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Ghana needs skills upgrade and free trade to make automotive tax breaks work

By David Whitehouse
Posted on Monday, 26 August 2019 11:33, updated on Tuesday, 8 October 2019 14:34

German Chancellor Angela Merkel with Ghana's President Nana Akufo-Addo in Accra in August 2018. Merkel announced VW's Ghana plans during her visit. REUTERS/Francis Kokoroko

Ghana’s use of tax incentives to attract foreign carmakers to the country will need follow-through on skills if full assembly in the country is to become a reality.

The government said in August that it will give tax breaks of up ten years for automakers that create local manufacturing plants. A five-year break will be given for partial manufacturing, while import duties on new and used vehicles will be lifted from 5%-20% to 35%.

Volkswagen, Nissan, Toyota and Suzuki all plan to produce vehicles in Ghana.

The requirement to build the whole vehicle in Ghana is “rather restrictive”, argues James Woods, director at Invest Africa in London. “The government is aware that this is not an achievable condition as most of the vehicle parts cannot be produced in Ghana and it will take time for consumers to have full confidence in vehicles wholly built in Ghana,” he says.

  • Woods predicts that further negotiations will be needed.

Kodjo Adovor, founder and CEO at Kevi Capital in Ghana, says that the incentives need to be two-sided. Strong local content provisions could see manufacturers partner with Ghanaian technical universities to prepare workers for the car manufacturing industry and help develop the local knowledge base, he says.

  • The incentives “should also increase the manufacturing knowledge base, reduce imports, and create meaningful employment.”

Free-trade agreement

Adovor points out that full vehicle assembly is not new in the sub-region. He remembers growing up in Ghana in the late 1970s and throughout the 1980s when many Peugeots and Volkswagen Beetles used in Ghana and across West Africa were assembled in Nigeria. Now, he says, demand in the West African sub-region is increasing as more people move into the middle class and demand for mobility increases.

Richard Ekow Mensah of the delegation of German Industry and Commerce in Ghana expresses caution over the increase in import duties on new and used cars to 35% from 5% to 20%, saying this “might not work”.

  • But Adovor at Kevi Capital says this will help make local manufacturing competitive versus imports.
  • The five-year tax exemption is sufficient for partial manufacturing, he says.

IMF forecasts for Ghanaian growth of 8.8% in 2019 would make the economy the fastest-growing in the world. Woods sees the country’s fiscal and regulatory environment as conducive to the automotive industry.

But a key unknown remains the success of the African free trade agreement, which has the potential to greatly expand the market for vehicles made in Ghana.

  • Woods says it’s difficult to be sure that African states will implement the agreement within a short period – even if Ghana hosts the secretariat.
  • Members states may be reluctant to genuinely open their markets, given the history of the Economic Community of West African States (ECOWAS).
  • The extent to which manufacturers can take advantage of the agreement to reduce costs down the supply chain and across borders will be the “determining factor” as to whether an export market will develop for cars produced in Africa, Woods says.

Bottom Line: Ghana’s tax incentives will need commitments to skills upgrading and African free trade to ensure a long-term foreign industry.

[For more on the challenges linked to the AfCFTA implementation, we have the podcast for you right here]

 

 

 

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