GASOLINE PRICES UP 50 PERCENT AS GHANA MOVES

UNCLAS SECTION 01 OF 02 ACCRA 000399

SIPDIS

SENSITIVE

DEPARTMENT PLEASE PASS FOR TREASURY ALEX SEVERENS
USTDA FOR BRYCE TENET
MILLENNIUM CHALLENGE CORP. FOR ROD NORMAN
DEPARTMENT OF ENERGY

E.O. 12958: N/A
TAGS: ECON ELAB ENRG EPET GH
SUBJECT: GASOLINE PRICES UP 50 PERCENT AS GHANA MOVES
TOWARDS DEREGULATION



1. (U) Summary: On February 20, Minister of Finance Kwadwo
Baah-Wiredu announced significant price increases for
petroleum products. The price of gasoline jumped 50 percent,
to USD 3.33 per imperial gallon. Diesel and Kerosene went up
over 40 percent, to USD 2.94 and USD 2.66 per imperial
gallon, respectively. Food and transport prices rose
immediately. A National Petroleum Tender Board (NPTB),made
up of private and public sector members, will monitor prices
during the deregulation process over the next year.
Baah-Wiredu also announced several initiatives designed to
offset the effects of the increase. The opposition National
Democratic Congress announced plans to demonstrate against
the price hikes, starting on March 1. End Summary.

BITING THE BULLET
--------------

2. (U) In recent weeks the GoG has made numerous
announcements of its intent to deregulate the oil sector in
order to fulfill its commitments to the IMF and World Bank
under the HIPC agreement. Sources in the Bank of Ghana told
EconOff the one-time increase to recovery cost levels
eliminates government subsidies, which exceeded USD 200
million 2004, roughly equivalent to Ghana's savings for the
year under HIPC.

DEREGULATION BEGINS
--------------

3. (U) The large increase from 20,000 cedis to 30,000 cedis
per imperial gallon also allows the GoG to transfer pricing
authority to the new NPTB with few political strings
attached. The NPTB, which consists of representatives from
Oil Marketing Companies (OMCs),Tema Oil Refinery (TOR),
trade unions, the banking sector and the Ministries of
Finance and Energy, will have authority to regulate the
prices OMCs charge consumers. The board will review prices
every two months, although it is not known what role the GoG
members of the board will play, nor exactly how much real
pricing authority the NPTB will have if crude oil prices
increase dramatically. For now, every retailer is selling at
identical prices.

INITIAL INFLATION
--------------

4. (U) Prices for some products increased as soon as the
announcement was made. Perishable food and transport prices
increased 30 to 100 percent. Baah-Wiredu said that the Ghana
Private Road and Transport Union (GPRTU),the largest member
of the powerful transport cartel that controls the bulk of
public transport in Ghana, agreed to a 30 percent increase in
fares. Many retailers, however, are holding back on price
increases due to a general decline in sales since the
announcement. Once consumers resume buying however,
inflation is likely to increase sharply. NOTE: If the market
responds similarly to the 90 percent fuel price increase in
2001, inflation should level off after two to three months,
possibly even going into single digits by the end of the
year. END NOTE.

ATTEMPTS TO OFFSET INCREASE
--------------

5. (U) In the same news conference, the Minister said the GoG
would use some of the savings created by the price increases
to eliminate primary school fees, although no specific
references were made to effected grade levels or any possible
timeline for this project. Baah-Wiredu also said the budget,
which is due to be submitted to Parliament next week,
includes 25 percent increases for both civil service wages
and the minimum daily wage (MDW) to offset the fuel price
increases. Note: Many workers and trade unions use the MDW
as a barometer for negotiations. The increase of the MDW
should translate into demand for wage increases in all
sectors, in addition to any demand created by a spike in
inflation. End Note.

OPPOSITION CALLS DEMONSTRATIONS
--------------

6. (U) Not surprisingly, the opposition National Democratic
Congress (NDC) party has attacked the petroleum price
increase. NDC presidential candidate John Atta Mills called
the price increase "mind boggling", saying it would hurt the
poor. It also undermined the government's credibility since
the NPP had opposed a fuel price hike when the NDC was in
power. In a press conference on February 23, NDC Chairman
Obed Asamoa called the GOG's justification of the price hike
"propaganda" and its promise of a social safety net
"tokenism". On February 23, opposition MPs staged a walkout
in Parliament, followed the same day by an NDC press release
calling for public demonstrations starting March 1 to protest
the price increases. The NDC's press release claims
(correctly) that the USD 200 million "subsidy" of petroleum
products in 2004 was roughly equivalent to the revenue
generated by fuel taxes, which make up about 40 percent of
the price. The NDC argues that these taxes could have been
reduced or eliminated entirely, thus allowing fuel to be sold
at cost recovery prices without impacting consumers. Other
smaller opposition parties have also criticized the fuel
price increases, although it is not clear they will support
the NDC demonstrations.

COMMENT
--------------

7. (SBU) The reasons for deregulation given by officials
within the GoG over the last few weeks have been consistent
and coordinated. President Kufuor called it a "necessary
evil" in his State of The Nation address on February 4, and
other ministers have gone to great lengths to explain the
unfairness of using USD 200 million in HIPC savings to give
Ghanaians cheap gasoline instead of education and healthcare.
So far, the public has accepted these explanations without
unrest or violence. However, the NDC is bitter about losing
the December 7 elections, and may be looking for a way to
embarrass the government. The election verified the NDC's
large support base with 44 percent of the vote. It is not
clear what the response to the NDC's planned protest will be.
According to NDC contacts, it is also possible they will
call off the demonstration this weekend if they sense the
response will be weak.


8. (SBU) COMMENT CONTINUED: The deregulation required by the
HIPC Completion Point agreement, however, is still far from
becoming reality, and there are many politically charged
speed bumps along the road. The new fuel prices meet
production costs, but only just, and Nigeria is still the
only country in the region with lower prices. If crude oil
prices increase in the next year, it will be politically more
difficult to pass along the cost to consumers again. END
COMMENT.
YATES