Category: News

Adnan Adams Mohammed In the wake of calls on the government to abandon the idea of forcing an Electronic Transaction Levy (E levy) on Ghanaians against all odds and massive opposition from the citizens, a former Chair of the Finance Committee of Parliament, Dr. Mark Assibey Yeboah, is urging the government to reconsider its decision not to go back to the International Monetary Fund (IMF) in the face of the country’s dwindling revenues. The former New Patriotic Party Member of Parliament for New Juaben South and a member of the current governing party maintains that, the government’s insistence on passing the E-Levy to shore up its revenue target is not right, given the existential economic challenges. His position which is against his party’s decision of not returning to the IMF for financial support but will look at prioritizing domestic revenue generation through the implementation of the E-Levy, has generated a lot of concerns and debate. The Finance Minister, Ken Ofori-Atta has indicated that, going to the IMF again will have dire economic implications. But, in an interview with a former finance, banking and energy industry expert for his take on the ramification for going to the IMF said, it will restore discipline in the fiscal system which will intend restructure the economy for better outlook in the bond market. “IMF will ensure discipline and that will bring credibility back”, Alex Mould, former Executive Director at Standard Chartered Bank and CEO of Ghana National Petroleum Corporation (GNPC) in a question and answer session with Economy Times. “They can become disciplined and reduce the expenditure especially the discretionary expenditures are focused on the Manifesto policies that do not increase the Gross Domestic Product.”

“IMF don’t lend much but act as credit “derivative “ where’s bilateral and other multi-laterals are under the “IMF umbrella” and seek such comfort to “assist” either by extension of tenor, Grace period on interest payments, and sometimes haircuts (though rare) and additional funds.” Below is the full Q&A: ET: Q1i. What does going to the IMF actually mean? 1ii. What do we gain by returning to IMF? 1iii. Does IMF “bail” a country out? What exactly does that mean ? 1v. What is the alternative if we do not go into an IMF Programme ? Alex Mould: By going to IMF, the managers of the economy can become disciplined and reduce the expenditure especially the discretionary expenditures are focused on the Manifesto policies that do not increase the Gross Domestic Product (GDP). IMF will ensure discipline and that’s bringing credibility back. So yes, If a country is disciplined then no need for IMF IMF don’t lend much but act as credit “derivative “ where’s bilateral and other multi-laterals are under the “IMF umbrella”and seek such comfort to “assist” either by extension of tenor, Grace period on interest payments , and sometimes haircuts (though rare) and sometimes additional funds The only way out for them are as follows; Refinance principal that is amortized. Issue here is capital markets are “closed to Ghana. Our bonds are trading at 70% of their Par value (100%), yield is now 12.5%. If Ghana goes to capital markets today the interests rate will be 12.5%. So they won’t go (or can’t go). ET: Q2i. Can’t Ghana manage its own affairs out of this situation on its own without going to the IMF? 2ii. Can’t Ghana raise anymore debt on its own without going to the IMF? 2iii. Does IMF impose any conditionalities? 2iv. How are these conditionalities arrived at? 2v. Is Ghana as a going concern bankrupt or going into an ICU? Alex Mould: TOP 20 LIST OF THE MOST INDEBTED NATIONS IN THE WORLD. 1. USA ($18,286 trillion) 2. UK ($7,499 trillion) 3. France ($5,250 trillion) 4. Germany ($5,084 trillion) 5. Netherland ($4,124 trillion) 6. Luxembourg ($3,900 trillion) 7. Japan ($3,408 trillion) 8. Italy ($2,285 trillion) 9. Ireland ($2,236 trillion) 10. Spain ($2,036 trillion) 11. Canada ($1,791 trillion) 12. Switzerland ($1,699 trillion) 13. Australia ($1,563 trillion) 14. China ($1,437 trillion) 15. China Hong Kong ($1,416 trillion) 16. Singapore ($1,300 trillion) 17. Belgium (($1,194 trillion) 18. Sweden ($938 billion) 19. Austria ($629 billion) 20. Norway ($623 billion) TOP 10 MOST INDEBTED AFRICAN NATIONS TO CHINA, IMF AND WORLD BANK. 1. Angola ($25 billion) 2. Ethiopia ($13.5 billion) 3. Kenya ($7.9 billion) 4. Republic of Congo ($7.5 billion) 5. Sudan ($6.4 billion) 6. Zambia ($6.5 billion) 7. Cameroon ($5.5 billion) 8. Nigeria ($4.8 billion) 9. Ghana ($3.5 billion) 10. DR. Congo ($3.4 billion) SOURCE: World Bank Annual Report for 2021. From the data above we can deduce that, the issue is not about the quantum of a country’s debt. It’s about the quantum of debt relative to your earnings from taxes and even more specific is the sustainability of your payments of your debt service from your unencumbered revenue without going to borrow again to pay for paying your debt service. The fear they have of going to IMF is that, IMF will only go into agreement with Ghana government on a program of discipline. Note this, IMF never imposed anything on a government. The government provides their plan, a Performance Improvement Plan (PIP), which the IMF agree. The IMF only monitors that they follow their own plan. ET: Q3i. Why are we in the position we find ourselves since we just came out of an IMF Programme? 3ii. What were we supposed to do? 3iii. What did we do wrong after coming out of the last programme to send us back to the IMF again? Alex Mould: Issue here is that, capital markets are “closed to Ghana. Our bonds are trading at 70% of their Par value (100%), yield is now 12.5%. If Ghana goes to capital markets today the interests rate will be 12.5%. So they won’t go (or can’t go). Ghana could not manage its expenditure very well and generating much less revenues. This forced the government to resort to borrowing incessantly. So, the fiscal deficit and debt accumulation kept widening. Ghana’s current outlook on the debt market is not positive. The Market never lies. Our debt price has dropped 30%. Why is Capital markets saying so? Are they wrong? The price dropped far before Fitch released the bomb. The market players (investors) always knows before the rating agencies report their findings. Rating agencies only report numbers already known to the market. Why is it that Nigeria and Ivory Coasts – our immediate peers- Bond prices are close to par (100%). First of all let’s get the numbers right. GDP is not government income; it is total income in the country. Government income is about 12-16% of GDP. 2022 Domestic Tax income is going to be about GHS74 billion. Total debt is GHS350 billion (approx) and goes up even if they don’t do anything because 50% of it is in US Dollars and when the Cedi depreciates our debt gets bigger. The debt service is principal and interest Interest debt service is GHS37.5 billion and Wages and compensation is GHS36 billion. These two expenditures are greater than our Domestic tax revenue. Principal repayment this 2022 is about US$8 billion but in 2025 will be over US$22 billion. That is when the problem will arise if we can not get into the capital markets to refinance and get the bilaterals and multi-laterals to support us.

By Elorm Desewu

 Notwithstanding the decline in the profit growth, the industry remained solvent with the average industry Capital Adequacy Ratio (CAR) of 19.6 percent which is well above the 11.5 percent regulatory minimum threshold.

Adnan Adams Mohammed Moody’s Investors Service (“Moody’s”) has downgraded the Government of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative. The international rating agency has also downgraded the senior unsecured MTN programme ratings to (P)Caa1 from (P)B3 and the backed senior unsecured debt rating to B3 from B1. The downgrade to Caa1 reflects the increasingly difficult task the government faces in addressing its intertwined liquidity and debt challenges. “Weak revenue generation constrains government’s budget flexibility and tight funding conditions on international markets have forced the government to rely on costly debt with shorter maturity”, according to Moody’s report last week. Moody’s estimates that, “interest payments will absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels.” As a remedy, the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms. However, the strategy comes with sizeable implementation risks, especially in a still-fragile post-pandemic environment and while international market creditors price in very wide risk premia. While Ghana’s external buffers and moderate external debt amortization schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements and have to rely on domestic sources. The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints on access to funding against the government’s pre-pandemic track record of relatively effective policy delivery and maintenance of a variety of funding sources. Ghana’s institutional framework and dynamic economy remain key credit supports, with economic growth forecasts of around 5% over the medium term. Concurrent to the rating downgrade, Moody’s has also downgraded Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) to B3 from B1, reflecting a blended expected loss now consistent with a one-notch uplift on the issuer rating. Finally, Moody’s has lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to respectively B1 and B2 from Ba3 and B1. Non-diversifiable risks are appropriately captured in a LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, low domestic political, and geopolitical risk; balanced against a large government footprint in the economy and the financial system and current account deficits. The FC country ceiling is maintained one notch below the LC country ceiling, reflecting constraints on capital account openness and fiscal policy effectiveness against robust foreign exchange reserves buffers and an average monetary policy effectiveness. Moody’s projects that Ghana’s government debt ratios will continue to deteriorate in the next few years with extremely weak debt affordability significantly constraining policymaking. Moody’s estimates that government debt ended 2021 at 80% of GDP while interest payments alone consumed half of government revenue that year (positioning Ghana with the second largest ratio among Moody’s rated sovereigns). Given Ghana’s still low average income at about $6000 per capita at Purchasing Power Parity and demands on social spending, very weak debt affordability constrains the government’s scope of policy action, intensifying the policy trade-off between servicing debt and delivering services to the Ghanaian population. Moody’s projects that the government will improve its primary balance by a cumulative 3% of GDP over 2022-24. The government’s own fiscal consolidation plan presented in November 2021 sets more ambitious targets, supported by new revenue measures worth 3% of GDP, some of which have since been opposed in Parliament. The government has announced a 20% cut in primary spending, equivalent to a 4% cut on a year-on-year basis or 16% in real terms, to compensate for any shortcoming in the government’s revenue measures package. Such an unprecedented fiscal tightening will be socially, economically, and politically challenging to implement. Moreover, Moody’s factors in further fiscal pressure from interest payments in the short term as the deterioration in funding conditions recently observed is unlikely to reverse until the government demonstrates to investors that significant fiscal consolidation is underway. Both domestic and external factors underpin Moody’s assumption that debt costs will remain high, including high inflation (at 12.6% most recently) and Moody’s expectation of tighter monetary policy globally. Ghana’s borrowing needs remaining elevated, at around 30% of GDP annually, mean higher borrowing rates will quickly translate into higher interest costs. Ultimately, Moody’s expects that a higher interest bill in 2022 and 2023 will offset the improvement in the government’s primary balance, thereby maintaining double-digit fiscal deficits (in cash terms) with a concomitant increase in the government’s debt . The government of Ghana’s capacity to access sufficient funding sources at manageable costs to meet large funding needs has deteriorated. The government’s external funding options have narrowed and, for the time being, appear limited to official sector sources or financing secured with the support of the official sector. This implies a greater reliance on domestic borrowing, primarily sourced from the banking sector at a cost that has recently increased to high levels. Ghana’s fiscal reserves, including in the various petroleum funds remain very small and therefore not suited to provide funding in times of stress. Ghana’s constraints on external funding come at a time when external debt service requirements in foreign currency are contained, thereby limiting short-term government liquidity risks. Foreign exchange reserves at $9.3 billion as of October 2021 according to the IMF (equivalent to 8 months of imports) provide a buffer to meet external debt flows. However, over the medium term, the government’s external liquidity profile will likely erode unless Ghana is able to restore its access to a wider range of external borrowing sources, including international markets. This, in turn, will rely on the ability of the government to demonstrate a track record of delivering on its fiscal consolidation objectives. The stable outlook balances Ghana’s significant fiscal challenges, large financing needs and funding constraints against the government’s pre-pandemic track record of relatively effective policies and maintenance of a variety of funding sources. On the downside, the constraints to policymaking posed by interest payments absorbing such a large proportion of the budget, risk undermining growth and, over time, social stability. However, while the capacity of the government to reduce its borrowing needs is limited, in 2022-23 refinancing will be primarily for local currency debt, providing a time-window for the government to deliver on its fiscal consolidation strategy and engender confidence that may restore its access to a broader range of external funding sources. Meanwhile, Ghana’s institutional framework and dynamic economy remain key credit supports. The government built a track record of meeting fiscal targets in the years preceding the pandemic-related shock in 2020, managing to consolidate its primary balance by 4.5% of GDP between 2016 and 2019. Improvements to Ghana’s personal and property tax systems and customs will likely continue and help the government in its efforts to improve tax compliance. Finally, the country’s strong growth potential from multiple sources both in the oil and non-oil sectors underpins Moody’s expectation for growth in the range of 4.5-6% over the medium term. Ghana’s ESG Credit Impact Score is highly negative (CIS-4), reflecting
its high exposure to social risks. Resilience to environmental and social risks is weak, constrained by low wealth and high debt levels. Ghana’s credit profile is moderately exposed to environmental risks (E-3 issuer profile score). The cocoa sector is a large contributor to GDP, exports and employment and being demanding in water, it exposes the country to climate changes and especially droughts. Ghana is exposed to water management risks stemming from a lack of access to potable water in some areas. The weight of the agricultural sector exposes the economy to weather-related disruptions and the effects of climate change. The exposure to social risk is high (S-4 issuer profile score), driven by limited access to quality housing and education, especially in rural areas. Risks related to health and safety and access to basic services are moderately negative. While the government has put in place measures aimed at reducing poverty and inequality and strengthening social safety nets, its fiscal challenges constrain its scope for meaningful reduction in social risks given more than half of government revenue is consumed by interest payments. Governance is highly negative with a G-4 issuer profile score. Overall, Ghana’s institutions have shown some effectiveness. Moody’s has lowered the governance issuer profile score to reflect domestic revenue mobilisation challenges and significant constraints on fiscal policy effectiveness reflected by very weak debt affordability. The authorities have undertaken some institutional reforms on the revenue and competitiveness front, which will take some time to produce results. GDP per capita (PPP basis, US$): 5,799 (2020 Actual) (also known as Per Capita Income) Real GDP growth (% change): 0.4% (2020 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): 10.5% (2020 Actual) Gen. Gov. Financial Balance/GDP: -10.8% (2020 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -3.1% (2020 Actual) (also known as External Balance) External debt/GDP: 45.7 (2020 Actual)Economic resiliency: ba3 Default history: No default events (on bonds or loans) have been recorded since 1983.On 01 February 2022, a rating committee was called to discuss the rating of the Ghana. The main points raised during the discussion were: The issuer’s institutions and governance strength, have decreased. The issuer’s fiscal or financial strength, including its debt profile, has decreased. Moody’s could downgrade Ghana’s ratings if it expected that the government will face heightened difficulty in covering its funding needs, increasing the likelihood of default. This could be evident in a sharper increase in interest rates than currently expected by Moody’s and could result from underperforming fiscal results. Moreover, there would be downward pressure on the ratings should Ghana’s currency, the cedi, weaken significantly with limited scope for a reversal. Conversely, Moody’s would likely upgrade Ghana’s ratings if fiscal consolidation proceeded more rapidly, resulting in much more favourable funding conditions for the government and indicating stronger policy credibility. Evidence that government’s funding options have broadened sustainably would also provide a path back to a higher rating level.

Adnan Adams Mohammed A former minister of finance has described embattled Electronic Transactions Levy policy (E-Levy)as the most nuisance of all nuisance taxes in the history of Ghana’s economic management. The former minister takes strong opposition against the most controversial tax policy in the fourth republic governance of Ghana. In a statement reacting to a ‘false’ publication alleging his endorsement for the e-levy, the minister described the e-Levy as a nuisance tax by taxing “savings” in electronic wallets government is among others. “Discriminating against savers using electronic ‘wallets’, instead of banks and pillows, to save. This offends the principle of fairness in taxation”, Seth Terkper objected in his statement released last week. He added that, e-levy will be “compelling customers to pay tax on the “wallet” transfers but the same tax does not apply to those using cheques and other conventional means; and engaging in double or multiple taxation of savings that may have attracted the conventional taxes already.” Below is the full statement: My attention has been drawn to publications and news reports alleging my endorsement of the e-levy proposal in the 2022 budget statement. I wish to state that my position, including a presentation I made at PFM-Tax Africa event 2 day ago and reported by various national media, has been consistent on the issue. 2. Ghana’s Tax Structure: In the four decades since the launch of the Economic Recovery Programme or Structural Adjustment Programme (ERP/SAP) in 1983, Ghana has NOT had a tax instrument that taxes savings and investments. 3. Taxing savings and investment: In a recent tweet I quizzed: what difference does it make if Ghanaians kept their savings (which may have attracted taxes already) under their pillows, or in a bank or in a “e-wallet” (purse) on their phones? In the case of the pillow and bank, they do not pay a tax until the money withdrawn is (a) used to set up a business to turn a profit (income tax) or (b) buy consumer goods and services and pay, mainly, VAT, excise and tariff or customs duty. Why then tax the equivalent savings taken from the phone ‘wallet’ before one uses it to set up a business and make profit or buy goods to attract the VAT etc? 4. E-levy: “most nuisance of nuisance taxes”: I have used this expression already to describe the e-levy because, by taxing “savings” in electronic wallets government is among others, a. Discriminating against savers using electronic ‘wallets’, instead of banks and pillows, to save. This offends the principle of fairness in taxation. b. Compelling customers to pay tax on the “wallet” transfers but the same tax does not apply to those using cheques and other conventional means; and c. Engaging in double or multiple taxation of savings that may have attracted the conventional taxes already (as noted below). 5. Likely tax E-Levy on Loans in e-Wallets: The last point may go to such ridiculous extent as paying e-levy on business loans in a bank account, for which, the bank uses its “wallet” to make transfers to customers. A rather ‘nice’ way to promote investments and reduce the cost of doing business? 6. Taxing fees and commissions: It is legitimate for owners of “savings” to (a) pay an “expenditure tax” on the commissions or fees that Banks and Telcos charge them for the “service rendered” in making the transfer; and “income tax” on the interest earned. The Banks and Telcos also pay “income tax” on the fees and commissions that form part of the profit they make. The dilemma facing the government is that, unless the taxes mentioned are exempt by law, it is already collecting these taxes described, discussed in detail below. 7. Our Conventional Taxes: as noted, Ghana has had a tax regime that, in the main, consists of the following handles or instruments. a. Income Tax: corporate income tax (CIT) earned by incorporated entities as well as personal income tax (PIT) earned by employees on salaries or wages and profit earned by uninncorporated persons. b. Value Added Tax (VAT): this expenditure tax is paid on taxable (or non-exempt) supplies of goods and services, whether imported or produced locally. c. Import Duty or Tariffs: this expenditure tax is paid on only imported goods, hence it protects local industries (note another controversy surrounding “benchmark” values and the tussle between AGI and GUTA). d. Excise Duty: a punitive expenditure tax paid, in addition to VAT and tariffs, on what is considered by some as ‘harmful’ products such as alcohol and tobacco as well as on petroleum products and some luxury items. e. Levies: these are special purpose income and expenditure taxes that mimic any one of the above categories and never on savings. 8. Conclusion: The Telcos pay VAT on taxable goods and services but the government abrogated the VAT on non-core financial services in 2017. Why impose another tax or levy on other finance sector savings, not just expenditures? As with the “blocking” of input VAT (on supplies to registered businesses) for NHIL and GETFund levy, there will be no credit/offset or refund for the e-levy. Is it time to overcome the “kumipreko” blues, call the e-Levy a VAT increase and stop distorting our well established tax regime with numerous levies in addition to “capping”? Most importantly, Ghana’s rationale tax regime has always had elaborate provisions to PROMOTE, NOT DELIBERATELY PUNISH, savings and investments. Signed: E. Seth Terkper