of which half will be used to fund the start-up of a new National Health Insurance Scheme, and the full-year yield will be 1?percent of GDP. A Debt Recovery Levy on petroleum products, at the rate of ?640?per liter. We will seek passage of this measure, which will yield an estimated 1.6?percent of GDP in 2003 and 1.9?percent of GDP in a full year, in March 2003, for immediate implementation.

Aside from its fiscal benefits, we expect the National Health Premium to have a positive distributional impact: the direct burden on lower income groups will be limited, because a high proportion of their consumption basket falls outside of the applicable tax base, while the poor will benefit from extra poverty-reducing expenditure to be financed by the additional budget resources that will become available. As for the Debt Recovery Levy, the government decided to implement it across-the-board, since the structure of petroleum product prices already includes significant cross subsidization in favor of products consumed primarily by low-income households.

18. Other revenue measures to help finance the 2003 budget include: extension of the National Reconstruction Levy (which expired at the end of 2002), yielding 0.2?percent of GDP; an increase in the Road Levy on petroleum products, yielding 0.9?percent of GDP to fund larger allocations for road maintenance; and in the timber sector, higher stumpage fees, which will support development projects in rural communities, and increased revenues (estimated at 0.5?percent of GDP) from the opening up of timber concessions to public auction.

19. A number of measures are being taken to further improve on tax administration. A Large Taxpayers' Unit (LTU) will be ready for launch by mid-June 2003, and initially will cover about 350 taxpaying entities. In support of the LTU and other initiatives, a Taxpayers Identification Number (TIN) law was passed in 2002, and during 2003 we intend to build the TIN database and enforce TIN implementation in all revenue agencies. Additional efforts to improve tax administration systems will be financed by a retention fund for the responsible agencies, equivalent to no more than 3?percent of their revenues. As a result of these measures, the rates of efficiency in collection by the main revenue agencies are assumed to improve by at least 5-6?percent in 2003. We also hope to enhance revenue generation from the national lotteries by bringing these under direct government control, supervised by the Revenue Agencies Governing Board; to be prudent, however, expected gains from this reform have not been included in the budget revenue projections. Should revenues fall short of the budget projections, expenditure ceilings will be adjusted accordingly to ensure adherence to the domestic financing targets; savings would be sought primarily in the non-priority capital expenditure programs, and poverty-related expenditures would be protected.

20. Every effort will be made to bring the wage bill under control in 2003. For the first time, the government will begin to apply a hard budget constraint to wages, and will limit the overall wage bill to no more than ?5,450?billion, a 22?percent increase on the underlying base for 2002. Our policy in this respect will be supported by the following immediate measures: the rigorous enforcement of quarterly expenditure ceilings on wages, with the effect that any MDA in breach of a quarterly ceiling will be required to make offsetting savings in subsequent quarters (a cabinet decision endorsing this regime will be adopted in March 2003). advancing the timetable for 2003 wage negotiations (including collective bargaining agreements of non-GUSS agencies) with a view to completing all negotiations before the 2003 budget is passed by Parliament; requiring that any MDA engaged in negotiations relating to wages or allowances will do so strictly within its 2003 budget ceiling, in cedi levels; and requiring that all MDAs present complete monthly rosters of employees paid through block payments to subvented agencies.

In the medium term, it is envisaged that the National Institutional Renewal Program will address pay reform, the rationalization of government and subvented agencies, and the restructuring of the civil service to carry out the objectives of the GPRS.

21. With the second round of adjustments in utility prices in March 2003 (see below), subsidies to utilities will be limited to ?50?billion and directed to finance lower-than-market rates for low-income consumers of electricity and water.

22. The government will remain current on its statutory payments to the District Assembly Common Fund and the Ghana Education Trust Fund. It has also provided for the clearance of end-2002 arrears to these funds in five equal parts during 2003-2007. The 2003 budget includes an allowance for the clearance of expenditure arrears in the roads sector totaling ?220?billion, and ?100?billion for other domestic expenditure arrears. An audit of 2002 expenditure arrears will be concluded by mid-2003.

23. Aggregate poverty-related expenditure, as defined in the GPRS, is budgeted at 4.6?percent of GDP in 2003, before use of HIPC resources, or around 6 percent of GDP including HIPC-financed expenditures. This compares with estimated poverty-related expenditures of 4.5?percent of GDP in 2001, the year before Ghana began to receive relief under the enhanced HIPC Initiative.

24. The 2003 budget is framed on the expectation of external program support totaling 3?percent of GDP, and a further 4.2?percent of GDP in external debt relief. Taking these contributions into account, the government intends to keep net domestic financing of the budget to zero in 2003, subject to application of the adjusters defined in the technical memorandum of understanding (TMU).

D. Public Expenditure Management

25. The government attaches the highest importance to the effective control and monitoring of public expenditure, as a means of ensuring that the spending priorities identified in the GPRS and reflected in our 2003 budget are implemented as planned. A number of steps have recently been taken to improve public sector monitoring and control in 2003, including the: routine monthly reconciliation of MDA accounts with banking data. regular reporting by MDAs of their internally generated funds. reform of the direct debits system, to ensure registration of debits at the Controller and Accountant General's Department (CAGD) before their issuance, and immediate entry into the CAGD's expenditure accounts; elimination of 800 dormant accounts at the Bank of Ghana (out of about 4,000 government accounts in total); completion of a personnel audit of the civil service, which led to the removal of approximately 3,000 names (out of a total of about 450,000) for the civil service and pension payrolls; and issuance of a circular to MDAs that all payment vouchers with respect to 2002 expenditure commitments should be issued no later than December?15,?2002.

26. A fully integrated, computerized budget and public expenditure management system (BPEMS) financial and accounting system, developed with assistance from the World Bank, is slated to replace the existing system by the end of 2003. All MDAs will gradually be brought into the BPEMS, with the CAGD and the Ministry of Finance (MOF) having migrated as of January?31,?2003, to be followed by the Ministries of Health, Education, and Roads and Transport by end-2003. During 2003, the BPEMS will be tested and operated in parallel with the current reporting system.

27. Further efforts are needed to tighten up controls on the validation of payroll lists, and on the implementation of additions, deletions, and changes to payroll rosters in the two main payroll databases (IPPD for workers on the Government Unified Salary Structure, and a second database for remaining subvented agencies). Some internal controls and audit trail capabilities will become available when IPPD2 is installed in late 2004. In the meantime, existing control systems will be tightened, MDAs will be required to ensure that all staff are registered on one of the two databases, and supervisors will be held accountable for the accurate and timely validation of their payroll lists.

28. To ensure effective and continuous monitoring of budget implementation, the MOF will submit monthly "fiscal early warning" reports to the Economic Management Team via the Economic Policy Coordinating Committee (EPCC), and the Minister of Finance will brief cabinet on fiscal developments on a quarterly basis. The reports (fully reconciled and with no more than an eight-week lag) will summarize fiscal outturns for revenue, expenditure, and financing developments for the year to date, and relative to budget, and will draw policy implications for the remainder of the year. The first such report, covering developments in December 2002, has already been provided to the Economic Management Team.

29. To improve control over expenditure commitments while enhancing flexibility at the MDA level, the current practice of releasing monthly funds on a prorated basis will be discontinued and replaced in 2003 with a cash management system underpinned by quarterly expenditure ceilings. Specifically, quarterly ceilings issued by the MOF for each expenditure item will be based on updated and prioritized cash projections to be submitted by MDAs. Poverty-related expenditures, as defined in the GPRS, will be closely monitored using the poverty expenditure tracking system, which will generate monthly reports with a lag of no more than eight weeks. MDAs and donors will be asked to improve the reporting of donor-financed expenditures and internally-generated funds, so that the coverage of data on poverty-related spending can be broadened to include these resources.

E. Public Enterprise Reform

30. The delay in implementing the automatic adjustment formula for petroleum prices was a setback for the 2002 program, and the government believes that a durable solution is required. As a first step, on January?17,?2003, we raised retail petroleum prices by 90?percent on average, bringing them fully in line with world market levels. To mitigate the impact on the poorer segments of Ghana's population (and as envisaged in the pricing formula), the cross subsidization of kerosene and liquefied petroleum gas (products used heavily by the poor) was maintained. We also announced that the National Petroleum Tender Board will henceforth have the mandate and independent authority to make monthly adjustments in maximum petroleum product prices according to the automatic adjustment formula, without further approval by the Ministry of Energy. The formula (the parameters of which are specified in the TMU) will become operational immediately following parliamentary approval of the Debt Recovery Levy. At that time, full cost recovery (ex refinery), plus all applicable levies and margins, will be assured and subsequently maintained. Before the end of 2003, the government will review the experience with setting petroleum prices flexibly according to the automatic adjustment formula, and on that basis consider the possible liberalization of petroleum product prices in 2004.

31. The delay in adjusting petroleum prices has meant that the short-term debt of Tema Oil Refinery (TOR) has again risen to unsustainable levels. Estimates are that TOR's short-term debt rose by around ?1,000?billion (2.0?percent of GDP) in 2002. To make TOR viable, the entire amount of short-term debt to the banking system that is quasi-fiscal in origin had to be recognized as government debt. Accordingly, in December 2002, ?1,400?billion of TOR's bank debt was exchanged for government TOR bonds paying a 4.5?percent real rate of interest, bringing the total amount of TOR debt assumed by the government to approximately ?2,400?billion and leaving around ?2,100?billion of short-term debt on TOR's books. Accommodation has been made in the medium-term fiscal framework for the servicing and amortization of the TOR bonds, funded by the Debt Recovery Levy.

32. The restructuring of TOR's debt should clear the way for the privatization of Ghana Commercial Bank (GCB), the refinery's main creditor. The divestiture of GCB is sufficiently important from the point of view of the overall soundness of the banking system that it will serve as a structural benchmark under the government's PRGF-supported program for 2003, with a target date of no later than September 30, 2003 for cabinet approval of the winning bid.

33. The government is considering options for the partial divestiture of Ghana Airways. The airline's current stock of outstanding debt to creditors is estimated at about US$140?million (2.4?percent of GDP), and following recent cost-cutting measures, its cash flow has been sufficient to service its debt in recent months. The government will resist any entreaties to assume Ghana Airways' commercial debt, which would not be in keeping with our priorities under the poverty reduction strategy, and will instead require the company to work out with its creditors a satisfactory solution to its debt problem.

34. By the end of 2004, the government intends to complete action on the divestiture of state holdings in joint venture companies. These and other asset sales are expected to yield around ?400-450?billion per year in 2003 and 2004.

35. The government remains committed to achieving and maintaining full cost recovery in electricity and water pricing. On March?1,?2003, a second round of price increases (12?percent each for electricity and water) came into effect, following which the Electricity Company of Ghana and the Ghana Water Company Limited should be able to cover their costs. Thereafter, the rates of cost recovery will be maintained through the implementation of the established automatic adjustment formulas. The Volta River Authority (VRA) will continue to incur losses as a result of the preferential tariffs granted to a large aluminum company. This problem is currently the subject of international arbitration, and a durable solution must await the conclusion of that process. However, the government will develop a plan by September?30,?2003, for managing the interim financial burden on VRA.

F. Financial Sector Reform

36. Significant progress has been made in financial sector reform over the past 12?months. Key elements include: the finalization of a new Banking Bill, to reinforce the central bank's powers to conduct effective supervision of the banking system, and of bills to modernize the legal framework for the payments system; the preparation of an Insurance Bill that will strengthen the regulatory framework for insurance companies operating in Ghana; an intensification of supervision activity for both banks and nonbank financial institutions (NBFIs), and a tightening of the regulatory framework; enhancement of the operating environment for rural banks, including through the opening of an Apex Bank to act as central clearing agent for rural banks and the reduction in reserve requirements for rural banks to commercial bank levels; initiation of legislation on money laundering; drafting of tighter regulations and oversight of securities dealers; preparation of an improved corporate investment plan for the state pension institution (SSNIT); and drafting of new insolvency legislation and a new Companies Code.

37. In the course of 2003, the government expects to submit for parliamentary approval the Banking, Payments System, Bills and Cheques, and Insurance bills, as well as the new Companies Code, and to reach an advanced stage on the money-laundering legislation. In addition, plans are being drawn up, based on the relevant sections of the GPRS, for a range of further reforms during 2003-05 that will enhance the financial sector's contribution to private sector development. Proposed measures are expected to include: legislation to allow the creation of private pension schemes, to help mobilize long-term funds for the business sector; the establishment of a legal framework for credit reference agencies, with a view to enhancing the access of individuals and small businesses to credit; and increased funding for rural and micro-finance institutions.

G. External Sector Policies

38. A further improvement in Ghana's terms of trade is expected in 2003, reflecting higher world prices for cocoa and gold, which, together with the expected increase in donor support, should result in a stronger external position this year. The government will strive to ensure that all necessary actions are fully implemented, notably in the areas of divestiture and public management reform, to facilitate timely donor disbursements. The government will pursue negotiations aimed at securing HIPC relief from non-Paris Club creditors and completing bilateral agreements with Paris Club creditors. The Bank of Ghana will continue to allow the cedi exchange rate to be market determined, limiting interventions to smoothing short-term fluctuations in the exchange rate and ensuring achievement of the targeted buildup of net international reserves. Given the prevailing uncertainties in world oil markets, the program floors on the accumulation of net international reserves will be adjusted downward (by a maximum of US$30?million) in the event of higher-than-programmed U.S. dollar prices for oil imports, as specified in the TMU, with a corresponding upward adjuster on the ceilings on the net domestic assets of the Bank of Ghana.

39. Following extensive preparatory work with market participants, the Bank of Ghana plans during the first half of 2003 to launch (for the first time in Ghana) a computerized dealing room as the platform for a real-time interbank foreign exchange market. If the new trading system works effectively, we intend to begin phasing out surrender requirements and to eliminate these requirements in due course, placing the emphasis instead on effective monitoring of repatriation requirements for statistical and analytical purposes.

40. In the 2003 budget, the government proposed increases in tariffs on a range of imported finished goods, rice, and poultry products. These measures will not, however, be implemented during the period of the PRGF arrangement.

H. Good Governance and Statistical Transparency

41. The Government of Ghana came into office with a pledge of zero-tolerance for all acts of corruption and, in 2003-05, will strive to continue to improve good governance in Ghana. Envisaged policies consistent with the GPRS include: an increase in the operational efficiency of the Auditor General's office, and assurance of full staffing of internal audit positions (a HIPC completion point trigger); implementation of the Anti-Corruption Action Plan, including through the passage of a freedom of information act and whistle-blower legislation; the definition of clear roles and responsibilities for the Office of Accountability, the Commissioner for Human Rights and Administrative Justice, and the Serious Fraud Office; and the provision of regular government reports to parliament on the implementation of the GPRS, and a strengthening of parliament's capacity to exercise oversight (including through additional research staffing).

42. The government notes that the Bank of Ghana (BOG) has conducted an external audit of its 2001 financial statements, and plans to conduct a similar audit for 2002 in conformity with International Accounting Standards. Efforts of the BOG to strengthen internal audit procedures are expected to be bolstered by a full safeguards assessment in 2003 by the IMF.

43. The government is committed to the production of more timely and accurate statistics, in support of transparency and to allow a better assessment of developments in the economy. To this end, work is underway to review the calculation of the CPI from 1999 onwards and, related to it, the series on nominal GDP. Every effort will be made to expedite the revision of the CPI and national accounts series (supported by technical assistance from the IMF's Statistics Department), now expected to be completed by mid-2003.

V. Program Monitoring for 2002

44. Technical Memorandum of Understanding. The program will be monitored using the definitions, data sources, and frequency of monitoring set out in the accompanying TMU. The government will make available to Fund staff all core data, appropriately reconciled and on a timely basis, as specified in the TMU.

45. Prior Actions. The government will undertake a number of actions prior to the IMF Board meeting to consider the request for a three-year arrangement under PRGF, in order to ensure effective implementation of the economic strategy described in this memorandum (Table?I.2).

46. Performance criteria. Table?I.1 shows the quantitative performance criteria and benchmarks set for June 2003, with indicative benchmarks for March, September, and December 2003. The end-December 2003 targets will be converted to performance criteria at the time of the first review. Structural performance criteria and benchmarks with corresponding dates are identified in Table?I.2. In addition, the nonaccumulation of external payment arrears (as defined in the TMU) will constitute a continuous performance criterion, as will the standard injunctions against imposing or intensifying restrictions on current payments introducing or modifying multiple currency practices, concluding bilateral payments agreements that are inconsistent with Article VIII, or imposing or intensifying import restrictions for balance of payments reasons.

47. Program review. The first review under the PRGF arrangement will be completed by November?14,?2003. This review will focus on implementation of (i) the public expenditure management and control system, (ii) the reforms of energy and utility pricing, and (iii) the divestiture of GCB, as well as on progress in developing the next phase of reforms of the financial sector.

Table I.2. Prior Actions, Structural Performance Criteria and Benchmarks for 2003 Prior actions for approval of new PRGF arrangement 1. Obtain parliamentary passage of a 2003 budget with aggregate revenues, expenditures, and net domestic financing that are consistent with the MEFP. 2. Obtain parliamentary passage of revenue measures, including those specified in paragraphs 17 and 18 of the MEFP, with an estimated yield of at least ?1,687?billion in 2003. 3. Obtain a cabinet decision, issued to all MDAs, that the 2003 quarterly expenditure ceilings on personal emoluments (Item 1) will be applied by the responsible MDAs and enforced by the Ministry of Finance, and that any MDA in breach of a quarterly ceiling will be required to make offsetting savings in subsequent quarters. 4. Bring petroleum prices into line with the automatic adjustment formula, ensuring full import cost recovery and incorporating all applicable taxes and levies, and announce publicly that future adjustments will be made in line with the formula without further government review or authorization. 5. Submit to the Economic Management Team the first monthly fiscal report, as described in paragraph 28 of the MEFP, covering December 2002.

Structural performance criteria 6. Implement fully the automatic adjustment formula for petroleum product prices, as specified in the Technical Memorandum of Understanding [June 30, 2003].

Structural benchmarks 7. Approval by cabinet of final purchase agreement for Ghana Commercial Bank [September 30, 2003]. 8. Submit to the Economic Management Team the monthly fiscal reports described in the MEFP, with a maximum lag of eight weeks, for January-April 2003 [June 30, 2003] and May-July 2003 [September 30, 2003]. 9. Implement the published plan for adjusting electricity and water tariffs, including 12?percent tariff increases in March 2003, and automatic adjustments in line with the published cost recovery formulas thereafter [September 30, 2003].

Technical Memorandum of Understanding

1. This technical note contains definitions and adjuster mechanisms that are intended to clarify the measurement of items in Table?I.1, Quantitative Performance Criteria, PRGF Arrangement, 2003, attached to the Memorandum of Economic and Financial Policies. Unless otherwise specified, all quantitative performance criteria and benchmarks will be evaluated in terms of cumulative flows from December?31,?2002.

Provision of Data to the Fund

2. Data with respect to all variables subject to performance criteria and indicative benchmarks will be provided to Fund staff on a monthly basis with a lag of no more than eight weeks (two weeks for data on the net domestic assets and net international reserves of the Bank of Ghana). The authorities will transmit promptly to Fund staff any data revisions. For variables that are relevant for assessing performance against program objectives but are not specifically defined in this memorandum, the authorities will consult with Fund staff as needed on appropriate measurement and reporting.

Definitions

3. Government is defined for the purposes of this memorandum to comprise the central government as well as all special funds (the Education Trust Fund, the Road Fund, the District Assembly Common Fund) and various subvented and other government agencies that are classified as government in the Bank of Ghana (BOG) Statement of Accounts (SOA). SSNIT and public enterprises, including Cocobod, are excluded from the definition of government.

4. Government domestic revenue comprises all tax and non-tax revenues of government (in domestic and foreign currency), excluding foreign grants and divestiture receipts. Revenue will be measured on a cash basis as gross inflows to government uncommitted treasury collections accounts. Revenue will not include an adjustment for unspent balances on committed accounts.

5. Government domestic expenditure comprises all spending from uncommitted accounts for Items 1-4, as captured by the accounts of the Controller Accountant General's Department (CAGD). Reporting will be based on the current NETS accounting system, and its associated 15-digit chart of accounts, and will be fully reconciled with BOG bank statements on spending (outflows) from the 42 newly created MDA Operational Accounts (plus any residual use of existing Treasury Drawing/overdraft accounts). Expenditure will also be verified by comparing it to accounts produced by the BPEMS accounting system, until such time as the latter system becomes fully operational.

6. Within the above total, poverty-related expenditures refer to those expenditures identified in Table 6 of the Decision Point Document for the Enhanced Heavily Indebted Poor Countries Initiative The last three digits of the 15-digit chart of accounts of the current NETS system will be used to identify budget expenditures that are poverty-related, and the sub-component which is financed by HIPC relief. These data will supplemented with that proportion of transfers to the District Assembly Common Fund, Ghana Educational Trust Fund, and Road Fund which are deemed by those entities to be poverty-related. Poverty spending will exclude some donor-supported expenditure not currently captured by CAGD.

7. Net domestic financing (NDF) of government is defined as the change in net credit to government by the banking system (i.e., the Bank of Ghana plus deposit money banks) plus the net change in holdings of treasury bills and other government securities by the nonbank sector, but excluding divestiture receipts. Outstanding net credit to the government by the Bank of Ghana is comprised of the sum of claims on government (SOA codes 0401 and 050101-4) less government deposits (1101 and 1202 as defined in the Template of the BOG Statement of Accounts dated March 13, 2003) which include the main HIPC receiving and disbursement accounts. Outstanding net credit by deposit money banks is comprised of DMB holdings of government securities at cash value, as reported by the BOG Treasury Department's Debt Registry, plus overdrafts less government deposits as reported by DMBs in their current BSD2 and 20R report forms (and defined in the template for reporting of DMBs dated March 13, 2003). Nonbank financing will be the difference between total net cash receipts to the OMO account from the sale/repurchase of government securities, less the corresponding net cash value received from the BOG and DMBs as indicated on the Debt Registry by holder at discount value. For each test date, any adjustment by the BOG to the data reported by individual DMBs, on account of their misclassification of government or for other reasons, will be reported to the Fund.

8. The domestic primary balance is defined as the difference between government domestic revenue and noninterest government expenditure as reported by the CAGD (i.e., payment vouchers issued for expenditures on items 1-4). It will exclude foreign-financed capital expenditure, for which data are reported by the Aid and Debt Management Unit. The measurement will be on a cash basis, with any positive (negative) discrepancy between the above- and below-the-line measure of the overall balance being added to (subtracted from) the measure of the domestic primary balance (including unspent balances remaining in committed accounts).

9. The program exchange rate for the purposes of this memorandum will be 8504?cedis per dollar, i.e., the simple average of the buying and selling interbank transactions rates for December 31, 2002.

10. Reserve money is defined as the sum of currency in circulation (BOG statement of accounts codes 901 plus 902), commercial banks' deposits at the Bank of Ghana excluding foreign exchange (and excluding accounts which are overdrawn, blocked, or owned by banks in liquidation) plus private and other non-government demand deposits at the Bank of Ghana in cedis (excluding blocked accounts). A more detailed listing of accounts to be included in the measure of reserve money is contained in the Template of the BOG Statement of Accounts. If any bank fails to meet its legal reserve requirement, currently 9?percent of bank deposits, then reserve money will be adjusted upward to the extent of any shortfall in compliance with that reserve requirement.

11. Net foreign assets (NFA) are defined in the monetary survey as short and long term foreign assets minus liabilities of the Bank of Ghana which are contracted with non-residents. Short-term foreign assets include: gold (valued at the spot market rate for gold, US$/fine ounce, London), holdings of SDRs, reserves and investments in the IMF, the HIPC umbrella SDR account (all as reported by the IMF), foreign notes and travelers checks, foreign securities, positive balances with correspondent banks, and other positive short-term or time deposits. Short-term foreign liabilities include foreign currency liabilities contracted by the Bank of Ghana at original maturities of one year or less (including overdrafts), plus outstanding liabilities to the IMF. Long-term foreign assets and liabilities are comprised of deposits of international institutions, assets (303), investments abroad (a subset of 60201), other long-term liabilities to nonresidents (a subset of 1103), and bilateral payment agreements (305). All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. A more detailed listing of accounts to be included in the measure of NFA is contained in the Template of the BOG Statement of Accounts.

12. Net international reserves (NIR) of the Bank of Ghana are defined for program monitoring purposes and in the balance of payments as short-term foreign assets of the Bank of Ghana, minus short-term external liabilities. To the extent that short-term foreign assets are not fully convertible external assets readily available to and controlled by the Bank of Ghana (i.e., they are pledged or otherwise encumbered external assets, including, but not limited to, the HIPC umbrella SDR account, assets used as collateral or guarantees for third party liabilities) these will be excluded from the definition of NIR. Net international reserves are also defined to include net swap transactions (receivable less payable), and exclude all positive foreign currency deposits at the BOG not held by the central government. All values are to be converted to U.S. dollars at actual market exchange rates prevailing at the test date. A more detailed listing of accounts to be included in the measure of NIR is contained in the Template of the BOG Statement of Accounts.

13. Net domestic assets of the Bank of Ghana are defined as the difference between reserve money and net foreign assets of the Bank of Ghana, converted from U.S. dollars to cedis at the program exchange rate.

14. The performance criterion on short-term external debt refers to the outstanding stock of external debt with original maturity of one year or less, including overdraft positions and debt owed or guaranteed by the government or the Bank of Ghana.1 Data on the Bank of Ghana's short-term external debt are those reported from the statement of accounts template as short-term liabilities to non-resident commercial banks (1201 plus 301 overdrafts plus Crown Agent). The limit on short-term external debt will exclude US$15.2?million in overdrafts with correspondent banks which are in dispute, until such time as these assets are re-classified.

15. The performance criterion on nonconcessional medium- and long-term external debt (Table?I.1) refers to the contracting or guaranteeing of external debt with original maturity of more than one year by the government or Bank of Ghana.2 Medium- and long-term debt will be reported by the Aid and Debt Management Unit of the Ministry of Finance and (as appropriate) the Bank of Ghana, measured in U.S. dollars at current exchange rates.

16. The stock of payment arrears in the road sector will include any arrear on a duly certified expenditure commitment that was not paid during a period of 90 days after the date the bill was issued. Any arrear in foreign currency will be converted into cedi at the actual exchange rate prevailing at the end of period date. Data on the stock of road arrears will be reported to the IMF staff monthly (with a lag of no more than 4 weeks) by the monitoring and evaluation department of the Ministry of Roads and Highways. At end-October 2002 the stock of road arrears was recognized to be 219.8?billion, and is expected to be paid down according to the quarterly schedule in Table I.1, which will be an indicative benchmark under the program.

17. External payment arrears occur when undisputed interest or amortization payments are not made within the terms of the debt contract, or in conformity with the terms for interim relief provided under the enhanced HIPC Initiative and the deferral agreed with the Paris Club on December?10,?2001. This is a continuous criterion.

18. Official external program support is defined as grants and loans provided by foreign official entities that are received by the budget, excluding project grants and loans, and other exceptional financing. Amounts assumed in the program consistent with this definition are shown in the memorandum item entitled "external program support" of Table?I.1.

19. Divestiture receipts are payments received by the government (in domestic and foreign currency) in connection with the sale of state assets. The programmed amounts consistent with this definition are shown in Table?I.1. Divestiture receipts in foreign exchange are those recorded as such in the Bank of Ghana's Cash Flow.

20. The automatic adjustment formula for petroleum prices is defined to ensure full cost recovery at the Tema Oil Refinery (TOR), by passing on to ex refinery prices the net cedi cost of imported refined petroleum products according to the specification provided to the IMF on March?7,?2003. The formula will become effective in late March 2003, following parliamentary approval of the debt recovery levy, at which time the ex pump product prices will be aligned with the formula to ensure full cost recovery ex refinery plus all applicable taxes, levies, and margins. Subsequent calculations of petroleum prices will be made by the National Petroleum Tender Board on the first working day of each month, beginning May?1,?2003. The trigger for a petroleum price adjustment will be a change in the calculated ex-refinery price of plus or minus 2??percent.

Adjusters

21. Deviations in official external program support, external debt service payments, and divestiture receipts from the amounts programmed in Table?I.1 will trigger adjusters for domestic financing of government, net domestic assets of the Bank of Ghana and net international reserves as indicated below. These and other adjusters as set out below will be measured cumulatively from the beginning of 2003.

22. Ceilings on net domestic financing (NDF) of the government and net domestic assets (NDA) of the Bank of Ghana. Monthly differences between projected and actual official external program support, external debt service payments, and divestiture receipts in foreign exchange will be converted to cedis at the actual monthly exchange rate and cumulated to the test date. The ceilings on net domestic financing of government and NDA will be reduced by the sum of: (i) excess official external program support; (ii) excess divestiture receipts; and (iii) the shortfall in external debt service payments. The adjustment to the ceiling on the NDA of the Bank of Ghana with respect to deviations in divestiture receipts will apply only to foreign exchange receipts. Both ceilings will be increased by 100?percent of any cumulative shortfall in official external program support or excess in external debt service, but will not be adjusted for a shortfall in divestiture receipts. The upward adjustment is capped at the equivalent of US$75?million, converted to cedis at actual exchange rates.

23. Floor on net international reserves (NIR) of the Bank of Ghana. Quarterly differences between projected and actual official external program support, external debt service payments, and divestiture receipts in foreign exchange will be converted to U.S. dollars at the actual exchange rates prevailing at the test date. The floor on NIR will be raised by the sum of: (i) excess official external program support; (ii) excess divestiture receipts in foreign exchange; and (iii) any shortfall in external debt service payments. The floor will be lowered by 100?percent of any shortfall in official external program support or excess in external debt service payments, but will not be adjusted for any shortfall in divestiture receipts. The downward adjustment is capped at the equivalent of US$75?million.

24. Oil price adjustor. NIR floors will be adjusted downward, and NDA ceilings upward, when world oil prices exceed the baseline price path assumed in the program. The floor on NIR will be reduced by the cumulative quarterly difference (if positive) between actual oil prices and projected prices as defined in Table?I.1, multiplied by a coefficient of 20 (a multiplier which quantifies the approximate impact that a US$1 rise in oil prices has on the value of Ghana's oil imports in US$millions) on an annual basis. For March the adjustor will be computed as the difference (if positive) between the average actual and forecast prices during the first quarter, times a coefficient of 20/4; for June, the adjustor will be the difference (if positive) between the half-year actual and forecast prices, times a coefficient of 20/2. The adjustor at all test dates will be capped at US$30?million. The ceiling on the NDA of the Bank of Ghana will be raised by the same adjustor amounts as for NIR, converted to cedis at actual exchange rates, up to a cap equivalent to US$30?million.

Reporting of Fiscal Data

25. The Ministry of Finance will provide to IMF staff:

a. Monthly data on central budget operations for revenues, expenditure and financing with a lag of no more than 6 weeks after the end of the month. b. Monthly reports showing the functional breakdown by Ministry, Department, and Agency of expenditure authorizations, payments vouchers issued, payment vouchers liquidated, and arrears with a lag of no more than 6 weeks after end of the month. These reports will also identify poverty-related and HIPC financed expenditures, as well as the inflows and disbursements from the HIPC receiving and drawing accounts at the BOG. c. Monthly reports prepared by the Ministry of Road and Highways on the stock of road arrears with a lag of no more than 4 weeks after the end of the month.

26. The BOG will provide the IMF staff: a. Monthly summary tables reporting the government's position on BOG committed and uncommitted accounts as well as financing within 4 weeks of the end of the month. This table should be accompanied by the table showing the composition of other receipts and other expenditure. b. Monthly tables showing the composition of banking system and non-banking system net claims on government, within 4 weeks of the end of the month. c. Monthly tables showing the structure and holders of domestic government debt, at face value and at discount, within 4 weeks of the end-of the month.

External Data, Debt and Debt Service, and HIPC Relief

27. The BOG will report value, volume, and unit value export data, and import data, by major categories on a monthly basis with a maximum lag of 3?months. The BOG will report other major balance of payments variables on a quarterly basis with a lag of no more than 3?months.

28. To improve the transparency and accountability of external debt management, the Minister of Finance has written to the Controller Accountant General (CAGD) and the Governor of the Bank of Ghana setting down the formal procedures for settlement of debt and specifying the functions that the CAGD and the Bank of Ghana are expected to fulfill in carrying out those procedures. In addition, the following measures have been initiated and will be maintained: a. All Ministries, Departments and Agencies (MD