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Tough times for small businesses as govt continues to borrow

The Chief Executive Officer of Dalex Finance, Ken Thompson is advising Small and Medium Enterprises (SMEs) to prepare for a ‘stormy weather ’ next year if government‘s borrowing is not controlled.

Concerns have been raised about the country’s debt sustainability. Public debt reached $83 billion dollars in July 2015.

Government’s ability to borrow has been restricted following its decision to sign up to an IMF programme. Conditions under the programme do not allow government to borrow from the Eurobond Market or for the Bank of Ghana to finance the government’s deficit.

This Mr. Thompson says, could compel the government to borrow from the domestic market, which could influence increase in interest rate on Treasury Bills.

Most SME’s are financed by non bank finance institutions, who borrow at the average interest rate for 182 day treasury bills plus a margin of between 5 to 8 percent.

SME’s pay an average of 72 percent on loans. If the interest rate on Treasury Bills increases, the cost of borrowing by SME’s will also increase.

“It is companies like Dalex Finance that lend to SMEs. The banks don’t do that. They would rather buy treasury bills so if the rates go up, the amount that we charge for our loans also goes up.

“Remember that in the 90’s the treasury bill at some point was over 40 percent. So for every Cedi that you earn, if you borrow from a non bank finance institution, you would probably pay over 80 pesewas of that as interest,” he said.

You must be making abnormal profits to finance your business, Mr. Thompson explained.

There appears to be a ‘liquidity’ problem in the market, the very reason why most banks are running promotions. These promotions are aimed at attracting people to make deposits.

The liquidity challenge Mr. Thompson said is not surprising. The Volta River Authority (VRA) for example, owes banks approximately US$1.3 billion.

This makes it imperative for government to maintain a tight grip on its expenditure as well as find ways to widen the tax net to increase revenue.

That in his view is the only way a potential increase in Treasury Bill rates can be averted.

Asked what he sees as he looks into the ‘crystal ball’, Mr. Thompson mimicked ‘Captain Haddock’ and exclaimed, “Ahoi, Ahoi…. batten down the hatches, stormy weather ahead…..Ahoi.”

Credit: Joy Online

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