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AN ASSESSMENT OF CORPORATE SECTOR PERFORMANCE AND CONTRIBUTION TO GROWTH IN THE GHANAIAN ECONOMY 1. Introduction 1.1 Background The corporate sector is receiving increasing attention in many countries since the Asian crisis. The increasing attention stems from the importance of the sector in the links that it has with economic performance. The development of a viable private sector requires a stable macroeconomic environment. An unstable macroeconomic environment characterized by high inflation, rapid depreciation of the currency and high interest rates do not promote sound corporate growth. Macroeconomic instability, with rapidly depreciating local currency, can increase the debt-servicing costs of firms with large foreign currency obligations, destabilize the corporate sector and even threaten the financial viability of many firms. Conversely, the corporate sector can affect macroeconomic performance if the sector does not have access to adequate capital for new investment. This generally will impair growth in the economy. Ghana has over the past two decades pursued policies aimed at restoring macroeconomic stability. The initial successes made bought about appreciable amount of progress in the activities of the private sector. Although some of the constraints and bottlenecks that confronted the sector in the past were removed during the reforms, others still remain and new problems have emerged. The major problems facing the private sector include lack of adequate working capital, which may be attributed to the rather rigid banking requirements of equity, collateral security, and financial reporting standards that most entrepreneurs are not able to comply with. Secondly, macroeconomic instability that is characterized by high rates of inflation and exchange rate depreciation has resulted in high cost of credit and rendered business planning very difficult. Also the smallness of the Ghanaian economy coupled with low-income levels results in low level of aggregate demand for industrial products. The other factors include inadequate and high cost of physical infrastructure and high cost of inputs. On assumption of power at the beginning of the year 2001, the current government declared a “GOLDEN AGE OF BUSINESS” and began implementing corrective policies and measures to ensure the growth and development of private enterprises. The government’s fiscal measures since 2001 were aimed at achieving domestic primary surplus (above 4.0 per cent of GDP). This was to minimize the government’s domestic borrowing requirements in order to reduce interest rates as well as halt the crowding out of the private sector from the credit market. Since the inception of the Economic Recovery Programme (ERP) Ghana’s macroeconomic policy measures have been directed at transforming the economy from a controlled to a liberalised market economy. The process of transformation has seen the private sector increasingly become the driving force of the economy. The government continued to pursue polices with the goal of creating an enabling environment for the achievement of these objectives. The policies include appropriate monetary and fiscal policies, financial sector reforms, industrial policies and policies aimed at attracting investments into the country. Also the Ghana Poverty Reduction Strategy (GPRS 2003-2005) identifies acceleration of the rate of economic growth as the key ingredient for creating jobs and meeting poverty reduction targets. As appropriately identified by the strategy accelerated growth can only be achieved with “the active involvement of the private sector as the main engine of growth and partner in nation building”. Accordingly Ghana, in partnership with other development agencies, defined her medium-term economic growth strategic objective as to “increase competitiveness of Ghana’s private sector in the global marketplace of goods and services, as measured by Ghana’s share of world trade”. The purpose of this objective is to increase employment opportunities and income levels for poor Ghanaians, which requires that Ghana accelerates the rate of her economic growth. The symbiotic relationship between corporate sector growth and the development of the entire economy underscores the importance of an analysis of the performance of the corporate sector in Ghana. 1.2 Terms of reference The objective of this study is to undertake an assessment of the corporate sector performance in Ghana and its contribution to economic growth. The rest of the document is organized as follows: Section two is an overview of the corporate sector in Ghana. Section three is devoted to analyzing the performance of the corporate sector and its contribution to the economy while section four highlights the problems confronting the corporate sector in Ghana. The conclusions and recommendations are in Section five. For the purpose of this document, the analysis of the Corporate Sector performance will be based primarily on the companies listed on the Ghana Stock Exchange (GSE). This is due to the unavailability of adequate financial information on the businesses not listed on the exchange. 2. Overview 2.1 The Corporate sector Chart 1 Number of Busineses Registered by Registrar Generals Department Limited Liability 22% Limited by Guarantee 2% Partnerships 3% Sole Proprietorship 73% External Companies 0% Source: Registrar General’s Department Corporate bodies in Ghana are either companies registered under the Companies Code 1963 (Act 179) or established by an Act of Parliament. They must be public limited liability entities existing as bodies separate from their owners. Of the 478,360 registered companies as at April 15, 2003, 346,442 were sole proprietorships, 105,794 were limited liability companies (private and public), 11,273 were limited by guarantee and 13,980 partnerships. There are also 871 external companies, which are offshore companies with offices in Ghana. The data shows that sole proprietorship businesses constituted the largest of organizational form, followed by limited liability businesses. The country has only 25 publicly listed companies on the Ghana Stock Exchange. The corporate sector has an obvious government presence but the current divestiture programme taking place will change the face and structure of the sector. The difficulty in obtaining information on firms not listed on the Ghana Stock Exchange makes it difficult to assess the entire corporate sector and this limitation implies that this assessment does not present a complete picture of corporate performance and its contribution to growth. Nevertheless, we should note that the corporate sector in Ghana is small in terms of total employment. A USAID study (Manual for Actions in the private sector – 1989) noted that total employment in the private sector was represented as follows: Self- employed enterprises accounted for about 90 per cent; Rural/informal entities 4 per cent, while Limited liability companies accounted for only 6 per cent of total employment. Suffice it to say that though not corporate by definition, the majority of operators in the private sector are self-employed family enterprises. 2.2 Activities of Corporate Sector Corporate institutions in Ghana operate in several sectors of the economy. The dominance of the agricultural sector in economic activity also reflects somewhat in corporate sector activity as the sector is involved in all activities in the food chain - from the point of production (farm gate) to the final consumer. Agricultural sector activities are handled by private operators, some of whom operate as corporate entities (e.g. British–American Tobacco (BAT) Co. Ltd, UNILEVER etc.). BAT is involved in Tobacco farming whilst UNILEVER has Oil Palm plantations, thereby producing the raw materials needed in their final products. In the mining sector, corporate activity is stronger with many foreign companies operating in the sector. However, only one mining company is listed on the Ghana Stock Exchange; Ashanti Goldfields Company (AGC). The sector accounted for 5.3 per cent of GDP in 2001 and 5.2 per cent in 2002. In 2001, total manufacturing accounted for about 10 per cent of GDP with GSE registered/listed companies representing over 40 per cent of the total. Areas in which there is medium to large scale corporate activity include food processing, beverages, wood products and textiles. The tertiary sector in the Ghanaian economy is large, accounting for 33 per cent of GDP. Corporate sector activity is fairly large in all the sub sectors. In the Wholesale and Retail trade sub-sector large trading houses such as Unilever, PZ and CFAO dominate in terms of market shares, although the majority of businesses in this sector are operated on a small scale. Corporate activity is also significant in the bank and non-bank financial sub-sector. Other businesses operate on a small-scale basis in the areas of transport, construction (building and roads) and provision of consultancy services. It is worthy of note that over the past decade the services sector has been a consistent growth segment of the economy. 3. PERFORMANCE OF THE CORPORATE SECTOR 3.1 Global Developments The defining image of corporate performance between 2001 and 2002 in the industrialised economies was the bankruptcy of several ‘Blue Chip’ companies (e.g. World Com, Enron etc). Corporate performance was also exacerbated by a depressed stock market with hardly any growth in the major global bourses. The stock market in the US has experienced three consecutive years of declining return. The last time the market saw three years of down turn was during the Second World War. On the New York Stock Exchange (NYSE) alone, market value was estimated to have fallen by US$2.6 billion in 2001 (Ned Davis Research, FT 02/2003) during the same period. Standard and Poors 500 Index estimated that the market was down by 22 per cent, while the Dow Jones Industrial Average and NASDAQ Composite recorded declines of 16 per cent and 30 per cent respectively. The consensus was that corporate performance in 2001/2002 was seen to be positively correlated among other things with governance and transparency. Since the latter half of 2001, much introspective soul searching among listed companies has directly attributed poor performance to a lack of transparency in their financial statements as well as to deficiencies in the structure and diversity of top management – with particular reference to the composition of corporate boards and the need for more non- executive board members. Concentration of ownership of corporations and the lack of transparency in their management led to the corporate scandals mentioned in the preceding paragraph. The prevalence of conditions of bad governance and weak controls in an economy gives a clear signal to agents in corporations to abuse their ability to influence legislation thus making it easy to massively ‘book cook’ – so to speak. In response to these corporate scandals, Governments in the industrialised countries instituted commissions of inquiry tasked with the responsibility of drawing up new corporate governance laws. The consensus of varied commissions is for a two-tier system of supervisory boards overseeing a management board as a way of restoring good corporate governance and performance. Corporations in the industrialised economies have over the years managed to offset the agency problems created by the separation of ownership and control by: Putting in place the right incentives for management, particularly by tying compensation to changes in earnings and stock price; Enjoining/Requiring managers and directors to act in shareholders’ interest, backed up by monitoring by auditors, lenders, security analysts and large institutional investors; and The threat of a takeover, either by another public company or a private investment partnership. It is however necessary for one not to assume that ownership and control are always separated. The conclusion from the experiences of corporations in the industrialised economies in the aftermath of the corporate scandals was that improvements in financial transparency and good corporate governance practices were key to holding corporate executives in check. In this regard, the boards of companies listed on NYSE and NASDAQ will in 2004 be required to have a majority of independent directors and auditors made up of entirely nonexecutives in order to control Top Management greed and to protect shareholders interest. Additional evidence shows that companies with a high proportion of non-executive members on their boards are very unlikely to condone doubtful accounting practices so as to present a wrong impression of corporate performance. 3.2 Corporate sector performance in Ghana Corporate sector performance in Ghana shows an improvement between 2001 and 2002. The GSE All Share index recorded an increase of 45.96 per cent. Unlike developments in the industrial world with a low level of shareholder/investor confidence due to governance and transparency problems, investor /shareholder confidence in Ghana improved over the period reflecting partly the improved macroeconomic conditions. The next section discusses the performance of the corporate sector in Ghana in terms of economic contribution to the economy and financial performance. 3.2.1 Economic Criteria The contribution of the corporate sector to the economy can be assessed in terms of the revenues they generate for government through taxes and the employment they create. Attainment of employment and tax targets are useful gauges of performance although such information is not usually readily available. In assessing the contribution of the corporate sector to the economy in terms of their contribution to the social security an national insurance trust (SSNIT) scheme, information on the 100 largest corporate contributors to the SSNIT scheme was obtained and analysed (See Appendix 2). Chart 2 Total Contribution to SSNIT by 100 top Regular paying Establishments and Implied Total Salaries 1600 1400 1200 1000 Billions of cedis 800 600 400 200 0 2001 2002 Years Total Contribution to SSNIT Total Salaries Source: Social Security & National Insurance Trust The data suggests that the 100 top regular corporate contributors to the SSNIT paid ¢221.34 billion cedis in 2001 and ¢276.68 billion cedis in 2002. These represent 17.5 per cent of their gross salaries implying that total salaries paid by this group in 2001 and 2002 amounted to ¢1,264.81 billion ¢1,581.023 billion respectively. The increase in salaries paid over the period was 25 per cent. Data was also obtained from the Revenue Agencies Governing Board (RAGB) on tax revenue collection of Government by tax type. Of the total tax collection of ¢814.69 billion for first quarter of 2003, company taxes accounted for ¢382.45 billion (46.9%). Chart 3 Revenue collection byTax Type (First Quarter 2003) Other Taxes 4% Airport Tax 1% NRL 2% Min Royalties 6% PAYE 35% Companies 47% Self Employed 5% Source: Internal Revenue Service The data from the RAGB also show that company taxes amounted to ¢1,161.5 billion in 2002 compared to ¢966.6 billion in 2001 and ¢696.7 billion in 2000. Chart 4 Company Taxes As Proportion of Income & Property Taxes (2000-2002) 2500 2000 1500 1000 500 0 1997 1998 1999 Company Tax Source: Internal Revenue Service 2000 Incone & Property Taxes 2001 2002 On employment contribution of the corporate sector, data from the RAGB suggests that majority of tax payers are on Pay As You Earn (PAYE) basis numbering about 1,159,242 at the end of March 2003. Self employed persons numbered 108,552, while companies were 44,938. Chart 5 Number of Taxpayers 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 PAYE Self Employed Mar-03 Companies Dec-03 Source: Internal Revenue Service 3.2.2 Financial Performance In assessing the financial performance of the corporate sector in this document, two approaches were used. The first was to assess the performance of the shares of the companies listed on the stock exchange in terms of returns on investments; e.g.- earnings growth, capital gain or losses, dividend yield, nominal returns etc. The second approach was to analyse financial statements of individual companies to assess their leverage ratio, liquidity ratios and profitability ratios. Suffice it to say that despite the convenience of using ratios as a way of summarising financial data to determine performance, it does not necessarily answer most implicit questions, even though it helps in asking the right ones. In terms of the performance of corporate sector shares on the Ghana Stock Exchange, the companies that recorded the highest earnings growth between 2001 and 2002 were ABL, AGC, FML, GBL, GGL, HFC1. Chart 6 Earnings of GSE Listed Companies (2001-2002) 700000 600000 500000 400000 300000 200000 100000 0 -100000 AGC+ ALW BAT* CFAO CMLT EIC FML GBL** GCB HFC Companies 2001 Earnings (¢’m ) 2002 Earnings (¢’m) Source: Ghana Stock Exchange Chart 7 Earnings of GSE Listed Companies 160,000.00 140,000.00 120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 0.00 -20,000.00 MLC MOGL PAF SCB SPPC SSB UNIL SWL Companies 2001 Earnings (¢’m ) 2002 Earnings (¢’m) Source: Ghana Stock Exchange The companies that experienced the biggest downturn in earnings growth were CFAO, CMLT and SPPC. 1 See Appendix 1 for for the name of listed companies In terms of capital gains, the companies that registered the highest gains during the period were GCB, NIB, UNILEVER, PZ and FML. Chart 8 Capital Gain/ Loss (%) 140 120 100 80 60 40 20 0 -20 -40 -60 ABL AGC+ ALW BAT* CFAO CMLT EIC FML GBL** GCB GGL Company Capital Gain/ Loss (%) Source: Ghana Stock Exchange Chart 9 Capital Gain/ Loss (%) 120 100 80 60 40 20 0 -20 HFC MGL MLC MOGL PAF PBC PZ SCB SPPC SSB UNIL SWL TBL*** CPC Companies Capital Gain/ Loss (%) Source: Ghana Stock Exchange ** *** Overall the performance of companies on the GSE improved between 2001/2002. BAT, GCB, SCB, SSB and UNILEVER, recorded higher dividend yields for their shares during the period. Earnings per share was also high for AGC, BAT, EIC, GCB, MOGL and SCB (See table 1 in Appendix). In nominal terms, the exchange as a whole performed creditably well. 3.2.3 Financial Analysis A corporate body may be considered as a team effort in which all the players2 have a stake in the company’s success and therefore need to monitor its progress. The stakeholders rely mainly on the company’s financial statements for this role. To summarise the rather huge amount of data that actual financial statements contain into a manageable form requires the calculation of a small number of key financial ratios, three of which are considered in this section of the paper. a. Leverage Ratios The most commonly used measure of the degree to which a company is exposed to debt is the debt/equity ratio. This ratio is often used by lenders in setting a firm’s borrowing limits. Financial stocks, by the nature of their operations rely greatly on borrowed funds. Hence debt/equity ratio for the sector grew progressively from 2.11 in 1997 to 3.44 in 2001. An examination of the manufacturing sector’s ratio however revealed the contrary. It recorded on the average a ratio of less than 1 except in 1999 when an average of 1.02 was registered. The average ratio declined from 0.61 in 1997 to 0.39 in 2001. The declining debt/equity ratio showed a gradual shift in the policy of manufacturing companies to rely more on equity capital rather than the more expensive use of borrowed capital, a fact underpinned by existing high interest rates. The trend in the distribution sector follows that of the manufacturing sector. The average ratio of the sector declined from 0.99 recorded in1998 to 0.21 in 2001. The mining sector, represented by a single company AGC depicted a much different picture. AGC’s debt/equity ratio averaged above 1, showing a relatively higher dependence on borrowed funds. Overall, regarding the use of debt, the financial sector maintained a high debt/equity ratio, due to the nature of their business. The mining sector due to its capital intensity has also had to borrow to supplement equity capital. The significance of this is high interest payments, which undermine profits. Generally the analysis of the debt/equity ratio of listed companies showed that they have been able to reduce their leverage to manageable levels. 2 The shareholders, lenders, director, managers, and employees. b. Liquidity Ratios This is the broad indication of the safety margin available to companies in terms of their ability to meet maturing obligations. A company can be forced into liquidation if it is not able to meet its short-term debts as they fall due. One of these measures is comparing current assets to current liabilities. (Current Ratio) The situation presumed ideal is for current assets to exceed current liabilities. Fortunately, the financial and manufacturing companies registered ratios above 1, meaning there were more current assets than current liabilities and therefore had most of their short-term debts covered. The ratio in the distribution sector continuously stayed below 1 from 1998 to 2001. This does not signify any danger for the sector because of its reliance on suppliers’ credit for its operations. The mining sector’s ratio was also below 1, a situation hugely influenced by a preponderance of short term bank financing. c. Profitability Ratios This is a key test of how companies use their resources to generate revenue. The measures, namely: net profit margin; asset turnover; and financial coverage can all be rolled into one as the Return on Equity (ROE). The financial stocks out-performed all other sectors in this regard. The sector consistently averaged above 35 from the year 1997 to 2001.The financial sector’s high profits as a result of high interest income was due largely to high interest rates. The manufacturing sector registered a lower Return on Equity, ranging between 17.91 and 21.5 for 2000 and 2001 respectively. Negative ROE of –9.7 and –0.6 were recorded in 1998 and 1999 respectively. The year 1999 was particularly difficult for businesses in Ghana as the Asian crises and a huge slide in the domestic currency affected companies. The distribution sector’s performance on this scale was mixed. The sector was not spared the effect of the macroeconomic shock in 1999 when –124 ROE was recorded. It, however, rebounded back in 2000 and 2001. 4. PROBLEMS CONFRONTING THE CORPORATE SECTOR The operations of the corporate sector has at different times during the review period been constrained by all or some of the following factors; unstable macroeconomic environment, high cost of capital, poor services of utility companies and unfavourable international environment. A recent survey conducted by Bruks Associates suggested that the business environment in Ghana is affected mainly by micro and macroeconomic factors as well as the availability and quality of infrastructure, governance, labour laws and the environment. 4.1 Investment Financing The single largest constraint to corporate sector development is the problem of access to long–term credit or rather the lack of it. This is attributed to unsatisfactory business plans, which are now considered as a prerequisite by lending institutions to companies in order to determine solvency of borrowers. Unfortunately, local banks are risk averse when it comes to term lending because of their past experiences of being saddled with over half their assets classified as non-performing. Therefore, banks are not sufficiently motivated to encourage the funding of companies. The absence of a local credit rating agency for corporate borrowers also remains a problem. On the borrowers side, a recent survey conducted by Bruks Associates is very revealing. The most common source of investment financing used by businesses sampled was internal funds or retained earnings. Sixty three percent (63%) of the 391 sampled businesses3 reported using internal funds/retained earnings to support growth and any other financing needs. The second leading source of financing used was loans from local commercial banks (23%) followed by equity sale or sale of stocks (15%). Foreign banks/investors and companies were not very active in the credit business in the country. For instance, only 9 per cent of the companies interviewed indicated that they sourced investment funds from foreign banks, investors or companies, see figure below. Fifteen percent of the respondents indicated that they sourced investment funding from informal sources such as traditional moneylenders and family or friends. Ten percent of businesses claimed that they used suppliers’ credit. 3 Of the total sample of 391 business 82% constituted limited liability companies, 9% were sole proprietorships and 3% partnerships. Only 20% were companies listed on the Ghana Stock Exchange. Chart 10 Sources of Investment Financing, N = 391 10% Supplier credit 6% Money lenders Family friends 9% Foreign banks \inves tors \companies 9% 23% Local commercial banks 15% Equity s ale of s tock Internal funds \retained earnings 63% 0% 10% 20% 30% 40% 50% 60% 70% Source: Bruks Associates 4.1.1 Loan Facilities According to their survey, thirty-eight (38%) out of 387 firms sampled said they have taken loans from the bank during the last 12 months. Most of the loans (75%) acquired by business were short-term in nature, i.e., repayment due in one year or less. On the other hand, only a quarter of the loans (25%) obtained by the firms were long-term loans, these were loan facilities that had tenures of more than one year. The shortage of long-term credit has been a hindrance to further growth in business over a long time in the country, since long-term funds required for capital investment is not readily available. See the pie chart below. Chart 11 Tenure of Loans to Business Long term (more than 1 year) 25% Short term(up to1 year) 75% Source: Bruks Associates Eighty four percent (84%) out of 147 firms that responded to questions on collateral claimed they provided collateral for their loans. Of those who indicated they were required to provide collateral, 114 (78%) indicated the value of collateral to the loans contracted, the rest were not able or willing to declare the collateral to loan ratio that was applied. Chart 12 Collateral to Loan Ratio, N = 114 Over 100% 15% 91-100% 19% Collateral/Loan 81-90% 4% 71-80% 1% 61-70% 1% 51-60% 1% 41-50% 18% 31-40% 21% 21-30% 11% 11-20% 8% Up to 10% 2% 0% 5% 10% 15% 20% 25% Re s pons e Source: Bruks Associates Considering the value of collateral to loans, it was also found that about 32 per cent of the loans that were sourced by businesses had collateral to loan ratios of 40 per cent or less with the other 68 per cent of loans attracting collateral to loan ratios of more than 40 per cent. 4.1.2 Interest Rates The survey by Bruks Associates also showed that the cost of funds in Ghana is still relatively expensives, 42 per cent of companies that contracted loans over the past 12 months paid interest rates ranging between 41-100 per cent. Another 31 per cent had their loans rates varying from 31-40 per cent. Yet there are some businesses that have had to borrow at usurious rates of over 60 per cent, see figure below. Whilst over 40 per cent of the borrowers paid interest in excess of 40 per cent, about 13 per cent of the companies are strangely paying interest below the level of inflation. These may probably be concessional loans for particular sectors of the economy. The businesses that borrowed at interest rates beyond 60 per cent may have borrowed from the informal sector especially from moneylenders; these are known to charge exorbitant rates. Chart 13 Interest Rates Interest Rates on Loans accessed, N = 144 91-100% 1% 61-70% 1% 9% 51-60% 41-50% 31% 31-40% 31% 21-30% 6% 9% 11-20% 13% Up to 10% 0% 5% 10% 15% 20% 25% 30% 35% Responses (%) Source: Bruks Associates 4.2 Infrastructure The country’s transport system has been rehabilitated and expanded at great cost. Roads, being the principal means of transportation are considered to be indispensable for the economic advancement of the country. Feeder roads account for about 60 per cent of the total road network but still considered to be in an unsatisfactory condition. As part of government’s policy of encouraging the private sector, national budgets have often made provision for the re-tarring, spot improvement, surfacing, rehabilitation and upgrading of roads nationwide. In order to encourage the relocation of the corporate entities to agricultural areas, government emphasis is on opening up such areas. There is also the apparent lack of adequate and efficient storage facilities at the ports for exports. The lack of refrigerated trucks and inland port facilities are problems for companies, which produce perishable goods especially where the alternative is to airfreight. Agricultural post harvest losses estimated at 30 per cent could be reduced if storage facilities are provided nationwide to enhance corporate growth. The installed hydro/thermal capacity of 1200 MW is not reliable for corporate development and growth. The resort to expensive alternative means of energy (importing from neighboring countries) will reflect in high cost and therefore render it more difficult for Ghanaian firms to compete internationally. Ghana’s telecommunication system is presently underdeveloped although some improvements have indeed taken place. Safe water delivery is unavailable to much of the country especially in the rural areas. Sewerage systems are in dire need of rehabilitation. A further constraint within the corporate sector is the cumbersome procedure and uncertainty involved in the acquisition of land in the urban areas especially in Accra. To sum up, the unsatisfactory and inadequate level of infrastructural support for corporate development and growth may be attributed to the lack of a comprehensive infrastructure strategy defining priority areas of development. Moreover, the dominance of the public sector and inadequate representation of the corporate sector in key (telecommunications, transport and water) subsectors coupled with problems caused by bureaucratic indifference only goes to exacerbate the sector’s development and growth. 4.3 Legal and Regulatory Corporate sector development and growth is also constrained by a legal and regulatory environment characterised by a weak and cumbersome legal process. Dissemination of business law is poor. There is a need for expeditious passage of laws relating to bankruptcy and insolvency. The need for greater confidence in the banks must commence with the revision of obsolete and ineffective laws. Other areas that the Bruks survey covered included the quality of regulations, administrative requirements and bureaucracy in setting up a business. The survey noted that respondents were generally dissatisfied with regulatory and administrative procedures in setting up a business. 4.4 Professional/Technical and Management Skills The curriculum of education (in particular tertiary) will need to be structured to meet the needs of the corporate sector. In the past, tertiary education distorted the flow of skilled workers to the labour market. This situation inevitably demands manpower retraining. 4.5 Institutional Support Institutions which are relevant to corporate sector growth may be classified into three categories. Public sector institutions such as: Ghana Investment Promotion Council (GIPC), Ghana Export Promotion Council (GEPC), CEPS, and NBSSI. Private sector institutions such as: Association of Ghana Industries (AGI), Ghana National Chamber of Commerce (GNCC), Federation of Ghanaian Exporters, Private Enterprise Foundation (PEF), Enterprise Networking (Ghana) and other categories of smaller trade associations linked to furniture, timber, horticulture, kola nuts, batik. tie and dye etc. G.I.P.C. ought to concentrate more on promotion and not regulatory work. Direct foreign investment in the country is still not very significant. More can be done if the G.I.P.C. is really made autonomous. The unsatisfactory pace of the divestiture process is also a constraint to corporate development. It is conceded by government that the divestiture of public companies is best done through GSE. This is like killing two birds with one stone. 4.6 Government attitude towards the Corporate Sector Until two years ago, when a Golden Age of Business was declared by government and various presidential special initiatives (cassava, salt, palm oil) geared towards private sector development were implemented, the perception of Government for a period of about two decades was that the corporate sector was exploitative, subversive and above all politically incorrect. This situation was aggravated by utterances from very senior government officials that sent a bad/wrong signal to confuse and intimidate the sector. Recent developments suggest that governments attitude towards business has improved significantly under the current administration. Indeed the survey by Bruks revealed that most businesses felt that the central government has been more helpful than local governments in promoting business. 4.7 Unfavourable International Environment The indigenous industrialist faces stiff competition from subsidised imports. The high level of subsidies and other government supports industries in other countries receive coupled with the high domestic production cost renders most of the local industries uncompetitive. 4.8 Research and Development Research and development (R & D) is weak in the public and private sectors. In the latter, it is virtually absent. Government financing of R & D is estimated at about 1 per cent of GDP. This is low when compared to other developing countries. The modest level of research work in the country is characterised by weaknesses in administration and management, poor linkages between research institutions and industry, poor information dissemination and transfer of technology to companies. The absence of design centres to display and market research findings and the lack of packaged research results for commercialization purposes also limits the usefulness of the research undertaken. It is worth noting however that of all the bottlenecks that impede the operation and growth of business in Ghana i.e. availability and state of infrastructure, governance, and regulatory and administrative issues, a severity index which was used by the Bruks survey saw the most severe bottleneck as interest rates. This attracted a severity index score of more than 70 per cent. Again, 60 per cent of the respondents indicated that, interest rates were either a major problem or very severe problem that hinders the operations and growth of their businesses. High interest rates can therefore be said to be the one single most chronic macroeconomic difficulty that militates against the operations and growth of business in Ghana. And, to the extent that it is underlined by excessive fiscal deficits and public debt the finding underscores the urgent need for fiscal consolidation and sustainable macro stability and low inflation. 5.0 CONCLUSION AND RECOMMENDATIONS The impact of the corporate sector on the Ghanaian economy exhibits a symbiotic relationship as evident in the positive correlation between the Ghana Stock Exchange (GSE) All Share Index and growth in real Gross Domestic Product (GDP). Since the Economic Recovery Programme over two decades ago, several programmes of structural adjustment and stabilisation have been implemented – the results of which have been mixed in terms of the attainment of macroeconomic targets. The declaration of a GOLDEN AGE OF BUSINESS by government has brought to the fore the role of the corporate sector as a catalyst in accelerating economic growth. For the business sector to play effectively its role as the engine of economic growth, not only must Government create and maintain a business friendly policy environment but the quality of corporate governance will have to improve substantially. Improving corporate governance in Ghana is therefore an important mechanism of enhancing the country’s international competitiveness in attracting foreign investment. Ghana’s corporate sector though overwhelmingly of small-scale, still offers a lot of hope to the country particularly if the problems of capital formation, governance ability and taxation are addressed. The high interest rates that prevail currently in the economy has been identified as the single most important macroeconomic issue militating against corporate sector growth. The persistence and the severity of the problem is underlined by the excessive fiscal deficits and public debt levels posted by the Government over the years. The situation therefore underscores the urgent need for fiscal consolidation and sustainable macroeconomic stability and low inflation. Corporate performance enhancement will demand new legislation to protect shareholder and investors. More attention should be focused on the ability of companies to practise transparent ethics. The experiences of the developed countries are a point in case. The United States of America (USA) AGOA, EEC Lome Convention and ECOWAS have given the Ghanaian corporate sector a ready market for most products. What is needed now is to effectively solve several of the problems impeding the growth of the sector. Finally, it is clear beyond reasonable doubt that the scarcity of medium to long-term capital remains a hindrance to the sector’s development and growth. Companies can be listed on the GSE under 3 categories. Despite some publicity given to the merits on being on the bourse, many companies can meet the requirements for listing but are skeptical. Meanwhile the exchange offers the hope for efficient companies to obtain long-term funds. The monetary authorities on their part can at best complement the role of other sectors of the economy by minimizing all financial risk factors in the economy to ensure that there is an enabling environment for business to thrive. Again, the Bank will continue to formulate and implement sound financial and monetary policy that would ensure favourable macroeconomic variables necessary for economic growth. In the light of the positive interest rate policy being pursued by the monetary authorities, there is the need for concerted effort to reduce the level of inflation. With this achieved, banks could mobilise savings at lower interest rates and lend at rates which are lower than those currently prevailing. This would imply a reduction in the cost of credit, which would give some relief to private sector enterprises, which borrow from the banks. It is worthy of note that foreign direct investment (FDI) is very essential to Ghana’s growth and development efforts. FDI does not only bring financial resources, it also brings with it changes in technology and prospects for human capital development. FDI can also be instrumental in opening up markets for host economies. The government must therefore do what ever it takes to get FDI flowing into the industrial sector. There is also the need to sustain the restraint on public sector borrowing (Government’s borrowing from the banking system) so that loanable funds would be available for lending to the private sector. The rate of development of the country’s infrastructural base also has to be accelerated. Finally, it is recommended that the government take a closer look at the nation’s trade liberalisation by using the tariff system to prevent unfair competition, especially in clear cases of dumping. References: Asiedu-Mante E, (2002): The Golden Age of Business: The Role of the Banking Sector – ISSER/Merchant Bank Annual Lecture and Roundtable Discussion, 2002. Brealey R. A. & Myers S. C: Principles of Corporate Finance, Sixth Edition Irwin McGraw-Hill BRUKS ASSOCIATES (forthcoming 2003) “Cost of doing business in Ghana” Ghana Centre for Democratic development briefing paper. Vol. 3 No. 4. Prempeh K (2002): Reforming Corporate Governance in Ghana Part 1: Private Sector Manual on Corporate Governance in Ghana. USAID (1989), Manual for Action for the Private Sector APPENDIX 1 LISTED COMPANIES ON THE GHANA STOCK EXCHANGE ABL - Accra Brewery Company Ltd AGC - Ashanti Goldfields Co. Ltd. ALW - Aluworks CFAO - CFAO Ghana Ltd. EIC - Enterprise Insurance Co. Ltd. FML - Fan Milk Ltd. GBL - Ghana Breweries Ltd. GCB - Ghana Commercial Bank Ltd. GGL - Guinness Ghana Ltd HFC - Home Finance Company ltd. MGL - Metalloplastica Ghana Ltd. MLC - Mechanical Lloyd MOGL - Mobil Oil Ghana Ltd. PAF - Pioneer Aluminium Factory Ltd. BAT - British America Tobacco Co. PZ - PZ Ghana Ltd. SCB - Standard Chartered Bank Ltd. SPPC - Super Paper Product Ghana Ltd. SSB - SSB Bank Ltd. SWL - Sam Woode Ltd. UNIL - Unilever Ghana Ltd. PBC - Produce Buying Company Ltd. CMLT - Camelot Ghana Ltd. CMC - Cocoa Marketing Company TBL - Trust Bank Ltd. (The Gambia) APPENDIX 2 Financial Analysis These set of ratios are employed to judge how efficiently companies are using their assets. (1.) Leverage Ratio: These ratios show how heavily the company is in debt. This may be determined by the Debt-Equity ratio and the Interest Cover, among others. (a) Debt-Equity ratio = Long-Term debt + value of leases Equity (b) Interest Cover4 = Earning Before Int. & Tax + depreciation Interest Liquidity ratios: Provides an idea of the total asset coverage of a firm’s debt, thus showing inability to repay short-term debt (2) (a) Current ratio = Current Assets (CA) Current Liabilities (CL) (b)Net Working Capital -Total Assets ratio = CA-CL Total Assets This roughly measures a company's potential reservoir of cash. (c) Cash ratio = Cash + Short-term Securities Current Liabilities The essence of this ratio is that Cash and short-term Securities are a company’s most liquid asset. However, if a firm can borrow on short notice the use of this ratio is redundant. Profitability Ratios: Ratios under this section are used more as a guide in asking questions rather than to help answer them. (i) Net profit Margin: = Earnings After Tax Sales 4 This is also known a Times Interest Earned. This margin shows the percentage of sales that finds its way into profits. (ii) Return on Equity: Often used to measure a firm's performance Return on Equity ratio = Earnings Before Int. & Tax Average Equity Efficiency ratios: Financial analysts employ another set of ratios to judge how efficiently the firm is using its assets. One of such ratios is; i) Sales to Total Assets or Working Capital = Sale Average Total assets It indicates how hard the firm's assets (WC) are being put to use. A high ratio is indicative of a high load factor (Capacity Utilization). (3) Market Value Ratio: - It is often helpful to combine accounting and stock market data. There is no law that prohibits this practices and at the same time allow one additional information on a company’s performance. Price – Earning ratio (P/E) This ratio is a common measure of the esteem in which a company is held by investors. Price-Earnings ratio = Stock Price Earning per share A high P/E ratio indicates : Expectation of high dividend, Stock has low risk, and Company is expected to achieve growth while paying out a high proportion of its income. APPENDIX 3 Table 1 Year 2001 2002 Earnings Capitaliza- Share Share Capital Dividend Dividend Nominal No of End Earnings Pay Out Per Share Ratio P/E Shares Earnings Earnings Growth tion Price Price (¢’billion) 01/02 Gain/ Per Shar Yield Return (cedis) (%) (%) Outstndg. (%) (¢’m ) (¢’m) 30/12/2002 Loss (cedis) ABL Mar 1209 2910.25 140.72 68.18 320 410 AGC+ ALW BAT* CFAO CMLT EIC FML GBL** GCB GGL HFC MGL MLC MOGL PAF PBC PZ SCB SPPC SSB UNIL SWL TBL*** Dec 454902.921 655685.52 44.14 3434.91 18800 27000 43.62 Dec 38567 29580.71 -22.3 154.21 4,300 3700 -13.95 Dec 23702 33781.07 42.52 69.2 627 1001 59.65 Dec 2091 -864.08 -141.32 3.75 60 67 11.67 28.13 10 3.13 31.25 166.3 17.5 0 0 43.62 127.22 5153.95 500 11.63 -2.33 41.68 709.71 235 37.48 97.13 69.13 488.66 0 0 11.67 56 -15.43 57.14 - 23.43 5.24 70.45 48.09 - 5.21 2.05 -4.34 Dec 611.22 38.72 -93.67 3.01 430 460 6.98 23.5 5.47 12.44 6.54 5.92 396.93 77.7 Dec 4,093.88 6365.1 55.48 23 3,050 4600 50.82 120 3.93 54.75 5 1273.02 9.43 3.61 Dec 6268 14600.01 132.37 35.31 950 1785 87.89 100 10.53 98.42 19.78 738.12 Dec -10633 -19185.24 80.43 14.46 1,000 500 -50 0 0 -50 28.92 -663.39 Dec 169346 168572.25 -0.46 580.14 1570 3516 123.95 400 25.48 149.43 165 1021.65 39.15 3.44 June 18358.79 35189.96 91.68 123.14 901 1050 16.54 175 19.42 35.96 117.48 299.54 58.42 3.51 Dec 7,584.41 14598.24 92.48 76.17 952 955 0.32 45 4.73 5.04 79.75 183.05 24.58 5.22 13.55 - 2.42 -0.75 Mar 531 347.4 -34.58 4.57 241 254 5.39 0 0 5.39 18 19.3 Dec 3,614.65 2381.95 -34.1 10.82 145 270 86.21 22.5 15.52 101.72 40.08 59.43 Dec 13694 14419.98 5.3 79.91 18,500 19730 6.65 2536 13.71 20.36 4.05 3560.49 Dec 415 128.04 -69.15 12.38 800 750 -6.25 0 0 -6.25 16.5 7.76 - 96.65 Mar 5581 11107.2 99.02 187.2 450 390 -13.33 0 0 -13.33 480 23.14 - 16.85 May - 13.16 37.86 71.23 4.54 5.54 11966.46 12356.12 3.26 56.14 1010 2005 98.51 57.57 5.7 104.21 28 441.29 13.05 4.54 Dec 108107 143864.34 33.08 505.01 20500 28,700 40 4200 20.49 60.49 17.6 8174.11 51.38 3.51 Dec 773.48 -181.96 -123.52 7.52 341 387 10.09 20 5.87 19.35 19.44 -9.36 -213.67 -41.35 Dec 91452 48921.68 -46.51 282.58 2200 3,966 80.27 600 27.27 107.55 71.25 686.62 87.38 5.78 Dec 55725 61788.13 10.88 300.31 2300 4,805 108.91 512 22.26 131.17 62.5 988.61 108.06 - 6.22 250 285 14 0 0 14 21.83 4.95 37766.7 - 145.5 4100 4850 18.29 627.8 15.31 33.6 30 1258.89 51.79 - 4.86 57.57 49.87 3.85 Table 2: PERFORMANCE OF THE GHANA STOCK EXCHANGE 1998 Volume of shares traded (‘mn) Value of shares traded ¢’b GSE – All Share Index Market Capitalisation ¢’b US$’b Change in GSE Index (%) Change in Market. Capitalisation (%) “ “ “ $’m Turnover Ratio (%) Liquidity Ratio (%) 91-day T-bill Discount Rate (%) Inflation rate (%) Exchange rate depreciation (%) 1999 2000 2001 91.4 134.01 868.35 3245.6 1.4 49.57 69.61 736.16 3206.39 1.21 30.72 50.62 857.93 3655.04 0.53 55.3 92.23 955.95 3904.03 69.7 27.1 12.6 4.1 0.8 26.7 15.7 4.8 -15.2 -1.2 -13.6 2.2 0.3 31.5 13.8 48.0 16.5 14.0 -56.2 1.4 0.2 38.0 40.5 98.2 11.4 6.8 1.5 2.4 0.2 27.7 21.3 5.2 28 Table 4: : 100 TOP REGULAR PAYING ESTABLISHMENTS COMPANY NUMBER 1 11011 AGC 2,520 ANNUAL 2001 ¢ M 30,240 2 06203 BANK OF GHANA 930 11,163 13,953 3 08751 SSNIT 919 11,024 13,780 4 06190 GCB 889 10,670 13,337 5 02072 GHANA TELECOM 718 8,618 10,772 6 3087 VALCO 700 8,401 10,501 7 08514 VRA 557 6,687 8,359 8 05000 ELECTRICITY CORPORATION 495 5,936 7,420 9 0F579 SSB BANK 451 5,412 6,766 10 00086 COCOA SERVICES DIV 402 4,820 6,025 11 06377 UNILEVER GHANA LTD 391 4,690 5,862 12 06772 SCB 388 4,659 5,824 13 07014 GHANA AIRWAYS 327 3,922 4,902 14 08388 INTERNAL REVENUE SERVICES 266 3,187 3,984 15 08395 C.E.P.S. 257 3,085 3,856 16 063914 BARCLAYS BANK GH LTD 244 2,924 3,654 17 08445 GH. CIVIL AVIATION AUTHORITY 239 2,867 3,583 PRESTEA GOLD 236 2,833 3,542 18 503B0219 ESTABLISHMENT MONTHLY 2001 ¢ M ESTIMATE 2003 ¢ M 37,800 19 02074 GHANA POSTAL SERVICES CO. 223 2,670 3,338 20 06905 STATE INSURANCE CORPORATION 221 2,655 3,319 21 065462 ECOBANK (GH) LTD 208 2,498 3,122 22 00088 QUALITY CONTROL DIVISION 201 2,414 3,018 23 08327 GHANA INTERNATIONAL SCH. 194 2,332 2,915 24 971027 G.P.H.A. 193 2,316 2,895 25 06364 SHELL (GH) SERVICES 183 2,194 2,743 26 02514 PIONEER GOOD CANNERY LTD 164 1,971 2,464 27 03901 TEMA OIL REFINERY 154 1,846 2,307 28 06789 MARCHANT BANK GH. LTD 148 1,775 2,218 29 408B003 ASHANTI GOLDFIELDS 147 1,769 2,211 30 201J381 INTER CON SECURITY SYST. GH 144 1,732 2,165 31 081148 WORLD VISION INT. 140 1,680 2,100 32 48387 COCOA RESEARCH INST. 134 1,610 2,012 33 011011 BONTE GOLD MINES LTD 130 1,562 1,952 34 031046 ALUWORKS CO. LTD 126 1,518 1,897 35 141156 MBC. LTD 126 1,516 1,895 36 06211 NATIONAL INVESTMENT BANK 121 1,458 1,822 37 00078 PBC LTD 121 1,448 1,810 38 302C026 THE COCA-COLA BOTTLING CO 117 1,400 1,750 39 0H033 USAID MISSION 115 1,384 1,730 40 0H038 AMERCIAN EMBASSY 112 1,343 1,679 41 00052 GHANA COCOA MARKETING BD. 112 1,341 1,676 42 201B002 BAYSWATER CONTRACT MINING 102 1,226 1,532 43 06106 NESTLE GHANA LIMITED 97 1,164 1,454 44 201j641 LA-PALM ROYAL BEACH HOTEL 96 1,151 1,439 45 06106 NESTLE GHANA LIMITED 95 1,135 1,419 46 38164 UCC 95 1,135 1,419 29 47 02176 AKOSOMBO TEXTLES LTD 94 1,126 1,408 48 021153 LEVER BROTHERS GHA LTD 93 1,118 1,397 49 05002 GHANA WATER AND SEWERAGE CORP 92 1,105 1,381 50 202H003 AFGO 92 1,102 1,377 51 02365 COCOA PROCESSING CO 89 1,072 1,340 52 02126 G.T.P. 87 1,042 1,303 53 06596 DEWEGER GRUTHER BROWN 85 1,018 1,272 54 063135 GOLDEN TULIP HOTEL 84 1,010 1,262 55 06569 COCOA MARKETING COMPANY 84 1,008 1,260 56 08009 GHANA BAUXITE CO LTD 82 985 1,232 57 08417 STC VANEF 78 941 1,176 58 02114 ACCRA BREWERY LIMITED 77 922 1,153 59 08501 REGIONAL MARITIME CADEMY 75 898 1,122 60 02068 GRAPHIC COMMUNICATIONS 74 890 1,112 61 302J003 MILICOM (GH) LTD 73 880 1,100 62 065485 CAL MERCHANT BANK 72 868 1,085 63 06507 MOBIL OIL (GH) LTD 72 868 1,085 64 08505 CATHOLIC RELIEF SERVICES 72 866 1,083 65 82042 BRITISH AMERICAN TOBACCO 71 850 1,063 66 302G112 THE TRUST BANK 70 845 1,057 67 205C011 GHANA AGRO-FOOD CO. LTD 68 821 1,027 68 03331 CROCODILE MATCHET 68 818 1,023 69 73000 JUAPONG TEXTILES LTD 68 816 1,020 70 202J263 PRUICEWATER HOUSE & COOPERS 68 816 1,020 71 206E018 STEEL AFRICAN MAINT. & CONST. 65 781 976 72 302j556 WESTERN TELESYSTEMS (GH) LTD 65 778 972 73 201J003 HOTEL INVEST. GH LTD 64 764 955 74 12085 A G TIMBERS 63 754 943 75 12093 NAJA DAVID VENNER & PLYWOOD 63 751 938 76 201J809 ACP-BPS (GHANA) LTD 61 729 911 77 302J433 WESTEC SECURITY SYSTEM GH. 59 704 880 78 202G030 CASHPRO 58 695 868 79 06004 GHANA OIL CO. LTD 58 693 866 80 08735 PLANNED PARENTHOOD 57 687 859 81 41007 G C D LIMITED 57 686 857 82 02025 FAN MILK LTD 57 685 857 83 06494 ELF OIL GHANA LTD 57 682 853 84 201J302 VAT PROJECT 57 681 851 85 401C181 OMEGA WOOD PROCESSING 54 654 86 041009 TAYSEC CONSTRUCTION LTD 54 646 807 817 87 08753 LINCOLN COMMUNITY SCHOOL 53 636 795 88 0F155 TRACTOR AND EQUIPMENT GH LTD 50 601 752 89 0301J311 SCANCOM LTD 50 599 748 90 206G015 GATEWAY SERVICES LTD 49 583 729 91 931009 WAHOME STEEL LIMITED 48 580 725 92 03225 GHACEM LTD 48 574 717 93 201C008 CARSON PRODUCTS W. AFRICAN LTD 47 566 707 94 408C008 SUHUMA TIMBER COMPANY LTD 47 559 698 95 302J150 WEST COAST ALLED SERVICE 46 556 695 96 081279 ADVENTIST DEV. RELIEF 46 549 686 30 97 07129 P.S.C. TEMA SHIPYARD 44 533 666 98 03338 ASSOCIATED CONSTANTS 44 533 666 99 08599 ACCRA METROPOLITAN ASSEMBLY 43 520 650 100 0H041 TECHNOSERVE 43 519 649 31