Riding the Economic Tiger, Gov't Struggles to Rein in Inflation

There is danger that Government's promise to bring down inflation is already off-target. Mid-way through the fiscal year, indications are that inflation rate could be shooting up despite pronouncements from government officials that things are changing for the better.

The Ministry of Finance says there are signs to show a turn around in inflation figures. Deputy Minister of Finance, Dr. Adonbila Agambila told Public Agenda that economic indicators point to progress being made in the inflation numbers, dropping from 41.9 percent at the beginning of the year to 39.7 percent by April this year.

But this is disputed by economists at the Centre for Policy Analysis (CEPA) and the Institute of Economic Affairs (IEA).

A research fellow at IEA, S. K. Apea, argues that inflation rate is set to go higher because Government failed to factor in such variable as the increase in utility tariffs, increase in fuel prices and the upward adjustment of the minimum wage.

He said the government would have to wait to see how the increase in minimum wage reflects in employers' calculation of their production cost.

Another economist, Dr. Samuel Nii Ashong of CEPA, supports this view and points out that "the figures being quoted by the Ministry do not reflect the consumer price index since the hiking of tariffs after the first quarter of the year".

The views held by the two economists are reflected in the actual consumer prices on the market. A market survey conducted by Public Agenda points to sharp rise in consumer items across the board.

Both Apea and Ashong were however quick to acknowledge that the government has initiated good policies to contain the situation.

They point to policies on revenue enhancing measures and matching capital against revenue to control government borrowing from the banking sector.

"These are prudent fiscal policies that will keep inflation in check", said Apea.

During the National During the National Economic Forum held recently in Accra, President John Agyekum Kufuor pledged his government's determination to pay off the country's national debt of over ?9 trillion by the end of his tenure of office.

He said the successful attainment of this objective would lead to the nation saving over ?1 trillion in domestic debt payments.

This objective is complimented by the international donor community's commitment to write off ?2 trillion of Ghana's external debt due for payment this year.

But for the man or woman in the street all these rosy promises are not being felt in the pocket now. Within the first half of the year, workers have had to contend with a 64 percent increase in petroleum prices and 100 percent in utilities. This is against a 25 percent in wage increment. The snowball effect is a general price hike affecting every commodity in the economy.

The situation could be compounded by a hike in prices of foodstuffs as a result of the late farming season. Reports from the agriculture front indicate that farmers in certain communities have been compelled by the persistent heavy rains to embark on replanting of their products. This might lead to a late harvesting season, which in turn could affect prices of foodstuffs.

In spite of the apparent negative economic indicators as reflected in high inflation and interest rates, the cedi has exhibited stability over a relatively long period.

However, the two economic experts are sounding a note of caution that it is too early to consider this phenomenon as sustainable.

They point out that the seemingly stable cedi is currently being propped up by donor inflow of external grants that started coming in since the beginning of the year.

"The apparent stability may not be sustainable [ ] there is no concrete support for the cedi, and that is tenuous", says Apea, a Research Fellow at IEA.

He therefore urged government to start building a more sustainable base for the cedi instead of over-relying on inflows.

Nii Ashong observed also that the apparent stability of the cedi could be attributed to "democracy dividend". This he explained stems from the goodwill being extended to the government as a result of the smooth transition of political power in the country.

It was his contention, however, that even at its present level, the rate of the cedi is too high to attract investor confidence.

On the issue of high interest rates, Apea noted that it would take time for government to mobilise funds and, therefore it has to borrow from the banking system to keep government machinery running. Hence, interest rates on treasury bills will continue to be high.

"The national coffers were virtually empty when this government took over in January, and it had to borrow to pay for both domestic and international debts," said Apea.

Dynamising the Ghanaian economy has been a major goal of governments since independence. However the record shows a steady deterioration especially in terms of wages and salaries. During the last election, the NPP cited high inflation and high cost of living generally as major indicators of the NDC's failure as government.

Now that it is the government people are watching to see how it can fulfill its promise of ensuring that workers earn a living wage and are able to afford the minimum for a decent life.

With the next interim budget slated for sometime in August, Ghanaians will be waiting with bated breath to see how the macro-economic policies initiated at the beginning of the year will translate into wealth not on paper but in people's pockets.