Impact of Ghana’s monetary policy rate hike to 28% on SMEs
In response to macroeconomic problems and inflationary pressures, the Bank of Ghana's Monetary Policy Committee (MPC) increased the Monetary Policy Rate (MPR) by 100 basis points (bps) to 28.0%.
High inflation, exchange rate volatility, and fiscal deficits have all weighed heavily on Ghana's economic stability, prompting the decision.
While the change is meant to enhance the economy in the long run, it will have a substantial immediate impact on small and medium-sized businesses (SMEs) and their owners.
Understanding the repercussions of this rate hike is critical because SMEs are the backbone of Ghana's economy, accounting for a large portion of employment and GDP.
The following are keyways this hike will influence SMEs and company owners in Ghana.
Increased cost of borrowing
One of the direct repercussions of the MPR hike is higher loan rates from commercial banks. Small and medium-sized enterprises (SMEs) that rely on bank loans to fund operations, expansion, or inventory purchases will face higher interest rates.
This will make credit more expensive, reducing firms' capacity to obtain much-needed finance.
The increased cost of borrowing may result in cash flow difficulties, impeding growth and expansion initiatives.
For instance, a Kumasi furniture maker requesting a GH₵200,000 loan at 30% interest (up from 27%) now pays GH₵60,000/year instead of GH₵54,000. This results in a decreasing profit. Furthermore, market participants utilizing overdrafts pay higher fees, causing some to reduce inventory orders.
Reduced profit margins
Higher borrowing prices can have a substantial impact on Ghana's SMEs, particularly those with tight profit margins.
For example, a small agribusiness that obtains a loan to expand its operations may discover that rising interest rates raise monthly obligations.
Instead of using revenues to buy more raw materials or hire more employees, the company must devote a greater part of its revenue to debt payment.
Similarly, an Accra retail shop that uses loans to stock inventory may struggle to maintain profitability as payback obligations increase, causing it to lower stock levels.
This financial burden might result in downsizing, limited business growth, or even closure.
To survive, SMEs must consider cost-cutting measures, alternative funding options, and better cash flow management.
Decline in consumer spending
A higher Monetary Policy Rate (MPR) diminishes economic liquidity, raising borrowing costs for both businesses and consumers. Consumer spending falls as disposable income falls, which has a direct impact on Ghana's SMEs.
For example, a small restaurant in Kumasi may see fewer clients if residents cut back on dining out.
Similarly, a store in Accra may witness a drop in sales as customers priorities necessities above fashion.
Service-based businesses, such as hairdressers and event planners, may struggle when customers restrict discretionary spending.
With decreasing revenues, SMEs may struggle to fund operational costs, pay personnel, and replace inventory.
To survive, firms must investigate cost-cutting strategies, diversify revenue streams, and increase consumer loyalty through promotions or value-added services.
Limited access to capital and investment
With rising capital costs, Ghana's venture capitalists, private investors, and banks may become more risk-averse, making it difficult for SMEs to acquire funding.
For example, an Accra-based IT business creating an agritech solution may struggle to attract investors who want bigger returns. Similarly, a small manufacturing business in Takoradi looking for a loan to improve its equipment may face stiffer lending criteria, such as greater collateral or interest rates.
As banks tighten lending access, SMEs that require working money for expansion or innovation may be pushed to reduce their operations.
To overcome this difficulty, firms could investigate alternate funding options such as grants, crowdfunding, or strategic alliances, while also upgrading their financial records to attract potential investors.
Potential business closures and job losses
For SMEs already facing economic difficulties, an increase in the cost of loans could be the tipping point that leads to business closures.
Businesses that cannot sustain operations due to excessive debt costs and dwindling sales may be forced to close. This, in turn, will result in job losses, affecting livelihoods and raising unemployment rates in Ghana.
Conclusion
The 100-basis point hike in Ghana's Monetary Policy Rate to 28.0% creates a tough environment for SMEs and business owners.
While the policy action aims to manage inflation and stabilize the economy, it comes at a cost: increased borrowing costs, lower profitability, decreased consumer demand, and limited access to capital.
Business owners must adjust by looking into new financing options, increasing operational efficiencies, and carefully controlling costs. Meanwhile, authorities should consider additional steps to boost SMEs, such as targeted funding programs, tax breaks, and policies that promote a more resilient business environment.
The route ahead is unpredictable, but careful preparation and adaptability will be critical in navigating these economic shifts.