Funding challenges for SMEs in Ghana in an election year

In Ghana, election years are often marked by increased political activity, which causes economic swings and disruptions in corporate environments. 

Banks, investors, and other financial institutions are tightening their lending conditions in response to perceived political and economic volatility. 

SMEs, which are already working in a challenging economic environment, find it considerably more difficult to obtain the cash they require to survive and grow their operations. 

During election seasons, the government's attention is often directed towards campaign spending, diverting resources away from developmental measures such as SME assistance programs.

Furthermore, inflation, currency depreciation, and low consumer confidence compound the situation, making SMEs susceptible. 

This paper discusses the primary funding problems that SMEs in Ghana experience during election years, using actual examples from previous election cycles and insights into what to expect in 2024.

Banks tightened lending conditions

Financial institutions become cautious during election years because of the perceived risk of economic upheaval. 

Banks tighten lending standards by raising interest rates and implementing more severe collateral requirements. SMEs, who frequently lack significant assets for collateral, find it challenging to meet these requirements. 

For example, during the 2020 election season, some SMEs in the retail and agribusiness sectors stated that banks were hesitant to provide loans, fearing a possible post-election economic slowdown. 

Similar conditions are forecast before the 2024 elections, potentially making it more difficult for SMEs to get much-needed operational cash.

Delayed government contract payments

Election years frequently cause delays in payments for government contracts, which are vital sources of revenue for many SMEs. The government's focus moves to election campaigning and political projects, causing bureaucratic delays in clearing overdue bills. 

For example, in 2016, numerous SMEs participating in infrastructure and supply chain contracts encountered cash flow issues due to delayed government payments during the election season. 

With the forthcoming 2024 elections, SMEs involved in government projects may face financing deficits again, limiting their capacity to meet operational costs and deliver orders.

Reduced investor confidence

Political instability during election seasons frequently causes a dip in investor confidence. 

Both domestic and foreign investors may be hesitant to fund SMEs until the political scene has stabilized. 

This was obvious throughout the 2008 and 2012 election cycles, when investors, apprehensive about the future of fiscal policy and governance after the elections, postponed investment choices. 

In 2024, SMEs seeking equity financing, venture capital, or partnerships may have difficulties as investors adopt a wait-and-see approach, delaying funding flows and impeding growth.

Currency volatility

Election years are often marked by budgetary slippages, which lead to inflation and currency depreciation. For SMEs, this means greater import costs, higher operating expenses, and, as a result, lower profitability.

In 2012, for example, the Ghanaian cedi fell dramatically during the election year, increasing expenses for enterprises that rely on imported raw materials and equipment. 

Similar trends are expected in the 2024 election cycle, with SMEs experiencing rising prices and restricted access to inexpensive credit, exacerbating their finance issues.

Slower economic activity and consumer spending

Election uncertainty can cause a slowdown in overall economic activity, as both consumers and businesses become more cautious. 

Reduced consumer spending leads to lower revenue for SMEs, making it difficult to service existing debts or obtain new finance. 

During the 2020 election year, firms in the retail and hospitality sectors reported a drop in sales as customers tightened their belts due to political uncertainty.

This trend is anticipated to continue in 2024, with SMEs unable to generate the cash flow required to qualify for more funding, resulting in a vicious circle of lower liquidity and curtailed expansion.

Conclusion

The December 2024 elections in Ghana are projected to pose considerable finance issues for SMEs. The economic picture during election years is riddled with hazards that limit access to credit, ranging from stricter lending conditions and delayed government payments to decreased investor confidence and rising inflation. 

SMEs should prepare for these problems by diversifying their funding sources, strengthening cash flow management, and investigating new financing possibilities such as crowdsourcing and partnerships. 

Policymakers should also consider putting in place measures to protect SMEs from the economic disruptions that come with election seasons, ensuring that these critical firms continue to prosper in the face of uncertainty. 

As Ghana prepares for another election cycle, overcoming these finance problems will be critical to the growth and resilience of SMEs across the country.

Dr Andrews Ayiku, Lecturer/SME Industry Coach, Coordinator (MBA Impact Entrepreneurship and Innovation), University of Professional Studies Accra
ayiku.andrews@upsamail.edu.gh
IG: andy_ayiku
@AndrewsAyiku
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