Lessons learnt from the 2021 budget – the perspective of the Chartered Institute of Bankers

Patricia Sappor, President of the Chartered Institute of Bankers, Ghana

The 2021 budget statement was for the first time presented in Parliament by someone other than a substantive finance minister – thus, the Minister of Parliamentary Affairs, Osei Kyei Mensah Bonsu on Friday, 12th March 2021.  In his recitals, Osei Kyei Mensah Bonsu revealed that government has decided to introduce some new taxes and have revised existing ones upwards to generate more revenue to the nations’ purse. Prominent among the taxes introduced includes what is dubbed the financial sector clean up levy.

This levy which will see a five percent point increase in the current taxes on the profit-before-tax of the banks in Ghana. This according to the budget statement is to help defray outstanding commitments stemming from the financial sector clean-up. This will work alongside other new taxes and other tax increments. What this essentially means is that prices of banking and business services are likely to go up and it is likely it will impact on the consumer and business confidence again. This is a real concern to the banks in Ghana.

Osei Kyei Mensah Bonsu added that 2020 was a very challenging year for the global economy primarily because of the impact of the COVID-19 pandemic. The pandemic has disrupted global economic activity, created uncertainty, and weakened global growth conditions. Growth for 2020 which was projected at 3.4 percent, was further expected to contract by 4.9. Advanced countries are expected to contract by 8.0 percent, Emerging Markets and Developing Economies are projected to contract by 3.0 percent while Sub-Saharan Africa is expected to contract by 3.2 percent.

As the Ghanaian economy was beginning to consolidate recent gains for growth and jobs, the COVID-19 outbreak hit the country leading to the initial severe movement restrictions. COVID-19 also led to disruption in corporate and general business confidence, with threats to projected revenues, profitability, liquidity, and corporate growth. According to Osei Kyei Mensah Bonsu at the time of presenting the budget statement suggested that so far 19 out of the 28 State-owned Enterprises (SOEs) are projecting losses up to GH¢1.55 billion for 2020 and still counting.

In the budget statement, the Non. Minister, Osei Kyei Mensah Bonsu stated that the COVID-19 pandemic continues to have dire consequences on Africa. According to estimates of the World Bank, economic growth in Sub-Saharan Africa (SSA) is expected to decline from its 2019 value of 2.4% to between -2.1% and -5.1 % in 2020, making 2020 the worst year since records began in 1970 for the continent’s economic growth, (according to IMF’s Regional Economic Outlook for Africa, “COVID-19: An Unprecedented Threat to Development”, April 2020).

Osei Kyei Mensah Bonsu stated that “it is still the responsibility, as leaders, as the people’s elected government, to work out and execute an intelligent, ambitious and all-inclusive recovery plan, than none other, that will steer this nation and her people out of the recession before us”. This challenge continues as the daunting task facing us in Ghana today. The pandemic has also affected Africa’s long term structural response to its economic woes, creating the largest trade block at 1.2 billion people for a US$3.2 trillion economy.

COVID-19 Pandemic Support

Government in 2020 outlined a number of initiatives to cushion the effect of the pandemic on the populace. Some sectors of the economy and sections of the population, however, continue to suffer the devastating consequences of the pandemic. Government is therefore rolling out these additional reliefs for different sections of the population, especially that hardest hit by the pandemic. A few of such initiative includes:

  • Tax Rebate: Provision of a rebate of 30 percent on the income tax due for companies in hotels and restaurants, education, arts and entertainment, and travel and tours for the second, third and fourth quarters of 2021;
  • Tax Stamps: Suspension of quarterly income tax instalment payments for the second, third and fourth quarters of 2021 for small businesses using the income tax stamp system;
  • Vehicle Income Tax: Suspension of quarterly instalment payments of the vehicle income tax for the second, third and fourth quarters of 2021, for “trotros” and taxis as part of measures to reduce the cost of transportation (we at the Institute hope this works well for the safe livelihoods of Ghanaians).

2020 in Retrospect – 2020 Mid-Year Provisional Budget Macro-economic indicators

Macroeconomics (just  for academic purposes) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes and government spending to regulate an economy’s growth and stability. This study includes regional, national, and global economies. Macroeconomists study topics such as Gross Domestic Product (GDP), unemployment rates, national income, price indices, output, consumption, unemployment, inflation, saving, investment, energy, international trade, and international finance.

One will recall that the 2020 Mid-Year Provisional Budget Review document predicted the performance of Ghana’s macro-economic performance as follows:

  • Overall real GDP growth rate of 0.9 percent;
  • Overall non-oil real GDP growth rate of 1.6 percent;
  • End-period December year-on-year inflation of 11.0 percent;
  • Overall budget deficit (on cash basis) of 11.4 percent of GDP;
  • Primary balance deficit of 4.6 percent of GDP; and
  • End-period December stock of Gross International Reserves to cover at least the equivalent of 4.0 months of imports of goods and services.

2021 Budget Macro-economic indicators

According to the 2021 budget statement, provisional estimates from the Ghana Statistical Service (GSS) show that average overall real GDP growth for the first three quarters of 2020 was 0.2 percent, compared with 6.0 percent for the same period in 2019. Over the same period, overall non-oil growth was 0.4 percent, compared with 5.0 percent in 2019. The drastic slowdown in overall economic performance largely reflected the impact of the COVID-19 pandemic.

The 2021 budget statement also revealed that the provisional data on the performance of the economy as at the end December 2020 shows the targets for most of the macroeconomic indicators as stated earlier in in the 2020 Mid-Year Review documents was realized.

A summary of this performance is as follows:

  • Data for the first three quarters of 2020 shows an overall real GDP growth rate of 0.2 percent on the average. The outturn mainly reflected the impact of the COVID-19 pandemic on economic activities in the economy. The 2020 GDP growth outlook is projected at 0.9 percent;
  • Non-Oil real GDP also grew at an average of 0.4 percent in the first three quarters of 2020. The projected outlook for 2020 is 1.6 percent;
  • End-period inflation was 10.4 percent in December 2020 compared to the revised target of 11.0 percent;
  • The overall budget deficit on cash basis was 11.7 percent of GDP against a revised target of 11.4 percent of GDP;
  • The primary balance recorded a deficit of 5.3 percent of GDP against a target deficit of 4.6 percent of GDP; and
  • Gross International Reserves accumulated to US$8.6 billion at endDecember 2020, the equivalent of 4.1 months of import cover, which was slightly above target.

Monetary Development

According to Osei Kyei Mensah Bonsu, the thrust of monetary policy in 2020 was to steer the path of inflation towards the medium-term target band of 8±2 percent. The policy targeted an end-period stock of Gross International Reserves of at least 4.0 months of import cover. Monetary policy performance in 2020 was broadly in line with expectations, despite a brief setback in the second quarter, following the COVID-19 outbreak and the subsequent surge in inflation.

Osei Kyei Mensah Bonsu revealed that Headline Inflation rose sharply from 7.9 percent in December 2019 to 11.4 percent in July 2020. The upward trend was mainly due to panic-buying episodes preceding the COVID-19 partial lockdown measure, which exerted significant pressures on food prices. However, with the gradual lifting of restrictions, the food price pressures eased and headline inflation steadily declined to 10.4 percent at end-December 2020.

Provisional data on monetary aggregates as at December 2020 showed that Broad money, including foreign currency deposits (M2+), grew on year-on-year basis by 29.6 percent compared to 21.7 percent in December 2019. Broad money supply stood at GH¢120,521.8 million at the end of December 2020, compared with GH¢92,975.5 million and GH¢76,380.4 million at the end of December 2019 and December 2018, respectively. The growth in money supply was driven by growth in Net Domestic Assets (NDA) of the banking system, largely on account of Net Claims on Government (NCG), partly reflecting the fiscal financing of Government’s measures to mitigate the impact of the COVID-19 pandemic.

2021 Revenue target

Osei Kyei Mensah Bonsu read that the Total Revenue and Grants for 2021 is projected to rise to GH¢72,452 million (16.7% of GDP), up from an outturn of GH¢54,922 million (14.3% of GDP) for 2020. The composition is as follows, Domestic Revenue is estimated at GH¢70,987 million and represents an annual growth of 32.2 percent over the recorded outturn for 2020. Of the total Domestic Revenue amount of GH¢70,987 million, Non-oil Tax Revenue constitutes 75.6 percent and amounts to GH¢53,632 million (12.4% of GDP), representing an increase of 26% from the 2020 outturn.

The Banking Sector reforms and performance

According to Osei Kyei Mensah Bonsu at the start of the banking sector reforms in August 2017, the total assets of the banking sector was GH¢89.1 billion for 36 banks. Two years after the reforms, total assets have increased to GH¢115.2 billion at end August 2019, even with 23 banks. In the same direction, total deposits have improved from GH¢55.7 billion to GH¢76.0 billion over the same comparative period, reflecting a stronger deposit base, owing to increased trust and confidence in the banking sector.

Osei Kyei Mensah Bonsu added that the completion of reforms within the Financial Sector was expected to pave a way for the operationalization of the Ghana Deposit Protection Scheme. The Scheme will protect the national budget from costs arising from banking sector failure, if that were even to happen in the future, and ensure that going forward all depositors’ funds are insured against bank failures.

The Minister added that this scheme, supplemented by effective regulation and supervision by the Bank of Ghana, and the work of the Financial Stability Council, will go a long way to make our financial system more resilient and supportive of our efforts to foster inclusive socio-economic growth.

Osei Kyei Mensah Bonsu added that with the President’s directives to fully pay all depositors whose funds were locked up with the failed Specialised Deposit-taking Institutions (SDIs), Micro Finance Institutions (MFIs), an amount of GH¢5 billion has been spent to that effect. This brings the total expenditure on financial sector interventions as at June 2020 to GH¢18.6 billion (4.8 percent of GDP). Government has also committed an amount of GH¢3.1 billion (0.78 percent of GDP) towards supporting investors in failed asset management companies regulated by the Securities and Exchange Commission (SEC). The timely intervention under this administration resulted in the saving of these locked up funds in failed banks. This was a sobering but necessary action that in total is costing the state in excess of GH¢21 billion of taxpayers’ funds. These are funds that could have been otherwise deployed to support the development agenda of the government.

Osei Kyei Mensah Bonsu stated that “let it be said that a serious government, as we are, desperate as we were to fix a broken economy as it was and fund our own programmes, as promised, and as patriotic as we are, had absolutely no thoughts, no time, no energy or the luxury to conspire with the central bank to deliberately cause the downfall of Ghanaian banks that were already in zombie state, fatally insolvent, by the time we took office”. “What we did was to merge those that had failed, save those that could be saved with the view to building a strong and viable financial sector with integrity”. “What the President did, which is unusual in banking practice, globally, was to go the extra mile to save the funds of all depositors of failed banks”.

As at the end of first quarter 2020, a total amount of GH¢13.6 billion (3.5 percent of GDP) has been spent on the resolution of failed banks, Specialised Deposit-taking Institutions (SDIs), Micro Finance Institutions (MFIs), the establishment of the Consolidated Bank Ghana Limited (CBG), as well as the capitalisation of the Ghana Amalgamated Trust (GAT). This created a level of stability and confidence in the banking sector again.

COVID-19 and the Bank of Ghana’s Interventions

After all these governmental interventions had been put in place to stabilize Ghana’s banking sector and economy then came the COVID-19 pandemic. The outbreak of the pandemic is having a negative impact on the financial sector here in Ghana again and across the world. All over the world, central banks are being relied upon by governments to find the liquidity to tackle the socio-economic difficulties unleashed by the pandemic.

According to Osei Kyei Mensah Bonsu, the Bank of Ghana has since stepped up to the challenge and announced further policy measures to help support the economy and financial institutions to cushion the adverse impact of COVID-19 on the economy. It is important to stress that this has been possible because of the responsible and competent management of both the fiscal and monetary space since 2017. However, as events unfold, it is becoming increasingly evident that the COVID19 pandemic and its crippling economic effects has an assured place in economic history as, perhaps, the singular event that decimated the global economy in ways never imagined. It is a crisis that has tested global and national leadership like none other in the history of the world during peace time.

Osei Kyei Mensah Bonsu reiterated that the annual growth in banks’ outstanding credit decreased in December 2020, relative to what was recorded in the corresponding period in 2019. The nominal annual growth of outstanding credit slowed from 23.9 percent in December 2019 to 5.8 percent in December 2020. Outstanding credit to the private sector in December 2020 stood at GH¢43,533.2 million, compared with GH¢39,364.9 million in December 2019. In real terms, the annual growth of outstanding credit to the private sector moderated from 9.4 percent growth in December 2019 to 0.2 percent in December 2020.

Government, through the Bank of Ghana, responded to the COVID-19-related challenges in the banking sector with a suite of policy measures designed to cushion businesses and the economy at large. The banks have reported loan restructurings, moratoria, and new facilities of over GHȼ7 billion in the past four months.

The Monetary Policy Committee (MPC) of the Bank of Ghana reduced the Monetary Policy Rate (MPR) by 150 basis points to 14.50 percent in March 2020. The MPC further announced a 2-percentage point reduction in the Cash Reserve Requirement (CRR) of deposit money banks and lowered the Capital Conservation Buffer by 150 basis points to 11.5 percent. The policy rate remained unchanged at 14.50 percent for the rest of the year 2020.

Interest rates in the money market generally trended downward in 2020 on year-on-year basis. The 91-day and 182-day Treasury bill rates declined to 14.08 percent and 14.13 percent, respectively, in December 2020, from 14.69 percent and 15.15 percent in December 2019. Similarly, the rate on the 364- day instrument decreased to 16.98 percent from 17.88 percent over the same comparative periods.

Rates on the secondary bond market have also broadly declined except for rates on the 5-year and 20-year, which increased by 35 basis points and 18 points respectively, to settle at 19.85 percent and 22.28 percent respectively. Yields on 2-year, 3-year, 6-year, 7-year, 10-year, and 15-year bonds decreased by 245 basis points, 45 basis points, 212 basis points, 163 basis points, 77 basis points, and 33 basis points respectively, to settle at 18.50 percent, 19.25 percent, 19.76 percent, 19.74 percent, 21 percent and 21.23 percent respectively, over the same comparative periods.

The weighted average interbank rate declined from 15.20 percent to 13.56 percent, in line with the cut in the monetary policy rate in March 2020. Cumulatively, the Ghana Cedi depreciated against the US Dollar, the Pound Sterling, and the Euro by 3.9 percent, 7.1 percent, and 12.1 percent, respectively. This compares with larger depreciation rates of 12.9 percent, 15.7 percent, and 11.2 percent for the US Dollar, Pound Sterling, and Euro, respectively, during the same period in 2019.

The financial sector clean-up levy and other new taxes

Osei Kyei Mensah Bonsu read that the financial sector clean-up and the refund of monies to depositors largely restored investor confidence and protected the hard-earned savings of millions of Ghanaians. According to the 2021 budget statement this has come at a huge cost of over GHs 21 billion to Government. The 2021 budget statement therefore proposes the introduction of a financial sector clean up levy of 5 percent on profit-before-tax of banks to help defray outstanding commitments in the sector. The levy will be reviewed in 2024. The new taxes slapped on the banks and other businesses is likely to create a challenging economic environment and add additional cost to their operations, as the banks for example are already paying a five percent fiscal stability levy, hence, an additional five percent financial sector clean-up pre-tax on profit will double that burden.

Additionally, the increase in the National Health Insurance Levy (NHIL) will be an additional cost to the banks, consumers and businesses as that is a component of the straight levies which are not taken as an input claim, this will increase the base for calculation of VAT. Also, the proposed increase in the VAT flat rate from three percent to four percent will result in other costs increase to consumers and businesses.

With all these challenges, it now time for the banks to collaborate with government to share the effect of the new financial sector clean-up levy or find a common ground to appreciate government’s call for with their customers, shareholders and other relevant stakeholders including their regulators.

The impact of the financial sector clean-up levy and other taxes on the banks and their customers

The 2021 budget statement provided some justification for the introduction of taxes against government’s own promise of shifting from taxation to production. The first cry of the banks and other practitioners is that the imposition of these new taxes may result in making it difficult for consumers and businesses to pay bank loans they may take from the banks, thereby increasing the non-performing loans, affect the Assets quality of the banks and consequently their profitability.

Most often than not better-capitalized banks raise their long-term non-depository debt from external cheaper financing sources and thus benefit from an enlarged tax shield. Whereas the worse-capitalized banks instead reduce their lending because a higher tax rate increases the tax-adjusted cost of funding, which renders the marginal loan unprofitable.

It must emphasize that since rich people save more than the poor, progressive rate of taxation reduces savings potentiality. This means low level of investment. Lower rate of investment has a dampening effect on business and banking profitability and economic growth of a country. Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest. Also, imposition of taxes results in the reduction of disposable income of the taxpayers. This reduces their expenditure on necessaries which are required to be consumed for the sake of improving efficiency. As efficiency suffers ability to work declines. This ultimately adversely affects savings and investment. However, this happens the more in the case of poor persons.

Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes, however, have adverse effects on the ability to work. There are some harmful goods, such as cigarettes, whose consumption has to be reduced to increase ability to work. That is why high rate of taxes are often imposed on such harmful goods to curb their consumption. But all taxes adversely affect ability to save. Since rich people save more than the poor, progressive rate of taxation reduces savings potentiality. This means low level of investment. Lower rate of investment has a dampening effect on economic growth of a country. Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest.

Taxpayers have a feeling that every tax is a burden. This psychological state of mind of the taxpayers has a disincentive effect on the willingness to work. They feel that it is not worth taking extra responsibility or putting in more hours because so much of their extra income would be taken away by the government in the form of taxes. However, if taxpayers are desirous of maintaining their existing standard of living in the midst of payment of large taxes, they might put in extra efforts to make up for the income lost in tax.

It is often said that the effects of taxes upon the willingness to work, save and invest depends on the income elasticity of demand. Income elasticity of demand varies from individual to individual. If taxes affect the volume of savings and investment badly then recession and unemployment problem will be aggravated. Again, effect of taxes on the price level may be favourable and unfavourable. Sometimes, taxes are imposed to curb inflation. Again, as an imposition of commodity taxes lead to rising costs of production, taxes aggravate the problem of inflation. Thus, taxation creates both favourable and unfavourable effects on various parameters. Unfavourable effects of taxes can be wiped out by the judicious use of progressive taxation.

If the income demand of an individual taxpayer is inelastic, a cut in income consequent upon the imposition of taxes will induce him to work more and to save more so that the lost income is at least partially recovered. On the other hand, the desire to work and save of those people whose demand for income is elastic will be affected adversely. Thus, we have conflicting views on the incentives to work. It would seem logical that there must be a disincentive effect of taxes at some point but it is not clear at what level of taxation that crucial point would be reached.

By diverting resources to the desired directions, taxation can influence the volume or the size of production as well as the pattern of production in the economy. It may, in the ultimate analysis, produce some beneficial effects on production. High taxation on harmful drugs and commodities will reduce their consumption. This will discourage production of these commodities and the scarce resources will now be diverted from their production to the other products which are useful for economic growth. Similarly, tax concessions on some products are given in a “locality” which is considered as challenged. Thus, taxation may promote regional balanced development by allocating resources in the challenged regions.

The impact of the financial sector clean-up and other taxes on Government, Regulators and Policy Makers

There are other ways that government could be considered to address the financial burden that COVID-19 has brought on the economy, instead of heaping taxes on the citizenry. Government could consider cutting down on expenditure to make up for the loss of revenue experienced as a result of the pandemic. The impact of taxation in the financial services and banking sector can be unfavourable to the banks and government. It therefore behooves on the government, regulators and policy makers to consider new ways and require joint businesses and Policy Makers expertise to make things work in the face of the pandemic.

Conclusion and Recommendations

The Institute through this publication would like to suggest some few learning points that could be considered to cure some of these challenges. Narayana Kocherlakota (an American economist and is the Lionel W. McKenzie Professor of Economics at the University of Rochester. Previously, he served as the 12th president of the Federal Reserve Bank of Minneapolis until December 31, 2015) for example says the government should consider imposing taxes on each bank equal to the government’s future cost of bailing it out – as in the case of the financial sector clean-up. Banks that make very risky investments must be made to pay higher taxes. Those that make less risky investments would pay lower taxes. Additionally, the voice of Tax Policy Centre’s researchers and staff in 2010 wrote that Washington is buzzing with talk about taxing banks. And after watching the Goldman Sachs masters of the universe testify on Capitol Hill a couple of years ago, it is no surprise that many want to tax these people until they bleed. Unfortunately, punitive taxes are a bad idea, no matter how good they make us feel.

In a speech to the Economic Club of Minnesota, the Fed president compared financial institution risk to pollution. This sounds good but, it doesn’t quite mean what you might think. To an economist, the pollution created by a factory is an externality. That is, its cost is borne by society at large, and not by the polluter’s shareholders or customers. He added that the trick to getting a company to stop spewing waste is to make the firm pay the social cost of its own pollution. Kocherlakota says same, with financial institutions. He starts with an assumption that government will always bail out the big, stupid, and greedy in the midst of a financial crisis. Policymakers, he says, “inevitably resort to bailouts even when they have explicitly resolved, in the strongest possible terms, to let firms fail.”

Depositors and investors on their part know this and, as a result, are willing to accept lower interest rates on the loans they make to these too-big-to-fail institutions. This relatively cheap money, in turn, encourages the banks to take on more risk and more leverage.

Taxation is an elegant solution for revenue generation, but it has one big problem. While we do a pretty good job of measuring pollution, we are bad at figuring the value of future bailouts and clean-ups. These calculations are likely to be complex in a number of ways and could well be controversial. Government could use the market itself to help measure this risk.

The Institute would like to recommend that government could consider issuing a security and a rescue bond for each financial institution. The price of the bond would rise or fall with the market’s perception of the firm’s risk, and the tax would be tied to the price of the bond. Of course, the recent financial meltdown and the Ghanaian case of financial sector clean-up was caused in part by the market’s inability to predict or calculate the risk that the banks would fail. If these taxes are to succeed, bankers, depositors and investors would have to know a lot more than they do today about what securities are sitting in a bank’s portfolio.

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