Ghana's economy is mainly rural: cocoa, timber, and pineapples are the main export crops; and mining (mainly gold) has become one of the biggest sources of foreign exchange. The emerging industrial sector's products include cassava, fruits, and cocoa by-products.

The economy is in its fifth year of expansion, combining improvements in macroeconomic management and strong export growth. The latest figures are positive, and indicate that:

• The annual real GDP growth rate reached 5.8 percent in 2005, sustaining the growth rate observed in 2004;
• Export growth continued strong, rising by 5 percent in 2005, with the decline in cocoa exports offset by increases in gold and timber exports;
• Imports increased by 9 percent, largely due to the 45 percent rise in the price of imported oil;
• The fiscal deficit continued shrinking, falling to 2.4 percent of GDP by end-2005, down from 3.6 percent of GDP in 2004, and providing scope for an increase in the share of credit allocated to the private sector;
  
  - Broad money increased by 23.1 percent, allowing the central bank to accommodate the rise in net international reserves to 4 months of imports, up from 3.8 months at end 2004, while still keeping the increase in the growth of monetary aggregates below the levels observed in 2004.

CURRENT MACROECONOMIC SITUATION

Ghana's economy demonstrated significant resilience in 2005, maintaining strong real GDP growth and macroeconomic stability, notwithstanding the sharp increase in crude oil prices on the international markets.

The main driver of growth in 2005 appears to have been the increase in investment, both private and public, with road construction accounting for most of the projected 9 percent real increase in public investment. While private investment matched the increase in public investment, suggesting that private investment have been able to respond to the opportunities provided by the economic expansion, there appears that there is still scope for faster growth through an increase in investment efficiency. At Ghana's current investment to GDP ratio, almost 30 percent, if the efficiency of investment were at levels comparable to other developing countries, the country could be growing at an additional 2 to 3 percentage points per year.

One of the factors that assisted Ghana in absorbing the impact of higher crude oil prices was the liberalization of domestic retail prices for petroleum products. Domestic retail prices for petroleum products were adjusted three times during the course of 2005.

Prudent fiscal management also contributed to ensuring macroeconomic stability, with central government expenditures being adjusted downwards at the last quarter of the year to compensate for an unexpected shortfall in revenues. Tax revenues collection undershot budget projections because of a shortfall in indirect taxes, primarily due to lower than projected revenues from taxes on imported products.
Prudent fiscal management made possible a further reduction in the ratio of public expenditures to GDP. Lower domestic debt service allowed, in turn, lower interest rates, contributing to maintaining expenditures within the budget ceiling, and exerting a moderating effect on inflation.

The exchange rate also had a moderating effect on inflation, with the cedi depreciating by only 0.3 percent in nominal terms against the dollar, and the real effective exchange rate appreciating by around 19 percent. The behavior of the exchange rate, as well as the in year fluctuations in international reserves at the Bank of Ghana, reflect the seasonality in the country's exchange rate earnings, as most of the revenues from cocoa exports flow in the last quarter of the year.

Notwithstanding the need to tighten expenditures at the end of the year, fiscal management maintained its pro-poor orientation, with poverty related expenditures rising to 8.3 percent of GDP in 2005, up from 7.7 in 2004.

The dominance of basic education and primary health care programs also meant that wages and salaries continued accounting for a large fraction of overall spending. The share of wages and salaries in overall spending reached 55 percent, down slightly from 56 percent in 2004.

The increase in poverty related expenditures reflects to a large degree a stronger poverty orientation of the consolidated fund, which saw its share of funding of poverty related expenditures rise to 61 percent, up from 58 percent in 2004. This increase in share of funding for poverty related expenditures through the consolidated fund is remarkable because 2005 saw the emergence of new sources of funding for poverty related expenditures, such as the National Health Insurance Fund and the Social Safety Net provided by taxes on petroleum retail products.

The growth outlook for 2006 is positive, with the expansion of the domestic economy supported by the growth of exports and continued increases in public and private sector investment. The real GDP growth rate is projected to reach 6 percent, yielding a per capita real GDP growth in 3.3 percent range. Growth will be supported by new private sector investment in the mining sector, as well as continued public sector investment in the road, electric power, and water & sanitation sectors.

The sustainability of the economic expansion is predicated on the continuation of the current macroeconomic policies and the sustained inflows of external remittances and official transfers. Maintaining current macroeconomic policies should translate into the continuing implementation of prudent fiscal policies, allowing further reductions in the domestic debt to GDP ratio, and ensuring that overall fiscal deficit that is primarily financed through external grants. The sustainability of the economic expansion hinges also on actions aimed at enhancing the efficiency of investment and raising productivity throughout the economy.

Under current projections, Ghana's debt sustainability outlook is expected to remain robust, with the possibility of improving considerably following full implementation of the Multilateral Debt Relief Initiative (MDRI).

The government's approach to macro-economic management is supported by the IMF, as reflected in a three-year Poverty Reduction and Growth Facility (PGRF) arrangement for SDR 184.5 million (about US$271.3 million). The PRGF is the IMF's concessional facility for low-income countries, and PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP).