Mobile money taxes drives poor out of digital economy

To boost their revenues, cash-strapped African states are implementing an elevy on mobile money transactions. But, this policy could harm the poorest of African nations as the cost to live rises and reverse the gains made in economic inclusion. Kent Mensah & Nita BhahallaThomson Reuters Foundation

Comfort Ankrah, a Ghanaian grocery store proprietor, has had to rethink her business model after the government introduced a tax on mobile money transactions.

For eight years, the 45-year-old single mother relied on mobile transfers to run her shop in Accra’s Darkuman suburb – from taking customer payments to paying the farmers who supply her with plantain, cassava and other everyday staples.

Ankrah explained that the convenience of digital money makes it easier for her and other local businesswomen to travel with cash.

But the new 1.5% tax on mobile money, also known as the e-levy, is now forcing Ankrah – who earns about 400 Ghanaian cedi ($53) weekly – to switch back to coins and banknotes.

“I can’t afford to pay my farmers with mobile money now because the e-levy will reduce my profit. To pay farmers, I have to give money to my relatives or drivers. It’s a risky, long process,” said Ankrah.

Ghana is one of a growing number African countries to impose a mobile phone transaction tax. However, critics claim that the levies are hurting millions and small-business owners as well as other low-income people, just like the cost of living increases.

They warn that the charges could reverse the remarkable gains made by mobile currency in increasing economic inclusion.

“Mobile money has been a great enabler, especially for the marginalized. It’s a main driver of financial inclusion for the poor, women and rural communities across Africa,” said Angela Wamola, head of sub-Saharan Africa at telecoms industry body GSMA.

“Any discouragement such as extra fees or taxes on mobile money services will take Africans backwards simply because there are no other alternatives for most people.”

Many countries already have fees such as VAT and excise duty on mobile services, she said, adding that the extra tax – at a time of high inflation – would mean the poor would be the first to be pushed out of the digital economy.

Peer-to-peer transactions in Tanzania dropped 38% after the country imposed a mobile currency tax last July. It went from 30 million to just 18 million per month. GSMA study found.

John Kumah, one of Ghana’s deputy finance ministers, rejected criticism that the tax was regressive.

“The e-levy is not going to be a burden on the poor,” Kumah told the Thomson Reuters Foundation.

“It’s a game-changer that will rather bring about development. We’re going to use the taxes to build more schools, hospitals, roads. It will be used to create jobs. Ghanaians will see and enjoy the benefits in the coming years.”

The rise and rise in mobile money

Africa is the dominant market for mobile money worldwide, thanks to Safaricom, a Kenyan telecoms operator, who pioneered the M-Pesa platform in 2007 in order to reach people without access to formal banking networks.

Sub-Saharan Africa is home to more than half of the world’s nearly 350 million active mobile money accounts – with countries such as Kenya, Uganda, Ghana, Senegal, Ivory Coast and Cameroon showing the highest prevalence rates, GSMA data shows.

The data showed that $1 trillion was transacted worldwide through mobile money platforms last year. Nearly 70% of this transaction came from sub-Saharan Africa.

The SIM card-based technology – which can be used on basic phones without internet – has unlocked access to financial services to often neglected populations such as informal workers, smallholder farmers, women, and rural communities.

Users can securely receive, withdraw and send money, pay for bills and get remittances from family abroad – all without being connected to the formal banking system. Some operators also offer insurance products, loans, and savings.

Kenyan housekeeper Brenda Vitute checks her mobile money wallet at an M-Pesa booth in Nairobi, Kenya on May 25, 2022. Thomson Reuters Foundation/Nita Bhalla

Waiting to withdraw cash at an M-Pesa booth in Nairobi’s upmarket Lavington suburb, Kenyan housekeeper Brenda Vitute said she uses mobile money to shop, pay bills and send money to her mother and children.

“It would be very difficult without M-Pesa as many people in the rural areas don’t have a bank account or the bank is too far. With M-Pesa, they don’t have to travel long distances to get the money,” Vitute, 41, said.

A study published in Science journal found access to mobile money in Kenya has increased per capita consumption and lifted 194,000 households – 2% of the total – out of poverty since 2008.

According to the study, consumption in households headed by women increased twice as quickly as those without female heads. This indicates that mobile money can be especially helpful for women.

The Covid-19 pandemic has further accelerated the sector’s growth in Africa. Transaction values increased due to restrictions on movement and wariness about cash handling, as well central banks relaxing regulations and operators waiving fees.

Sub-Saharan Africa’s mobile money transactions rose by 40% in terms of value in 2021 from the previous year, against the global average of 31%, GSMA data shows.

Ghanaian shopkeeper Comfort Ankrah outside her store in Darkuman suburb in Accra, Ghana on May 6, 2022. Thomson Reuters Foundation/Kent Mensah

Controversial tax

However, the African economies are also reeling from the global health crisis. Sub-Saharan Africa’s public debt ratios are their highest in more than two decades, and many low-income countries are facing debt distress, the International Monetary Fund (IMF) said last month.

It warned that the shock to the global commodity markets caused the Ukraine war will increase food insecurity and fuel inflation.

Numerous African governments turned their attention to mobile money to increase their tax revenue and lower their debts in desperate attempts to reduce their massive debt.

It was introduced in May. 1, Ghana’s 1.5% e-levy for transactions above 100 Ghanaian cedi mimics policies elsewhere in the region.

Cameroon has imposed mobile money taxes in Uganda, Tanzania and Congo Republic, as well as Zimbabwe, Ivory Coast, Kenya, and Zimbabwe. These were despite opposition from many sectors.

The November e-levy debate in Ghana saw lawmakers clashing. The policy was discussed in Cameroon and prompted the use of the hashtag #EndMobileMoneyTax to social media.

Authorities were forced to lower tax rates in Uganda, Tanzania, Ghana. A 1% levy was also announced by Malawi in September 2019. However, opposition made it difficult to reverse the decision.

Kinyanjui Maungai, senior analyst for the Centre for Financial Regulation and Inclusion said that the policies were not well planned and didn’t consider the views and opinions of stakeholders like consumer groups.

“We are still in quite a nascent stage in terms of financial inclusion in most African countries,” said Mungai. “You have to get more people out of the ‘cash boat’ and into the ‘digital boat’ before you impose these taxes.”

Concerns have been raised by international organisations like the IMF, World Bank, and the United Nations about taxes.

In its March report on Cameroon, the IMF warned that taxing mobile money could be “fiscally inequitable” and hinder the current low level of financial inclusion.

“The poor and unbanked segments of the population, who often live in rural areas and face high transaction costs from the formal banking, have been found to be negatively affected by the measure,” it warned.

Kumah indicated that the Ghanaian government would undertake public sensitization campaigns to ensure mobile money continued to be used despite the elevy.

“All over the world, people don’t like paying taxes – but with time they begin to see the importance,” he said.

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