Rate of Inflation Slower Than Expected

- Renaissance Capital

By Tommy Ekpe





Findings on Ghana’s current economic outlook by Renaissance Capital, a leading independent investment bank of the Renaissance Group, reveals that the acceleration of the country’s inflation has been significantly slower than expected.

According to a report issued last week, despite the Cedi’s 30 percent depreciation against the dollar, headline inflation increased to 9.5 % year-on-year (YoY) in July, from 8.4% YoY a year earlier.





While acknowledging that low food inflation has helped keep headline inflation in the single-digit region, it however noted that food inflation has also edged up over the past 12 months to 5.8% YoY in July, from 3.3% YoY a year earlier.


“That said, we expected most of the inflationary pressure to stem from non-food items, particularly from housing and utilities’ costs and transport prices, owing to particularly high oil prices in the first quarter of 2012 (1Q12), and from clothing and furnishings, given that a significant share of these goods are imported”, the report stated.


The report observed that non-food inflation only increased to 12.4% YoY in July, from 11.3% YoY at year-end 2012 (YE12), adding that all that pointed to downwardly sticky inflation, which had delayed its return to the double-digit region ‘in our view’.

“We think a more stable cedi in the second half of 2012 (2H12), on the back of the raft of policy measures that the Bank of Ghana (BoG) implemented in 1H12, is positive for the inflation outlook”, it said, expecting inflation to however rise into the low double-digit region by YE12, due to the proposed increase in government spending and base effects.





On fiscal slippage, the report said it was largely due to wage costs. Elaborating further, it said Ghana has a history of running up bigger-than-targeted budget deficits in election years, particularly in the post-military-rule period, adding that the only exceptions are 2000 and 2004, the year before Ghana qualified for debt relief, 2005, when the authorities worked hard on narrowing the deficit to improve the country’s prospects.


“One of the country’s worst fiscal slippages was during the last election in 2008, when the outgoing New Patriotic Party (NPP) government ran up a budget deficit of 8.5% of GDP, which was significantly bigger than the target of 2- 3% (under the rebased GDP)”, it said.


The current National Democratic Congress (NDC) administration, which inherited a large fiscal deficit, according to the report, was compelled to adopt a fiscal consolidation policy enabling it to narrow the deficit until 2011, when the budget deficit came in at 4.4% of GDP, below the target of 5.1%.

“Given the below-target deficit of 2011 and the NDC administration’s fiscal consolidation credentials, our expectation was that fiscal spending in 2012 would be contained, the fiscal slippage would be minimal and the budget deficit would be close to the target of 4.8% of GDP”, the report stated.


However in July, it said, Finance Minister, Dr. Kwabena Duffuor proposed a supplementary budget of GHS2.6bn ($1.34bn) that would allow for an increase in spending of 1.9% of GDP and a wider budget deficit of 6.7% of GDP. “According to our estimates, 60% of the supplementary budget will go towards the migration of public sector workers to the single spine salary structure, and the implementation of the base pay increase of 18%. Twelve per cent will go towards debt service costs and 11% to cover the government’s under-recovery of fuel and utility costs. The upside is that public sector workers’ migration to the new salary structure is near complete, which should ease future wage cost increases”, it added.


This article was originally published in The Business Analyst of Wednesday, 29th August – Tuesday, 4th September, 2012. E-mail: thebusinessanalystgh@gmail.com