Government must set lower target for inflation – IMF
The International Monetary Fund (IMF) has advised government to set a lower medium-term target for inflation in order for the economy to remain competitive among its peers in sub-Saharan Africa.
Government maintained its medium-term inflation target of 8±2 in the 2020 Budget, despite a rebasing of the basket in August 2019 that saw inflation drop to 7.8 percent from 9.4 percent in July. What this essentially means is that government has achieved its medium-term target after the rebasing. It was therefore expected that it would set a new and lower medium-term target in 2020. However, that didn’t happen.
It is against this background that the IMF says it would be better for managers of the economy to revise the target, especially when the country’s peers in sub-Saharan Africa all have medium-term targets lower than the 8±2 percent – making their economies more competitive than Ghana’s. For example, Kenya has a medium-term target of 5±2.5 percent, South Africa is 3-6 percent and Uganda 5 percent.
“If inflation remains below or close to target, it may be appropriate to adopt a lower target over the medium term, provided that this change is carefully implemented and communicated. Coordination with fiscal policy would also be key, including to ensure that a lower target and related tightening of money supply would not crowd out private-sector credit,” the IMF Article IV report stated.
The IMF is not the only entity urging government to set a lower medium-term target for inflation. Even the Governor of the Bank of Ghana, Dr. Ernest Addison, said he was surprised when inflation recorded a figure lower than the medium-term target after the rebasing exercise; and quickly called for a downward revision of the target to 5 or 6 percent.
“We were all quite surprised with the new rate of inflation of 7.8 percent that came about because of the rebasing. So, we will try to assess what that means in terms of our medium-term target and see what has to be done. We currently have a medium-term target of 8 percent, which means if we are to accept the 7.8 percent then we are slightly below the medium-term central path of 8 percent.
“We think that maybe this is the time for us to review the optimal inflation target for a country like Ghana. When your trade partners’ inflation is below 5 percent and you have 8 percent inflation, then you are not competitive; so we must aim to drive inflation closer to our trading partners’ inflation rate.
“And if you agree with that argument, we should be looking at setting a lower medium-term target for inflation; whether it should be 5 or 6%, that’s where the target should be. But I expect that by the end of this medium-term period we will probably have to reset the target for inflation lower,” he told journalists during a press conference.
The IMF report however added that government says it will consider lowering the target, in order to “maintain competitiveness against trading partners and in line with ECOWAS criteria”.