Inflation is Ghana’s demon. It is the evil that has dogged all aspects of national life for long. And like the devil, it is a tempting lot. Falling for its bait brings ephemeral gains. But like all fiends, it can wreck havoc. Inflation causes global concerns because it can distort economic patterns. Inflation can result in the redistribution of wealth when not anticipated. For instance, inflation tends to benefit borrowers at the expense of lenders whenever rates are underestimated over the life of a loan. Inflation has a corrosive effect on savings. As prices surge, the value of savings will decline if the rate of inflation exceeds the rate of interest. People on fixed incomes are hurt by inflation. Workers who retired on fixed incomes are often hurt because of the declining value of their monthly cheques as a result of rising inflation. Thus inflation is a worry for the health of the world’s economy and sustenance of the global financial system. While inflationary pressures or the rise in the general cost of goods affects all nations, it is even more invidious in developing nations such as Ghana. It is an economic fact of Ghanaian life. But more volatile are its political dimensions. Evidently, inflation in Ghana is caused by both fiscal and non-monetary issues. In the past, Ghana’s balance of payments position has been in severe difficulties due to inappropriate trade, fiscal and monetary policies. Excessive money supply is the single most pervasive cause of inflation in Ghana. For instance between 1996 and 1997 inflation was at 25% and 8% respectively, meaning the then P/NDC government adopted some prudent economic management tools to tame the demon. But it lost the race when the rate jumped to 40% at some point, again reflecting fiscal mismanagement. Monetary factors play an important role in the failure to control inflation in Ghana. The devaluation of the cedi at diverse times especially during the Economic Reforms Programme (ERP) led to price raises. The ERP’s attempt to promote production in the short term resulted in higher debts and inflation. Ghana’s debt profile increased from 4 billion US dollars in 1992 to 4.3 billion dollars by the next year, because of heavy borrowing and excessive printing of money to service domestic and multilateral debts. A non-monetary source of high inflation is attributable to the poor performance of the agriculture sector. Between 1995 and 1999, Ghana’s agriculture sector grew by 4.4 %, but it dropped again to 1.1 % by 2000. This resulted in high food prices in the country. Food prices alone accounts for over half of the average household expenditure in Ghana. The other dimension to inflationary trends in Ghana is the international connection. Inflation in Ghana, like the rest of the world, is partly internationally transmitted. An example is crude oil hikes. Increases in petroleum products often have direct consequences on food prices in Ghana. Whether internally induced or otherwise, inflation often results in severe socio-economic consequences for the average Ghanaian. This is due to the fact that high inflation reduces purchasing power. Again, the higher the level of inflation, the less amount of goods and services a worker can obtain from his earnings, even if nominal earnings remain constant. In effect, inflation can reduce output and employment. It is a major cause of civil strife in Ghana. It belies almost every military overthrow in Ghana. As an example, inflation topped 100 % in 1977 moderating to 54 % in 1981. These high rates underlined popular resentments against the Limann government, which led to his removal from office by Jerry John Rawlings in a military putsch in 1981. Rawlings was dubbed ‘Junior Jesus’ by the populace on account of his aggressive efforts to tackle the vampire. His government imposed fiscal and monetary discipline to curb it. One such attempt is the devaluation of the cedi in 1987. It was therefore very surprising that Rawlings government resorted to spending unwisely during the 2000 election. This situation negated restructuring plans began in 1983 and obviated his reasons for stringent economic structures adopted during his reign. Between 1998 and 2000, inflation climbed from about 8 % to more than 30 %. The result was political unrests. John Agyekum Kufuor new government realised that something must be done about it and initially succeeded in that effort. He too is failing. Inflation as at January 2008 stood at 12.81 %. However, this has shot to 18.4 % by July 2008, putting a squeeze on the purchasing power of the average Ghanaian. Of course, this rising trend is in spite of some genuine efforts made by the Kufour administration to contain the scourge. For instance, Kufuor’s government granted autonomy to the Bank of Ghana (BOG). Thus monetary issues are now left to the discretion of the central bank, while government concentrates on fiscal matters. The bank consequently adopted inflation targeting framework as the mainstay of its monetary policy operations. This has brought about some preliminary improvements in the macro-economic outlook of the country with investor confidence soaring as a result of the stability that the economy now offers, as against the uncertainties of the past. BOG’s prudent management of monetary policies has helped ease price fluctuations normally associated inflation and aided in improving transparency of relative prices. A significant area of improvement is the reduction in prime rate from 40 + % to 13.5 % at some point. Sadly, the prime rate is on the ascendancy. It has clocked 16 % as at July and may continue to mount even higher, because of the rising inflation trend. But before this sad commentary, the initial successes attained by the BOG spurred creditors to grant more loans to their customers on the assumption that prices will remain stable in the future. A second assumption is that through prudent management of the economy, lenders will not demand extra return to compensate them for inflation risks associated with holding nominal assets over the longer term. On the downside too, is the realisation that putting too much weight on fighting inflation can have adverse effect on output growth and employment stabilization. In particular, critics argue that the BOG has overly resorted to fighting inflation at the expense of growth, which is creating high unemployment. Popular resentment is on the increase and might lead to removing Kufuor’s party from office. But this has not degenerated into the groundswell activism that led to the toppling of previous governments. Nonetheless, the deterioration in the inflation rate and its attendant impact on the prime rate shows that things are not well with the country’s macro outlook. As can be gleaned from the survey above, inflation is a worldwide economic fact, but it is an evil in Ghanaian life. And it mirrors the political evolution of the country. Governments who want to stay in power and enjoy the support of the people must resist this devil. They must stick to prudent economic policies and avoid excessive money printing. At a point, many Ghanaians, particularly financial watchers felt the vampire is being leashed. But recently, happenings on the country’s economic front indicate that something more radical ought to be attempted than the Kufour-government has done so far. Credit: Nathaniel Glover-Meni [glovermeni@yahoo.com]