Our thinking

Ghana’s e-levy to bring much needed revenue – but at what cost?

12 April 2022

On 29 March, the Ghanaian Parliament approved the highly controversial “e-levy” after a protracted political battle that saw two opposition walkouts, a physical brawl on the floor of parliament, a supreme court case, and widespread pushback from the general public. Below – in a piece developed with our research partner in Ghana, Boi Awoonor – we explore why the government has pursued such a politically unpopular policy, what makes this policy unusual among other regional efforts to tax the digital economy, and what it may mean – for Ghana and for the region – now that the policy has been signed into law.

The e-levy: simple, effective, unpopular

The e-levy is a 1.5% tax (reduced from an initially proposed 1.75%) on all electronic transactions above a GHS 100 ($13.25) daily threshold. This means an increase in costs to the consumer for all mobile money payments, bank transfers, exchange payments and inward remittances. It is also a potential, badly needed, windfall for the government given the recent rapid growth of Ghana’s digital economy.

The simplicity of the e-levy, the ease with which it can be implemented and enforced relative to other types of taxes, and the breadth of its applicability, is what makes the policy simultaneously attractive to government and broadly disliked by just about everyone else.

The best of a bad set of options?

The ‘why’ of the policy is also quite straightforward: the government is in dire need of revenue. While Ghana’s fiscal constraints are not a new problem, the situation has become more extreme over the past two years as the government seeks to recover from the economic impact of COVID-19, which has simultaneously reduced revenue and increased the need for spending. Traditional sources of fiscal support have also dried up: at the beginning of the year, Ghana’s sovereign rating was downgraded and the government has effectively lost access to international debt markets (at least temporarily).  Recourse to the IMF, meanwhile, is politically unpalatable, with the NPP government having only recently exited a Fund programme – to some fanfare – in April 2019.

In light of all this, the digital economy has become an obvious target for a fiscal squeeze: in 2020, the value of digital transactions exceeded $81 billion (more than the value of Ghana’s 2020 GDP) according to estimates by finance minister Ken Ofori-Atta. The government could also point to recent regional trends in digital taxation for its move: since 2018, several African countries, including Uganda, the DRC, Cameroon, Zimbabwe and Tanzania, have taken a shot at taxing mobile payments and services through the use of various e-levies, mobile money taxes, or taxes on the registration of mobile devices. However, most were much less aggressive than Ghana’s e-levy, and were – in any case – quickly reduced or rolled back after facing significant public backlash, a prospect that does not appear likely in Ghana.

While concerns around the potential impacts of the e-levy have been widely discussed, there has been less conversation around the potentially serious impacts on the country’s economy if the fiscal situation is not brought under control. With an exorbitant debt burden, inflation reaching upwards of 15%, and the cedi’s depreciation against the US dollar of 20% this year, the country may very well be at risk of reaching a tipping point from which it would be difficult to return. While criticism of the e-levy is ubiquitous, there have also been very few viable alternatives put forward, and with the IMF and international markets off the table, it is hard to see where one might come from.

The e-levy will undoubtedly have negative consequences, and will not be enough to right the ship on its own, but it should do some good towards stabilising the situation. The move seems to have reassured international investors to some extent, at least in the short-term, with Ghanaian Eurobonds getting an immediate bump following the levy’s passage. That said, there is still a long road to go and significant cuts in spending (also part of the government’s plan) will likely also be needed before Ghana can access international bond market again.

Our perspectives

The potential benefit to the Ghana treasury is significant – the government projects the e-levy will generate roughly $900 million. For a cash strapped government, grappling with COVID-recovery priorities, the take is tempting. However, it will undoubtedly have negative consequences, and we anticipate the final haul may be significantly less than anticipated, even excluding indirect economic impacts.

Destroying demand in a high growth sector

Ghana’s e-levy is in fact much broader and more regressive than many of the ‘digital taxes’ being considered and implemented around the region. While many countries (including Ghana itself) have sought to close the tax loophole on foreign companies offering digital services such as Google, TikTok and Facebook, the new levy effectively imposes a cost on the pipeline itself, potentially destroying demand in one of Ghana’s only fast-growing economic sectors. The potential damage to the growth of  Ghanaian digital services has already been on display: rumours that the e-levy would take effect in December spurred a mass withdrawal from mobile wallets. While there is a minimum transaction fee, the levy will in any case likely undermine consumer confidence in mobile money and digital financial services, as well as the business case for those seeking to offer those services.

Reversing gains in financial inclusion

The e-levy will almost certainly reverse the trend of recent gains in financial inclusion. As a transaction tax imposed on the consumer, it is likely that lower-income families and small businesses reliant on digital transactions will be hit the hardest – contrary to the government’s stated objectives to address the financial needs of rural and low-income individuals, and support and grow SMEs – while wealthier Ghanaians and larger businesses can use alternative means of payment or simply absorb the costs. While the daily threshold of GHS100 may help soften the impact, it does not appear to have accounted for a widespread reliance on mobile money agents used by many to facilitate transfers who will likely exceed the threshold and be forced to include the tax even where a customer’s transaction is below the threshold. To make matters worse, it comes at a moment when inflation is at its highest since 2016, driven in part by a global rise in the price of basic commodities such as fuel, food, and fertiliser (key for Ghana’s smallholder farmers) resulting from Russia’s invasion of Ukraine.

Compromising Ghana’s bid to be West Africa’s digital hub

The tax may undermine Ghana’s otherwise exemplary efforts to nurture its digital economy and innovation – a policy goal claimed by many emerging market governments, but rarely achieved in any meaningful way. Since Akufo-Addo took office in 2017, the government has been loudly and publicly championing a digital agenda and has backed it with a number of tangible initiatives, including the launch of a mobile money interoperability system in 2018, the  launch of the Digital Financial Services Policy, the rollout of the Cash-Lite Roadmap (both in 2020), and the launch of a digital financial services regulatory sandbox pilot last year.

Through these steps, Ghana has been making a concerted push to be considered a fintech and digital economy hub in West Africa, effectively pitting itself against Nigeria to be the locus of digital innovation in the region. While it remains an underdog in the fight (Ghana pales in comparison to Nigeria in terms of market size), it has had some notable success in positioning itself as a more stable, business-friendly environment in which to operate and invest: an example of the fruits of this approach was Twitter’s recent decision to base its regional office in Ghana. At one swoop, the e-levy undermines the government’s reputation for careful stewardship of the digital economy, erodes Ghana’s value proposition to international digital companies deciding where to invest, and hurts local digital startups that may attract investment down the road.

Less revenue than anticipated?

The government has revised down their estimates of the revenue the e-levy will bring following a moderate reduction from the initially planned rate of 1.75% to 1.5%. However, we anticipate (and there is precedent for) a lower-than-estimated take due to a significant reduction in the use of electronic transactions in the wake of the bill and a potential increase in crypto currency use for remittances in particular. A UNCDF report notes that the government anticipates a 24% decline in users in the initial months followed by a return to the status quo. However, a follow-up study they conducted in Uganda on the impact of a mobile money tax found a 50% reduction in overall transaction value, primarily as a result of higher income individuals shifting away from mobile money for larger transactions. We expect a similar situation to play out in Ghana as high-income individuals have easy access to alternative payment options.

Bad precedent

Finally, we see potential for the more widespread adoption of transaction-based e-levies, now that the Ghanaian government has swallowed the pill. If the e-levy is seen as a success on the revenue side, other governments may look to do the same, or similar, especially if popular opposition wanes over time; the potential revenues are so much easier to capture than those moving through the large informal retail sector. The potential for policy emulation could be a concern in West Africa in particular, where Ghana is a leader on many digital issues, and where mobile money and digital payments are only now starting to takeoff after relatively low adoption relative to East Africa.

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