VZCZCXRO3915 
RR RUEHLMC 
DE RUEHAR #0330/01 0991602 
ZNR UUUUU ZZH 
R 091602Z APR 09 
FM AMEMBASSY ACCRA 
TO RUEHC/SECSTATE WASHDC 7754 
INFO RUEHPC/AMEMBASSY LOME 2200 
RUEHCO/AMEMBASSY COTONOU 0852 
RUEHOU/AMEMBASSY OUAGADOUGOU 0588 
RUEHAB/AMEMBASSY ABIDJAN 0846 
RUEHUJA/AMEMBASSY ABUJA 0821 
RUEHOS/AMCONSUL LAGOS 1802 
RHEHAAA/WHITE HOUSE WASHDC 
RUEATRS/DEPT OF TREASURY WASHDC 
RUCPDOC/USDOC WASHDC 0702 
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 ACCRA 000330 
 
WHITE HOUSE FOR USTR LAURIE-ANN AGAMA 
DEPT OF TREASURY FOR RICHARD HALL 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EFIN EINV GH
SUBJECT: TWIN DEFICITS CHALLENGE GHANA 
 
¶1. SUMMARY: Ghana's budget and current account deficits constitute 
major challenges to Ghana's macroeconomic performance in 2009. 
Corresponding with the deficits, Ghana's cedi continues its fall 
against world currencies, driving domestic inflation beyond 20 
percent. Growth in 2008 has been provisionally estimated at a 
strong 6.2 percent, but growth will likely drop in 2009, partially 
due to tighter credit. Ghana's ability to restore fiscal and 
monetary stability will be a key task for the current government, 
which may eventually be forced to seek IMF assistance. END SUMMARY. 
 
 
A HUGE FISCAL DEFICIT 
--------------------- 
¶2. (U) Unrestrained government spending in 2008 resulted in a 
budget deficit of 14.9 percent of GDP (excluding divestiture) or 
11.5 percent of GDP (including privatization proceeds). Given the 
election year context, the large deficit was partially caused by 
free spending on infrastructure projects (e.g. soccer stadiums and 
roads to key constituencies), government wages and salaries, and 
crude oil purchases (at notably high world prices costs) for thermal 
power generation. 
 
AND TRADE DEFICIT ... 
--------------------- 
¶3. (U) Although Ghana's core export performance increased in 2008, 
imports showed stronger growth. Cocoa export earnings increased by 
33 percent, amounting to USD 1.502 billion. Similarly gold export 
earnings increased by 34 percent to USD 2.246 billion in 2008. In 
both cases, stable to rising international commodity prices assisted 
with export performance. Nonetheless, total imports increased by 
23.6 percent, with oil and non-oil imports growing by 12.1 percent 
and 32.5 percent respectively. Overall, the trade deficit and 
current account deficit (now estimated at 18 percent of GDP) 
increased dramatically. 
 
LEADS TO A CURRENT ACCOUNT DEFICIT, 
---------------------------------- 
¶4. The overall balance of payments in 2008 recorded a deficit of USD 
940.7 million, more than doubling the 2007 BOP deficit of USD 413.1 
million. The 2008 deficit was financed by drawing on reserves and 
from the USD 750 million 'Eurobond' (issued in 2007, due in 2017.) 
In December 2008, Gross International Reserves (GIR) were USD 2.0362 
billion, declining by 28.2 percent from December 2007, translating 
into 1.8 months of goods and services import cover. By end January 
2009, the GIR continued to decline to USD 1.940 billion, providing 
only 1.7 months of import cover. (NOTE: three to four months of 
import cover is a traditional benchmark for a minimum reserve 
position. END NOTE.) Between December of 2008 and January 2009, 
financial inflows dropped by more than 30 percent, an exceptional 
decline far above the 3-year average of an 11 percent decline for 
that same period. 
 
AND A WEAKENING CURRENCY, 
------------------------ 
¶5. Thus, given the budgetary, trade and financial deficits that grew 
in 2008, it is no surprise that Ghana's cedi has depreciated by more 
than 30 percent against the U.S. dollar in the past 12 months. 
 
WHICH DRIVES INFLATION 
---------------------- 
¶6. (U) Inflation surged to 20.3 percent in February 2009, with 
inflationary pressures evident in both imports and domestic 
products. This is the highest inflation figure in Ghana since 
January 2004. The Bank of Ghana (BoG) pointed to external factors 
as contributing to inflation, including rising global food and 
energy prices and exchange rate depreciation. 
 
REQUIRING TIGHTER MONETARY POLICY 
--------------------------------- 
¶7. (U) To restore macroeconomic stability, the BoG's Monetary 
Policy Committee (MPC) has called for efforts to address the fiscal 
and current account deficits. In order to tame inflation over the 
coming year, the BoG called for a tightening in the money supply. As 
a first step, on February 24, 2009, the BoG increased its prime rate 
from 17 percent to 18.5 percent. Furthermore, short-term securities 
rates may have to rise from the current 24 percent to above 30 
percent. If these measures are not taken, the BoG expects inflation 
to persist beyond the second quarter with a 22 percent inflation 
rate by the end of 2009. 
 
 
...THAT CAN HURT GROWTH 
----------------------- 
¶8. (U) Industry and bank officials criticized the BoG's prime rate 
hike. They argue the decision will stifle business growth and could 
result in an increase in non-performing loans. Lending rates by 
banks are expected to rise above 35 percent as the prime rate 
directly impacts commercial interest rates charged by banks. 
Industry complains that high domestic interest rates paired with the 
global credit crunch will have a severe impact on output. 
¶9. (U) COMMENT: The restoration of Ghana's macroeconomic stability 
demands fiscal restraint by the Government of Ghana. The new 
administration's 2009 budget plan (to be reported on SEPTEL) aspires 
to more prudent spending, but the government is already saddled with 
must-pay bills and commitments initiated by the prior government. 
In the face of diminished access to international capital, even 
worthwhile projects in Ghana may suffer for lack of financing. 
Managing the depreciation of the cedi in the face of dwindling 
foreign exchange reserves and declining remittances presents a 
considerable economic challenge for the new government. Without IMF 
assistance and a corresponding external imperative to contain 
government spending, it is unclear what course Ghana will chart 
through current economic conditions. END COMMENT. 
 
 
Teitelbaum