Inflation targeting policy not credible - Prof. Kusi

Executive Director of the Institute for Fiscal Studies (IFS), Prof. Newman Kusi, has described as “ineffective” the central bank’s approach to breaking the pace of surging inflation and interest rates in the country; suggesting viable options other than the regular monetary policy adjustments.

Speaking on the maiden edition of “Business Time” -- a business magazine TV programme powered by the Business and Financial Times, he said the instruments that the Bank of Ghana has adopted to get inflation in check are ironically the very ones that are contributing to the continual rise of value indicators.

He argued that the central bank’s decision to increase the cost of capital or mop up liquidity from the system as a way of reducing demand or consumption to sustain the pressure on prices is a misplaced approach.

He explained: “The inflation that we have now is not demand-cost but cost-push inflation -- in the sense that the exchange rate is being depreciated and this is a country where everything is imported. So as exchange rates depreciate, the landed cost of imports also goes up and automatically feeds into the price”.

On the domestic side, he said, as the cost of credit goes up so does the cost of production and pricing of goods and services…and for that reason “one cannot sit down on one side and decide to increase the policy rate to serve as a deterrent for people not to borrow or spend, as they rather feed into the cost of credit and ultimately inflation”.

According to Prof. Kusi, the ideal approach to tackling interest rates and inflation hinges on government’s ability to put in place measures that will increase domestic production and make businesses more attractive in terms of profitability and productivity.

Another way, he said, would be to deal with interest rates and inflation more directly; for instance, by increasing reserve requirements for commercial banks and reducing the cost of credit to private business instead of crowding them out of the credit space.

Otherwise, he said: “There is even what we called direction and distribution of credit, whereby the central bank can direct commercial banks as to what percentage of their loans should go to the private sector and which goes into other sectors -- thus controlling the percentage of credit that goes to the consumers and ensure more loans go into production, which is on the low.

Inflation as at January last year was 16.4 percent; ended the year at 17.9 percent; and has currently reached 19 percent in January this year. This continual rise has forced the central bank to tighten its Monetary Policy Rate by 400 basis points from 21 percent in the same month to 25 percent, but these interventions have yet to achieve the intended results.

According to the economist, the tight monetary policy regime has rather caused interest rates to go up -- which has directly increased the cost of credit and made it difficult for private businesses to borrow from financial institutions to sustain their business, increase investments and spur economic growth.

And given that government continues to borrow excessively from the domestic market --with Treasury-bill rates hovering above 25 percent -- Prof. Kusi indicated that banks, instead of lending to private businesses, now prefer to lend to government, sit down and count on the interest.

This situation, coupled with the lack of political will to stir productivity in key sectors of the economy, according to the economist continues to hinder growth of the national economy.

Prof. Kusi further said of the economy: “The economic situation is not getting any better because all the macroeconomic and growth indicators are pointing in the wrong direction; growth for instance has declined from 7.9 percent in 2013 to 4 percent as at 2014. Government last year projected a growth of 4.1 percent; so from 14 percent in 2011 it’s now creeping at 4.1 percent, I don’t think it’s a good turnaround”.

He also decried the gradual relegation of the country’s dominant agricultural sector’s contribution to Gross Domestic Product (GDP) and the lack of concrete policies and actions that will improve agricultural productivity, as well as establish linkages between the sector and industrial growth so as to transform the economy.