Adnan Adams Mohammed
Some analysts are predicting tougher times ahead for the economy arguing that businesses looking to expand this year will face very severe challenges.
According to a business analyst, David Ofosu-Dorte, while many businesses had not envisaged such a harsh economic terrain coming into the New Year, the prevailing crisis means companies would have to adapt and probably shelve some of their plans in order to weather the storm.
They emphasized that, the ongoing domestic debt exchange will deprive businesses of key financing support as a result of the liquidity problems it will create for banks in the coming months. To corroborate this, a financial analyst has also shared that, government seems not to have thought through this debt exchange programme thoroughly; the economic contraction implications are dire!
“There will be a general slowdown of the economy and we will either not grow as anticipated, or, perhaps, even not exceed 2% GDP growth this year”, former Executive Director of Standard Chartered Bank, Alexander Kofi-Mensah Mould, in an interview last week said.
“This will be due to less demand, which means that there will be less production, fewer imports, and fewer services being given to the populace.”
Mr Dorte speaking during a TV discussion explained that, “Most businesses don’t expand using returns on bonds except the financial sector. Businesses expand using loans and debt instruments or other corporate financing instruments that they take.
“The challenge is that the banks are going to have liquidity problems, so you will still not be able to do that expansion because the banks will not be giving you the money or the cost of that borrowing will be so outrageous that you’ll not be able to make returns on it so definitely expansion programmes are going to be very very difficult.”
He added that even for businesses that have other sources of income, borrowing for expansion will still be very difficult.
“And if you reduce it to GDP terms, the government’s own expectation of GDP is not that bullish because if businesses are not growing and expanding then we are going to have a situation where we are going to contract. There will be some growth but I don’t expect very bullish growth,” he said.
Consequently, “Now, what does this mean for government revenue?”, Mr Mould asked rhetorically.
“Since the demand of goods and services will go down, it means people will be paying less taxes. Additionally, due to reduced demand – a result of less discretionary expenses – there be fewer imports and as such there will be less duty and other excise taxes collected at the ports.
“So, government revenue will plummet and they may fall short of making the projected revenue in the approved budget.”
The finance and energy analyst further expunged that, the Debt Exchange, if carried out in its current form, will result in many banks not getting any income from Government Treasury Bonds they hold for almost 15 years.
“In some cases, this forms up to 60% of their revenue and is a huge contributor to their profits! To be blunt most banks will be making losses when you combine this loss of income to the high default rate on loans to SMEs and corporates.”
This implies that, with lower than expected revenue, Government will have no other option than to cut down its expenditure.
The first to go will be discretionary expenditure and other non-productive policy programmes.
He said, “We also expect a reduction in the construction of new roads as well as a slowdown in road maintenance, and a lot of non-essential government workers’ salaries being delayed or not paid at all, i.e more expenditure accruals.
“Furthermore, with the statutory payments, like pension contributions, the situation will be worse than it currently is, that is, government backlog of unpaid pension contributions of government workers.
“Government needs to re-visit this debt exchange program and create policies that will bring back confidence in the economy, as well as attract investment to spur on the economy; resulting in more spending and increased savings.”
