In response to rising debt levels and economic instability, the Ghanaian government launched the Domestic Debt Exchange Programme on December 5, 2022.

The Domestic Debt Exchange Programme (DDEP) is an economic policy effort designed to restructure the country's debt and maintain budgetary sustainability.

By exchanging existing domestic debts for new ones with varied terms, Ghana's government hopes to better manage its debt burden and restore economic stability. While the programme's long-term purpose is to stabilize the economy, its immediate effects for SMEs have been far-reaching and complex. This article examines the DDEP's ramifications for Ghanaian SMEs, focusing on six significant ways it has impacted firms.

Cash flow constraints

The DDEP resulted in a massive restructuring of government bonds, which many SMEs had invested in as a secure and consistent source of revenue. For example, a small manufacturing firm in Accra that had invested its spare cash in government bonds saw its interest revenue collapse due to the restructured bonds' lower interest rates.

This unexpected fall in cash flow constituted a significant challenge, since many organisations relied on these returns to fund operational operations, investments, and growth plans. To stay afloat, the company had to postpone plans to modernize its machinery and reduce some operational expenses.

Access to credit

One unforeseen result of the DDEP was a tightening of credit terms. Faced with lower profitability from bond holdings, financial institutions became more cautious in their lending practices. For example, a Kumasi-based tech business that was developing a new software product found it more difficult to obtain a bank loan.

The limited availability of loans for SMEs meant that enterprises already struggling with cash flow faced further challenges in financing operations, investing in new projects, and expanding their operations.

Investor confidence

The restructuring of domestic debt gave contradictory signals to the market, which harmed investor confidence. Both international and domestic investors were skeptical of the initiative, expecting defaults or more economic upheaval.

For example, a small agribusiness trying to seek capital for expansion through equity investment found it difficult to find investors. This cautious stance resulted in lower investment inflows for SMEs, who rely largely on investor confidence to get funding for growth and innovation. The programme's unpredictability made it impossible for businesses to confidently plan for the future.

Operational costs

The government's use of austerity measures to supplement the DDEP had an impact on the larger economy. Public-sector spending cuts impacted a variety of industries, diminishing demand for SMEs' goods and services. Furthermore, the inflationary pressures created by these policies increased operational expenses, notably higher raw material and utility prices.

For example, a local restaurant chain in Tema saw its electricity and food supply expenses skyrocket, reducing profit margins. SMEs, which already have low margins, found it difficult to absorb these additional costs without passing them on to customers, risking losing market share.

Employment

Small and medium-sized enterprises (SMEs) are significant employers in Ghana, employing a big proportion of the population. The financial hardship imposed by the DDEP pushed many enterprises to reconsider their staffing demands. Some SMEs were forced to implement cost-cutting measures, such as layoffs and hiring freezes, to remain viable. For example, a small garment factory in Takoradi had to lay off some employees and restrict working hours for the others. This decrease in work prospects not only harmed the livelihoods of many Ghanaian families, but it also contributed to a drop in consumer expenditure, further lowering economic activity.

Innovation and growth

The uncertainty and financial constraints imposed by the DDEP hindered SMEs' innovation and growth. Businesses that would normally spend in research and development, new technology, or market expansion were compelled to take a more cautious approach. For example, a fintech startup in Accra working on a novel mobile payment platform was forced to reduce its R&D activities due to funding constraints.

The emphasis has changed from growth and innovation to survival, with many SMEs prioritising short-term stability over long-term strategic goals. This transformation had long-term ramifications for Ghanaian enterprises' competitiveness in both local and international markets.

Conclusion

The establishment of the Domestic Debt Exchange Programme, while intended to restore fiscal stability, has had a substantial impact on Ghanaian SMEs. The consequences have been far-reaching and difficult, ranging from cash flow problems and limited credit availability to decreased investor confidence and higher operating costs.

Furthermore, the plan has had an impact on employment numbers as well as hampered SMEs' innovation and growth. As the government navigates its fiscal issues, it is critical to implement supporting policies that might alleviate the negative consequences and ensure that SMEs stay resilient, contributing to Ghana's economic recovery and growth.

By:

Dr. Andrews Ayiku
Lecturer/SME Industry Coach
Coordinator (MBA Impact Entrepreneurship and Innovation)
University of Professional Studies Accra

Dr. Mrs Juliana Akushika Andoh
Lecturer UPSA/ Marketing consultant