#Occupyflagstaffhouse & Ghana’s Revenue Generation Challenges

Black Narrator
Black Narrator

Ghana’s fiscal deficit according to the June 2013 IMF Country Report No. 13/187 “rose to almost 12 percent of GDP—nearly twice the level anticipated in the revised budget” and triple that of 2011. The 2014 Africa Economic Outlook which is jointly published by AfDB, OECD, UNDP confirmed that, “Ghana’s public-debt performance indicates a rising trend from 25% of GDP in 2006, following debt relief under the HIPC initiative, to 48% of GDP in 2012, and further to 52% in 2013″. The total debt level in 2013 was 57% of GDP driven by continued wide budget deficit. In an attempt to close the deficit, the government increased tariffs making life quite unbearable for both low and middle income earning Ghanaians.

Revenues from extractives for Ghana
Revenues from extractives for Ghana

Ghana government has enjoyed increasing revenues from the extractives sector since 2010 because of the discovery of Oil and so it is a wonder that with increased revenues has come wider budget deficits. One main cause for the large fiscal deterioration was higher spending according to the IMF. Question is what did they spend on that did not reflect in the human development of the people? All of the above led to the Occupy flagstaff house demonstration.

Occupy Flagstaff House

July 1, 2014 marked the 54th republic day in Ghana. On this day democracy found expression through a social media orchestrated demonstration/protest aimed at registering citizens’ dissatisfaction with government’s management of the economy. The demonstration marked a new chapter in Ghana’s citizen participatory component of democracy. While demonstrations in general are not new in Ghana, a demonstration triggered by social media activism where mostly middle class folk from different political parties pour on to the streets definitely is.

Present among demonstrators were professors, managing directors, bankers, doctors, students etc. They numbered in the hundreds and withstood both the rain and police intimidation who came out full force riot gear and armored vehicles. Fortunately, the demonstrations were by and large peaceful. After circumventing a number of obstacles such as roadblocks placed in their path by police, demonstrators made their way to the seat of government where the Deputy Chief of Staff received their petition.

Trigger—National Disgrace

The final trigger that set off the occupy flagstaff house protest was the national disgrace suffered by citizens accompanying the Ghana Black Stars football team at the 2014 world cup. The Ghana Football Association (GFA) President was allegedly accused of participating in match fixing according to investigations by the Telegraph and Channel Four’s Dispatches programme. Not long after, two of Ghana’s star football players were suspended indefinitely—one for fighting with an official of the Ghana Football Association and the other for hurling foul language at the national coach—both of which were reported internationally because of the connection to the world cup. Then the national team decided to blackmail government by stipulating that they would boycott their crucial World Cup group game against Portugal if the government did not send them their appearance fees in Brazil—somewhere in the region of $3 million. The President of Ghana in response then authorized the release of this hefty sum of money to be delivered via a chartered jet to the players in Brazil. This also garnered negative international media attention for Ghana—much to the displeasure of most Ghanaians.

One commentator commented thus:

Outrageously, Government was able to speedily mobilize 3.5 million dollars in less than twenty four hours, bundle the cash in bags, chatter a flight from Ghana to Brazil, hire 72 Military Police, 19 Municipal Guards, 26 Squadron Ground Force Military, 14 members of the Grupamento de Operacoes Especiais de Brasilia, One Aeronautical Policia (Air Force), 2 Highway Patrol Battalion and an Air Mobile Brasilia Group to send the $3.5 million through the streets of Brasilia to the players. Woow!!! Look at how brilliant and responsive the Managers of Ghana are!!!!!

B
Black Narrator

What makes the action of government absurd was the fact that Ghana was and is still undergoing a financial crisis with a widening fiscal debt. Some salaries were unpaid, there was petrol shortage due to government’s so-called inability to pay Gh¢1.8 billion owed to Bulk Oil distribution Companies—a sum that has been accruing since 2011, and energy and utilities prices were at an all time high. How does government justify sending $3 million cash via a chartered jet to footballers while its main hospital the Korle Bu Teaching Hospital does not even have flowing water or stable electricity for its operation theaters?

Right about the same period, Moody’s Investors Service downgraded Ghana’s sovereign rating to B2. A consideration for the downgrade was Ghana’s deteriorating fiscal strength, as reflected in the rising debt level and worsening debt affordability amid persistently high fiscal deficits. Another consideration was the increase in Ghana’s vulnerability to shocks given its large debt-refinancing needs and wide external imbalances.

Current revenue mobilization model

Revenue mobilization has not been the strongest suit of any government administration that has had the opportunity to manage Ghana. Instead of coming up with homegrown sustainable solutions to local problems, they have often deferred to prescriptions from World Bank or IMF which historically have proven to be mostly unsustainable and ultimately detrimental to the public. The protests were due to what is in part perceived by citizens as the mismanagement of the economy which has led to high cost of living for even middle class Ghanaians. The question is why has government increased the cost of living by increasing fuel and electricity prices amongst a host of others—each with unfavorable knock-on effects within the economy? Answers can be gleaned from two reports.

The June 2013 IMF Country Report No. 13/187 reveal that the IMF considering the cash deficit of Ghana too high advised government to re-establish cost-recovery pricing of energy products. The government obeyed and in the first two quarters of 2013 alone, electricity tariffs were increased by 78.2%, water tariffs by 59.8%, corporate taxes increased by 5% and VAT by 2.5% according to the 2014 Africa Economic Outlook . The consequence for the citizenry is shouldering the burden of higher tariffs with salaries that have not been increased. 

By doing this, the benefit for government is their World Bank’s Doing Business rating for electricity supply improved by 24 points and that of paying taxes by 3 points. These ratings from the world bank has come under fire in recent times for destabilizing countries by encouraging them to make policies that are unfavorable to long term development yet the Bank still uses it as a criterion for lending to low-income countries. The Doing Business ranking also determines where foreign investors, lenders, and donors decide to spend their money.

Some thoughts on revenue generation

Its time Africa finds local solutions to its problems. That is not to say, she does need a lending hand from the international community. She does but ultimately only Africans can place the development of Africa first. The Bretton Woods institutions are financial institutions and their first priority is to recoup their money so they place debt servicing above the meeting of basic amenities within a state. It’s up to the state—in this case Ghana—to recognize this so that when taking advice from the aforementioned, balance the servicing obligations with meeting the basic needs of their peoples.

If increasing fuel prices by almost 80% is going to put untold burden on citizens, it’s up to government to look out for alternative solutions to revenue generation. This is because in a country where there is no state-owned efficient public transportation, the onus falls on the citizens so any disruption in fuel prices affects the entire economy.

It is estimated that 80% of the Ghanaian workforce is employed in the informal sector—meaning 80% of Ghana’s labor force do not pay tax. This grouping holds huge potential for revenue generation. Government should learn from other states how to mobilize revenue from this grouping—instead of leaving the burden on the 20% of employed folk in the formal sector. The process of going about this should be multi-stakeholder based and free from political party bias.

Secondly counters like Ghana are heavily dependent on the export of few primary products like cocoa, gold and oil. This makes them vulnerable to international price variations. What’s more, these exported primary products become inputs to industries in Europe and elsewhere. The finished product like Cadbury’s chocolate and wrist watches or petrol are sent back to Ghana and sold to Ghanaians at hefty prices. Why continue on such a trend? Why not rather add value to some of our primary products. This is what industrialization is all about. It will create industries that will provide jobs to loads of unemployed Ghanaians while at the same time generating revenue. UNECA and others have been practically screaming at African governments to consider industrialization. It is high time Ghana hears this call. It is not as if this is undoable.

For instance, There are industrious Ghanaians who have assembled vehicles, earth moving equipments and various other products like wheel chairs, automated WCs, bicycles etc for decades in Ghana on a small scale. Surprisingly they received no support from government.

Another Ghanaian came up with an ingenious way of producing clean diesel fuel from plants. This diesel is better for the environment—yet he too received no support from Ghana government or the international community. The list of potential runs long. Why will government not get behind some of these folks and drive Ghana’s own industrial revolution. Some complain that solar panels are expensive. Ok how about harnessing biogas. The Council for Scientific and Industrial Research of Ghana has come up with so many research and inventions—each a potential revenue generation avenue for Ghana—yet most of their research gathers dust on shelves. There seems to be a broken feedback loop between government and research and development in Ghana. This should be fixed.

Third, each year the nation of Ghana loses tax revenue from trade misinvoicing to the tune of an estimated $386 million per year. These are from under and over invoicing of export and imports among others. Plugging these leakages can save the nation so much money—enough to go around. Sadly, even when patriotic Ghanaian investigative journalist Anas Aremeyaw Anas provides government with video evidence of customs and police officials bankrupting the nation through illicit processes, no serious actions are taken to reprimand culprits or plug leakages. This leads to the assumption that there are entrenched positions in government—the present or former—who benefit from these leakages.

There has been much talk about the depreciating cedi which leads me to a fourth avenue of revenue generation that government can explore. All telecom companies in Ghana are owned by foreigners much like Ghana gold extracting industry. These transnational entities periodically transfer colossal sums of money out of the country. It is colossal because most Ghanaians use mobile telephony because landlines are not as easily accessible. Each time the transfers takes place, Ghana’s fragile economy reels. This is same for other transnational corporations in Ghana. Government must revisit and renegotiate agreements so that these transfers do not cause such instability to Ghana’s economy.

Finally its time Ghana’s government gives Ghanaians a stake in their national resource. It was surprising to learn that Ghana’s share in the gold mining corporations within its borders is currently 0%. This should change. Additionally Ghana should start working on Ghanaians owning some of the telecom companies within their borders. Why? Because this sector is enjoying enormous growth and the International Telecommunications Union (ITU) forecasts that this phenomenal penetration of mobile telephony and internet technologies will only grow further. It does not make sense to have most of the dividends from this sector transferred out of the country when an appreciable percentage of it could be kept within Ghana’s economy.

What are Illicit Financial Flows?

GFI Graph
GFI Graph

The Global financial Integrity disclosed that, “As a percent of GDP, Sub-Saharan Africa suffers more from illicit financial outflows than any other region in the world”. The gravity of this statement is better appreciated when one considers that this part of the globe constitutes a huge percentage of the world’s youthful populations—many of which are poor, live on less than a dollar a day and suffer from low human development with poor access to healthcare, education and security. In effect, the region that needs help the most suffers the most from Illicit Financial Flows (IFF) which if rightfully curbed could aid development.

In the past I have written about Illicit Financial Flows in my article entitled “Africa: Tackling Illicit Outflows” but I have not really taken the time to define what they are. So what are they?

Illicit flows are all unrecorded private financial outflows involving capital that is illegally earned, transferred, or utilized, generally used by residents to accumulate foreign assets in contravention of applicable capital controls and regulatory frameworks. Thus, even if the funds earned are legitimate, such as the profits of a legitimate business, their transfer abroad in violation of exchange control regulations or corporate tax laws would render the capital illicit.

This definition was taken from the Global Financial Integrity Report dubbed, “Illicit Financial Flows from Developing Countries: 2002-2011“.

Illicit Money & Flight Capital

Further deepening our understanding, below is an excerpt from another report which defines some more terms for the uninitiated titled, “Illicit Financial Flows From Africa: Hidden Resource For Development“:

Illicit money is money that is illegally earned, transferred, or utilized. If it breaks laws in its origin, movement, or use it merits the label.

Flight capital takes two forms. The legal component stays on the books of the entity or individual making the outward transfer. The illegal component is intended to disappear from records in the country from which it comes.

By far the greatest part of unrecorded flows are indeed illicit, violating the national criminal and civil codes, tax laws, customs regulations, VAT assessments, exchange control requirements, or banking regulations of the countries out of which the unrecorded/illicit flows occur.

There are two main channels through which illicit capital, unrecorded in official statistics, can leave a country.

The World Bank Residual model captures the first channel through which illicit capital leaves a country through its external accounts. The second type of illicit flows, generated through the mispricing of trade transactions, is captured by the Trade Misinvoicing model which uses IMF Direction of Trade Statistics.

Mohamed Sultan, an economic governance program officer at the Open Society Initiative for West Africa offers yet another explanation of IFFs as follows:

When money is moved secretly and illegally from one jurisdiction to another, this constitutes an illegal financial flow. For developing countries, the term refers to money that leaves the continent instead of being used to finance development.

Such funds may be proceeds from organized crime, smuggling, corruption, money laundering, tax evasion, or international trade manipulations.

He adds:

While concentrated in a few countries such as Nigeria and Ghana, and essentially stemming from extractive and mining industries, IFFs are a burden for nearly all West African countries. Across the continent, only 3 percent of IFFs are derived from government corruption, while 33 percent comes from organized criminal activity and 64 percent from trade manipulations.

African economies have lost between $597 billion and $1.4 trillion in illicit financial flows in the past three decades. That’s nearly equal to the entire continent’s current gross domestic product. This plunder results in missed development opportunities, increased poverty, and continued injustice.

While many African nations are experiencing unprecedented economic growth, illicit financial flows (IFFs) prevent this growth from translating into better overall living conditions for Africans.

For more on measurements and the impact of IFFs on the human family and specifically sub-Saharan Africa, read the hyperlinked reports.


Africa Tells EU to Back Off Uganda, Nigeria

African,_Caribbean_and_Pacific_Group_of_States_member_nations_map

A couple of weeks ago, I wrote an article titled Africa and the West: Revising the Rules of Engagement. It tackled what in my opinion was uncivil and derogatory treatment of Uganda and Nigeria (and by extension the entire sub-Saharan African people) by some developed countries. These countries attempted to use development assistance as a control mechanism to force these states to abrogate an anti-gay bill arrived at democratically through parliamentary and executive arms of governments.

I wondered why African leaders had not yet spoken up for their citizens and beliefs. In addition to withdrawing aid, the European Union had gone as far as tabling the EU Parliament resolution of 13 March 2014 on launching consultations to suspend Uganda and Nigeria from the Cotonou Agreement in view of recent legislation further criminalising homosexuality (2014/2634(RSP)).

Today I was very pleased to chance upon a response to the EU Parliament from the African, Caribbean and Pacific Group of States (ACP)—79 member nations, all signatories to the Cotonou Agreement save Cuba. .

The Parliamentary Assembly of the African, Caribbean and Pacific (ACP) Group of States answered the West by issuing the following DECLARATION OF THE ACP PARLIAMENTARY ASSEMBLY on recent proposals adopted by the EUROPEAN PARLIAMENT with regard to UGANDA and NIGERIA.

It is good to see Africans and other developing nations speaking up for what they believe in and not cowering at intimidatory control measures from the West. Hopefully this is a sign that Africans, Caribbeans and the people of the pacific are ready to take up the mantle of responsible [independent vis-à-vis controlled] leadership required to forge a better future for their peoples.

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Solomon Appiah
Twitter: @s_apiah
Email: connect@solomonappiah.com

 

Africa: Tackling Illicit Outflows

Flickr/Enough Food IF
Flickr/Enough Food IF

The Global Financial Integrity (GFI) report estimates that sub-Saharan Africa loses more than twice as much in illicit financial outflows than it receives in aid. According to Kevin Watkins, executive director of the Overseas Development Institute (ODI), transfer or trade mispricing is a practice that facilitates the shifting of profits to low-tax jurisdictions. He explains this practice costs less-developed countries “in excess of $550 billion annually: more than five times annual aid flows.” The lack of transparency in the global financial system facilitates such behavior among multi- and transnational corporations. Tax havens are the favorite destinations for such illicit transfers, which otherwise could have been used to boost economic and industrial development.

According to another GFI report, a conservative estimate for overall illicit outflows from Africa, exempting all other flows in illegal activities from 1970 to 2008, total $1.8 trillion. The 2013 Africa Progress Report, citing the GFI investigation, also puts the average annual loss to Africa from 2008 to 2010 at $38 billion — higher than development aid to this region in the same timeframe. Furthermore…

For more, do read this article titled Africa: Tackling Illicit Outflows on the Fair Observer° platform filed in the Economics section.

Competing Interests: The Ukrainian Crisis

Flickr/mac_ivan
Flickr/mac_ivan

Ukraine’s former president Viktor Fedorovych Yanukovych was removed from office on 22 February 2014. Since then, U.S., E.U. and Russian diplomats have been working to influence the future of Ukraine.

After Yanukovych’s removal, Ukraine’s parliament took the decision to cancel a law that gives legal status to the Russian language in Ukraine. This would have potentially disadvantaged the Russian speaking population in Ukraine. Additionally, Russia recognizes the removal of Yanukovych as illegal and unconstitutional making some arguments based on Ukrainian law during a press conference with Putin.

With the escalation of Western efforts in Ukraine, Russia deployed troops to the Crimea region. The West demanded Russia to pull its troops out under the threat of sanctions which the West imposed on 6 March. The U.S. expanded visa bans on Russian officials and hopes to get E.U. support in imposing further sanctions aimed at Russia’s financial infrastructure and foreign property holdings.

For the FULL article please click this link…

One bane of Africa’s Underdevelopment: Illicit financial outflows

GFI Infographic
GFI Infographic

Though the beneficiary of many development programs, sub-Saharan Africa still hosts some of the world’s poorest UNDP Human Development Indicies (HDIs). Qustion is why?

One answer may lie in the fact that Sub-Saharan Africa looses more than double what it gains through development assistance because of illicit financial outflows from the continent via multinational and trans-national entities. That’s the info to be gleaned from the GFI infographic.

The amount of money developing countries loose through transfer mispricing which is one form of tax avoidance that entails shifting profits to low-tax jurisdictions is in excess of US$550bn annually according to Kevin Watkins, Executive Director of ODI. This is five times more what is received in aid. It was estimated by the AU that 30 per cent of sub-Saharan Africa’s annual GDP is siphoned to tax havens. Between 1970 and 2008 the continent lost US$1.8 trillion through illicit outflows according to Global Financial Integrity report.

The G8 and G20 have it in their power to stop this massive injustice but time and again they have not shown the political will to do so. Why? Because many of them are themselves homes to the flourishing tax haven industry plus some of their current leaders have their political campaigns sponsored by big business using such dubious funds.

How much longer can the globe stand by and watch this injustice take place? It is true that illicit outflows occur in almost all nations on earth but truth is developing nations such as are found in Africa feel its bite the most because they are bled of the very little capital they could have had to make ends meet. It’s easy to point fingers at petty corruption by petty politicians in Africa but it can be argued that the type of corruption being discussed here has done way more harm to Africa and most developing regions than any petty corruption ever has.

Having been bled of such colossal sums of capital, is it any wonder that development aid alone has not been able to make a dent in the drive to spur development on the African continent? The globe must rectify this injustice.

As Jeffery Sachs put it, it’s about “stopping the abuse itself by letting very-very rich people from the US or Europe or mega companies like Apple or Google take their profits, and instead of paying the taxes that they should pay as decent citizens, put them tax free into these tax havens with the approval of the politicians of course, who use this to pay campaign contributions.”

Conditions ripe for Industrialization

New cement factory opens in Ethiopia - one of Africa's fastest-growing nations
Photo credit: Flickr/DFID – UK Department for International Development

Africa is poised to becoming the most populated continent in a few decades with its current population forecasted to double in a mere 36years by the United Nations. The current leaders of the continent have a responsibly to present and future generations to act sagaciously to leave behind a self sustaining, strong continent which can sustain the projected demographic change. They can do this owing to the convergence of many factors to the continents advantage at this point in its development history. For the past decade, economic development in sub-Saharan Africa has been phenomenal thanks to high global commodity prices, improved macroeconomic policies, increased investment in infrastructure, institutional development, the deepening of financial systems, and rising productivity.

Governments in this region must take advantage of the economic growth along with other factors listed in the article below to push for massive industrial development i.e. switching from a mentality of being solely primary producers to a mentality that works to add value to its primary products thereby providing jobs and foreign exchange for its massive populations. This value addition process is the focus of industrialization.

This and much more is discussed in my editorial that can be accessed H E R E.

The article was originally published on the Fair Observer Website. The author Solomon Appiah is a native of Ghana and ardent advocate for strategic public policies that advance the development of sub-Saharan Africa.

Twitter: @s_apiah

Blog: http://solomonappiah.com

Email: connect@solomonappiah.com

Tax Malfeasance & the Global Leadership Vacuum

Credit: Thomson Reuters, Knowledge Efect
Credit: Thomson Reuters, Knowledge Efect

I wrote a blog piece for the Africa Progress Panel website published 03.09.2013 leading to the G20 meetings. It discussed how the G20 could fare with regards to filling the global leadership vacuum in the area of ensuring transparency in tax and trade issues. They did not disappoint. The meetings ended up being one big talk shop. But why? Why could the G20 not bring the much needed corrective measures to the global economic system in the area of tax integrity? One of the answers is regulatory capture. I wrote this phenomenon in this article on the fair observer platform.

Regulatory capture is the reason why both the G8 and G20 in 2013 could not take meaningful action against the gross injustice that is currently taking place in the global family where a developing region like Africa gets bled in excess of US$550 billion annually: more than five times what they receive in aid flows annually according to Kevin Watkins, Executive Director of the Overseas Development Institute (ODI). For more on regulatory capture, read THIS. The leakage of US$550 billion annually occurs through a practice that facilitates the shifting of profits to low-tax jurisdictions known as Trade mispricing—one form of tax avoidance. Trade mispricing is simply one of the many leakages in the global economic system that greatly impacts the developing world adversely…and these leakages persist in large part because of the opacity that is tolerated in the current global economic system.

G8 and G20 leaders are aware of this lack of transparency, yet they do nothing significant to combat this by way of strong regulation because they (the regulators) have been captured by those who they are supposed to be regulating (Big business which invariably finances elections etc.). Furthermore members of the G8 and G20 are themselves part of the problem because they host tax havens within their jurisdictions. When the USA and UK host tax havens within their own jurisdictions, how can the globe expect them to speak up or clamp down on the global problem that these havens pose? If some politicians are busy accepting monetary contributions from tax criminals, businesses etc. who engage in tax practices that make the poor poorer, how can we expect these same politicians to regulate these actors?

As shown from the cover graphic, Africa is not the only jurisdiction hurting from tax fraud and avoidance. The EU looses billions of Euros from tax fraud and evasion with much of these illegal sums parked in tax havens.

Since the 2008 global economic downturn, some tax havens have been forced to open up to the EU and the USA but this same largesse has not yet been extended to Africa. Why? As one national parliamentarian from one tax haven told me, you guys (Africans) are not big or united enough to leverage such a move from us whereas the USA and EU are.

Please do not misunderstand me. There are scenarios where a tax haven might be okay or beneficial to an economy but in the absence of strong global regulation, by and large, these havens have been used for more negative than positive it seems by transnational corporations seeking to hide profits from their home countries or from countries within which they operate. An interesting article by the Economist on tax havens can be found here.

The world is in dire need of better global leadership. We cannot progress much longer using the current uneven scales in an opaque  and unjust global financial system. 

Equity and Justice form the foundation of enlightened ethical leadership—Solomon Appiah

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