Question

Covid-19 has caused major disruptions to the global economy. The impact of Covid19 is globally, regionally, and locally pervasive and Ghana is no exception. The macrofiscal impact is extra-ordinary and it will take probably more than 3 years for Ghana to normalize the situation. The macro-fiscal impact is noted in the sharp contraction of GDP from the 6.8% projected in the 2020 budget to 1.5% in the worst situation given the partial lockdown of greater Accra and Greater Kumasi and elevated fiscal deficit to a level not seen in our modern history from GHS 18.9 to GHS 30.2 according to Ministry of Finance Statement to Ghana’s Parliament on the 30^th March, 2020. The nation’s central bank on 18^th March 2020 announced certain measures to help ease the pressure on the economy including a 150 basis rate cut from 16% to 14.5%. Bank of Ghana in addition put forward the following measures including reducing the Primary Reserve Requirement from 10% to 8% as well as reducing the Capital Conservation Buffer for banks from 3.0% to 1.5% thus effectively reduces the Capital Adequacy Requirement from 13 percent to 11.5 percent. Government also responded with fiscal stimulus arrangements including the setting of the Coronavirus Alleviation Program with a seed money of GHS 1 billion with GHS 600 earmarked for the private sector to be administered by National Board for Small-Scale Industries (NBSSI). It has been argued that the containment measures put in place has caused more harm than the virus itself. Given the above and your own understanding of recent development with respect to Covid-19 and the various interventions both fiscal and monetary, you are required to attempt the following questions:

1. Discuss how the Covid-19 containment measures interferes with the Going Concern of the Private Sector particularly SMEs                                                     
2. Discuss the implications of the various Monetary Policy measures on the two critical decisions of the financial manager namely investment and financing decisions of SMEs      

c. Critically analyse the effect of government’s fiscal measures on the going concern of SMEs including what the NBSSI should be looking out for in the disbursement of the funds                                                                                                            

Answer 1

a. At the onset of the COVID-19 outbreak, the global economy has experienced a sustained slowdown or downturn which is apprehended to linger or be extended even after the absolute meltdown of the global pandemic. In this context, based on the description of the economic conditions or situation prevailing in Ghana following the global engulfment of COVID-19, it was highly imperative for the country's federal government to undertake various remedial and recuperative measures to immediately mitigate the macroeconomic predicaments and restore macroeconomic normalcy and stability caused by the pandemic outbreak, which the government has actually done through various fiscal and monetary policy tools or instruments. As highlighted or emphasized by the case study presented in the question, various expansionary fiscal and monetary policies implemented by the government of Ghana to restore temporary and long-term economic growth and stability would significantly impact the operational performance or commercial or economic future of the domestic firms or business organizations as much of the operational stability and commercial success of the firms or companies essentially depend on the level of aggregate consumer demand for goods and services in the economy and sustainable financial investment to finance or liquidate various business and commercial projects and initiatives. Hence, suitable monetary and fiscal policies and measures can stimulate domestic consumer demand for goods and services and improve the operational efficiency and productivity of the firms or business organizations through higher aggregate investment level in the economy and increased mobility or utilization of productive resources and factors or inputs of production.

b. As mentioned in the case study, various expansionary monetary measures by the Central Bank of Ghana are intended to ensure temporary and long-term macroeconomic stability in the country which also includes economic stimulation and commercial growth of local or domestic businesses and firms/companies. A reduction in the interest rate in the domestic money or loanable funds market from 16% to 14.5% and relaxation of the primary reserve requirement as part of the expansionary monetary stimulus would expectedly encourage the domestic firms or companies to undertake higher financial borrowings or loans to finance or liquidate potential business and commercial investment projects and initiatives, considering the reduced cost of financial borrowings or loans due to lower interest rate by the Central Bank of Ghana. Hence, the investment level of the firms or companies would potentially increase due to such expansionary moves by the central bank. As the business or commercial investment environment or scenario becomes optimistic due to various monetary relaxations by the central bank, the firms or companies would expectedly have higher liquidity and financial solvency to further undertake various business decisions and initiatives, which could consequently contribute in economic recovery process both temporarily and in the long-run.

c. As part of the fiscal stimulus package or program, the government of Ghana has announced financial assistance of GHS 600 to stimulate the private sector firms or business organizations under the governance of National Board of Small-Scale Industries(NBSSI), which essentially regulates how the fiscal funds can be appropriated suitably or effectively for the growth and development of various industries in the domestic economy. In this context, the disbursement of the fiscal stimulus or package can be mostly prioritized towards the businesses that have been most severely affected by the onset of COVID-19 due to significantly lower consumer demand both in the domestic and international arena or markets and financial insolvency or lower profitability. Hence, some of the financial assistance can be specifically directed towards the revival and growth of these industrial sectors. Additionally, some of the fiscal assistance can also be utilized to help or enable the small and medium scale industries to recover from the economic downturn through higher resource and factor/input mobilization or employment and increase in the business and commercial investment which can considerably improve their solvency or liquidity conditions, considering that small and medium scale industries are usually the larger victims of economic downturns compared to their large-scale counterparts. This can expectedly prevent many potential bankruptcies and shutdowns of mainly many small and medium scale firms or business organizations. Moreover, the disbursement of financial assistance can also be essentially based on the industrial or sectoral priority or preferences with the industrial sectors that are mostly severely hit by the economic slowdown due to COVID-19 pandemic to gain higher priority than the relatively less affected ones.