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