Ghana: Selected Issues
Author: International Monetary Fund
Publication Date:
18 Feb 1999
eISBN:
9781451814750
Language:
English
Keywords:
ISCR; CR; Ghana; rate; bank; Ghana's competitiveness; effective tariff rate; tariff structure; reform option; import tariff; tariff system; import share; Tariffs; Imports; Valuation; origin and classification; Value-added tax; West Africa
Download PDF (986.3 KB)

This Selected Issues paper reviews public service reform in Ghana. The paper highlights that a range of public service reform initiatives have been undertaken in Ghana since the early 1980s. The public service in Ghana is composed of centrally managed agencies, ministries, subvented agencies, district assemblies, and state enterprises. The civil service, which covers the centrally managed agencies, ministries, and local government, accounts for only about 20 percent of total public sector employment as a result of the spin-off in the 1980s of the internal revenue, customs, education, and health services as subvented agencies.

Abstract

This Selected Issues paper reviews public service reform in Ghana. The paper highlights that a range of public service reform initiatives have been undertaken in Ghana since the early 1980s. The public service in Ghana is composed of centrally managed agencies, ministries, subvented agencies, district assemblies, and state enterprises. The civil service, which covers the centrally managed agencies, ministries, and local government, accounts for only about 20 percent of total public sector employment as a result of the spin-off in the 1980s of the internal revenue, customs, education, and health services as subvented agencies.

III. Tariff Reform in Ghana18

A. Review of Tariff Policy

48. The trade and tariff system in Ghana has undergone substantial change since the launching of the Economic Recovery Program (ERP) in 1983 and the implementation of several liberalization programs through the mid-1990s. The index of aggregate trade competitiveness for Ghana is currently in the moderate range.19 (International Monetary Fund, 1997). After briefly reviewing past developments, this chapter presents the current tariff system in detail and examines the implications of reducing zero rating and exemptions, and lowering the top rate.

Recent Developments in Tariff Policy

49. The launching of the ERP initiated a significant break from the protectionist trade policies that had prevailed for many years. An important objective was to replace an economic development plan based on import substitution with a growth strategy based on export expansion. By liberalizing trade and submitting the economy to external competition, industry was expected to develop in sectors in which Ghana had a comparative advantage and, therefore, good prospects for growth through exports in the world market. In order to allow competition to work, the government needed to remove restrictions and distortions impeding trade and permit the private sector to respond to market incentives.

50. By 1983, constraints on trade were considerable as Ghana had become one of the most protectionist countries in the world (Edwards, 1990). During the ERP period, Ghana’s trade and tariff system was simplified by the steady implementation of measures to remove quantitative restrictions on imports, abolish import licensing, remove limitations on the availability of foreign exchange, move away from a fixed exchange rate, and eliminate price controls. In 1983, the existing tariff system was replaced by a predominantly uniform tariff structure with a rate of 30 percent. Although the uniform tariff rate was replaced by a four-tiered cascading structure in 1986, rates in each tier were steadily lowered over the course of the ERP.

51. The performance of the manufacturing sector improved markedly with the trade and tariff reforms under the ERP. Prior to the ERP, during the peak period of the import substitution program in 1978-83, value added of the manufacturing sector declined at an annual average rate of 12 percent. Over the 1984-93 period, real value added in manufacturing grew at an average rate of about 8 percent annually. A disaggregated study of the impact of trade liberalization found that its objectives were achieved (Biggs and Shah, 1997). Specifically, exporting firms grew substantially, benefiting from higher prices of their output and lower costs of inputs. Firms producing nontradable goods increased production, while those competing with imports, especially in textiles, contracted.

52. Decreases in tariff rates over the ERP period substantially reduced Ghana’s effective tariff rate (Figure 2). In the period 1978-84, before trade liberalization began under the ERP, the effective import tariff rate was 17 percent (Farhadian-Lorie and Katz, 1988). The trade liberalization program came into effect in 1986, and, by 1988, the effective tariff rate had fallen to 7.4 percent. Through 1992, the effective import tariff rate continued to decline, largely from the lowering of statutory rates. Between 1992 and 1996, the effective rate fluctuated. In 1993, an unusually strong demand for imported consumer goods in the last quarter raised the average effective tariff rate for the year. In 1994, the effective rate returned to its average level in 1990-92. In 1995, it rose when import tariffs were collected along with the new value-added tax (VAT) on imports and the tax base was broadened by limiting exemptions. However, after the VAT was rescinded and the list of exempted imports was expanded again in 1996, the effective tariff rate declined to about 5 percent, its lowest level so far.

Figure 2.
Figure 2.

Ghana: Effective Rate of Tariff and Sales Tax on Imports, 1988-96

(In percent)

Citation: IMF Staff Country Reports 1999, 003; 10.5089/9781451814750.002.A003

53. The government’s 1994 budget simplified the tariff structure, enacting three ad valorem rates of 0, 10, and 25 percent of the c.i.f. value of imports. However, specific duties were applied to over 100 commodities at the eight-digit code level in the harmonized system, as well as to many textiles and garments. These specific duties were set up as alternatives to the domestic sales tax, with the higher of the two being applied. In addition, sales tax rates on imported goods were set at 0, 15, and 35 percent.

54. Taxes on international trade and, more specifically, import tariffs, have been and continue to be a major source of government revenue in Ghana (Figure 3). In 1986, the share of trade taxes in total revenue declined following the replacement of the prevailing uniform tariff rate of 30 percent by a cascading structure with lower rates. From 1989, the average share has fluctuated in the 25-30 percent range. The share of import tariffs in total tax revenue has followed a similar pattern, fluctuating in the 15-20 percent range since 1989.

Figure 3.
Figure 3.

Ghana: Share of Trade Taxes and Imports Tariffs in Total Tax Revenue

(In percent), 1986-96

Citation: IMF Staff Country Reports 1999, 003; 10.5089/9781451814750.002.A003

55. Simple and import-weighted averages of statutory tariff rates for Ghana and a sample of other African countries are presented in Figure 4.20 Ghana’s average tariff rates are below those in the other countries, with the import-weighted average significantly lower than the rest of the sample. As shown in the next section, this difference follows primarily from the extensive zero rating and the erosion of the tariff base by exemptions in Ghana.

Figure 4.
Figure 4.

Selected African Countries: Statutory and Import-Weighted Averages of Tariff Rates

Citation: IMF Staff Country Reports 1999, 003; 10.5089/9781451814750.002.A003

1/ Data for 1994, from Kirmani (1994)2/ Data for 1997, from Aksoy (1998), and IMF staff calculations for Ghana and the Gambia

Key Features of the Current Tariff System

56. Ghana’s current tariff structure is relatively simple, with four rates and no quantitative restrictions. The system was introduced in 1994 with three rates of 0, 10, and 25 percent, with the objective of enhancing uniformity and reducing dispersion. A 5 percent rate was added in 1998 to facilitate shifting zero-rated goods to a positive rate. The current system also incorporates a 15 percent sales tax. In addition, the tariff system has a significant number of exemptions. The problems created by extensive use of zero rating and exemptions have given rise to calls for further reform of the tariff system.

Statutory and effective tariff rates

57. Table 6 summarizes Ghana’s tariff system by applying its rate structure and exemptions to import data for 1997.21, 22 It presents for each rate the number of lines in the tariff schedule, the number of lines with actual imports, the share in total c.i.f. import value, and the statutory and effective rates for the import tariff and sales, and other taxes on imported goods.

Table 6.

Ghana: Statutory and Effective Tax Rates on Imports

article image

58. Zero-rated goods comprise a large share, nearly 47 percent, of import value. The share of goods imported at the 10 percent rate is almost 38 percent. Goods imported at the 5 percent and 25 percent rates together account for only about 15 percent of imports.

59. The effective tariff rate corresponding to each positive statutory rate is much lower because of exemptions—specifically, 0.7 percent at the 5 percent statutory rate, 5.5 percent at the 10 percent rate, and 13.6 percent at the 25 percent rate. The effective sales tax rate is also considerably lower than the simple average of the statutory sales tax rates applied at the 10 and 25 percent tariff rates (the sales tax is not applied at the 5 percent tariff rate). In particular, the effective sales tax rate is 4.5 percent for an average statutory sales tax rate of 12.2 percent at the 10 percent tariff rate and 7.9 percent for an average statutory sales tax rate of 15 percent at the 25 percent tariff rate.

60. Taxes on imports other than tariffs and sales taxes show little or no variation between the statutory and effective rates at each tariff rate, with one exception. At the 25 percent tariff rate, other taxes have a 3.9 percent statutory rate but an effective rate of 1.3 percent, indicating that exemptions have a significant impact on other taxes at the top tariff rate.

The system of exemptions

61. A comparison of the revenue collected by the customs administration and the potential revenue that could have been collected if there were no exemptions reveals the following:

  • The total tax revenue foregone to exemptions amounts to approximately 52 percent of potential revenue, or 8.2 percent of the total c.i.f. value of imports.

  • Elimination of exemptions would more than double total revenue collection at the 10 and 25 percent rates. At the 5 percent rate, elimination of exemptions would increase revenue collection from 0.7 percent of total revenue to 5 percent.

62. Certain exemptions are required by regional and international agreements, such as the ECOWAS Protocol, Geneva Convention, and donor-funded contracts. They cannot be altered unilaterally by the government and are not subject to domestic tariff policy considerations alone.

63. Fifteen different programs of exemption from import tariffs are currently available. The share of the total c.i.f. value of imports for the seven main exemption regimes, as well as their share of the total revenue loss generated by all exemptions, is presented in Table 7.

Table 7.

Ghana: Share of Imports by Main Exemption Regimes and Associated Revenue Loss

article image

64. The exemption system has the following features:

  • The seven main regimes produce 93.4 percent of the total revenue loss from exemptions. The exemptions listed under the Ministry of Finance account for over 36 percent of the total loss, over twice the loss from the next largest regime.23

  • A large share of the total loss is not necessarily associated with a large import share. Specifically, the regimes for the Mining and Minerals Commission and the Volta Aluminum Company (VALCO) generate 16.7 percent and 10.5 percent of the total revenue loss but have relatively small import shares of 7.2 percent and 3.2 percent, respectively.24

65. The composition of imports in the main exemption regimes, as shown in Table 8, reveals the following:

Table 8.

Ghana: Distribution of Main Imports by Exemption Regimes and Associated Revenue Loss Due to the Exemptions System

article image
article image

Percent of total revenue loss within the respective exemption regime.

Percent of total revenue loss of the entire exemption system.

  • Exemptions do not appear to be based on the economic use of the commodities under each regime.

  • For most regimes, a few commodities have relatively large shares of the revenue loss under a particular regime; the rest of the commodities have small shares, under 1 percent of total revenue loss for most items. For example, imports of aluminum oxide account for 37.5 percent of the total revenue loss under the VALCO regime; transmission and reception equipment, 18.3 percent of the loss of the National Revenue Secretariat (NRS) regime; and instruments for physical or chemical analysis, 12.3 percent of the loss under the Ghana Investment Centre.

66. Table 9 examines the revenue loss from exemptions by broad categories of imports. Nuclear reactors, mineral fuels, and vehicles comprise nearly half of the total import value. However, some of the main sources of revenue losses—electrical machinery, articles of iron and steel, and inorganic chemicals—do not have large import shares.

Table 9.

Ghana: Ranking of Main Two-Digit Commodity Code Imports by Import Share and Associated Revenue Loss Owing to Exemptions

(In percent)

article image

67. Table 10 presents imports and revenue loss distributed by main uses of imports. The largest losses arise from exemptions on capital goods and intermediate goods, which account for approximately 32 percent and 44 percent of total loss, respectively. The loss from exemptions for consumer goods is almost 18 percent.

Table 10.

Ghana: Sector Classification of Imports by Revenue Loss Owing to the Exemptions System

(In percent)

article image

B. Directions for Further Reforms

68. As Ghana continues its efforts to achieve sustainable growth, the government will need to carry out tariff reforms to prevent misallocation of resources and loss of efficiency owing to distortionary effects of the tariff structure. However, trade tariffs still represent a significant source of revenue, and, therefore, any change in the tariff system needs to take into account its effects on revenue. The analysis of the present tariff structure in Ghana highlights three important points: (a) the widespread use of zero rates, in many cases without economic justification; (b) the generous use of exemptions, which reduces transparency and creates discriminatory treatment of users; and (c) the relatively high top rate of 25 percent, which may need to be reduced for Ghana to be in line with the tariff structure recommended for countries in the West Africa Economic and Monetary Union and, therefore, in a competitive position for foreign investment. This section examines several reform packages proposed with these points in mind to gauge their impact on effective tariff rates and revenue.

Options for Tariff Reforms

69. Reform packages can take many forms, and it would be impossible to cover all of them. The purpose of the analysis in this section is not to advocate a specific package of tariff reforms, but to explore the implications of a limited number of reform options on the effective tariff rate and tariff revenues. In particular, we examine the likely effects of various combinations of three elements:

  • a reduction in the top tariff rate from 25 percent to 20 percent;

  • a reduction in the value of tariff exemptions to one-half of their current level, with exemptions for sales tax and other taxes remaining at their current level; and

  • an increase in the tariff on zero-rated consumer goods to 5 percent.

70. These three elements will be combined into six different options in an effort to identify some trade-offs among revenue loss, removal of distortions, and reduction of tariff dispersion. In order to simplify the examination of their impact, the demand for imports is assumed to remain unaffected by changes in the tariff system. The six options, as shown in Table 11, are the following:

Table 11.

Ghana: Main Features of Reform Options

article image

  • Option 1, which reduces the value of tariff exemptions by one-half;

  • Option 2, which reduces the value of tariff exemptions by one-half and the top tariff rate from 25 percent to 20 percent;

  • Option 3, which moves consumer goods from the zero-rated category to the 5 percent rate;

  • Option 4, which applies the 5 percent rate to zero-rated consumer goods and reduces the top tariff rate from 25 percent to 20 percent;

  • Option 5, which lowers the value of tariff exemptions by one-half and applies the 5 percent rate to zero-rated consumer goods; and

  • Option 6, which reduces the value of tariff exemptions by one-half, applies the 5 percent rate to zero-rated consumer goods, and lowers the top tariff rate from 25 percent to 20 percent.

Impact of Tariff Reform Options

71. This section analyzes the implications of the different tariff reform options listed above on average and effective tariff rates and revenue collection. Table 12 presents the simple and import-weighted averages of import tariff rates under each of the options. Table 13 describes the impact of the tariff reform options on effective tariff rates. Finally, Table 14 describes the effects on revenue.

Table 12.

Ghana: Simple and Import-Weighted Averages of Effective Tariff Rates Under the Reform Options

(In percent)

article image
Table 13.

Ghana: Effective Tariff Rates Under the Reform Options

(In percent)

article image
Table 14.

Ghana: Effects of Reform Options on Revenue and Loss Owing to the Exemptions System1

article image

Aggregate import tariff revenue computed from the data set used in this study is about 25 percent higher than import tariff revenue reported for 1997 in the budget (see footnote 3). Possible reasons for these differences include problems with collection procedures, reporting, and data, and potential discrepancies between tariff calculations in this study and actual calculations. Calculations in this study reflect the application to 1997 data of the tariff structure in 1998, which incorporates changes implemented in March 1998. However, these changes are unlikely to explain the higher revenue computed from the data set.

72. As can be seen from Table 12, the effect of any one of the options being considered is less than 1.5 percentage points in the case of simple average nominal tariffs, and at most about 0.6 of a percentage point in the case of the import-weighted average nominal tariffs. Options 2, 4, and 6 lower both tariff averages: by 1.3-1.5 percentage points for the simple averages, and by 0.4–0.6 percentage points for the import-weighted averages. Options 3 and 5 increase them marginally. Option 1 leaves the averages unchanged, as it modifies only the existing exemption system.

73. Effective tariff rates are much lower than average statutory tariff rates because of the widespread use of exemptions. As one would expect, the halving of tariff exemptions would significantly increase the effective tariff rates and the reclassification of lines has a more modest impact based on the change in the benefit associated with the reclassified items. The effective tariff rates under each option are presented in Table 13 below. As can be observed, for options that involve halving of the exemptions (options 1, 2, 5, and 6), the effect is much larger than in those that involve only a reclassification of lines (options 3 and 4). The largest effect occurs in option 5, which not only eliminates half of the exemptions but also reclassifies zero-rated consumer goods, while maintaining the top tariff rate at 25 percent. Option 4 actually results in a small reduction of the average effective tariff rate as the effect of the reduction in the top rate dominates the switching of zero-rated consumer goods to the 5 percent tariff group.

74. Table 14 below summarizes the impact of the different reform options on revenue and on the losses owing to the exemption system. The main effect of the reform options on tariff revenue comes from the reduction of exemptions. The adoption of any of the options that assume a reduction of exemptions (options 1, 2, 5, and 6) generates a gain in revenue ranging from 16 percent to 23 percent of current tariff revenue. Moreover, option 3, which assumes the application of a 5 percent tariff to zero-rated consumer goods, but changes neither the exemptions nor the top rate, shows a 1 percent increase in tariff revenue. The only case that results in a modest reduction (4 percent) in tariff revenue is option 4, which, in addition to the reforms of option 3, also assumes a decline in the top rate from 25 percent to 20 percent. This latter element has a stronger negative effect on tariff revenue than the effect arising from the reclassification of zero-rated consumer goods to the 5 percent tariff group.

Conclusion

75. This study highlights the trade-offs between reductions in tariff dispersion, average tariff rates, and tariff revenue. Option 5 brings the maximum positive effect in terms of increasing revenue, and it reduces somewhat tariff dispersion by raising the tariff applicable on zero-rated consumer goods to 5 percent. However, it also results in the largest increase in the average tariff rates, both simple and import-weighted averages. Options 4 and 6 minimize the tariff dispersion while reducing modestly average tariff rates. Option 4, however, results in the sharpest decline in tariff revenue of all the options examined; option 6, meanwhile, increases tariff revenue by 16 percent and seems to represent the most balanced reform package among those studied in this chapter.

76. Further reform of the tariff structure needs to be considered in the context of integration with the value-added tax (VAT) being introduced at the end of 1998. Imports will be exempt from the VAT only if they are exempted under the VAT law. Reductions in zero-rating and exemptions under the tariff system should be pursued in part to bring the taxation of imports in line with the taxation of consumption embodied in the VAT.

References

  • Aksoy, Ataman, “Preliminary Results from Africa Regional Trade Study,” paper presented at the World Bank-International Monetary Fund Workshop (Washington: April 28, 1998).

    • Search Google Scholar
    • Export Citation

  • Biggs, Tyler and Manju Shah, “Trade Reforms, Incentives on Ground and Firm Performance in Ghana,” World Bank (Washington: World Bank, July 1997).

    • Search Google Scholar
    • Export Citation

  • Edwards, Sebastian, “On Uniform Import Tariff in Developing Countries,” NBER Working Paper No. 3447 (Cambridge, MA, May 1990).

  • Farhadian-Lorie, Ziba and Menachem Katz, “Fiscal Dimensions of Trade Policy,” International Monetary Fund Working Paper No. WP/88/43 (Washington: International Monetary Fund, May 1988).

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund, “Trade Liberalization in Fund-Supported Programs,” EBS/97/163 (Washington: International Monetary Fund, August 27, 1997).

    • Search Google Scholar
    • Export Citation

  • Kirmani, Naheed, “International Trade Policies: The Uruguay Round and Beyond, Volume II, Background Papers,” World Economic and Financial Surveys (Washington: International Monetary Fund, 1994).

    • Search Google Scholar
    • Export Citation
18

Prepared by Roman Arjona-Gracia, Anthony Pellechio, and Allan Crego (World Bank).

19

International Monetary Fund, 1997. Ghana’s restrictiveness index was 4 on a scale of 0-10.

20

The simple and import-weighted averages are calculated using the formula ∑iwiti/W and w = ∑iwi where i indexes the statutory tariff rates and wi equals the number of lines in the tariff schedule at rate ti for the simple averages, and the c.i.f. value of imports at rate ti for the import-weighted averages.

21

The analysis in the remainder of this study is based on the Automated System for Customs Data Management (ASYCUDA) data set provided by the Ghana Statistical Service. This data set consists of all transactions in 1997 at the three main ports in Ghana (Tema, Kotoka International Airport, and Takoradi) and covers more than 95 percent of the total imports. Aggregate figures derived from this data set differ in value from similar figures reported by the customs administration. These differences are under review by Fund and Bank staff in collaboration with Ghanaian authorities. The outcome of this review is not expected to alter the main empirical results and conclusions of this study as it relies on statistics calculated as ratios or shares whose values are unlikely to change significantly.

22

The analysis excludes petroleum products which are subject to special excises and fees, but not to either specific or ad valorem import tariffs. All petroleum product imports take place at the Tema Oil Refinery, the state oil refinery that has a monopoly in the importation of petroleum products.

23

It is important to note that the Ministry of Finance has no discretionary powers to grant exemptions. Exemptions classified under Ministry of Finance cover exemptions from all other ministries, departments, and agencies under various contractual agreements. They also cover nongovernmental organizations, as well as exemptions granted by parliament. Only parliament has the power to grant exemptions under the Constitution of Ghana.

24

With regard to VALCO, the Government of Ghana is bound by the Master Agreement that was signed in 1964.

Cover IMF Staff Country Reports
Ghana: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1999: Issue 003
Publisher:
International Monetary Fund
ISBN:
9781451814750
ISSN:
1934-7685
Pages:
145
DOI:
https://doi.org/10.5089/9781451814750.002
  • View in gallery

    Ghana: Effective Rate of Tariff and Sales Tax on Imports, 1988-96

    (In percent)

  • View in gallery

    Ghana: Share of Trade Taxes and Imports Tariffs in Total Tax Revenue

    (In percent), 1986-96

  • View in gallery

    Selected African Countries: Statutory and Import-Weighted Averages of Tariff Rates

Ghana: Effective Rate of Tariff and Sales Tax on Imports, 1988-96

(In percent)

Ghana: Share of Trade Taxes and Imports Tariffs in Total Tax Revenue

(In percent), 1986-96

Selected African Countries: Statutory and Import-Weighted Averages of Tariff Rates