Investments, inflation and controlled interest rates are currently at thresholds that really paints a grim picture for entrepreneurs in Ghana. What every economy needs is a cocktail of economic variables that will keep investors’ capital intact through stable inflation, and interest rates with market forces determining the determination of success or failure. The current economic management system by the central bank is deemed to be a fire fighting approach, by effectively churning out policies that seem to address a part of the problems rather than effectively tackling the entire system in a timely and coordinated fashion.
Currently, the situation with access to capital is that financial intermediaries are looking to deal in short term securities and this leaves a huge gap compared to the tenure entrepreneurs are looking for leaving a liquidity gap. This trend has been heightened by the high inflation rate and the ever increasing policy rate set by the central bank which is effectively sets the floor for banks base rates translating to higher cost of debt servicing by entrepreneurs.
In the past five years inflation has averaged about 12.2% stemming from high economic growth to high increased consumer demand and increased prices in essential commodities and utility prices. Let’s be clear here that what seems a good prospect to an entrepreneur may not be seen as such as managers of monetary and fiscal policy. At every point in time, the Monetary Policy Committee (MPC) of the central bank reviews economic parameters and matches with the set targets and the variances inform the strategies to adopt. This recent move by the central bank is an attempt to get a grip on inflation mostly in reaction to speculated 100% plus increases in utility prices amidst the rising incidence of core inflation as well us uncertainties in the foreign exchange market. This basically highlights the fire-fighting approach which inextricably will have larger adverse consequences on various sectors of the economy whiles it may be positive on restraining inflation.
Here is what the domino effect might be. The increase in the policy rate is an attempt to reduce spending through restraining demand for money. As banks increase their retail lending rates as a result, demand for credit will slow and demand for security cover will be more stringent. The rate of closing loan deals will slow down given the current competitive environment and financial intermediaries will be forced to invest idle funds in short term securities and bonds. The increased liquidity in the financial system will force interest rates for asset securities to decline albeit marginally.
The scenario above will leave entrepreneurs scrambling for debt which may in turn lead to difficulty in servicing them as a result of the high inflation and multiple borrowing on the same set of pledged security.
It is incumbent on small and medium business owners to be pragmatic in their spending and applying limited debt financing to the intended purpose. It pays to be more analytical by applying realistic parameters to contract quotations thereby not undervaluing their bids and absolutely focusing their efforts on quality. Also avoiding allocation of business funds to family expenditure is important to avoid incomplete project execution.