Wrong Time to Be Protectionist

Protectionism

It’s official: Ghana is becoming protectionist.

In 2011, when I came to start my business, the business environment in Ghana was friendly.  There were three main types of businesses a foreigner could start:

  • A joint venture involving a foreigner and a Ghanaian where the Ghanaian owned 10 percent of the shares outstanding required $10,000 in stated capital
  • A wholly owned foreign company with 100 percent foreign ownership required $50,000 in stated capital invested in Ghana
  • A trading company involved in importing goods for resale in Ghana required $300,000 in stated capital or inventory

The stated capital requirement means that a foreigner or foreign company has to deposit a certain amount of funds at a bank in order to receive a letter stating that it has met the requirement.  This amount is converted into cedis at the (worst) bank rate which tends to be 3 – 7 percent worse than the prevailing market rate.

I chose the first option because I didn’t have the money for a trading company and felt that it would be helpful to have a local’s help in running my business.

Last week, my friend alerted me that the Ghana Investment and Promotion Centre (GIPC) has changed the rules.  The stated capital or new foreign equity is now as follows:

  • Joint venture – $200,000
  • A wholly owned foreign company – $500,000
  • Trading company – $1,000,000

Wow!  In October or November 2013, the folks at GIPC decide to change the rules to make it more difficult for foreigners to enter Ghana.  I’m not surprised that the World Bank has reduced Ghana’s ranking on the ease for starting a business from 111 in 2013 to 128 in 2014.  (A lower number means the country is easier to start a business.)  Ghana’s “Doing Business” ranking in the world has fallen from 62 in 2013 to 67 in 2014.

Similarly, Cote D’Ivoire has become a much easier place to start a business.  It has moved up from 179 in 2013 to 115 in 2014.  Cote D’Ivoire’s “Doing Business” ranking remains low but has improved from 173 in 2013 to 167 in 2014.  My friend pointed out that a foreign company could set up a similar operation in neighboring Cote D’Ivoire for $20,000 rather than tie up $200,000 or $500,000 in Ghana.

In the US, “small businesses provide 55% of all jobs and 66% of all net new jobs since the 1970s.”  I’m sure in Ghana small businesses are responsible for at least as high a percentage of job creation as in the US.  By making it harder for small business owners to enter Ghana, I can only imagine that it’s hurting the country’s goals of greater employment and economic growth.  Sure, preventing foreigners from entering the market may protect some local companies.  Foreigners, however, bring fresh capital and outside expertise to Ghana.  They can help locals understand the expectations of the global market and implement corporate systems that can compel all companies to compete at a higher level.  More importantly, they can employ unemployed and under-employed Ghanaians.

Of course, all investment decisions must be made against the prevailing macroeconomic environment.  Since the US Federal Reserve indicated that it would terminate its quantitative easing policy last August, all frontier and emerging markets have seen financial flows out of their countries and back to more developed markets, e.g. the US.  The Ghana cedi has lost nearly 30 percent of its value as it has weakened from 2.10 in August 2013 to 2.69 today.

Cedi has lost 38 percent of its value in last 12 months

Cedi has lost 38 percent of its value in last 12 months

By raising the capital requirements necessary to starting a business in Ghana, GIPC is discouraging investment at exactly the moment they should be encouraging foreign firms and foreigners to invest in Ghana.  The country desperately needs dollar and euro inflows to arrest the falling cedi.  By making it harder for small business owners to enter Ghana, the government isn’t doing the country any favors.

 

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