VZCZCXRO1231
RR RUEHMA RUEHPA
DE RUEHAR #0725/01 1561618
ZNR UUUUU ZZH
R 041618Z JUN 08
FM AMEMBASSY ACCRA
TO RUEHC/SECSTATE WASHDC 6577
RUEHZK/ECOWAS COLLECTIVE

UNCLAS SECTION 01 OF 02 ACCRA 000725 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV EAGR ENRG ETRD GH
SUBJECT: Kufuor Announces Tax and Tariff Relief as Fiscal Woes Mount 
 
¶1. (SBU)Summary:  In response to concerns about rising food and fuel 
prices, President Kufuor on May 22 called for elimination of tariffs 
on several food staples, provision of subsidies for fertilizer and 
expansion of tractor subsidies.  He also called for elimination of 
excise tax and debt recovery levies on fuels important for 
commercial transport, agriculture and fishing and increased support 
for the production cost of electricity.  Parliament moved quickly to 
pass legislation on May 23 necessary for implementation.  However, 
the President did not sign the legislation removing import tariffs 
before leaving the country for Japan.  The measures, driven by both 
political and social concerns, come at a time when Ghana is facing 
serious fiscal and inflationary pressures.  The cost of foregone 
revenue and subsidies and delays in raising some utility tariffs 
will add to the pressure and, in an election year, Ghana has few 
palatable tools with which to counter the pressure.  End Summary. 
 
¶2. (SBU) In a widely publicized speech on May 22, President Kufuor 
called for elimination of import tariffs on wheat, rice, yellow corn 
and vegetable oil along with subsidies on fertilizer and a 
stepped-up program to make subsidized tractors available to farmers. 
 In the fuel sector, he called for elimination of excise duty and 
debt recovery levy on pre-mix fuel, gas oil, kerosene and marine gas 
oil.  More opaquely, he said the GoG would "increase support for the 
production of the cost of electricity to bring relief to domestic 
consumers.  According to the Chief Director at the Ministry of 
Finance this means the subsidy to the Volta River Authority, the 
producer of Ghana's power, but he also indicated that the plan to 
increase non-residential tariffs remained in place.  Those tariffs 
were to have gone up to cost recovery levels May 1 but no action has 
been taken. 
 
¶3. (SBU) The proposal was developed by a small group of advisors 
from the Presidency, Finance Ministry and Bank of Ghana and was 
driven by the ruling party's concern about their election prospects 
as well as a desire to avoid social unrest, the cost of which they 
believe could be far higher than the cost of the new measures. 
 
¶4. (SBU) The impact of the measures on transport prices are not yet 
being seen to any large extent, and it is questionable whether they 
will have the desired political impact.  Diesel prices at the pump 
have come down about 5 cents per liter but prices were well above a 
dollar per liter so the savings to operators is quite small.  The 
excise tax and debt levy was not removed for fuel for non-diesel 
vehicles.  With oil prices continuing to rise, even the small 
decrease in pump prices may be short-lived as the GoG did not 
re-regulate oil prices (a positive element).  The tariff rate on the 
food staples being covered was between 10 percent and 20 percent. 
The President reportedly did not sign the bill due to some ongoing 
discussions about the inclusion of vegetable oil.  Once the 
President returns from Japan on June 7, it will be revisited. 
 
¶5. (U) With the expected decrease in expected revenue, the GoG is 
asking Ministries to review development programs with a view to 
cutting back on less urgent priorities.  The President has given 
assurances, however, that programs for the most vulnerable such as 
the School Feeding Program and the Capitation Grant will not be 
affected. 
 
¶6. (SBU) The full impact on the budget is still not known, in part 
because of lack of clarity on the impact of the program on planned 
utility tariff increases.  According to the parliamentary report, 
the cost of foregone fuel taxes will be about 49 million Ghana cedis 
(about USD 49 million) while foregone import duties will be about 38 
million Ghana cedis (about USD 38 million).  The agricultural sector 
subsidies are expected to be about 11 million Ghana cedis (about USD 
11 million).  A timely increase of utility tariffs for commercial 
users the mines (which currently get highly subsidized power) is 
critical for a quick fiscal improvement, as the May 1, 2008 deadline 
slipped. 
 
¶7. (SBU) Public reaction to the speech was generally 
positive-to-neutral but it faded quickly as a news item.  Domestic 
producers voiced some concern about the removal of tariffs on 
domestic producers and commentators have voiced concern about 
potential smuggling of fuel or re-export of food staples brought in 
with the zero tariff.  In a briefing to development partners, the 
IMF country director Arnold McIntyre (protect) expressed grave 
concern about Ghana's vulnerability to losing its hard-won 
macroeconomic stability.  He cited concern that inflation will get 
out of hand, not only in light of energy issues, but due to Ghana's 
inability to rein in the public sector wage bill.  According to the 
Treasury Resident Advisor, in order of magnitude, the fiscal impact 
of subsidizing thermal power generation with crude oil and diesel is 
greater than that of the public sector wage bill. 
 
¶8. (SBU) Comment:  The potential macro-economic impact of the 
subsidies and the removal of tariffs and taxes is cause for concern. 
 Ghana is already facing a ballooning fiscal deficit that is 
expected to exceed 10 percent of GDP and inflation that topped 15 
percent in April after being about 10 percent at the end of 2007. 
Ghana's fiscal woes are driven largely by government absorption of 
 
ACCRA 00000725  002 OF 002 
 
 
rising energy costs and the public sector wage bill.  While it is 
abundantly clear from an economic standpoint that Ghana needs to 
move to full-cost recovery of energy tariffs, the social case is 
harder to make.  Residential users already absorbed an increase of 
around 100 percent in November 2007 which puts the current 
residential tariffs at full cost recovery once gas is available for 
thermal generation, but service remains dismal.  The system is 
fraught with technical losses and inefficiencies, which take time to 
remedy even if revenue is increased.  Asking people to pay even more 
for bad service is unpalatable, especially in an election year. 
Similarly, the needed public sector reductions are unlikely to occur 
any time soon.  In concluding his speech, President Kufuor flagged 
the coming oil as reason for optimism that difficulties could be 
short-lived.  While Ghana is working to develop a sound oil 
management framework, relying on future oil revenues to solve 
economic woes could lead to more worrisome policy slippages.   End 
Comment 
 
 
Bridgewater