The Proof That Government Of Ghana Is Insensitive To SMEs Development

What this paper seeks to achieve is to analyse the classical economic figures of Bank of Ghana on the general financial market and how these analysis are related to economic activities. The pursuit is to simply bring to bear the understanding of the non-economic expert. What it seeks also to do is to draw a correlation between the analysis and SME's. In furtherance this literature is to ultimately justify how insensitive the government of Ghana is to the development of domestic businesses.

According to 2014 figures from the Bank of Ghana indicates that, the GDP growth rate was pegged at 4.2%. The main drivers of Ghana's economy were mentioned as DMB's credit to the private sector, SNNIT contributions and port activities. Inflationary rate for the year ending 2014, stood at 17% although according to recent figures it has reduced to about 16.4%. Food inflation however, rose from 6.6% to 6.9% and this figure still holds as of now.

Revenue and grant mobilisation made up 16.6% of the GDP whiles government spending stood at 23.6% of the GDP. Budget deficit as financed by the both the banking and the non-banking sector of the Ghana's economy was 7% with total debt ratio to the GDP being 67.1%. as of the closure of the 2014 fiscal year. Current Account Deficit (2014) is $3.6% billion (9.2%) “(BOG, 2015)”

Analyzing the figures using the “Double Deficit Hypothesis” (DDH) in macroeconomic proposition; which postulate that there is a strong link between current account balance of national economy and its government budget.

Y= C + I + G + (X-M)

Y - GDP of Ghana
C - Consumption spending
I - Private Investment Spending
X- Export
M- Import

Y = C + S + T

S – Savings
T – Taxes
While Y & C remain under the above definition

C+S+T = C + I + G + (X- M)
(S-I) = (G-T) + (X-M)
(S-I) + (T-G) = (X-M)
While (X-M) = B as Net Export

Then (S-I) + (T-G) = B

The above mathematics, prove that government of Ghana will continue to run trade deficit at a low tax revenue collection and low savings but high infrastructure investment and increased government spending. And this really plays a role in the depreciating of the value of the cedi and causes rise in inflation, making the cost of borrowing very high for the domestic business to thrive. In a situation of crowding out there is fewer export, higher exchange rate, less private investment and higher interest rate.

According to the sectorial balance frame work

(G-T) = (S-I) – B (Net Export) Private net saving is only possible if the government runs budget deficits, which indicate government deposit more money into private banks accounts than it has removed in taxes and believed to be necessary for economic growth to avoid deflation. But in the case of Ghana the character is different, because government deposit money into private banks who are not direct players in the domestic economy creating a reverse of this model against the progress of the domestic businesses. The few that hit the domestic bank never extend funds to the SMEs sector that is the engine of the economic growth with the perception of high risk, therefore make the observed growth in the market not realised as projected theoretically.

Bank of Ghana classical statistic projections only define the financial dynamism; to determine the wellbeing of the economy and it business environment, undermining other major factors is a strong limitation and an indication of lack of government commitment to assist the progress of SMEs growth.

DEGREE OF DIFFICULTY TO ACCESS FUNDS

Credit to private sector grew by 42.1% as at December 2014 credit growth was mainly funded by increased mobilisation of domestic deposits by the banking system. The average lending rate of the bank rose to 29% in 2014. Evidence from the banks survey of credit condition; SMEs access to credit and loans for mortgages were tightened marginally. However access to credit for large enterprise remained eased. (BOG, 2015)

99% of the banks in Ghana define SMEs based on their annual turnover. Most of the SMEs requesting for small credit are subjected to the processes similar to those applied to the banks commercial client; by so doing, the probability of SMEs to qualify through such rigorous process is very minimal.

The reason why many Banks in Ghana deals with SMEs, is their deposit, 55% of the bankers explained that SMEs are better source of cheap deposit as relative to larger corporate customers. They are less likely to place funds with banks with a primary aim of making return. (PWC, 2013)

It is also identified that 90% of the banks classify SMEs to be symptomatic implying they are insensitive to pricing like interest rate and fees on facilities given to SME's. It is only when, they experience the unexpected within a certain period of time, turn to attribute it to superstitious believes resulting in high default in loan payment. This implies that most of the SMEs need Fundamental Economic Education (FEE) to guide them in quality decision making on daily bases for their business growth.

The following are identified strategic economic focus of the Banks in dealing with SMEs
1. To Enhance the bank development
2. Increase in penetration and improve their respective positions in a market, which is believed to have significant commercial potential.
3. Their business in the SMEs economy originates from their need to ensure an enhanced banking and service experience to win bigger corporate and commercial customers who operate in telecom, petroleum and construction sector. ( PWC, 2013)

The Economic Benefit of the Banks from the SMEs were listed as follows; 88% indicated the benefit of SMEs depositing, 67% indicated the benefit of transactional banking, 57% indicated the benefit of SMEs lending” (PWC, 2013)

About 45% indicated that SMEs economy was more costly to serve in comparison to larger corporate and commercial consumers and obstacles were measured as follows; 85% indicated the unstructured governance and management system of SMEs, 62% indicated the opacity of their financial transaction
54% High default rate. (BGI, 2014)

The percentage aggregate of the Bank support to the SME sector

Commerce................................ 77%
Service..................................... 54%
Industry.................................... 31%
Construction............................ 23%
Mining.................................... 8%
Education................................. 8%
Churches................................... 8%
Oil & Gas................................. 8% “(PWC, 2013; 4)”

The overall argument this paper seeks to establish is that, Government of Ghana's actions through economic policies and operations within the economic market is a clear indication of lack of commitment to the development of the domestic businesses but rather in favour of large companies whose root and economic development are derived from foreign market.

To go strictly by the sectorial formula above used by BoG for analysis, then it highly answers, why such economic pressure on SMEs, who are noted to be Banks good depositors are finding it difficult to survive yet none of this bankers have made any step to assist to change the situation presuming it may have hard impact on their business, but on the contrarily SMEs are even seen more as a danger in lending in such unstable economic environment but with the following report from Bank of Ghana indicating that, the Bank industry ended on a firm note by 2014.

Broad Money grew by 36.8% 2014 as compared to 19.1% corresponding period in 2013. Reserve money expanded by 30.1% from 15.1% from 2013. Bank industry ended 2014 on a firm note, with industry fundamentals exhibiting a positive outlook. Domestic Banks continue to account for the highest number of branches. The total assets of the industry increased by 42.2% compared to growth of 32.8% in 2013” (BOG, 2015). Yet as an observed, it clear that the economic situation of SMEs is continually getting worse in Ghana.

So where is the will of government to enact a policy such that huge spending that affect the domestic businesses in one economic direction is economically beneficial in another direction through a simple and efficient mechanism. This is believed to spur domestic banks to extend the credit line to the SMEs, who are the engine of economic growth termed as the cyclical effect.

If we further study the report of BoG clearly, it is evident that the information on private sector extension of 41.2% credit, the question raised is, which sectors benefited and what has been government's policy to realize that such percentage extension is highly beneficial to the SMEs who suffer so much of government's budget deficit. These indications further affirm my argument that government of Ghana is never committed to the development of domestic businesses.

Further analysis of about the 0.3% rise of the food inflation will justify how the present economic actions of government is worsening plight of the poor. This may be referred to as “Capitalist Extortionism”. But that is not within the parameters of my argument and will end on this note.

Tweneboah Senzu PhD.
Bastiat Ghana Institute
(Free Market Economic Think Tank)
[email protected]
BGI-Scholastic Article Vol.78