High Rates Choking Businesses

Jorge Bonsu, a second-hand phone retailer sits behind the glass counter of his mobile-phone store in central Accra. With few customers, he worries about where he will get the money to pay the next installment on a loan taken out in December to keep his business afloat. A 38% plunge in Ghana’s currency against the dollar since the end of 2013 has increased the cost of phones, phone cases, headphones and other accessories, discouraging shoppers as Jorge struggles to raise cash to cover his debt. The odds against him worsened when the central bank raised interest rates up to the highest levels since 2003, the government raised utility prices by at least half and a new tax on gasoline imposed in January this year has pushed up the cost of fuel by more than 5%.

“If the interest rate on my loan would go down, I would reduce prices so that more people can buy, the price of everything has gone up, so people are not able to buy. This has drastically affected my sales” said Jorge.

Sales are down as much as 83 percent at his shop from 2013, when he would take up to 4,000 cedis ($1,000) in a day. The Ghanaian currency gained 0.1 percent to 3.86 per dollar by the close of day March 8 in Accra. The Bank of Ghana increased the key benchmark lending rate by 4 percentage points since July 2015 to stem losses in the cedi and combat inflation that soared to a record 19 percent in January 2016. That’s not helping the economy in a nation of approximately 26 million.

Growth in the world’s second-largest cocoa producer, an oil supplier since 2010, is languishing near the slowest pace in 20 years, with the government expecting expansion of 4.1 percent for 2015. Currently, almost a quarter of the population now lives below the government’s poverty line, with incomes of $340 a year or less.

Experts say they expect the Bank of Ghana to increase interest rates by 100 basis points in the first half of the year 2016.

“The impact is being felt worst by small businesses that don’t have the ability to absorb rising funding costs, like Jorge’s phone store,” said Leslie Dwight Mensah, an economist at the Accra-based Institute for Fiscal Studies.

Ventures with 10 or fewer employees contribute to70 percent of the country’s gross domestic product, Mensah said. Companies with sales of less than 10 million cedis ($2.57 million) a year account for 92 percent of all businesses in Ghana and more than four-fifths of manufacturing employment, he said.

High interest rates are crippling small businesses, said Carine Tsekumah, a researcher at the Association of Ghana Industries, whose 1,200 members are mostly involved in this type of venture. “Some will tell you they have suspended operations, and that is the last time you heard they were in business. Because they are small, most of them are not able to absorb the shock of interest rate increases.”

Ghanaians are paying the price for government overspending that led to budget deficits exceeding 10 percent of GDP for the three years until the government accepted almost $1 billion in emergency loans from the International Monetary Fund in April 2015. The Washington-based lender said in January “a continued tight monetary policy stance” will be needed if the central bank fails to bring inflation under control. This gives Jorge little cause for optimism that his repayment burdens will ease.

“We are not making sales and the monthly repayment is drawing near,” Jorge said, pointing to goods that have been on the shelves for almost a year as foot-travelers rushed by his store in the busy capital. “I may have to borrow money from our business association to pay off the bank. They charge almost double interest compared with the bank, but it’s better because if you default the bank will charge you a penalty.” He added.