Ghana’s Private Sector Globally Competitive?

Ghana’s Private Sector Globally Competitive?

The competitiveness of the private sector is critical for economic growth, as it provides jobs for a large section of

the youth. In developing countries, economic growth, job creation, growth in tax revenue and domestic investment is dependent on the development of private sector businesses.

Macroeconomic and financial indicators.

Growth in Ghana recovered to 6.8% in 2017 from its sluggish performance in the preceding 4 years on the backdrop of an 80.4% surge in production of oil and gas. Relative to some comparable countries in Sub Saharan Africa (SSA), Ghana’s growth was below Ethiopia (9.7%), however, it was higher than Cote D’Ivoire (3.3%), Kenya (4.9%) and South Africa (2.9%). These countries have consistently experienced a positive GDP growth rate, above the SSA average. This performance is not only comparable in the sub-region but also to countries in Southern Asia.

The private sector in Ghana faces major challenges in the financial sector relative to other countries in SSA comparing financial sector indicators. The indicators give a fair understanding of the degree to which governments are committed to private sector development of the countries. Kenya, South Africa, and Mauritius experienced a relatively stable and favorable financial sector environment compared to Ghana on all indicators.

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The government of Ghana’s one-year Treasury bill rate stood at 15% at the end of 2017, a significant decline from 24.5% as of December 2016. Despite decline in the treasury bill rate in recent years, the rate remains relatively higher than the comparator countries.

Monetary and fiscal indicators

Country One-year T. bill rate Lending rate Public debt (% GDP) Domestic credit to the private sector (% GDP)
2014 2017 2014 2017 2014 2017 2014 2017
Ethiopia 50.0 33.5  –
Ghana 22.7 21 24.3 24 69 70.5 19.9 17.3
Kenya 8.9 8.1 16.5 13.7 47 57.1 34.2 31.0
Mauritius 2.4 3.6 8.5 8.5 56.1 64.9 100.3 101.8
South Africa 5.8 6.5 9.1 10.4 149 53. 8 151.5 65.6
Vietnam 5 6.3 8.7 7.4 55.5 61.5 100.3  130.7

High government borrowing from the domestic financial market potentially crowds-out the private sector, impeding its development. Ghana is outperformed by these selected countries in relation to commercial bank lending rates, private sector credit and public debt to GDP ratios, and below SSA averages. Across the selected countries there is a close correlation between treasury bill rate and other macro and financial indicators.

Countries with low treasury bill rates also have relatively lower lending rates, low public debt to GDP ratio and high private-sector domestic credit. Ghana’s private sector is bedeviled with a high cost of credit and coupled with competition from the government for available loanable funds. Development of the private sector is extremely constrained under these conditions and it is imperative for the government to initiate and implement policies that potentially change the narratives.

Business Environment

The Ease of Doing Business Index (EDBI) and the Global Competitiveness Index (GCI) is used to assess the business and investment environment in Ghana and the selected countries, providing an overview of the global competitiveness of the private sector. The competitiveness of businesses in Mauritius (45th) in 2017 is relatively higher compared to the selected countries. The country also outperforms all the selected countries on the EDBI (42 and 25 in 2017 and 2018, respectively).

Ghana ranks a lowly (108 and 120 in 2017 and 2018, respectively), outperforming Cote D’Ivoire and Ethiopia. The decline in Ghana’s performance in doing business is due to the difficulty of acquiring construction permits, electricity and registering of property. Although, Ethiopia experienced high economic growth, the country ranking of the ease of doing business declined.

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Ghana placed bottom compared to the selected countries in terms of global competitiveness of businesses (111th) in 2017-2018, despite recording an improvement. This performance was driven by improvement in institutions, goods and labor market efficiencies, and innovations. Interestingly, though South Africa registered a decline in EDBI, it performed remarkably well on the GCI – moving 14 places up to between 2017 and 2018. Vietnam has improved access to credit through the setting up of four state-owned banks and the establishment of a credit bureau and this led to the improvement in business competitiveness.

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Developmental paths and Lessons for Ghana

It is necessary to point out that the development of the private sector and the economy is not the sole responsibility of government but there is the need for public-private sector collaboration. Thus, nature, scope, and depth of the state’s role and coordination with the private sector is critical and differs across countries in an attempt to achieve economic transformation. Countries have resorted to various combinations in the transformation agenda; for instance, Ethiopia and Vietnam have the state spearheading developmental efforts, with the private sector leading the developmental agenda in the other selected countries.

Ethiopia’s transformation agenda is heavily state-driven. Industrial sector development is dependent on agriculture-led industrialization, establishing labor-intensive industries and increasing exports, with the state playing a critical role. In this regard, the government embarked on aggressive public investment into industrial parks, power and railways networks aimed at increasing private sector investments, strengthening state-owned enterprises and attracting FDIs into strategic sectors.

The government has combined these with tax incentives to attract FDIs. The success of Ethiopia’s leather and floriculture industries was a result of the state’s active involvement in identifying and creating an enabling environment for a strategic investor in the value chain. The rapid progress of the shoe and leather industry underscores the role of the state as the initial risk-taker and market shaper. Additionally, prudent macroeconomic measures by the government and its strong presence in the financial sector have resulted in economic growth.

The Central Bank has imposed a cap on credit as it is mainly channeled into infrastructure financing. The government has also maintained an overvalued exchange rate and implemented measures that suppress imports. The consequences of such policies inadvertently constrain private sector development and dampen economic transformation. This development strategy bears similarity with that of the East Asian state-led development agenda, however, economic growth in Ethiopia is driven largely by public sector investments.

Ethiopia’s attempt to attract FDIs is based on attracting strategic investors with global outreach with technological innovations leading to technological transfer. Ghana stands to benefits immensely from adopting this strategy as it hastens the country’s movement up the value chain, crowds-in local industry players and strengthens the competitiveness of local businesses.

Vietnam and Ethiopia embarked on massive investment in industrial parks along those of the East Asian countries. This also turns to facilitate technological transfer from multinational enterprises to local small and medium-sized enterprises. It is worth noting that small and medium scale enterprises derive extreme benefits from such policies as firms acquire knowledge through close association. Industrial clusters of firms in Ghana has the potential to aid local firms to grow into large firms and the development of the sector.

The private sectors in Kenya, South Africa, and Mauritius are viewed as partners in the transformational agenda by the state and the sectors play leading roles. The governments aim at making the sector internationally competitive, depicted by the high private sector credit and low cost of credit. These countries have developed strong financial markets, with a regional presence that attracts FDIs, and macroeconomic fundamentals, promoting private sector development.

Additionally, the private sectors in these countries have strong representations and are united under an apex body. For instance, the Kenya Private Sector Alliance (KEPSA) played a critical role in the peace process during the electoral crisis in 2007/2008 and assisted to revise the Constitution. KEPSA is also instrumental in designing the Vision 2030 (Long-term Development Blueprint of Kenya).

The success of the private sector in Kenya, Mauritius, and South Africa is basically based on strong representation and is well-resourced, with the ability to embarked on quality research, provide the government with evidence-based proposals. A successful private sector development strategy in Ghana requires a well-organized and united private sector under a single umbrella with the mandate to represent all businesses and associations. The body should be well resourced to conduct independent quality researches to inform proposals presented for the government’s consideration.

The right balance of public-private sector collaborations and engagements have played pivotal roles in the development process in countries, such as Kenya, Mauritius, Ethiopia, South Africa, and Vietnam. The creation of an environment that enables the private sector to make a meaningful contribution to the development of strategic policies that eventually impacts on the sector.

Investments in logistics, transport and other infrastructure facilities have played crucial roles in the development business in Cote D’Ivoire, Ethiopia and Vietnam. Ghana must increase its infrastructural expenditure to put the private sector on a transformational path.

One major challenge of the private sector is the crowding-out of the sector fr0m the financial market and the cost of borrowing in Ghana. Ethiopia and other countries such as Vietnam and Mauritius solved this problem of access to credit by establishing and supporting the financial sector to develop and help direct credit to the priority sectors of the economy.

The pioneering role of the Development Bank of Ethiopia in providing low-interest credit facilities to support capital investments has been critical for the transformation of the private sector. The crucial role of the Bank eased the perennial challenge of access to credit, enabling enterprise development and increase employment in these countries. The Ghana government must assist financial institutions to play critical roles in the development of the private sector through the active provision of credit.

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