Development Economist Dr Frank Bannor provides analysis of Ghana’s inflationary trends

Development Economist and Head of Research at the Danquah Institute, Dr. Frank Bannor, has provided a detailed economic analysis regarding Ghana’s inflationary trends and their broader economic implications.

During the discussion on a television programme on Thursday, August 15, 2024, Dr. Bannor argued that a nuanced understanding of inflation and economic stability was crucial for accurate discourse.

Nitty-gritty of inflation trends

He explained that while the inflation rate reached a staggering 54.1% in 2022, attributing this solely to the printing of money was an oversimplification. He stressed that inflation is a complex phenomenon influenced by multiple factors, including global economic conditions, supply chain disruptions, and domestic economic policies.

Dr. Bannor said the recent reduction in inflation rates of 20.9% was indicative of positive economic adjustments and effective monetary policy measures rather than just the end of money printing. He pointed out that in 2022, global inflation increased by 1.5%.

“This rise affected the world economy, not just Ghana. The United States, known for its stable inflation rate of around 2% since 1981, saw a significant jump to 9.1%. President Joe Biden attributed this surge to the Russian invasion of Ukraine, which he indicated weaponized gas, impacting Europe and other advanced economies,” he explained on Good Morning Ghana Programme.

DI Head of Research said during the COVID era, before March 2020, the average cost of shipping a 40-foot container was about $1,300, according to the Drewry World Container Index. He noted that by September 2020, this cost had surged to $8,500 for the same container.

Based on this, he said for importers, who previously paid $1,300 to import goods from Asia (e.g., China), the cost of freight increased about eightfold. He added that when these containers arrived in Ghana, the increased freight costs and duties led to a substantial rise in product prices. Consequently, he argued that local manufacturing costs, which rely heavily on imported inputs, also increased.

“Once this container arrives in Ghana, if you were selling a single unit for GH₵2, you would need to factor in the increased freight cost and duties, resulting in a product price that could be 10 to 12 times higher. This significant rise in costs impacts local manufacturing, as many inputs are imported. For example, the cement sector relies on imported clinker. Higher input costs lead to increased market prices and contribute to overall inflation,” he explained.

Central Bank (BoG) and money printing

The Development Economist noted that there is a common misconception about the role of the central bank in printing money. He, therefore, explained that the central bank prints money annually for two main purposes: replacing old currency notes and financing government deficits.

He further explained that Governments typically fund deficits in two ways: either through central bank financing or by borrowing from domestic or international markets, including issuing Eurobonds, commercial loans, or concessionary loans.

“Excessive domestic borrowing can crowd out private investment, as banks may lend less to businesses when the government borrows heavily. And this can limit or prevent business owners who readily need available funds for business expansion. Therefore, while some domestic borrowing is inevitable, it is usually advisable for governments to balance it with international borrowing,” he added.

Juxtaposing with historical deficits

He indicated that under the Fourth Republic, Ghana’s highest deficit was 11.6% of Gross Domestic Product (GDP) in 2012 (NDC). He noted that the highest deficit recorded by the NPP was 10.8% of GDP in 2020, according to figures from the Ministry of Finance.

He supported his arguments by noting that the IMF’s 2013 report states that the Bank of Ghana fully financed the 11.6% deficit in 2012. He stressed that despite this, inflation did not spike excessively; for example, inflation in 2013 was 13.5%, and not until 2015, almost 3 years later that Ghana recorded an inflation of 17.7%.

“In 2022, Ghana faced significant economic challenges, including depleted reserves and a depreciated cedi, which fell to about GH¢17 per dollar. This depreciation was partly due to the impact of COVID-19 and subsequent economic conditions,” he stated.

Comparative inflation and policy responses

Dr. Bannor further cited Turkey, which also experienced high inflation of 64.3% in 2022, attributing it to exogenous factors. He noted that the Turkish government chose to maintain its Monetary Policy Rate (MPR) and abandoned inflation targeting.

In his view, Ghana could have considered similar measures, however, he reteirated that attributing Ghana’s inflation rise solely to the central bank’s money printing is not accurate.

“As explained, inflation in 2022 was exacerbated by rising fuel prices and other factors. Food inflation was particularly high in 2022 because many food production inputs are sourced from Russia and Ukraine, major suppliers of fertilizer. The invasion of Ukraine caused global fertilizer prices to rise about fifteenfold, significantly impacting food prices in Sub-Saharan Africa,” he indicated.

Economic theory and gov’t expenditure

Dr. Bannor remarked that economic theory can be complex. As a monetarist, he believes the impact of money supply depends on whether liquidity is directed toward the domestic economy or external creditors.

He explained that, according to the 2024 budget statement, the largest government expenditure is salaries and emoluments, costing about GH¢66.4 billion.

“The second-largest item is debt servicing, with external loans constituting a significant portion. Understanding these dynamics is crucial for evaluating the causes and effects of inflation in Ghana,” he added.

Source: 3news