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Short-term contracts are the best — BoG executive

09/09/2014
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The Assistant Director at the Financial Stability Department of the Bank of Ghana, Dr. Settor Amediku, has advised SMEs to prioritise short-term contracts over long-term ones in order to guard against foreign exchange volatility.

“When you enter into a long-term contract like two or three years in an environment of currency volatility like this, it exposes your business to a lot of shocks; but if it is a short-term contract with clauses inserted, then it will give you the opportunity to overcome some of these challenges and help the business stay afloat.

“You should enter short-term contracts and look at your current import strategy, and produce things that you can manufacture locally so that it can reduce your burden and exchange losses,” he said.

Dr. Amediku, who said this when he addressed businessmen on the topic “Risk Management: Focus on Exchange Rate Risk” at this month’s Union Savings and Loans SME Clinic, further advised SMEs to critically look at the option of hedging in a volatile environment since it can have both positive and negative consequences for their operations.

“It (hedging) can lead to the collapse of your business, so you need to look at the pros and cons before entering hedging. If you have a business, you should be able to project into the future a little and see where your business will be and what amount of foreign exchange you will need.”

He called on the SMEs to have a foreign exchange policy document that will help to guide them in their decision-making process.

“Every SME needs to have at least a one-page foreign exchange document to guard against risk and help them identify, measure, monitor, and manage these risks on a regular basis. This will help the SMEs withstand the volatility in the foreign exchange market.”

Since beginning of the year, the cedi has depreciated against the US dollar by about 40%, pushing the country to ask for International Monetary Fund (IMF) help to stabilise the currency, boost confidence in government’s policies, and accelerate the process to restore economic stability.

The Business Division Head at Union Savings and Loans, Dominic Donkor, advised SMEs to take advantage of the opportunities to produce goods and services locally so as to mitigate foreign exchange losses.

“Once we are using local materials to produce here it means we are spending the local currency, and that means the volatility one would experience by converting cedis to purchase dollars for the purpose of trading is minimised.

“This way you can predict and plan your businesses better, and manage your costs — and you are more profitable in the long-term.”

The SME Clinic is a management capacity building programme aimed at offering business solutions toward advancing the growth of SME’s to help accelerate the country’s development.

Mr. Donkor said the company wants to help companies to increase the level of local production for some of the foods that are imported.

“The partnership involves Union Savings and Loans providing funding opportunities to the companies, and with their expertise and knowledge of the market they can then begin to increase local production — because that is the only way toward resolving the challenges the cedi faces in the long-term and making the economy stronger.”

Mr. Donkor added that Union Savings & Loans started the SME Clinic in June, even though the company’s branches across the country periodically undertake SME Clinic exercises for clients.

Source: BFT

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