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 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 after wards. 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 governments 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 Groups
Country Assistance Strategy objectives for FY08-11 and with the World Banks 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 Governments 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, implement a net hiring freeze in
the public sector, eliminate ghost workers in health and education services, classify 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 and near poor 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 theproposed 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 Governments 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 additionthe 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