GHANA COMPLETES IMF LETTER OF INTENT, PUSHES FOR

UNCLAS SECTION 01 OF 02 ACCRA 001283

SIPDIS

SENSITIVE

TREASURY FOR ALEX SEVERENS

E.O. 12958: N/A
TAGS: EFIN GH
SUBJECT: GHANA COMPLETES IMF LETTER OF INTENT, PUSHES FOR
HIPC COMPLETION POINT

REF: ACCRA 929

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

1. (SBU) The GoG submitted its Letter of Intent (LOI) to the
IMF on June 8, in time for IMF Executive Board meeting to go
forward as planned on June 30. The GoG is working to fulfill
prior actions: 1) impose a 2.5 percent VAT increase; 2)
adjust water and electricity prices; and 3) complete wage
negotiations. The GoG will soon announce its intention to
deregulate the petroleum sector starting February 15, 2005,
which is a requirement for reaching HIPC Completion Point
this July. End Summary.

Status of IFI Programs
--------------

2. (SBU) The GoG submitted its Letter of Intent to the IMF on
June 8, just in time for IMF staff to get it ready for the
IMF Executive Board meeting June 30. Post obtained a copy
from contacts at the Bank of Ghana (emailed to Treasury and
EB/IFD/OMA). Based on this draft and the results of the IMF
and World Bank program reviews in May, both IMF and World
Bank staffs are circulating documents to their Executive
Directors related to their programs and HIPC. According to
World Bank-Ghana staff, the GoG has met all conditions for
its Poverty Reduction Support Credit (PRSC). The GoG still
has several outstanding prior conditions for the IMF Poverty
Reduction and Growth Facility (PRGF) and for the IMF Board to
approve HIPC Completion Point.

Completed Prior Actions
--------------

3. (SBU) The GoG has fulfilled the following prior actions:

-- The GoG increased water tariffs 16 percent in April to
reach cost-recovery levels. Current electricity tariffs are
appropriate, but both water and electricity prices must be
reviewed in August and November 2004, and February 2005, and
adjusted if necessary.

-- The GoG completed wage negotiations to keep salaries in
line with the 17 percent increase authorized in the 2004
budget.

-- On June 9, the GoG introduced a legislative instrument in
Parliament to implement the National Health Insurance Levy.
The levy automatically goes into effect 21 days after the
legislative instrument is presented to Parliament, although
the IMF has allowed the GoG to start charging it on August 1.
The levy -- equivalent to a 2.5 percent VAT increase --
should raise almost USD 45 million in new revenue.

-- In June the Ministry of Finance imposed spending ceilings
on ministries and departments.

Pending Prior Actions
--------------

4. (SBU) The critical outstanding action is the GoG's
agreement with the IMF to announce publicly that it will
deregulate the petroleum sector to allow market forces to
determine gas prices. IMF staff insisted that the press
release describe the key elements of the new regime and the
time frame for implementation. The GoG has prepared a draft
press release announcing its intention to deregulate starting
February 15, 2005. After IMF staff sign off on the
statement, the Information Ministry will issue it prior to
the June 30 IMF board meeting. (Comment: According to IMF
and GoG, this announcement should satisfy the final HIPC
trigger, so should pave the way to achieving Completion
Point. End Comment)


5. (SBU) The new regulatory/pricing regime will allow oil
marketing companies to adjust prices (according to a formula)
without prior GoG approval. (Comment: Kufuor has refused to
increase gas prices during the election year, choosing to
subsidize the sector. Higher world prices increased the
monthly subsidy to USD 18.5 million in May. The GoG agreed
to contain the 2004 subsidy at 1.1 trillion cedis, or about
USD 122 million. If it exceeds this level the GoG must cut
spending further. Right now it is funding the subsidy by
forcing payments from parastatals and raiding the debt
recovery levy -- a 640 cedi per liter levy used to pay
domestic debt. End Comment).


6. (SBU) It is unclear whether the GoG has satisfied IMF
concerns regarding a USD 300 million loan, or "supplier's
credit," from a Hong Kong company. The IMF initially
demanded that Ghana prove the concessionality of this loan by
providing evidence that the Chinese government is backing and
guaranteeing it. However, it is not mentioned in the draft
LOI. (Comment: Finance Minister Osafo Maafo told Ambassador
June 9 that the GoG had decided to back away from the loan in
response to negative public reaction. For this reason, the
IMF and GoG may have agreed to leave it out of the LOI. End
Comment)

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

7. (SBU) President Kufuor has empowered Finance Minister
Osafo Maafo to do whatever it takes to get to HIPC Completion
Point. The IMF has made this a much easier job by showing
great flexibility on both PRGF and HIPC conditions. We
expect the GoG will manage to fulfill all prior actions,
including the public announcement of petroleum deregulation,
before the June 30 IMF Board meeting, so should achieve its
goal of reaching Completion Point in July. However, we
suspect the 2005 implementation of petroleum deregulation
will be problematic, especially without the HIPC leverage.
There is even speculation at mid-levels in the Bank of Ghana
and Ministry of Finance that the August implementation of the
2.5 percent VAT increase could slip, due to the expected
public outcry. Nevertheless, this government has for the
most part done a solid job of macroeconomic and structural
reform, and so far seems to be holding its finances together
during the election year. Therefore, Post supports the
IMF/World Bank position that Ghana meets the basic conditions
for Completion Point. End Comment.
Yates