Perhaps in the last few years and months, Ghana has received worldwide publicity and recognition for being Africa’s paragon of true democracy. Additionally, the discovery of potential world class oil reserves has boosted the confidence of most Ghanaians promoting an environment of elation in Ghana. Strangely, in spite of the unprecedented accolade, the challenges ahead for its undaunting new President His Excellency Prof. John Atta-Mills are herculean and overwhelming. Beyond doubt the interplay of the controlling forces of the global recession has taken a hit on almost every country in the world including Ghana. Major economies of the world including but not limited to U.S, EU, and Japan have all been at the mercy of the global recession and so Ghana will be no exception. Nevertheless, in the midst of this global economic uncertainty, the main challenge of the current government will be to promote economic growth through policies that dampens the impact of inflation and exchange rate depreciation, stimulates capital inflow through DFI and privatization, reduce interest rate and most importantly unemployment in Ghana. The attainment of such goals may seem insurmountable yet it is realizable. Frankly, the odds against the feat are very high considering the level of pessimism surrounding global capital flows from DFI (a primary source of job creation) in the years ahead.
The recent economic news regarding the fall of 40% in global DFI in 2009 obviously has had a negative impact on the inflow of DFI in Ghana. This presupposes that Ghana is not immune to any global DFI shocks and it is imperative that the country augments its economic policies to absorb these shocks and stimulate economic growth. The fact is the shocks are not over as the global economy has become more stochastic than deterministic. In the past, manipulating the macro-factors to achieve economic growth has worked easily because the governing economic models were deterministic. However, it is not like that these days as major economies have struggled to control the macro-factors for economic growth but to no avail. According to World Investment Prospects Survey (WIPS) report on global FDI outlook for 2009-2011, multinational companies are skeptical about the growth prospects of DFI globally. Multinational companies who are prospective candidates for DFI in developing and developed countries expressed concerned about certain risk factors likely to cause a retreat in their investment activities internationally within the period 2009-2011. From the WIPS report, the major risk factors (based on percentage of respondents) likely to affect global FDI flows in the period 2009 – 2011 comprises the following;
• Exchange rate fluctuations - 54%
• Worsening global economic downturn - 39%
• Volatility of petroleum and raw material prices - 53%
• Volatility of prices in general (inflation or deflation) – 49%
• Increased financial instability – 40%
• Growing protectionism and changes in regimes in investment regimes – 53%
• Environmental crisis (example climate change) – 23%
• War and Political Instability – 16% (Source: WIPS 2009 Report)
In same report, it was deduced that the overriding factors that could attract investors into a country inadvertently leveraging and immobilizing the impact of these major risk factors are the quality of business environment and market characteristics. The factors encompassing quality of business environment are government efficiency, quality of infrastructure and availability of skill and talents. Market characteristics include market growth, size, accessibility to regional markets and presence of suppliers. In fact, the market characteristics dimension may not resonate with the market potential of the Ghanaian economy in terms of size and consumer spending impact. However, the business environment aspect should have a direct correlation with the growth prospects of the economy of Ghana. It is good that the current government of Ghana is pursuing stringent fiscal and monetary policies to stabilize the economy and promote growth yet these three features of the quality business environment must be on the government’s priority list. Otherwise, job creation in Ghana could be a delusion. Analyzing the WIPS report, it can be deciphered that the factors namely exchange rate fluctuations, volatility of petroleum and raw materials and growing protectionism could be deciding factors for investor’s proclivity towards investment in the country. These critical factors may also be tied up to the efficacy of the government in terms of its ability to stabilize the Cedi, set-up appropriate legal and regulatory framework that is not local investors biased as against foreign investors, stimulate the banking system through its monetary policies so as to ease the credit crunch and make loans available, embark on infrastructure rehabilitation that leads to appreciable improvements in water, roads, sanitation, health sector, information and communication sector and the energy sector and overhaul the educational system to produce world class skilled graduates. All these culminate in an enabling environment for local and foreign investors to thrive and succeed resulting in job creation. As a matter of fact, the prime reason why DFI flows have failed to enter Africa is because of inefficient government, poor infrastructure and lack of skilled and talent personnel. Next, government must pay special attention to the energy sector as it is vital for the attraction of DFI. Continued dependence predominantly on Hydroelectric Power is not sustainable and as such government should create tax incentives, rebates that will promote renewable energy production such as wind power, solar energy and geothermal energy and even bio-fuels. I must say that the current import taxes of 5% on wind energy, solar energy generating sets should be repealed. Additionally, there should be immense tax rebates and lesser corporate tax for investors interested in setting up energy production projects in Ghana. It is sad to know that Ghana is currently an importer of energy and this ought not to be so. The last time I was in Ghana, I witnessed electricity rationing and I have a funny feeling that the insufficient energy could be a disincentive for attraction of foreign investors both in the capital and labor intensive industries.
Also, the current corporate income tax of 25% for listed companies should be reviewed and perhaps slashed to a smaller figure. Though when compared with that of countries like Germany (30.18%), U.S (39.25%), and U.K (28.00%) depending on the characteristics of the company, it appears to be low. However, a high corporate income tax puts the DFI flow into the country at risk. A comparatively low value of corporate tax should permit investors from countries like Germany, U.S, U.K to receive tax credits when they transfer their after-tax earnings from Ghana back to their host countries. Obviously, this stimulates DFI. However, it appears the tax-rebates or credits or incentives are more towards the agricultural sector than the manufacturing or service sectors. I am not against a corporate tax of 25% for hotels but my suggestion is that government should seek to leverage corporate taxes, rebates, VAT across the manufacturing, agricultural and service sectors so as to encourage diversification into all sectors and promote a diversified economy which is more resilient to global recessionary pressures. The good thing about the Ghanaian tax system is its consistency (continuity and stability) in terms of less susceptibility to change or uncertainty even when there is regime change. In most African countries regime changes goes with tax rates changes and so there is no continuity. Such contingencies do scare investors and retards the impact of DFI on a country. Fortunately, the constancy in tax rates in Ghana will permit foreign investors to do better capital budgeting analysis from the perspective of Net Present Value (NPV) or Cash flow projections. I must commend the government of Ghana for embarking on investment promotion and protections agreements for investors from countries such as U.K, Germany, Denmark, China, Netherlands and a host of others. All investors need is confidence in the system and such covenantal gestures have long – term effect of attracting investors. Again, such tax treaties help foreign investors avoid exposure to double taxation or triple taxation especially in the case where dividend disbursements are involved. Ultimately, earnings by foreign investors are not taxed by the country (Ghana) and then again by country of origin of the investor when the earnings are transferred back to their country. Frankly, such income tax treaties reduce taxes on earnings by investors and therefore stimulate DFI. On the other hand, my main concern is the corporate income tax, high personal income tax coupled with the high VAT of 12.5% because of the indirect effect these tax nets will have on doing business in Ghana: foreigners investors may be compelled to pay higher wages and second the VAT will affect the investor cash flows as it increases the prices of product from Ghana and makes them less competitive globally. I will discuss thoroughly the expected impact of the corporate tax level of 25% on the ease of doing business in Ghana and the need to review it in part two(2) of this article. Two main risk factors cost of capital and cost of debt emanating from this level of corporate tax will be the subject. I will also talk about the remedial measures needed to make it lucrative for both local and foreign investors alike. As an introduction, cost of capital is made up of cost of debt and cost of equity. For Ghana, the cost of capital can predominantly be attributed to cost of debt since most projects are pursued using debt financing as against equity financing. Now, I would not end this article without commenting on another positive dimension of the country’s tax system. That is the flexibility the system offers pragmatically to foreign companies through what is called “carry losses forward”. In this context, any losses in the earlier years for companies are not taxed but deferred onto future returns such that deductions takes place on future returns. This is a great incentive since companies are not afraid to start the business in the country knowing that the laws do not allow them to be tax in the first few years when they are incurring losses but rather to be tax in future when profit begins to show up. All these are incentives that should stimulate DFI and hence job creation.
Author: Charles Horace Ampong
Blog: http://www.charliepee.blogspot.com
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