Inflation patterns in Ghana since independence

Ghana@50

Inflation is of interest in any economy. In fact, it has determined the outcome of elections and is widely discussed even by those with little knowledge of economics. CLEMENT TUONURU reviews inflationary trends in Ghana since independence

Introduction
Inflation is widely discussed because it changes the purchasing power of money and real values of variables such as interest rates, wages and many others. An unexpected change in inflation also redistributes income between lenders and borrowers. This explains why it is a very important issue of concern to policy makers especially when it assumes a relatively high level.

Inflation is defined as the persistent and appreciable increase in the general price level. However, one should be circumspect in defining inflation, because for inflation to occur there must be a continuous and rapidly increasing price level. More often than not, inflation has been mistaken to be just high prices. If prices are high but remain so without any appreciable change then there is no inflation. There must be changes in the general price level for inflation to exist.

This is why sometimes non-economists argue erroneously that the rate of inflation has not reduced because average price levels have increased. The fact that inflation in Ghana reduced from say 122.8% in 1983 to 40.2% in 1984 did not imply that average price level for the period fell. Rather it implied that the rate of increase in the average price level in 1984 was slower compared to the rate of increase in 1983. In other words, prices increased faster and more rapidly in 1983 than in 1984.

The most common measure of inflation is the Consumer Price Index (CPI). The CPI measures changes in the average price of consumer goods and services. Once the CPI is known, the rate of inflation is the rate of change in the CPI over a period (e.g. year-on-year inflation rate).

Inflation can be viewed from two directions: as a demand side problem and as a supply side problem. The demand side problem of inflation occurs when too much money chases few goods. If more money is injected into the economy with goods and services remaining the same, then demand-pull inflation arises. Underlying this analysis is the assumption that there is full employment of production of output, such that output cannot be increased in response to demand leading to continual increase in prices.

The supply side problem also known as cost-push inflation occurs when there is a tendency for increases in the cost of production (due to increase in wages, increase in interest rates or depreciation of the cedi) to lead to a continuous increase in the general price level.

Inflation has been one of the intractable problems that has confronted and inhibited the growth and development of the Ghanaian economy ever since the attainment of independence in 1957. Consequently, monetary policy in Ghana has had as its main objective, the attainment of price stability. It is therefore necessary to review inflation in Ghana under the various regimes of government.

Convention Peoples Party Era – 1957 to 1966
The Convention People’s Party (CPP) era marked the rule of Osagyefo Dr. Kwame Nkrumah, the first president of the Republic of Ghana. He masterminded the attainment of independence for Ghana in 1957 and later became the President in 1960, the year when Ghana assumed a Republican status. He was however overthrown in 1966.

Until 1964, inflation was not really a problem in the country. Ghana experienced her first serious bout of inflation in the mid-1960s. The period from independence to 1963 was a normal one in the sense that the previous practice of conservative monetary and fiscal management was more or less maintained. Consequently, the rate of inflation in 1961 was 3.6%. This further fell to 1.7% in 1962 but thereafter rose to 6.8% in 1963.

After independence, the CPP administration embarked on an industrialisation drive with the setting up of many import substitution industries to step up the level of economic development in Ghana. These import substitution industries relied heavily on imported raw materials and other inputs. However, due to poor management and lack of foreign currencies for the acquisition of such inputs, these industries performed abysmally.

Output was therefore minimal and with increased demand, this exerted an upward pressure on prices.

Inflationary pressures however started mounting up between 1964 and 1966. The rate of inflation rose from 9.6% in 1964 to 26.4% in 1965, the highest during the CPP era. It however fell in 1966 to 13.3% but this is still unacceptably high compared to rates in the preceding years.

One major factor behind the development of the inflationary pressures during the period under review was the government’s policy of budgetary deficits, and the financing of deficits mainly by borrowing from the central bank and the commercial banks with the result that more money was pumped into the economy than was warranted by real growth in GDP.

In addition, between 1964 and 1965, there was a sharp increase in total payments made to cocoa farmers following the boom in cocoa yield in the 1964/65 cocoa season. This further increased the money supply in the economy by 37.2% and with a decline in the supply of goods due to shortages and import restrictions, there exerted an upward pressure in general price levels resulting in a 16.8% rise in inflation between 1964 and 1965.

The table below shows annual rates of inflation in Ghana from 1961 to 2006.
Table 1


Year Inflation rate (%)
1961 3.6
1962 1.7
1963 6.8
1964 9.6
1965 26.4
1966 13.3
1967 9.0
1968 8.8
1969 7.1
1970 3.9
1971 9.3
1972 10.1
1973 17.5
1974 18.4
1975 29.7
1976 56.4
1977 116.3
1978 73.3
1979 54.2
1980 49.7
1981 117.1
1982 22.3
1983 122.8
1984 40.2
1985 10.0
1986 24.6
1987 39.8
1988 31.4
1989 25.2
1990 37.0
1991 18.0
1992 10.02
1993 27.7
1994 24.9
1995 74.4
1996 46.6
1997 27.6
1998 19.2
1999 12.6
2000 40.5
2001 21.3
2002 15.2
2003 23.6
2004 11.8
2005 14.8
2006 10.5
Source: M.M. Hug (1989), The Economy of Ghana, Pg 216
ISSER (2001- 2005), The State of the Ghanaian Economy
Ghana Review International Magazine


National Liberation Council Era - 1966 to 1969
After the overthrow of Nkrumah in 1966, the Military Government of the National Liberation Council (NLC) came into power between 1966 and 1969. During this period attempts were made to reverse Nkrumah’s Import-Substitution Industrialisation policies. The NLC rather adopted an International Monetary Fund (IMF) sponsored Stabilisation Programme including devaluation and trade liberalisation to bring inflation down to an acceptable level.

This involved cutting back public spending and the use of bank financing to resolve budget deficits.

The regime also pursued tight monetary policies through interest rate increases and credit restrictions which helped to pin down the amount of money stock in circulation in the economy.

In addition, there was a 30% devaluation of the domestic currency in 1967 which in effect served as a tax on imports and a subsidy on exports. In other words, devaluation tends to make imports more expensive and exports cheaper thereby stimulating domestic production. Devaluation is the deliberate attempt by government to reduce the value of the domestic currency against the other currencies such as the US dollar, the Great British Pound and the Euro. Unlike devaluation, depreciation refers to the fall in the exchange rate of the domestic currency as a result of the forces of demand and supply operating in the foreign exchange market.

Consequently, inflation had declined from 13.3% in 1966 to 9.0% in 1967 and further declined to 7.1% in 1969, as can be seen in table 1 above.

However, these measures curtailed inflation at the expense of economic decline.

Progress Party Era - 1969 to 1972
The NLC government in 1969 handed over power to a pro-market oriented government, the Progress Party of K.A. Busia which continued with some of the NLC’s policies.

After the period of stabilisation, the Busia government revived economic activity as public (government) investment and spending increased as well as private participation.

This brought down inflation further to as low as 3.9% in 1970. This was due to marked domestic output growth and improved import supplies due to the cocoa boom in 1970.

The Busia administration also pursued trade liberalisation which was initiated by the NLC government in 1967. However, the import liberalisation policy and the precipitous fall in the world market price of cocoa in 1971 combined to cause a rapid decline in the country’s foreign exchange reserves, leading to balance of payments difficulties.

Following these pressures, the low rate of inflation in 1970 could not be sustained and thus rose to 9.3% in 1971.

However, the Busia government responded by introducing stiffer restrictions on imports and foreign exchange transfers and the cedi was again devalued in December 1971. This reduced the value of the cedi in terms of the US dollar by 78%. The attempts by the Busia government to further correct the distortions in the economy were still on course when it was overthrown in a military coup led by Col. Acheampong in 1972.

The “Printing Press” era – 1972 to 1981
The era encompassed the regimes of the National Redemption Council, the Supreme Military Council, the Armed Forces Revolutionary Council and People’s National Party.
The decade 1972-1981 was characterised by one military take over to another. The military government of the National Redemption Council (NRC) headed by Col. Acheampong which usurped power from the Busia government in 1972 proceeded to recreate a command economy dubbed “Self Help” with expanded state participation. The popular economic slogans at the time were “Operation Feed Yourself” and “Operation Feed Your Nation”. While the Busia government had devalued the cedi, the NRC revalued it and imposed rigorous price controls. Despite all these, it failed to control inflation.

The Supreme Military Council (SMC) headed by General Akuffo ousted the NRC in 1978. However, the formation of the SMC was met with the military uprising that culminated in its overthrow in June 1979 by the Armed Forces Revolutionary Council (AFRC) under Flt. Lt. J.J. Rawlings. The AFRC stayed in Power for only three months and handed over power to a pro-Nkrumah civilian government of the Peoples National Party (PNP) under the presidency of Hilla Liman.

However, the PNP government was overthrown in 1981 in a military coup headed by Flt. Lt. Rawlings and replaced by the Provisional National Defence Council (PNDC).

From 1972 onward, inflation gathered momentum and it has been described in political parlance as a period of “acceleration towards the abyss”.

The rate of inflation increased persistently between 1972 and 1977 as can be seen in table 1.00 above. In fact, the situation worsened in 1976 and in subsequent years, Ghana’s inflation could truly be termed as galloping since it was assuming triple digits.

In discussing the causes of inflation during the late 1970s and early 1980s, the Central Bureau of Statistics put the blame squarely on the ‘huge borrowings by the government from the Central Bank, which continued to increase year after year’. Budget deficits were financed by bank loans to government and parastatals.

This period witnessed persistent budget deficits. In 1972 and 1976, the Deficit-GDP ratio was 6% and 11% respectively

In fact this was the period in which the Bank of Ghana was regarded as a government “printing press” by the various regimes especially the SMC regime. This is because government often resorted to the Bank of Ghana to print money to finance expenditures and budget deficits.

Total money supply by the end of 1981 was about 29 times the level at the end of 1971.
The Bureau cites the worsening supply position of domestic agricultural produce over the decade as another major contributory factor generating the runaway inflation.

Between 1972 and 1981, inflation averaged about 50% while the average for 1977 and 1981 stood at 116.7%.

To curtail inflation these regimes made use of extensive price controls, fixed exchange rate regimes and interest rate controls. This led to economic stagnation and severe shortage of goods and services and this further worsened the inflationary situation in the country.

PNDC and NDC Era - 1982 to 2000
The PNDC came to power in 1982 during which time the Ghanaian economy was in a very bad shape. This was manifested in a declining per capita income, negative growth rate in GDP, huge external deficits, run down in social and economic infrastructure and strong inflationary pressures.

Inflation hit its all time high figure of 122.8% in 1983, the highest since independence. This resulted from the intensive drought and bush fires which destroyed large quantities of food crops in 1983 thereby creating acute food shortage in the country. The situation was further worsened by the influx of Ghanaians from Nigeria in the same period. All these exerted upward pressures on demand for goods and services and on general price levels.

The year 1983 also witnessed an exchange rate overvaluation as well as the development of a buoyant parallel market coupled with other inappropriate policies all of which are contributory factors to the inflationary pressures at the time.

Following the poor economic performance at the time, the PNDC government initiated the Economic Recovery Programme (ERP) in 1983 with the control of inflation being one of the prime objectives. The main components of the ERP included IMF stabilisation policies and policies of World Bank Structural Adjustment Lending and/or Sectoral Adjustment Lending.

Within a year of the ERP, inflation dropped drastically from the all time high of 122.8% in 1983 to 40.2% in 1984 and further fell to 10% in 1985.

The low rate attained in 1985 was due to the good harvest in 1984. Food prices constitute about 50%- 60% of the CPI. An increase in food production exerted downward pressure on food prices and as a result the rate of inflation dropped for the period.

Between 1986 and the end of 2000, inflation remained above the targets set by the government in the ERP. For instance, in 1989, inflation when had fallen from 31.4% to 25.2% was above the target of 15%. In 1990, inflation rose again to 37% and fell in the subsequent year to 18%. It further fell in 1992 to 10.02% which again was above the target of 8%. The further decline in the rate of inflation in 1992 was due to the conscious effort at monetary control by the government and the good harvest in 1991.

The years 1993 and 1994 have different stories to tell. The rate of inflation rose from 10.02% to 27.7% in 1993 and declined to 24.9% in 1994 but rose to 74.4% in 1995, the highest since the inception of the ERP.

The high rate of inflation in 1995 could be explained by the introduction of the Value Added Tax (VAT) by the NDC government which received severe criticisms by a wide spectrum of Ghanaians. The new tax scheme, VAT resulted in prices skyrocketing because the VAT rate was even higher than the existing tax rate, that is, the Sales Tax, which it came to replace.

Inflation however declined continuously between 1996 and 1999 falling from 46.6% in 1996 to 12.6% at end of 1999.

Unfortunately, this decline could not be sustained as the year 2000 ended with a disappointing result on inflation. The year-on-year inflation had increased to 40.5%. This was due to the expansionary monetary policies pursued, the depreciation of the domestic currency which stood at 49.5%, the terms of trade shocks, the general loss in confidence in the Ghanaian economy and the extensive borrowing from the Central Bank in 2000 probably to finance the election.

Overall, the PNDC-NDC regime witnessed fluctuating results in the rate of inflation with the first quarter of their administration recording the highest rate of inflation since independence.

New Patriotic Party Era - 2001 to date
For the first time in Ghana’s history, a democratically elected government, the NDC handed over the helm of affairs of the country to another democratically elected government, the NPP in January 2001.

As at the end of the first quarter of the year 2001 (i.e. three months into the first year of the NPP government), inflation had increased to 41.9% from 40.5% as at the end of December 2000. This was due to the excessive money supply growth in the last quarter of 2000, rundown of local food stocks and the upward adjustment in petroleum prices in February 2001.

However, through prudent fiscal management and tight monetary policies coupled with a relatively stable cedi, the NPP government has been able to reduce the year-on-year inflation from 40.5% as at the end of December 2000 to 21.3% as at the end of December 2001, representing a 19.2% decline. This was below the target of 25% set for the end of 2001, the first time an actual inflation rate fell below the target. Remarkably, the rate of inflation has further been reduced to 10.5% as at end of December 2006, which is a narrow miss of the single digit target that is set for the period.

The NPP government like other industrialised countries such as Canada, New Zealand, Spain, Sweden, Australia, and the United Kingdom and among others adopted Inflation Targeting in 2001 as a stabilisation policy pursued with the aim of controlling inflation. This has yielded the favourable results during the NPP administration in the fight against inflation in Ghana.

Inflation targeting is an economic policy in which a Central Bank estimates and makes public a projected or “target” inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools. The targets are often set as range or point. However, when these are set, unexpected changes such as fuel price changes which tend to affect a whole range of activities can bring deviations from the target.

Inflation targeting thrives on the independence of the Central Bank in conducting monetary policy which includes the freedom to use its available instruments in achieving its inflation target with little or no government borrowing from the Central Bank.

It also relies on the technical and institutional capacity of the Central Bank to model and forecast domestic inflation rate, predict the time lag between monetary tools and their effect on inflation rate and have a well informed view of the relative effectiveness of the various instruments of the monetary policy.

With the commitment of the NPP administration to reducing inflation to a low and stable level, the government enacted the Bank of Ghana Act 2002 (Act 612). The Act redefined the objective of the Central Bank to be essentially price stability and granted the Central Bank some degree of independence. The Act also established the Monetary Policy Committee (MPC) of the Bank of Ghana and mandates the MPC to formulate and implement policy in the areas of money, banking and credit with the main aim of maintaining stable prices conducive to a balanced and stable economic growth.

Based on the Act, the Bank of Ghana is to implement monetary policy that would switch the economy from a regime of high inflation, high interest rate and exchange rate depreciation to a regime of low inflation and low interest rate with exchange rate stability.

The Bank of Ghana, unlike other independent Central Banks has not adopted an explicit inflation targeting framework, where the Central Bank in collaboration with the government announces to the public, its inflation target and is bound by law to explain to the public any reasons for missing the target in any particular period. Transparency through full disclosure in its dealings to the general public is also a critical aspect of explicit inflation targeting. This is in exchange for the independence that is granted the Central Bank under the framework. The Central Bank targets its forecast of inflation over a horizon and interest rate policy is fashioned out to react to deviations between forecasted and actual inflation over the policy horizon.

The current inflation target used by the Bank of Ghana is set jointly by the Central Bank and the Ministry of Finance and Economic Planning. The Central Bank in its quest to achieve the targeted inflation uses the prime rate as its key policy instrument for monetary policy.

With the adoption of inflation targeting, the NPP government has been able to bring down inflation to lower levels as inflation in Ghana now hardly rises above 20%.

In line with the broad objective of Ghana’s medium term Economic Programme, the NPP government set an inflation target of 13% by end of 2002. To meet the set target, the NPP government together with the monetary authorities continued with the prudent fiscal management and the tight monetary policy stance initiated in 2001. These measures coupled with the slow pace of depreciation of the cedi led to a deceleration on the year-on-year inflation rate from 21.3% in 2001 to 15.2% as at the end of December 2002. This time, the actual rate of inflation rose above the target set for the period.

In 2003, the Finance Minister in his budget statement to Parliament indicated that the NPP government had targeted a 9% year-on-year inflation at the end of 2003. This was also influenced by commitments towards achieving the targets set within the West Africa Momentary Zone (WAMZ) convergence criteria that would eventually lead to five West African countries (Gambia, Nigeria, Ghana, Guinea and Sierra Leone) adopting a common currency, the Eco.

However, at the end of the year, inflation stood at 23.6%, far above the target for the period. This was due to the adjustments and corrective measures instituted in the petroleum sector of the economy. There was 100% adjustment in petroleum prices in January 2003 resulting in distortions in general prices. This escalated the rate of inflation to its peak of 30% in April, but sustained implementation of the fiscal framework along with prudent monetary management implemented by the Bank of Ghana reduced inflation to 23.3% at end-December 2003.


The year 2004 was an election year and a very challenging one for the monetary authorities in view of the history of excessive fiscal deficits accumulated through expansionary monetary policy that give rise to price increases and exchange rate volatility in the run-up to elections. The NPP government was voted back into power for yet another four year team.

However, due to prudent monetary management by the Bank of Ghana and the NPP government, coupled with improved prices in the non-food component of the CPI, led to a decline in inflation to 11.8%, a further miss of the single digit target. There was also exchange rate stability coupled with a decline in the prime rate which was introduced during the NPP government in 2002 to replace the bank rate. This reflected in a fall in interest rates which is a boost to investments and overall output in the economy.

The early months of post-election years are often charactised by rising inflation and exchange rate instability mainly due to fiscal deficits accumulated through expansionary monetary policy in the latter part of the preceding year. However, macroeconomic stability remained central to government as seen in the inflation and monetary growth targets for the period.

In order to achieve the stability necessary for accelerated growth and poverty reduction, government proposed to reduce the end of period inflation to 13.5% by December 2005 and gradually moves towards a single digit rate by end 2006.

However, due to petroleum price adjustments within the year under review, the growth in money supply and the appreciation of the cedi by 9.98%, the rate of inflation as at end of December 2005 was 14.8%, overshooting the target of 13.5%.

In 2006, inflation hit the single digit mark in the months of March and April, but the year ended with a 10.50% rate of inflation. The yearly average for 2006 is 10.96% which is a narrow miss of the single digit target that the NPP government want to attain to be able to meet the WAMZ convergence criteria.

Conclusion
On the whole, the NPP administration so far has been able to tame inflation within limits though they have not been able to hit the targets except in 2001. The adoption of inflation targeting has yielded favourable results in the fight against inflation during the NPP administration because this has helped brought inflation down to below 20%. The average inflation rate for the NPP regime is lower compared to the PNDC-NDC era. This is because of high inflationary pressures in 1983 and in 1995. The “Printing Press” regime has rather high average rate of inflation compared to the NPP regime. However, comparing these three regimes to the Busia regime, there is a marked difference because the Busia era recorded single digit inflation rates throughout except in his last year in 1972, when inflation went up to 10.1%. The average inflation rate for the entire regime is 5.2%.

The CPP era has recorded the lowest rate of inflation since independence. This was in 1962 when inflation was as low as 1.7%. Inflation generally was low during the CPP era except in 1965 when the economy nearly went off track due to inappropriate policies.

In assessing the inflationary situation in Ghana, and comparing it to other parts of the world, it can objectively be said that Ghana still has a long way to go. Even within Africa, Ghana is far behind. For instance, inflation in Libya is low, averaging 0.9% between 2003 and 2005. In the same period, the annual average rate of inflation for Cameroon is 1.5%. The average for Ghana in the same period is 16.63% which is quite higher. South Africa in the same period has an annual average inflation rate of 3.4%. In Africa, we can only be said to be far better than Zimbabwe in the fight against inflation.

The rate of inflation in Zimbabwe is more than 1000%, the highest in the world, according to the International Monetary Fund. Between 2003 and 2005, China has an average annual inflation rate of 2.3%. A country like Japan has been in deflation between 1999 and 2004 with an average deflation rate of -0.6%.

In this regard, Ghana really has to tighten her belt in the fight against inflation. It is not impossible to attain the single digit mark. All we need is prudent monetary management and fiscal discipline. It is the attempt to finance our persistent budget deficits that often prompt the need for monetary expansion, a policy which is inflationary.

We also need to devise measures to increase agricultural production especially food. It is evident that during periods of good harvest, inflation declines drastically and vice versa during periods of poor harvest as manifested in 1983. This is because food items constitute a significant part of the CPI and therefore food shortages can be critical in the fight against inflation in Ghana.


References:
M.M Hug (1989). The Economy of Ghana
ISSER (2001-2005). The State of the Ghanaian Economy
Emmanuel A. Codjoe (2004). Inflation in Ghana