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This report is for official use only by the Bank Group and specifically authorized organizationsor persons. it may noc be published, quoted or cited without Bank Group authorization. TheBank Group does not accept responsibility for the accuracy or completeness of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPf0lMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CURRENT ECONOMIC SITUATION

AND PROSPECTS

OF

,'TT A 1WT A

(in seven volumes)

VOLUME VI

REVIEW OF ECONOMIC PLANNING

March 9, 1972

Western Africa Department

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CURRENCY EQUIVALENTS

1 New Cedi = US$0.98

1 US Dollar = N¢1.02

On December 27, 1971 the Cedi was devalued to

1 New Cedi = US$0;55 and on February 7, 1972

the Cedi was revalued to 1 New Cedi = US$0.78.

In this report the exchange rate of 1 New Cedi

= US$0.98 has been used.

This report was prepared in the latter half of 1971. The

Green cover version of the report was circulated in December

of 1971 but following the change of government in Ghana in

January of 1972 the issuing of the report in Grey cover was

postponed pending discussion with, and approval from, the

Ghanaian authorities. The report takes account of budgetary

measures for the fiscal year 1971/72 which were introduced

in August of 1971. It also takes account of a comprehensive

study of cocoa prospects which was completed in December of

1971. The report does not take account of the changes in

the parity value of the cedi in December of 1971 and February

of 1972, and other measures announced since December of 1971

such as the abolition of import surcharge and export bonus

systems, increase in cocoa producer price, increase in

minimum wage rate and abolition of the National Development

Levy.

COMPOSITION OF THE MISSION

This rpnort. is based on the findings of a mission to Ghanain April 1971, consisting of:

Mr ames JT Mr-(ihhn - Ghief of Mi ss.ionMr. Fateh Chaudhri - General EconomistMr-. HelimuT TDos.ta.nl - Nati onal Annolints and Prodnct.lton SpntMr. Ved Gandhi - F-iscalMr. Norman Hicks - FRonnnmiG ProirntionsMr. Thomas Klein - External DebtMiss Katharine Mortim.er - Social SectorsMr. Herman Nissenbaum - ProjectsMr. Nabil Sukki - T-rade and BaIance of PavTmentsMr. Carlos St Hill - External Debt StatisticsMr. Merrill Rae.n - Glo'oa

Mr. Dean Papavassiliou - Research and StatisticsMiss Geraldnlre Prefo-ntaie - Secretr

Consulant

The report comprises the following volumes

Volume I - Main ReportVolume L.L - ALLt Llerna'l Debt

Volume III - Recent Fiscal PoliciesVolTme IV - CocoaVolume V - Interest Rates and the Mobilization

ofL Privat[e Svings-1r- -Volume VI - Review of Economic PlanningVIT-,,e VII - Nati. onLad.l ^cc.ts Dat. - So-ces±

and Methods

This volume has been prepared by Mr. Fateh Chaudhri

REVIEW OF ECONOMIC PLANNING ANDDDlUTMAC OW nTrE1TVT flDPMTJP OThA'IrPV lU r^UAMA

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ......... ............................... i

II. REVIEW OF ECONOMIC PLANNING ANDPROBL E n iS. OF MEN LOPPsrN` STRA-1mGY ImN Ynr.n 1% iNA . .

Review of Planned Development and EconomicPerformance. 1

a) Five Year Plan, 1959. 1b) Seven Year Plan, 1961. 1c) Two Year Development Plan, 1968. 5d) One Year Development Plan, 1970. 8

IIM. PRINCIPAL PROBL aS OF DEEVE MENT ..... 1U............... io

i) General and Social Sectors ......... ... 10(a) Unemployment .................... . 10(b) Education ............ ............ 11(c) Health ....... .................... 11(d) Housing .......................... 12

ii) Productive and economic Sectors . . 12(a) Cocoa .12(b) Non-Cocoa Agriculture .13(c) Industry .15

(d) Transportation .16

iii) Public Finance . .18(a) Recurrent Expenditure .18(b) Capital Expenditure .19(c) Government Revenue .20(d) Balance of Payments and External

Debt .21

iv) General Conclusions .22

I. INTRODUCTION

1. During the second half of 1971, the Government of Ghana waspreparinga mediuim term Development Plan tn c.nver the period 1972-76.Since Ghana has had the experience of preparing and adopting a number ofdevelopment plans during the lest fifteen years, itvas thought desirableto review earlier plans as a necessary background to ascertaining the natureof current economic -roblems nand to discuss the issues oaf devlopmentstrat-

egy for the coming years. It is against the record of past experience andno f--n that the -resena F A4 t f4 dif 1 Fc u a4 4-ostin and futurevn riosects of the

economy can best be appreciated and understood.

2. Did the past development strategy and plan priorities in generalreflect te resource endowent and require..ents of thkme econom.y? .at were

L Ci C IC LCU L t_ C,t.LWI,CSL Cfl 5.C L CUIC, W .L L -%JltffL . lf&OL VY5

the general objectives of the various development plans and how best werethe traslae ino spcii gol anA 1 _vAvw_*wcw1 varge s' n 4A t-l- e pln 4 generAl_iL.UCZ Li. auO t a LCU Lit LU Oj)C;^L .f XL 5LVA aat~ LOt SLa *D .~ Ltl *-- , Ofl-0 *- 6 CtCL a.

determine the resources actually and potentially available for achievingth-e statedl goals and "id they specify pollcies and programs for m.obili1zi4ngL.L OCL UJ OL LL L LC OCL.L U L& -LL U %AI jJ J5 .a UAZiU±..LLt

the resources? How far did plan formulation reflect the administrative,IIL=nIdrl aL n skiU cJ a pab,ll;,e anU 'L.LiUations andu hw ...uch attentionwas paid to plan implementation? These were some of the more basic andiLmportant questions tilat Uetermineud the genera, frameworkU ,n -w'Lch the re-view was conducted in this report.

3. The main focus of the analysis was to highlight the more importantproblems and the broad lines of policy strategy in different areas. Giventhe breadth of the subject considered, the discussion could not be exhaustivein all respects and is only indicative of possible approaches which appearmost suitable to Ghana's development effort. It is believed that a clearrecognition of the basic problems and a realistic appraisal and assessmentof the past experience will be a useful guide in determining an appropriateframework for the major development effort that is needed to initiate andsustain growth in the Ghanaian economy.

II. REVIEW OF ECONOMIC PLANNING ANDPROBLEMS OF DEVELOPMENT STRATEGY IN G-HANA

Review of Planned Development and Economic Performance

4. Unlike many less developed countries, Ghana started the processof development planning early in the post-independence era. Following atwo-year period of consolidation after independence (March 6, 1957), aFive-Year Plan was launched on March 4, 1959. The general objectives ofthe Plan were to achieve a standard of living which would abolish disease,poverty and illiteracy and give people ample food and good housing.

5. The Plan was intended to cover the period 1959-64 but after lessthan two years of inadequate implementation, the government decided toabandon it and to start work on a new plan covering a longer period. ThePlan was never supplemented by any proiect list and virtually no feasibilitystudies were carried out for the projects undertaken. Problems of implemen-tation were seriously neglected. The general objectives of the Plan werenever expressed in specific quantified goals or targets. Furthermore, thePlan onlv vaguely determined the resources actually and potentially availableand did not specify how resources were to be mobilized.

6. Soon after abandoning the Plan, a National Planning Commission wasformed in 1961 with the President aa the Chairman and charged with theresponsibility of preparing a Seven-Year Plan.

7. The National Planning Comilssion established a number of committeesto consider certain economic and social aspeets of the economv. The importantcommittees were those dealing with education and manpower, health and nutri-tion, infrastructure, finance, works and housing, agrirculture and industry.The Commission was serviced by a Secretariat of technicians - a governmentdepartment directi- under the President.

8. The Convention People's Party's (MP) policy as enunciated in the

Party's manifestos was the basis of plan formulation with central planningthe core of regulating the major means of -roduction, distribution and ex-change. The Plan did not envisage any increase in private investment overthe seven year period.

9. The Plan's saJor obJectives were to ralse the standard of livingof the people under "Democratic Socialism' and to make Ghana a visiblymodern country. Th.is was o be Ador.e by a rapid increase in national income

through the development of agriculture and industry. The Plan also soughtto change the pattern of productIon by Increasing the cortribution of thenon-agricultural sector to national income and employment. In general, thePl an atLLer,ptedu to aLtLer thle trad L tior.al stru.ture of production based on the

export of primary commodities by giving emphasis to processing raw materialsand industriLalizatLon. It was aLao decidd LiLdaL t .. ars WoulA play a greatez

role in the Pan-African Community which implied that enterprises should beestablished with the ultimate aim of selling on the entire continentalAfrican market.

10. More specifically, the Seven-Year Plan set out to achieve anannual average GDP growth rate of 5.5 percent with an estimated populationgrowth of 2.6 percent per annum. The capital output ratio used to assessinvestment levels was 3.5:1 and total investment in the Plan was estimatedat about US$2 billion, nearly half of which was in the Government sector.More than half of the public sector investment and a third of private sec-tor investment was to be financed by external borrowing. The Plan's aim toincrease investment in directly productive activities in agriculture and in-dustry (about 37 percent compared with about 20 percent during the earlierplan) has to be viewed against the background of substantial investment ininfrastructure and social sectors since 1951.

11. The Plan proposed to set up a number of institutions to facilitaterapid achievement of Plan objectives. A large number of state corporationsnot only in industry, agriculture and infrastructure but also in trade andtourism were established. Results proved rather disappointing because themanagement constraint and ill-prepared projects retarded progress on manyfronts. The country not only used all its foreign exchange reserves butalso incurred hqavy external debts. Mechanized farming and grandiose agri-cultural schemes neglecting the small farmers did not show good resultswhile cocoa production was ignored and allowed to deteriorate. Contraryto the declared objectives of the Plan, the industrial structure establishedduring this period was not only highly capital intensive but also dependedtoo heavily on imported inputs. This neither suited the resource endowmentof the country nor mitigated balance of payments pressures. With the over-dependence on i*_.ported spare parts and raw materials, and the recurringperiods of foreign exchange scarcity, most of the industrial capacity re-mained underutilized. The balance of payments problem was precipitated bydebt service payments due on high cost, medium-term suppliers' credit whichmainly went to finance less productive and inefficient production units.The government's recurrent expenditure, mainly because of rapid proliferationof government ministries and agencies, increased at a rapid rate so thatdespite heavy taxation there was continuous resort to deficit financingwhich intensified pressures on prices (raising them 20 percent per annumduring 1963-65) and accentuated the balance of payment difficulties.

12. The overall performance of the economy during the sixties leftthe per capita income in virtual stagnation. The growth rate of GDP inreal terms (1960 prices) was about 1.7 percent per annum, about the sameas population growth.1/ While total consumption increased at about 3 percent

1/ Ahnsnee of data an GDP by industrial oriain does not allow anv evalua-tion of the growth performance of difference sectors. The discussionin, therefore, restricted tn the 'pmenAft rp cnmnnn,nta of MW.

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per annum, government consumption increased at a much faster rate (about 10percent a year) than private consumption which grew by only about 2 percentper annum in real terms. The ratios of gross domestic capital formation anddomestic savings to GDP which were quite high during the first half of thesixties, declined from about 23-26 percent at the beginning of the decadeto about 14-15 percent in 1970. High levels of gross domestic savings andinvestment, particularly up to 1966 when they were about 20 percent of GDP,would probably have resulted in better economic performance if a consider-able part of investment had not been channelled into capital intensive, lowyielding and over-sized investment projects established without properlyexecuted feasibility studies. More than fifty percent of total investmentduring 1961-66 was undertaken by the public sector. The government's deepinvolvement in agriculture, industry, trading and social services not onlyclaimed a large amount of financial resources, it also severely taxed theenergies of the management cadre and resulted in poor overall performance.

13. Although the severe economic and financial crisis of 1966 was pre-cipitated and compounded by the fall in cocoa prices, it was a direct resultof the particular structure and methods of the development efforts in thepreceding years. Firstly, under the pressure of the development effort,with increasing focus on central control, the number of ministries almosttripled and the number of specialized agencies grew close to 100. Parallel-ing the proliferation of agencies and staff, there was fairly rapid reassign-ment of functions and staffs between these agencies which severely affectedcivil service morale and deteriorated coordinated economic and financialplanning and control.l/

14. The fact that the government's development program continueddespite staff and organizational limitations was due to the increasingrecourse to supplier's credit projects implemented on a 'turn-key' basis.In many cases, decisions were made at the highest level of government toimplement projects without any feasibility studies. In these circumstances,orders of priority, systematic planning and the prosDects for obtainingproductive results from projects virtually disappeared.

15. In general, the development effort was on the one hand orientedtowards gaining increased control over the economv and on the other handtowards achieving economic growth by the introduction on a large scale ofmodern methods of production which in many cases resulted in over-sizedenterprises with underutilized capacity, even on the most optimistic assump-tions of likely demand in chana. In most cases. especiallv in mechanizedfarming and industry, it called for complementing supplies of staff,

1/ The full extent of the balance of payments crisis was not known untillate 1965 because, inter alia, no single agency had a complete inventoryof the rapidly growing external debt obligations. I.B.R.D. Stabiliza-tion and Development in Ghana, March 14, 1967, pp. 3.4.

-4-

materials and other inputs that were not and, given training and deilverydelays, could not be made available when required. Thus Ghana had thousandsor tractor-plowed acres with no improved seeds for high value crops; sugarrefineries and vegetable and meat canneries without raw materials and manymanufacturing enterprises depending too heavily on imported spares andmaterial inputs which could not be readily and regularly supplied.

16. This is not to deny that, in some respects, the results of thedevelopment efforts were not only satistactory but also impressive. Exten-sive education and health facilities were provided, even though they werenot adequately related to the general requirements of the economy. Thecompletion of the Volta River Project - at costs significantly below theoriginal estimates, has provided ample and cheap electricity. The con-struction of a large and modern port at Tema has fulfilled the need foradditional port facilities and will meet traffic expansion for a long timeto come. The extensive road network was in fairly good condition. On thewhole, however, there is no doubt that with a more diversified developmenteffort properly reflecting the resource endowment; needs and limitation ofthe economy and with greater attention to project preparation, executionand financing, much better results could have been obtained from smallerexpenditures. The government's increasing eftort to foster and controlinvestment did not produce returns commensurate with the size of investment,nor did it compensate for the reduction in private investment. All in all,the growing balance of payments constraint and debt-burden, declining domes-tic savings and rapidly increasing prices, poor management and a lack ofbalance in the development of the economy together with rapid populationgrowth ultimately resulted in the economic, financial and political crisisof 1966.

17. Between February 1966 and mid-1968, the National Liberation Councilmanaged the Ghanaian economy without the guidance of a formal developmentplan. The dimensions of the economic and financial problems inherited bythe new regime were such that deflation and retrenchment were unavoidable.As a result of stabilization efforts, gross investment dropped by about onethird between 1965 and 1967. It appears that the reduction in capital for-mation applied about equally to the public and private sectors. It is es-timated that public sector investment which had tripled between 1957 and1965, was reduced in each of the fiscal years 1967 through 1969 to lessthan half its 1966 level. The government strategy was directed at theproductive utilization of past investment, and new investment was authorizedonly for necessary complements to existing capacity and for essential pro-grams in agriculture and infrastructure. In order to stem the rising un-employment which was aggravated by the 1966 austerity measures, some employ-ment creating programs were also maintained or expanded. In retrospect,this strategy worked fairly well; performance in the public sector improvedand onnortunities for exnandin2 government investment started slowly emerz-ing again.

- 5 -

18. In contrast, the private sector which was thoroughly neglectedand somewhat suppressed during the Seven-Year Plan period and was expectedto fill some of the gaD left bv retrenchment of the nublic sector. did notrevive during the stabilization period. The main reason seems to be thatimnorts fell far short of what was ronsidprAd a deairahle level and inallocating scarce foreign exchange, the government had to curtail importsfor private investment As well. Thun the nrivate sectnr; thnorth emo.rIei.--ing some improvement, notably in transportation and the timber industry,emerged from the atabilization period not apnrechablv stronger than it-

was in 1966. This is also reflected in the inflow of new foreign privatecanltal whIc-h wan on na alpe much helnw general exvnec'tAtinnQ The oveanll

growth of the economy during 1966-68 was, therefore, severely constrained,MTP only shnwino a 1 ner'ent avernag nnnual growth This wan principallydue to the drastic reduction in domestic capital formation from about 22perent of GDP in 1966 to 12 percent in 1968 and to iunfarorable weatherconditions during the later year. However, price increases during 1966-68decelerated-" A 8percer.t per anntn c^pared w4-h a 20 average an,ualincrease during the previous three years.

After the stabilization period, the government initiated a morealsto emo.ati develop,menht efor by. p:epinD a Two--YeVa:. fn..alonmn,.a Dia

covering the period mid-1968 to mid-1970. This was formulated by the newprlannin5g mahine-ry established by .h1e govemrnmren. ir. the fo-rm ofl plann4ngunits in the ministries and planning committees in the regions. TheCernt-r.il Planning an r I_-.y 4.t.... _ ,. _ ASAAA4J._

v^-i J. S .LQJA ^&L.Lfl& -Dit&.. LWj.L y-~ S~ L~U bUZL 4LLL&A.L0 LA VLA. "L.WJI.VJUJ.L L. ~1ML A. .a

provided the guidance, coordination and liaison. The Plan was essentiallyAudes ign.ed to st eer thLLe L LU L JroUm stabliza".on tu d

20. TLe pr'ncipal objectives of the Plan, were:

(a) to lay the foundation fLor se'lf-sUustaillilig grcwth;J

(D) to reduce the high level of Unempl0yment and cnecK tuerate of migration to the cities;

(c) to improve the rate of growth of national income througha sustain.-ed higI rate ofJ Ude-velU-jmenLr, well-balced

between sectors;

(d) to achieve a more equitable distribution of incomebetween regions and between persons and in particularpromote rural development;

(ce) to diversify the export base of the economy and ultimatelyreduce the country's dependence on foreign aid.

21. winle enunciating tne broad oDjectives and goals, the Governmentalso recognized the existence of several constraints such as the acutescarcity of foreign exchange, low saving and investment rates, high rateof population growth; high level of unemployment and under-employment,

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snortage or nignly skiiled laDor, tne large si' - of foreign indebtednesso4 the country, the extreme dependence on higLJ'> volatile export incomefrom cocoa, an appreciabie degree of under-utilization and redundancy insome investments, a stagnant agriculture and over-centralization of thedecision-making process as well as neglect of the private sector.

22 . -r-ne establishment of major objectives and recognition of theprinicipal constraints determined the broad lines of the strategy thatthe government announced on the following lines:

23. The government decided to accord highest priority to agriculturebecause of its strategic role as a potential source of additional exports,food and industrial raw materials and employment, and as a means of re-ducing disparities in income and of slowing down the drift to the town.

24. Within the industrial sector, priority was given to utilizationof existing capacity coupled with greater encouragement to small and mediumscale industries.

25. In the infrastructure sector, emphasis was placed on expandingthe feeder road program as an aid to agricultural production and processing,witlh provision for fully adequate maintenance facilities to be carried outwith labor intensive methods.

26. In the foreign sector, the principal elements of the developmentstrategv were to promote economic export possibilities, to improve importlicensing, and to reduce trade credits and short-term debts.

?7, In the fiscal sector the main strategy was to ensure adequatelevels of public savings, effective use of national resources with dueconsideration to income distribution.

28. The overall growth of the economy during the two year plan periodwas very close to the Plan targets - 4-5 percent a year growth in realGDP, and was a marked improvement over previous years. Output of theindustrial sector - including manufacturing, electricity! fuel, construc-tion and mining - increased by about 11 percent over the two year period.While the Plan was sliShtlv underfulfilled in total manufacturinz. thegrowth rate realized constituted a major improvement on past perfromance.W1t-iin t-he intidstrial secf-tor; electricitv and fuel exceeded the Plan targets.Exports of manufactured goods, largely aluminum ingots, also increased.

29. The output of the agriculture sector probably fell short of the5.5 percent growth target for 1967-69 period covered by the plan. This wasreflected in the continued importation of agricultural commodities on a.Large scaLe a.d the shlLarp upward movement. in prices of local foods tu.The poor performance of the agricultural sector was mainly due to except-ionally heavy rai.-s 'n 1968 and stringent bgdgetary retrenchments reducingthe allocation to agriculture. In addition, the agriculture sector hasmany structural problems which U5st be tackled before satisfactory s-ustained

-7-

growth can be exnected. The minh needed imnrovements in the agrirultiresector, despite top priority in the Plan, remained unrealized. Cocoa outputin 19R/68 fell hv nh1-tt- 7 percent but in 1969/70 increased by about 15 per-cent compared with a target growth rate of 5 percent per annum.

30. The construction sector also achieved only a marginal increasein output. .mentamtiOn f housie4n progra-S, epil b -*4---4n -_I-o

Housing and Tema Development Corporations, fell short of the Plan targets,nartl-y a -esult of l1ack of fur.ds.

31. In the .,4ining sector, production in all brnches declined 4n both1968 and 1969, the sharpest decline being in manganese and bauxite output.Output 4n rr4ning decreased by about 1.7 percent compared with a target

growth rate of 5 percent per annum.

32. The ratio of gross domestic investment to GDP in 1968-69 wasaroundLU 12 percent -WIic II wa.s some-WhLat IDeU1W- tLhe p J-L Oj LLL ofe thLe Pr Lart

but the savings ratio declined from 12.5 percent in 1968 to 11.3 percentin 197U6 i.Ltead ofL iLncreas'Lng to 15.5 percent as erLv'Lsageu ii tile Plan.Inadequate savings clearly pose a threat to future growth. One contributingfLactor was the continued rise in the level or both private and public con-sumption which exceeded the Plan limits. Whereas the Two-Year Plan projectedan increase in real consumption of about 9 percent, it is estimated thattotal consumption rose by 11.6 percent.

33. The increase in recurrent expenditure in excess of the Planprojection was due mainly to the implementation of civil service reformsfollowing the Mills-Odoi report. Capital receipts also fell short of Planprojections, particularly receipts of foreign aid. The shortfall in bothinternal and external funds resulted in much lower than projected levels ofcapital expenditure. As regards price movements, the Two-Year Plan projecteda price increase of only 4 percent. By contrast, the Consumer price indexincreased by nearly 16 percent over the 1967-69 period.

34. The Government also failed to introduce adequate measures toimprove the licensing system, to reduce trade credits or short-term debtand to promote exports as announced in the Two-Year Development Plan.

35. The New Civilian Government which came into power in the fall of1969 produced a One-Year Development Plan covering the period July 1970 toJune 1971. This plan concentrated largely on the public sector and itscontents were closely related to the 1970/71 Budget. Just as the previousTwo-Year Development Plan, this Plan again recognized the failure of theeconomy to achieve or sustain a high rate of growth mainly due to lowsavings and high consumption rates as well as the almost complete stagna-tion of the agricultural sector. The Plan, therefore, accorded highestpriority to increasing agricultural production including the improvement ofGhana's competitive position among world cocoa producers. The Plan soughtto apply better technology to achieve increases in the production of food

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particularly sugar, rice, livestock and other agricultural crops along withsubstantial improvement in the efficiency of the existing marketine andtransport system.

36. The industrial sector was assumed to make a substantial contri-bution in the short run by a further increase in the use of existinQ in-stalled capacity through adequate increases in raw materials. It was alsorecognized that incentives must be provided for export as a means of In-creasing production and foreign exchange earnings through a system of priceincentives to exporters and a simDlification of the administrative nrorpdutreto control foreign exchange transactions.

37. Total Gross Domestic Produce (GDP) during the Plan period wasprolected to arow between 3.5 nercent and 5.0 nerrent with the follnwingassociated sectoral growth rates:

PLANNED SECTORAL GROWTH RATES 1970/71

Sectors Growth RatesLow High

Agriculture and forestry 3.0 4.0

Cocoa 1.0 3.0

Fising 5.0 7.0

Mining -1.0 2.0

Construction 5.0 7.0

Manufacturing 10.0 15.0

Fuel and Electricity 5.0 7.0

Services 3.0 4.0

TOTAL GDP 3.5 5.0

Mi--Year Plan Evaluation

38. Lack of data on GDP by industrial origin does not permit an evalu-ation of the specific growth targets for the different sectors. While itis too early to expect GD? estimates for the fiscal year 1970/71, someevidence of the nature of economic activity during 1970 can be found in thepreliminary statistics now available on GDP by expenditure. According tothese estimates, real GDP in 1970 increased at a rate of 4.2 percent, aslightly higher growth than in 1969 and appears well within the Plan target.

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Private consumption in real terms increased by about 3.5 percent during 1970again within the Plan target of 3.0 percent to 4.5 percent. Government con-sumption is reported to have increased by about 12 percent compared with thePlan target of 3.0 percent. This figure is, however, subject to seriousdoubt because the implicit price deflator shows an implausible decline.Nevertheless, it is quite likely that Government consumption increased atalmost double the rate of growth of private consumption. The One Year Planenvisaged a slight increase in domestic savings, but provisional figuresshow that cross domestic savings in real terms declined by about 3.6 percentduring 1970. This lends support to the general impression that governmentconsumption must have increased at a rate substantially more than the targetgrowth rate but perhaps less than the provisional figures show. The One-YearPlan also expected fixed investment to rise from 10.6 percent of GDP in1969/70 to 12.4 percent of GDP in 1970/71 a growth rate of about 23 percent.It now apDears that the investment erowth was nrohablv about half of thisrate. This estimate again is subject to revision because there seem to bediscrepancies between the growth of imnorted ranital enuipment and grossfixed investment.

39. In constant 1960 prices, the value of exports of goods and non-faictnr .sPrvir-Pq inrrpn.Rd hv 6-3 nprcent duzr"ing 1Q7n hbut tha i_n1iul nf im-ports of goods and non-factor services increased by about 14 percent, atleast doubhlp thp imnort grrwth exnected in tho Plan period.

40. On the fiscal side, the principal ob4ectives were to substantiallyraise development expenditures, contain recurrent expenditure and raise govern-mDnt revenues. Wh.ile there is no doubt that m-any of the specifictagtsothe Pan are not likely to be realized, the government introduced with thisnl an a number of ne. obJectives and polic ^-i h4 -e S 4- canpp-ar t4o I.e 4ir t- 4he ri4 ht

direction.

41. The 1970/71 Budget aimed at restricting the growth of governmentcurrent expenditure t1-o about- 4 percent. Gi.1ven the built-in elasticity oft~LL .LLU ~ UUL Ut~ 'A"JUL 1 ~'~L t.~'ALLL * t.L L.I L LL U U.LLL.L J. LL..ILy WIJ

such expenditure, 4 percent was a difficult target to achieve. The growthof recurrent expenditure was in fact in line with the trend rate of 7=8percent which has prevailed in recent years. The declining trend in govern-m..nt develop..ent expen A4ture was also to be correctedA 4n t-1,e 107n/71 BuAdget.

and preliminary estimates suggest that the budget outturn will show an in-crease of about 20f' percent in -le level of' expend"ture (No 90 milli1.on inti. ~~~~~~~~~ tJL ~~~~~~~~~~LJt,UL~~~~~~~~~ LU u jiv L .1 .Li L11L ~ ± V L I 2pLU.L LUL v ,iJ 7tJ I.LJL.L.L±LI

1969/70) with significant increases in expenditure on agriculture ser-v.1ces, feeder roads anA rura IdAevelopm,ents. Tn 107n, t-he --veu"%ent

.L A. u L L U U ~IU I' L GB LJA 1.t, AIL . JI B I F. UL 5

t .SAw*

also introduced measures for import liberalization, removing about 50 per-_ _- J c . _ _ J C___. _ J 11c___ 1 4____w__ _ _ J__ - - - - - - _- - - A _ _J _ __t

LcentL. L LIt JAII{VULL U_1_ LLUILI _,_Ib_ILr Kt94UL8lIIL!l[Lb dfLU xILU5I._Ing imporU

surcharges ranging from 5 to 125 percent. On the export side, the govern-m.ent i,ntends to si,impli fy existing tax incentives sucn as rebate of incometax and refund of indirect taxes. In addition, an export subsidy scheme haseen iLntroduced granting a subsidy to exporters of 25 percent of the gross

export value of all non-traditional exports.

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III. PRINCIPAL P-KOBLEMS OF DEVELOPMENAT.

i) General and Social Sectors:

42. Ghana's development strategy for the coming years can only bemapped out after a clear recognition of the basic problems which have createdthe present difficult situation. Some of the more important problems and thebroad lines of policy strategy in different areas are highlighted below.

(a) Unemployment

43. A serious unemployment problem exists. During the stabilizationperiod about 80,000 workers from the public sector were added to the un-employed labor force. Activities in the private sector were also affectedduring this period. In subsequent years the growth of the economy was suchthat it did not relieve the unemployment situation. The major impact onthis problem must come from expanded activities in the private sector wherethe potential for gainful employment exists and must be exploited.

44. In addition to introducing appropriate changes in the existingeducational system, improvement in employment opportunities must be con-ceived within a broad approach involving agriculture, industry, commerce,construction, transportation, etc. For example, agricultural developmentpolicies should generally further small holder farming with relatively un-mechanized but improved agricultural techniques coupled with adequate credit,marketing, and prices stabilization arrangements for handling resulting in-creases in production. For large scale farming operation, it would be de-sirable to concentrate on those activities which are inherently labor inten-sive such as cotton, rubber, sugar, etc. Similarly, on feeder road construc-tion and maintenance, a lighter type of equipment would increase laborparticipation without sacrifice provided adequate supervision is available.Also any reduction in the foreign exchange component of construction throughappropriate incentives, tax measures and research would loosen the foreignexchange constraint and raise demand for construction which could accommodatesubstantial numbers of workers.

(b) Education

45. Even the limited information that is now available reveals quiteclearly that the education system needs significant change to mitigate un-employment pressures by providing the right kind of education to meet theskilled mannower renuirements of the economv. The skill level of the laborforce as a whole is low even within organized industry and calls for wideeffortsif to-n uincrarde the ntialit-v of labnor The cou_ntry annpear to he hanndi-

capped by the lack of trained teachers to achieve this objective. Inad4dtion the rnost nf the lanat-hv educationn nornrc tha hoarding and1 non-~..h--------teaching staff expenditures and the recurrent expenditure on education ingeneral and unduly low fees, all need reappraisal and rationalization. Asa first step, the government has already raised the charge for books insecondary schools, announceA restriction of scholarships to students ofexceptional merit and initiated a student loan scheme.

(c) Health

46. The availability of adequate health facilities is basic to the

development of a more productive population. Ghana faces a number of pro-

blems in this area. Existing health facilities in cities are far better

than in rural areas where almost 80 percent of the population lives. Since

present expenditure for development determines future recurrent expenditure,

there is a danger that the rural/urban disparity in the pattern of health

expenditures will tend to nersist if not corrected. Within the framework

of giving overall high priority to agriculture and rural development, a

stronc case exists for the speedy develonment of health posts. The govern-

ment's strategy should therefore be to multiply health posts and adopt anlncentive system including pay differentials, promotions etc. to reduce

the unwillingness of medical personnel to move to rural areas. The health

posts could also be equipped to serve as information and material dispensing

units for family planning.

47. Malaria is another major health problem in Ghana which affects

output and productivity very seriously. The government's short-termstrategy should be to expand spraying and extend patient treatment. In

the long run, however, control of malaria will require concerted regionalcooperation with neighboring countries and it would be desirable if Ghanatook the initiative in collaborating wlth WHO to set un a ioint regionaleffort for the eradication of malaria.

(d) Housing

48. The country's urban housing is faced with a major gap betweenthe rate of construction of new houses anid the housing needs of a rapidly

increasing urban population. Since it is the low and middle income groupsthat are most affected, a major effort on the production of low costhousing is required. With some increase in the capacity and efficiency ofthe construction Lndustry such a strategy is quite feasible if publicsector efforts are reinforced with incentives in the private sector. TheState '1ousing Corporation, Tema Develonpment Cornoration; as well as municiDal

and local authorities should construct the low/medium priced houses and offertheer. on a rental purchase basis or charge a sufficiently economic rent so

that previous investments will be recouped and will be available for re-

investment in new housing projects. The government should also encourngeviable house building societies and cooperatives, and induce banks and

insurance compan'ies to provvide mortgages. The Department of Architectureat the Uiversity of Kumasi has developed several prototypes with an aver-age cost of less tnan 'l 1500 per unirt. Tf the s-rle u-nits …rove attrac-

tive, their production should be intensified. In addition, the governmentmust provide maximum help to research bodies to substitute iuIorted con-struction materials with indigenous supplies.

49. Housing in rural areas is low in structural quality. In additionto providing moderate loans (around N; 700=800) as a part of Roof Loan Schemesso that properly planned communities develop, the government should concen-

trate on providing technical aid and better quality local materials.

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50. Finally, the government strategy in the long run should be todevelop a national housing plan covering urban and rural areas, and toachieve coordination and cohesiveness among the various agencies dealingwith construction, financing and research.

ii) Productive and Economic Sectors

(a) Cocoa

51. Cocoa has been the mainstay of the Ghanaian economy both in termsof export earnings and government revenue. Ghana has so far failed todevelop alternative exports. Ghana's share in world cocoa exports hasdeclined over recent years from about 36-37 percent in 1966-68 to about29-30 percent in 1970. An important question is whether Ghana's strategyshould be to maintain the present share or try to retrieve a part of thelost share. Another associated problem is that since 1960/61 cocoa farmers'real income has fallen and in 1969/70 was only about 60 percent of the1960/61 level. In order to give the necessary impetus to cocoa production,it will probably be essential to improve upon present levels of real aggregateincome in addition to rehabilitating some old cocoa farms and opening up newareas. Almost no plantings have taken place since 1963. It is estimatedthat the long run price elasticity is sufficiently high to assure that themore cocoa Ghana produces the more foreign exchange she will earn. Ghana'slong run strategy should be to devise policies which avoid wide fluctuationsin output.

(b) Non-Cocoa Agriculture

52. Ghana's agricultural sector in general is neither adequatelydeveloped nor properly organized at present to make a satisfactory con-tribution to the overall development efforts of the economy. Agricul-tural production (outside of cocoa) has not kept pace with the increasein food demand; hence food imports have been increasing rapidly reachinga level of $70-80 million a year and constituting as much as 15-20 percentof the total import bill in recent years. The agricultural sector alsofailed to increase export production to supplement foreign exchange earningsfrom cocoa and made little contribution to the raw material needs of in-dustrv. It is certain that Ghana has the potential for achievine largeincreases in farm output but realizing that potential will require satis-factory derisionR regarding (1) a clear definition of the policies of theMinistry of Agriculture to guide the work of the operating divisions andfipld sqt-aff, (9) an pnnrnnriatP alratinn of resnonsihilIties betweenthe public and private sectors to enable the government to concentrate ona mnnageable range nf activities, (3) willinoness ton uitili7e aitonnomousagencies to handle activities that can be carried out efficiently assepar.ate programs ar.d (4) measures to increase the effecti.teness nf gove-r.-

ment action to develop and disseminate yield increasing innovations byconcentrating or, LLLir .te Ud but Im.portant objectiv s -ar. achirncs

coordination of research, extension and training activities.

- 13 -

53. Another general implication for agricultural strategy is to under-score the great importance of agricultural innovations such as improved seedvarieties and the application of fertilizers which are complementary to theexisting farm resources. Such innovations are likely to produce higherreturns than investment cf scarce capital resources and foreign exchangein mechanical equipment (except perhaps in facilitating the expansion ofrice production or land clearing) which mainly substitute for labor witha relatively low social cost.

54. The more fundamental problem appears to be a failure to establishpriorities and to develop a program for government action based on a reali-stic assessment of resources available or likely to become available. Thisfailure, in turn, has in large part been a result of the lack of clearlydefined policies that would provide a basis for determining priorities andworking out detailed programs consistent with the funds and manpower avail-able for implementation. The most urgent need, therefore, is to establishsuch an order of priorities and formulate a set of consistent policies. Topromote agricultural production, the government's general strategy shouldbe to give due encouragement to the small-holder sector so as to increaseemployment opportunities,. reduce rural-urban migration and economize oncostly capital equipment. The emphasis, should be on labor intensive opera-tion wherever economically and technically feasible and the use of simpleequipment in the production, storage and processing of agricultural com-modities. Ideally, an attempt should be made to adjust the market priceof labor-displacing capital equipment so that its price more accuratelyreflects the opportunity cost of capital and foreign exchange.

55. Some of these problems should perhaps be tackled through strength-ening the Coordination Unit, Economics and Statistics Division and ProjectPreparation and Studies unit in the Ministry of Agriculture as well asthrough the establishment of a nolicy advisory machinerv (drawing exten-sively on the expertise and professional competence of the Faculties ofAericulture at Legon and Kuma,si) to advise on snecific issues of a2ri rUl-tural policy.

56. In the development of agricultural research and extension thegovernment strategv shonuld be to Initially foc on commnoditie for whichincrease in production is of great economic importance and which offernarticular nromise for achievin- gains in productivity.o Amona h.n.a'sfood crops, maize and rice are prime examples; and among livestock beefproduction mnrits special attention. Research should be aimed at the in-troduction, yield testing and selection of the best varieties of rice ormaize for each of the major areas of commoercIal production. An efficientpackage program covering the recommended variety, fertilizer, spacing andp-,ant -rotec-tion should then be reco.JnnenAeA ensuring the availas A414-y ofinputs and trained extension staff at the village level. The establish-ment of close arnd effective workin.g rel ationsh14ps ben,een research, workersand extension staff would be crucial to success. In the case of rice pro-Auct4on, appropriate steps to introduce improved practices for thAreshing,cleaning, milling, grading and handling to increase consumer acceptance sothaltC 'local rlice can replace importeJ rice as rapidly as possible withminimum price discount.

- 14 -

57. The country's goal of general agricultural development would bebest served if larger units with strong managerial capabilities (in bothpublic and private sectors) concentrate increasingly on specialized acti-vities such as seed production and multiplication, production of qualityrice, maize, etc. and production of export crops that require specialmarketing skills and contacts such as rubber and oil palm.

58. In the case of cattle development (e.g. in the Banda-Branam-Wenshi areas of Bong-Alfo) and calf raising (e.g. in the Torgu Districtof the Volta region) the government strategy should be to invest more inextension services, training facilities, demonstration units and improvedpasture and to conduct more detailed studies of the costs and benefitsinvolved.

59. In addition it would be desirable to establish regional develop-ment commissions which could examine the most effective wav of integratingcrop and livestock improvement programs with the obvious needs for improve-ment in rural health; hvgiene. water sunnlvy migration- eduiration; hoisingand improvement in transport and communications.

60. In order to reduce wastage and damage to foodstuff and eliminatehealth risks due to over-crowdine and unsanitarv conditions in the maintowns and cities, a detailed study of existing marketing/transport facilitiesand tf-heir shortrnmings shnuld he institiiuted before a final nol{ey in this

respect is instituted.

(c) Industry

61. As already indicated, a large number of industries establishedduring the sixties were not only too capital intensive and imnort oriented,but were also of a capacity well beyond the country's needs. Thus thecurrent structure of indc trial production, performi-ng mostly end-of-lineassembly activities and depending too heavily on imported inputs, is in-appropri.ate either for producing competitive exports or for substantialeconomic import substitution.

62. In addition, most of the industries were developed under re-.adLtVely lIeadVy tarLdL i pLULrotection andU frequenty unluer total or rtial. a

government ownership. In its anxiety to encourage domestic manufacturing,exempLtions from import duties andLU 'ricomLe tax WVere grLartnted for aL uL of

years to a wide range of industries. As a result, not only revenue fromtariffs and surcharges have declined desp'te the rapid rlse 'n 'mports,but the tariff system has fostered a high cost inefficient industrialstructure and reduced Gnana's international competitive position. Inorder to develop a strategy for the future and to rationalize the existingtariff structure there is a clear need for a detailed review of cases inwhich a significant volume of imports is involved so that an integratedagro-industrial policy is evolved which wouid rapidly encourage the domesticproduction of inputs presently being imported and concessions are linked tofirms likely to achieve progressive economies in domestic operations.

- 15 -

63. ITt is gonerallyv -r'on4vad t$hnt GhnAa' domesatic mnrket 4i tnn

small for a number of existing or potential industries. Ghana's strategyshould be to encourage regional trade so na ( to secure hbettov u,tili-zation of its earning capacity in some existing industries e.g. ship build-ing and repair; steel re-rollin; footwear, fruit-canni, cement, etc. and(b) to achieve a maximum economic market for some feasible new industries

a..^u ,. 1,4 a-.nan ne.rnt*4 n A nitr, n4 DtR a*n

{z^v,A cLosiv& ,s& s nn*aA - 1 er v-as v-m n n..h 4 - vn n r * nn no h4. bi me.L,a------ a _d a, _1. w_ w,IfM

64. AX already noted, a large r...ber of public corp-- orations estab-lished in the sixties had accumulated large losses by the end of 1966 and...-St of th.ese continue to be a drain on public finance. Tncrtat onstate/private or pure private enterprises showed better profitability.n.erever the local or foreign private entrepreneurs --- beA .… to -"&it IV ~ I~L L~ L £L L ~ L L ± L ~ VIL JL CALLU L C t-LIL UPIC 6AJV. WU FJ.Lny

a successful role, the Government strategy in future should be to encouragestate/private oL=L Or pure pLiLVatL uW11t.LZs.hp andU .. r.11 a1t d crL.eMIDLe mULore

on supportive activities. Whatever enterprises remain under public sectoror GInOC control, greater attent'on m-ust be paid to providir.g con.,petentmanagers. The National Investment Bank and Capital Investment Board mustbe encourageu to play a more crucial role in new industrial developmentand to help efficient implementation of projects. In this connection, thehigh degree of uncertalnty about the remittance of profits ana uividendsconstitutes a strong disincentive to interested foreign private investors.

65. In view of the massive investment in industry in the past, Ghana'smedium run strategy in general should be to aim at consolidating and makingmore efficient use of existing capacity. New investment should take placeonly in balancing and modernizing operations as well as correcting, where-ever feasiable, the inappropriate design and location of some past investmentefforts. New industries must be based increasingly on indigenous raw materialsupplies and existing industries should be encouraged to develop local supplies.

66. Some of Ghana's existing mineral resources such as manganese,gold, etc. seem either to have been declining or virtually stagnatingduring recent years. The country's future strategy must concentrate infurther exploring and developing such resources as bauxite, limestone,fish, oil, etc.

(d) Transportation

67. The highway network is adequate to serve traffic demands duringthe coming decade without major expansion. With the existing financial sit-uation, government strategy should be to avoid further construction of majornew roads and to give top priority to restoring the trunk road network,which deteriorated markedly in the 1960's. An IDA credit to help financethe road rehabilitation program is now being processed. Proposed new in-vestment in trunk roads should be scrutinized carefully to avoid commitmentof funds to projects of low economic priority. The continuation of thefeeder and village access road programs, on which substantial resourceshave been expended in recent years, should be based upon careful planning

- 16 -

in the light of rural and agricultural development needs. Special attentionshould be given to the strengthening of the "Ghana Highway Study" office ofthe Public Works Department. The PWD should shortly have thie report on astudy financed by the UK Overseas Development Administration of the organi-zation and of road maintenance operations and maintenance equipment needs.This should serve as the basis for a reorganized maintenance program tosafeguard investment in the road system .

68. Ghana Railways are in a weak financial position. Unfavorabletrack layout obviously accounts for high operating costs but any improvementof the alignment would involve high cost which, at present traffic volumes,would be out of proportion to the benefits that could be obtained. Thegovernment's short-run strategy must be to look for improvement on otherfronts. The government has already taken some steps in this direction.For example, there was an urgent need that ports and railways, whose tech-nical and operational problems are vastly different, should be run underseparate management. It is understood that the government has institutedseparate management procedures. Separation, reinforced with senior executivesof high competence, should permit a better control of operational and fi-ancial performance of both organizations. The tariff structure of the rail-ways, however, is yet to be rationalized. Presently, cocoa rates are nearlyfour times higher than the corresponding full cost; manganese rates are alsowell above full cost whereas bauxite is hauled substantially below cost. Timberrates are more or less in line with costs but a tentative cost allocation byconsultants in 1970 indicated that revenue from passenger trains covered lessthan half of the cost of these services and priority is always given topassenger trains over goods trains. In addition, staffing has been steadilyincreased in spite of a declining transport volume. The general impressionis that while some senior positions are vacant, railways are overstaffedby about 20-30 percent on the whole. If the government gradually tacklesmost of these problems and institutes cost accounting, modern businessmethods and appropriate marketing policies, railway operations in Ghana canbe improved substantially.

69. Like railways, Ghana Airways also appears to be seriously over-staffed and cost accounting is too disorganized to permit proper financialmanagement. There is an urgent need for a general review of Ghana Airwaysoperations. financial status and long-term role and strategv. If its in-ternational operations are carefully scrutinized and serious considerationis given to the ontential gains or lossPR tnvolved; it might hp dpeirableto seek a merger with other airlines. It is understood the government isnlrpndv npontintina with Air Afrirn in thii rpenprt TnmPQt-ir nnPrqtainnR

could be improved with an upward revision of tariffs in line with costs.

70. Similarly in the case of the Black Star Line (BSL), the govern-ment will have to introduce measures to improve performance. The govern-ment strategy should be to set a deadline for subsidizing BSL's debtse-ricing obligations. In addition, no new investment in vessels shouldbe undertaken unless the company can show clearly that these are econo-mically and financ4ally Jus*tifie -an tb.at it would be able to se-,ice -he

- 17 -

f4nancial obligations. For the last four/five years, no corm"rohancivefinancial accounts have been published by the company. These accounts..ust be brought up-to-date gm aatter of high priority to eavise appro-

priate policies.

(e) Electric Power

71. As w- ra l.ways and- a -.- ays, tfe Ele-4trcty .otn

Ghana (FCCG) and the Volta River Authority (VRA) suffer from inadequatesenio sAf _ _il;se J1t _ _ at4v. _ _e sam #U 4MW sinficn 4mr-O-afn exiStS atOSL&LLJL OL I.tX WA LI. ..L L C0 L L1~aiu& L.LII X±~I I l;Dr^Xt^-U. DLOL IJV |L * XL0, ^ LLL W 0 a- 0i.

the lower levels. Both ECG and VRA should move toward rationalization ofthleir asttaffing- requ"irem,er.ts. A cor.solidation of thee pMer sector through

a merger of ECG's and VRA's operations should be seriously considered bythile GovernLient priJarilly to increase the efficiency ofj the sector th.. LroughLthe elimination of presently similar but separate services and throughtiole more eiLc'le use ofL'LImiLtedU 'LocaL uanagegizent capablLLtLes. A mergerof the two organizations would, through the elimination of inter-agencyb'illings, al;low a more equitable distribution of total net incorUU be.Wtenthe generation and distribution aspects and thus lead to a more rationaltariff structure and tarirI levels.

iii) Public Finance

(a) Recurrent Expenditure

72. Government consumption which increased gradually from 1961-65,accelerated sharply during 1966-68. As a result, the share of governmentconsumption (including debt service payments) in GDP increased from about11 percent in 1961 to 18 percent in 1969/70. While there is no doubt thatsome extraordinary factors such as increased debt service, new salary struc-tures, impact of social security schemes initiated in 1965 and the devalu-ation of the cedi in 1967 were responsible for some of the increases inrecurrent expenditure in the second half of the nixtien, the trend erowthrate excluding most of these factors was nevertheless around 7-8 percentper annum. One of the mont erurlal nrnhlemn facing the t-n-ntrv at nrpeent

is to restrain the fast growth in government current expenditure.

73. The government strategy should be to limit the growth of recurrentexpenditure (excluding debt service) to about 4-5 percent per annum. Enforc-ing this would require treezing the level of public employment and an almostcomplete freeze on the overall real purchases of goods and services by thegovernment. This general expenditure strategy should be applied not onlyto government departments but also to educational and other public institu-tions which rely so heavily on the government budget for subventions andgrants. In order to enforce expenditure discipline, the government may haveto severely restrict the approval of supplementary grants. At the same time,the government should speed up the work of the recently established committeereexamining the indebtedness of government departments and corporations sothat proposals may be made for future limitation and control of expenditurenot specifically provided for in the annual budget.

74 The governm ent strategy in sa ould be to udertake comprehensive examination of the "growth corridors" of recurrent expendi-ture which appear to be education, defense, general administration, in=ternal administration and health. In the latest budget the government hasalread- reduced defense expenditures andu comm,issionL1e d -omrhrsv -reports-4

on health and.JL ~ educaUtio exenLltO.L V Lu_eL-

on health and education expenditures.

- 18 -

(b) Capital Expenditure

75. There was a sharp increase in government investment expenditureduring the first half of the sixties - rising from Ne 90 million in 1961to Ne 142 million in 1965. Between 1966-68, the level of capital expendi-ture declined markedly but picked up again in 1969/70 and 1970/71. Therelatively large capital expenditure in the early sixties must be viewedin the context of the fast growing public sector and the growing losses ofthe state enterprises. The decline in capital expenditure from No 140 mil-lion in 1965/66 to No 65 million in 1968/69 was the result of the govern-ment's policy of consolidating past investment and improving the produc-tivity of already existing capacity. New investments were few and wereauthorized only for necessary complements to existing capacity and foressential programs in agriculture and infrastructure.

76. The relatively slow growth in government capital expenditureafter the consolidation and stabilization period was in the main due toinadequate proiect preparation and lack of sufficient foreign exchange.In many cases, the public works department's failure to prepare the drawingsand documents, site selection and land acquisition, the contractor's in-ability to accomplish the work as well as the long and complicated tenderprocedure were also responsible for slow growth in capital expenditure.

77. Government stratesv in the medium run must be not only to increasethe rate of growth of capital expenditure in line with the growth potentialof the country but also to improve the composition of capital expenditure sothat development expenditure (economic and social sectors) rises faster thanthe canital exnenditure of the administrative and defense sectors. Most ofthe capital expenditure on administrative and defense sectors goes to financeoffice hbildings; hostels and staff hungalows- nurchases of minor eauipment;purchases of vehicles, etc., all of which is not necessarily of a 'priority'character and needs to h thoroughly srrtiani zed. Tn the mnre produrtivesectors such as agriculture and industry, the government strategy should beto acrfulvtp annd ftreamlinp the pennrtinns of t-hp Agriuiilt-iira1 DPUelopmentBank and the National Investment Board.

78. The declining dependence of state enterprises on the budget is awelc0m. 0 development. The Avernf nt strateoy during the nxOt fe -e2ars

should be to work off the losses of sugar factories, gold mining and otherstate en.terprises - A give the necessary fillip to profttmaking enterprisesunder GIHOC. It might also be worthwile to examine the possibilities ofgenerating so..e revenue from govefmentf invest ment in he4altCha -d edu.ation.

In general, the government nust urgently improve its own planning and projectpreparatLon.

( c) t-ove rn-urtent Rev -enue

79. Tne governemn ts tax revenue doubled between 19761 anuA 197UJ

there was a sharp decline in 1966 and a slow increase in 1967 and 1968 sothat in 1968, the absolute le7el of tax revenue was about Lhe same as'u

- 19 -

1965. As a result, the tax/GNP ratio which increased from 12.3 in 1961to 15.5 in 1965, declined to 11.5 in 1966 and improved to 13-14 in 1969/70.Taxes on foreign trade continue to dominate the tax structure. Cocoa re-venue which declined at a rate of 10 percent per annum between 1961-65,increased from NO 15 million in 1966 to NC 112 million in 1969/70 mainlydue to increased cocoa prices. Non-cocoa revenue increased at an annualaverage rate of 16.5 percent during 1961-65 and 5 percent during 1966-1969/70. As a result of divergent movements in tax revenue and currentdevelopment expenditure trends, the level of public savings which increasedgradually between 1961-65 (and financed about 43-45 percent of governmentinvestment during 1964-66) declined sharnlv in 1967 and was actually nega-tive in 1968.

80. The military government in 1966 reduced the tax burden by raisingthe exemptlon limit for incomP tax, rreduIrng ePrtain incnmP tAw rxar:

abolishing urban property tax, capital gains tax and estate duty, andreducing the rate of withholding tax on InrpIatri ated finrnfits and several

indirect taxes.

81. The present government faces the difficult task of meeting thedlPmnndla nf rnnidlv rv-qinc rpt-irr*,nt- tnn4 A.uvlnnpmnt Sawnpindtff,,ac wit-h a

substantially diminished tax base.

82. Buoyant cocoa revenue, on which the government relied so heavilyin 1969-70 an.d 1970/71, Is unlikely for the future partly due to fallingcocoa prices and partly due to rising costs of the Cocoa Marketing Board.

83. The government strategy in the medium term should be to supple-ment the declining share of nonoa rev,.renue- with. n0n-cocoa taxes and to

orient the tax structure to the economic development needs of the economy.Cocoa taxatior. lt sellf needs rationalization.wi, wlth. re g ard lto production itn=

centives and Marketing Board costs. Imports by the Public sector, certainorganizations ar.dU persor.s hAave rendueredu alm.ost yr=30 percent of the iminportbill tax exempt and contributed to the gradual reduction of the averageburden of i.port duty. T.he need fo- refo-r. in the J.,ort Auty w re-cognized and as a first step all government imports have become subjectt1o i.-.port, taxes in the 10971./72 budget. q.he -- 4-- -14-c issues *t -prsna

income taxation relate to the 'inadequacy' of the income tax rate structure,tax exe..ptlons of farm incoms. an.d Iax evasion Luy s.mall. business and traders.The built-in elasticity of Ghana's non-cocoa tax structure (1970/71) doesnot appear to be very high but some improiem.,ent appears to have taken placein 1971/72.

84. If development expenditure in the medium and long-run is not tosuffer thle governmIent strategy should ob.U viousVLuy concentrate on reducAing

the growth of government recurrent expenditure well below the growth ofGNPir aniu siri-ultaneousIry to strCen8;h01-ICen a.ad iL,LPLVoVe Lthe UU.LtL-i.Ln eLL.LatLiy

of the non-cocoa tax structure with respect to GNP. Otherwise, continuedrecourse to increasei UomestLc andU external borruw-ing woulu JeopardLze long

term development programs and create serious financial problems.

- 20 -

(d) Balance of Payments and External Debt

85. During 1962-65, the gap on goods and services account increasedfniir-fnld frnmn ahout /LQ mnllion t-o ahniit $186 million This wac the

direct result of policies designed to encourage rapid industrializationfinqnrt-ep hv exte-nsQve hnrrro.incg nhrnnd raislng imports by about 50 percentduring this period, and a neglect of exports. In 1965, the current accountdeficit (trade gap plus net investment- rpecints qnd net transfers ahroad)reached a peak level of $226 million or about two-thirds of export receiptsin that vyer The prodinr of cstnhab4I1ition that fol1ed, r c,1 the tradegap from $185 million in 1965 to zero in 1969 and the current accountdeficit from. $226 . 4114on in 1965 to about $50 million in 1969 which wasabout 1/8th of total export receipts in that year. However, this reversalin the t-rnAd qndA u,vrrent- a unts n t-he scoDnA half nf t-ha asixt-4i a

achieved almost exclusively by a sharp reduction in imports rather thanany acceleration of ex o wh4oh Incr s only 2 percnt f _4m

during 1965-69. A very good cocoa year in 1970 increased exports of goodsby aboua 22 per.ent but ir..ports also wer.t up by about 17 percent, so thatL

even in 1970 there was a current account deficit of about $27 million.

86. In the face of stagnating export earnings during the first halfof the sixties, Chana drew down its considerable reserves ($480 millIon in1957) and contracted some $500 million in external debt. The utilizationof these funds in 1960=66 contributed little too ar.a's export capaci--.The industries established with part of these credits still depend heavilyon imports of raw ,m,aterials a..d components. ASpite heavry c.apital 1i-'ports,the phenomenon of stagnating exports forced Ghana to intensify import re-strictions. T^>ring 1966-69, long=terml assistar,ce, relief of part of

0 LL.LL.LSLLO JU L.LL I7 vu'JU , 9 SL~CIS000LAL~L4L Lu. 1 JL.LL

external debt service and a 30 percent devaluation made possible a consi-d2erable relaxation of 'ru-port controls. S-- .1-usatly increasd cocoCL~UJL L ±ALL1 ] LUL LLLLL L ..)± * OULJ0 LdCIL±.LCtL.y &LILUL1_L..-U L;UI..0d

export earnings in 1970, gave Ghana a further opportunity to liberalizeirimports. *about 5J0V perLcet o imuports were removedu fromL i±Lcenis'ng requ'Lre-ments and made subject to import surcharges ranging from S to 125 percent.

87. The present balance of payments position is hampered by very lowreserves (negative if account is taken of VrTr obligations), relativelyheavy short-term debt and other debt servicing obligations, prospects ofonly moderate growth (about 3.5 percent) in cocoa earnings wnicn accountfor about two-thirds of total exports and a near stagnation of other tradi-tional exports such as timber, gold, manganese, diamonds etc.

88. It is quite 6bvious that imports have to be cut back sharply.This has to be achieved with a minimum disruption of development and employ-ment objectives. In the medium and long run, the basic solution to Ghana'sbalance of payment lies in export-led development efforts supplemented withspeedy replacement of imported food, raw materials and consumer goods throughprogressive economic import substitution and domestic production.

89. In view of the only moderate growth expected in Ghana's receiptsfrom cocoa and the seriously eroded base of other traditional exports, thegeneral strategy must be to foster exports of various agriculture commodities

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such aq rubber, eonra or rocontit oil casheB nuts, ground nut, c-offee palmoil, fresh and processed fruits and cassava products. In addition, stepsshoildl hp takpn to fmnrnvp nprfnrmanrp of trdr1tional Pennrt. hv raisina

the standards of management in the gold mining, timber and diamond industriesa__Q well aQ imnroved selling nprfnrmmance of the rnrnn Marketing Board. E "orts

of bauxite and derived products also hold out promise for export earnings,annr ,cert-ain manuifa-tuired e-onnamr gos e-nr alon hga averte,A to nelghrin

countries if adequate incentives are offered. The government's decision tosimnlify t-he am4nat-I atAnn of a-rist-4in t-ax 4ncnt-i4zsa ndrA a'--n exportsubsidy of 25 percent on non-traditional exports may help stimulate some ofthese exports but these measures mus tbe per40dically rev i='ed to improvethe export performance of the economy.

90. To supplement its own export earnings, the government must alsoseek to -ttract a foreign capital infl^w in. the for". of long-term dev,elopmen.aid, limit the cost of external debt servicing and encourage direct foreigninvest..ment. Chana will. have to exer.ci5se great cautlon in increasing iCtsexternal debt, even though a substantial capital inflow is essential to anysustained dlevellop..ent- eftfort. Its- strategy shouldI b1e to attract miost of ` scapital inflows on concessionary terms because the already heavy debt burden,we '11 reserve position a.d1 heav,y duependlence on coco-a ex-portUs woldoteris

raise the future debt burden disproportionately. The objective of securingan iLncreasedU capiLtaCl nilw requires a well-conceived development prograr.Land consistent set of policies, backed up with a comprehensive list of ade-quate'Ly prepLaeu pLuJoects, LU ub Lrv'Lseu aLU uJu'ateu' perLouu"LcaLCJ WILl UUeconsideration to speedy implementation of the projects.

91. Even though Ghana's home market for many products is small, it willattract more direct foreign investment, if the restrictions on remittancesof profits and dividends of foreign investors and the uncertainties surround-ing these restrictions are minimised. Tne 1971/72 has announced guaranteedimmediate remittance of profits and dividends earned during the current yearif a 25 percent service c'narge is paid on the remittances. Similarly, avoid-ance of further payments arrears would improve Ghana's commercial creditstandulng and Lfaci±lLtate a shlft away froUm the c0U8ly I1O-dUay iLUIPUL CKeCU.Lsystem.

92. The present overall short-term financial position is an obstacleto more rational management or hne economy and a strengthening of Ghana'scredit standing. Less short-term debt and higher reserves would facilitatemaintenance of a system of import management more compatiDie with hnana'sadministrative and managerial capacity. Ghana is currently engaged in exten-sive discussions with the Dsr and other creditor countries for possiblesolutions to the short-term debt problem.

93. It has already been stated that a speedy replacement of imported~~~~~~~~~~~~~~~~~~. . I .food, some raw-materials and consumer goods wherever economically ana tecn-nically feasible should be an important element of the overall balance ofpayments strategy. hnere is also an urgent need to restructure unanasimports away from the non-essential, non-development types of goods.

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94. The rising debt service burden becomes a matter of increasingconcern becaiLse:

n) Ghana'R nresent reserve position i8 weak and provideslittle flexibility in case of a setback in exports;

b) Ghana will continue to be heavily dependent on exports ofone conmnonAtv - rnrna - whirh in nast vears has been subiectto severe fluctuations and whose prospects in future areAt best moderato;

.% qnmno nf t-h. ct-r,,ie-f-,,r nrnh lpmq in, qcrir ilIt-iirP I infii'c t?t7 in,-

C) ..om of the stutrlprobler- --- agriculture, -nlcr nd

other sectors will continue to make Ghanaian developments sufferfrom a shortfal nf rcsonrrc fror sanme years to come.

OC. an1.a. will facea shortfall of forOein -xhange r-ources of sub-

stantial magnitude, particularly in the first half of the seventies. Theshortfall will depend on the rate at which the eronnmy grows nnd more speci-fically on the effectiveness of policies to increase public and privatesavings, to achieve efficient an-d econo-miclmport substitution, rapid exportincreases, increased productivity of investments, better management and1 al ane 4 n - af Afta 1 nrmaa r n -rl a r or, rn,. Anon F t, a- -r 4

ra-A

sector, and reasonably stable prices with minimum administrative and directcontrols.

,6A . Both 4-the A4i.ffcult.y of raislng additional resources at hom.e dan

abroad and the existence of a large reservior of manpower, require thatt1he genera s aa-,. 4i tle next few years pursue a la-bor-intensive rater3-tIC r,CLALCtL CtO OL.LCL~ *U* LALa LtL tr ao pu . a i LAN 3-ato .3 V aI CILlSC

than capital-intensive path of development. The balance of payments con-straint powerfully reLinforces the case for a policy that places em..phas4son the development of agriculture - progressive domestic production of food-stuffs, L indLustriLaL raw r.ateria'Ls and some eAportables aind an efficientmanufacture of construction goods, simple implements, spares and machineryas well as a graual transfLori-iatlio of tle inefficientL iLLgh-cost consumLer

goods industries created under high tariff barriers in the sixties. Thepossibilities of an acute fiscal constralnt and management problems inlarge-scale government investment suggest that maximum encouragement shouldbe given to the private sector wnerever the local or foreign private entre-preneurs can be expected to play a successful role and government shouldconcentrate mainly on supporting activities and rational policy formuiationto stimulate productive activities outside the direct sphere of governmentoperations.