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

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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


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