The Institute of Economic Affairs is calling for a new approach in managing the country’s inflation, saying, the Bank of Ghana and government must work together to tame inflation rather than in separate silos.
It argument is that the rising inflation is due to strong supply and cost undercurrents.
In a statement, the policy and economic think tank maintained that the Bank of Ghana’s Inflation Targeting framework has failed to live up to its expectations.
“More importantly, the new approach requires the BoG and Government working together rather than in separate silos or pigeon holes. For this purpose, we wish to separate the management of the current inflation, which is like a fire-fighting exercise, from finding a lasting solution to inflation persistence in Ghana”.
It pointed out that mitigating the current inflation calls for interventions in respect of food and fuel, in particular.
For food inflation, the IEA said it is necessary to augment supply, including from accessing the ECOWAS strategic stock and banning the exportation of essential items.
Furthermore, it wants the government to consider providing a temporary subsidy on staples like maize, rice and bread to ease the burden on low-income consumers.
“Even the IMF, which is known not to be a fan of subsidies, has called on governments to provide food subsidies to their citizens. For fuel, the government should try to cushion pump prices, including from its own windfall earnings from higher oil prices, the Energy Sector Stabilisation Levy Act (ESLA) fund, or reduction of some of the taxes and levies.”
BoG must keep monetary policy tight
Meanwhile, it said the Bank of Ghana may still have to keep monetary policy tight, as necessary, to dampen potential demand pressures from fiscal policy impulses as well as counter second-round effects that could emanate from the supply shocks.
For inflation to be addressed over the long term, the IEA suggested a mixed or hybrid approach. This is a combination of the Inflation Targeting or “macro-approach” and the “micro-approach.
This is a combination of the IT approach—which, for want of a better name, we call the “macro approach” to the extent that it targets the entire headline inflation—with an approach that directly targets the persistent supply or cost components of the CPI, which we refer to as the “micro-approach”.
The policy and economic think tank also recommended some specific policies are recommended in support of the IT framework.
They include ensuring adequate food access and affordability, promoting production, increasing storage and processing facilities and ensuring the availability of food in all markets all year round.
Others are ensuring the sustainable supply of fuel and the avoidance of extreme price volatilities, including resourcing BOST to maintain strategic reserves for cushioning shocks, resuscitating Tema Oil Refinery to refine Ghana’s share of crude oil and mitigating price shocks from the government’s windfall earnings and ESLA fund and reducing taxes and levies, as necessary.
“Finally, we wish to emphasise that what we are proposing is a pragmatic rather than an ideological approach to resolving what has become a perennial national problem. What we all want is what works for Ghana”, it concluded.
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