The Transaction Costs of Doing Business in Ghana

Rice in GhanaIntroduction

“The global conditions that necessitated the removal of those duties have abated and government finds it pertinent to restore the duties in order to encourage local production, create jobs and conserve foreign exchange.” This development is not just welcome news and an incentive to our local farmers but also fits into the social democratic values of this government.” Statement from the Finance Ministry. Daily Graphic 23 December 2009

The above statement was the justification for government’s restoration of import duties on rice and other food imports early this year. But while it may be true to say that the global conditions have abated, the reality of the ordinary Ghanaian consumers has not. The impact is still being felt by ordinary people especially in the form of high food prices and unbearable conditions of life. In so far as the cost of living is concern, the figures are clear; there has been a consistent rise in the Consumer price Index since the crisis from 309.89 points to 314.83 points. There are presently concerns among economists that Government may be applying the right fiscal tools but at the wrong time. For instance, the reasoning behind the restoration of import duties on food imports as a way to ‘encourage local production’ is problematic as it implies reducing the problems of local production to the question of lack of market for local products.  But it doesn’t take economics lenses to know that the constraints to local production go beyond just the market. Very few farmers/local producers are able to meet export quotas.  A sober assessment of Ghana’s economy today depicts that though a lot of progress has been made in integrating the country into the global market economy, the things that hold back progress still lurk around. The per capita income still hovers around US$350. Taxes are still high; the over 28% average cost of credit scares many would-be entrepreneurs. Combating the poverty cycle means widespread opportunity that includes good business environment or a relatively free entrepreneurial field where everybody would mind his or her own business. This should ultimately lay government off as the father for all from the toil of the field to the last morsel on the dinning table.

The Minister of Finance argued recently in his address to parliament that the removal of duties on certain basic foodstuffs has led to loss of revenue to government and has boosted “dumping” of imported food items “The focus’ he argued, ‘would be to expand the tax net to be able to increase government revenue so there would be enough money to develop the country”.  While it is true that enough money is needed to develop the country it is equally true that the source from where the money is gotten is important.  Revenue will have to be mobilised in a manner that does not lead to social and economic destabilisation or create disincentive to investment and enterprise. Thus government’s focus on high import duties and other taxes as the panacea to development thus has serious implications because of the associated contraction effect.   The use of heavy taxes/tariffs as the main fiscal measure to shape economic behaviour in a small and developing country such as Ghana can be tricky: High duties on food imports for instance may mean drawing more money from the many famished workers; erecting tariffs means staying poorer hence your inability to compete and avail yourself of the latest technology. For business and potential entrepreneurs it means whittling their start up capital and driving them into the informal economy. Presently there are over twelve inbuilt local cost elements in the petroleum prices reflecting a 95 per cent increase in petroleum prices. This does not add up properly to the cost of doing business and the business environment as a whole.

The Doing Business in 2005 report of the World Bank and International Finance Corporation; the private sector lending arm of the World Bank Group focuses on removing obstacle to growth. The report which “benchmarks regulatory performance and reforms in 145 nations, finds that poor nations, through administrative procedures, still make it two times harder than rich nations for entrepreneurs to start, operate, or close a business, and businesses in poor nations have less than half the property rights protections available to businesses in rich countries.” The report cites Ghana as one of the least investor protection destinations but specializes in baiting investors with packages that end up being non-existent. This among others issues that need careful study in order to inform government and stakeholders on the realities of doing business in Ghana.

Based on the increasingly strangulating business atmosphere, the Food and Beverage Association of Ghana decided to examine the merits (as well as demerits) of the case for the recent fiscal measures pursued by government such as the restoration of the 20% import duties on food items. The study had two-tire objectives which involves examining the issues and implications of promoting local food production, and, raising revenue for development via high import duties. In the process the FABAG seeks to amplify the calls for rethinking government’s revenue mobilisation policies especially within the current context of high interest rates and slumping business atmosphere.

Some of the surprising and unintended effects of Ghana’s tariff system have been illustrated with cases based on interviews with consumers, importers and distributors and government officials. The limited time available for the study permitted neither a systematic sampling of Ghanaian industries nor an economy-wide effective protection study. Nevertheless, meetings were held with and data collected from a wide variety of businesses and government officials in Accra.  The resulting examples, based on data from consumers and retail businesses on effects of Ghanaian import and export policies, provide an accurate reflection of some of the most important issues arising from the structure of the tariff system especially the recent re-introduction of the 20% tariff on rice and other food products.

This aspect of the study was conducted in central business districts and suburbs of four cities, Accra, Kumasi, Takoradi and Tamale. Discussions were held with Freight forwarders and Officials of CEPS and port authorities. Some officials responded to the questions on condition of anonymity especially at the francophone (Ivory Coast) side.  In matters related to trade data/information especially issues of smuggling and border issues in the ECOWAS region, the Embassies of Ivory Coast and Togo were contacted for clarity. This   made it possible to comparatively analyse trade facilitation practices that pertain to Ghana’s immediate neighbour – Ivory Coast.  Though the comparisons with Ivory Coast were not done on sector or economy-wide basis, it nonetheless enabled us to understand the likely effects of the policies of neighbours on government’s fiscal and monetary policy and the economy of Ghana as a whole. While the study is not suggesting or expecting the Trade and Regulatory authorities and, for that matter government to solve all the problems identified in a day, it is believed that government will begin to muster the political will to relax rules or fiscal policies that hurt investors and entrepreneurs who have, over the years, impressively played vital roles in providing employment to Ghanaians, and revenue for government.

The first section of this study examines whether or not the restoration of the 20% duty on food imports has political and economic merits. In the process, it highlights some unintended effects such as smuggling and the tendency for high cost of living to ignite social upheavals and labour unrest.

Section two is a comparative study focusing on the impact of the tariff structure or import duties on cost of imports and hence the price of food products. The analyses cover other aspects of port activities and trade facilitation services that tend to inhibit or frustrate import trade or increase the cost of imports and doing business.  It seeks to suggest that any fiscal policy measure taken by government has to be weighed against those of its neighbours since actions across at the other side of the border can influence or at worst negate government policy objectives.

Section three focuses on the reality of the Ghanaian business environment. It reviews the functions of the trade facilitation services such as CEPS, the Ports, and food import laws and regulatory /control agencies. The analysis identify high duty on food imports as constraining but that this was only an aspect of the factors that inhibit import trade.  Other hidden cost stem from port charges, registration, renewal and inspection fees, demanded by control agencies, damage and thefts at the port and widespread corruption.  Other issues include weight limits impose on cargo transport which may make sense but comes with high cost to trade that needs rethinking.  A worrying phenomenon in all this is the lack of coordination which results in overlaps and apparent gaps in the regulatory functions. This creates weird and ambiguous situations for food imports in particular.

Section five is dedicated to policy recommendations/suggestions on alternatives to boosting government revenue besides resorting to high tariffs within the duty brackets of food imports and, at the same time supporting local production without necessarily imposing hardships to consumers and businesses alike. This will salvage Ghana from the current slumping business environment as reported in key global reports on level of competitiveness and the business environment in Ghana. The report believes this is the only way to thrust Ghana forward in its quest or objective to make the country the gateway to Africa.

Download the full report here:  FABAG Transaction Cost Report

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