Adjunct Senior at the Institute of Economic Affairs (IEA), Dr Eric Osei-Assibey, has advocated for a rethinking of Ghana’s inflation targeting (IT) regime, in order to accelerate the nation’s socio-economic development.
He said, if Ghana’s IT regime was to be maintained, then we need to solidify the fundamentals, stating that; “we need to make sure the productive sectors of this economy is good. We are exporting more, we have favourable terms of trade and our currency is strong, just like in developed countries, so that inflation target will be relevant to us.
“If IT is to continue, then there is the need to strengthen the economic fundamentals, otherwise an alternative policy that is in sync with our development agenda should be sought”.
Dr Osei-Assibey gave the recommendation in his presentation at an IEA Roundtable in Accra; on the theme “Inflation Targeting Under Weak Macroeconomic Fundamentals: Does Ghana Need a Monetary Policy Re-direction?
He said IT had often been successful in keeping inflation levels low and avoiding many of its negative effects.
He said IT is an economic policy, through which a central bank publicly determines a target inflation rate and then attempts to steer actual inflation towards the target.
Dr Osei-Assibey said IT is a transparent way to explain interest rate policy and to anchor consumers’ expectations about future inflation, adding that, on the other hand, if the rule was implemented very strictly, an IT could severely limit the central bank’s flexibility in responding to changing economic conditions.
He said out of the 195 countries in the world, only 33 were practising IT; of which Ghana, South Africa and Uganda were the only sub-Saharan African countries.
Dr Osei-Assibey said the functional autonomy of the Bank of Ghana (BoG) in adopting inflation targeting was guaranteed under the Bank of Ghana Act, 2002 (Act 612), but it was not until 2007 that the Bank officially adopted an inflation targeting framework for the conduct of monetary policy.
He said prior to its adoption, the BoG operated largely a direct-controlled system of monetary framework, known as the monetary aggregate regime with money growth as the nominal anchor in arresting inflation.
He said, however, a decade after the adoption of IT, Ghana’s experience under the framework had been mixed.
Dr Osei-Assibey said proponents of IT argue that a volatile inflation rate had negative effects on an economy: high levels of inflation, increase menu costs, discourage lending, may create an inflationary spiral that leads to hyperinflation and uncertainty about future prices.
He said IT had been successful in keeping inflation levels low and avoiding many of these negative effects.
He said some argue that the costs of inflation targeting exceed the benefits and that if the rule was implemented very strictly, an inflation target could severely limit the central bank’s flexibility in responding to changing economic conditions.
He said any alternative policy target should be consistent with and support Ghana’s national priorities; “in other words, an important criteria for the target is that it should play a positive development role and actively support the economy’s structural transformation”.
He said given the Cedi’s frequent volatility with high pass-through effect to the economy, a monetary policy that targets a stable and competitive real exchange rate was a better intermediate target.
He said in situations where IT had generated significant costs – slow growth, sluggish employment generation and high real interest rates, as had also been found in Ghana, the literature proposes a real targeting approach.
Dr Osei-Assibey said although in principle his presentation was not against the adoption of inflation targeting as a monetary policy, it was to make a point that further interventions seem necessary to augment its effectiveness.
“Again, while changing the IT involves risks and can run into important transitional difficulties, we must give sufficient consideration to the fact that we need to rethink how to best pursue monetary policy (price stability) that will be growth enhancing and have employment creation potential,” he said.
“The most important aspect that I believe we should introduce is a framework for thinking about both price stability, exchange rate stability and growth,” he added.
Dr Johnson Asiamah, BoG former Deputy Governor, who chaired the function, called for concerted efforts to enhance the effectiveness of the monetary policy regime in the country.