The Institute of Economic Affairs (IEA) has asked the Bank of Ghana to assess and review the country’s inflation-targeting regime 10 years after its implementation.
Although the regime had helped in reducing inflation over the period of its implementation, the institute believes this had come at a huge economic cost to the country.
At a forum on inflation targeting, an Adjunct Senior Fellow of the IEA, Dr Eric Osei-Assibey, said the inflation-targeting regime required strong macro-economic fundamentals, a phenomenon which was lacking at the moment in the country.
The forum which was organised by the IEA was on the theme: ‘Inflation targeting under weak macro-economic fundamentals: Does Ghana need a monetary policy re-direction?’
“Ten years after its implementation, in terms of having lower inflation, we have done well but what has been the real sacrificial economic cost?” Dr Assibey asked.
He said the country’s non-oil growth had been flat when it could have done better, interest rates remained one of the highest in Africa and unemployment was still high.
“We are now talking about job creation which has been the centrepiece of government policy and economic growth, and at the same time the central bank has been very stringent in its monetary policy, all in the name of achieving a certain inflation target all because of the regime we are implementing,” he noted.
“Monetary policies must complement each other to achieve a common goal; and so if the goal of the central government is to create jobs and grow the economy, then the government will pursue more expansionary policies and in this case the central bank must support it to achieve this,” he said.
Subsequently, he said, the central bank now had a role to reduce inflationary pressures and pursue a tighter monetary policy, which also meant that the government must also cut down on its expenditures and improve tax collections.
Inflation targeting not for all
Dr Osei-Assibey also pointed out that inflation targeting was not for every country as it needed a strong economic fundamental to thrive.
“In the whole world, there are only 30 countries that are pursuing inflation targeting and about 90 per cent of these countries are developed and industrial countries with very strong economic and productive structures less sensitive to commodity prices,” he pointed out.
“But in our part of the world, our economy is already weak, institutions are weak, the transmission mechanism is weak as we depend so much on commodity prices, exchange rates fluctuate every now and then so the fundamentals are too weak to support an otherwise good regime,” he added.
Time to rethink
Dr Osei-Assibey explained that for the country to be able to achieve its national aspirations and for the economy to be able to expand rapidly and accelerate development and create more jobs, the time had come for a rethink about the inflation-targeting regime.
“If we want to continue with it, then we need to solidify the foundation. We have to make sure that the productive sectors of this economy are good,” he stated.
“We have to ensure we are exporting more, we have favourable terms of trade and our currency is strong just like in developed countries,” he added.
He stressed that was the only way that inflation targeting would be relevant to the country.
Dr Osei-Assibey also advised the government to consider an alternative policy target that was consistent with and supported the country’s national priorities.
He said one of the alternatives the central bank could consider was the dual mandate approach where it could combine both the real gross domestic product (GDP) growth and inflation, so that while it was looking at inflation, it would also be looking at economic growth.