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Economic recovery hinges on attracting and retaining foreign investment

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Wed, 23 Oct 2024 Source: thebftonline.com

Ghana has long been recognized as a lighthouse of stability in a region often characterized by volatility. Its reputation for democratic governance, rich natural resources, and growing consumer market have made it an attractive destination for foreign investment.

Yet, despite these advantages, the country struggles to fully capitalize on its potential. To attract and retain more foreign investments, the country must address specific structural and regulatory challenges that hinder its competitiveness, particularly in business entry, digitalization, and the broader regulatory environment.

In the Business Ready 2024 report by the World Bank Ghana’s regulatory framework scored in the third quintile of the countries analyzed, suggesting that its regulations are moderately conducive for business but there is significant room for improvement.

Comparatively, other countries that excel in regulatory clarity and transparency tend to perform better in attracting foreign investment.

A mixed business environment

In recent years, the Black Star of Africa, as it is known, has made significant strides in labour regulation, utility services, and business insolvency—factors that appeal to investors seeking stable markets.

According to a recent assessment by the World Bank, captured in its Business Ready report 2023, Ghana scores relatively high in labour dispute resolution mechanisms and transparency in utility services, including water and electricity provision.

The establishment of electronic case management systems for business liquidation and reorganization has further strengthened investor confidence.

However, the nation’s attractiveness falters when one considers the more technical aspects of business entry and market competition. The ease of starting a business—a critical factor for any investor—is marred by bureaucratic inefficiencies and a lack of digitalization.

While the regulatory framework for company registration scores a commendable 71.87 out of 100, public services for business startups receive a much lower score of 38.83. This discrepancy is mainly due to a lack of fully digitized services for business registration, slow processing times, and high registration costs.

A domestic firm, for instance, takes 57 days on average to complete the registration process—an uncompetitive figure in today’s fast-paced global economy.

Leveraging digital transformation

To position itself as a leading investment destination, the former Gold Coast must prioritize the digitalization of its public services. A World Bank study points out that Ghana’s digital services related to business operations are either incomplete or non-functional.

For example, the country lacks a comprehensive online platform for issuing building authorizations and environmental permits, and property registration remains largely paper based. These inefficiencies lead to delays, higher operational costs, and uncertainty—conditions that dissuade potential investors.

A fully digitized business registration and property transfer system could drastically improve investor confidence. By reducing the time, it takes to register a company or transfer property, Ghana could demonstrate its commitment to improving the ease of doing business.

The introduction of electronic signatures and an integrated digital platform where investors can register businesses, apply for permits, and pay taxes online would reduce bureaucratic red tape and enhance transparency—critical factors for attracting international capital.

Enhancing market competition

Ghana’s lacklustre performance in market competition is another area of concern, as captured in the aforementioned World Bank report. The country’s score in this category is among its lowest, reflecting a rigid business environment that hampers innovation and restricts market entry.

For foreign investors, particularly those in industries like technology, financial services, and manufacturing, a competitive market is essential for growth and profitability. The absence of competition not only discourages new entrants but also stifles the expansion of existing players.

One critical step to boost market competition is the further liberalization of the telecommunications and internet sectors, both of which are tightly controlled by a small number of dominant players.

Ensuring fair competition in these industries would allow foreign investors to enter and expand their operations, fostering innovation and lowering costs for consumers. Similarly, sectors like energy and financial services could benefit from reduced barriers to entry for foreign firms.

Implementing these reforms would send a clear signal to the international community that Ghana is open for business and serious about fostering a competitive business environment.

Infrastructure gaps

While the regulatory framework for utilities is relatively strong, the actual delivery of services—particularly electricity—remains a stumbling block for investors. The country has made progress in establishing mechanisms for monitoring service quality, but the reliability of the electricity supply is still far from ideal.

According to recent data, the average firm experiences three power outages per month, with a typical outage lasting one hour. For manufacturing companies or those in tech-driven sectors, even minor disruptions in electricity can result in significant operational setbacks.

Addressing the nation’s energy infrastructure shortcomings is critical to attracting capital-intensive industries, such as manufacturing and agro-processing. While the government has taken steps to improve power generation, more must be done to ensure the stability and reliability of supply.

Investment in renewable energy, in particular, presents a unique opportunity. Not only does the country have vast untapped solar and hydroelectric potential but developing this sector would align Ghana with global trends toward sustainability, making it an attractive destination for environmentally conscious investors.

Strengthening financial services and credit infrastructure

Another area where the country could significantly improve its attractiveness to foreign investors is its financial services sector. While the country has made strides in customer due diligence, e-payments, and credit information sharing, its secured transactions and credit infrastructure remain underdeveloped.

Investors often cite the difficulty of securing loans as a major obstacle to doing business. The time to obtain a loan averages 24 days, and firms report unfavorable collateral requirements as a major deterrent.

To address these challenges, Ghana should focus on improving the efficiency of its credit infrastructure. Establishing a robust collateral registry and ensuring that credit information is updated promptly would make it easier for businesses to access financing.

Furthermore, fostering the growth of fintech companies could bridge the gap between traditional banking services and the needs of smaller firms or startups, which often struggle to secure loans.

Policy reforms for retaining investments

While attracting foreign investments is crucial, retaining these investments is equally important. Investors seek stable, predictable environments where long-term growth is possible.

To this end, there must be a focus on regulatory consistency and transparency. Investors are often wary of sudden changes in tax laws, import tariffs, or sector-specific regulations. Implementing a stable, investor-friendly tax regime is essential for retaining capital.

Moreover, the Ghana Investment Promotion Centre (GIPC) should expand its support services and ensure that investors have access to the resources they need to succeed in the market.

The Centre must improve on its work as a one-stop investment centre that not only helps investors navigate the regulatory landscape but also offers aftercare services to address issues that arise post-investment. This would enhance investor confidence and foster long-term partnerships.

International trade

The international trade sector, while showing promise, also needs reforms. The country’s export and import processes are plagued by inefficiencies, including outdated customs procedures and lengthy delays at ports.

To boost its position as a trading hub, the country should modernize its customs systems and integrate technology to streamline border processes. The establishment of a national single-window system could significantly reduce the time and cost associated with international trade, making Ghana a more attractive destination for export-oriented investments.

Additionally, Ghana’s participation in the African Continental Free Trade Area (AfCFTA) presents a unique opportunity. By leveraging its strategic location and improving its trade facilitation mechanisms, Ghana could position itself as a gateway to West Africa for foreign investors looking to tap into the wider regional market.

As Ghana seeks to recover from the unpleasant macroeconomic environment of the last four years, the country’s ability to attract and retain foreign investment will be crucial. This will depend on its willingness to enact meaningful reforms in key areas such as business entry, market competition, infrastructure, and financial services.

Source: thebftonline.com
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