 Executive Director of the
Institute for Fiscal Studies (IFS), Prof. Newman Kusi, has described as
“ineffective” the central bank’s approach to breaking the pace of surging
inflation and interest rates in the country; suggesting viable options
other than the regular monetary policy adjustments.
Speaking on the maiden edition
of “Business Time” -- a business magazine TV programme powered by the
Business and Financial Times, he said the instruments that the Bank of
Ghana has adopted to get inflation in check are ironically the very ones
that are contributing to the continual rise of value indicators.
He argued that the central
bank’s decision to increase the cost of capital or mop up liquidity from
the system as a way of reducing demand or consumption to sustain the
pressure on prices is a misplaced approach.
He explained: “The inflation
that we have now is not demand-cost but cost-push inflation -- in the
sense that the exchange rate is being depreciated and this is a country
where everything is imported. So as exchange rates depreciate, the landed
cost of imports also goes up and automatically feeds into the price”.
On the domestic side, he said,
as the cost of credit goes up so does the cost of production and pricing
of goods and services…and for that reason “one cannot sit down on one
side and decide to increase the policy rate to serve as a deterrent for
people not to borrow or spend, as they rather feed into the cost of
credit and ultimately inflation”.
According to Prof. Kusi, the
ideal approach to tackling interest rates and inflation hinges on
government’s ability to put in place measures that will increase domestic
production and make businesses more attractive in terms of profitability
and productivity.
Another way, he said, would be
to deal with interest rates and inflation more directly; for instance, by
increasing reserve requirements for commercial banks and reducing the
cost of credit to private business instead of crowding them out of the
credit space.
Otherwise, he said: “There is
even what we called direction and distribution of credit, whereby the
central bank can direct commercial banks as to what percentage of their
loans should go to the private sector and which goes into other sectors
-- thus controlling the percentage of credit that goes to the consumers
and ensure more loans go into production, which is on the low.
Inflation as at January last
year was 16.4 percent; ended the year at 17.9 percent; and has currently
reached 19 percent in January this year. This continual rise has forced
the central bank to tighten its Monetary Policy Rate by 400 basis points
from 21 percent in the same month to 25 percent, but these interventions
have yet to achieve the intended results.
According to the economist,
the tight monetary policy regime has rather caused interest rates to go
up -- which has directly increased the cost of credit and made it
difficult for private businesses to borrow from financial institutions to
sustain their business, increase investments and spur economic growth.
And given that government
continues to borrow excessively from the domestic market --with
Treasury-bill rates hovering above 25 percent -- Prof. Kusi indicated
that banks, instead of lending to private businesses, now prefer to lend
to government, sit down and count on the interest.
This situation, coupled with
the lack of political will to stir productivity in key sectors of the
economy, according to the economist continues to hinder growth of the
national economy.
Prof. Kusi further said of the
economy: “The economic situation is not getting any better because all
the macroeconomic and growth indicators are pointing in the wrong
direction; growth for instance has declined from 7.9 percent in 2013 to 4
percent as at 2014. Government last year projected a growth of 4.1
percent; so from 14 percent in 2011 it’s now creeping at 4.1 percent, I
don’t think it’s a good turnaround”.
He also decried the gradual
relegation of the country’s dominant agricultural sector’s contribution
to Gross Domestic Product (GDP) and the lack of concrete policies and
actions that will improve agricultural productivity, as well as establish
linkages between the sector and industrial growth so as to transform the
economy.
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