-Advertisement-

-Advertisement-

Why an innovative domestic revenue mobilisation is essential

Ghana is no exception from the devastating impact of the COVID-19 pandemic on businesses, jobs, and livelihoods. According to an IMF blog post by Selassie and Tiffin (May, 2021), governments are in “The Policymaker’s Trilemma,” pulled in three divergent ways of increasing public expenditures, increasing debt, and resistances to tax increases.

Ghana finds itself right amid this policy trilemma. Finding the right balance to achieve fiscal consolidation and economic transformation is no mean task for managers of the economy.

The government of Ghana is faced with increased demand for spending to support businesses and vulnerable people through the Covid-19 Alleviation Programmes (Business Support Scheme and CARES Obaatanpa programme). The government budget deficit (Including Financial Sector Bailout and Energy Sector payments) has widened to about 12.1% of GDP in 2021, because of significant revenue shortfalls and slowdown of GDP. Given the limited sources of domestic financial resources, the government, since 2020, has had to resort to debt financing through domestic bond issuance, raising argumentative concerns about rising public debt stock and interest payment burdens on the government’s budget.

For decades, the rising public debt and low domestic resource mobilisation (DRM) have been Ghana’s highly debated economic story. Ghana’s provisional nominal debt figures increased from GHS 299.1 billion (76.1% of GDP) at the end of 2020 to GHS 344.5 billion (78.4% of GDP) at the end of November 2021. The increase in the debt stock arose from financing requirements of the 2021 budget deficit, exchange rate depreciation, and its effect on the stock of external debt and disbursements of already existing loans. The interest expense is projected at 47% of government revenue in 2022.

Concerning domestic resource mobilisation, an estimated 10-12% of tax to GDP is lost through, among others, tax evasions, exemption regimes, illicit financial flows, low property rate collections, fraud, and corruption,  according to Kwakye (2021) in an IEA discussion paper “Key Policy Initiatives for Ghana’s Post-Covid19 Recovery”.  This revenue loss is equivalent to the current tax capacity of 12-13 per cent of GDP. Taking steps to plug these loopholes requires the conduct of innovative DRM initiatives.

The 2022 budget takes bold DRM initiatives to close some of the gaps. These initiatives include the electronic transactions levy (E-levy), review of the benchmark policy, implementation of a uniform common platform for property tax administration, revision of fees for government services, revision of the tax exemption Act, and the revenue assurance and compliance enforcement (RACE) initiatives.

The perceived decline in future demand for Ghana’s Eurobonds in the international capital markets, although upsetting, is not disastrous. Bloomberg’s December and Fitch’s January doomsday forecasts about Ghana’s inability to meet debt obligations is contrary to the excellent performance of the bonds in the opening of 2022. Ghana’s bond yield rose by about 65 per cent basis points since 6 January 2022.

Though Ghana may have some rising challenges in financing its budget because of delays in the approval of the E-levy policy, its risk premium remains intact, and bond investors do not have to panic. The revenue measure sought in the 2022 budget, if approved, will lead to a fast track post-COVID19 economic recovery projected by the World Bank and an eventual slowdown in public debt accumulation. Given the projected revenues to be realised from the various DRM measures, Ghana will be in pole position to service maturing debts’ obligations and further finance the innovative YouthStart, CAP-BuSS, and CARES Obataanpa programmes.

In the face of the government’s policy trilemma, Fitch projected that Ghana would need IMF support to consolidate economic progress in 2022 and ahead of 2025 because of the stress of the external debt burden. Economists have pronounced that while the government cannot stay away from borrowing, it needs to focus on its debt management strategies. Except in 2002, the most straightforward option has been for governments to seek IMF support, with little policy efforts to resolve fiscal challenges of low domestic resource mobilisation. While going for the IMF has been elemental in previous regimes, the “quick fix” approach could only help the country pay for its rising interest burden on debt owed. With little commitment to slow down, and reduce the overall size of the public debt, government development agenda and economic recovery programmes have suffered.

Because the COVID-19 pandemic has made external financing more complex and access to the Eurobond market has tightened, the government’s decision to come up with new ways to raise revenue at home to pay for the government’s needs, close the fiscal deficit, and achieve long-term fiscal consolidation is brave.

Previous regimes have attempted to innovate taxation solutions that rope in the large informal sector with little success. This government’s bold attempt to balance its policy trilemma by tackling the weak domestic revenue mobilisation is crucial and refreshing. It is an indication that the era of the “quick fix” approach may be over. Improving domestic resource mobilisation is now not even more necessary but extra desirable.

Among the budget 2022 DRM policy initiatives, the electronic transaction levy (E-levy) is the most contentious and has received enormous public attention. Critics have cited the failure of the e-levy in Uganda and Kenya. Evidence shows that Ghana’s market is mature enough to introduce the tax, unlike Uganda and Kenya, where the e-levy was slapped at an early stage in developing the mobile money market. In Ghana, digital payment is institutionalised and has become a convenient practice, with weak and no convenient substitutes, reducing possible tax evasion and escapism. The E-levy is one source Government can use to quickly generate revenue domestically to shore up the low tax revenue and achieve fiscal sustainability.

Over the past five years alone, the digital transactions market has grown from about GH78 billion ($12.5 billion) in 2016 to an estimated GH500 billion (about $81 billion) in 2020. Given the state of market development, the government can tax the booming digital economy without jeopardising financial inclusion and efficiency in the payment and settlement systems environment.

What remains to be done by the government is boosting public confidence in the E-levy by seeking broader consultation and building consensus on the implementation of the tax policy. The agreement by “Telcos” to cut e-charges by 25% will allow the government to reach its revenue goals while easing the strain on taxpayers. From hindsight, the history of the VAT policy development should serve as a guide at this development stage of the E-levy. This tax policy might eventually prove critical to Ghana’s fiscal sustainability, economic transformation, and development.

The expected revenue gains from the E-levy and other innovative revenue initiatives should boost the local and international business community’s confidence in the economy of Ghana. The 2022 economic outlook for Ghana is positive, and the economy will recover to its growth path pre-pandemic.

Concluding, lessons learned show that the E-levy will generate significant returns to fund government business and service debt obligations with stakeholder support. The government must ensure accountability and openness in the collection and usage of the revenue to boost citizens’ confidence in E-levy. It is also vital that the government use the E-levy revenue earmarked to localise infrastructural and economic development.

Note: References are available on request

By: Eric Oteng-Abayie and Kofi Amanor

Oteng-Abayie is Senior Economist and Amanor, Researcher, at the Centre for Macro-Fiscal and Economic Policy, Kumasi, Ghana

You might also like
Leave A Reply

Your email address will not be published.