Managing risk in a recovering economy

By Ernestina MENSAH

The Ghanaian economy is expected to enter a recovery phase in 2024 under the International Monetary Fund (IMF) programme, driven by stronger private consumption. Market players forecast the economy to expand by about 3.5 percent in 2024, up from a lower growth of 2.7 percent recorded in 2023.

However, IMF and the government both project the overall Gross Domestic Product (GDP) to rebound to 2.8 percent, 4.4 percent, and 4.9 percent in 2024, 2025 and 2026 – IMF 2023 Article IV and Ministry of Finance (MoF) 2024 Budget Statement.

Key policies under the IMF programme include large and frontloaded fiscal consolidation to bring public finances back on a sustainable path, complemented by efforts to protect the vulnerable.

This is expected to be supported by structural reforms in the areas of tax policy, revenue administration, and public financial management, as well as steps to address weaknesses in the energy and cocoa sectors. In the near term to 2026, the expectation is for inflation to get to a single digit (8 /-2%), a drastic drop in the policy rate and treasury bill rates and a stabilized exchange rate.

When an economy is down, certain indicators may signal an economic recovery. As these signs show improvement, it may be time to make changes to your portfolio so that you are positioned to take financial advantage of the possible expansion in the economy bearing in mind any possible risk. Businesses are expected to gradually invest in their businesses in line with the expected growth in private sector consumption.

Effective risk management becomes critical as businesses look for ways to navigate this fragile economy despite its recovery. This is critical due to the nature of Ghana’s economy where certain sectors recover faster than others and also due to the structural challenges affecting the overall economy.

The risk in the economy is further exacerbated by geopolitical risks around the globe. A good game plan for managing risk naturally starts with identifying specific risks that could affect businesses and the possible impact they could have on one’s business. Understanding the severity of potential threats is one way to break potential risks down into manageable pieces.

Businesses must remedy this by first improving their overall risk awareness including geopolitical risk by evaluating the associated implications of geopolitical threats on their risk exposure.

Developing a game plan for how you would respond to such hazards may not make you sleep any better at night, but it will harden your risk defenses from such threats.

The problem for risk managers faced with the task of managing geopolitical risk is the scale of this risk type and the diversity of shock waves that it could send through global markets.

What is business risk

Business risk is the exposure a company or organization has, to factors that will lower their profits or lead it to fail. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk. Many factors can converge to create business risk. Sometimes it is a company’s top leadership or management that creates situations where a business may be exposed to a greater degree of risk.

Business risk is the potential for a company to experience financial losses or other negative outcomes due to various factors. These factors can include economic conditions, competition, changes in consumer in consumer preferences, technological advancements, regulatory changes, and natural disasters.

However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with operating a business; most companies accomplish this by adopting a risk management strategy.

In identifying and managing risks, one should consider the possible causes and impacts of the risks identified and how these risks affect the business objectives, how the risks could be recorded in a risk management plan and finally come up with steps to minimize the risk or impact. By considering potential risks and impacts in advance, one can develop procedures without the added pressure of trying to manage the risk at the same time.

Types of risks include:

• Direct risk—a threat to your business that is within your control.
• Indirect risk—a threat to your business that is out of your control.
• Internal risk—risks you have the power to prevent or mitigate within your business.
• External risk—risks you have no control over.

In the realm of risk assessment and management, the concept of inherent risk plays a critical role. Inherent risk refers to the level of risk that exists in an activity, process, or organization without considering any internal controls or risk mitigation efforts. For example, the Bank of Africa’s resilience in identifying its inherent risks like liquidity risk, interest rate risk and exchange rate risk keeps the bank profitable and liquid. These risks are monitored daily by the local Bank and its Group Bank to help its management make prompt and proactive decisions if there are any deviations from the bank’s risk appetite.

Understanding inherent risk is essential for auditors, internal controllers, risk managers, and decision-makers to evaluate and address potential risks effectively. Assessing the inherent risk in certain financial transactions can help tailor appropriate levels of customer due diligence to prevent issues like embezzlement.

Business continuity planning

One key way businesses stay resilient is to build a comprehensive business continuity plan. Business continuity planning helps businesses respond to unexpected events and situations that can interrupt their operations. It helps businesses minimize the impacts of these events and continue operating.

“A business continuity plan is a document that explains the actions one should take before, during and after unexpected events and situations.” 

It is designed to help one identify, prevent, or reduce risks where possible and prepare for risks that are out of one’s control, respond, and recover if an incident or crisis occurs. Business continuity planning aims to return to business activities within the shortest period, planning helps businesses be more resilient and continue with minimal interruptions.

Risk management failures are often chalked up to willful misconduct, gross recklessness, or a series of unfortunate events no one could have predicted. Here is a rundown of some mistakes to avoid.

Risk management limitations and examples of failures

Overemphasis on efficiency vs. resiliency. Greater efficiency can lead to bigger profits when all goes well. Doing things quicker, faster, and cheaper by doing them the same way every time, however, can result in a lack of resiliency, as companies found out during the pandemic when supply chains broke down. “When we look at the nature of the world things change all the time,” said Forrester’s Valente. “So, we have to understand that efficiency is great, but we also have to plan for all of the what ifs.”

Limitations of risk analysis techniques. Many risk analysis techniques, such as creating a risk prediction model or a risk simulation, require gathering large amounts of data. Extensive data collection can be expensive and is not guaranteed to be reliable. Furthermore, the use of data in decision-making processes can have poor outcomes if simple indicators are used to reflect complex risk situations.

Lack of risk analysis expertise. Software programmes developed to simulate events that might negatively impact a company can be cost-effective, but they also require highly trained personnel to accurately understand the generated results.

The illusion of control. Risk models can give organizations the false belief that they can quantify and regulate every potential risk. This could cause an organization to neglect the possibility of novel or unexpected risks.

Changing Risk Landscape: Business environments are dynamic, and risks can evolve. New risks may emerge, while existing risks may change in nature or severity. This makes it difficult to predict or anticipate a potential threat.

Cost-Benefit trade-offs: Implementing risk management strategies often incurs costs, such as investing in insurance and security measures. Balancing the cost of risk mitigation with the potential benefits and the likelihood of occurrence can be a complex decision-making process.

Businesses face a great deal of uncertainty in their operations, much of it outside their control. This uncertainty creates a risk that can jeopardize both a company’s short-term profits and long-term existence. Because risk is unavoidable, risk management is an important part of running a business.

“We manage risks so we know which risks are worth taking, which ones will get us to our goal, which ones have enough of a payout to even take them” – Alla Valente,

The writer is a Market Risk Officer, Bank of Africa (BoA),

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