Editorial
The latest figures emanating from the Ghana Statistical Service indicate that consumer price inflation continues to fall, the rate of 14.23% for February being the lowest in 22 months. For an economy where monetary policy centres around inflation targeting and fiscal policy is also largely influenced by the desire to minimize the rate of price increases, this counts as a major achievement for what it is worth, despite the obvious downside of the deflationary policies used to achieve it, in the form of damping of overall economic activity and business expansion.
However, past experience has shown that bringing relatively high inflation down is one thing but keeping it down is another thing altogether, especially in Ghana’s current economic circumstances which are still tenuous at best. Which means government’s economic managers will need to tread very carefully if the gains of the past consecutive eight months of falling inflation are not to be lost even faster than they were made.
To be sure, despite several clear threats to the gains with regards to inflation, there is good cause to hope. Food inflation, which accounts for nearly 45% of the basket of goods and services used to compute the Consumer Price Index (CPI) was just 8.17%, year-on-year, for February, and during the second half of the year can be expected to fall even further, after the annual harvest.
Non-food inflation which accounts for 55.09% of the CPI is more than twice as high, at 18.54% for February, but instructively is currently falling faster than food inflation, in part because the cedi, petrol prices and utility tariffs have been more or less stable since the middle of last year.
However, upward pressure on consumer prices threaten from two sources that could easily negate the recent gains in the fight against inflation. One is the surge in crude oil prices on the international market, which, if sustained will sooner or later translate into higher local transport costs which in turn would reverberate all around the economy. The other is the cost of public utilities – electricity and water – whose public sector providers are clamouring for major tariff hikes.
As for the first – the price of oil and resultant cost of petroleum products locally – little if anything can be done about it. Ghana cannot afford to reintroduce petroleum subsidies currently, especially with the ongoing pact between government and the International Monetary Fund and the World Bank, neither of which favours subsidies by countries which are already leaning on it to cover fiscal deficits and weak balance of payments positions.
Indeed President John Atta Mills administration is probably already rueful about its election promise of cutting petroleum product prices without fully explaining that its only maneuvering room in this regard was to reduce petroleum price taxes, a move it has already done but which has since been negated by rising crude oil prices. Thus, the dire prospect of higher petroleum product prices and its inevitable reverberation across consumer prices for virtually everything else seems not only imminent but unavoidable too.
The second potential source of upward pressure on prices however – possible hikes in tariffs on public utilities – can be averted. To be sure both the IMF and the World Bank will insist that subsidies are not allowed to creep in again, even as the state-owned electricity and water providers count their losses at the current tariff levels.
But those state owned corporations themselves admit that a major source of their financial problems is the failure of government ministries, departments and agencies to pay their bills; which means those problems are more the result of poor cashflow than lack of profitability. Unfortunately in typical fashion their recommended solution is to get their private sector customers both institutions and households to pay more to make up for the cashflow they are deprived of by their public sector customers failure to pay their own bills.
This should not be allowed. Rather, government and its agencies should pay their bills, even in the face of their obvious budgetary constraints. Those constraints should not be allowed to become the cause of a return to an economy dogged by high and rising inflation.
Of course this means further belt tightening by government. But the alternative – higher public utility tariffs and higher inflation – would serve to snatch away the gains of government’s improved fiscal discipline so far, which would thus amount to lots of motion but no movement.
The latest figures emanating from the Ghana Statistical Service indicate that consumer price inflation continues to fall, the rate of 14.23% for February being the lowest in 22 months. For an economy where monetary policy centres around inflation targeting and fiscal policy is also largely influenced by the desire to minimize the rate of price increases, this counts as a major achievement for what it is worth, despite the obvious downside of the deflationary policies used to achieve it, in the form of damping of overall economic activity and business expansion.
However, past experience has shown that bringing relatively high inflation down is one thing but keeping it down is another thing altogether, especially in Ghana’s current economic circumstances which are still tenuous at best. Which means government’s economic managers will need to tread very carefully if the gains of the past consecutive eight months of falling inflation are not to be lost even faster than they were made.
To be sure, despite several clear threats to the gains with regards to inflation, there is good cause to hope. Food inflation, which accounts for nearly 45% of the basket of goods and services used to compute the Consumer Price Index (CPI) was just 8.17%, year-on-year, for February, and during the second half of the year can be expected to fall even further, after the annual harvest.
Non-food inflation which accounts for 55.09% of the CPI is more than twice as high, at 18.54% for February, but instructively is currently falling faster than food inflation, in part because the cedi, petrol prices and utility tariffs have been more or less stable since the middle of last year.
However, upward pressure on consumer prices threaten from two sources that could easily negate the recent gains in the fight against inflation. One is the surge in crude oil prices on the international market, which, if sustained will sooner or later translate into higher local transport costs which in turn would reverberate all around the economy. The other is the cost of public utilities – electricity and water – whose public sector providers are clamouring for major tariff hikes.
As for the first – the price of oil and resultant cost of petroleum products locally – little if anything can be done about it. Ghana cannot afford to reintroduce petroleum subsidies currently, especially with the ongoing pact between government and the International Monetary Fund and the World Bank, neither of which favours subsidies by countries which are already leaning on it to cover fiscal deficits and weak balance of payments positions.
Indeed President John Atta Mills administration is probably already rueful about its election promise of cutting petroleum product prices without fully explaining that its only maneuvering room in this regard was to reduce petroleum price taxes, a move it has already done but which has since been negated by rising crude oil prices. Thus, the dire prospect of higher petroleum product prices and its inevitable reverberation across consumer prices for virtually everything else seems not only imminent but unavoidable too.
The second potential source of upward pressure on prices however – possible hikes in tariffs on public utilities – can be averted. To be sure both the IMF and the World Bank will insist that subsidies are not allowed to creep in again, even as the state-owned electricity and water providers count their losses at the current tariff levels.
But those state owned corporations themselves admit that a major source of their financial problems is the failure of government ministries, departments and agencies to pay their bills; which means those problems are more the result of poor cashflow than lack of profitability. Unfortunately in typical fashion their recommended solution is to get their private sector customers both institutions and households to pay more to make up for the cashflow they are deprived of by their public sector customers failure to pay their own bills.
This should not be allowed. Rather, government and its agencies should pay their bills, even in the face of their obvious budgetary constraints. Those constraints should not be allowed to become the cause of a return to an economy dogged by high and rising inflation.
Of course this means further belt tightening by government. But the alternative – higher public utility tariffs and higher inflation – would serve to snatch away the gains of government’s improved fiscal discipline so far, which would thus amount to lots of motion but no movement.
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