Duffuor’s Disincentivising Disinflation Victories

Gabby Asare Otchere-Darko

On Wednesday, June 14, the Ghana Statistical Service announced a single digit inflation of 9.52 for the month of June, which Finance Minister Kwabena Duffuor, according to media reports, told Ghanaians that it is the first time the country has achieved a single digit inflation rate since 1999.

The GSS, in the same week, brought out some very worrying figures which confirmed that Ghanaians have gotten poorer. Per capita income was $654.80 in 2007. It moved up impressively to $713.33 in 2008. By the end of 2009, per capita income had fallen to $659.21. Which means that every Ghanaian was on an average $54.12 worse off last year than they were in 2008. Yet, Government spin doctors, conducted by the Finance Minister, want us to focus mainly on the discordant vuvuzelating chorus of a single digit inflation.

Dr Duffuor, who was the governor of the Bank of Ghana at the time, is right to hail the June inflation rate but he is wrong to claim that the last time that happened was during his time at the central bank.

Under Governor Paul Acquah and Finance Minister Kwadwo Baah-Wiredu single digit inflation was attained in April 2006 (9.9%) and May 2006 (9.5%). The trick is, one, in keeping it there or lower and, two, while growing the economy at the same time. Inflation is only as important to consumers as the money in their pockets buying more or same rather than less goods and services, as continues to be the case.

It is, of course, very necessary to have low inflation in any economy. This is because as inflation rises, every cedi you own buys a smaller percentage of a good or service. So, we should not be shy in congratulating the Finance Minister for being on course with Government’s policy of low inflation for the economy.

However, there is more to prosperity than low inflation. Inflation cannot be treated as a lone ranger in our quest for defeating poverty and creating prosperity for all. To achieve lower inflation and a stable currency by denying a small and struggling economy the very oxygen of growth is a fraudulent way to manage any economy. It is like selling your car to buy a new battery.

We were promised a two-course menu of ‘Stability & Growth’ for 2010 by President JEA Mills. So far, the stability portion is being dished out, but the chef appears to be still out there in the marketplace shopping for the ingredients of growth. The jury is still out on Duffuor’s claim that the 9.52% inflation and stable cedi confirm that Government's Better Ghana Agenda is well on course.

A chef who chooses to locate his kitchen in the Ivory Tower of home economics is bound to serve his eaters a dish that could be no more delicious, nutritious and filling than Hope. Dr Duffuor must be reminded of the saying that Hope is a good breakfast to wake up to, but a terrible supper to go to bed on.

While, we should not be shy in congratulating the Finance Minister for being on course with Government’s policy of low inflation for the economy, we, however, run the risk of dying from this disinflationary chase. Inflation cannot be treated as a lone ranger in our quest for defeating poverty and creating prosperity for all. To achieve lower inflation and a stable currency by denying a small and struggling economy the very oxygen of growth is a fraudulent way to manage any economy. It is like selling your car to buy a new battery.

In fact, the economics theory, known as the Phillips Curve, tells us that whenever unemployment is low, inflation tends to be high. This, the theory goes, is because low unemployment makes the job market competitive, therefore, employers will pay more to keep people on their staff role. Whenever unemployment is high, inflation tends to be low. A. W. H. Phillips’s study of wage inflation and unemployment in the United Kingdom showed that salary levels are low when demand for jobs far outstrips vacancies available.

Linked to this are general consumption levels. In Dr Joe Abbey’s words, Ghanaians are paying too high a price for low inflation. Last year for instance, the growth rate of GDP of the high-employing, high-consumption service areas of wholesale, retail trade, restaurants and hotels was a mere 2.8%. It was 10.2% in 2008!

Manufacturing declined, registering -1.3% growth, as compared to 4.5% in 2008. Construction also slumped to -1.7% as compared to 8.3% the previous year. Fishing, an area that won Prof Mills some considerable election-winning votes, was the worst hit, suffering a -2.3% growth as compared to 10% in 2008. Net indirect taxes, dominated by VAT (a major indicator of consumer activity), grew by -2.3% of GDP, as compared to 6.2% the previous year.

Things on that score, namely the capacity of the Ghanaian to buy, have not improved this year, while Government hails the lowering inflation. Fundamental to this is what has happened to wages and salaries since 2009. Put it this way, inflation can be as high as 40%, so long as workers pay has enjoyed an increase of more than 40%, they, in theory, should not be negatively affected. But, if inflation is 6% and my pay has increased by 1%, it means I am five percentage points worse off than before.

Hence, it is difficult to see how the stability is helping both those who are unemployed and those who are receiving the same salaries they were last year because their bosses are not selling enough to pay them more. The June 2010 survey conducted by the Bank of Ghana to gauge the sentiments of businesses and consumers showed that consumer confidence is even lower this year than the very depressing situation of 2009. This comes on the back of a depressing performance last year, which saw industry growing by 1.6%, carried almost exclusively on the shoulders of an 8.6% growth in gold exports, while all the other major mineral;s (diamond, bauxite and manganese) recorded negative growths in output.

Overall consumer confidence declined by 5.2 points, meaning Ghanaians are growing less and less confident about the economy. The sustained deterioration in consumer sentiments, according to the Governor, reflects “pessimistic assessment of changes in household finances, possibly due to the increase in utility tariffs that had been recently announced.”

However, while the inverse relationship between inflation and unemployment is important there can be no excuse for double digit inflation in our economy. Ghana should try to make that a dead issue.

Since, inflation is defined as a sustained increase in the general level of prices for goods and services, measured as an annual percentage increase, the 9.52% rate for June is supposed to be an indication of by how much (in percentage terms) prices of goods and services captured in the consumer basket have gone up since June 2009.

But, how true is this seems to be the question on the lips of many Ghanaians. Every Ghanaian can do their own inflation check at home. Just go back to your consumer basket (the things you spend money on every month) and go back to how much you were spending on the same items June last year. Take any 10 items and check to see if their prices have gone up by only 10% in the last 12 months.

At best we are experiencing what economists describe as disinflation. Disinflation is a sustained decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services over time.

For example, the annual inflation rate was 13.30% in March, 2010 and was 11.66% in April. This means prices disinflated by 2.64% but were still increasing at a 11.66% annual rate.

This disinflationary trend continued at 10.70% in May. With the June rate at 9.52%, it means that whereas prices disinflated by 1.18%, they are still increasing by an annual rate of 9.52%.

But, since our government is happy to justify the slow down in the Ghanaian economy by seeking solace under the global meltdown, let us also compare our inflation figures, as well. Consumer prices or inflation in the OECD countries rose by 2.1% in the year to April 2010, unchanged from March. Excluding food and energy, OECD consumer prices increased by 1.2% only in April, the lowest rate on record.

Linked to this low inflation rates in countries that are most hit by the global crisis is record low interest rates. Let us go through the current interest rates of selected central banks to cement the link between low interest rate and low inflation rate: Bank of Canada (0.5%); Bank of England (0.5%); Bank of Japan (0.1%); European Central Bank (1%); Federal Reserve (0.25%); Swiss National Bank (0.25%).

But, what have we seen in Ghana? Inflation has been halved in the last 12 months, yet our banks have not reduced their lending rates by even one percentage point! – not 1%! So we should be asking, is the Better Ghana really on course? And, if so then the course must be really coarse because bankers certainly don’t believe in it, by the indicators above.

Since January 2009, the interbank overnight rate has fallen from 16.3% to 13.2%. The average base and lending rates of the commercial banks have hardly moved, however. Average base rate quotations of the banks went down by less than 3 percent in the first six months of 2010 to 28.7%, ranging between 24.7 – 29.5%.

But, what really matters to the average Ghanaian borrower is the actual lending rate not the base rate. Average lending rates have merely gone down by less than 1 percent to 31.8% in the range 23.5 – 35.0% since January.

There is a general net tightening of credit to small and medium sized enterprises and households for mortgages. This cannot be good for any economy. I was on radio at the weekend (Citi FM) making the same point when Deputy Finance Minister, Fiifi Kwettey called into the programme to say that Government has done its bit by reducing inflation and stabilising the cedi; the rest, he said, is left to the private sector.

Amissah-Arthur, the central bank boss explained, “Loans to small and medium sized enterprises and households were however tightened through increases in margin for riskier loans and security and collateral requirements.” What he did not say however is that loans have become riskier because people are simply not buying for lenders to in turn service their loans.

The advantage of low inflation is that it can help maintain the cost of servicing a loan. But, not in this environment where consumption is low. Ghana, which just four years ago boasted of a Non-Performing Loans (NPL) ratio of 7.5%, about five percentage points lower than the global average at the time, has now shot up, in spite of a marginal recovery. The ratio of loan losses to gross advances stood at 18.7% May 2010. It may be better than it was in January but still higher than the recorded NPL ratio of 11% in May 2009.

Commercial banks’ credit to the private sector and public institutions over the 12-month period to May 2010 increased by GH¢214.4 million (3.2%), the lowest since May 2003. But, even that increase was supported only by credit to Government.

In real terms, according to the Governor, commercial bank credit to the private sector fell by 3.4% at end-May 2010, compared with a growth of 19.1% at end-May 2009.

The Economist magazine makes the point that deflation, not inflation, is now the greatest concern for the world economy. So for us, here in Ghana, to be making progress with disinflation shows that we are only trying to catch up with the global trend. But, at what cost? For whose benefit?

Over the past year, producer prices have fallen throughout the advanced world; while producer prices for our major exports have stayed at record peak; consumer prices have been falling for the last 6 months in France and Germany; in Ghana, real wages have actually fallen considerably in the past year, while prices are rising albeit slowly.

What is pushing prices down in the world? The fact still remains that the world's production capacity is now growing more rapidly than ever before, thanks to globalization, high rates of investment, and rapid productivity increase. Meanwhile, demand is generally not keeping up - perhaps because income is too unequally distributed, perhaps because consumers are satiated.

But, what we know is that the credit crunch that led to massive unemployment across the globe also led to a cyclical reduction in purchasing power, which therefore suppressed demand. The result is global excess capacity, which exerts an inexorable downward pressure on prices.

Let us bring it home to Ghana. We may not be producing much but we have produced enough food in the last few years to keep prices low – so much so that we were not as hard hit as others during the food crisis of 2008. Excess capacity even in imported goods has been exerting inexorable downward pressure on prices. This supports the argument that the reduction in inflation and the stability in the cedi are both down to a simple suppression on demand. People simply don’t have enough money to spend.

If in doubt check what is happening on the tax front. Government has over the past 12 months introduced all sorts of tolls and taxes to enhance revenue, in the process hurting consumption. Total receipts up to June 2010 amounted to GH¢3.3 billion comprising GH¢2.7 billion in tax revenue, and GH¢500.8 million in non-tax receipts.

“Due to lower collections of import duties and import VAT, CEPS collections were below target, recording GH¢1.0 billion,” the Governor disclosed, adding that low “Construction and Port & Harbour activity weighed down on the index.”

Thus, Government must begin to think out of the box to stop the Better Ghana Agenda from being battered by the bitter realities on the ground.

The author is the Executive Director of the Danquah Institute, a policy think tank in Accra.