VZCZCXRO1519
RR RUEHMA RUEHPA
DE RUEHAR #2381/01 3121340
ZNR UUUUU ZZH
R 081340Z NOV 07
FM AMEMBASSY ACCRA
TO RUEHC/SECSTATE WASHDC 5685
RUEHZK/ECOWAS COLLECTIVE
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 ACCRA 002381 
 
SIPDIS 
 
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PLEASE PASS TO TREASURY DAN PETERS; MCC FOR SKRAHAM 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID GH
 
SUBJECT: Ghana - Signs of Economic Overheating 
 
REF: Accra 811 
 
ACCRA 00002381  001.2 OF 002 
 
 
¶1. (SBU) Summary:  In the wake of its most recent mission to Ghana, 
the IMF expressed concern about an overall worsening of the 
macro-economic situation and signs that the economy may be 
overheating.  While growth continues to be strong, foreign reserves 
are at worrisome levels, inflation seems stuck at about 10% and the 
public sector wage bill continues to grow. The IMF believes fast 
action is needed to control government expenditures and private 
sector demand to avoid a ballooning fiscal deficit and higher 
inflation in the months to come.  The Bank of Ghana took a first 
step to cool demand by raising the prime rate from 12.5% to 13.5% on 
November 6.  End Summary. 
 
¶2.  (SBU) On November 2, IMF ResRep and D.C.-based country Director 
briefed development partners November 2 at the conclusion of their 
October 29-November 2.  The purpose of the Mission had been to 
discuss the medium term macro-economic framework with a view to 
developing a Policy Support Instrument (PSI), a non-lending 
monitoring program.  However, in light of the more immediate 
problems that surfaced, the IMF Mission was not able to address 
substantially the medium term framework. 
 
¶3. (SBU) In contrast to the upbeat assessment presented after its 
Mission in late March (reftel), the Fund expressed considerable 
concern about a potentially overheating economy, worsening 
macro-economic picture and stalled reform, especially in the public 
sector. 
 
On the positive side: 
- Growth remains strong.  2007 growth is estimated to be about 6.4% 
and the IMF concurs with GoG's growth projection of 7% for 2008. 
- Revenue projections are being met after several years of 
shortfalls due in part to improved enforcement. 
- Ghana's Terms of Trade (ToT) improved in spite of increased oil 
prices.  Note: the Bank of Ghana, however, reported on November 6 
that the previously improving ToT had reversed starting in March 
2007 and, as of September 2007, ToT were worse than in September 
¶2006.  End note. 
- Private sector demand and credit are up (a positive development 
but also contributing to possible overheating). 
 
On the worrisome side: 
 
- Inflation is stuck at about 10% vice the 7%-9% the Bank of Ghana 
is seeking (note: per the IMF the average in sub-Saharan Africa is 
7.5% if you exclude Zimbabwe. End note). 
- The current account has worsened in spite of improved Terms of 
Trade (there is a very high import content to spending). 
- Reserves are at only 2.3 months import cover (three months is the 
target) 
- The fiscal deficit is expected to be about 8.2% of GDP in 07. 
- Debt ratios are coming back up - total debt (domestic, external 
and other, e.g. Tema Oil Refinery bonds) are at about 46% of GDP; 
60% of the debt is non-concessional. 
 
¶4.  (SBU) The key drivers of the indicators of concern include: 
- Government expenditures well above target are caused in large part 
by the public sector wage bill, which is expected to be in the 
neighborhood of 10% of GDP (versus 9.6% last year) 
 
- Energy subsidies.  The recent tariff increases are a positive step 
but tariffs are still not at cost recovery levels. 
 
- Despite robust cocoa/gold exports and remittances, increased 
imports for energy including higher prices for crude have been 
significant factors contributing to the worsening reserves 
situation. 
 
¶5.  (SBU) The IMF also noted that GOG records indicate that donor 
resources had declined, both nominally and as a percentage of GDP, 
exacerbating the budget woes.  However, as the discussion with 
development partners unfolded, it became clear that there is a need 
to take a closer look because the development partners have 
different (higher) numbers than the GoG is using.  Beginning January 
1, the UK Development Agency, DFID, will post an official at the IMF 
office in Accra to help gather harmonized data on donor resources. 
 
¶6.  The GoG is not simply standing by.  Energy tariff increases have 
been put in place but more is needed.  A public sector head count is 
nearing completion, which will give the GoG a handle on numbers and 
locations of public sector employees.  This is a first step toward 
getting more centralized control over hiring and salaries.  Most 
significantly, the Bank of Ghana announced an increase in the prime 
rate from 12.5% to 13.5% on November 6 to cool demand.  The IMF 
ResRep said this was something the IMF would favor but it had not 
been discussed with the GoG. 
 
ACCRA 00002381  002.2 OF 002 
 
 
 
¶6.  (SBU) Comment:  Many of the factors such as the public sector 
wage bill and fiscal expansion that are of increasing concern to the 
IMF have been present for some time.  During the last IMF Mission, 
there was the sense that the GoG had a solid plan to address the 
challenges.  Eight months later, many of the plans remain on the 
drawing board.  With the upcoming election, it will be politically 
difficult to reign in spending and public sector employment. 
Nevertheless, we should not be overly alarmist.  The Bank of Ghana's 
action on the prime rate and a vibrant public debate over the need 
for further energy tariff increases are positive signs that the GoG 
is taking the worrisome signs seriously.  End Comment. 
 
BRIDGEWATER