Hannah Tetteh, Ghana’s Minister of Trade and Industry

The Association of Ghana Industries (AGI) quarterly Business Barometer Index is becoming more than a morsel for the talking heads.
It signals how our economy works.

When AGI released its Business Barometer Survey report for the last quarter of 2010, the debate raging in Ghanaian living rooms and among the political elite centred on oil production, petroleum bills and how to budget and spend the expected half a billion dollar windfall likely to lubricate the economy for the foreseeable future. The fact that access to credit, or its lack, had assumed the topmost position for the first time in the AGI survey, as the leading factor hampering business growth in Ghana, hardly created news waves.

While the unavailability of credit to small and medium-sized enterprises (SMEs) may not sound life-threatening to a country that has consistently been touted as one of the best places in Africa to conduct business, continuous qualitative and quantitative reforms in the business environment have given rise to serious concern among wealth creators in the country.

They worry that if the unavailability of credit is not addressed, this would pulverize an already beleaguered private sector that is currently grappling with unfettered competition from cheap foreign imports, the high cost of raw material inputs, high utility prices, and comparatively high levels of taxation, among other challenges.

Industrialists are currently calling for the issue of high lending rates to be tackled, as funding of business operations in the country is becoming more and more difficult.

Even at quoted average rates in the high 20% range, lending rates among commercial banks in Ghana are among the highest in the West African sub-region, with most SMEs claiming to be charged up to 40% on bank loans.

"Considering that we are saddled with the highest lending rates in the West African sub-region, coupled with the difficulty in accessing credit, businesses now have little or no chance to finance viable projects," said Nana Owusu-Afari, president of the AGI.

With the cost of credit coming out as the number one challenge in the last six editions of the AGI Business Barometer Surveys, AGI undertook a comprehensive study on the topic, "Determinants of Nominal Lending Rates in Ghana" in 2010. The findings are yet to be released.

Ironically, the Bank of Ghana (central bank) Monetary Policy Committee (MPC) bi-monthly reports that macroeconomic performance and the economic outlook for the country, have had conflicting assessments with the AGI Business Barometer reports in recent times. The MPC's report released in July 2010, which focused on performance for the first half of 2010 and the outlook for the rest of the year, observed of "while overall business confidence rose by 1.2 points in June 2010, overall consumer confidence declined by 5.2 points. This was intriguing because it was diametrically contrary to the findings of the AGI BBI 2010 second-quarter report that was released in the same week, and registered the lowest business confidence yet, in a year".

Of course, central bank analysts have always been quick to point out that prudent monetary policy management has resulted in marked macroeconomic improvements, which has in turn led to a consistent downward revision of the Monetary Policy Rate (MPR). This stood at 13.5% at September last year, bringing the cumulative reduction in the MPR for 2010 to 450 basis points.

This implies that commercial banks' lending rates should follow a similar trend, thereby making inexpensive credit available to businesses. But the average commercial bank's lending rates are still high, exceeding 25%, with their spread -the difference between the interest they offer depositors and what they charge lenders - equally high. Commercial banks argue that the high risk factor posed by most SMEs justifies the high lending rates.  

The Ghanaian chronicle reported in February that "in its most recent report, the MPC observes that consumer and business sentiments moved in opposite directions in the latest survey conducted in January 2011. While consumer confidence declined, business confidence improved. The survey suggests that the reduction in consumer confidence can be attributed to increased crude oil prices and the immediate impact of the recent petroleum price hike." The central bank's MPR for February further stated that "optimism about general economic prospects, realisation of expectations, and companies' prospects, contributed significantly to the positive assessment of businesses".

Additionally, the report states that "the latest credit conditions survey conducted by the Band of Ghana in January 2011, shows that access to credit continued to improve. Commercial banks eased credit conditions for small, medium sized and large enterprises through reductions in margins on average loans and increased the size of credit. The survey points to an overall improvement in credit conditions for both households and enterprises. However, the survey also revealed that credit conditions for mortgages continued to be tightened through additional collateral requirements."

The implications for private sector development, especially an indigenous one, are tremendous. According to a March 8th article by the Business & Financial Times, Owusu-Afari stated that "it may seem that commercial banks, under pressure to rein in their non-performing portfolios, are squeezing SMEs out of the credit market, and considering larger enterprises as the lesser risk."

"The situation cannot be helpful to the economy. SMEs constitute the greater proportion of business enterprises and as a sector, the largest employer of the teeming labour force. Just as the banks see denying access to the SMEs as the first line of action in managing their books to maintain their profitability, entrepreneurs who are primarily driven by the profit motive also see employee layoffs as the first line of action to minimise their losses as the costs of production rise unbearably," Owusu-Afari said. He added that as unemployment rises, the economy will ultimately suffer. The AGI president also pointed out that a future challenge to the country would be the decimation of industry, while the services sector grew.

The manufacturing sector has lagged behind all sectors and general GDP growth rates. Between 2003 and 2008, average GDP growth was 6.5%, while the manufacturing sector only had a 3.4% average growth rate, recording its lowest point at negative 2.3% growth in 2007.

It is well known now that the services sector has overtaken agriculture as the highest contributor to GDP in Ghana, with industry taking up the rear, and the manufacturing sub-sector contributing the least to that sector.

"This is an unwelcome and unacceptable development, where the productive sectors and highest employment generating sectors of the national economy continue to dwindle in size while the relatively unproductive sectors assume prominence," Owusu-Afari said.

He added that without a conscious effort at revamping the manufacturing and agricultural sectors, through ensuring access to adequate and affordable credit, the country risks the dreaded Dutch Disease with the onset of the oil economy. 'Dutch disease' is the name used by economists to describe the decline in manufacturing that often accompanies the discovery of natural resources, especially oil.

Owusu-Afari is not alone in his fears of an unbalanced economy in the wake of oil production. Trade and Industry Minister, Hannah Tetteh, emphasised the need for competitiveness and diversification of the local economy, at the first ever International Policy Conference for sub-Saharan Africa, held in Accra on March 14.

There is an obvious growing recognition for the need to sustain private sector growth at the national policy level. However, the persistent challenge has been how to reduce the cost of borrowing to the SME sector. The central bank acknowledges that even with prudent macroeconomic management, significant achievements in lowering inflation to a single digit, coupled with a 13.5 MPR, and a relatively stable cedi, lower credit rates have not been achieved.

Perhaps the solution to this seemingly intractable problem lies somewhere between the AGI Business Barometer and the Bank of Ghana's MPC surveys - after all, the most enduring policy, in principle, would be for both the policymaker and the business practitioner to cooperate and collaborate. Until then, developments in other sectors of the economy may receive more discussion time and media coverage, but only because the expected changes are not occurring in the most critical area of our economy, the SME sector.