African economies are struggling after the pandemic.
Like many developing countries, Ghana’s economy is being tested both by the effects of the pandemic and by the disruptions from the ongoing conflict between Russia and Ukraine. Ghana has experienced rapid economic growth in recent years, but the economy is struggling with double-digit inflation, a weak currency, rising public debt and a high cost of living. To aid recovery and pursue development without abandoning Akufo-Addo’s characteristic vision of “Ghana beyond aid”, his administration introduced electronic levies to help increase national net income. Initially, the administration hoped to avoid the need for an International Monetary Fund (IMF) bailout, but did an about-face to secure IMF support. A government projection in July, meanwhile, reduced projected e-tax revenue to around $70 million, down sharply from previous estimates of around $800 million.
A World Bank report in April blamed the country’s disappointing economic performance on poor public finance management, and Ghanaians protested the controversial electronic levy. These developments raise questions about viable solutions to post-pandemic economic recovery in Africa. Here’s why.
Is Africa losing ground in the battle for water and sanitation?
Ghanaians want to know where their taxes are going
Ghanaians pay high prices for goods and services – and many see reason to protest the additional tax. IMF economists have revised growth projections for the region to 3.8% in 2022 and predicted that rising food prices resulting from the Russian-Ukrainian conflict will hurt consumer purchasing power in sub-Saharan Africa. In Ghana, some politicians say electronic direct debit is adding additional economic pressures as two-thirds of households report that incomes have yet to return to pre-coronavirus pandemic levels, according to the Ghana Statistical Service.
A 2021 Afrobarometer survey suggests that Ghanaians are willing to contribute to their own economic progress but want increased transparency on how tax revenues are used. They also want solutions to counter widespread corruption among public officials. The survey shows that 72% of respondents in Ghana are willing to pay more taxes to support development with domestic resources rather than external loans. But 70% aren’t sure how their government uses taxes.
This sentiment was clear in a recent Afrobarometer survey, conducted after the introduction of e-levy: 76% of respondents believe that e-levy is a bad idea and will increase the burden on poor and ordinary citizens, while that 51% are not up to it. all convinced that the government will use the revenues for development programs. Popular disapproval of e-levy may therefore stem not only from the current situation of ordinary Ghanaians, but also from a deeper distrust of government promises to provide social services.
Are there any flashbacks to the rollout of VAT in Ghana?
The impassioned rhetoric – including the threat of a coup – that followed the introduction of electronic direct debit with Ghana’s 2022 budget statement is familiar enough to many citizens. In 1994, the government introduced an unpopular Value Added Tax (VAT). This has led to deadly protests, especially in Accra. The government subsequently withdrew the VAT, then reintroduced it in 1998. The VAT has become an integral part of the Ghanaian tax system, with several modifications over the years.
Much of the political wrangling and ugly protests over the e-tax parallel what followed the original 1994 VAT Act in Ghana. Some scholars argue that, among other lessons learned from this experience, the government failed to adequately prepare citizens ahead of a major public policy. In the case of Ghana, for example, a large part of the population is employed in the informal sectors of the economy, and only 42% of the current population have bank accounts.
Can Africa “leapfrog” the traditional electric model?
As in other parts of Africa, informal workers and the unbanked are likely to rely heavily on ‘mobile money’ to transact easily – they can simply transfer money with mobile phones and do business without a bank account.
Will the mobile money industry contribute to post-pandemic recovery?
Critics of the e-levy claim the tax is insensitive and untimely. Former President and Opposition Leader John Mahama opposes the e-tax, saying the current administration lacks political vision and leadership – and engages in economic mismanagement. He has promised to repeal the tax if his political party is elected to power after the 2024 elections.
In any event, the adoption of this electronic debit is another validation of the exponential growth of the mobile money transaction industry across Africa. The use of mobile money has increased dramatically in recent years, and the pandemic has further accelerated this preferred form of payment. Ghana’s total digital transactions for 2020 were estimated at around $81 billion, up from $12.5 billion in 2016.
Don’t miss any of TMC’s smart analytics! Subscribe to our newsletter.
It’s not just Ghana, Uganda and Kenya that have also started taxing mobile transactions. Similarly, critics in Ghana fear that the introduction of such a levy does not necessarily broaden the tax base. Instead, the new tax could reverse gains made in electronic payments and financial inclusion, especially in informal sectors of the economy. Curiously, the Afrobarometer survey reveals an almost 50-50 split between Ghanaians who would continue to use – or avoid using – electronic financial transactions after electronic debit. Other experts say, conversely, that with the exponential increase in registered active mobile money users – around 61% of Ghanaians by November 2021 – this industry will undoubtedly remain a crucial part of the recovery. post-pandemic.
The effects of the COVID-19 global economic crisis and ongoing supply disruptions provide further incentive for developing economies like Ghana to adopt resilient domestic economic policies based on sound public spending and inclusive revenue mobilization. The recent launch of the e-tax in Ghana and public reaction suggest that building broad public consensus and effective public education, alongside government accountability, will be a critical part of these policy changes. Although public education campaigns will not eliminate concerns about a new tax, they can alleviate setbacks and frustrations.
Teachers: Check out TMC’s ever-growing list of topical classroom guides.
Richard Aidoo is a professor of political science at the Spadoni College of Education and Social Sciences at Coastal Carolina University.