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Opinions of Monday, 24 June 2024

Columnist: Dr. Andrews Ayiku

Surviving High Exchange Rates for Ghanaian SMEs

Dr Andrews Ayiku Dr Andrews Ayiku

Surviving High Exchange Rates for Ghanaian SMEs

Exchange rates have a significant impact on the financial health of firms, particularly in nations like Ghana where many goods and services are imported. The Cedi's devaluation has an impact on not only import costs, but also pricing tactics and competitive positioning in both domestic and foreign markets. Inflation, trade deficits, and global economic conditions all contribute to the Cedi's volatility, making it critical for SMEs to implement efficient exchange rate risk management methods. These swings can raise the cost of imported goods and services, making it difficult for SMEs to remain profitable. This article explores the background of high exchange rates in Ghana and provides strategies for SMEs to survive and thrive amidst these economic pressures.

Financial Planning and Risk Management
SMEs should create complete financial plans that incorporate risk management measures for dealing with currency rate volatility. This includes frequent financial reviews and stress tests. A logistics company in Kumasi set up a strong financial planning system that includes regular risk assessments and scenario analysis. This proactive approach enabled them to foresee the probable effects of exchange rate fluctuations and plan accordingly.

Hedging Against Currency Risks
Hedging is the process of employing financial instruments to safeguard against prospective losses caused by exchange rate movements. Forward contracts and options are two popular hedging methods that SMEs can employ to lock in exchange rates for future transactions. Spintex's furniture import firm entered a forward contract with their bank in anticipation of future purchases from Europe. This contract locked in the current currency rate for a specific period, ensuring that future purchases were unaffected by potential Cedi devaluation.

Diversifying Supplier Base
Depending on a single supplier, particularly one from a country with a strong currency, might be problematic. SMEs should broaden their supply base to include countries with more stable or favorable exchange rates. A textile SME in Kumasi expanded its supplier base by purchasing raw materials from numerous nations, including some with more stable currencies than the Cedi. This method helps to reduce the impact of exchange rate variations on their total costs.

Local Sourcing and Import Substitution
Increasing local sourcing and lowering reliance on imports might assist SMEs mitigate the negative consequences of high exchange rates. This technique also benefits local industries by reducing lead times. A cosmetics company in Takoradi switched from importing essential oils to sourcing them from local farmers. This action not only lowered the costs associated with currency rate swings, but it also boosted local agriculture and streamlined supply chains.

Pricing Strategies and Currency Clauses
SMEs should adapt their pricing strategy to accommodate exchange rate changes and incorporate currency clauses in contracts to transfer part of the exchange rate risk to customers. Currency fluctuation clauses were added in contracts with international customers by an Accra-based electronics store. This enabled the corporation to modify prices in response to major exchange rate fluctuations, ensuring profitability.

Building Foreign Currency Reserves
Maintaining reserves in foreign currencies can help SMEs better manage their cash flows and mitigate the immediate impact of exchange rate swings. A construction company in Tema gradually built up a reserve of US dollars and Euros. This reserve enabled them to make critical purchases without being influenced by short-term exchange rate volatility, resulting in financial stability.

Focusing on Export Markets
Expanding into export markets allows SMEs to earn revenue in foreign currencies, which can offset import expenses and serve as a natural hedge against currency swings. A food processing SME in Cape Coast began exporting its products to neighboring countries. The revenue earned in foreign currencies helped to balance their financial risk and reduce the impact of the Cedi's devaluation.

Improving Operational Efficiency
Improving operational efficiency can help SMEs decrease expenses and increase competitiveness. This can include simplifying operations, implementing new technology, and minimizing waste. A manufacturing SME in Accra invested in new machinery to increase production efficiency and cut energy use. These operational improvements reduced total expenses, allowing the corporation to bear the effects of high exchange rates.

To survive high currency rates, Ghana's SMEs must take a diversified approach that includes financial hedging, supplier diversity, local sourcing, adaptive pricing, and operational efficiency. By employing these measures, SMEs can reduce the risks associated with currency rate fluctuation while remaining competitive in both domestic and international markets. Each plan described provides real answers targeted to the unique difficulties that Ghanaian SMEs confront today.

Dr. Andrews Ayiku
Lecturer/SME Industry Coach
Coordinator, MBA Impact Entrepreneurship and Innovation
University of Professional Studies Accra
[email protected]
IG: andy_ayiku
F: Andyayiku