Election 2024: Time for a delicate balancing act for businesses
By Prof. Samuel Lartey
Introduction
ELECTIONS in Ghana are more than just political milestones; they are critical economic events that send ripples through the business community.
As the country prepares for its 2024 general elections, businesses are already taking strategic steps to manage uncertainty, protect cash flow, and safeguard operations.
Drawing on historical trends and current economic realities, this article explores how businesses react and adapt during this sensitive period.
Cash Management Behavior in Ghanaian Election Years
Ghanaian businesses, entrepreneurs, and individuals tend to adopt cautious and speculative cash management strategies in election years, influenced by heightened economic uncertainty and liquidity constraints.
Before Elections:
- Increased Spending:
Pre-election periods often see heightened government and private-sector spending as political campaigns intensify. This is marked by significant cash injections into the economy for advertising, rallies, and other campaign-related activities.
- Liquidity Crunch for Businesses:
Government contractors and vendors may experience delayed payments as funds are diverted to election-related expenses. This can create liquidity challenges for businesses relying on state contracts.
- Speculative Behavior:
Businesses and individuals may hoard cash due to uncertainty about post-election economic policies and currency stability. Investors may also convert cash into foreign currency, contributing to exchange rate pressures.
During Elections:
- Cash Hoarding:
Individuals and businesses tend to keep more cash on hand to mitigate risks of disruptions to banking and electronic payment systems during election periods.
- Slowdown in Business
Activity: Many businesses adopt a “wait-and-see” approach, reducing inventory purchases and capital investments to conserve liquidity until the political climate stabilizes.
- Consumer Caution:
Individuals limit discretionary spending, focusing on essential needs, which reduces cash flow for businesses dependent on consumer spending.
After Elections:
- Post-Election Uncertainty:
Depending on the election outcome, businesses and individuals may delay spending further as they assess the new administration’s economic policies.
- Government Debt Management:
Newly elected governments often attempt to manage debt accrued from pre-election spending, leading to budget cuts or tax increases that affect liquidity in the private sector.
- Inflationary Pressures:
Increased money supply during the pre-election period may lead to inflation, reducing the purchasing power of cash holdings.
- Policy Stabilisation:
Businesses gradually return to normal operations as the political and economic environment stabilizes, although this process can be slow if confidence in governance is low.
Trends Observed Across the 4th Republic
- Volatility in Exchange Rates:
The election years often see a depreciation of the cedi due to speculative foreign exchange demand.
- Delayed Payments:
Contractors and service providers face cash flow challenges due to government prioritization of election spending.
- Increased Informal Transactions:
During election periods, informal cash transactions rise as individuals and businesses avoid banks to ensure liquidity.
- Recovery Time:
Post-election economic recovery is slower during contested or disputed election outcomes, as uncertainty lingers.
Over the years, Ghanaian businesses have developed strategies to navigate the uncertainties of election seasons. From stockpiling inventory to holding off on major investments, these measures reflect lessons learned from previous elections:
- 2008 Elections:
A runoff led to a two-month delay in forming a new government, causing a 15% drop in retail activity.
- 2012 Elections:
Legal challenges to the election results created a tense business environment, resulting in slowed economic activity.
- 2020 Elections:
Businesses faced heightened risks amid the COVID-19 pandemic, leading to increased demand for cash reserves and a notable 5% drop in bank deposits in November.
These historical patterns have shaped how businesses plan for election seasons, with the 2024 elections expected to follow similar trends.
Financial Decisions Businesses Make Before Elections
Cash Flow and Reserves
Businesses tend to prioritise liquidity ahead of elections to manage potential disruptions. Key steps include:
- Holding Cash Reserves:
Companies withdraw significant amounts of cash to hedge against possible disruptions in banking and digital payment systems.
- Delaying Investments:
Major expenditures and long-term projects are often postponed until after elections, reducing risk exposure. For example, in the months leading up to the 2020 elections, many companies deferred capital investments, contributing to a 10% decline in credit demand by the fourth quarter.
- Reduced Credit Activity
Lenders typically experience lower demand for loans during election periods. Businesses are wary of borrowing due to uncertainties around interest rate stability and potential economic shocks. With Ghana’s inflation rate at 40% in October 2023 and the cedi depreciating by 15% against the dollar this year, these concerns are even more pronounced in 2024.
Business Relations and Operations
- Supply Chain Adjustments
Elections often disrupt supply chains. In 2008, political unrest caused a 20% drop in trade activity in urban centers. Ahead of the 2024 elections, businesses are likely to:
- Stockpile inventory to avoid shortages.
Diversify supply sources to reduce dependency on single suppliers.
- Suspension of New Contracts
Public and private sector contracts often slow down during election seasons. Businesses adopt a “wait-and-see” approach, anticipating potential changes in government policies or leadership.
How Businesses Can Prepare for 2024
- Focus on Liquidity
Maintaining strong cash reserves is critical. Businesses should:
- Avoid unnecessary spending.
Strengthen relationships with banks to ensure access to funds when needed.
- Scenario Planning
Businesses must prepare for multiple scenarios, including potential political unrest. Financial models should account for best- and worst-case outcomes to minimize risks.
- Communicating with Stakeholders
Open communication with customers, employees, and investors can help reassure them of the company’s resilience and continuity plans during the election period.
Conclusion
Election seasons in Ghana are marked by uncertainty, but they also present opportunities for businesses to showcase resilience and adaptability.
By learning from historical patterns and implementing proactive strategies, businesses can weather the challenges of the 2024 elections while positioning themselves for success in a post-election economy. As the countdown to December 7 begins, Ghanaian businesses are once again preparing for a delicate balancing act, managing risk while staying open for opportunity.
