There are signs of imminent global recession as the COVID-19 pandemic causes serious economic damage across the world. Ghana is expected to grow 1.5 percent in 2020 according to the government and International Monetary Fund (IMF). Fitch, a rating agency, however expects the economy to do slightly better with a growth rate of 2 percent in 2020. This means that Ghana may record her lowest growth in more than three decades. In addition, the COVID-19 pandemic will have significant implications for employment, poverty and inequality and, importantly, government revenue to do the necessary investments to ensure economic growth.
This year. government has projected a revenue shortfall of about GH¢9.5billion as a result of the pandemic. In the last five years – that is, between 2015 and 2019 – government’s total revenue grew cumulatively by 65%, while its expenditure grew by 75%; causing the deficit finance requirement and the country’s debt to increase. Within the same period, Ghana’s domestic and tax revenue grew cumulatively by 77% and 75% respectively, while interest expenditure increased by 118%. But grants from development partners declined by 63%, partially due to Ghana’s lower middle income country status.
The situation with grants could worsen, as the rest of the world is expected to focus on building their economies after the COVID-19 pandemic. Also, many countries are expected to have their debts increased. According to the IMF, global debt is expected to increase from 83.3% to 96.4% of global GDP. The United State of America’s debt is projected to go up from 109% to 131% of GDP; and from 134.8% to 155.5% for Italy as the Fund projects fiscal deficit to widen in major economies of the world. This could limit their ability to give grants and other supporting finances to countries like Ghana.
Government’s fiscal space will further be shrunk by capital market and debt sustainability challenges. Many countries with better bond risk ratings than Ghana are expected to increase borrowing from the capital market. This will limit the ability of developing countries like Ghana to raise the needed funds at reasonable interest rates to support their development. Ghana’s public debt stock stood at GH¢236.1billion (59.3% of GDP) at the end of March 2020, with external debt component of about GH¢124.8billion (31.4% of GDP) according to the latest Bank of Ghana’s Summary of Economic and Financial Data. Last month, Fitch projected Ghana’s Debt to GDP ratio to be about 77% at the end of this year as a result of revenue shortfalls due to the COVID-19 pandemic.
Meanwhile, Ghana is expected to save about US$350million in debt servicing payments this year as G20 countries suspend debt servicing payments due them this year from the 76 poorest countries in the world (the IMF’s April 2019 World Economic Outlook ranked Ghana 59th poorest country in the world). Commercial debts and debt owed to export credit agencies are not eligible for debt relief under this policy. However, multilateral debt owed to institutions like the World Bank and IMF qualify – as well as bilateral debt owed to development partner countries.
In 2018 (the date for which latest debt comprehensive data is available), total debt servicing on bilateral debt and multilateral debt amounted to US$327.1million, while debt servicing on commercial debt was about US$2.2billion. This implies that, in 2018, debt servicing on bilateral debt and multilateral debt represented about 13% of total debt servicing obligation. Given that the debt stock had increased form the 2018 figure, and given the rate of growth of servicing requirements at least between 2017 and 2018, debt servicing on bilateral and multilateral debts should exceed the US$350million relief government may get.
This situation means that Ghana will have to focus seriously on domestic revenue mobilisation, which was made up of 81% tax revenue, 15% non-tax revenue and 4% other revenue at the end of 2019. Domestic revenue recorded an average annual growth of 17% in the last five years, and was projected to growth by 27% this year before the outbreak of COVID-19 (50% of this growth was expected from tax revenues). We however know that this cannot be achieved, given government’s impact analysis of the COVID-19 pandemic. This notwithstanding, it is the only real hope of revenue for government to enable expenditures that will support growth of the economy.
Tax revenue remains the most reliable source of domestic revenue, and it constitutes the bulk of the country’s domestic revenue (81%) as earlier stated. However, tax revenue to GDP ratio for Ghana remains low compared to other countries in sub-Saharan Africa and the regional average, despite efforts of governments to change this narrative. According to the Revenue Statistics in Africa 2019 published by the Organisation for Economic Cooperation and Development (OECD), in 2017 Ghana’s tax revenue to GDP ratio was 14.1% relative to the ‘regional’ average of 17.2%. Also, Ghana recorded a lower ratio compared to its peers and neighbours (Côte d’Ivoire 17.9%; Kenya 18.2%; Burkina Faso 19.3%, South Africa 28.4%).
Given the current situation and its implication for the global economy, in addition to the potential and the financial resources needed to achieve national development aspirations, there cannot be any ‘tokenism’ or half-heartedness in efforts to mobilise domestic revenue. A recent publication by Prince Aboagye and Ellen Hillboll, stated that: “The Ghanaian state’s fiscal capacity has been consistently limited by its inability to secure political support for its revenue mobilisation efforts”. They further stated that the “history of misappropriation of tax revenues, overt corruption and profligacy diminished citizens’ support for governments’ tax efforts. Hence, tax reforms were often met with violent protests, strikes and demonstrations by various interest groups and social classes, weakening governments’ tax capacity”. I believe these statements signal where we should be looking to resolve tax revenue and domestic revenue issues.
Following government’s outline for presenting revenue, domestic revenue can be classified into three categories: tax revenue, non-tax revenue, and other revenues. Studies on Ghana’s revenue potential have shown that all these categories have unexploited potentials. For example, the United Nations Economic Commission for Africa (UNECA) in 2018 estimated that the tax gap for Value Added Tax (the shortfall between potential and actual VAT collections) in Ghana was about 67%. This means Ghana collects only 33% of potential VAT revenue. This is certainly good news, since there is a huge potential to collect more. But as a country we need to assess comprehensively the available policy options if we want to grow our domestic revenue.
Improving tax compliance requires a taxpayer compliance programme – with focus on retooling the Ghana Revenue Authority (GRA), deploying robust collection systems and increasing capacity in core tax administration functions such as registration, debt collection, audit, taxpayer services, filing and payment enforcement and education. On the hand, there must be strategies to build strong links between revenues and public benefits to promote trust and tax morale among taxpayers. This could be reinforced with effective and efficient collaboration between the GRA and Metropolitan, Municipal and District Assemblies (MMDAs) to better-tailor reforms to local contexts and needs.
In recent years, the Ghana Revenue Authority (GRA) has tried to build citizen’s confidence in the tax system and to promote voluntary compliance. However, it is near-impossible for taxpayers to comply with the full disclosure required to achieve this outcome. Therefore, there is a need to pursue more aggressively ‘quasi-voluntary’ tax compliance. In this case, citizens comply out of strategic considerations – like the possibility of being caught and the penalty implications. Studies have also shown that a sense of equitable distribution of the tax burden among taxpayers improves their willingness to comply with tax regulations. In addition, leveraging on information technology could increase compliance and lower administrative costs.
Increasing the tax net/base
The central challenges for the country’s domestic revenue generation post COVID-19 pandemic are probably going to be the identification of potential taxpayers (individuals and groups) and taxing them appropriately. This could probably be a standalone project looking at the various efforts in the past and their outcomes. We have all wondered why increasing the tax net is such a herculean task for finance ministers and governments, especially in sub-Saharan Africa. The obvious reason is the difficulty in identification due to the informal nature of economies on the continent. This is true for Ghana as well.
According to a report by the Institute for Fiscal Studies (IFS) in October 2017, less than 50% of potential taxpayers in the country actually pay their taxes. Another study by Danquah and Osei – Assibey estimated that only 31% of potential government revenue in the informal sector is being collected. However, the sector contributes about 70% of the country’s GDP. Hence, identifying and tracking the economic activities of the sector players and finding the appropriate tax type and rate will contribute significantly to tax revenue. Currently, government is hoping the Ghana Card, the digital address system and the street-naming programmes will significantly solve the identification problem.
Even though solving the identification challenge will be a great step toward taxing the informal sector, it is not enough to increase the tax net to the desired level. It must be accompanied by the right tax type and rate. The former seems more complex as it involves a lot more technicalities. This is not to say that determining the appropriate tax rate is not important, but this becomes relatively easy upon identifying the economic agent, the nature of their businesses and the tax type to implement. Both the tax type and rate can broadly be categorised into two: direct and indirect; specific and ad valorem respectively.
Ghana’s tax revenue was dominated by indirect tax revenue partially due to inability to increase the tax net and effectively cover the informal sector. This improved significantly as the contribution of both direct and indirect tax to total tax revenue was almost at par at the end of 2019. But a further analysis of the data showed that the improved performance of direct tax revenue was mainly due to significant growth in company taxes on oil and royalties from oil. Oil companies are presumably in the formal sector; therefore, direct taxation of the informal sector remains a challenge.
To ensure equitable distribution of the tax burden and improve compliance, especially from the few who are shouldering the direct tax burden, the informal sector needs to brace itself for tax reforms. The other alternative for government will be to adopt the easier and usual approach of indirect taxation with the burden on everyone – including those in the formal sector who are currently overburdened by the direct tax incidence.
Tackling tax evasion, avoidance and exemptions
Tax avoidance and evasion are done mostly by taking advantage of gaps or exceptions in the tax regulations and also falsifying documents. Tax evasion is an illegal practice; it is an unlawful attempt to minimise tax liability. Tax avoidance, on the other hand, usually takes place when companies and individuals use areas where tax regulations are ambiguous to avoid paying tax. But, identifying and understanding the reasons underlying these problems will help develop means and the tools for fighting them.
In doing so, attention should be paid to reasons for noncompliance with tax legislation, the transfer pricing regime and reasons for the low ability of tax authorities to enforce tax obligations. Tax exemptions have increased in recent years, and it is estimated at about GH¢10 billion annually. This is about 19% of domestic revenue or 24% of tax revenue in 2019. Given the expected revenue difficulties after COVID-19, government may want to do a comprehensive review of the tax exemption regime.
Improving the performance of non-tax revenue policy instruments/tools and reducing non-tax revenue volatility
According to the Economic Commission for Africa (ECA), African countries rely on a small set of non-tax instruments which in most cases bring little revenue to governments. Ghana’s set of non-tax revenue instruments include retentions; fees, licences and charges; dividend/interest and profits; rentals; property income; business permits; penalties and forfeitures. Due to the nature of some of these instruments, non-tax revenue growth showed a volatile trend, which makes it highly unpredictable. However, it is possible to smoothen the trend by increasing the performance of these tools: especially property rate; fees, licence and charges; penalties and forfeitures.
Increasing revenue collection in the areas of fees, licence and charges; penalties and forfeitures, depends on law enforcement. While this will increase government revenue, it will also help to reduce crime and disregard for the law. Perhaps this is the time to impose fees, fines, charges and penalties in certain cases instead of prison sentences. Although these revenue sources may begin to fall as crime falls, its short- to medium-term relevance for domestic revenue generation is crucial.
The ‘big fish’ here is property rates. This is one of the best sources of income for local governments, and if properly harnessed some local assemblies may not have to depend on central government finances. A report titled ‘Residential Occupancy and Property Tax Arrears in Accra’ by a team of researchers from the Durham University Business School revealed that 80% of property tax are in arrears, with some up to 10-yrs. This means that only 20% of property owners in Accra pay their property tax regularly.
Given the expected limited fiscal space after COVID-19, collection of property rates should improve across all assemblies in the country. The primary focus should be on resolving challenges with the property rate regime. Some of the problems are: poor property data systems, lack of political will, non-enforcement of the law, and insufficient technical capacity.
Finally, while intensifying efforts to increase domestic revenue, it is important to recognise that its size also depends on the level of economic activity. Therefore, returning businesses to a growth path versus collecting more money from them should be a big dilemma for government. Should government tax to grow or grow to tax? This old debate should dominate post COVID-19 strategies. This notwithstanding, the COVID-19 pandemic could be the catalyst that compels us to undertake the necessarily reforms in domestic revenue mobilisation to give life to the ‘Ghana Beyond Aid’ agenda.