US embassy cable - 05ACCRA399

UNCLAS SECTION 01 OF 02 ACCRA 000399 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT PLEASE PASS FOR TREASURY ALEX SEVERENS 
USTDA FOR BRYCE TENET 
MILLENNIUM CHALLENGE CORP. FOR ROD NORMAN 
DEPARTMENT OF ENERGY 
 
E.O. 12958: N/A 
TAGS: ECON, ELAB, ENRG, EPET, GH 
SUBJECT: GASOLINE PRICES UP 50 PERCENT AS GHANA MOVES 
TOWARDS DEREGULATION 
 
 
1. (U) Summary:  On February 20, Minister of Finance Kwadwo 
Baah-Wiredu announced significant price increases for 
petroleum products.  The price of gasoline jumped 50 percent, 
to USD 3.33 per imperial gallon.  Diesel and Kerosene went up 
over 40 percent, to USD 2.94 and USD 2.66 per imperial 
gallon, respectively.  Food and transport prices rose 
immediately.  A National Petroleum Tender Board (NPTB), made 
up of private and public sector members, will monitor prices 
during the deregulation process over the next year. 
Baah-Wiredu also announced several initiatives designed to 
offset the effects of the increase.  The opposition National 
Democratic Congress announced plans to demonstrate against 
the price hikes, starting on March 1.  End Summary. 
 
BITING THE BULLET 
----------------- 
2. (U) In recent weeks the GoG has made numerous 
announcements of its intent to deregulate the oil sector in 
order to fulfill its commitments to the IMF and World Bank 
under the HIPC agreement.  Sources in the Bank of Ghana told 
EconOff the one-time increase to recovery cost levels 
eliminates government subsidies, which exceeded USD 200 
million 2004, roughly equivalent to Ghana's savings for the 
year under HIPC. 
 
DEREGULATION BEGINS 
------------------- 
3. (U) The large increase from 20,000 cedis to 30,000 cedis 
per imperial gallon also allows the GoG to transfer pricing 
authority to the new NPTB with few political strings 
attached.  The NPTB, which consists of representatives from 
Oil Marketing Companies (OMCs), Tema Oil Refinery (TOR), 
trade unions, the banking sector and the Ministries of 
Finance and Energy, will have authority to regulate the 
prices OMCs charge consumers.  The board will review prices 
every two months, although it is not known what role the GoG 
members of the board will play, nor exactly how much real 
pricing authority the NPTB will have if crude oil prices 
increase dramatically.  For now, every retailer is selling at 
identical prices. 
 
INITIAL INFLATION 
----------------- 
4. (U) Prices for some products increased as soon as the 
announcement was made.  Perishable food and transport prices 
increased 30 to 100 percent.  Baah-Wiredu said that the Ghana 
Private Road and Transport Union (GPRTU), the largest member 
of the powerful transport cartel that controls the bulk of 
public transport in Ghana, agreed to a 30 percent increase in 
fares.  Many retailers, however, are holding back on price 
increases due to a general decline in sales since the 
announcement.  Once consumers resume buying however, 
inflation is likely to increase sharply.  NOTE: If the market 
responds similarly to the 90 percent fuel price increase in 
2001, inflation should level off after two to three months, 
possibly even going into single digits by the end of the 
year.  END NOTE. 
 
ATTEMPTS TO OFFSET INCREASE 
--------------------------- 
5. (U) In the same news conference, the Minister said the GoG 
would use some of the savings created by the price increases 
to eliminate primary school fees, although no specific 
references were made to effected grade levels or any possible 
timeline for this project. Baah-Wiredu also said the budget, 
which is due to be submitted to Parliament next week, 
includes 25 percent increases for both civil service wages 
and the minimum daily wage (MDW) to offset the fuel price 
increases.  Note: Many workers and trade unions use the MDW 
as a barometer for negotiations.  The increase of the MDW 
should translate into demand for wage increases in all 
sectors, in addition to any demand created by a spike in 
inflation.  End Note. 
 
OPPOSITION CALLS DEMONSTRATIONS 
------------------------------- 
6. (U) Not surprisingly, the opposition National Democratic 
Congress (NDC) party has attacked the petroleum price 
increase.  NDC presidential candidate John Atta Mills called 
the price increase "mind boggling", saying it would hurt the 
poor.  It also undermined the government's credibility since 
the NPP had opposed a fuel price hike when the NDC was in 
power.  In a press conference on February 23, NDC Chairman 
Obed Asamoa called the GOG's justification of the price hike 
"propaganda" and its promise of a social safety net 
"tokenism".  On February 23, opposition MPs staged a walkout 
in Parliament, followed the same day by an NDC press release 
calling for public demonstrations starting March 1 to protest 
the price increases.  The NDC's press release claims 
(correctly) that the USD 200 million "subsidy" of petroleum 
products in 2004 was roughly equivalent to the revenue 
generated by fuel taxes, which make up about 40 percent of 
the price.  The NDC argues that these taxes could have been 
reduced or eliminated entirely, thus allowing fuel to be sold 
at cost recovery prices without impacting consumers.  Other 
smaller opposition parties have also criticized the fuel 
price increases, although it is not clear they will support 
the NDC demonstrations. 
 
COMMENT 
------- 
7. (SBU) The reasons for deregulation given by officials 
within the GoG over the last few weeks have been consistent 
and coordinated.  President Kufuor called it a "necessary 
evil" in his State of The Nation address on February 4, and 
other ministers have gone to great lengths to explain the 
unfairness of using USD 200 million in HIPC savings to give 
Ghanaians cheap gasoline instead of education and healthcare. 
 So far, the public has accepted these explanations without 
unrest or violence.  However, the NDC is bitter about losing 
the December 7 elections, and may be looking for a way to 
embarrass the government.  The election verified the NDC's 
large support base with 44 percent of the vote.  It is not 
clear what the response to the NDC's planned protest will be. 
 According to NDC contacts, it is also possible they will 
call off the demonstration this weekend if they sense the 
response will be weak. 
 
8. (SBU) COMMENT CONTINUED:  The deregulation required by the 
HIPC Completion Point agreement, however, is still far from 
becoming reality, and there are many politically charged 
speed bumps along the road.  The new fuel prices meet 
production costs, but only just, and Nigeria is still the 
only country in the region with lower prices. If crude oil 
prices increase in the next year, it will be politically more 
difficult to pass along the cost to consumers again.  END 
COMMENT. 
YATES