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 creating an environment of elation in Ghana. Interestingly, in spite of the unprecedented accolade, the challenges ahead for its undaunted new President His Excellency Prof. John Atta-Mills are herculean and overwhelming. Beyond doubt the inherent 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 fluctuations, stimulates capital inflow through Direct Foreign Investment (DFI) and privatization, reduce interest rate and most importantly unemployment in Ghana. The attainment of such goals may seem insurmountable yet it is realizable. Furthermore, the odds against the feat are very high considering the level of pessimism surrounding global capital flows from DFI in the years ahead.
The recent economic news regarding a fall of 40% in global DFI in 2009 obviously has had a negative impact on the inflow of DFI in Ghana. This presupposes Ghana is susceptible 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, manipulation of macro-factors by governments to achieve economic growth has worked easily because the governing economic models were presumably deterministic. However, it is not like that these days as major economies are struggling 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 developed, developing and under-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 impact) – 23%
• War and Political Instability – 16% (Source: WIPS 2009 Report)
In the 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. On the other hand, 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. Optimist may argue that the policies for DFI inflow are working because of the recent announcement by the President that 300 projects were registered with an estimated cash inflow of $700 million and an estimated $2 billion worth of investment for 2009 alone. The policies may be said to be working. However, sustainability of these projects for job creation in the long-term is the issue of importance and not the presence of numerous projects. The projects should translate into jobs so as to reduce the unemployment rate in Ghana. If that is not happening then it suggests there is still greater room for improvement regarding the policies in place. As a matter of fact, the current unemployment rate of more than 20% (World Factbook Source) should be an issue of concern for all Ghanaians considering the marginal impact the 300 projects is having on the unemployment rate in the country. Ghanaians may be interested in inflation reduction but the reality for every Ghanaian is jobs creation and unemployment reduction. It is paradoxical and perhaps deceptive to unemployed Ghanaians when you tell them inflation is down, investment is up and yet they are still unemployed. In fact, there is a missing link here between these rosy economic statistics and the situation on the ground for an unemployed Ghanaian.
Again, 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, reduce interest rates 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 besides overhaul of the educational system to produce world class skilled graduates. All these establish an enabling environment for local and foreign investors to thrive and succeed subsequently resulting in job creation. As a matter of fact, the prime reason why DFI have failed to flow into Africa is because of inefficient government, poor infrastructure and lack of skilled and talented personnel. African governments must move away from conservative policies that culminate in protectionism of dying state-owned enterprises, use of political power for nepotism and other special interest to policies of selflessness, privatization and market economy promotion. The continent has witnessed regimes where there has been government “take-overs” of foreign interest in some countries thereby stigmatizing Africa as a continent of ferocious people and governments. All these sentiments do scare investors and strips the continent of the much needed employment and capital inflow. Next, government of Ghana 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 energy. 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. The government cannot continue to provide subsidized energy for investors as a way of reducing energy cost for them and so it must seek to promote the sustainable energy production in Ghana.
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 DFI flow into the country at risk. A comparatively low value of corporate tax should permit investors from countries like Germany, U.S, and U.K to receive tax credits when they transfer their after-tax earnings from Ghana back to their host countries. Obviously, this stimulates DFI and job creation. Now, it appears the tax-rebates or credits or incentives are oriented 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 especially when there is regime change. In most African countries regime change goes with tax rate changes and so there is no continuity. Such contingencies do scare investors and retards the positive 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) and generally Cash flow projections. I must commend the government of Ghana for embarking on investment promotion and protection agreements for investors from countries such as U.K, Germany, Denmark, China, Netherlands and a host of others. Sincerely, all investors need is confidence in the system and such covenantal gestures have long – term effect of attracting and retaining investors. On that note also, I must commend the recent pledge by President Mills to investors concerning the protection of their interest as well as the government's earnest desire to promote a quality business environment for them. Again, the 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 high corporate income tax, high personal income tax coupled with the high VAT of 12.5% because of the direct and indirect effects such tax nets will have on doing business in Ghana: foreign investors may reap low after-tax cash returns, be compelled to pay higher wages and thirdly the high 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 revise it in part two (2) of this article. Two main factors namely cost of capital and cost of debt and their relation to 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.
Finally, 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 rather takes place on future returns. This is a great incentive since it erases another investor “phobia” surrounding the commencement of business in the country. Investors know that the laws do not allow them to be tax in the first few years should they incur losses but rather to be taxed in future when returns may be up or has stabilized. For there is a possibility of losses in the early years of operation for new entrants and this tax incentive serves as an insurance for would-be-investors. All these are incentives that should stimulate DFI inflow and hence job creation in Ghana if properly managed.
Source: Charles Horace Ampong