Economic Update

Published 31 Mar 2017

Ghana’s 2017 budget contains a range of incentives and reforms – including the removal of value-added tax (VAT) on financial services and property sales – that aim to bolster the private sector and sustain a recovery in foreign investment.

The spending plan, released on March 2 by Ken Ofori-Atta, minister of finance, contains a number of articles that look to increase fixed capital formation and investment inflows from overseas.

One of the most noticeable reforms in the budget is the abolition of the 17.5% VAT on financial services. The removal of the tax should provide a healthy fillip to the sector, in addition to lowering transaction costs and paving the way for private sector credit growth.

Tax cuts to spur business

A number of other tax reforms have been announced for implementation in the short to medium term as part of moves to reenergise the private sector and provide relief for businesses, according to the language of the budget.

In construction, for example, stakeholders will be encouraged by the fact that import duties on raw materials are set to be lifted, while a similar removal of levies on the import of machinery and raw materials for production could support growth in manufacturing.

In the real estate sector, the decision to remove the 5% VAT on property transactions outlined in this year’s spending plan should also help reduce the cost of both residential development and home sales.

With Ghana currently facing a significant housing shortage of roughly 1.7m units, according to various industry estimates – projected to rise to 2m by 2018 – the potential benefits of the tax reform could be sizeable.

Strengthening the economy

The tax cuts formed a central part of President Nana Akufo-Addo’s campaign platform during the 2016 election, as the country looked to increase growth from 3.6% last year. That figure is a significant drop from a high of nearly 15% in 2011, and from the more recent 4% growth of 2014 and 2015.

The new administration is also looking to rebound from a drop in foreign investment inflows last year: foreign direct investment (FDI) saw a decrease of just over 11% in 2016 to $2.4bn, according to data from the Ghana Investment Promotion Centre (GIPC).

This figure is down from a peak of $6.3bn, or 15.9% of GDP, in 2011, with the government looking to channel greater capital into manufacturing and tourism in the future.

Among the major projects in those sectors are the recent commissioning of a $75m cement plant by Ciments de l’Afrique Ghana – a subsidiary of Morocco’s Addoha Group – and a $60m Hilton Garden Inn in Accra.

GIPC has set an FDI target of $5bn this year and plans to redouble its efforts to attract investors. New promotional and rebranding campaigns should go some way towards achieving this by raising Ghana’s profile as an international investment destination, Yoofi Grant, newly appointed CEO of GIPC, told local media in mid-February.

IMF swings and roundabouts

The tax cuts come as the country looks to reduce a debt burden equivalent to 74% of GDP and bridge a fiscal shortfall that widened to 9% of GDP last year, according to the IMF.

Ghana’s budget deficit worsened in 2016 on the back of lower-than-expected tax revenue, equal to just over 15% of GDP against a target of 17%.

While the gap has been financed through a combination of non-tax revenue, a $750m eurobond issue in September and domestic financing, it has been a focal point of the IMF’s three-year, $918m assistance programme, which came into force in April 2015. The programme is intended to stabilise government finances and allow for structural fiscal reforms to be put in place.

In mid-February the IMF flagged the possibility of the fund extending its fiscal support programme, which is due to conclude in April next year – a measure that is likely to bolster investor sentiment further.