Ghana Businesses Urged to Seek Alternatives as Borrowing Costs Surge

Ghanaian businesses are facing heightened financial pressures after the Bank of Ghana’s Monetary Policy Committee (MPC) raised the benchmark interest rate by 100 basis points to 28%, marking the third consecutive hike in 2024.

The move, aimed at curbing inflation hovering near 23%, has drawn sharp warnings from economists urging firms to pivot from traditional loans to alternative funding strategies.

Professor Isaac Boadi, Executive Director of the Institute of Economic and Research for Public Policy (IERPP), cautioned that taking on new debt under current conditions risks destabilizing cash-strapped enterprises. “Borrowing at these rates is financially perilous,” he said, citing the widening gap between soaring policy rates and declining Treasury bill yields, which fell to 16% this month from 19% in January. This divergence, he argued, creates “unpredictable capital costs,” complicating budget forecasts and investment plans.

Boadi advised businesses to delay major credit commitments until monetary conditions stabilize, recommending equity financing, trade credit agreements, and public-private partnerships (PPPs) as safer alternatives. “These models offer flexibility without the burden of unsustainable debt,” he noted, pointing to Ghana’s nascent PPP sector, which attracted $2.1 billion in infrastructure deals last year.

The rate hike compounds challenges for sectors like manufacturing and agriculture, where credit dependency remains high. Bank lending rates now average 32%, up from 28% in 2023, squeezing firms already grappling with currency volatility and supply-chain disruptions. Kwame Asante, CEO of Accra-based AgriGro, shared that his firm shelved expansion plans after loan repayments consumed 40% of quarterly revenue. “We’re exploring investor partnerships to avoid collapse,” he said.

While the central bank signals resolve to tame inflation, analysts highlight risks to growth. Ghana’s GDP expanded by 2.9% in Q1 2024—below the 4.6% sub-Saharan average—as high borrowing costs stifle productivity. The MPC’s stance contrasts with regional peers like Nigeria, which cut rates to stimulate spending.

Boadi emphasized vigilance, urging businesses to monitor Treasury trends for signs of future rate cuts. “A sustained yield decline could prompt policy easing, offering relief by late 2024,” he projected. Until then, strategic financial management remains critical for survival in an economy where 60% of firms cite access to affordable credit as their top challenge.

As the deadline for Q2 tax filings approaches, the Ghana Union of Traders Association reports a 15% drop in loan applications—a stark indicator of sector-wide caution. For now, businesses navigate a tightrope: innovate funding or risk insolvency.