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Credit crunch hits businesses

Oct. 13, 2016, 10:15 a.m.

•As economic meltdown persists

By Isaac Aidoo 

The hostile business environment in Ghana is deteriorating further as businesses are starved of much needed funds for expansion and re-tooling.

Growth in credit to Ghana’s private sector declined sharply in the first half of 2016, from 33 per cent in 2015 to 9 per cent, the International Monetary Fund (IMF) has reported. 

Business Finder’s checks revealed that per the Bank of Ghana (BoG) data, growth in private sector credit reduced from 24.5 per cent in 2015 to 8.5 per cent in 2016, showing differences in data between the IMF and the BoG.

The Fund further disclosed that the average lending rate of banks in Ghana increased from 28 per cent to 33 per cent, “signaling a tightening in credit conditions.”

These revelations confirm what the Association of Ghana Industries (AGI) described as a drop in business confidence for the second quarter of this year.

The Association reported in its quarterly Business Barometer Report (June 2016) that for small businesses, access to credit was the second topmost challenge.

According to the report, due to inadequate access to credit , high utility tariffs and a depreciating local currency among others, 69 per cent of businesses said they would be unable to employ new hands in the next six months (from Q2). Apart from their inability to employ, 12 out of the 69 per cent said they would actually cut jobs in the next six months.

Analysts and some business owners who spoke to Business Finder also confirmed that “the growth rate of bank credit to the private sector has been falling month by month in 2016”.

Entrepreneur and Lecturer in Public Accounting at GIMPA, Dr Raziel Obeng-Okon blamed the Bank of Ghana’s (BoG) tight monetary policy and the challenging macro-economic environment which had according to him, led to significant default of bank loans.

“The drastic reduction in credits to the private sector is the direct result of the deliberate policy of the BoG’s current tight monetary policy aimed at reducing the liquidity in the system with the view to stabilizing inflation and the exchange rate,” he noted.

Dr Obeng–Okon pointed out that “the banks are being more careful and selective in their credit appraisals due to high levels of Non-Performing Loans. 

Non-Performing Loans (NPLs) in the banking industry have increased from 11.2 per cent in June 2015 to 18.8 per cent in June 2016. 

“The NPLs have gone up due to the high interest rate regime and the fact that businesses did not do so well during the 2015-2016 period,” the GIMPA lecturer and business owner revealed.

The high policy rate of 26 per cent of the BoG is a disincentive to the growth of businesses and industry at large.

Industry, Dr Obeng-Okon pointed out thrives on lower interest rates, reasonable taxes, good flow of power and stable macro-economic environment.

“These indicators have gone against industry for some time now and impacted negatively on industry as a whole and by extension the GDP,” added. 

According to the Ghana Statistical Service, the industrial sector recorded a negative growth rate of one point one per cent (-1.1per cent) during the first quarter of 2016 but this deteriorated to a negative growth rate of five per cent (-5per cent) by the end of the second quarter of 2016.   

Economist and Senior Lecturer with the University of Ghana Business School, Dr Lord Mensah explained that Ghana’s economic slowdown coupled with the protracted energy crisis in 2015 had impacted negatively on businesses, drastically reducing their profitability. 

“There was nothing hopeful about this economy in 2015; this was a year when the energy sector was in crisis so if you’re a bank or company extending credit to the private sector you will be careful because all business are operating under the same harsh economic conditions,” he elaborated.

Dr Mensah blamed government’s insatiable thirst for borrowing from the domestic market, in competition with private sector players for the credit crisis.

  Commenting on the indebtedness of state enterprises to some banks in the country, the IMF noted that “we expect similar restructurings of remaining legacy utility debts to ultimately increase the banking system’s ability to extend credit to the private and public sectors, and to contain contingent liabilities for the government.”

 Indeed, the BoG’s own annual report for 2015  said slower economic activity exacerbated by an energy crisis, rising inflation and interest rates, and a volatile and weaker  cedi,  negatively affected borrowers’ repayment capacity.