The government has a lot of convincing to do before it can rally Ghana’s entrepreneurs behind its budget

Government’s budget for the first year of Ghana’s oil economy, 2011, was announced with the theme “Stimulating growth and development for job creation,” but not many local industrialists seem to agree that the policies it contains are business and investor friendly.

Present and past governments have long recognised the Association of Ghana Industries’ advocacy role and have often consulted and taken into consideration the views and concerns of the association in fashioning policies to improve the business environment for the manufacturing sector.

At the 50th annual general meeting of the Association of Ghana Industries (AGI) held on November 25th 2010, Finance and Economic Planning Minister, Dr. Kwabena Duffuor, was invited as guest of honour to help members of the association clear doubts in their minds about how policies outlined in the 2011 budget would stimulate economic growth and expand job creation.

Dr. Duffuor explained to his audience why he considered AGI’s invitation so important: “The private sector is the engine for real job creation and this underscores the proposed deployment of significant resources in the 2011 budget to support the sector to be more competitive and create the much needed jobs for the people”.

Corroborating the Finance Minister’s position on the budget being pro-private sector, Trade and Industry Minister Ms. Hanna Tetteh, herself a former executive member of the AGI before becoming a minister, said the 2011 budget had “underlined the significant role of infrastructure development in accelerating economic growth, especially at this stage of the country’s development.”
However, Ms. Tetteh admitted to the industrialists that government was aware they were still confronted with challenges. “We are aware that the infrastructure deficit in the energy, housing, roads and water sectors undermine the ability of many businesses to produce goods and services in an efficient manner and also be competitive in the global market,” Ms. Tetteh said.
In November last year, the Ghana Statistical Service completed its re-basing exercise which resulted in Ghana’s reclassification as a low middle income country with a per capita GDP of just over $1,000.

The re-based economy showed that the manufacturing sector now accounts for only 18.6% of the economy, while the services sector’s share of the economy had shot up to 51%, overtaking agriculture, which now accounts for 30.2% of GDP.

The AGI President, Nana Owusu-Afari  noted that the figures are a true reflection of the sad realities on the ground, as a result of which, the manufacturing sector had experienced declining fortunes in recent years, with negative growth of 2.3% and 1.3% recorded in 2007 and 2009 respectively.

“Obviously, it is the services sector that is propelling us into a middle income economy, while the two most productive sectors – agriculture and industry – are lagging behind,” Owusu-Afari said, adding that there is a weak linkage between the productive sectors of the economy and the services sector.

30% of contracts awarded to foreign contractors should be reserved for local contractors.

The AGI President told GB&F that it was counterproductive to adopt an antagonistic stance to the budget, though it contained several government proposals that would particularly hurt manufacturing and industry in general. “We, as the business community, would rather focus on promoting dialogue that would get both the private sector and government to appreciate what challenges we both are faced with in our efforts at creating more jobs and consequently fostering prosperity in the country,” he said. High on the list of budget proposals that industrialists find challenging is the abolition of deferred payments on VAT, which hitherto allowed manufacturers to only make good the value-added tax obligations after actual production. “It took us over five years of effort, negotiating the VAT deferred payment, which came into force only recently. Scrapping it now  would mean manufacturers will be faced with cash flow challenges as we will dole out cash that we have not yet earned, thereby making us less competitive on the market,” Nana Owusu-Afari said.

Another sticking point was the proposed 20% environmental tax on plastic packaging materials and products, excluding bottled water which already attracts excise duty. Plastic packaging manufacturers say this is rather discriminatory since only 30% of plastic packaging companies use flexible plastics that are deemed environmentally harmful, and even that, over 50% are imported finished products.

“Over 70 % of plastic packaging materials manufactured locally are from rigid plastics, which are environmentally friendly. How then should all manufacturers be punished for only 15% of plastic pollutants manufactured locally?” queries Humphrey Ayim-Darke, CEO, Hamdark Industrial Packaging, who also doubles as AGI Greater Accra Regional Chairman.  “A better approach would be to promote the use of bio-degradable packaging
materials rather than adopt taxation that virtually hurt even those manufacturers of environmentally friendly plastics,” he said. Real estate developers are also not taking kindly to proposals by government for the abolition of the five-year tax exemption they have been enjoying. Under the new proposal, only real estate developers who partner with the Ministry of Works and Housing to provide affordable houses will continue to benefit from the five year tax exemption.

Ministry of Finance sources explained that real estate developers had hitherto produced only for high-end consumers to the neglect of the large chunk of low-end consumers and it is for this reason that government was withdrawing the tax exemption. Yet another group of peeved business people are the importers of finished products in the form of equipments and machinery, including automobiles.

“Given the time lag between the demand for and the effective supply of our products, the abrogation of the warehousing policy may lead to the creation of shortages of our products on the market,” said a representative of Ghamot Motors. Ministry of Finance officials have countered that the new policy, which only allows for warehousing of industrial and other raw materials, is aimed at curbing the high incidence of abuse – in the past – by some importers of finished products who kept imported finished items warehoused well beyond the stipulated time under the regulation.

Industrialists say they understand government’s need to raise money for the development of critical infrastructure but insist that the tax net be widened to capture the majority of small and medium enterprises that form a bulk of the country’s productive sector. Finance Minister Duffuor however points out that the 2011 budget is not primarily about raising revenues for government but about curbing certain practices that have been inhibiting economic growth and domestic production.  Ghana, obviously, is faced with the apparent incongruous divide accepted by development experts as a universal conundrum: how to expand capital investment projects with the view to creating more jobs, while upgrading systems to meet growing demand in a more environmentally sensible manner without onerously taxing the very productive sectors of the economy that create job opportunities and wealth.

As AGI President Nana Owusu-Afari points out, local manufacturers are confronted with a myriad of daunting challenges that threaten the very survival of industry. “Competition from imported goods in our local market has consistently featured among the top three challenges of industry in Ghana in AGI’s Business Barometer Surveys. What is worse is the unfair competition being suffered by manufacturing companies due to poor administration of our tariff regime,” Owusu-Afari said.

The AGI is recommending to government that the harmonised code should be enforced in a manner that eliminates the opportunity for some importers to evade taxes. Again, the AGI is proposing a review of the laws, which force manufacturers from taking withholding tax from suppliers of raw materials since the suppliers eventually add the five percent withholding tax to their cost of supplies rendering the local manufacturer uncompetitive. Industrialists are also urging government to waive the duty on specific imported raw materials, which are used mainly for production as is the case for Free Zone companies, for manufacturing to increase production levels and to accelerate the pace of industrialisation in the country. “The current 10% duty on raw materials renders Ghanaian manufacturers less competitive both locally and internationally,” Owusu-Afari said.

Another area of concern is in the construction industry. The use of expatriate contractors to build roads, including those being financed from internally generated funds, according to AGI, is considered inimical to the development of domestic construction capacity. “It is sad that, by our own defined requirements, most Ghanaian companies cannot meet the prequalification requirements in terms of equipment and cash flow for serious internationally funded contracts. We need to develop special incentives within the procurement framework to give premium to local firms in contract awards,” Owusu-Afari said, proposing that 30% of contracts awarded to foreign contractors should be reserved for local contractors.

The industrialists are aware that one budget statement cannot address the myriad of challenges they face, especially as the country now has to traverse the difficult terrain from a $1,000 to a $3,000 per capita middle-income economy. However well-intentioned officials of the Ministry of Finance and Economic Planning may be, industrialists are of the view that bureaucrats may not really understand these challenges better than the captains of industry who continually are bruising their knuckles in the trenches of Ghana’s business realm.

Obviously, increasing dialogue between policy makers and the private sector would foster better understanding between them and help improve the business environment for corporate Ghana to do more business and create more jobs.

Equally importantly, both domestic and foreign investors would prefer a more stable and predictable business policy environment where government’s decisions on such critical matters as tax rates, duties, VAT withholding, tax payment deferments and investment incentives are stable and can be used for longer-term planning.  For now, it remains to be seen how the implementation of the 2011 budget and the new taxation policies will impact on businesses, and the kinds of agile practices that business executives and their legal and tax accountants might come up with to ensure their continued viability and competitivevess.