US embassy cable - 03ACCRA447

C O N F I D E N T I A L SECTION 01 OF 02 ACCRA 000447 
 
SIPDIS 
 
E.O. 12958: DECL: 03/01/2013 
TAGS: ECON, EFIN, GH, taxes 
SUBJECT: WAGES AND TAXES:  WEEK'S EVENTS SET STAGE FOR 
TENSION ON WAGES 
 
Classified By: EconChief F.Day for Reasons 1.5 (b) and (d) 
 
1. (U) Summary: The government is in a very difficult 
position with its ongoing wage negotiations with government 
employees. Its new agreement with the IMF caps the wage bill 
at a 22 percent increase, but it has accepted a 28.6 percent 
increase in the minimum wage.  Holding the average increase 
to 22 percent is going to be difficult, particularly as 
public employees are expecting generous raises to compensate 
for the doubling of petrol prices last January.  Ghana's HIPC 
program will be endangered, however, if the GoG does not 
succeed in holding the line on its wage bill.  End Summary. 
 
2.  (U) Wage negotiations in Ghana typically begin with 
agreement on a new minimum wage.  The rate of increase in 
that wage becomes the benchmark for the rest of the public 
sector, which in turn influences the private sector.  After 
an abortive attempt by the GoG to unilaterally move the 
minimum wage up 26 percent to 9,000 cedis per day ($1.05), 
government, employers and the unions have agreed to 9,200 
cedis.  This is quite a bit less than the 12,000 cedis unions 
had been demanding, and it is not clear that the rank and 
file will accept it. 
 
3. (U) Negotiations on public sector pay above the minimum 
rate have not begun, but Finance Minister Osafo-Maafo's 
presentation to Parliament February 27 clarified the fiscal 
constraints within which they will be conducted.  He 
announced many measures to enhance revenue, among them a 7 
1/2 percent "national reconstruction levy" on banks that was 
to lapse but which will be continued, a 5 percent levy on 
re-exported goods, the abolition of non-government lotteries 
to give the government lottery a monopoly, direct taxation of 
tro-tro drivers, etc.  Many observers were surprised by the 
absence of an increase in the VAT; we had been told by a 
senior minister it would go up 5 percent.  In fact, 
Osafo-Maafo did announce a 2 1/2 percent increase, but buried 
it in the speech so deftly (under the National Health 
Insurance Scheme)that not even trained economic analysts 
caught the fleeting mention of an increase in levies on 
"expenditures and transactions," i.e., the VAT.  We were 
alerted by an official who knew where in the speech it had 
been inserted. 
 
4. (U) The Minister also announced increases in two taxes on 
petrol:  the road maintenance levy and the debt recovery 
levy; together, these will raise prices at the pump by more 
than 10 percent on top of January's near doubling of the 
price. 
 
5. (C) Protectionist tariffs on rice and frozen chicken were 
also added to the package at the last minute, four days 
before the speech.  According to a source at the central 
bank, practically no one knew these were coming.  The IMF is 
said to be upset with these tariffs for a number of reasons: 
it didn't like being blindsided, the reversion to 
protectionism seems regressive, and the last minute nature of 
the decision raises governance issues. Particularly so, in 
the view of our central bank source, as the chicken tariff is 
nearly certainly the work of Kwabena Darko, a wealthy and 
very well connected chicken farmer (comment:  we concur in 
this assessment).  These tariffs will raise the cost of 
living for ordinary Ghanaians. 
 
6. (U) The IMF agreement limits the GoG's ability to offer 
more in salary increases than can be afforded with these new 
revenue measures but without increased borrowing. The 
mutually agreed upon limit is 22 percent.  Since the increase 
at the bottom end of the scale was nearly 29 percent, other 
workers will be asked to settle for somewhat under 20 
percent.  Workers certainly do not know this yet, and labor 
negotiators trying to boost the minimum wage increase did not 
realize (or perhaps accept) the zero sum nature of what they 
were doing. The more successful they were, the less other 
workers might get later. 
 
7.  (U) Comment:  We may be entering a contentious period. 
There is unsettled business left over from the petroleum 
increases; people are expecting pay raises.  Given Ghana's 
current situation, unrealistic expectations may run into 
unpleasant reality--the government simply cannot afford more. 
 Furthermore, a number of provincial officials we have spoken 
to recently have termed a VAT increase on the heels of the 
petrol hikes "political suicide," but fiscal exigencies left 
the GoG no real choice. 
 
8. (U) Comment Continued. While no one noticed the VAT 
increase in Osafo-Maafo's address, people will notice it in 
their pockets (store clerks will receive instructions on 
collecting it), and may be even more annoyed at the seemingly 
non-transparent manner in which it came about. They may also 
notice the smallish bump in gas prices. Additionally, 
electricity and water rates were scheduled to go up March 
1st. The stakes are high; ng the line on government borrowing 
is a firm IMF condition on renewal of Ghana's HIPC program. 
However, we note a near non-reaction to the doubling of fuel 
prices save two modest labor marches and the usual radio talk 
show froth. The agreement on the minimum wage has also seen 
little protest. Fiscal discipline must balance with domestic 
political concerns--so far the government is keeping its 
balance. End Comment. 
PERGL