Let’s now focus on real sector

Let’s now focus on real sector
•Although lower inflation is desirable
Story: Boahene Asamoah

A Senior Research Fellow at the Institute of Economic Affairs, Dr John Asafu-Adjaye, has said that while achieving a single digit inflation was desirable, there was the need to also focus on other real sector variables such as employment and investment.
He said “although low inflation is desirable for an economy, an overly aggressive anti-inflationary stance has the potential to dampen aggregate demand, causing firms to reduce production, which could then stagnate economic growth”.
Delivering a paper on “Dynamic Analysis of Ghana’s Inflationary Process” at a round-table discussion organised by the Institute of Economic Affairs (IEA) in Accra on Thursday, Dr Asafu-Adjaye asked “what should be an optimal inflation target for Ghana”.
He said at a lower inflation target about three per cent it could be a costly opportunity as it could have adverse effects on the economic development as the output gap could be widened.
“The danger in a single-minded attempt to keep inflation low is that it could compromise economic growth,” he said, adding that other economic variables such as employment general and investments which could help in enhancing economic growth while reducing poverty.
Dr Asafu-Adjaye recounted the inflationary trend in the country since independence to 2004 and said over the past years, money supply had been a determinant in the money supply in the short term.
He said according to his module, in the long run however, money supply and currency depreciation and the out put gap had been the main drivers of inflation in the country.
He said since 1983, when the country experienced its highest inflation of about 123 per cent as a result of the draught the country faced and the return of Ghanaian migrants from neighbouring Nigeria to Ghana, inflation had been on the decline.
Dr Asafu-Adjaye said “inflation reduction to be successful, it has to go hand-in-hand with acceleration of structural reforms, in particular deregulation of the economy and institutional reforms.
Again, he said there was the urgent need to remove the lack of credit, which was one of the major barriers preventing both consumers and producers from reaping the benefits of low inflation.
“Why are market interest rates high (currently about 18- 20 per cent) when inflation is hovering around 10.5 per cent,” he questioned.
Dr Asafu-Adjaye said over the past five years, the country had seen some considerable stability in economic fundamentals which had moved the country from high inflation to disinflation and macro-economic stability.
On the re-denomination of the cedi, he said there was a possibility of the policy leading to higher prices and hence inflation.
He explained that for some commodities the possibility of rounding up prices to arrive at a even figure could lead to high prices and called for public education.
The research fellow said while the central bank’s inflation targeting had been largely successful, with a single digit inflation within reach, the Bank of Ghana “should consider targeting real sector variables such as employment and investment, which do not only enhance economic growth but also have the potential to reduce poverty.