IMF TEAM VISITS CU10th Dec 2019
On November 26, the Office of the IMF Resident Representative to Ghana interacted with students and faculty members of Central University through a presentation on the issues raised in the latest Regional Economic Outlook.
It was an opportunity to bring the IMF closer to the people, especially to academia and, in particular to economics and business students.
Dr Touna Mama, the IMF Resident Representative spoke on the latest regional economic outlook, restructuring the taxing system, possible solutions to debt servicing and the issue with non-performing loans.
Below is a summary of the question and and answer session.
Q1- You mentioned that restructuring our taxes will help us. If exports still lag behind our imports it presumes that it will be difficult for us to repay our debts, especially, on euro bonds which keep escalating. Do you suggest that in the near future Ghana is likely to go HIPC and do you advice that Ghana goes HIPC to help us restructure our debt?
A-Not much tax that is actually collected compared to what should be collected. For example, we have the capacity to collect property tax but very few people pay property tax as far as I know. This is where the effort should be placed and not on over burdening those that already pay. About 70% of GRA staff are in the Small Tax Unit which collects very small revenue. So why are most of the resources placed where there is no money; and that unit collects 5% of the total tax revenue. So clearly there is a rebalancing to do. There are some quick wins if one looks at what companies are declaring on the VAT side, on the cooperate-income tax side and some other taxes. Look at the consistency and there is a lot of money to collect. So there is a bit of tax evasion going on.
I doubt that there’ll be another HIPC. There’s very little appetite from creditors internationally to go through another HIPC. There’s very little appetite by Western countries and let alone banks to write off this debt. If you don’t want to default, your resource goes into paying debts and that’s the case for Ghana. More than 40% of the tax revenue collected just goes into paying debt service and interest, which is enormous and the rest pay salaries. So there is no more space for capital spending and that’s the challenge.
Q2- I want to know if the IMF can help Ghana with innovative ways of spreading the tax net so that everyone pays and not just people in the formal sector. Secondly, this canker of non-performing loans has been with us for years. Will you consider researching into the real dynamics or factors that account for attitude of Ghanaians towards debt servicing at the micro level to ascertain if it is endemic or perhaps it’s our culture? I believe it would be worthwhile if traditional leaders can step in and if we could also include something in our curriculum academically from the basic level to address the issue permanently rather than tackling it from an economic and banking perspective.
A- I agree with you and I’ll not advise that more tax be levied on those that are already paying their fair share. That’s not the way to go. On tax exemption, there are a lot of goods and entities that are just exempted for a lot of reasons. By estimate this is between 2% and 5% points of GDP. We have evidence that by expanding our tax net, i.e., taxing those that are supposed to pay but are not paying you may improve this by more than four percentage points of GDP. So that’s where the effort should be.
The issues of non-performing loans are common across the region. There should be a system where assets declared as collateral of defaulters could be recovered and the challenge starts with that. Banks struggle in courts with many of such cases. There may be a piece of land with a couple of people owning the title of that particular land. Such challenges make it complicated for banks to recover the necessary assets.
There are non-performing loans in almost every system but with the appropriate infrastructure, i.e., legal infrastructure and enforcement infrastructure to recover the underlying asset that was used or where the money was invested, that should go a long way to help. Now, rewarding good habits of payment: there are so many systems such as credit ratings and credit bureau where there is a centralized system that monitors payment habits and gives a rating. These payment habits includes payments of utilities. Such a structure will go a long way to help as well.
“As an economist I believe that the incentive system is what drives behavior. I usually don’t like to go towards culture because I feel like once you mention culture—as a policy maker—there is nothing you can do; you know, it’s almost a dead end.”
We are quite optimistic that by doing the right thing in terms of domestic revenue mobilization, there will be good results coming. We have identified some reforms to the extent that the political will is there to implement them and they will be painful for some and to the extent that they can deploy it, there is no reason why Ghana should not improve and in this case it’s actually easy because we see where the solution is and it’s doable but it’s costly politically.
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