How Ghana can Financing its transformation agenda

The current global development framework and the UN Sustainable Development Goals (SDGs) charges each country with the primary responsibility for its “own economic and social development”, and accordingly emphasizes the crucial role of domestic resource mobilization for financing the implementation of the SDGs. Ghana’s attainment (in 2010) of a lower middle-income country status has resulted in significant reductions in donor inflows and opportunities for concessional borrowing. Between 2010 and 2014, average gross ODA to Ghana amounted to US$ 1.43 billion per year, compared to US$ 2.58 billion between 2005 and 2009. This declining trend becomes even more apparent considering that net ODA to Ghana as percentage of Gross National Income (GNI), fell from 16.34% in 2004 to 2.18% in 2013.This means that implementation of Ghana’s development goals will require innovative means of sustainable revenue generation and financing. The question of what has to be done differently is thus an important one.

1.      Domestic revenue mobilization.

Tax receipts represent the highest source of domestic revenue stream for Ghana and most developing countries. However, many developing countries have performed poorly as far as tax collection in concerned. Whiles for most developed (OECD) countries, tax to GDP ratio averages 34%, developing countries achieve only about half of this rate; Ghana achieved tax to GDP ratio of about 17% in 2014 and 18.1% (provisional) in 2015.The situation is worsened by a number of factors, including high tax expenditure (tax incentives), high levels of capital flight, and inability to collect maximum corporate taxes (especially from multinationals)

Ghana is reported to lose about $2.27 billion annually through corporate tax incentives alone.

Non-tax revenue mobilization has also been quite weak. For instance, a recent newspaper report indicates only 4 out of a sampled 22 mining companies paid dividends based on government’s 10% carried interest in the last 10 years. Inadequate domestic revenue clearly undermines government’s ability to transform the society and economy. Necessary steps need to be taken to raise enough financial resources to support the transformation agenda. In particular, efforts are needed to:

·         Increase capacity for revenue generation

·         Widen tax base to capture the large informal sector

·         Plug loopholes in the tax administration system

·         Strengthen administrative structures for revenue mobilization

·         Ensure efficient natural resource management and appropriate returns for government.

·         Intensify collection of fees and levies by local government authorities

·         Addressing the problem of illicit flows and transfer mispricing to preserve domestic resources for development.

2.      Addressing the problem of leakages/corruption

However, attaining greater socio-economic transformation will require more than increased efforts in mobilizing domestic resources; enhancing the efficient use of these resources is equally crucial. 

The problems of corrupt practices or ‘leakages’ have long been a major bane to Ghana’s transformation agenda. In Transparency International’s Corruption Perception Index (CPI), Ghana has consistently scored below average since the country’s initial assessment in 1998.

So how can a nation succeed in transforming its economy when most state institutions, including those charged with fighting corruption, are deemed to be corrupt?

3.      Promoting Private Sector Development through Innovative Financing

The private sector has been recognised as an engine of inclusive growth by generating employment, contributing to public revenue and providing affordable goods and services. However, the limited access to finance has been a major hindrance to private sector development in Ghana and other developing countries. Innovative approaches to financing are required to support the private sector as an important contributor to the development process and increase its capacity of contributing in terms of production, employment and income.

4.     Facilitate capital market development –

 The development of the capital market and stock exchanges is regarded the final and most sophisticated phase as far as financial sector development is concerned. We need to address the problems of size and liquidity on the market by encouraging participation and intensifying public education.Equally important is the development of the private equity and venture capital market to support SMEs with patient or long-term capital.

5.     Encourage FDI amidst an efficient domestic financial market

In 2014, out of the estimated $681 billion FDI inflows into all developing countries, Africa received only 8% ($53.9 billion), with Ghana’s share being $3.357 (6%);Studies have shown that FDI has not had the desired impact on growth in developing countries. FDI seems to positively impact on the growth of countries with strong financial markets.

6.     Adopt Project Finance Approach to Infrastructure Financing

The Coordinated Programme of Economic and Social Development Polices recognizes that the massive amounts of resources needed to finance infrastructure under the Transformation Agenda is beyond the capacity of government, especially in the face of a growing human population and a corresponding increase in the demand for public services. The private sector can thrive in an environment of solid infrastructure in terms of transportation, water, energy and power. A World Bank study indicates that at least USD 1.5bn is needed per annum over the next decade to close the existing infrastructural gap in Ghana. Project finance will serve as a raising long-term finance for major projects through projects financial engineering, based on financing against cash flows generated by the project alone which helps allocating risks and rewards among the parties involved in a manner that is mutually acceptable. Project finance may be structured as joint ventures in which private sector investors and government cooperate through a public-private partnership (PPP) arrangement. Such a financing model helps in dealing with the issues of pricing and risk sharing between the public and private partners.

Conclusion

Access to sustainable financing is necessary to drive the growth required to facilitate Ghana’s social and economic transformation and address the country’s infrastructure and social services backlogs. Enhancing domestic revenue generation, addressing the leakages/corruption as well as the need for prudent public spending require our attention. Structural transformation requires that government expenditures be guided by a clear long-term development plan and vision. We also need to identify innovative financing techniques to drive private sector growth to support the socio-economic development.