Ghana’s inflationary pressures multi-layered – Economist

Story: Isaac AIDOO, Accra

AN economist with the Institute for Fiscal Studies (IFS), Mr. Leslie Dwight Mensah, has provided key insights into the persistent inflationary pressures Ghana continues to face.

Speaking exclusively to The New Finder, the economist attributed the stubbornly high inflation rates to three main factors: the ongoing exchange rate instability, a gradual economic recovery, and elevated spending patterns ahead of Ghana’s upcoming elections.

Mr. Mensah pointed out that Ghana’s inflation crisis, which has lingered for over three years, is deeply rooted in a series of economic disruptions that the country has not fully recovered from.

“The persistence of high inflation up to this point is really a product of the crisis we have been through and which we have not recovered from fully,” he remarked. “The exchange rate is a main culprit in the inflation persistence.”

He highlighted that the Ghanaian cedi has depreciated at an alarming rate, falling by nearly 30% annually since 2022. “For three consecutive years, the exchange rate has depreciated per annum by around 30%, a level we haven’t seen since the 1990s,” he noted.

This consistent depreciation has driven up the costs of imported goods and raw materials, intensifying inflation across sectors. In the latest data from October, month-on-month non-food inflation was reported at over 1%, while food inflation rose by only 0.3%, signaling the significant impact of currency instability on prices of non-food items.

Mr. Mensah further elaborated on the second factor contributing to inflation persistence: the recent pickup in economic activity as Ghana emerges from the economic downturn. “The economy is slowly recovering, and therefore, economic activity has picked up,” he explained.

With industries and services sectors rebounding, demand for goods and services has increased, inadvertently keeping pressure on prices. This phenomenon, while positive in terms of economic growth, has had the unintended consequence of sustaining inflationary pressures.

Another critical factor identified by Mr. Mensah is the ramp-up in spending as the nation approaches its 2024 general elections. He pointed out that both public and private spending historically spike in election years, particularly in the latter half.

“Typically in an election year, both public and private spending ramp up, driving liquidity,” he said. This surge in liquidity — reflected in increased government expenditures and private sector spending on campaigns and public activities — has a direct effect on price stability. As more money circulates within the economy, the demand for goods and services rises, leading to further inflationary pressure.

Ghana’s inflation rate, which peaked in recent years due to these cumulative factors, has had broad social and economic implications. Rising prices have strained household budgets and placed significant pressure on businesses.

Many companies face higher operational costs, which are passed down to consumers, reducing purchasing power. The challenges have also highlighted the vulnerability of the cedi, which struggles against major currencies, further impacting inflation through imported costs.

Mr. Mensah’s analysis underscores the complex, multi-layered nature of Ghana’s inflationary pressures, suggesting that addressing inflation will require a comprehensive approach.

He emphasized the importance of stabilizing the exchange rate, particularly through enhanced fiscal discipline, to curb the persistent depreciation. Additionally, while economic recovery is necessary, he highlighted the need for strategic management to prevent growth from overheating prices.

Finally, he advised government agencies to adopt prudent spending policies, especially in election periods, to mitigate inflationary effects on the economy.

For Ghanaian policymakers, Mr. Mensah’s insights bring home the urgency of finding a balanced approach to economic recovery while managing inflation. The persistence of these inflationary drivers suggests that the coming months will be critical in shaping Ghana’s economic stability as the country prepares for the 2024 general elections.