Economic analysis of legislative instrument to restrict imports of strategic products in Ghana

The media sphere has been saturated with discussions surrounding the Legislative Instrument (LI) designed to limit the importation of certain products deemed strategic by the Minister of Trade and Industry, K. T. Hammond. The Minister clarifies that the intention behind the LI is not to outright ban these products but rather to impose restrictions on their import volumes.

However, notable opposition to the LI has emerged from various quarters, including civil society organizations, trade associations such as the Ghana Union of Traders Associations (GUTA), Food and Beverages Association of Ghana (FABAG), Importers and Exporters Association of Ghana, Ghana Institute of Freight Forwarders (GIFF), Chamber of Automobile Dealership Ghana (CADEG), Ghana National Chamber of Commerce and Industry (GNCCI), and the minority in Parliament.

Restricted products and provision of necessities of life:

The LI seeks to impose restrictions on crucial and sensitive products that may profoundly impact three fundamental necessities of life: food, shelter, and clothing. These products constitute everyday essentials regularly purchased by the average Ghanaian consumer. The list of items earmarked for restriction includes essential food products such as rice, offal, poultry, cooking oil, fruit juices, noodles and pasta, fish, sugar, and canned tomatoes—items integral to the daily consumption in most Ghanaian households. Consequently, any restrictions on these items raise concerns about potential threats to food
security.

Moreover, the LI targets products equally vital to the well-being of Ghanaians, including building materials such as cement, iron, and steel, directly influencing accommodation. With an estimated housing deficit of approximately 1.8 million homes in Ghana, restrictions on these building materials, particularly if domestic demand cannot be adequately met, could exacerbate the housing crisis, leading to an escalation in rental rates across the country.

A cost-benefit analysis of the policy:

The Minister advocates for the imposition of the LI based on two primary arguments. Firstly, the aim is to curb the depreciation of the Ghanaian cedi, asserting that the import of these products increases the demand for US dollars, thereby exerting pressure on the local currency. The Minister highlights that Ghana spends approximately US$12-13 billion annually on the import of these products. Secondly, the LI is presented as a strategy to promote local industrialization.

Restricting the importation of these products is expected to reduce competition for local producers, fostering increased local production, and making Ghana less reliant on foreign countries to meet domestic demand. To comprehensively evaluate the impact of this proposed restrictive trade policy, it is crucial to conduct a cost-benefit analysis. Such an analysis is imperative as the policy appears counterintuitive and counterproductive.

The restriction on the importation of these products represents a protectionist trade policy. Fundamental theories in international trade suggest that the imposition of such policies by a small country like Ghana is likely to have a welfare-reducing effect. The reduction in welfare may stem from the higher prices that consumers are likely to pay due to the restriction on imports, leading to a decrease in total domestic supply. This situation creates an imbalance, resulting in higher prices imposed by producers and a subsequent reduction in consumer surplus. While producers may benefit from selling at
higher prices and experiencing an increase in their producer surplus, consumers bear the brunt of this policy.

Beyond the impact on consumer prices, there is also the potential for revenue loss, particularly from customs and import duties. Many developing countries, including Ghana, heavily depend on import duties as a significant source of government revenue.

Recent statistics from the World Bank's World Development Indicators (WDI) for 2020 indicate that customs and import duties accounted for 12.4% of tax revenue.
Is the policy consistent with WTO principles?

As a member of the World Trade Organization (WTO), Ghana is expected to align its trade policies with the relevant provisions and rules of the WTO. According to the WTO, import licensing refers to administrative procedures governing importation into the customs territory of a member country, typically requiring a prior condition for importation.

Import licensing can manifest as either automatic or non-automatic. Automatic licensing involves approving all cases, while non-automatic licensing does not guarantee approval in every case. Given the policy objective to restrict the importation of certain products, as articulated by the Ministry, the import licensing in this context will take the form of non-automatic licensing.

While the use of import licensing is permitted and justified within the General Provisions of the WTO, the organization acknowledges that it can be trade-distortive and impede international trade flow, particularly if implemented contrary to its provisions. The WTO stipulates that non-automatic licensing should not have trade-restrictive or distortive effects. Furthermore, Ghana may face the risk of retaliation from major importing countries if such restrictions negatively impact their interests.

Although import licensing is permissible under WTO rules, challenges arise in its implementation, especially concerning the allocation of quotas to importers and importing countries. Successful implementation requires thorough consultation with importers and importing countries. The initial opposition within Ghana from groups such as GUTA and FABAG suggests a lack of serious consultation by the government and the ministry.

Import licensing also introduces conditions conducive to rent-seeking activities in a country like Ghana. Establishing a committee to grant licenses to importers opens avenues for bribery and corruption. The issue of corruption is particularly concerning, as various data sources, including Transparency International and the World Bank, rank Ghana higher in the corruption index compared to other developing countries. For instance, the World Bank Enterprise Survey indicates a high percentage of firms in Ghana being required to pay bribes to obtain licenses, government contracts, and business permits.

Restricting import and promoting industrialization:

While supporting policies that drive industrialization and position Ghana as a net exporter is crucial, it's essential to avoid self-inflicted setbacks. Restraining imports without alternative domestic production and supply mechanisms is economically unsound. The recently presented Budget Statement for 2024 revealed a negative 2.2% growth for the industrial sector, emphasizing the counterproductive nature of such policies without viable domestic alternatives.

Promoting domestic production necessitates creating a competitive environment for Ghanaian industries both domestically and internationally. If imports are restricted and domestic products are of low quality and uncompetitive, consumers may not choose these products. Even if they do, it might be at the expense of quality or due to inflated prices for made-in-Ghana products.

To drive industrialization successfully, the government should focus on reducing
production constraints and providing incentives that give Ghanaian producers a
competitive advantage in the domestic market. Closing borders to international trade or restricting imports contradicts the objective of promoting industrialization and is not a sustainable approach.

Conclusion:

The key takeaway is that promoting industrialization requires a competitive
environment, and restricting imports without ensuring high-quality and competitive domestic products will not lead to consumer preference for locally made goods. Ultimately, driving industrialization calls for addressing production constraints and providing incentives for Ghanaian producers to compete domestically, rather than closing borders or restricting imports, which goes against the goal of fostering a robust industrial sector.