Kufuor Announces Tax and Tariff Relief as Fiscal Woes Mount

UNCLAS SECTION 01 OF 02 ACCRA 000725 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PGOV EAGR ENRG ETRD GH SUBJECT: Kufuor Announces Tax and Tariff Relief as Fiscal Woes Mount ¶1. (SBU)Summary: In response to concerns about rising food and fuel prices, President Kufuor on May 22 called for elimination of tariffs on several food staples, provision of subsidies for fertilizer and expansion of tractor subsidies. He also called for elimination of excise tax and debt recovery levies on fuels important for commercial transport, agriculture and fishing and increased support for the production cost of electricity. Parliament moved quickly to pass legislation on May 23 necessary for implementation. However, the President did not sign the legislation removing import tariffs before leaving the country for Japan. The measures, driven by both political and social concerns, come at a time when Ghana is facing serious fiscal and inflationary pressures. The cost of foregone revenue and subsidies and delays in raising some utility tariffs will add to the pressure and, in an election year, Ghana has few palatable tools with which to counter the pressure. End Summary. ¶2. (SBU) In a widely publicized speech on May 22, President Kufuor called for elimination of import tariffs on wheat, rice, yellow corn and vegetable oil along with subsidies on fertilizer and a stepped-up program to make subsidized tractors available to farmers. In the fuel sector, he called for elimination of excise duty and debt recovery levy on pre-mix fuel, gas oil, kerosene and marine gas oil. More opaquely, he said the GoG would "increase support for the production of the cost of electricity to bring relief to domestic consumers. According to the Chief Director at the Ministry of Finance this means the subsidy to the Volta River Authority, the producer of Ghana's power, but he also indicated that the plan to increase non-residential tariffs remained in place. Those tariffs were to have gone up to cost recovery levels May 1 but no action has been taken. ¶3. (SBU) The proposal was developed by a small group of advisors from the Presidency, Finance Ministry and Bank of Ghana and was driven by the ruling party's concern about their election prospects as well as a desire to avoid social unrest, the cost of which they believe could be far higher than the cost of the new measures. ¶4. (SBU) The impact of the measures on transport prices are not yet being seen to any large extent, and it is questionable whether they will have the desired political impact. Diesel prices at the pump have come down about 5 cents per liter but prices were well above a dollar per liter so the savings to operators is quite small. The excise tax and debt levy was not removed for fuel for non-diesel vehicles. With oil prices continuing to rise, even the small decrease in pump prices may be short-lived as the GoG did not re-regulate oil prices (a positive element). The tariff rate on the food staples being covered was between 10 percent and 20 percent. The President reportedly did not sign the bill due to some ongoing discussions about the inclusion of vegetable oil. Once the President returns from Japan on June 7, it will be revisited. ¶5. (U) With the expected decrease in expected revenue, the GoG is asking Ministries to review development programs with a view to cutting back on less urgent priorities. The President has given assurances, however, that programs for the most vulnerable such as the School Feeding Program and the Capitation Grant will not be affected. ¶6. (SBU) The full impact on the budget is still not known, in part because of lack of clarity on the impact of the program on planned utility tariff increases. According to the parliamentary report, the cost of foregone fuel taxes will be about 49 million Ghana cedis (about USD 49 million) while foregone import duties will be about 38 million Ghana cedis (about USD 38 million). The agricultural sector subsidies are expected to be about 11 million Ghana cedis (about USD 11 million). A timely increase of utility tariffs for commercial users the mines (which currently get highly subsidized power) is critical for a quick fiscal improvement, as the May 1, 2008 deadline slipped. ¶7. (SBU) Public reaction to the speech was generally positive-to-neutral but it faded quickly as a news item. Domestic producers voiced some concern about the removal of tariffs on domestic producers and commentators have voiced concern about potential smuggling of fuel or re-export of food staples brought in with the zero tariff. In a briefing to development partners, the IMF country director Arnold McIntyre (protect) expressed grave concern about Ghana's vulnerability to losing its hard-won macroeconomic stability. He cited concern that inflation will get out of hand, not only in light of energy issues, but due to Ghana's inability to rein in the public sector wage bill. According to the Treasury Resident Advisor, in order of magnitude, the fiscal impact of subsidizing thermal power generation with crude oil and diesel is greater than that of the public sector wage bill. ¶8. (SBU) Comment: The potential macro-economic impact of the subsidies and the removal of tariffs and taxes is cause for concern. Ghana is already facing a ballooning fiscal deficit that is expected to exceed 10 percent of GDP and inflation that topped 15 percent in April after being about 10 percent at the end of 2007. Ghana's fiscal woes are driven largely by government absorption of ACCRA 00000725 002 OF 002 rising energy costs and the public sector wage bill. While it is abundantly clear from an economic standpoint that Ghana needs to move to full-cost recovery of energy tariffs, the social case is harder to make. Residential users already absorbed an increase of around 100 percent in November 2007 which puts the current residential tariffs at full cost recovery once gas is available for thermal generation, but service remains dismal. The system is fraught with technical losses and inefficiencies, which take time to remedy even if revenue is increased. Asking people to pay even more for bad service is unpalatable, especially in an election year. Similarly, the needed public sector reductions are unlikely to occur any time soon. In concluding his speech, President Kufuor flagged the coming oil as reason for optimism that difficulties could be short-lived. While Ghana is working to develop a sound oil management framework, relying on future oil revenues to solve economic woes could lead to more worrisome policy slippages. End Comment Bridgewater