The Institute for Fiscal Studies (IFS), has described the approach used by the Bank of Ghana(BoG) in taming inflation in the country as ineffective.
According to the IFS, there are shortcomings in the country’s inflation management where the BoG seems to over-rely on demand management tools to tackle a problem that is essentially supply or structurally driven.
Speaking to Citi Business News Executive Director of the Institute for Fiscal Studies, Prof. Newman Kwadwo Kusi said the central bank must begin to consider innovative ways like using micro-economic indicators in addressing inflation.
“It is ineffective because the Bank of Ghana is using an instrument to target something that is not. Prices are going up not because there is excess liquidity in the system. We all know the cost of credit, in any case how much credit is going to the private sector,” he asked.
He maintained that what is driving the inflation is not the excess liquidity in the system.
“This is mainly because prices of all petroleum products with other things have gone up, Inflation has gone up because domestic production has gone down, GDP growth has dropped from 11% in 2011 to 3.5% in 2016 and it has affected food production,” he argued.
Prof. Kusi argued that the central bank’s decision to increase the cost of capital or mop up liquidity from the system as a way of reducing demand or consumption to sustain the pressure on prices is a misplaced approach.
“We are importing tomatoes, onions, plantain and other foodstuffs from Burkina Faso. That has got nothing to do with liquidity in the system and that is why the food component of inflation is going up,” he said.
He explained that raising interest and hoping that it will reduce inflation is rather a counter-productive move.
Inflation targeting by BoG
The Bo,G whose core mandate is inflation targeting has been struggling for years to keep prices down, with inflation currently at 18.9% far above the BOG’s end of year target of 8percent, plus or minus 2.
Both government and the Bank of Ghana have clearly missed their inflation targets for 2015, according to figures released by the Ghana Statistical Service.
GSS figures on inflation
Latest figures announced by the Ghana Statistical Service show the year-on-year inflation rate for the month of May went up marginally to 18.9%. The rate increased by 0.2% from the 18.7% in April 2016. The monthly change rate for May was 1.1%.
According to the Ghana Statistical Service, elements of the non-food group of inflation namely; transport, housing, water, electricity, education and recreation among others accounted for the increase.
The food and non-alcoholic beverages group recorded a year-on-year inflation rate of 8.5 percent. This represented a 0.1 percentage point higher than the 8.4 percent recorded in April 2016.
The non-food group on the other hand recorded a year-on-year inflation rate of 25 percent in May 2016. Four sub-groups recorded year-on-year inflation higher than the group’s average rate of 25 percent.
Transport recorded the highest inflation rate of 40.9 percent, followed by housing,water, electricity, gas and other fuels with 35.7 percent, education 32.3 percent and recreation & culture with 27.9 percent.
At the regional level, the year-on-year inflation rate ranged from 15 percent in the Upper East region to 22.6 percent in the Greater Accra region.
Two regions; Greater Accra and Ashanti recorded inflation rates above the national average of 18.9 percent.
Inflation for the month of April had declined from 19.2 percent recorded in March 2016.
Similarly the non-food inflation components accounted for the decrease in April.
The consumer price index measures the change over time in the general price levels of goods and services that households require for the purpose of consumption.
By: Norvan Acquah – Hayford/citibusinessnews.com/Ghana