TREASURY UNDER SECRETARY TAYLOR MEETING WITH

UNCLAS SECTION 01 OF 02 ACCRA 001280

SIPDIS

SENSITIVE

TREASURY FOR ALEX SEVERENS

E.O. 12958: N/A
TAGS: EFIN GH
SUBJECT: TREASURY UNDER SECRETARY TAYLOR MEETING WITH
CENTRAL BANK GOVERNOR ACQUAH


Summary
--------------

1. (SBU) Under Secretary Taylor met May 31 with Bank of Ghana
(BoG) Governor Paul Acquah to review the state of Ghana,s
economy. Acquah stated that the GoG is on course to meet IMF
and World Bank conditions necessary to achieve HIPC
Completion Point in July. Acquah reiterated GoG support for
the West African Monetary Zone, although Ghana is the only
country close to meeting the convergence criteria. The GoG
also fully supports the West Africa Gas Pipeline, but Acquah
noted there are outstanding issues to resolve. End Summary

Governor Acquah on Inflation and Monetary Policy
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2. (SBU) Acquah commented that domestic debt is a major
constraint on growth, and emphasized the importance of
foreign financial support to help Ghana pay down its domestic
debt and force down inflation and interest rates. Taylor
responded that the USG has encouraged the World Bank to
increase its grant assistance. Grants now total 21 percent
of total World Bank assistance, and Taylor thought this could
increase, especially for HIPC countries, thus easing their
debt burden. Acquah noted that Ghana must increase its
investment ratio from the current 18 percent of GDP to above
the 25 percent level common in the fastest growing developing
countries.


3. (SBU) Acquah commended robust fiscal policies and higher
tax revenues for making it easier for the BoG to conduct
disinflationary monetary policies. He noted that market
expectations are converging towards the 2004 target inflation
rate of 7 to 8 percent, and said the BoG seemed to have
succeeded in focusing markets on inflation and interest rates
rather than on the exchange rate. With annual inflation
falling from 30 percent in April 2003 to 11 percent in May
2004, the BoG was able to reduce its prime rate from 27.5
percent to 18.5 percent, and is considering reducing it
further.


4. (SBU) In addition to tight monetary policy, Acquah stated
there are three main reasons for declining inflation. First,
the fiscal pillar is increasingly robust, with the Finance
Ministry committed to public expenditure management and
controlling finances within the budget framework. Acquah
noted that the quality of expenditures has also increased,
with more spending brought on budget and in-line with
established priorities. Second, GoG revenues have increased
from 17 percent of GDP in 2001 in to almost 23 percent of GDP
in 2004, almost doubling the amount collected. This was due
partially to higher growth but also to improved collection
capacity. Finally, by controlling expenditures and
increasing revenues, the GoG reduced the budget deficit from
roughly 9 percent of GDP in 2001 to an estimated 3.5 percent
for 2004.

Status of IMF/World Bank Agreements and HIPC
--------------

5. (SBU) Acquah stated that the GoG should be able to meet
IMF and World Bank conditions in time for their Executive
Boards to approve HIPC Completion Point in late June/early
July. The GoG will soon implement a health insurance levy in
the form of a 2.5 percent VAT increase, and is also preparing
an announcement that it will deregulate the petroleum sector
starting Spring 2005. (Note: The GoG sent its draft Letter
of Intent to the IMF on June 8 -- details reported septel.
End Note)

Acquah's Views on West African Monetary Zone (WAMZ)
-------------- --------------

6. (SBU) Acquah commented that there is strong political will
in Ghana in support of the creation of a central bank and
common currency (the "Eco") among the six ECOWAS nations not
part of WAEMU (the CFA zone). Acquah was pleased Ghana was
chosen as the headquarters of the Central Bank, and considers
it a great responsibility. However, he was skeptical about
prospects for meeting the mid-2005 deadline, pointing out
that Ghana is the only country close to meeting the
convergence criteria, and the health of the group -- and
success of WAMZ -- depends on Nigeria getting its act
together. U/S Taylor agreed with Acquah's concerns about
Nigeria's financial situation, since Nigeria's Central Bank
is financing the GON deficit. However, he also commented
that Nigeria had made recent progress, for example it
successfully brought official and private interest rates
closer through its recently established Dutch Auction
process.

Acquah's Views on West African Gas Pipeline (WAGP)
-------------- --------------

7. (SBU) In response to U/S Taylor's expression of concern
about the status of WAGP preparations, Acquah said the GoG
consensus was that the pipeline would be good for Ghana, but
there are outstanding issues related to costs and financing
that must be resolved prior to the July 31 final investment
decision date. In particular, the GoG is reviewing options
for financing the USD 80 million it needs to pay for its 16
percent equity stake in the pipeline. Acquah said he has
wondered why the "sponsors" -- Chevron Texaco and Shell -- do
not seem willing to borrow the money for Ghana, since they
can do so internationally at low rates. He added that issues
such as the cost of the project and rate of return the
operator will receive had not been resolved to GoG officials'
satisfaction. Finally, he said a realistic market analysis
was required before Ghana could agree to the take or pay
arrangement. The GoG is working with the other WAGP
investors to mitigate risks via MIGA political risk
insurance.

Comment
--------------

8. (SBU) U/S Taylor's separate meeting with Governor Acquah
was important to show USG support for the BoG's management of
monetary policy. Acquah has played a critical role in
developing the GoG's sound economic policies, which have
resulted in a relatively strong and strengthening economy.
He is often the lone voice of reason on economic policy, and
is due credit for the courageous reforms he has spearheaded
within the Bank of Ghana -- such as reducing the staff by 50
percent and instituting a Monetary Policy Committee to ensure
the BoG stays focused on achieving inflation targets. End
Comment.
Yates