Election spending may drive prices higher – Data Bank research

A report by Data Bank Research has indicated that prices of goods and services may not remain stable due to high spending by government ahead of the December polls.

According to the report, titled ‘Ghana’s Inflation Update for December 2019’, aside from the excessive spending by the government that could cause prices of goods and services to rise, there are also threats emanating from the external environment such as volatile crude oil prices – and a local threat coming from high transport fares.

“Potential shocks from likely fiscal and currency pressures, as well as possible crude oil price shocks, remain key risk factors to Ghana’s inflation outlook in 2020… A resurfacing of fiscal risks from excess public expenditure ahead of the 2020 general elections could rattle the local unit, thereby posing a major threat to price stability. General prices could equally take a hit from higher fuel costs and transport fares if the US-Iran tensions escalate,” the report said.

Despite the aforementioned threats to the stability of prices, the Data Bank researchers are of the firm belief that inflation will remain within the medium-term target of 8-10 per cent by end of the year, especially if the central bank maintains a tight monetary policy stance.

“These risk factors notwithstanding, we expect a more cautious monetary policy stance in 2020, which could potentially balance out probable risks from fiscal excesses to inflation. The cedi’s positive start to the year is also welcome news, which together with the Bank of Ghana’s FX forward guidance could anchor market expectations. Based on the above, we expect a moderated upside risk to inflation. We, therefore, tip headline inflation to be contained within the 8%±2% target band through 2020,” states the report.

Maintaining a tight monetary policy stance is also supported by the IMF, as it explains in its Article IV Consultation report that the central bank should remain cautious since inflationary pressures are crouching at the door.

“It is important to tighten policy if signs of inflationary pressures materialise…In addition, inflation expectations remain aligned with the central bank’s target, and short-term real rates are above the historical average. This context suggests that the current policy rate is appropriate. The MPC should remain cautious as inflationary pressures could re-emerge, and a relatively tight stance may help stabilise the exchange rate and reduce FX interventions,” the IMF advised.

And in view of rebasing of the inflation basket in August 2019, the IMF has further advised the government to lower its medium-term target of 8-10 per cent in order to make the economy competitive among its peers in sub-Saharan Africa.

“Over the medium-term, the authorities may consider lowering the inflation target band in line with other countries of the region, in coordination with fiscal policy,” the IMF maintains.