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Current inflation requires new tools to fight

BY: Maxwell Akalaare Adombilla
Dr Ernest Addison,Governor of the Bank of Ghana
Dr Ernest Addison,Governor of the Bank of Ghana

The Bank of Ghana (BoG) is enduring its fair share of the global surge in inflation that has caught central banks off guard and kept them awake at night.

At 23.6 per cent in April, inflation has set new records: it is now the highest rate in 18 years and the highest on record since the rebased Consumer Price Index (CPI) basket was introduced in September 2019 to calculate inflation.

The jump from single digit to the high end of double digit is also the quickest run in recent times, happening within just two years.

‘Baffling’ It explains why the BoG Governor, Dr Ernest Addison, described the inflationary trend as baffling.

When asked about the situation in an interview with international newswire, Bloomberg, last week, the Chairman of the central bank’s Monetary Policy Committee (MPC)
said “I think that it is an issue which, in a sense, is baffling for all of us.

“A year ago, inflation was at single digits, around 7.5 per cent, and a year later, we are in the high ends of double digits,” he noted.

The swift and potentially entrenching nature of the price pressures requires that new tools either than what the country is used to are deployed to contain the rise and
its persistence.

Implications

There is no need be labouring the point that high inflation impacts negatively on lives and livelihoods.

Higher prices mean hard times for families and businesses.

Pressure is already mounting on employers, including the government, to raise salaries in ways that will be commensurate with inflation.

The high borrowing cost arising from the rising inflation is also a blow to an economy recovering from the COVID-19 pandemic.

It risks marginalising the economic reboot, increasing the debt stock and the deficit, thereby deteriorating the macroeconomic indicators further and worsening the
unemployment crisis.

These pose dire consequences for an economy that has been shut out of the international financial market over debt sustainability issues.

To be fair, the issue of price jumps is global as other central banks are battling with a similar situation.

The United Kingdom (UK) and the United States of America (USA) are both suffering their highest pace of price increments in 40 years, and that has already pushed their central banks into frantic searches for solutions.

Ghana’s case more intriguing 

Unlike other countries where the pressures emanate from internal sources, indicating a localised challenge, the current CPI shows that the country is importing the inflation pressures.

The April reading showed that for the first time in two years, imported inflation had surpassed the domestic one.

This means that prices of imported goods increased at a faster rate than that of locally produced items.

Coming at a time when the Russia/Ukraine crisis and the remnants of the COVID-19 pandemic are fuelling price increases globally, there is grave cause for worry.

It presupposes that countries that depend largely on imports, as Ghana does, will endure a quicker pace of price increases for a while.

The bigger concern though is the unresponsive nature of the price pressures to BoG’s tools so far.

As Dr Addison said in the Bloomberg interview, the central bank anticipated the upward trend and raised its policy rate twice to help tame it.

“In November last year, we raised the policy rate by a 100 basis points (bps) and then we were rather surprised by the inflation rate that came out after that.

“The February (inflation) rate in particular (was also surprising), which triggered the 250bps upward adjustment in the policy rate,” the Governor added.

As revealing as this may sound, it indicates that different tools either than the usual methods are needed to contain the current situation.

Boost local production In spite of having arable lands, the country is a heavy importer of edibles, including cooking oil and fats, cereals, fruits and vegetables and live animals and their meats.

Interestingly, these are the set of items driving up the imported inflation.

What this means is that should the country revamp local production, which it has the capacity to do, and strategically curtails the imports, demand will shift to domestic goods, thereby dampening the price pressures.

It is, therefore, advisable that the central bank and the government work together in this regard.

Also, there should be serious consideration for tax breaks on imported items as a short gap measure to arresting the pace of price increases and cushioning the citizens
against the precarious price jumps.

In the medium to long term, special incentives, including soft loans and subsidised inputs, should be extended to farmers to help make up for the shortfall that is fuelling the imports.

The government and BoG could use one planting season to achieve this.

Similar supports should also be extended to local manufacturers of imported substitutes.

While at it, the predicaments of Wilmar Africa and Avnash, which produce cooking oil and rice locally, in the face of the ill-fated discount on imports should serve as a painful reminder.

Efforts should be made to rid the system of such policies and to encourage domestic production on sustainable basis.

In the end, this should teach us the much-needed lesson: Domestic production is key and our years of paying lip service to it is embarrassing and hurting to the economy and the citizens.