The Role of the Extractive Sector in Ghana’s Comparatively Low Public Sector Revenue Mobilization [Occasional Paper No. 24]

The government of Ghana has implemented extensive tax and non-tax policy and administration reforms over the years. Starting from 1983, these reforms have largely been carried out under the auspices of the IMF and the World Bank. However, using a sample of 35 countries in the developing world, we find in this paper that, relative to GDP, Ghana’s total public sector revenue has performed very poorly, compared with those of its peers, confirming findings of other studies. The government of Ghana has often blamed the country’s poor revenue performance on the difficulty in taxing the large informal sector, the generous tax exemption system, and the weak real property taxation. However, credible estimates of untapped revenues from the informal sector and the tax exemption system fall far short of the identified gaps in the total revenue to GDP ratios between Ghana and its peers. Additionally, we show in this paper that the country’s weak real property taxation is not a major cause of the gaps. After analyzing the government of Ghana’s (1) revenue from the entire extractive sector and comparing it with those of a sample of 21 economies in the developing world, and (2) revenues from the oil and mining subsectors and comparing them with the government of Nigeria’s revenue from the oil subsector and the government of Botswana’s revenue from the mining subsector respectively as case studies, we find the following: (a) the government of Ghana’s revenues from the extractive sector are extremely low, compared with those of its peers, and (b) the extractive sector is the main source of the country’s comparatively poor total revenue performance, which has led to the large gaps between Ghana and the peer countries in terms of total revenue to GDP ratio.

Therefore, to be able to raise its total revenue to GDP ratio to the level of the peer countries and thus significantly cut down the rate of borrowing, reduce the huge debt service cost and create a sizable fiscal space to fund developmental projects, Ghana needs to sharply increase its revenue generation from the extractive sector to match the peer countries. We have provided a number of recommendations as to how this can be achieved, after identifying the main causes of the incredibly poor performance of the country’s extractive sector revenue.