Double-Digit Inflation Coming

Dr. Kwabena Duffuor, Minister of Finance and Economic Planning

Posted on: www.businessguideghana.com

By William Yaw Owusu

Accra, Tuesday August 21, 2012

Renaissance Capital has predicted a double-digit inflation before the end of 2012.

“We expect inflation to rise into the low double-digit region by year end 2012 due to the proposed increase in government spending and base effects.”

In the firm’s August Macro-Economic Update, analyst Yvonne Mhango said “we think a more stable cedi in second half of 2012 on the back of the raft of policy measures that the Bank of Ghana (BoG) implemented in first half of 2012 is positive for the inflation outlook.”

The report said acceleration of Ghana’s inflation had been significantly slower than expected.

“Headline inflation increased to 9.5 per cent year on year in July from 8.4 per cent a year earlier despite the cedi’s 30 per cent depreciation against the dollar over the same period, to GHS1.96/$1.”

It acknowledged that low food inflation had helped to keep headline inflation in the single-digit region and added that “however, food inflation also has edged up over the past 12 months to 5.8 per cent year on year in July from 3.3 per cent a year earlier.”

“That said, we expected most of the inflationary pressure to stem from non-food items, particularly from housing and utilities’ costs and transport prices, owing to particularly high oil prices in first quarter of 2012 and from clothing and furnishings, given that significant shares of these goods are imported.”

The think tank said non-food inflation only increased to 12.4 per cent year on year in July from 11.3 per cent at year end 2012, explaining that “all this points to downwardly sticky inflation, which has delayed its return to the double-digit region in our view.”

On the budget deficit, the report attributed fiscal slippage to wage costs saying “Ghana has a history of running up bigger-than-targeted budget deficits in elections years, particularly in the post-military-rule period.”

It said the only exceptions were 2000 and 2004, the year before Ghana qualified for debt relief, 2005 when the authorities worked hard to narrow the deficit to improve the country’s prospects.

It added that one of Ghana’s worst fiscal slippages was during the last election in 2008 when the outgoing New Patriotic Party (NPP) government ran up a budget deficit of 8.5 per cent of GDP, which was significantly bigger than the target of 2-3 per cent (under the rebased GDP).

“The National Democratic Congress (NDC) administration managed to narrow the deficit until 2011 when the budget deficit came in at 4.4 per cent of GDP, below the target of 5.1 per cent.

However, in July, Finance Minister Kwabena Duffuor proposed a supplementary budget of GHS2.6bn ($1.34bn) that would allow for an increase in spending of 1.9 per cent of GDP and a wider budget deficit of 6.7 per cent of GDP.”