World Bank's 8th Economic Update for Ghana Emphasizes Strengthening Domestic Revenue for Fiscal Stability

The report highlights the steady progress Ghana has made over the past year in addressing severe macroeconomic imbalances that emerged in 2022.

The World Bank’s 8th Economic Update for Ghana, titled "Strengthening Domestic Revenue Systems for Fiscal Sustainability," indicates that despite recent exchange rate depreciation and slower-than-expected inflation reduction, Ghana’s economic indicators are on track for 2024 and beyond.

The report highlights the steady progress Ghana has made over the past year in addressing severe macroeconomic imbalances that emerged in 2022. The economic situation has been improving due to efforts to restore fiscal and debt sustainability, reduce inflation, and strengthen financial stability. Growth in 2023 was low at 2.9%, higher than initial projections, while inflation declined to 23.2% in December 2023 from a peak of 54.1% in December 2022. This progress is attributed to the Bank of Ghana’s firm monetary policy and more stable exchange rates.

“Ghana’s macroeconomic crisis in 2022 has set back poverty reduction efforts, with poverty levels estimated at 30.3% in 2023. It is crucial to maintain the momentum of the reforms while mitigating the impact on the poor to help sustain Ghana’s economic rebound. We must lay the foundations for sustainable and resilient economic growth by implementing comprehensive structural reforms to foster economic diversification and promote long-term inclusive growth,” said Michelle Keane, World Bank Acting Country Director for Ghana, Liberia, and Sierra Leone.

The report underscores the need to focus on the quality of fiscal adjustments to minimize the impact on growth, the poor, and the vulnerable population. Recommendations include reestablishing the fiscal rule, strengthening public financial management, and accelerating revenue mobilization to restore macroeconomic stability and support long-term sustainable growth. Additionally, the report highlights the importance of sector-specific reforms to ensure financial sustainability in agriculture and energy and rebuild capital buffers in the financial sector.

Structural reforms will be key to revitalizing growth and fostering economic diversification and transformation. For example, improving infrastructure quality and accessibility can boost trade, competitiveness, connectivity, and productivity. Facilitating access to long-term financing and improving the business climate could create a conducive environment for private sector growth. Building human capital and improving service delivery for underserved regions and populations can enhance productivity and attract both Foreign Direct Investment (FDI) and local investment in high-value, labor-intensive manufacturing and services.

“These measures collectively aim to enhance fiscal transparency, accountability, and resilience, ensuring sustainable economic growth. They should be complemented by initiatives to expand targeted social protection programs to promote social inclusion,” said Kwabena Gyan Kwakye, Economist and author of the Economic Update.

The special topic of the report focuses on domestic revenue mobilization, noting that Ghana’s tax collection has been low relative to its peers. Between 2017 and 2021, Ghana’s average tax collection was 13.2% of GDP, well below the Sub-Saharan Africa average and 8 percentage points short of the country’s estimated tax capacity of 21.2% of GDP. The report identifies inefficiencies within Ghana’s tax policy framework and compliance mechanisms. Addressing these could help ensure macroeconomic stability and generate resources necessary for sustainable long-term growth and poverty reduction efforts.

Despite efforts in 2023 and 2024, bold tax policy measures and tax administration reforms are necessary to improve Ghana’s fiscal position and budget credibility. The adoption of an ambitious Medium Term Revenue Strategy for 2024-2027 lays a foundation for more robust reforms towards fiscal stability and economic prosperity. Areas identified for enhancement include rationalizing large tax expenditures, which have contributed to the overall decline of tax revenues. This requires balancing reducing revenue losses with the potential distributional and social impacts.

“Rationalizing Tax Exemptions will entail removing those deemed unjustified or falling short of their stated goals. The Ministry of Finance should first assess the impact of Tax Exemption removals on poverty and suggest appropriate mitigating measures,” said Elijah Gatuanjau Kimani, co-author.