Running a business in Ghana is for the tough skinned

The Business Roundtable is an annual forum organized by Ishmael Yamson & Associates. The theme of the 2022 event on 18th May 2022 is “Building a Transformative economy.”  The Business Roundtable provides a forum for business executives, policymakers, millennials, and other key stakeholders to discuss a wide range of topics, issues and risks facing the economy and taking advantage of opportunities to ensure the creation of a more sustainable economy.

This post is the first of a series of publications to encourage conversation ahead of the main event stimulate some discussion about the current and emerging issues faced by businesses operating across the Ghanaian economy.

 ISSUES FACED BY THE GHANAIAN ECONOMY

The objective of every government is to build a strong and stable economy with every fiscal or monetary policy geared towards this objective.  The growth of any economy is determined using the Gross Domestic Product (GDP) which is a measurement of the output of an economy.  The components of GDP consists of consumption, business investment, spending by government and net exports. Businesses regardless of their sizes play an important role in this growth; from the creation of products and services to boost consumption, contribute to the export figures of the country and also the creation of employment to grow personal income. Businesses do not however operate in isolation. Their operations are affected by government policy or market factors either positively or negatively.

What are the key concerns of businesses across the Ghanaian economy today?

Inflation - inflation started a monthly upward rise from July 2021 (BoG)

Recently, I checked up on a friend and in his words, “Running a business in Ghana is for the tough skinned and any business that is able to survive till the end of 2024 must be applauded.”  He is not the only business owner who has complained about the challenges of running a business in the country.  The increasing cost of running a business is a deterrent to a group that could help support government with economic growth through their operations. It is fair to admit that the current rise in inflation which has been impacted by the depreciation of the cedi and the Russian-Ukraine war might be uncontrollable to an extent.  

 According to the Bank of Ghana, the current inflation stands at 19.4% which is more than twice the target rate of +/- 8%.  To be able to understand how to tackle inflation, the main drivers (Figures 1 and 2) have to be understood and sustainable measures taken to help address these inflationary pressures.  Based on data from the Ghana Statistical Service (GSS), inflation started a monthly upward rise from July 2021 (Figure 3).  This was mainly as a result of food, housing and transport with food contributing 47% to the overall inflation according to a press briefing by the government’s statistician.  Surprisingly, I expected imported products to contribute more to the rise in inflation than locally produced items but it was the reverse.   We must understand this. Is this as a result of the:

• high cost of local inputs,
• lack of infrastructure,
• lack of knowledge and know-how,
• lack of commitment or the absence of a practical strategy to achieve economies of scale in the local market using a higher proportion of local inputs versus imported inputs?

Figure 1: Non-Food inflation classifications (August 2019 to January 2022)     

Figure 2: Food inflation by major subgroups (January 2022)

Figure 3: Inflation trend (August 2019 to January 2022)

Rwanda’s transformation over 20 years after the 1994 genocide has been attributed to investments made in these sectors: agriculture, energy and mining and tourism. This in no means is not indicative that Ghana should replicate Rwanda’s steps but rather learn from it and the approach taken by other economies who are performing well. If other countries were able to make a turnaround, what makes it different for Ghana?

Cedi depreciation - unsustainable results which will keep showing up their problematic side

It is expected that currency depreciation would lead to inflation. It will also make imports expensive and exports cheaper on the international market.  In the midst of the global inflation, this could have been an opportunity to increase the country’s net export position.  As a country would it be possible to feed ourselves and generate excess to sell off to others?  How do we make this possible as a country?  The results would not be immediate but one thing that is certain is the benefits of implementing a sustainable growth strategy would be enjoyed in the medium to long-term.  Short term measures from experience usually result in unsustainable results which will keep showing up their problematic side until a more sustainable solution is laid down.

 The high demand for foreign currency to finance the demand for imported products or input for local production drive the currency’s depreciation. The Bank of Ghana recently increased the monetary policy rate to 17% with the intention to increase the cost of borrowing. Businesses already suffer from having access to capital and an increase in the rate would further restrict capital access and increase the cost of borrowing even for businesses that are not in the import space. A blanket approach might not completely solve this problem. How do we leverage on building data to help in setting policies that are more segregated and targeted towards relevant sectors of the economy? Focus on the country’s industrialization and designing realistic policies that make agriculture and its related value adding sectors more attractive to the private sector. Progress has been made in this space but more can be done to maximize production and reduce waste in the sector. Gradual progress can help to increase the trust in the country’s economy including boosting investor confidence and also help manage the debt stock.

High cost of regulatory compliance - the lack of awareness by SMEs results in significant penalties

Entities registered as private companies have to comply with the Companies’ Act requirements which includes having an annual audit and making periodic filings and submissions to the Registrar of Companies regardless of their size.  Despite the moves made to digitalise tax payments to make it convenient for tax payments, the approach towards compliance has been quite difficult for small businesses.  There seems to be an emphasis on meeting tax revenue targets to the detriment of the long-term survival needs of businesses.

• What if some exemptions were granted depending on the company’s revenue threshold as is done in the United Kingdom?  
• Would subsidising the initial registration costs and business operating permit and other payments in the first year of operations have a positive impact on business operations?

 Sometimes the lack of awareness by SMEs results in significant penalties by the regulator. Businesses also find it costly to comply with the monthly SSNIT contributions for employees and if care is not taken most businesses would shift from employing full time staff to engaging people as independent contractors to shift the responsibility on to the employee. SSNIT through its mobile setups is looking to rope in businesses in the informal sector which is good.

• Would it be time for the Pensions Authority to formally structure SSNIT contributions for the informal sector?

For further reading

Ghana Business News. (2022, April 29). Ghana inflation rate for July 2021 rises up to 9%. Retrieved from Ghana Business News: https://www.ghanabusinessnews.com/2021/08/11/ghana-inflation-rate-for-july-2021-rises-up-to-9/

GSS. (2022, April 29). Ghana Statistical Service. Retrieved from Consumer Price Index (CPI) January 2022: https://statsghana.gov.gh/gssmain/fileUpload/Price%20Indices/Bulletin%20_%20CPI%20January%202022.pdf

Nkusi, A. (2022, April 28). The Rwandan miracle. Retrieved from UNESCO: https://en.unesco.org/courier/2019-2/rwandan-miracle#:~:text=With%20an%20average%20growth%20rate,million%20people%20out%20of%20poverty.