https://www.myjoyonline.com/iea-cautions-government-against-low-inflation/-------https://www.myjoyonline.com/iea-cautions-government-against-low-inflation/
National

IEA cautions Government against low inflation

A Senior Fellow of the Institute of Economic Affairs (IEA), Dr John Asafu-Adjaye, on Thursday said Ghana's pursuit of single digit inflation to satisfy the requirement for the second West African Monetary Zone (WAMZ) was laudable but beyond that, further reduction in inflation could have negative consequences for the country. He said low inflation was not necessarily good for an economy like Ghana’s, with several rigidities such as low productivity, low income levels, high unemployment levels and general poverty among other things. Dr Asafu-Adjaye, who is also an Associate Professor of Economics at the University of Queensland, Australia, made the remark at a roundtable organized by the IEA under the theme: "The Dynamic Analysis of Ghana's Inflationary Process." His presentation was based on his study of the dynamics of inflation in Ghana between 1964 and 2004, using money supply growth, the output gap (the gap between actual production and potential production) and exchange rates as the main determining variables of inflation. "When a single digit inflation required for the WAMZ is achieved, caution should be exercised on further reductions because of possible output losses," he stated. Dr Asafu-Adjaye noted that over the past few years the Ghanaian economy had made some strong gains, characterized by the 5.3 percent GDP growth since 2001; protracted favourable exchange rate due to stability of the cedi against the dollar, decreasing interest rate levels and reduction in inflation. He said with those achievements there was every indication that the Bank of Ghana (BoG) single digit inflationary target of 8.8 percent by the close of 2008 was well within reach, but it was important for the Central Bank to consider targeting real sector variables such as employment and investment, which would not only enhance economic growth but also had the potential to reduce poverty. Dr Asafu-Adjaye was of the view that low inflation had the danger of increasing the purchasing power of Ghanaians and therefore raising demand for goods over supply, given that the productivity levels in Ghana were generally low. He said that kind of situation could raise inflation in the long run. He noted that the more developed nations had stronger real sectors and could therefore afford to reduce their inflation levels to zero, which was actually the target of some of the countries, but an economy like Ghana could afford to go as low as between five per cent to six percent. As at the end of October 2006 inflation level of Ghana stood at about 11 percent. He noted that the current 11 percent inflation was one of the lowest in this country, saying that in his studies he found that the highest inflation of 121.7 percent occurred in 1983 due to the infamous drought and returnees from Nigeria at the time, and the lowest inflation was negative 8.4 percent in 1967. Dr Asafu-Adjaye attributed the decrease in inflation and the general good performance of the Ghanaian economy characterized by 6.2 percent GDP in 2006 to the 30 percent growth in earning from cocoa since 2004 and 6.6 percent increase in the construction sector due to the several Highly Indebted Poor Countries (HIPC) Fund projects. He noted that the HIPC Funds had contributed immensely to the resilience of the economy, saying; "if the HIPC funds are properly applied over the next two years, we will improve upon our productive capacity and be able to get off World Bank loans like we have freed ourselves from the IMF." Dr Asafu-Adjaye touching on the recent re-denomination of the cedi and its possible impact on inflation noted that the danger in the exercise lied in the possibility of traders rounding up the prices of goods and, therefore, reducing the purchasing power of citizens. "Traders are likely to avoid dealing with fractions like 50.5 Ghana cedis so they may mark it up to 60 Ghana cedis thinking it is insignificant but in terms of value those fractions are very significant and could impact on people's living standards," he said. Dr Asafu-Adjaye lauded the Government’s moves to introduce the clocking in and clocking out system to monitor the performance of public sector workers, saying that as much as that was good, there should be a more stringent measure to ensure that workers actually contributed their quota to increased productivity in the country. "We need to use performance based methods to determine the wages of workers - that way we can ensure that increased wages go with increased productivity to prevent the occurrence of an output gap that could lead to inflation in the long run," he said. Dr Kwabena Anaman, Director of Research at IEA, who presided, noted that from the 1970s to 1983 when Ghana was under military dictatorship, inflation levels were in their highest, adding that from 46.5 percent in 1996, the present Government had managed to decrease inflation to a near single digit of 11 percent. Source: GNA

DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.
Tags:  


DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.