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Using monetary policy to control inflation: Economists look elsewhere for solution

Adnan Adams Mohammed

Two renowned economists from the country’s leading universities have all flagged down the potency of using the monetary policies to control the recent leapfrogging inflation rate.

They believe the Bank of Ghana’s measures put in place to curb the consistent rise in inflation are either not working or the situation is not being diagnosed properly. Both, are thereby calling on the government through the finance ministry to consider other factors such as the fiscal space.

The Ghana Statistical Service last week announced that, increment in transport fares and unbearable food prices pushed  May inflation rate to 27.6%. This is against 23.6% recorded in April which was about 4% jump from March inflation of 19.4%. The inflationary trend pushed the Monetary Policy Committee (MPC) of the BoG to tighten the policy rate by 200 basis points from 17% in April to 19% in May. Yet, the according to Professor of Finance and Economics at University of Ghana, the monetary policy has proven to be inefficient and has therefore asked the government to adopt a fiscal policy approach toward mitigating inflation in the country.

“If you look at the disparity between the inflation and the policy rate and the Treasury bill rate, it tells you there’s a lot more work to be done and we cannot look to the monetary policy because the problem is from the fiscal side”, Prof. Godfred Alufar Bokpin of the UG Business School. “The monetary policy is constrained in terms of how we can deploy that effectively to contain inflation and engineer growth.”

Also, an economist at the University of Cape Coast has opined that the Central Bank maybe misdiagnosing the problem. He said, the increase in the BoG policy rate by 200 basis points to 19% is in response to risk to the economy; high inflation, weak financial inter-mediation and fiscal stress, which is expected to trigger lending rate hike.

“The measures taken in an environment of volatile depreciation promises rather further inflation”, Professor John Gatsi, Dean of School of Business and Finance at UCC said in reaction to the MPC’s announcement, last week. “High inflation and upward lending rate will undermine government contracts execution and create new levels of arears due to cost implications for procurement of materials.”

Prof Gatsi expatiated that, a number of projects maybe abandoned due to inflation, depreciation and cost of borrowing and warned that there maybe too much pressure on the banks as cost of mobilizing funds continue to increase with the possibility of distorted returns on placement of funds with the banks.

According to the Government Statistician, Professor Kobina Annim, the rate of inflation for Transport (39.0%), Household Equipment and Maintenance (33.8%), Housing, Water, Gas and Electricity (32.3%) and Food and Non-Alcoholic Beverages (30.1.6%) were higher than the national average (27.6%).

In May, 2022, 12 of the 13 divisions recorded inflation rates higher than the rolling average from June, 2021 to May, 2022.

The data showed that Food inflation in May, 2022 was 30.1%, compared with 26.6% in April 2022. Non-food Inflation was however 25.7% in May, 2022, as against 21.3% the previous month.

Meanwhile, Prof Bopkin has posited that, we cannot look to monetary policy to tackle this.

“We must shift our attention to the fiscal side so that the fiscal side will respond appropriately with the discipline that it requires,” he stressed.

“Once the source of the inflation is largely fiscal, then there’s a limit to how far you can deploy the monetary policy to bring down inflation and then engineer growth.

“More so, because of the monetary policy framework that we are using under inflation targeting, because for one key requirement for inflation targeting to be effective, it is fiscal discipline. Once you deny the monetary side the fiscal discipline, then there’s no way they can use the monetary policy effectively to bring down inflation and engineer growth.

At a press briefing, fortnight ago, the central bank said the growth prospects in the domestic economy remain positive and the Bank’s high-frequency indicators point to continued and increased momentum in economic activities with private sector credit showing some improvement in real terms, despite the increased price pressures.

“All these are resulting in a closure of the negative output gap. The banking sector remains robust, with sustained growth in total assets, investments and deposits. However, business and consumer confidence have dipped, reflecting the sharp depreciation of the currency and the general high inflationary environment, which has resulted in higher input costs for businesses. A quick turnaround, with more confidence-building measures to counter these conditions, would provide further boost to the real economy”, it added.

On fiscal policy implementation, the Committee observed that execution of the budget for the first quarter was broadly in line with targets although there was a minor deviation in the deficit target, stemming largely from low revenue receipts.

It is the expectation of the Committee that fiscal consolidation will take hold gradually and the mid-year budget review will provide further fiscal fine-tuning to ensure that the fiscal consolidation efforts stay on track.

The MPC said despite the improvement in the trade balance due to favourable commodity prices, the external sector has weakened somewhat due to developments in the capital and financial account.

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