Category: Technology

Adnan Adams Mohammed

As inflation rate in the country has leapfrogged within past few months to record highest rate in about 18 years has unveiled the Bank of Ghana’s inflation control framework to criticism. 

The current inflationary trend, despite the Monetary Policy Committee of the central bank raising the policy rate by about 250 basis points last month, yet, it was that month annual inflation rate jumped from 19.4% in March to 23.6%, the highest since January 2004. Not only is the inflation substantially above the Bank’s target of 8+/-2 %, but it has also markedly outstripped the current policy rate of 17%.

While inflation is high it is also straining economic growth together with slowing global output and a 2.5 percentage point increase in March in the key interest rate, the biggest hike since at least 2002. The S&P Global Ghana Purchasing Managers’ Index has also been below 50 since February, indicating a deterioration in business conditions. 

All things being equal an increase in the policy rate is supposed to tame the rate of inflation, but in the current development has disapproved the macroeconomic management theory.  This has therefore lay bare the inflation targeting regime of the central bank, which it uses to control economy in terms of currency exchange rate and rate of economic growth, to criticisms by some economists as to whether it real works the magic or it is a ‘try your luck’ theory.

Among such economists, is the Director of Research at the Institute of Economic Affairs (IEA), Dr. John Kwakye, who has expressed unhappiness with the current approach being used by the Bank of Ghana in stemming Ghana’s inflation situation.

According to the Institute, “the inflation targeting framework being used by the Central Bank cannot provide a lasting solution to the country’s inflation problem hence must be avoided.”

In a paper titled, “How should the bank of Ghana respond to the run-away inflation and the high cost of living in Ghana”, Dr. Kwakye argued that, “in principle, the inflation-targeting framework may be relevant in dealing with second-round inflationary effects of initial supply or cost shocks but the situation isn’t so in the Ghanaian context thereby rendering the framework less effective in stemming the country’s type of inflation.”

In view of this, he stressed on the need for a comprehensive approach that includes direct targeting of the supply or cost elements to find a lasting solution to the rising inflation rate.

The IEA opines that going by the principle underlying the inflation targeting, with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by increasing it by 200 basis points to help narrow the gap with inflation.

Arguably, an economist with Databank Group has indicated that, the BoG’s MPC will have tough time to arrive at their decisions in their May bimonthly review meeting. 

“The monetary policy committee of the central bank will have a nail-biting decision to make,” Courage Martey said in an interview.  “Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone.” 

Mr Martey cautioned that, “Inflation hasn’t peaked yet, so the MPC would want to avoid creating a perception of chasing inflation when it should be ahead of the inflation curve.”

However, according to an astatute financial and economic journalist who doubles as the managing editor of Economy Times newspaper, Elorm Desewu, year on year inflation is expected to worsen further in the coming months in the wake of the decision by the Public Utility Regulation Commission (PURC) to hike tariffs of electricity and water as well as increase in transport fares by the transport operators in the country. 

Fortnight ago, the Electricity Company of Ghana and the Ghana Water Company tabled a tariff hike before the PURC awaiting approval or disapproval for consumers to pay more in access of 148 percent for power and 334 percent for water, while the transport fares have gone up by 20 percent effective last week. 

“This is expected to impact heavily on the non-food inflation which would trigger a further rise in year on year inflation”, the journalist noted in his analysis. 

“The current development would pose a headache to the seven member committee of the Monetary Policy Committee (MPC) as they announce their decisions of the bimonthly review of the economy today, May 23, 2022. 

Already, the MPC has revised it medium term inflation target of 8+/-2 to March 2023.

Additionally, the Bank of Ghana announced some measures in April this year in relation to universal banks, in attempt to anchor inflation. These include, the Cash Reserve Ratio was increased to 12 percent; the Capital Conservation Buffer was reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category was reset to the pre-pandemic level of 10 percent.

But recent figures from the Ghana Statistical Service, (GSS) depict that year on year inflation measured by the Consumer Price Index, (CPI) increased significantly to 23.6 percent for the 12-months period ended April, 2022 from 19.4 percent in March, 2022.

According to the Ghana Statistical Service, “four divisions – transport (33.5%); household equipment and routine maintenance (28.5%); food and non-alcoholic beverages (25.6%), and housing, water, electricity, gas and other fuels (25.0%) recorded inflation rates above the national average of 23.6% with transport recording the highest inflation.”

National month-on-month inflation from March 2022 to April 2022 was 5.1%.

It also noted that this is the first time in 29 months that inflation for imported items exceeded domestic inflation. Whilst inflation for locally produced items was 23.0%, inflation for imported items was 24.7%.

“The inflation for imported goods is higher than the 17.3% recorded for March 2022 while the inflation for locally produced items is 23.0% higher than the 20.0% recorded in March 2022.”

Whilst Food and Non-Alcoholic Beverages inflation was 26.6%, Non-Food inflation stood at 21.3%.

April 2022’s food inflation of 26.6% is higher than both food inflation for March 2022 (22.4%) and the average of the previous 12 months (13.5%).

Food inflation’s contribution to total inflation however, decreased from 51.4% in March 2022 to 50.0% in April 2022.

All the 15 food subclasses recorded positive month-on-month inflation with Fruit and Vegetable Juices recording the highest of 15.3%.

Non-food year-on-year inflation on average went up again in April 2022 compared to March 2022, that is from 17.0% to 21.3%. Only one out of the 12 Non-food Divisions had the 12 months rolling average to be higher than the year-on-year inflation for April 2022 for the divisions. Transport is the Division that recorded the highest inflation in April 2022 (33.5%).

There is a high expectation that the MPC would again hike the policy rate further to stem the rising inflation.

Adnan Adams Mohammed

The Bank of Ghana has expressed shock at skyrocketing rise in the rate of inflation in the country.

The central bank is however confident that the Monetary Policy Committee, which is meeting to review developments in the economy, will take a decision to see the decline of the rate of growth.  

The MPC need to decide on the current policy rate, which stands at 17%. The policy rate, which influences interest rates for individuals and businesses, is also used as a tool to curb inflation in the country.

“It’s an issue, which in a sense is baffling for all of us. A year ago inflation in Ghana was 7%% and now we find ourselves with high double-digit inflation. It’s a very complicated environment”, the Governor of the Bank of Ghana, Dr. Ernest Addison, said in an interview, last week.  “The MPC is meeting this week and I do not want to pre-empt what the committee will decide, but I think it’s a very complicated situation. We do need to take a position on what to do with the policy rate, which stands at 17%.”

Data from the Ghana Statistical Service shows that the continuous surge in transport and food prices among others, across the country, has pushed the national year-on-year inflation for April 2022 to 23.6 %, which is over 13 percentage points higher than the upper band of government’s inflation target for 2022, which is 10 %.

Under the inflation targeting regime being operated by the Central Bank, policy makers generally prefer that the policy rate stays ahead of headline inflation. But for the first time in a long while, the key rate is trailing headline inflation by about 700 basis points, leaving the Central Bank in a difficult position.

Meanwhile, Dr. Addison has assured that he was confident the rate of inflation had peaked and should begin declining for the rest of the year.

“Government and the Central Bank are very much aware of the problem. We’ve had very major decisions on fiscal consolidation. Expenditures have been cut by 20% among other things. We expect that these measures will serve as an anchor to inflation. A lot of the shocks that we are seeing now tend to be supply-side in nature, but we think the worst has gone through the system, and we expect that inflation will be tapering off for the rest of the year.”

The Governor further noted that, the Ghanaian economy is growing strongly despite the threat of rising inflation and the recent sharp volatility of the cedi. 

According to him, data secured by his outfit so far indicates that the economy continues to rebound, irrespective of the challenges. He said, the real sector of the economy has been resilient despite the impact of COVID-19 pandemic.

“The Ghanaian situation in a sense also reflects what happened in 2020 where the government took a very expansionary stance on policy. Therefore there were many interventions that was put into place in order to protect lives and livelihoods.”

“The impact of that was real sector being more resilient than we see in other places. As I said, we are beginning to see a pick-up in growth in 2021”, Dr. Addison emphasised.”

Indeed, sectors such as Information, Communications and Technology; Tourism and Hospitality; Manufacturing have bounced back, registering strong growth rates.

“Some of the data that has come in 2022 does not suggest that we are slowing down”, the Governor noted.

“I believe, if we were to choose between growth and inflation, the policy priority should be managing the pace at which prices are increasing”, he added.

Economy expanded by 5.4% in 2021 – GSS

Ghana’s economy expanded by 5.4% in 2021, far higher than the 0.4% recorded in the year 2020, a period that COVID-19 pandemic had severely hit the global economy.  

Without oil, the economy recorded a Gross Domestic Product (GDP) growth rate of 6.9%

According to provisional estimate by the Ghana Statistical Service, only 10 countries in Africa recorded growth rates higher than that of Ghana. They included Cote d’ lvoire and Uganda.

The strong growth rate was driven by the Services sector, particularly the Information, Communication and Technology (33.1%) and the Agriculture sector, such as Fishing (13.4%).

The Services sector recorded the highest GDP growth rate of 9.4% in 2021.

Adnan Adams Mohammed

As the Bank of Ghana Monetary Policy Committee (MPC) is scheduled to announce its next decision on May 23 amidst historical rise in inflation to record high of 23.6 percent in more than 18 years, MPC members have one of the toughest test to pass.

Some economists have predicted that, the MPC bimonthly review of the economy will ‘sweat’ to arrive at policy recommendations that balance its mandate to tame the unprecedented inflation spike, manage liquidity issues, and growing the economy. 

Underscoring the dilemma the central bank faces, an economist with Institute of Economic Affairs (IEA) have suggested upwards adjustment in the policy rate by about 200 basis point to help narrow the gap with rising inflation and also ease to some extent the risk of foreign currency outflows. But, Databank research proof otherwise as it predict that, a further tightening of the Monetary Policy Rate (MPR) could stifle economic growth.

“Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone,” Courage Martey, an economist at Databank Group said in an interview last week. “Inflation hasn’t peaked yet, so the MPC would want to avoid creating a perception of chasing inflation when it should be ahead of the inflation curve.”

Although, the Databank economist admits that the Committee members of the central bank will have “a nail-biting decision to make.” 

Annual inflation jumped to 23.6%, the highest since January 2004, from 19.4% in March. As calls increase for an intervention to stem the situation, the IEA has projected a 200 basis points increase in the monetary policy rate to 19 percent. The last MPC meeting in April increased the policy rate by 250 basis points to 17%, but, Director of Research at the IEA, Dr. John Kwakye, believes the rate should see another increase to par with the current inflation rate of 23.6 percent.

In a paper titled, ‘How should the Bank of Ghana respond to the run-away inflation and the high cost of living in Ghana?’, Dr. Kwakye asserted that, “Taking all of these factors together, it may be surmised that the PR should be raised by another 200 basis points to 19 percent.”

“This will help narrow the gap with inflation and also ease to some extent the risk of foreign currency outflows. The adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation. Anything less than this may be interpreted as a weak response, which may be concerning to the markets.”

According to the Institute, the factors that should determine the rate adjustment include the wide gap between the current rate of 17% and inflation rate of 23.6%; the policy tightening by major central banks, which increases the risk of foreign currency outflows from developing and emerging market economies and which could put renewed pressure on the cedi; and the increase in the policy rate by as much as 250 basis points two months ago, an increase that may not have fully exerted its impact.

Apparently, according to the Databank’s Weekly Fixed Income Update, while it maintains an additional 200 basis hike in the policy rate in 2022, it expect the Monetary Policy Committee (MPC) to exercise restraint in May 2022, deferring a potential 100 basis points hike in MPR to July 2022.

It expatiates that, liquidity levels are already tight on the interbank market. Real returns on fixed-income securities are also depressed with the high inflation profile, continually undermining the Treasury’s financing operations.

“We note that short-term interest rates are misaligned, resulting in negative real yields, which could prompt the MPC to act in the week ahead”, it however pointed out.

The first and second-round effects of petroleum and transport price hikes, elevated food prices and the lagged impact of exchange rate pass through are the main drivers of the April 2022 inflation rate. 

“We believe these cost-push pressures will persist until the third quarter”, the investment bank stressed. Additionally, it noted that the implementation of the Electronic Transaction Levy from May 1st, 2022, and the impending hike in utility tariffs are further upside risks to inflation.

The MPC’s regular meetings over the next three days will conclude with an announcement of a decision to either maintain, reduce or increase the policy rate today, 23rd May 2022.

At the last meeting the policy rate which informs the rate at which the central bank lends to commercial banks which ultimately influences final interest rates was increased by 250 basis points to 17 percent to tame inflation which has so far risen by about 10 percentage points from January’s 13.9 percent to April’s 23.6 percent.