Bank of Ghana
Bank of Ghana

The Centre for Economic and Business Research (CEBRE) wishes to advice the Central bank (Bank of Ghana) to change the policy direction of its inflation targeting because it is approaching inflation targeting from the direction that does not support business growth.

Bank of Ghana
Bank of Ghana

CAUSES OF INFLATING
Inflating is mainly caused by two factors:

Demand-pull and cost push
1. Demand-pull inflation occurs when there is too much money in circulation in relation to goods and services available, therefore causing more money to chase fewer goods and services and hence prices go up.

2. Cost push inflation on the other side occurs when cost of production goes up. That is prices of inputs, electricity bills, interest rates etc. Producers in turn pass on these increases in cost to consumers by increasing the prices of their goods and services.

MEASURES TO CONTROL INFLATION
Inflation can be fought from two angles (demand and supply sides) depending on the cause of the inflation.
The Central bank (Bank of Ghana) is fighting the inflation from the demand side by restricting money supply into the economy and by keeping the interest rate so high to deter borrowing. By keeping the policy rate so high (current monetary policy rate is 26%), the Central bank assumes that inflation in Ghana is caused by the demand side (more money chasing fewer goods) and that the only way to resolve the situation is by mopping up the excess liquidity in the system.

CEBRE’s Analysis
From CEBRE’s analysis, the real cause of inflation in Ghana is cost push which is the supply side of the problem. That is fewer goods and services are being produced and supplied in relation to the amount of goods and services being demanded.

These shortfalls are due to the following reasons:
1. High cost of borrowing to produce due to the high policy rate of the Central bank, which in turn raises the interest rate from the universal banks (currently the least lending rate is 32%).
2. High electricity tariffs
3. High cost of using generators due to the persistent power outages.
4. High input prices.
5. High taxes on goods and services.
6. Over reliance on imported raw materials for production and consumption of foreign goods.
7. Most of the goods consumed in Ghana are also imported

EFFECTS OF SUPPLY SIDE MANAGEMENT ON THE ECONOMY

It is clear from elementary economics that the demand side management actually restricts the economy from expanding and hence has a negative impact on Gross Domestic Product (GDP). On the other hand, supply side management brings about more job creation and expands the economy and hence has a positive impact on economic growth.

From the approach the Central bank is using in fighting inflation, it will only make it more difficult for business to operate and hence unable to contribute meaningfully to the economic development of the country. This is because they are borrowing at a high interest rate and so they are not able to borrow enough money to produce more to meet the demand.

Furthermore, because the companies are not producing more they will lay off some of the workers and this comes with its own negative effects on the economy.
All these problems cripple the businesses, stifle growth and increase unemployment.

CEBRE’S PROPOSAL
1. CEBRE proposes that the Central bank should reduce the policy rate to alleviate the high cost of borrowing in the country because as of now most of the private sectors are crowded out of the borrowing market. If the interest rates are reduced, producers can borrow more money to produce on large scale to take advantage of economies of scale and hence reduce their prices.
2. The central bank should also reduce the Treasury bill rate and buy back some of government debts so that more money could be release into the economy.
For instance, the Bank of England just last week (4/08/2016) cut interest rate to 0.25% which is the lowest rate in the Bank’s 322 year history, just to boost the economy.
3. The Central bank should also make available more Dollars available to protect the cedis from depreciation further.

Source: The Centre for Economic and
Business Research

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