One of the core and central functions of governments worldwide is to manage and control inflation as it directly affects purchasing power and general economic stability. In recent years, Ghana’s inflation has been on an upward trajectory, currently pegged at 27.6% an eighteen years high. This breaks Bank of Ghana’s upper ceiling of 6 to 10% for the first nine months of 2022. The year will end with inflation standing at 29.4% according to the OECD study on emerging markets in sub Saharan Africa, relating it to global disruptions in supply of goods and services.
But Ghana’s rising inflation has been quite unexpected especially with government in 2018 successfully exiting from an IMF program ( Extended Credit Facility), the objective of which was to restoring fiscal discipline, stable macroeconomic environment as well as strengthen the country’s external position. The unstable economic outlook of the country between 2014 and 2016 is largely attributed to a slump commodity prices, fiscal impact of single spine salary structure and the electrical power crisis which was hampering production.
However, soon after exiting the IMF program, the Akufo Addo-led government started recording high budget deficit, upward inflation trend, a fast depreciating cedi coupled with a worsening debt position. And above all, lack of policy credibility in the financial sector( Banking Sector Clean up).
In response to the negative economic outlook, the government through the Central Bank which mandated with ‘Inflation Targeting’ sought to pursue “late in the day” monetary policy of increasing prime rate from 16% to 19%. In my estimation this policy measure will only escalate the dip in investor confidence in the financial market in the short to medium term. In light of the inefficacy of the policy measure, we must highlight how inflation is destroying lives and businesses. Inflation is eroding capital of business particularly Small Medium Enterprises( SME’s), reducing purchasing power of citizens, increasing the tendency for governments to hike taxes and introduce new ones.
In view of this bizarre and seeming helpless situation government should do the following to salvage the situation;
- Reduce fiscal dominance and purse credible monetary policies by looking at expenditures within the context of its Fiscal Responsibility Act as well as taking a second look at the political motivated base rate of 19% and return back to 0% Central bank financing of government.
- Enhancement of fiscal measures in the mid year budget review will be commendable and sustainable such as ensuring tax compliance, enhancement of the Public financial Management Act, an Improved Public Procurement Act fully utilize the GIFMIX platform and quickly prioritize the development of certain oil blocks such as the Springfields to help the narrowing of the budget deficit in the medium term
- Rising cost of fuel has been an inherent and dominant driver in price determination of goods and services which has been largely due to the depreciation currency being the Cedi. The Central Bank current arrangement with the BDC’s which is making available forex to them should be scaled up from current 50 million USD to 500million USD as the demand from BDC’S monthly to avert the buying of forex at exorbitant prices in the black market which has being a major determinant of high prices at the pumps. For instance the Consumer Price Index basket indicated 7.2% for transportation which is quite weightier. (Source Ghana Statistical Service)
- Rising food prices has been a disturbing phenomenon and a major driver of high inflation. In Ghana, the most important component of the Consumer Price Index (CPI) are food and non Alcoholic beverages (which is 43.6% of the total CPI basket) together with transportation CPI escalate prices of food. In view of this, the NPP government has to prioritize spending in the agricultural sector to minimize inflation. This will somehow require a coordinated approach from Agriculture and Trade Ministries to overcome this quagmire.
Abolish the introduction of distortionary taxes such as the 1.5% electronic tax which has begun to build inflationary pressures Eg. Prices of food and non food rose from 26.6% in April to 30.1% in May and 21.7% in April to 25.7% in May respectively. ( Source GSS)
- Opting for an IMF program which has been neglected due to political expediency will help restore confidence in the economy as our external vulnerabilities will be minimize through support from the fund( IMF) to boost our reserve which also serves as a signaling tool for non resident financial sector players and achieve policy credibility. Failure to do so, will further impose more risk to our economy and even in the era where the ECB FED etc are raising, interest rate will trigger capital flight because of less risk associated with those economies
In conclusion, if this situation continue to persist, purchasing power of the citizenry may erode thereby affecting production and add to the declining of the real sector from (48%in April to 47.4% of GDP in May) according to S&P Global. This has the tendency to negatively impact on our already terrible unemployment situation, on government fiscal projections and the unstable investment climate.
THE TIME TO ACT IS NOW!!!
Michael Ofoei Akorli
Deputy Eastern Regional Communication officer, NDC
Anglotown Koforidua
Source: Mybrytnewsroom.com