From protection to strangulation: How import taxes are hurting businesses

Many analysts believe that the high import duties have become a major obstacle to trade; driving businesses to relocate, reducing port traffic and leading to higher prices for consumers, unemployment and lower revenue for government.

High import duties increase the cost of goods entering Ghana, making it less attractive for businesses to operate within or through the nation’s ports. While import duties on various goods range significantly, some exceed 50% – worse if you add all the attendant costs and charges that have unfortunately become dominant in recent times.

This has led many businesses relocating to countries with more favourable trade terms, reducing the volume of goods processed through the country’s ports.

High import duties are making imported goods significantly more expensive in Ghana. For businesses, this has become a major deterrent. Smaller enterprises, in particular, struggle to absorb these costs and lead some to close down operations. Larger companies are increasingly looking at relocating to countries with more favourable import policies.

The consequences are visible at Ghana’s ports. Cargo volumes are declining as fewer goods are imported. This has a ripple-effect, as jobs are lost in port operations, logistics and related sectors. For example, the high cost of importing machinery and raw materials has discouraged manufacturing and industrial firms from using Ghanaian ports, also leading to a decline in port activity.

The numbers do not lie. Ghana’s imports have declined by 10 percent over the past year, with a significant drop in cargo volumes at the Tema and Takoradi ports, according to data from Ghana Ports and Harbours Authority.

This decrease in import activity is not an isolated phenomenon but part of a broader trend affecting the entire economy. The Ghana Chamber of Commerce estimates that the number of businesses operating in the country has decreased by 8 percent in the same period, resulting in significant job losses.

This reduction in business operations has a direct correlation with the country’s rising unemployment rates, as companies either shut down or move their operations to more favourable environments.

Consumer prices have also been significantly affected, with inflation reaching a three-year high of 23.6 percent in 2023. This inflationary pressure is largely due to the increased costs of imported goods, which are passed on to consumers. Higher prices for essential items such as food, medical supplies and everyday consumer goods reduce the purchasing power of Ghanaians, contributing to a lower standard of living and increased economic strain on households. For consumers, high import duties translate to higher prices for a wide range of essential goods.

The recent Excise Duty (Amendment) Act 2023 has further exacerbated this issue. This act imposes a 20 percent excise duty on fruit juices, 50 percent on electronic cigarettes and liquids, and a hefty 61 percent increase on tobacco products.

The excise duty rate on wine has doubled to 45 percent and that on spirits has also doubled to 50 percent.

Additionally, manufactured tobacco is now subject to a dual excise duty of 50 percent plus GH¢280 per kilogramme. These increases are not only exorbitant but also regressive, disproportionately affecting low-income consumers who rely on these products.

Take medical supplies, a critical commodity for any nation. High tariffs on these goods can have dire consequences. Ghana imposes import duties and VAT on medical supplies, increasing their cost significantly. During the COVID-19 pandemic, high import duties on essential medical supplies exacerbated shortages and drove up costs for hospitals and patients. This not only burdened the healthcare system but also pushed some medical supply companies into relocating to more tax-friendly regions, further reducing port activity and availability of essential goods.

Food is another essential category heavily impacted by import duties. High tariffs on food imports lead to increased prices for consumers, contributing to food insecurity. For instance, Ghana imposes high tariffs on imported rice which make it more expensive for consumers and increases the cost of living.

This has a direct impact on low-income families, who struggle to afford basic necessities. Moreover, businesses dealing in food imports often pass these costs onto consumers, leading to inflationary pressures that destabilise the economy.

The tobacco industry provides another stark example. In addition to the hefty increases, importers also have to pay as much as US$15,000 per brand unit per year to the Food and Drugs Authority. While this has existed for years, its effects combined with other tariff increases discourage legal imports and fuel the black market, where smuggling becomes rampant.

As legitimate businesses suffer, many are forced to shut down or relocate, leading to job losses. The tobacco industry in Ghana employs a significant number of people and high import duties threaten these jobs, contributing to higher unemployment rates.

It’s important to also note that this does not help government but benefits multinational corporations, as the same brands from other markets like Togo and Nigeria cross the borders – leading to a drop of volumes for Ghana while volumes increase in Nigeria and surrounding markets.

Besides government losing revenue, the Ghana Revenue Authority and Customs Excise and Preventive Service under it must invest extra resources to fight the influx. The draconian laws and charges have not achieved the intent of reducing tobacco use but instead fuelled illicit trade, depriving government of revenue and posing serious health risks to consumers.

While high import duties may seem like a straightforward way to increase government revenue, the reality is more complex. As businesses scale back operations or relocate, the tax base shrinks. Additionally, reduced economic activity due to the higher cost of doing business can lead to lower overall tax collection.

The thriving black market, particularly for tobacco products, further erodes potential government revenue. It is estimated that the country loses millions of cedis annually to illicit tobacco trade.

The reduction in port traffic due to high import duties has a domino-effect on the economy. Ports are significant employment hubs, and a decrease in port activity leads to job losses not only in logistics but also related sectors such as transportation, warehousing and retail. For example, Port Tema has seen fluctuations in activity due to varying import duties – affecting local employment and economic stability.

Additionally, high import duties can lead to lower tax revenues for governments. When businesses relocate or smuggling increases, government loses out on legitimate tax revenue, which can strain public finances and reduce funds available for critical infrastructure and social services.

The current import duty regime requires urgent reassessment. A more balanced approach is needed; one that considers the needs of domestic industries, consumers and the nation’s overall economic health. A phased reduction in duties, especially on essential goods, could ease the burden on consumers and businesses.

Exempting critical sectors like healthcare and certain food items could improve affordability and access. It is equally important to crack down on the black market, particularly for tobacco, to protect consumers and ensure legitimate businesses can compete.

To revitalise the domestic trade sector, it is important to initiate a complete review of the import duty structure to align it with regional and international standards. By reducing these barriers, the economy can attract businesses, increase trade and stimulate economic growth.

Managers of the economy must strive to create an environment where local industries can thrive without excessively burdening consumers and stifling broader economic growth. It’s a delicate balance, but one that Ghana must achieve to secure its economic future.