Graphic Business News

Govt to miss end of year inflation target

By: Kester Aburam Korankye


THE government is likely to miss the targeted inflation rate of 10 per cent by the end of the year. 

This is because of expected rise in non-food inflation with upcoming federal funds rate hikes from the United States market. 

Also, increased demand for imports as the Christmas season approach is likely to contribute to the rise in non-food inflation, a FirstBanC research has suggested.

Food inflation is also expected to rise as lower rainfall levels are expected to produce lower level of crop harvests this year.

 “We expect a slight inflation overrun above the government’s target of 10 per cent for the rest of the year,” the report said.

The report on the 2018 half-year review of the Economy and Capital Market said the expected rise in inflation rate was despite the government’s resolve to meet the International Monetary Fund (IMF) bailout requirements and exit the programme in December.

Inflation trend 

Earlier this year, the stability in the non-food subgroup, according to the research, was attributable to the relative stability in the cedi-dollar exchange rate from the start of the year until April, which kept import driven inflation in check.

However, the year-on-year non-food inflation rate increased to 10.8 per cent in August this year compared with the rate of 10.7 per cent recorded in July partly due to the depreciation of the cedi against the US dollar. 

The year-on-year inflation rate for imported items of 11.7 per cent recorded in August was also 2.6 percentage points higher than that of locally produced items of 9.1 per cent according to data from the Ghana Statistical Service.

Imports effect on cedi 

The importation of goods from countries such as China where manufactures insist on dollars as compensation for their produce according to some financial analysts had contributed to the depreciation of the cedi.

This is because local traders are forced to scout for dollars from the currency market and in some cases, the black market to import such goods. 

The Governor of the Bank of Ghana (BoG) Dr Ernest Addison in an interview said the phenomenon had thwarted the central bank’s effort of stocking renminbi, the Chinese currency, to meet the demand for traders who go to China to buy goods. 

“The Bank of Ghana, as you are aware, had a stock of renminbi to meet the demand for traders who go to China to buy goods. Unfortunately, even those who were buying goods in China preferred to carry dollars because the manufacturers in China themselves were asking for dollars. So it’s a very complicated matter which we are looking at and trying to, maybe, join the Chinese payments arrangements,” he said. 

Increase revenue

However, the report said revenue generated by the government was expected to pick up based on the new tax policies announced in the mid-budget review, particularly from the additional 10 per cent the government will generate on monthly income exceeding GH¢10,000, as well as taxes on luxury vehicles. 

On expenditure, the report suggested that the government was likely to continue to slash planned outlays for discretionary expenditure items as revenue is projected to remain below target so as to achieve the planned fiscal deficit target of 4.5 per cent of Gross Domestic Product (GDP). 

“The growth in the hydrocarbon sector has been impressive since 2017 due to the coming on-stream of additional fields.

“With the growth in the sector almost reaching a peak, we expect the growth in GDP to reflect more activity in some non-oil sectors, especially from e-commerce platforms and offerings,” the report said.

 The tight credit stance from the banks, according to the report, was unlikely to improve for the rest of the year but limit the growth in other non-oil sectors.

The report also said “We also expect Government to continue to sell less of the shorter term debt instruments and more of the longer-tenor debt.

“We expect increased activity and liquidity on the secondary market in the remaining quarters of 2018, as a result of relatively high yields on off-the run treasuries as opposed to on-the-run treasuries.” — GB