FOR WHAT IT'S WORTH

Persistent inflation and macroeconomic instability have forced banking authorities to raise interest rates as a last resort strategy to right the course of Ghana's economic trajectory using monetary policy.

Ghana's currency has suffered a 6.9% decline over 2015, making it the second-worst performer against the dollar in Africa. The inflation rate jumped to 17.7% in the last month of 2015, up from the 17.6% recorded in the previous month. This increase was mainly driven by a rise in utility charges, after an upward review by service providers.

The increase pushed the inflation rate to its highest since July 2015, when it breached the 17.9% mark. The Bank of Ghana seems powerless to ward off the rises, warning repeatedly that inflation targets would not be met unless the monetary policy was tightened. "The current forecasts suggest that attainment of the medium-term inflation target by the end of 2016 would require further tightening in the monetary policy stance or else the target horizon will shift into 2017," the Central Bank stated in a December press release.
The government had set an inflation target of 9% for 2015, but was forced to revise the figure to 13.5%. Despite tight monetary policies introduced by the Central Bank to contain inflation, however, the targets were missed. The rapid rise in Ghana's inflation has been blamed on skyrocketing commodities prices.

Inflation has been increasing for the last three years after lower commodity prices and a fiscal crisis led to a sharp drop in value of the local currency against the US dollar, raising import prices and creating macroeconomic instability. In January 2015, the inflation rate temporarily went down to 16.4% from 17% the previous month. A rise in food prices drove that figure back to 16.5% in February. Inflation increased by 0.2% in April from 16.6% in March, while YoY inflation stood at 16.8%. From then on the rate increased steadily, reaching 17.4% in September due to higher prices for housing, utilities, education, and food.

Ghana's inflation rate has averaged at 17.1% since 1998. It reached an all-time high of 63% in March 2001 and a record low of 0.40% in May of 1999.

The producer price index (PPI) measures the average change over time in the prices received by domestic producers for the production of their goods and services. The PPI for Ghana reports the price indices using September 2006 as its base period. Persistent inflation and ongoing macroeconomic volatility forced the world's second largest cocoa producer to sign a three-year $918 million IMF deal aimed at bringing the economy back on track. Consequently, Ghana's annual PPI for industries rose sharply to 10.5% in December 2015, against just 3% recorded in the previous month.

The utilities sub-sector recorded a 56.6% PPI in December 2015, a worrisome increase from just over 5.3% during the previous month. The mining and quarrying sub-sector dropped 2.5 percentage points from the November rate of 7.3% to 4.8% in December. The PPI of the manufacturing segment, which constitutes over two-thirds of total industry output, rose by 1.8 percentage points to 3.5% in December 2015. On a monthly changes basis, the utilities sub-sector recorded the highest inflation rate at 48.8%, followed by the manufacturing sub-sector at -0.3%. According to Ghana's statistical service, mining and quarrying recorded the lowest rate at negative 1.4%.

Stakeholders and research experts have blamed the high cost of credit partly on government borrowing. Bank of Ghana Governor Kofi Wampah has had to counter inflation by raising rates 500 basis points since April, when the IMF approved its nearly $1 billion emergency loan. With key borrowing costs at their highest level since July 2003, yields on benchmark treasury bills are not benefiting from IMF assistance, as the Washington-based lender cautions policy makers to act more aggressively if inflation does not ease.

Daniel Asiedu, former MD of Zenith Bank Ghana, explained, “Factors like the depreciation of the cedi, a rise in inflation and interest rates, and the power crisis all made 2014 a challenging year for most companies in Ghana.” Operations that have been performing well seem to be doing so in spite of these difficulties. The pressures have been felt particularly strongly by the SMEs, which make up 90% of the Ghanaian market.
Prince Amoabeng of UT Holdings illustrated how hard the factors had hit Ghana's manufacturing sector. “Companies in the manufacturing sector recorded losses almost across the board because of the consequent reductions in their working capital. The currency depreciation damaged business in the services and trading sectors, which rely on imported goods.” Banks like UT Bank and UniBank had to evaluate their lending policies and aggressively mobilize deposits in order to reduce the impact of the excessive rise in interest rates.
The shake-up has ultimately had an impact on FDI. Figures from the Ghana Investment Promotion Center showed that FDI for the third quarter of 2015 experienced a 9% decline compared to the same figures from last year.

The Bank of Ghana's Monetary Policy Committee told the press in January 2016, “The slower pace of inflation reflects the tight monetary policy stance and the ongoing fiscal consolidation.” Conclusions expect that, in the medium term, growth conditions are expected to recover, with a sustained improvement in the energy situation, an anticipated increase in the production of oil and gas, and a general improvement in the macroeconomic environment. There are, however, caveats to the growth outlook, primarily whether or not the tight monetary and fiscal stances can be held.