Key policy initiatives for post COVID-19 recovery

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The COVID-19 pandemic has caused extensive disruption to Ghana’s economy; severely affecting businesses, jobs and livelihoods. The post-pandemic recovery will be arduous and protracted, and will require well-coordinated and comprehensive policies to turn the situation around. The IEA presents here a summary of policy initiatives that we believe are key to achieving immediate recovery and long-term growth (for further details see IEA Discussion Paper [hyperlink]). The initiatives cover fiscal policy, monetary policy, natural resource policy, agricultural policy and industrial policy. The Institute wants to bring these policy initiatives to the attention of government as it prepares its post-pandemic recovery plan.

Fiscal Policy

Fiscal policy must necessarily lead the recovery, since it is uniquely placed to mobilise and manage the resources required. To be able to play this role effectively, persistent rigidities in both revenue and expenditure must be addressed.

Scaling-up Revenue 

Ghana has a long-standing problem with revenue mobilisation. Currently, the country’s tax revenue/GDP ratio is 12-13%, which compares unfavourably with the average of 25% for middle-income countries and the minimum threshold of 20% under the proposed eco currency system of the Economic Community of West African States. Ghana’s situation of low tax revenues does not arise from the fact that it has low tax rates. On the contrary, Ghana’s personal income, corporate income and VAT rates are relatively high. The problem rather lies with tax losses – which experts estimate to be around 10-12% of GDP. In other words, we lose about as much tax revenue as we collect. Ghana’s tax revenues should be significantly scaled-up to support the recovery and long-term growth. The following are some of the actions we recommend for achieving this all-important goal:

  • The informal sector remains almost entirely outside the tax net. The activities in this sector are largely small in scale, but on aggregate the sector accounts for nearly 30% of GDP. Therefore, it cannot be completely ignored when it comes to taxation. However, we should be taxing the mechanics, hairdressers, tailors and other artisans who employ at least a few people, rather than the tiny fish like kayayei, kenkey, waakye and ice-water sellers, who have tiny net incomes.

To ensure that adequate taxes are collected from the informal sector, it must be integrated into the tax system through formalisation. Government’s initiative to digitise the economy is well-directed to bringing the informal sector into the tax net. This effort should be supplemented by leveraging new information and communication technologies, such as mobile money and other tech platforms.

  • Tax evasion is pervasive in Ghana. The act is often perpetrated through connivance between taxpayers and tax officials. The way to deal with this problem is to institute a strict surveillance system backed by a strong sanctions regime for offenders under the aegis of the commercial courts.
  • Tax exemptions are also pervasive, enjoyed by selected companies, NGOs, diplomatic missions, public officials and other individuals. The system is subject to considerable abuse, characterised by pervasive lobbying for special treatment. Tax exemptions are estimated at GH¢5billion currently. It is important that we reduce exemptions to an acceptable minimum. Recognising the problem’s magnitude and the need to do something about it, government submitted a bill to Parliament about two years ago. The bill has languished before Parliament and there is no apparent desire by either of the two major parties to pass it. We urge prompt passage of the bill to plug a glaring hole in the tax system and save billions in revenue for the budget.
  • Illicit financial flows in the form of trade mis-invoicing, transfer pricing and various forms of money laundering are pervasive in Ghana. These underground dealings cost the nation huge amounts in tax losses, estimated to be around US$3-4billion annually. We need a strongly investigative surveillance system to detect and curb these practices. Meanwhile, a strong sanctions regime is required to punish and deter culprits.
  • Property taxes have huge potential in Ghana, given the sprawling mansions in urban centres – but they are barely collected. They should be made the responsibility of Metropolitan, Municipal and District Assemblies, which should be incentivised to collect and retain part as internally generated funds. They should be authorised to use those funds at their discretion to finance development projects.
  • Tax fraud and corruption are rampant, and usually arise from connivance between taxpayers and tax officials to underestimate payable taxes. The pervasive human interface in the tax system is part of the problem. It can therefore be abated through a strong, multi-layered surveillance system supported by automation and digitisation; not forgetting the need for a strong sanctions and punishment regime.
  • Inefficiencies in tax administration persist, despite efforts over the years to remedy the situation. These relate to timeliness, coverage and costs, among other things. There should be continual efforts to strengthen tax administration. Expanding automation and digitisation would go a long way to improve efficiency in tax administration.
  • The pandemic has severely affected traditional revenue sources like personal income tax, corporate income tax and international trade tax. It is, therefore, critical that we step-up efforts to plug these tax leakages in order to make up for the shortfall.

 

Reforming Expenditure: The utilisation of government revenue, on the other hand, is plagued by two key problems: i) inadequacy of revenue (noted above); and ii) excessive expenditure earmarking (or rigidities). The latter refers to obligatory payments for wages, debt service and statutory funds. In the end, capital expenditure that’s needed for growth is sacrificed. We suggest the following measures to tidy up the expenditure side of the budget and ensure efficient utilisation of revenue:

  • The public sector wage bill is excessively high. In 2019, the wage bill used up as much as 47% of tax revenue, which is clearly unsustainable. The way to curtail the wage bill is to implement the long-delayed public sector reforms to downsize the sector and make it more efficient and productive.
  • Debt service has become a major burden in the budget. In 2019, interest payments used up 46% of tax revenue. The way to bring debt service under control is to adopt a comprehensive debt management strategy that includes restructuring, refinancing (or re-profiling) and buybacks. But the bottom line for reducing debt service over the long haul is to curtail the budget deficit and associated borrowing by bridging the revenue expenditure gap; something that we are strongly advocating.
  • Payments to statutory funds have also become an increasing burden on the government budget. Efficiency in the management of these funds has, however, been called into question. The funds should be reviewed and reformed as necessary to improve their efficiency and make them more fit for purpose. They should be streamlined and aligned closely with the central government capital budget.
  • Expenditure on goods and services has been growing in line with an expanding public sector. In 2019, this line item used up 16.3% of tax revenue. The item should be controlled through streamlining, rationalisation and effective monitoring and oversight.
  • Capital expenditure (CAPEX) has been unduly squeezed, bearing the brunt of inadequate revenue and competing recurrent-spending interests. In 2019, CAPEX was only 2.8% of GDP – which is extremely low by all standards, and inimical to long-term growth. CAPEX should be scaled-up by allocating a higher portion of an enlarged revenue envelope to it, and through appropriate expenditure reforms.

We recognise that the Public Financial Management and the Fiscal Responsibility Acts are directed at strengthening fiscal policy. But to be effective, they should be supported by measures to address underlying weaknesses in both revenue and expenditure, as outlined above.

Monetary Policy

Monetary policy must play a complementary role in the recovery effort. It is incumbent on the central bank to exercise its broad mandate, which goes beyond price stability and includes “support for the general economic policy of government, economic growth and development”. We call on the Bank to support post COVID-19 recovery, especially in the following areas:

  • The Bank should directly support development projects and programmes. In particular, it should support the agricultural value chain; including in the buffer stock system, where it has been involved recently. This it can do either through its own department or through a separate development finance institution.
  • The Bank should create a regime of affordable lending rates for SMEs and strategic sectors of the economy like agriculture and industry. This it can do by subsidising credit from a development finance institution to these sectors.
  • The Bank should restore its financing of the budget which has been temporarily put on hold, subject to caps. This will allow government to benefit from cheaper and more convenient supplementary funds to execute the recovery plan.

 

 Natural Resource Policy 

Ghana’s natural resources represent the low-hanging fruits for mobilising funds to support the recovery. The country has untapped natural resource wealth in the form of oil, gas, gold, manganese, bauxite and iron ore inter alia, that is estimated to be worth over US$12trillion. Invariably, we give away these resources to foreign investors through concession contracts that cede rights over mineral lands and oil plots to the investors, with minimal benefits to Ghana. We should exploit our natural resources more prudently and more beneficially through the following actions:

  • We should refrain from signing any more concession contracts, which are actually in breach of the Petroleum Exploration and Production Act, 2016 (Act 919). The Act stipulates that all contracts should be on product-sharing basis, and that is what we should be doing.
  • We should revisit our mineral contracts and, where possible, renegotiate the export retention and other generous terms granted to foreign investors.
  • We should take full ownership of our natural resources and ensure that they deliver maximum benefits to Ghanaians.
  • To the greatest extent possible, we should only contract foreign investors to exploit our resources for a fee that takes care of their costs plus a profit margin.
  • We should include technology transfer clauses in all contracts to ensure that Ghanaians ultimately acquire the technical knowhow to exploit our resources.
  • We should utilise our comparative advantage in natural resources to support industrialisation by adding value to them, thereby maximising their returns.

Agricultural Policy 

Ghana needs to tap the huge potential of its agriculture, which currently employs over 60% of the labour force and contributes 19% of GDP, to support post COVID-19 recovery and long-term growth. Agricultural productivity should be increased to improve food affordability and security, while leveraging agriculture for industrialisation. The following actions are recommended to government aimed at achieving these objectives:

  • Increase availability of irrigation facilities, high-yielding seed varieties, fertiliser and quality extension services to peasant farmers.
  • Reduce post-harvest losses to avoid waste, the disincentive to farmers and large markups of retail prices over farm-gate prices. This should be done by beefing-up food preservation and storage facilities, and improving transportation infrastructure and marketing facilities. The National Food and Buffer Stock Company should be strengthened to play a more effective role in this regard.
  • Provide affordable credit to agriculture through a designated development finance institution.
  • Incorporate Government’s Planting and Rearing for Food and Jobs, One Village-One Dam and One District-One Warehouse initiatives into an integrated agricultural value chain from production to storage, to processing to marketing.
  • Leverage the country’s comparative advantage in agricultural resources to promote industrialisation (see next section).
  • Increase support for large-scale commercial agriculture capable of leveraging modern equipment and farming methods.

 

Industrial Policy  

Industrialisation is a key propeller of economic growth. Unfortunately, Ghana is less industrialised today than it was in 1970 – with manufacturing output as a ratio of GDP dropping by about a third from 15% to 10%. This is the result of privatising and abandoning many of Nkrumah’s industries in the wake of extensive liberalisation of the economy. We should leverage our comparative advantage in natural resources to spur industrialisation and transformation of the economy. The following actions are recommended to government:

  • Link industrialisation with agriculture, leveraging the resources of the latter.
  • Fully integrate production and extraction of raw materials with local processing and fabrication.
  • Ensure the One District, One Factory (1D1F) initiative is informed by our historical industrialisation experience and international best practice. In particular, link factories to our natural resource supplies to ensure their competitiveness and sustainability. Carefully consider supply chain, product-type, factory sizes, locations, ownership and management structures.  
  • In addition to 1D1F, consider also the possibility of creating large industrial parks comprising strategic industrial conglomerates, so that industries can benefit from contagion in terms of technology transfer and economies of scale. 
  • Support the private sector to be part of the industrialisation process with a relaxed regulatory framework, good infrastructure, affordable credit, stable and adequate markets, favourable trade policies, R&D support and a stable macroeconomic environment.

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