Belt-tightening and tax widening: Ghana’s totemic E-levy bill passes
Ghana was downgraded by two major credit rating agencies earlier this year – more of an exclamation point than the start of investment community concerns about public financial management in the country. Now, necessary but on their own insufficient conditions for rehabilitating confidence in Ghana’s risk outlook revolve around:
(a) how policy makers define the problem, and (b) their ability to take action that will meaningfully improve liquidity and solvency ratios. Public debt was equivalent to 80% of GDP at end-2021 and debt servicing costs around half of domestic revenue. There are other sides to Ghana’s current economic crisis e.g., double digit currency depreciation and inflation, but these are so heavily influenced by the confidence question that public financial management is the crux issue.
In that regard, this has been an important week for Ghana. Finance Minister Ken Ofori-Atta set out new expenditure restraint and revenue mobilisation measures on 22 March, parliament passed the long-awaited digital transactions tax (the e-levy) on 29 March, and on 30 March, President Nana Addo Dankwa Akufo Addo delivered his state of the nation address to parliament. Considered together, major points include:
1. Defining the problem
Following the Moody’s downgrade especially, the Ghanaian government expressed outrage, arguing that the decision underplayed fiscal consolidation efforts and domestic political stability. Also, that the decision was undermined by an arms-length analysis by individuals with little on-the-ground, in-country perspective. Now however, the discussion has moved on.
In his State of the Nation Address, the president acknowledges the “general anxiety in our nation at the moment [regarding] the economy, the cost of living, income levels, jobs for young people, and even about issues on which we all thought we had achieved a national consensus.” A week before, the finance minister recognised “economic difficulties we are facing… due to global and domestic events” including “revenue mobilisation challenges”, as well as the Ghanaian people’s desire to “tackle our debt problem”.
Policy prescriptions described below support the perception of a shift.
2. Liquidity and solvency
The Minister of Finance pledged 10% reduction in discretionary spending on top of the 20% in cuts announced previously, and pullback on remittances/allowances for senior government officials. See: Ghana Finance Minister lays out plans for the economic crisis. And in the short time since the minister made his statement, the e-levy has been passed by parliament at a rate of 1.5% on digital transactions above GHS100 (USD13).
This includes the ubiquitous momo (mobile money) as well as bank transfers, merchant payments and inward remittances. Under the original plan, draft legislation set out in November 2021, the e-levy was to be 1.75% and was expected to deliver GHS6.963 billion (USD928 million) of tax revenue in 2022. But following the public outcry at the proposed measure, parliament has made a concession, reducing the amount. Outside of taxes on income and property, only VAT and import duties were projected to be larger contributors to this particular pot.
Lawmakers have scheduled the launch for May 2022. The same month in which government hopes to conclude an up to USD2 billion external financing arrangement and review policy on foreign exchange retention.
3. Ability and willingness
The policies headlined above signal that, at the very least, the government does not believe that highlighting projected post-pandemic growth, past policy successes or biases of the international agencies are equal to the moment.
Considerable political capital has been spent on a broad-based revenue mobilisation strategy that is highly unpopular on the ground. Hurdles up ahead include: (a) effective implementation, and (b) parliamentary business, still. The e-levy was passed by the ruling New Patriotic Party (NPP) without the participation of its recalcitrant member, the MP for Dome Kwabenya and Gender Minister Sarah Adwoa Safo, or with the opposition National Democratic Congress (NDC). Instead, the NPP took advantage of NDC absences and a consequent majority to whip the bill through. The attending NDC MPs walked out and have expressed an intention to challenge the decision at the Supreme Court.
In other words, legislative vulnerabilities for government business remain. See: Ghana’s parliamentary arithmetic puts budget approval at risk.
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