TWIN DEFICITS CHALLENGE GHANA

UNCLAS SECTION 01 OF 02 ACCRA 000330

WHITE HOUSE FOR USTR LAURIE-ANN AGAMA
DEPT OF TREASURY FOR RICHARD HALL

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EFIN EINV GH
SUBJECT: TWIN DEFICITS CHALLENGE GHANA


1. SUMMARY: Ghana's budget and current account deficits constitute
major challenges to Ghana's macroeconomic performance in 2009.
Corresponding with the deficits, Ghana's cedi continues its fall
against world currencies, driving domestic inflation beyond 20
percent. Growth in 2008 has been provisionally estimated at a
strong 6.2 percent, but growth will likely drop in 2009, partially
due to tighter credit. Ghana's ability to restore fiscal and
monetary stability will be a key task for the current government,
which may eventually be forced to seek IMF assistance. END SUMMARY.


A HUGE FISCAL DEFICIT
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2. (U) Unrestrained government spending in 2008 resulted in a
budget deficit of 14.9 percent of GDP (excluding divestiture) or
11.5 percent of GDP (including privatization proceeds). Given the
election year context, the large deficit was partially caused by
free spending on infrastructure projects (e.g. soccer stadiums and
roads to key constituencies),government wages and salaries, and
crude oil purchases (at notably high world prices costs) for thermal
power generation.

AND TRADE DEFICIT ...
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3. (U) Although Ghana's core export performance increased in 2008,
imports showed stronger growth. Cocoa export earnings increased by
33 percent, amounting to USD 1.502 billion. Similarly gold export
earnings increased by 34 percent to USD 2.246 billion in 2008. In
both cases, stable to rising international commodity prices assisted
with export performance. Nonetheless, total imports increased by
23.6 percent, with oil and non-oil imports growing by 12.1 percent
and 32.5 percent respectively. Overall, the trade deficit and
current account deficit (now estimated at 18 percent of GDP)
increased dramatically.

LEADS TO A CURRENT ACCOUNT DEFICIT,
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4. The overall balance of payments in 2008 recorded a deficit of USD
940.7 million, more than doubling the 2007 BOP deficit of USD 413.1
million. The 2008 deficit was financed by drawing on reserves and
from the USD 750 million 'Eurobond' (issued in 2007, due in 2017.)
In December 2008, Gross International Reserves (GIR) were USD 2.0362
billion, declining by 28.2 percent from December 2007, translating
into 1.8 months of goods and services import cover. By end January
2009, the GIR continued to decline to USD 1.940 billion, providing
only 1.7 months of import cover. (NOTE: three to four months of
import cover is a traditional benchmark for a minimum reserve
position. END NOTE.) Between December of 2008 and January 2009,
financial inflows dropped by more than 30 percent, an exceptional
decline far above the 3-year average of an 11 percent decline for
that same period.

AND A WEAKENING CURRENCY,
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5. Thus, given the budgetary, trade and financial deficits that grew
in 2008, it is no surprise that Ghana's cedi has depreciated by more
than 30 percent against the U.S. dollar in the past 12 months.

WHICH DRIVES INFLATION
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6. (U) Inflation surged to 20.3 percent in February 2009, with
inflationary pressures evident in both imports and domestic
products. This is the highest inflation figure in Ghana since
January 2004. The Bank of Ghana (BoG) pointed to external factors
as contributing to inflation, including rising global food and
energy prices and exchange rate depreciation.

REQUIRING TIGHTER MONETARY POLICY
--------------

7. (U) To restore macroeconomic stability, the BoG's Monetary
Policy Committee (MPC) has called for efforts to address the fiscal
and current account deficits. In order to tame inflation over the
coming year, the BoG called for a tightening in the money supply. As
a first step, on February 24, 2009, the BoG increased its prime rate
from 17 percent to 18.5 percent. Furthermore, short-term securities
rates may have to rise from the current 24 percent to above 30
percent. If these measures are not taken, the BoG expects inflation
to persist beyond the second quarter with a 22 percent inflation
rate by the end of 2009.


...THAT CAN HURT GROWTH
--------------

8. (U) Industry and bank officials criticized the BoG's prime rate
hike. They argue the decision will stifle business growth and could
result in an increase in non-performing loans. Lending rates by
banks are expected to rise above 35 percent as the prime rate
directly impacts commercial interest rates charged by banks.
Industry complains that high domestic interest rates paired with the
global credit crunch will have a severe impact on output.

9. (U) COMMENT: The restoration of Ghana's macroeconomic stability
demands fiscal restraint by the Government of Ghana. The new
administration's 2009 budget plan (to be reported on SEPTEL) aspires
to more prudent spending, but the government is already saddled with
must-pay bills and commitments initiated by the prior government.
In the face of diminished access to international capital, even
worthwhile projects in Ghana may suffer for lack of financing.
Managing the depreciation of the cedi in the face of dwindling
foreign exchange reserves and declining remittances presents a
considerable economic challenge for the new government. Without IMF
assistance and a corresponding external imperative to contain
government spending, it is unclear what course Ghana will chart
through current economic conditions. END COMMENT.


Teitelbaum