The State of our EconomySpeech Delivered by: Dr. Mahamudu Bawumia, 2012 NPP vice-presidential candidate

Continued from Friday May 4 2012 issue

Single Digit Inflation
Mr. Chairman, I would now like to turn my attention to the issue of inflation in Ghana. All countries would prefer to have a low and stable inflation in the context of economic growth and job creation. This is because inflation represents a fall in the value of money. It is a tax on the poor and makes it difficult for businesses and investors to plan. Inflation results in an increase in interest rates as lenders seek to protect the value of their money and also results in exchange rate depreciation. Under these circumstances inflation tends to hamper sustained growth and job creation. It is for this reason that governments and economic managers set their eyes to reduce inflation to low single digits because it would inter alia:
. reduce the cost of living
. reduce interest rates
. stabilize the exchange rate
Low and stable inflation is only meaningful if it can translate into these tangible benefits for our people. The prevalence of these conditions would in turn, reduce the cost of doing business, reduce uncertainty, increase private sector investment, and enhance economic growth and job creation.
Mr. Chairman, on the issue of inflation in Ghana, official statistics indicate that inflation has been reduced from 18.1% in 2008 to 8.8% in March 2012. By the way, this is not the first time in our history that we have had inflation in single digits. In 1958 for example inflation was zero, and we also had single digit inflation between 1959 and 1963 (a four year period!) under Kwame Nkrumah. Single-digit inflation was also attained between 1970 and 1971 under K.A. Busia, as well as in 1992 under J.J. Rawlings and 2006 under J.A. Kufuor. There is therefore nothing unprecedented about achieving single digit inflation in Ghana.
The key question that is on the minds of many Ghanaians is: “Do we really have single-digit inflation in Ghana today?” While I do not want to argue with or question the integrity of our hard working officials at the Ghana Statistical Service who do a good job under very difficult circumstances, and should indeed be resourced (and given more independence) to do the work they do, I will like to state that the available evidence indicates that statistically reported single digit inflation is not consistent with the economic fundamentals and developments in some key economic indicators relating to the cost of living, interest rates and exchange rates. It could be a measurement issue, but the established relationships between inflation and key economic variables appear to have gone missing for now.
Inflation and the Cost of Living
Mr. Chairman, we do not seek to achieve single digit inflation just for the sake of beautiful statistics. The statistic must have meaning in people’s lives. Unfortunately, most people in
Ghana cannot relate to the talk about single digit inflation when they get to the market. I was in
Malata market last week and it is clear that prices are increasing at a faster rate than what the official statistics may be capturing.
A few examples will suffice: In the last three years the following price increases have taken place:
It is clear that the cost of living as measured by the prices of these items and others such as petroleum products, school fees, road tolls, and electricity bills, has increased by triple digits! I should add that these price changes do not necessarily mean that single digit inflation is not possible. It would depend on what is being measured and over what period. What we see of price increases for basic commodities in our markets over the last year is that they are increasingly volatile and definitely at rates beyond single digits. In Bolgatanga market for example, the price of a bag of maize between 2011 and 2012 has increased by over 60%.
Mr. Chairman, How many Ghanaians have seen a single digit increase in the prices of what they normally buy in the markets and shops over the past year? I can testify that if you try to give your spouse a single digit increase in chop money, she would not be amused.
What is interesting is the claim that Ghana’s recent single-digit inflation is being driven by food prices.
It is rather curious that in the face of declining growth in crop production and increased demand for food (including the demand for buffer stocks), statistically recorded food price inflation continues to decline. Just last week Ghana received food aid from Japan of 17000 tonnes of rice to augment our shortfall in domestic rice production. Is the decline in food price inflation therefore coming from certain imported foods that do not respond to exchange rate depreciation or is it food aid? Something does not add up.
Most Ghanaians would attest to the fact that life in Ghana has gotten harder and harder over the last three years. Single digit inflation has not reflected in a reduction in the cost of living and in this regard has been rendered practically meaningless. Ghanaians are in fact, experiencing triple digit “inflation” in our pain and suffering.
Single-Digit Inflation and Interest Rates
Ladies and Gentlemen, as I have noted, one area in which the attainment of reduced inflation to single-digit levels should reflect is reduced bank interest rates for loans. Between 2001 and
2008 for example, inflation was cut by more than half from 40.5% to 18.1%. In the process, average bank lending rates were reduced by almost half (from 44% to 27%) by 2008, a reduction of 17 percentage points.
Between 2009 and 2011, inflation has also been cut in half from 18.1% to some 8.8% currently.
Average bank lending rates have however only declined marginally from 27% in 2008 to 26% currently, a reduction of 1 percentage point. Why the missing link now? Why have interest rates become suddenly so sticky downwards? Could it be that banks, like the suppliers of goods in Mallata market have not quite bought into single digit inflation pricing? The financial services market (like our traders in Makola and Mallata) appear oblivious to the fact that we have single-digit inflation prevailing in the economy. So where are we collecting our price data for the computation of inflation? Which markets are we visiting?
Single-Digit Inflation and the Exchange Rate
Mr. Chairman, the exchange rate is a measure of the relative price of goods between two countries. In this regard movements in prices tend to reflect in exchange rate movements, with room for short term deviations. Simply put higher inflation in one country results in the depreciation of its currency. Low and stable inflation tends to result in exchange rate stability.
This relationship has held in the case of Ghana for many years.
What the chart above shows is the observed relationship between inflation and exchange rates.
What we are however seeing is that there is a sudden break in this relationship under this government. The exchange rate is rapidly depreciating while inflation is in single digits and stable. Ladies and Gentlemen, something does not add up. The rapid exchange rate depreciation observed suggests that inflation could be higher than what is being captured by the official data.
Mr. Chairman, it is clear that when it comes to established relationships between the cost of living, interest rates and exchange rates, the single digit inflation in Ghana is not consistent with what we expect to see. If single digit inflation is meaningless for cost of living, interest rates, exchange rates, and jobs, what is it for? To put it another way, if single digit inflation does not help with respect to the prices of the things you buy, the cost of borrowing money for your business, the value of the cedi to the dollar, or help the youth to get jobs, then what is the point?
I would however leave the judgment on whether we actually have single digit inflation to Ghanaians who shop in our markets every day. Nevertheless I think it is time for Ghana to have a truly independent and well-resourced statistical service.
Fiscal Developments and Public Debt
Mr. Chairman in the area of fiscal policy and public debt, the assessment of the prudence of fiscal management of our economy needs to be placed in context. First, it should be noted that
Ghana’s GDP was retrospectively rebased from 2006. In simple terms, this resulted in a 60% increase in statistically recorded GDP from 2006. It should however be noted that the rebasing of Ghana’s GDP that has taken place is purely statistical. Statistically increasing Ghana’s GDP from 2006 by 60% was not accompanied by an increase in Ghana’s foreign exchange reserves or cash flows by 60%. That money was assumed to have been already reflecting in our cash flows prior to the rebasing. Nonetheless the rebasing makes our debt/GDP as well as our deficit/GDP numbers look better.

TO be continued

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