Friday, 16 February 2018

Review of Ghana’s inflation targeting regime - Economist

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Adnan Adams Mohammed

Renowned economist and Senior Research fellow at the Institute of Economic Affairs (IEA), Dr Eric Osei-Assibey is calling for a review of Ghana’s inflation targeting (IT) regime.

This, he said, is to help focus on the acceleration of the nation’s socio-economic development.

Dr Assibey is of the view that, if Ghana’s IT regime was to be maintained, then we need to solidify the fundamentals. 

“We need to make sure the productive sectors of this economy are good. We are exporting more, we have favourable terms of trade and our currency is strong, just like in developed countries, so that inflation targeting will be relevant to us.

“If IT is to continue, then there is the need to strengthen the economic fundamentals, otherwise an alternative policy that is in line with our development agenda should be sought”.

At an IEA Roundtable in Accra, Dr Osei-Assibey gave the recommendation in his presentation saying, IT had often been successful in keeping inflation levels low and avoiding many of its negative effects.

IT is an economic policy, through which a central bank publicly determines a target inflation rate and then attempts to steer actual inflation towards the target.

IT is a transparent way to explain interest rate policy and to anchor consumers’ expectations about future inflation, adding that, on the other hand, if the rule was implemented very strictly, an IT policy could severely limit the central bank’s flexibility in responding to changing economic conditions.

Out of the 195 countries in the world, only 33 were practicing IT; of which Ghana, South Africa and Uganda were the only sub-Saharan African countries.

However, Dr Osei-Assibey said the functional autonomy of the Bank of Ghana (BoG) in adopting inflation targeting was guaranteed under the Bank of Ghana Act, 2002 (Act 612), but it was not until 2007 that the Bank officially adopted an inflation targeting framework for the conduct of monetary policy.

He said prior to its adoption, the BoG operated largely a direct controlled system of monetary framework, known as the monetary aggregate regime with money growth as the nominal anchor in arresting inflation.

But, a decade after the adoption of IT, Ghana’s experience under the framework had been mixed.

Dr Osei-Assibey said proponents of IT argue that a volatile inflation rate had negative effects on an economy: high levels of inflation, increase menu costs, discourage lending, and may create an inflationary spiral that leads to hyperinflation and uncertainty about future prices.

With this, any alternative policy target should be consistent with and support Ghana’s national priorities; “in other words, an important criteria for the target is that it should play a positive development role and actively support the economy’s structural transformation”.

Given the Cedi’s frequent volatility with high pass-through effect to the economy, a monetary policy that targets a stable and competitive real exchange rate was a better intermediate target.

Consequently, in situations where IT had generated significant costs – slow growth, sluggish employment generation and high real interest rates, as had also been found in Ghana, the literature proposes a real targeting approach.

Dr Osei-Assibey said although in principle his presentation was not against the adoption of inflation targeting as a monetary policy, it was to make a point that further interventions seem necessary to augment its effectiveness.

“Again, while changing the IT involves risks and can run into important transitional difficulties, we must give sufficient consideration to the fact that we need to rethink how to best pursue monetary policy (price stability) that will be growth enhancing and have employment creation potential,” he said.

“The most important aspect that I believe we should introduce is a framework for thinking about both price stability, exchange rate stability and growth,” he added.