19 April 2014

Ghana: Imani Report - Evidence-Based Support for Ghana's Government to Ratify the EPA

"Ghana must, however, consider traditional measures to guarantee market access seeing as a regional partnership agreement would not have been ratified before the deadline of 14th October of this year"- President Mahama, 2014 State of the Nation Address in Parliament.

The recent economic hardships in Ghana have turned much attention to strengthening and diversifying the export sector as the primary and focal means to build a resilient economy. This makes the impact of the European Partnership Agreement (EPA) between the EU and Ghana and/or the entire ECOWAS region exceptionally pivotal. The EU represents Ghana's largest trading partner, with an average of 40% of our Non - Traditional Exports (NTEs) ending up in Europe. Presently, the NTE export climate is being helmed by the Interim European Partnership Agreement (IEPA) which was initialed in 2007. In the ECOWAS region, an EPA was initiated to replace the Cotonou Agreements. However, technicalities have held up the signing of the EPA to date.

The IEPA was exceptionally necessary for Ghana in the interim because unlike the other countries in the sub region, there was no viable provisional trade agreement to fill the gap. Of the 15 countries in the West African bloc, 12 countries considered Least Developed Countries (LDCs) were guaranteed full tariff free, quota free access to EU market under the Everything but Arms (EBA) program. Of the remaining three, Nigeria was secured by its major export commodity being exempt from tariffs and Ivory Coast has already indicated that it would ratify the IEPA [1].

The IEPA stipulates that 75% of imports from the EU would be duty free in exchange for 100% EU market access for Ghana (except rice and sugar). The slicing of EU tariffs is to be executed over 15 years, with the first 5 years seeing no change in tariffs. The 25% of imports from the EU that would incur tariffs is to protect the agricultural produce and products currently manufactured in Ghana.

Initial feedback after signing the IEPA has been positive from the exporters of non-traditional products. These groups of industries endorse the passage of the ECOWAS EPA which was to have taken place in March 2014 at a meeting of the ECOWAS Heads of State. It however has been postponed to May 2014 in order to rectify technicalities in the contract. Response and perception of the EPAs, especially from civil society organizations has been overwhelmingly negative. The main critiques being that, it causes a loss of revenue to government in import tariffs from the EU, and it will ruin the local industries that will be unable to compete with the influx of cheaper products from the EU.

The purported upfront monetary loss to the government, should import tariffs be removed from applicable commodities imported from the EU are reportedly valued at US$378 million according to the United Nations Economic Commission for Africa Study [2]. [A lesser value of US$150 million has also been projected by the Ministry of Trade and Industry]. What this also means is that, with a total EU import portfolio for 2012 valued at EURO 3,614 million (US$5,023 million [3]), the slashing of tariffs will result in an average savings of 7.4% for consumers of these commodities. The net savings should also compensate for any increments in taxes on incomes and profits by the government. It is also important to note that, the shift to reliance on domestic taxation is inherently better because it is more predictable, facilitating the attainment of a more resilient economy that stimulates better budget planning and execution practices [4].

The second argument against signing the IEPA and ECOWAS EPA Agreements is the collapse and erosion of the local manufacturing industries that will be unable to compete. The top eight imports from the EU to Ghana are given below. These make up make up nearly 60% of the total imports, thus a side to side comparisons to domestic industries producing those commodities is relevant to this discussion.

Petroleum Oils

Petroleum oils make up a more than 30% of imports. In Ghana, the primary local competition is the Tema Oil Refinery (TOR). Unfortunately, TOR has been unproductive for a great majority of the past four years due to repeated shutdowns. An agreement with PetroSaudi is in the works to resuscitate the factory [5]. Secondly, TOR has been saddled with indebtedness which has threatened the survival of both the refinery and the Ghana Commercial Bank, its primary creditor. The government intervened, paying a total of GH¢1 billion, covering approximately 75% of the entire debt portfolio [6]. Suggesting that the TOR is the 'competition' that needs to be protected is an overstatement. Manufacturing and Agricultural Products

The sector for manufacturing of machinery and equipment and of transportation equipment is not occupied by any major local entity, thus removing tariffs has a net benefit of lowering costs of these commodities to consumers, and in fact, lowering the cost of production of local industries. The fourth largest import, being foodstuffs and beverages will continue to bear tariffs, as part of the agreement. Agricultural products that are considered sensitive are all in the exclusion list of the Market Access Offer (MAO). This is a list of items that are excluded from any tariff liberalization. It includes all agricultural produce and products manufactured in the country. Ghana is under no legal obligation to reduce or remove tariffs from these items at any time. Foodstuffs and Beverages imported from the EU, representing about 4.7% of total exports falls within the 25% Exclusion list, and thus will incur import duties. This trading/market arena thus remains unchanged.

Textile Industry

In the textiles industry, its struggles pre-date the EPA agreements with the EU. The main challenges of the Textile industry today are cheaper products and also fake products from China. In spite of the import tariffs imposed on the imported textiles, the local industry is still on the ropes. This scenario makes it clear that imposition of tariffs is not in itself a solution to the high cost of production in Ghana. Thus, the onus falls on government to assist local industries to improve their competitiveness. This will enhance their productivity and lead to better competitiveness.

Anti-EPA arguments will protect unproductive industries

As demonstrated, the central arguments not to sign the EPA are therefore, arguments to protect unproductive industries that are causing the government billions in bailouts and subsidies. These arguments also make claims to premature collapse of nascent industries whose chances of growth will be thwarted with the ratification of the EPA. It is not financially prudent to collapse the NTE industries that are currently productive, profitable and making growing contributions to GDP, by gambling on industries with questionable future profitability.

Non-Traditional Exports are doing well, will do better with EPAs

In the NTE sector, total value of exports has quadrupled from approximately $500m to over $2billion between 2001 and 2012. In 2012, the sector contributed over $2bn to the country's GDP, bringing in hard currencies as well as enhancing the country's balance of trade. The negative growth rate in 2012 was due to drop in prices of key products such as cashew nuts, cocoa paste and canned tuna. Furthermore, a lifted ban on cocoa exports and derivatives from Côte d'Ivoire, limited the market opportunities for local cocoa companies in Ghana. Lastly, unfavorable cross-border trade in cashew nuts with Burkina Faso and Cote d'Ivoire compounded these challenges in 2012. However, the projections for 2013 are bright at 3.3billion USD. Against the background of declining prices for cocoa and gold, NTEs can also serve as a solid diversification platform to minimize the shocks from the country's major export commodities.

The economic importance of these companies, if the EPA is not signed, are the loss in corporate tax contributions, employee tax contributions, annual payroll and job creation, social security contributions, direct purchases, contribution to GDP, and various other social responsibilities within the Ghanaian economy. The NTE industry provides thousands of direct and indirect jobs to Ghanaians, and the numbers will increase if the sector is provided with the needed support and incentives to thrive. These companies will not survive if the EPA is not signed. One of the big exporters of tuna, which makes up 7% of the total value of non-traditional exports, will be crippled by a 20.50% tariff, when at 0% tariff, it has a mere 5-6% advantage over the same commodity imported to the EU from other countries.

Loss of FDI

If Ghana fails to ratify the EPA, the country will find it extremely difficult to attract Foreign Direct Investments (FDI) into the NTE sector and it will also need to find favorable export markets and import partners. Currently, companies operating within the NTE sector have indicated that they will be forced to set up shop in other African countries if Ghana decides not to ratify the IEPA. This could be disastrous for Ghana, given Cote d'Ivoire, for example has indicated it will ratify its IEPA.

Conclusion and Warning

The evidence mounted for ratifying the EPA is concrete versus the intangible and conditional explanations rendered for why we should not sign. Ghana must sign the EPA agreement. It is a sure way of diversifying our exports. With increasing calls from local and international agencies for Ghana to diversify its exports, coupled with an economic growth strategy based on the expansion of exports, NTEs have a critical role to play if these objectives are to be achieved. The NTE sector possesses great potential for growth and expansion. If Ghana progresses with the EPA, it must spend the EU support funds judiciously to build up local industry capacity during the five - year window. It should also increase funding to key export trade agencies (GEPA) to ably assist the private sector to drive the anticipated increases in NTE revenue in subsequent years. Though the country has demonstrated a competitive advantage in tropical agricultural products, it is imperative to expand the production base of these products as well as seek avenues of promoting value addition through processing.

Full ratifications of the agreement, if signed, will take several years to take effect. Additionally, full ratifications by ECOWAS members are not a guarantee that the EU will not have separate trade agreements with each ECOWAS member. It certainly wouldn't mean ECOWAS members will respect their own protocols given Nigeria's non-compliance with current ECOWAS Trade Liberalization Schemes (ETLS)[7]. To fill the gap between ratification of the EPA and expiration of the IEPA, the IEPA must be extended with full affirmation from the government to ratify the EPA come May 2014.

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