Dr Ernest Addison, Ken Ofori-Atta and IMF Official
Adnan Adams Mohammed
Data from the International Monetary Fund (IMF) indicates that, Ghana’s debt with the Fund hovers around US$1.644 billion as at December 7, 2023.
This positions Ghana as the seventh most-indebted African nation to the Fund.
On the continent; Egypt ranks first with US$11.968 billion debt, Angola follows with US$3.153 billion and South Africa places third with US$2.669 billion. In the West Africa sub-region, Cote D’Ivoire places first owing US$2.117 billion, Nigeria comes second with US$1,840 billion followed by Ghana on the third spot.
On the global space; Argentina owes US$31.100 billion making the southern American nation the highest indebted to IMF followed by Egypt which owes US$11.968 billion.
IMF is a key player in global finance, offering monetary assistance to governments suffering economic difficulties. However, these loans from the IMF can have deep and varied effects on each country’s economy. These effects are felt in some parts of Africa, particularly in regions where the debt is unsustainable.
In times of economic crisis, most countries run to the IMF for relief to stabilize their financial systems. These loans help cushion the economic adversities that countries may be going through.
Currently, Ghana is in a Balance of Payment relief program with the IMF which was approved in May this year. The first tranche of the $3 billion extended credit facility hit Ghana’s account on Friday, 19 May 2023.
The Finance Minister, Ken Ofori-Atta, at the press conference noted that, the executive board approval given to the bailout, has already started impacting Ghana’s economy positively.
“We are already seeing relative stability in the currency and inflation and revitalising our economy. Government with support from the IMF and collective effort with Ghanaians will work through our current challenges and emerge stronger.”
Loans from global financier can also help buff the country’s finances until they can come up with a more sustainable solution to their economic problems. And, additionally, a loan from the IMF can boost a country’s credibility in the eyes of foreign investors. This rise in trust may result in higher foreign direct investment and better access to global capital markets.
However, these loans if not managed or utilized properly could hurt an economy. Aside from the fact that debts owed in general can cause financial stress in any economy, as it represents an expense that the country must take responsibility for, IMF loans often come with stringent conditions, including austerity measures such as reducing public spending, cutting subsidies, and implementing tax increases.
While these measures are intended to address fiscal imbalances, they can lead to social unrest and adversely affect vulnerable populations. These complications can also seep into the country’s exchange rate, making local currencies weaker than they should be.
Ghana’s economy is likely to end 2023 with a public debt to GDP ratio of 99 percent, Fitch Solutions has said. The projected public debt figure is an increase from the previous 88% recorded in 2022.
The primary driver for this projected rise is the depreciation of the cedi against the US dollar, with the local currency having already lost about 11.80% in value to the dollar on the retail market and 22% on the interbank market.
Ghana faces stive debt accumulation matrix. But Fitch is projecting that the public debt could decline by 4 percent of GDP at the end of 2024 to 95% of GDP and further to 94% in 2025 at the back of continues fiscal consolidation and stabilisation of the cedi.
Meanwhile, the International Monetary Fund (IMF) had previously projected a decline in Ghana’s debt-to-GDP ratio for 2023 to 84.9% from 92.4% in 2022.
The October 2023 Fiscal Monitor indicated an expected consistent decline in the country’s total debt-to-GDP ratio over the next five years.
Ghana has faced challenges in its public finances last year, leading to restricted access to Eurobond markets and a significant decline in external liquidity.
This resulted in credit downgrades, including a downgrade to ‘CCC’ by Fitch and subsequent placement on restricted default (‘RD’) in early 2023.
Despite the downgrades, Fitch notes that foreign-currency debt constitutes less than 40% of Ghana’s total public debt, well below the ‘B’ median.
The agency acknowledges Ghana’s stronger levels of governance compared to the ‘B’ median and its democratic record with peaceful transitions of power since 1992.
However, Fitch expresses concerns about the country’s weaknesses, including a low international liquidity position, low per-capita income and human development indicators, and a heavy reliance on exports of oil, gold, and cocoa, exposing it to commodity price volatility.
As the debate on the proposed new tax bills rages on, continuing from part one of this article, the opposition to the new tax bills is by day getting stiffer.
The Ghana Upstream Petroleum Chamber has also warned that, the proposed Growth and Sustainability Levy by government could trigger litigation through the international court as it breaches provisions in the petroleum agreements.
According to the Chamber, it is worried that the government is bent on going ahead to breach these provisions to raise money from what it describes as “creeping taxation”.
In a statement issued by the Ghana Upstream Petroleum Chamber, last week, asked government to reconsider the introduction of the growth and sustainability levy, especially at a time the country is struggling to attract new investments in oil and gas exploration.
The Chamber added that “the industry considers this levy as the latest in a series of crippling taxation that is affecting the economic balance of petroleum agreements.”
Some of these taxes include, “ the COVID-19 Recovery Levy, Ghana Education Trust Fund Levy, National Insurance Levy, the 1% Local Content Fund Levy and several others,” the Chamber disclosed.
It added that “this new tax disregards the importance of the preservation of contract sanctity to the promotion of new investment.”
The Chamber was also worried that “unpredictability of the fiscal terms of our petroleum agreements will discourage new oil and gas investment at a time when financial institutions are curtailing investment in fossil fuels.”
The better way out
In considering some alternative decisions and policies that government should be focusing on instead of the cheap way of introducing and reviewing tax policies frequently, hurting the already overburdened tax-compliant individuals and companies, the experts provided a better way out.
Doubling effort on digitisation of the economy
Professor Ebo Turkson urged government to ramp up its digitalization drive to put all the tax and invoice requirement on a single government platform to ease business at the ports.
He emphasised that, “For instance, the number of government agencies for instance at the ports that are collecting revenue for government, can we reduce the number of them and still getting more of these revenue. Because you see, the more you put in place some of these institutions and these taxes, the easier it is for people to evade those taxes for convenience. So let the process be so straightforward so that tax payers will comply easily so that it doesn’t waste their time,” he said.
Reversing tax incentives and tackling IFFs
In his suggestion, Dr Ali Nakyea wants government to reverse some tax incentives and block illicit flows of cash from the public purse.
“You are granting incentives to certain sectors that they shouldn’t pay tax, is it time to ask them to come and help you contribute? If it is the 25 they cannot pay, can you bring in 5%, 10%? That is one area.
“The second one is trying to look at what we refer to as illicit financial flows that is complete non-disclosure. If you take the Ghana Integrity Initiative and CHRAJ reports, it will tell you that Ghana is losing US$3 billion dollars annually from corruption. Is that not exactly the amount we’re looking from IMF.
“If you take ACEP report, it tells you we’re losing US$2 billion from illegal mining. If you add the two, we’re at US$5 billion. We’ve not come to under invoicing and other things at the port. So do you need IMF/ we’re talking about $5 billion a year now, and you’re going to get US$1 billion a year from IMF,” he said.
Dr. Ali Nakyea called on the government to close the tax gap and rope in much of the informal sector and suggested that, the second schedule to the Income Tax Act 2015 (Act 896) be implemented.
“Because it brings up the idea that why can’t we allow the informal sector to give say the 2% 3% of their turnover like the growth and stablization levy is saying and that is your total tax for VAT and income tax at least you are also contributing something then we could have opened the net, we would have widened the net,” he said.
Cutting government expenditure
Additionally, Dr. Ali Nakyea suggested that, instead of increasing taxes, the government should have instead explored avenues for drastically reducing their expenditure.
He said the government could have started with postponing some non-urgent projects to provide the much needed fiscal space for government maneuvering.
“If your income is to meet expenditure, are there no expenditures that may be postponed or suspended to give you enough room to maneuver when things are [hard] – you can’t continue. Indeed, most of the calls that are being made are not on cancellation entirely of some of the projects, people are even asking, can you suspend some of them that are not so immediate and pressing and when things normalise we come back to it. I don’t think that is asking too much,” he said.
He added that the government could have also explored ways to close the country’s widening tax gap instead of increasing taxes.
“For me it’s that are we efficient and effective in the collection of the existing taxes? Because we studies by Opoku and Tanaka in 2020 showing us what we call the tax gap, the difference between the actual taxes we collect and the potential we can collect. How have we closed that gap?
“Because the more taxes we introduce, the wider the gap will be if compliance is that low or non-existent. So I believe if we’re able to mop up excessively what exists and we’re not able to achieve then we can start thinking about is it that we don’t have enough? We have more than enough taxes. The …tax we have are competitive in the sub-region, and so why are you increasing it?” he said.
Tax education
Prof Turkson Ebo proposed enough public tax education to promote a tax compliant attitude in Ghanaians.
According to him, promoting a tax compliant attitude would support the government’s tax revenue mobilisation agenda rather than the introduction of new tax measures. He explained that increasing taxes without increasing tax compliance amongst Ghanaians would be counterproductive and potentially injurious to the growth of the private sector.
“One way the government could encourage Ghanaians to be tax-compliant was to show the citizenry that the government was making good use of their taxes.
“We need to ensure that there is enough public tax education and also we should show the public sector, the government machinery must show the average Ghanaian that we’re making good use of your money to support the public sector to create jobs for your kids or the young men and women of this country to get into jobs.
“When you do that and people see that the revenue that you get from the taxes are plowed back into the economy to help them, people will be willing to pay taxes. Businesses will be willing to pay more taxes, if for instance you discuss with them and increase their after profit tax by a little bit,” he said.
The Ghana Revenue Authority (GRA) says, in a special exercise to seal revenue losses, recovered in excess of GHS85 million revenue within a five month period between October 2022 and February 2023.
This comes at the time the managers of the economy are in ‘mad-rush’ to increase domestic revenue mobilisation as one of the conditions for the pending International Monetary Fund’s Board Approval for a US$3.0 billion Balance of Payment Support.
An economist has estimated that, Ghana loses more than GH¢5.6 billion annually in tax revenue. Blockage or reducing excessive bleeding of domestic revenue collection have been a discussion by many; including financial and economic experts, international development partners, civil society groups and the government actors. However, the discussion becomes as usual, a ‘talk-show’ without any significant achievement in revenue leakages blockage. This forces the government to resort to the cheap way of increasing domestic revenue by introducing new taxes or reviewing upwards existing taxes and levies almost every year. Just last week, the government proposed new taxes which have received strong opposition. But, the economist has passed judgment that, until government blocks revenue leakages that have bedeviled the country’s revenue mobilisation system for ages and creates an environment that encourages tax payers to be tax-compliant, the country will continue to lose large volumes of revenue yearly.
Credit: OMG
“We need to build systems in place to ensure that we keep to the barest minimum the leakages that leave the revenue stream. And it’s very very important that we do this”, Professor Ebo Turkson indicated in an interview following the attempt by government’s move to introduce new tax measures.
Citing the situation at Ghana’s ports and habours, he stated that the use of various government agencies to collect taxes and invoices has created space for people to evade taxes rather than comply due to how complicated the system is.
In anticipation to bring in more revenue, the Ministry of Finance, last week, laid three revenue papers; the Income Tax Amendment Bill, Growth and Sustainable Bill and the Excise Amendment Bill to parliament for consideration to be passed into law after approval from the Finance Committee of Parliament for it to be considered by the house. The ministry is optimistic that these revenue bills will bring in almost GH¢5 billion to support the economy. But, unfortunately the general House approval of the bills may suffer setbacks as key actors in the economy are against the proposals.
The 80:20 paradox
Apparently, a tax Consultant believes that government’s move to introduce new taxes will deepen the tax net instead of widening it. According to him, the government’s new tax measures are merely entrenching Ghana’s 80:20 tax paradox where 80% of tax payers contribute 20% of tax revenue while 20% of tax payers contribute 80% of tax revenue.
“The existing tax payers we know who are complying, if you increase taxes or you introduce taxes, the same segment of people continue to carry that burden because we have a paradox in the revenue mobilisation sector in Ghana where we say 80:20 paradox. 80% of tax payers bring in only 20% of revenue and 20% of tax payers bring in 80% of tax revenue”, Dr. Abdallah Ali Nakyea said in an interview.
The lecturer at the University of Ghana Law School explained; “Who are these 20%? The multinationals, the banks, financial sector, these are the same people we’ve saddled with national reconstruction levy, we’ve saddled them with financial sector recovery levy and now we’re talking about growth and sustainability levy. The 80% we all keep saying, the informal sector is between 70 and 80%, what is their contribution to revenue?. So if we’re even able to nurture the 80% non-compliant to come up to 60% you can imagine the revenue we can make.”
The tax expert further refuted that, the IMF had not made the introduction of new taxes a requirement for board approval; rather, it had urged the government to develop its fiscal space.
“I don’t think that anybody will tell you bring in taxes before I give you a loan. If he tells you I want to see how you’re developing your fiscal space, has he told you to increase taxes?” he said.
Anti-Business taxes
In his contraction, the Chief Executive Officer of the Ghana National Chamber of Commerce and Industry, Mark Aboagye, has noted that adding more taxes to an already tax-burdened economy will be counter-productive to revenue generation. Indicating that, the introduction of new tax measures to ramp up revenue generation is anti-business and should it be passed would collapse many businesses.
Reacting to the impasse between the Majority and Minority side of parliament concerning the course of proceedings on the new tax bills, the industries leader expressed extreme happiness that the tax measures were not passed and has called for them to be withdrawn from the house for wider consultation.
“Extremely happy, extremely excited because those taxes are anti-business, and I have no doubt in my mind that if it’s passed it’s going to cause the collapse of a lot of businesses, and businesses are going to produce under capacity. If you look at the environment and already the taxes that we have, adding up was going to be harsh for businesses so we’re happy that it’s not been passed.
He explained that in the government’s quest to generate revenue, it was crushing the very industries that would provide the revenue.
He said, should the tax measures be passed, “it’s going to cause unemployment.”
“We’re killing the micro, the basics for us to get to all these macro policies to work, we’re weakening it. So for me, we’re happy it’s not being passed, they should withdraw it, consult the business community, the Chamber is ready to work with them, get them convinced that these taxes what extent are they going to impact on your businesses, [also] get their input into the taxes,” he said.
Consequently, Prof Turkson in the interview described the government’s yet-to-be-passed tax measures as nuisance taxes, warning that, should they be maintained businesses would suffer in an already harsh climate.
“When you begin to introduce some of the taxes that become input taxes before you go and tax their profit you’re hurting them. You’re trying to tell them that you’re increasing their cost of production when you should rather be reducing their cost of production for them to produce more, make more profit and then you go and tax after they declare their profit. And that is what the businesses are complaining about, that is what we’ve called nuisance taxes in the past. And why they’re coming back I do not understand,” he said.
Tax Incentives to attract investments
Prof Ebo Turkson further explained that, most investors are least enthused by the government’s tax incentives as they are more concerned about the economic environment the government creates for them to run their business smoothly, thereby urging government to move beyond using tax incentives to attract foreign investment.
“Ghana should move beyond using tax incentives to attract investment. When you ask those who bring in investments they’ll tell you that the least of the incentives is the tax incentives that we give them. They need a business environment that is conducive, so don’t give them any tax exemptions. Give them a business environment that is conducive for them to come and produce here and tax them, they’ll pay,” he said.
The debt-stressed economy
Meanwhile, the Government of Ghana is currently facing serious liquidity challenges and is unable to service its debts.
The debt-stressed Ghanaian economy is in dire need of revenue to be able to survive pushing the government to resort to debt restructuring. The government concluded a domestic debt exchange programme in February this year and looking forward to an external debt relief. In early part of this year, Ghana asked official creditors for a debt restructuring under the G20 Common Framework Treatment. The IMF has said a comprehensive debt restructuring is a condition of its support.
The country has been struggling to refinance its debt since the start of 2022 after downgrades by multiple credit rating agencies on concerns it would not be able to issue new Eurobonds.
The Bank of Ghana’s January 2023 economic and financial data summary revealed that total public debt stock has shot up to GH¢575.7 billion at the end of November 2022, according to new data released by the Bank of Ghana.
The new debt figure brings Ghana’s debt to Gross Domestic Product (GDP) ratio to 93.5% from 75.9% in September 2022.
The external component of the country’s public debt shot up to GH¢382.7 billion in November 2022, equivalent to 62.1% of GDP. This was from GH¢271.7 billion in September 2022.
However, according to the Bank of Ghana, the total public debt is defined as Central Government debt excluding State Owned Enterprises/Special Purpose Vehicles Debt.
Also, according to Trading Economics’s global macro models and analysts expectations, government Debt to GDP in Ghana is expected to reach 86 percent of GDP by the end of 2023. In the long-term, the Debt to GDP is projected to trend around 88% of GDP in 2024 and 90% of GDP in 2025.
Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.
Part two of this article details the better way out of the annual ritual of introducing new or reviewing existing tax policies to overburden the already tax compliant individuals and institutions.
