Ghana - Economy Under Pressure

UNCLAS SECTION 01 OF 02 ACCRA 000904

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAGR ENRG GH
SUBJECT: Ghana - Economy Under Pressure

Ref: A)Accra 225; B)Accra 725


1. (SBU) Summary: this cable provides a summary of notable
developments in the economic sector in April, May and June 2008.
The inflation figures and relatively weak move on energy tariffs do
not bode well for Ghana's fiscal health in 2008.
-- May Inflation Accelerates to 16.9 Percent;
-- Distrust of USG Motives on Oil?;
-- Electricity Tariff Increased for High Voltage Consumers; -- Ghana
Grants Sixth Mobile Cellular License;
-- Vodafone's Pending Acquisition of Ghana Telecom Faces
Opposition.

End Summary.

May Inflation Accelerates to 16.9 Percent
--------------

2. (U) Inflation surged in May to 16.9 percent from 15.3 percent in
April, accelerating at a faster pace than in April, adding pressure
on the central bank to raise its prime rate again. Inflation is at
its highest since July 2005 and more than double of the upper limit
of the Central Bank's 2008 inflation target of 6-8 percent. The
rise in inflation continues to be led by higher food prices and
increasing price of petroleum products, but several other products
and services also showed significant price increase.


3. (U) Accelerating inflation may prompt the central bank to raise
the benchmark rate for a fourth time when the Monetary Policy
Committee meets in July. In an attempt to contain inflation, the
central bank raised interest rates three times by 3.5 percent in
November 2007, March and May 2008, to 16.0 percent from 12.5
percent. Most banks have responded by increasing their base rates
by the same margin. The dampening effect on credit growth is yet to
be felt.


3. (U) While analysts do not rule out a tighter monetary policy
stance in terms of an increase in interest rates and a higher cash
reserve ratio, they say the thrust has to be on the fiscal front.
On May 22, President Kufuor announced a plan which removed import
duty on rice, wheat, yellow corn, crude vegetable oil and reduced
excise tax on some petroleum products in order to help mitigate
price pressures. The GoG from June 1, implemented a 6%
communication service tax on communication services and also
increased electricity tariffs for mining companies but has not shown
any indication of cutting spending.


4. (U) Analysts at the Ghana Statistical Service anticipate a
marginal decline in inflation in June as government's fiscal
measures announced in May and good crop harvest impact prices.
However, a weakening currency and further increase in petroleum
prices weigh heavily against this expectation.

Distrust of USG Motives on Oil?
--------------

5. (SBU) Recent remarks and events, combined with ongoing pockets of
unease about AFRICOM, suggest there may be some leeriness of U.S.
involvement in the development of Ghana's 2007 oil discovery. A GoG
official close to the President remarked, albeit playfully, to
visiting Senate staffers in late May that "the U.S. has now come for
our oil." More substantively, the U.S. was initially excluded from
a meeting between the development partners and the President's Chief
Advisor and several Ministers to discuss next steps in development
of the GoG Petroleum Strategy. In addition, a U.S.-led oil
consortium that initially applied in November, 2006 for a concession
off the coast of Tema believed it had agreed on contract terms with
the Ghana National Petroleum Corporation (GNPC) in February 2008
(both sides had initialed) but in late June the GNPC Board requested
what they perceived as an unwarranted re-opening of the terms in
order to get GNPC Board approval. Comment: Individually, these
incidents have innocuous explanations. Taken together, they echo
the occasional slams in the local press about U.S. motives related
to humanitarian, commercial, or military engagement in Ghana and the
region and merit monitoring. End Comment

Electricity Tariff Increased for High Voltage Consumers
-------------- --------------

6. (U) The Public Utility Regulatory Commission (PURC) granted the
state-owned electricity utilities an increase in the average
end-user tariff for high voltage consumers from 12.77 Ghana
pesewas/kWh (GHp/kWh) to 22.31 GHp/kWh (from about 12.7 to about
22.31 cents). The new rate takes effect from July 1. According to
the PURC, the new rate only affects the high voltage consumers which
are mainly the mining companies and five steel/aluminum companies.



7. (U) Although the high cost of light crude oil used in thermal
power generation is eating deep into the GoG's budget, for political
reasons, the GoG could only single out high voltage users for the
recent increase in electricity tariff. GoG's decision is based on
the fact that the current rise in commodities prices makes it easier
for the mining companies to absorb the new increase.


8. (SBU) Newmont, however, thinks the tariffs increase of about 75%

ACCRA 00000904 002 OF 002


is too high and will impact negatively on their operations and the
entire mining industry in Ghana. In a meeting with Econoff, Newmont
says the 22.31 cents is well above their own calculation of 15 cents
for full cost pricing. Newmont believes there is the perception out
there that there is some windfall profit being made by the mining
companies so they are being made to subsidize other consumers.
According to Newmont, they are in discussion with GoG officials for
a review of the new tariff.


9. (U) The extent to which this increase will reduce the GoG's
subsidy to the utilities is still not known. Minister Anthony Osei
of the Ministry of Finance, in a press conference on June 24 said to
further reduce the subsidy, the hydro power generation component of
electricity generation mix will be increased to 65% from 60% and the
use of all the emergency diesel generators will be stopped.

Ghana Grants Sixth Mobile Cellular License
--------------

10. (U) The National Communication Authority, the telecom regulatory
authority, has issued Nigeria's Globacom mobile cellular license to
operate in Ghana. The $50.1 million Globacom license is the sixth
in the market and the first 3G license. Four out of the six
companies are operational and have a total of about 8.3 million
customers. The fifth operator, Westel, 75 percent owned by Celtel
(Zain),is yet to begin operation. Globacom expects to be
operational in the first half of 2009.

Vodafone's Ghana Telecom Acquisition Faces Opposition
-------------- --------------


11. (U) Vodafone announced on July 3, that it has agreed to buy 70
percent of Ghana Telecom at USD 900 million but the acquisition is
subject to approval by Ghana's parliament. The largest minority
party in parliament, the National Democratic Congress, however, has
problems with the transaction citing non transparency among other
issues. Speaking at a press conference, the minority Ranking Member
of Communications in parliament wants to know why other bidders were
excluded from the sale and why the government increased the stake
from the 66.7 percent it originally planned to sell to 70 percent.



12. The purchase agreement has been placed before parliament and is
expected to be ratified before the house goes on recess at the end
of July. The NPP is expected to use its numbers in parliament to
ratify the agreement despite the expected minority opposition.


Brown