GHANA MACROECONOMIC AND FINANCE HIGHLIGHTS, NOVEMBER 2008

UNCLAS SECTION 01 OF 02 ACCRA 001521

WHITE HOUSE FOR USTR LAURIE-ANN AGAMA


SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EFIN EINV GH
SUBJECT: GHANA MACROECONOMIC AND FINANCE HIGHLIGHTS, NOVEMBER 2008


1. SUMMARY:


A. (U) According to the Governor of the Bank of Ghana, Accra's
financial isolation may provide the country with a temporary respite
from the global economic downturn unfolding in international
financial centers, while leaving open the potential for a slide if
traditional exports, FDI and private remittances decline.


B. (SBU) Ghana's external debt has almost doubled in two years,
exacerbated particularly by high oil prices. Furthermore, some of
the external borrowing has funded pre-election pork-barrel schemes
and other expensive projects of questionable economic priority, and
a lack of technical expertise hampers some of the state's potential
gains.


C. (U) The cabinet is mulling revised investment regulations on
foreign investment that would lead to more restrictive provisions on
activities and levels of investment, along with prescriptions for
local content. The draft bill and the surrounding publicity appears
to be a sop to domestic commercial interests for electoral
advantage; the bill has little prospect for Parliamentary approval
before the formation of the next government.

-------------- --------------

A. Financial Isolation: Ghana's Secret Weapon
-------------- --------------


2. (U) As a consequence of the global economic downturn, some
economic observers have noted a drop in remittances to Ghana from
the U.S. In addition, the GOG decision to call off (or postpone) a
USD 300 million sovereign debt issuance was likely due to weak
market interest. Conversely, Post notes that the downturn has led
to lowered oil prices, and that the higher cost of oil in 2008 has
also contributed heavily to Ghana's negative balance of payments.
Accordingly, one positive impact of the financial crisis is lower
global oil prices, which will help lower Ghana's external deficit.


3. (U) Ghana Central Bank Governor Paul Acquah said the global
financial crisis would not affect Ghana's economy too drastically
because the country's financial sector--including the domestic
capital market--was not well integrated with the international
markets. He admitted that Ghana could be affected in the long run.
He noted the banking sector relies heavily on domestic deposits. In
Ghana, the banking sector's outstanding external borrowing as a
source of funding is less than five percent; cause for concern would
only be reached at levels of external borrowing exceeding 50
percent. Additionally, a decrease in the prices of Ghana's major
exports, such as cocoa and gold, and a decline in foreign direct
investment and private remittances, could worsen the country's
external and fiscal balances and create inflation.

--------------

B. Rising Tide of External Debt
--------------


4. (U) Ghana's total external debt increased from USD 2.14 billion
at the end of 2006 to USD 4.03 billion by the end of September 2008.
The total public debt including domestic debt is about 55 percent of
GDP. Ghana received a debt cancellation of USD 4.2 billion by
external creditors under the HIPC and MDRI in mid-2006 out of the
total USD 6.35 billion in GOG external debt.


5. (U) The single largest factor on Ghana's debt position in the
past year was higher oil prices. Additionally, some external debt
is financing current government expenditures, which include 'pork
barrel' projects tid to this year's elections. The most recent
example is a 19 million Euro German bank loan for budget support.
Accordingly, an economic think tank, the Institute of Economic
Affairs (IEA),and the opposition in parliament have raised concerns
about Ghana's rising level of external debt, particulary given the
government's conspicuous spending on four soccer stadiums, an
opulent presidential palace and fulsome celebrations in honor of
Ghana's 2007 golden jubilee. Econ Section contacts believe this
trend could abate in the first two years of a new GOG administration
following December's general elections.


6. (SBU) Beyond meeting energy needs through oil imports, an
additional segment of Ghana's external debt has gone into beneficial

ACCRA 00001521 002 OF 002


infrastructure investments. However, even for projects with
anticipated economic benefits, there is evidence that some agencies
within the GOG lack the technical expertise to maximize the state's
gains from the investments.


--------------

C. Revised Investment Bill: Last-Minute
Electioneering?
--------------


7. (U) A draft revised investment law was submitted in late November
to the cabinet for approval (the step prior to forwarding to
Parliament for approval). Reports suggest the revision proposes an
increase in the minimum capital requirement for foreign investment
in retailing from USD 300,000 to 1,000,000. The draft also reserves
the distribution of pharmaceuticals exclusively for Ghanaian firms.
Finally, the draft is reported to require local participation and
procurement in ancillary services for the oil and gas sector.


8. (SBU) The bill--and its very public announcement--
is best understood as a government tactic of appearing responsive to
domestic pressure groups. In November 2007, the Ghana Union of
Traders Association (GUTA) shut down their shops and presented a
petition to Parliament to revise the current Investment law, and to
press for better enforcement. GUTA pressed the GIPC to penalize
foreign retailers who did not meet the required USD 300,000 minimum
and employment of at least 10 Ghanaians. GUTA proposed the increase
of the minimum capital to USD 1.5 million. Responding to these
demands, the GIPC shut down over 40 shops, mainly owned by
Nigerians, Chinese and Indians.


9. (SBU) COMMENT: Since the bill will not be passed before the
December 7 general elections, the announcement of this revised law
is likely a last minute attempt by the ruling New Patriotic Party
(NPP) to win votes from Ghanaian retailers. Parliament is expected
to resume on December 16 (after elections) and will not likely
address this bill, leaving this issue for the next administration.
END COMMENT.

TEITELBAUM