Document of THE WORLD BANK FOR OFFICIAL USE ONLY MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of THE WORLD BANK FOR OFFICIAL USE ONLY MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF GHANA UNDER THE ENHANCED HIPC DEBT INITIATIVE June 15,2004 Report No. P7628-GH This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (exchange rate effective as of end-december 2003) Currency Unit - Ghanaian Cedi us1.oo WEIGHTS AND MEASURES Metric System GOVERNMENT FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS DSA GPRS HIPC IDA IMF NPV PRGF Country Assistance Strategy Debt Sustainability Analysis Ghanaian Poverty Reduction Strategy Heavily Indebted Poor Countries International Development Association International Monetary Fund Net Present Value Poverty Reduction and Growth Facility Special Drawing Rights Vice President: Country Director: Manager, HIPC Unit: Task Manager: Staff Members HIPC Unit: Callisto Madavo Mats Karlsson Vikram Nehm Marcel0 Andrade Carolin Geginat Sona Varma

3 I FOR OFFICIAL USE ONLY ASSISTANCE TO THE REPUBLIC OF GHANA UNDER THE ENHANCED HIPC DEBT INITIATIVE TABLE OF CONTENTS I IV. V. VI. VII. Background....2 Fulfillment of Completion Point Conditions....3 Review of Debt Figures... 3 IDA S Delivery of Assistance under the Enhanced HIPC Initiative... 3 Prospects for Long-Term Debt Sustainability under the Enhanced HIPC Initiative... 4 Satisfactory Financing Assurances from Ghana s Creditors....5 Recommendation....5 Chart Chart 1: Debt Service Due to IDA... 4 Annexes Annex 1 : Ghana IDA Credits to Debt Service Reduction under the Enhanced Heavily Indebted Poor Countries Initiative Annex 2: Ghana Schedule of Debt Service Reduction Enhanced Heavily Indebted Poor Countries Initiative This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 2 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON ASSISTANCE TO THE REPUBLIC OF GHANA UNDER THE ENHANCED HIPC DEBT INITIATIVE 1. I submit for your approval the following Memorandum and Recommendation on the assistance to be provided to the Republic of Ghana under the Enhanced Heavily Indebted Poor Countries (HIPC) Debt Initiative in respect of the debt owed by this country to the International Development Association (IDA). This report and recommendation addresses the criteria for reaching the Completion Point under the Enhanced HIPC Initiative as agreed by the Boards of the IDA and IMF in February 2002, and seeks approval for the debt relief endorsed at the Decision Point to be provided in respect to the debt owed to IDA to become irrevocable. 2. This document complements the joint IDA-IMF paper entitled Republic of Ghana: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Completion Point Document. The Completion Point Document presents (i) Ghana s progress in fulfilling the Completion Point triggers under the Enhanced HIPC Initiative; (ii) an update of the debt sustainability analysis (DSA) and details of the HIPC assistance considered at the Decision Point under the Enhanced HIPC Initiative; and (iii) the status of creditor participation since the Decision Point. I. BACKGROUND 3. Ghana reached the Decision Point under the Enhanced HIPC Initiative in February 2002, with the DSA based on the stock of debt as of end-december Under the fiscal criteria, Ghana qualified for US$2,186 million of assistance in net present value CNpV) terms, of which the multilaterals share amounted to US$1,102 million (50.4 percent). 4. The assistance from IDA under the Enhanced HPC Initiative agreed at the Decision Point amounted to US$781.5 million in NPV terms (US$ 1,445.7 million in nominal terms) (See Annex 2). This assistance is being delivered through a 67.4 percent reduction in debt service to IDA over the period on credits disbursed and outstanding as of end At the Completion Point under the Enhanced HIPC Initiative, and provided that the Executive Directors agree that satisfactory assurances of debt relief have been received from Ghana s other creditors, the debt service reduction for the remaining period up to 2022 would become irrevocable. Ghana: Decision Point Document for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative, IDNR ( )

6 3 11. FULFILLMENT OF COMPLETION POINT CONDITIONS 5. In accordance with the decisions of the Executive Directors of IDA and the IMF at the Decision Point, Ghana would reach its floating Completion Point under the Enhanced HIPC framework when a set of agreed conditions were met. These conditions and the assessment of progress for meeting them are described in the accompanying Completion Point document. The conditions for reaching the Completion Point require that Ghana should (i) have prepared and implemented for one year a fill PRSP through a participatory process, which the staffs assess as satisfactory; (ii) have maintained a stable macroeconomic framework and satisfactory performance under PRGF-supported programs as well have complied with specific targets for macroeconomic variables; and (iii) have implemented the specific structural reform and social measures indicated in the Decision Point document. 6. As discussed in detail in the Completion Point document, Ghana s progress in implementing the reforms specified for reaching the Completion Point has been generally satisfactory. All but one of the completion point triggers were met. The condition on petroleum pricing was not met. However, in June 2004, Cabinet is expected to endorse and announce publicly the key features of a new pricing regime. This new regime will credibly remove government influence over pricing decisions. More detail on this point is included in paragraphs of the HIPC Completion Point Document. It is proposed that the Executive Directors waive this completion point trigger on petroleum pricing given (i) the otherwise strong policy performance that allowed Ghana to meet all but one of the floating Completion Point conditions set out at the Decision Point, and (ii) that implementation of the new pricing regime has been established as a strict condition for the completion of the third review under the PRGF arrangement with the IMF REVIEW OF DEBT FIGURES 7. As detailed in the Completion Point document, assistance to Ghana under the enhanced HIPC Initiative, calculated at $2,186 million in NPV terms at the Decision Point, remained unchanged as a result of the review carried out for the Completion Point by the staffs of IDA and the Fund with the authorities. The review revealed the need for minor changes in the decision point data, but with a negligible overall impact on the NPV of debt. Therefore, there is no reason to revise the end-december 2000 stock of debt, the debt relief estimated at the decision point, or the associated common reduction factor. IV. IDA S DELIVERY OF ASSISTANCE UNDER THE ENHANCED HIPC INITIATIVE 8. Details of IDA assistance are set forth in Annexes 1 and 2. With the delivery mechanisms approved at the Decision Point, IDA S enhanced HIPC assistance will total US$1,445.7 million in nominal debt service reduction, equivalent to the target reduction of US$781.5 million in Decision Point NPV terms (see Annex 2).

7 4 9. Chart 1 below illustrates the impact of this debt relief on actual debt service to IDA over and on projected debt service due to IDA between 2004 and 2022 calculated as of end-december 2003 (the reference date used for the Completion Point DSA). Chart 1. Debt Service Due to IDA Before and After Assistance Under the Enhanced HIPC Initiative, so E 90 * 3 70 so lo Debt - - *Debt service after enhanced HIPC Assistance service before enhanced HIPC Assistance 10. On March 16,2004, the Executive Directors discussed a new Country Assistance Strategy (CAS) for Ghana covering the period FY04-FY07. The CAS supports the achievement of the GPRS goals through its existing lending portfolio, the planned CAS program of lending, advisory services and capacity building for monitoring and evaluation. In particular, the CAS sought to support the GPRS in a manner that could effectively help achieve the desired outcomes, by focusing on three main pillars, namely; (i) sustainable growth and job creation, (ii) service provision for human development, and (iii) governance for empowerment. With regard to new lending, the base-case scenario calls for new IDA commitments of US$1,055 million during the CAS period (FY04-07). V. PROSPECTS FOR LONG-TERM DEBT SUSTAINABILITY UNDER THE ENHANCED HIPC INITIATIVE 11. As detailed in the Completion Point document, the updated debt sustainability analysis (DSA) shows that after HIPC assistance and additional bilateral debt relief, Ghana s NPV of debt-to-revenues at end-2003 is 152 percent, and that the ratio is projected to decline gradually thereafter. By 2023 the ratio is projected to stand at 110 percent. The debt service to exports and debt service-to-revenues ratios after the provision of debt relief in the context of the HIPC Initiative are expected to average 4.7 percent and 6.2 percent respectively over the period , with a stable profile. Nevertheless, the sensitivity analysis emphasizes the importance of maintaining prudent

8 5 macroeconomic and debt-management policies in the medium and long term to achieve debt sustainability in the face of potential external shocks. It also stresses the need for maintaining prudent borrowing strategies, with reliance on highly concessional financing in order to meet the govemment s financial needs while ensuring debt sustainability. VI. SATISFACTORY FINANCING ASSURANCES FROM GHANA S CREDITORS 12. As of May 2004, satisfactory financing assurances with respect to creditor participation in enhanced HIPC assistance for Ghana amounted to 89.6 percent. All multilateral creditors have given assurances to participate, representing 50.4 percent of total debt relief in NPV terms as calculated in the Decision Point document. Furthermore, official bilateral creditors representing 39.2 percent of the targeted assistance have provided assurances of their participation.2 Ghana s authorities, with the assistance of IDA and IMF staff, will continue their efforts toward securing the participation of the remaining creditors. VII. RECOMMENDATION 13. In view of the above, I recommend that the Executive Directors endorse the staff assessment contained in the Completion Point Document concerning Ghana s fulfillment of the floating Completion Point conditions under the Enhanced HIPC Initiative. I hrther recommend that debt relief on debt owed to IDA by Ghana be provided unconditionally in the amount and manner proposed in this document. James D. Wolfensohn President By: Shengman Zhang Managing Director Washington D.C. June All official bilateral creditors have committed to relief, with the exception of Korea and India, with whom negotiations are ongoing.

9 6 Annex 1 Ghana IDA Credits Subject to Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Credit Project Name Currency Balance at December 31, 2000 In original currency In equivalent Power Distribution AccrdTema Water Supply & Sewage Fisheries Eastern Region Cocoa Second Power Distribution Sugar Rehabilitation First Highway Second Water Supply Livestock Development Oil Palm Second Highway Third Power 2nd National Investment Bank Volta Region Agricultural Dev. 3rd Highway - Emergency Maint. Railway Rehabilitation Cimao Restructuring Water Supply, Technical Assistance Energy Reconstruction Import Credit Export Rehabilitation Export Rehab. Tech. Assistance Petroleum Refinery Rehab Oil Palm Dev - Phase I1 Accra District Rehabilitation 2nd Reconstruction Imports Road Rehabilitation & Maintenance Power System Rehabilitation Health & Education Rehabilitation Industrial Sector Adjustment Ports Rehabilitation Education Sector Adjustment Northern Grid Extension Structural Adjustment Structural Adj. Inst. Support Agri. Services Rehabilitation Petroleum Ref. & Distribution Public Enterprise Cocoa Rehabilitation Transport Rehabilitation 6,152,356 2,204, ,441 5,016,933 5,006,571 9,554,229 8,970,000 7,302, ,850 9,588,000 7,500,000 7,155,000 16,080,872 25,655,245 22,028,332 21,086,500 7,9 12,000 10,644,057 8,033,774 34,225,000 35,243,064 14,983,4 10 5,869,805 20,585,541 20,294,355 58,2 12,000 38,005,632 25,650,000 13,110,000 24,543, ,389,762 27,360,000 4,992,000 25,958,500 8,299,000 12,8 1 1,422 11,288,099 7,266,550 17,125,577 44,086,000 6,152,356 2,204, ,441 5,016,933 5,006,571 9,554,229 8,970,000 7,302, ,850 9,588,000 7,500,000 7,155,000 16,080,872 25,655,245 22,028,332 27,473,812 10,308,624 13,868,249 10,467,284 44,592,095 45,918,541 19,522,035 7,647,827 26,821,108 26,441,719 75,844,997 49,5 17,919 33,4 19,642 17,081, ,977,972 27,868,935 35,647,618 6,504,127 33,821,589 10,8 12,850 16,692,130 14,707,377 9,467, ,313,086 57,440,090

10 7 Annex 1 (cont.) Ghana IDA Credits Subject to Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Credit Project Name Currency Balance at December 31,2000 In original currency In equivalent Priority Works Financial Sector Adustment Credit Financial Sector Adustment Credit Mining Sector Rehabilitation Second Telecommunications Forest Resource Management Private Small & Med Ent. Dev. Second Structural Adjustment Second Structural Adjustment Second Structural Adjustment Water Sector Rehabilitation Rural Finance Fifth Power Sixth Power 2nd Education Sector Adjustm. Urban Ii Agricultural Diversification 2nd Transport Rehabilitation Second Health And Population Economic Management Support Private Investment Private Investment Private Investment National Agricultural Research Community Secondary Schools 2nd Financial Sector Adjustment Natl Feeder Roads Rehabilition & Maintenance Agricultural Sector Adjustment Agricultural Sector Adjustment Agricultural Sector Adjustment Natl. Agricultural Extension Literacy And Functional Skills Environmental Resource Mgmt Tertiary Education National Livestock Services National Electrification Urban Transport Private Enterprise And Export Primary School Development Agricultural Sector Investment 7,325,422 68,495,000 4,845,000 27,828,168 12,653,614 29,355,175 21,161,411 86,524,000 4,462,000 5,820,000 16,409,026 14,510,077 29,39 1,000 4,73 1,671 37,477, ,509,848 10,099,472 67,860,819 18,940,916 10,669,973 84,600,000 4,600,000 4,720,000 16,120,637 10,653,777 71,214,625 39,294,924 57,000,000 4,130,000 3,600,000 20,288,379 11,596,826 12,594, ,200,000 14,887,401 52,804,553 54,087,693 12,363,406 36,583,777 15,122,146 9,544,365 89,242,820 6,3 12,599 36,257,599 16,486,520 38,247, ,571, ,732,985 5,813,584 7,582,936 21,379,483 18,905, ,293,828 6,164,941 48,829,499 68,4 15,606 13,158,703 88,4 16,540 24,678,309 13,902, ,226,186 5,993,386 6,149,735 21,003,739 13,880, ,786, ,197,749 74,265,870 5,381,018 4,690,476 26,433,932 15,109,620 16,409,115 40,650,792 19,396,944 68,799,580 70,471,396 16,108,406 47,665,369 19,702,796

11 Annex 1 (cont.) Ghana IDA Credits Subject to Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Credit Project Name Currency Balance at December 31,2000 In original currency In equivalent AOOlO A0030 A0130 A0250 A025 1 F0090 NO200 Local Government Development Community Water And Sanitation Private Sector Development Thermal Power Vocational Skills Fisheries Subsector Capacity Building Private Sector Adjustment Private Sector Adjustment Private Sector Adjustment Private Sector Adjustment Mining Sector Development Non-Bank Fin Institutions Urban Environmental Sanitation Highway Sector Investment Public Enterprise & Privatiz. Basic Education Sector Improv Public Financial Management Technical Asst. Health Sector Program Support Natural Resource Mgmnt Economic Reform Support Operat Trade And Investment Gateway Public Sector Mgmnt Reform Economic Reform Support I1 Economic Reform Support I1 National Functional Literacy 2nd Community Water & Sanitation Road Rehab. Maintenance Second Reconstruction Imports Industrial Sector Adjustment Structural Adjustment Credit Structural Adjustment Credit Export Rehabilitation Village Infrastructure 21,870, ,766,210 5,247,661 99,168,388 4,854,732 4,568,948 46,900,000 3,200,000 2,400,000 1,700,000 6,647,203 7,067,509 24,942,841 48,220,270 7,543,926 18,491,392 4,468, ,401,499 1,847,024 37,100,000 3,666,754 3,698,352 96,000,000 37,000,000 1,188,453 * 1,514,310 9,544,500 24,769,777 21,487,500 61,760,000 11,194, ,515,787 6,011,949 28,495,073 19,239,043 6,837, ,207,484 6,325,279 5,952,928 61,106,479 4,169,3 12 3,126,984 2,214,947 8,660,707 9,208,329 32,498,278 62,826,672 9,829,057 24,092,620 5,822,211 21,369,677 2,406,506 48,337,961 4,777,45 1 4,818, ,079,360 48,207,670 1,548,447 1,973,009 12,435,624 32,272,790 27,996,279 80,467,722 14,584,775 41,062,233 7,833,029 Sources: World Bank, Loan Accounting Department and staff estimates

12 9 Annex 2 Ghana Schedule of Debt Service Reduction Under the Enhanced Heavily Indebted Poor Countries Initiative Calendar Year Amount to be reduced (In thousands of US. dollars) TOTAL 2002 I / / 1,445,745 32,928 44,953 48,852 53,028 57,021 60,304 64,135 68, ,299 75,167 79,388 81,282 82, ,049 85,997 86,624 86,320 86,958 87,125 87,009 21,363 1/ Mar 1-Dec 31, / Jan 1- Feb 28, 2022.