US embassy cable - 04ACCRA1283

UNCLAS SECTION 01 OF 02 ACCRA 001283 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR ALEX SEVERENS 
 
E.O. 12958: N/A 
TAGS: EFIN, GH 
SUBJECT: GHANA COMPLETES IMF LETTER OF INTENT, PUSHES FOR 
HIPC COMPLETION POINT 
 
REF: ACCRA 929 
 
Summary 
------- 
1. (SBU) The GoG submitted its Letter of Intent (LOI) to the 
IMF on June 8, in time for IMF Executive Board meeting to go 
forward as planned on June 30.  The GoG is working to fulfill 
prior actions: 1) impose a 2.5 percent VAT increase; 2) 
adjust water and electricity prices; and 3) complete wage 
negotiations.  The GoG will soon announce its intention to 
deregulate the petroleum sector starting February 15, 2005, 
which is a requirement for reaching HIPC Completion Point 
this July.  End Summary. 
 
Status of IFI Programs 
---------------------- 
2. (SBU) The GoG submitted its Letter of Intent to the IMF on 
June 8, just in time for IMF staff to get it ready for the 
IMF Executive Board meeting June 30.  Post obtained a copy 
from contacts at the Bank of Ghana (emailed to Treasury and 
EB/IFD/OMA).  Based on this draft and the results of the IMF 
and World Bank program reviews in May, both IMF and World 
Bank staffs are circulating documents to their Executive 
Directors related to their programs and HIPC.  According to 
World Bank-Ghana staff, the GoG has met all conditions for 
its Poverty Reduction Support Credit (PRSC).  The GoG still 
has several outstanding prior conditions for the IMF Poverty 
Reduction and Growth Facility (PRGF) and for the IMF Board to 
approve HIPC Completion Point. 
 
Completed Prior Actions 
----------------------- 
3. (SBU) The GoG has fulfilled the following prior actions: 
 
-- The GoG increased water tariffs 16 percent in April to 
reach cost-recovery levels.  Current electricity tariffs are 
appropriate, but both water and electricity prices must be 
reviewed in August and November 2004, and February 2005, and 
adjusted if necessary. 
 
-- The GoG completed wage negotiations to keep salaries in 
line with the 17 percent increase authorized in the 2004 
budget. 
 
-- On June 9, the GoG introduced a legislative instrument in 
Parliament to implement the National Health Insurance Levy. 
The levy automatically goes into effect 21 days after the 
legislative instrument is presented to Parliament, although 
the IMF has allowed the GoG to start charging it on August 1. 
 The levy -- equivalent to a 2.5 percent VAT increase -- 
should raise almost USD 45 million in new revenue. 
 
-- In June the Ministry of Finance imposed spending ceilings 
on ministries and departments. 
 
Pending Prior Actions 
--------------------- 
4. (SBU) The critical outstanding action is the GoG's 
agreement with the IMF to announce publicly that it will 
deregulate the petroleum sector to allow market forces to 
determine gas prices.  IMF staff insisted that the press 
release describe the key elements of the new regime and the 
time frame for implementation.  The GoG has prepared a draft 
press release announcing its intention to deregulate starting 
February 15, 2005.  After IMF staff sign off on the 
statement, the Information Ministry will issue it prior to 
the June 30 IMF board meeting.  (Comment:  According to IMF 
and GoG, this announcement should satisfy the final HIPC 
trigger, so should pave the way to achieving Completion 
Point.  End Comment) 
 
5. (SBU) The new regulatory/pricing regime will allow oil 
marketing companies to adjust prices (according to a formula) 
without prior GoG approval.  (Comment: Kufuor has refused to 
increase gas prices during the election year, choosing to 
subsidize the sector.  Higher world prices increased the 
monthly subsidy to USD 18.5 million in May.  The GoG agreed 
to contain the 2004 subsidy at 1.1 trillion cedis, or about 
USD 122 million.  If it exceeds this level the GoG must cut 
spending further.  Right now it is funding the subsidy by 
forcing payments from parastatals and raiding the debt 
recovery levy -- a 640 cedi per liter levy used to pay 
domestic debt.  End Comment). 
 
6. (SBU) It is unclear whether the GoG has satisfied IMF 
concerns regarding a USD 300 million loan, or "supplier's 
credit," from a Hong Kong company.  The IMF initially 
demanded that Ghana prove the concessionality of this loan by 
providing evidence that the Chinese government is backing and 
guaranteeing it.  However, it is not mentioned in the draft 
LOI.  (Comment:  Finance Minister Osafo Maafo told Ambassador 
June 9 that the GoG had decided to back away from the loan in 
response to negative public reaction.  For this reason, the 
IMF and GoG may have agreed to leave it out of the LOI.  End 
Comment) 
 
Comment 
------- 
7. (SBU) President Kufuor has empowered Finance Minister 
Osafo Maafo to do whatever it takes to get to HIPC Completion 
Point.  The IMF has made this a much easier job by showing 
great flexibility on both PRGF and HIPC conditions.  We 
expect the GoG will manage to fulfill all prior actions, 
including the public announcement of petroleum deregulation, 
before the June 30 IMF Board meeting, so should achieve its 
goal of reaching Completion Point in July.  However, we 
suspect the 2005 implementation of petroleum deregulation 
will be problematic, especially without the HIPC leverage. 
There is even speculation at mid-levels in the Bank of Ghana 
and Ministry of Finance that the August implementation of the 
2.5 percent VAT increase could slip, due to the expected 
public outcry.  Nevertheless, this government has for the 
most part done a solid job of macroeconomic and structural 
reform, and so far seems to be holding its finances together 
during the election year.  Therefore, Post supports the 
IMF/World Bank position that Ghana meets the basic conditions 
for Completion Point.  End Comment. 
Yates