US embassy cable - 04ACCRA1280

UNCLAS SECTION 01 OF 02 ACCRA 001280 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR ALEX SEVERENS 
 
E.O. 12958: N/A 
TAGS: EFIN, GH, economy 
SUBJECT: TREASURY UNDER SECRETARY TAYLOR MEETING WITH 
CENTRAL BANK GOVERNOR ACQUAH 
 
 
Summary 
------- 
1. (SBU) Under Secretary Taylor met May 31 with Bank of Ghana 
(BoG) Governor Paul Acquah to review the state of Ghana,s 
economy.  Acquah stated that the GoG is on course to meet IMF 
and World Bank conditions necessary to achieve HIPC 
Completion Point in July.  Acquah reiterated GoG support for 
the West African Monetary Zone, although Ghana is the only 
country close to meeting the convergence criteria.  The GoG 
also fully supports the West Africa Gas Pipeline, but Acquah 
noted there are outstanding issues to resolve.  End Summary 
 
Governor Acquah on Inflation and Monetary Policy 
--------------------------------------------- --- 
2. (SBU) Acquah commented that domestic debt is a major 
constraint on growth, and emphasized the importance of 
foreign financial support to help Ghana pay down its domestic 
debt and force down inflation and interest rates.  Taylor 
responded that the USG has encouraged the World Bank to 
increase its grant assistance.  Grants now total 21 percent 
of total World Bank assistance, and Taylor thought this could 
increase, especially for HIPC countries, thus easing their 
debt burden.  Acquah noted that Ghana must increase its 
investment ratio from the current 18 percent of GDP to above 
the 25 percent level common in the fastest growing developing 
countries. 
 
3. (SBU) Acquah commended robust fiscal policies and higher 
tax revenues for making it easier for the BoG to conduct 
disinflationary monetary policies.  He noted that market 
expectations are converging towards the 2004 target inflation 
rate of 7 to 8 percent, and said the BoG seemed to have 
succeeded in focusing markets on inflation and interest rates 
rather than on the exchange rate.  With annual inflation 
falling from 30 percent in April 2003 to 11 percent in May 
2004, the BoG was able to reduce its prime rate from 27.5 
percent to 18.5 percent, and is considering reducing it 
further. 
 
4. (SBU) In addition to tight monetary policy, Acquah stated 
there are three main reasons for declining inflation.  First, 
the fiscal pillar is increasingly robust, with the Finance 
Ministry committed to public expenditure management and 
controlling finances within the budget framework.  Acquah 
noted that the quality of expenditures has also increased, 
with more spending brought on budget and in-line with 
established priorities.  Second, GoG revenues have increased 
from 17 percent of GDP in 2001 in to almost 23 percent of GDP 
in 2004, almost doubling the amount collected.  This was due 
partially to higher growth but also to improved collection 
capacity.  Finally, by controlling expenditures and 
increasing revenues, the GoG reduced the budget deficit from 
roughly 9 percent of GDP in 2001 to an estimated 3.5 percent 
for 2004. 
 
Status of IMF/World Bank Agreements and HIPC 
-------------------------------------------- 
5. (SBU) Acquah stated that the GoG should be able to meet 
IMF and World Bank conditions in time for their Executive 
Boards to approve HIPC Completion Point in late June/early 
July.  The GoG will soon implement a health insurance levy in 
the form of a 2.5 percent VAT increase, and is also preparing 
an announcement that it will deregulate the petroleum sector 
starting Spring 2005.  (Note:  The GoG sent its draft Letter 
of Intent to the IMF on June 8 -- details reported septel. 
End Note) 
 
Acquah's Views on West African Monetary Zone (WAMZ) 
--------------------------------------------- ------ 
6. (SBU) Acquah commented that there is strong political will 
in Ghana in support of the creation of a central bank and 
common currency (the "Eco") among the six ECOWAS nations not 
part of WAEMU (the CFA zone).  Acquah was pleased Ghana was 
chosen as the headquarters of the Central Bank, and considers 
it a great responsibility.  However, he was skeptical about 
prospects for meeting the mid-2005 deadline, pointing out 
that Ghana is the only country close to meeting the 
convergence criteria, and the health of the group -- and 
success of WAMZ -- depends on Nigeria getting its act 
together.  U/S Taylor agreed with Acquah's concerns about 
Nigeria's financial situation, since Nigeria's Central Bank 
is financing the GON deficit.  However, he also commented 
that Nigeria had made recent progress, for example it 
successfully brought official and private interest rates 
closer through its recently established Dutch Auction 
process. 
 
Acquah's Views on West African Gas Pipeline (WAGP) 
--------------------------------------------- ----- 
7. (SBU) In response to U/S Taylor's expression of concern 
about the status of WAGP preparations, Acquah said the GoG 
consensus was that the pipeline would be good for Ghana, but 
there are outstanding issues related to costs and financing 
that must be resolved prior to the July 31 final investment 
decision date.  In particular, the GoG is reviewing options 
for financing the USD 80 million it needs to pay for its 16 
percent equity stake in the pipeline.  Acquah said he has 
wondered why the "sponsors" -- Chevron Texaco and Shell -- do 
not seem willing to borrow the money for Ghana, since they 
can do so internationally at low rates.  He added that issues 
such as the cost of the project and rate of return the 
operator will receive had not been resolved to GoG officials' 
satisfaction.  Finally, he said a realistic market analysis 
was required before Ghana could agree to the take or pay 
arrangement.  The GoG is working with the other WAGP 
investors to mitigate risks via MIGA political risk 
insurance. 
 
Comment 
------- 
8. (SBU) U/S Taylor's separate meeting with Governor Acquah 
was important to show USG support for the BoG's management of 
monetary policy.  Acquah has played a critical role in 
developing the GoG's sound economic policies, which have 
resulted in a relatively strong and strengthening economy. 
He is often the lone voice of reason on economic policy, and 
is due credit for the courageous reforms he has spearheaded 
within the Bank of Ghana -- such as reducing the staff by 50 
percent and instituting a Monetary Policy Committee to ensure 
the BoG stays focused on achieving inflation targets.  End 
Comment. 
Yates