Tuesday, 11th February, 2025
Hon Stephen Amoah
Nhyiaeso
Mr Speaker, I am extremely thankful to you and your noble outfit for according me this prestigious opportunity to make this important statement in this august House.
Mr Speaker, I am making this statement on certain fundamental financial economic anomalies in Ghana which need to be rectified. One of such policies is the management of our monetary policy with respect to the periodical adjustments of Ghana's policy rate. Monetary policy is simply about decisions made by central banks such as the Bank of Ghana (BoG) makes on the money supply and interest rates. Normally, policy rates are determined to optimise the amount of money in circulation. The strategic technique of adopting inflationary targeted monetary policy in Ghana has not really yielded the expected results. It has rather been a strategic drift.
Mr Speaker, policy rate increased from 12.92 per cent in 2011 to 25 per cent in 2016 with their respective inflationary rates increasing from 8.73 per cent to 17.51 per cent. Policy rate decreased from 22.5 per cent in 2017 to 16.00 per cent in 2019 with their corresponding inflationary rates of 12.39 per cent to 7.17 per cent. Gross Domestic Product (GDP) growth reduced from 13.90 per cent to 3.4 per cent in the same period. Between 2021 and 2023, GDP reduced from 5.10 per cent to 2.90 per cent.
Mr Speaker, policy rates in 2020, 2021, 2022, and 2023 were 14.75 per cent, 14.00 per cent, 20.22 per cent, and 29.50 per cent and inflationary rates were 9.94 per cent, 9.96 per cent, 31.49 per cent and 40.28 per cent respectively. In inflationary targeted monetary policy, the policy rate is increased to reduce inflation so that the economy can be stabilised. The above trend illustrates the opposite. Increases in the policy rates rather increases inflation most of the time. It means that it is not just the magnitude of the inflation that determines how the monetary policy should be adjusted but rather, the cause of it.
Mr Speaker, this policy anomaly must be checked by the relevant stakeholders to stop its dysfunctional contribution to our unstable economic performance. It erodes the purchasing power of Ghanaians. It increases the cost of doing business and lowers standard of living. It is only when inflation increases as a result of demand pull, that is when people are buying and selling and there is a high circulation of money on the market, that one can adjust the policy rate upwards and vice versa.
Typically, Ghana's inflation is induced by cost push that is from the supplier's side. Interest rate has been a very strong element in the aggregate cost of doing business, as most investors in Ghana rely on debt financing, I mean loans. Cost push inflation does not profoundly induce economic growth. In the trends analysed above, the corresponding GDP growths were not rather following the expected trends.
Mr Speaker, my maiden statement during the 8th Parliament also unravelled another important anomaly. That was the pricing of treasury bills, that is, government securities or risk free as categorised in investment or risk return principles, and the comparable risky assets on the market. It is making Ghana's market or economy deviate from the global standard. In fact, all the traditional models for computing the returns from investing in risky assets are not effectively applicable in Ghana. It defeats the fundamental principle of riskreturn policy in investment. Examples are the Capital Assets Pricing Model (CAPM) and the Arbitrage Pricing Theorem (APT).
It is introducing the element of arbitrariness in the decisionmaking processes of capital assets' pricing in Ghana. Some schools of thoughts have it that it is as a result of governments' high demand for funds. We are dealing with a dysfunctional policy decision and its adverse impact on our economy. All these comments are welcome as they may assist in dealing with the inimical policy. It is indeed, dysfunctional to the performance of the republic of Ghana. It calls for a policy shift as well as regulatory reforms by the relevant stakeholders..
Mr Speaker, being hungry does not necessitate intake of pathogenic materials or toxins, or even poison. These anomalies contribute not only to the high cost of doing business but also high exchange rates, low productivity, high unemployment, and banks’ risk exposure. Ghanaian companies cannot produce to meet aggregate demand and, accordingly, resort to importation. Ghana’s economy can be accordingly described as a double-digit interest rate economy, and it is basically, among other factors, caused by these financial economic anomalies.
There are other policies that we need to critically look at. For instance, absolute free market economy: a country in which we have a weak entrepreneurial ecosystem and profiteering culture.
Mr Speaker, we should begin a conversation as to whether we need a mixed market economy to provide specific price caps for monopoly, oligopoly, or even cartels. For controlled market economies, I will not advise for a capitalistic economy to be exercised.
However, I would like to propose that a committee is set up by the Finance Committee, Committee on Economy and Development, and Budget Committee to engage the Bank of Ghana and, possibly, the Finance Ministry on these important policies. We need to remedy these fundamental anomalies to enable us to build a resilient economy for the purposes of attaining the needed longterm economic growth and stability. Without that, our quest for economic independence, national import substitution, strong and stable currency, and high employment rate would never be realised.
Mr Speaker, I would like to end with a plea. Please, I pray that some of these critical issues be accorded the needed attention and action. I thank you, Mr Speaker, once again, but in anticipation.
Hon Isaac Adongo
Bolgatanga Central
Thank you very much, Mr Speaker.
Mr Speaker, I would like to commend the maker of the Statement, who has consistently contributed to improving the economic management principles of our country, particularly monetary policy and capital asset pricing. I recall he made a Statement earlier where he questioned the basis for banks that were taking cheaper deposits, basically giving loans at a higher rate than government, which is seen as a risk free investor, which obviously did not make sense, given that the banks carry risk that government does not.
But his own Government ended up proving him wrong when the Government became riskier than the banks and began to do Domestic Debt Exchange Programme (DDEP) and restructuring its debts, which had basically defeated the common known principle that when one gives loans to government, it is risk-free. So, we are still learning and, over time, I am sure we will find a solution to some of them. But I agree in most part with his Statement.
Mr Speaker, as a matter of fact, Ghana has been operating an inflationary targeting framework, which is part of the process to anchor inflation expectations. So, when inflation is very high in our country and the monetary policy authorities assess that it is as a result of increased demand caused by excess liquidity in the economy, what they tend to do is to adjust the exchange rate to recall most of that excess liquidity back into our financial system. But it is also to give a signal to the community as to the direction that we want inflation to go, and we know that when people expect inflation to be tamed, chances are that inflation will follow suit.
But in the absence of adjusting the policy rate, chances are that people would begin to see inflation not being targeted and, as a result, the expectation would be that inflation will continue to grow. And our inflation targeting framework is premised on a combination of inflation targeting and managing inflation expectation and, at the moment, we have not found a better way of doing it.
Mr Speaker, I agree that monetary policy may not be adequate in dealing with the myriad of problems that have confronted us in our country, particularly when we know that even though hardcore inflation or headline inflation may be seen to be trending downwards when we increase the policy rate, if we look at the core measures of inflation, we would find that not all of it can be addressed by policy rate. So, for instance, food inflation—How does one use policy rate as a major tool for addressing what is essentially a misallocation of resources from the fiscal side? So, when a government is not putting money into agriculture or when the government is not investing money to grow industries so that we can produce either to substitute for domestic consumption or to reduce the cost of production of food, no amount of policy rate would be able to tackle that.
So, I agree that there must be complementary fiscal action that makes sure that, in the medium term, we are able to address a key part of our inflation, which is the food inflation. Of course, there are other factors that are necessarily not food inflation, like energy or fuel, and we would need to find a way to address that.
Mr Speaker, where I have a problem is that monetary policy itself tends to forget that its actions, in terms of using policy rate, has an impact on the general ability of the economy to grow food and to produce for us. Because, like he said, the cost of borrowing itself is being exacerbated by policy rate increases. Today, we do not do base rate, but we do what we call the Bank of Ghana reference rate, and the Bank of Ghana reference rate is calculated as a weighted average between the policy rate and the treasury bill rate.
Mr Speaker, so, it means that any time treasury bill rates go up or policy rate go up, automatically the reference rates that define the base at which businessmen and individuals must borrow would automatically go up. And if one borrows at a higher rate, it is obvious that one’s cost of production would go up, and the cost of producing food will be high, and the cost of producing industrial products will be high. So, we need to find a way to deal with this transmission from policy rate to the base rate or the reference rate at which businesses and individuals have to borrow.
Mr Speaker, if we are not able to tackle this, then any time we attempt to solve the problem of inflation, we would also deal with the base of the problem itself, which is production, because the cost of production would go up. And once the cost of production goes up, one expects the businessmen to want to recoup all that cost in addition to margins that are placed on the product that are produced. So, in that case, one would see policy rate becomes dysfunctional as my colleague calls it.
Those of us who attended Zamse Senior High Technical School (Zamstech) would not call it as the Hon Member mentioned; we call itBut the Achimota people are here; Sԑ mo nkᴐ sukuu a, na monam Achimota ne Odorgonno. Listen to the Hon Member So, it confirms exactly the fear that he has that policy rate has the tendency to limit the proper production of goods and services, and therefore, leading to additional round of inflation and others.
Mr Speaker, we also know that the monetary policy is not only targeting inflation but general price development: interest rates, exchange rates, and inflation. Now, each of them depend on the other. Once we are not able to deal with exchange rate and we begin to get higher exchange rate volatility, it would feed into the price of goods and services and inflation. Now, in an attempt to address this problem, the Bank of Ghana then goes to touch interest rates, and then it comes back in a spiral because that policy rate being used to tackle inflation would lead to a higher cost of production. So, we need to find a model that really understands the dynamics and the structure of our economy.
Mr Speaker, he brings in a very interesting conversation as to what type of economy we should run, whether we should run a market economy or we should find a hybrid. I do not think that we have the answers; this requires a lot of conversation and analysis on our economy.
But, generally, I believe that the model that we have set up ourselves itself leads to inefficient utilisation and allocation of resources and we begin to find ourselves in just cycles of the same problem. So, a government of the day finds relief, would begin to trumpet an achievement and with just one event, we are back to square one, then, we are criticising each other once again; we need to find a way to get out of that.
I want to thank the maker of the Statement and to thank you, Mr Speaker, for the opportunity to comment on the Statement. Thank you very much.
Hon Akwasi Gyamfi Onyina-Acheampong
Kwabre East
Mr Speaker, thank you for the opportunity. I would like to also commend the maker of the Statement and also accede to the fact that our policy rates tend to have a positive relationship with our inflation as the statistics and the data that he acceded to and also let us know that we have almost all the time targeted the opposite. We have almost all the time targeted an inverse relationship but we do not get that.
Mr Speaker, as we speak, Ghana’s policy rate is around 27 per cent and the corresponding interest rates are between 29.7 and 35 per cent depending on the bank that one is dealing with and the risk factor that the bank would determine for them. The two-year average, as we speak now, has been around 29.9 per cent and a five-year interest rate average is around 22.3 per cent.
Mr Speaker, we need to understand as a country what really constitutes or what really accounts for our inflation and as they have already said whether it is cost push or demand. Is it the demand that is causing our inflation or is it the cost that is causing our inflation? We need to understand these dynamics. Otherwise, whatever policy rate that we decide to bring might not yield the results that we have intended to have.
Mr Speaker, one thing that we need to understand is that when businesses are finding capital might be from a number of sources; either from equity, debts, a combination of both or other sources. We need to understand that in Ghana most businesses and entrepreneurs do their financing or their capital mostly from debt and this is causing a lot of issues for us. For example, as the Mr Adongo said, if the interest rate is a combination of the policy rates and also other factors, then it means that as we have said if the policy rate goes up
Mr Speaker, thank you. As we said, it means that if the policy rate goes up then automatically, we are also looking at a higher interest rate. Now I am just wondering how when the interest rate goes up, my investor or the entrepreneur in Kwabre East who produces sachet water, Ahinanang sachet water, would be able to borrow at that rate and be able to get enough margins on the interest to be able to get enough profit to turn his business around. The next factor that one has to do is to try to turn his or her business around.
Mr Speaker, the business environment in Ghana does not really support turning businesses around quicker because the average cycle for a business is around 30 to 45 days and people do not usually buy on cash. So how would a businessman borrow at a higher cost and turn his business around to be able to produce more? This is quite a tough task and challenge for businessmen and business people in Ghana. This high cost of borrowing is not sustainable. Per the analysis and the statistics that we are seeing, if there is a high possibility that this is being caused by a higher policy rate, then we need to come back to the table and have a thorough discussion of these things. Otherwise, we risk putting our businesses and our businessmen out of business.
Mr Speaker, to put this into context, United Kingdom (UK) and United States of America (USA)—UK now has a policy rate of around 4.75 per cent. Mr Speaker, since 1972, the highest policy rate in the UK is around 20.1 per cent. Since 1972, the average has been around 5.79 per cent and one would see that it also corresponds with their inflation rate. US also has a similar policy rate.
Mr Speaker, how can we compete with these foreign markets if they have a lower policy rate leading to a corresponding lower interest rate, which is also cushioning their businesses and making their prices lower as compared to us in Ghana? It is very important that we look at this factor and also make sure that our place, or Ghana, is not a dumping site. Look at the businesses or look at the products that come from China. They are very cheap, less costly, competing with our local manufacturers and they are taking our businesses out of the market.
Mr Speaker, the maker of this Statement has made a very profound Statement and because this has become a very thought-provoking Statement, we need to address it and we need to come back to the table and find out, as I said, what is really causing inflation so that we know which policy or which instrument we would use to target inflation. Whatever the case is, this is thoughtprovoking and it needs constant jawjawing around the table and it is about time we did that in order to save our businesses in Ghana.
Mr Speaker, thank you. I would once again like to commend the maker of the Statement.
Hon Joseph Kwame Kumah
Kintampo North
Thank you, Mr Speaker, for the opportunity to have a bite on my Colleague, Mr Stephen Amoah’s Statement on this.
Mr Speaker, he made a Statement on certain fundamental financial economic anomalies in Ghana which needs to be rectified.His emphasis was on the issue of policy rates that keep going up one government after another, and yet we are not finding our feet as far as the economy is concerned.
Mr Speaker, we do not need to go far in analysing policy rate issues when we know that our economy is more demanddriven, which outpaces the issue of supply.
Mr Speaker, inflation basically is the continuous rise in the prices of goods and services without a corresponding increase in production. So when demand outweighs supply, the issue of demand pull inflation arises because the total demand, or what we call aggregate demand, tends to outweigh aggregate supply.
When we lump all the demands in the system together, from the individual to the whole economy, as against the total supply from suppliers, from individual supply to the aggregate supply, and the demand outweighs, then definitely demand-pull inflation tends to come in. And no amount of policy rates by any government or Bank of Ghana Governor can outweigh this thing.
The fundamental issue is how do we produce more in excess? When we have excess supply, we feed individual homes and we are able to feed our industries with the excess.
The industries overproduce and then the issue of dollar automatically comes down; we do not need a magician or mathematical analysis. Anything we do in the nation is about less supply, less production.
Mr Speaker, may I take you back? When President Obama visited Ghana, it was simple. What he told us was that we should let our systems work. If we over produce at the rural areas—Is it irrigation that we cannot have? We have a lot of river bodies across Ghana. Water flows into the sea 24/7 freely. Can we go into irrigation along the river bodies and distant kilometres away from rivers, so that we have enough production of whatever food we need? Can we take to excess production to feed our poultry industries to reduce the bringing in of, excuse me to say, carcasses from other countries? The rice fields are in abundance.
Mr Speaker, in Kintampo North alone, the rice fields we have can feed the country. We can go into the Volta Region to know the rice that they produce, as well as the North East Region, and the Mankarigu, YagabaKubori areas. My former Minister for Youth and Sports’ place, where most of the MPs are farmers. If we concentrate—
But here is the case that those who produced rice last year in abundance did not have markets.
Rice production was in abundance in this nation last year; yet, they did not have market. Tamale, Mankarigu, Yagaba-Kubori, Volta Region, there was no market for us. We are undoing our own economy. No amount of explanation should we continue to have. The maker of the Statement was the Deputy Finance Minister—When rice was not bought in this country from local consumers.
Mr Speaker, I would like my Brother to get back to that economy, the basis of economics in Ghana. Production should outweigh demand so that we get our figures right; if not, no magician, no BoG magician can have anything of that sort in this country. Mr Speaker, I thank him for the analysis. We would continue to analyse economies if we do not go to practical economies.
If we do not practicalise it on the field—And produce more tractors like the 24-hour economy His Excellency John Dramani Mahama wants to build, we need to supply more tractors to the farmers. Let them have tractors at the right time to farm the groundnuts, the rice, the yams, and the soya beans. When we overproduce and export the excess, we will not be analysing any BoG rate.
Thank you very much, Mr Speaker.
Hon Tweneboa Kodua Fokuo
Manso Nkwanta
Thank you, Mr Speaker, for the opportunity. I really appreciate it.
Mr Speaker, I would like to comment briefly on the Statement made by the Hon Member for Nhyiaeso. It is true that at times, certain policy expectations of policymakers do not happen as expected and the case in question, as raised by the maker of the Statement, is the Monetary Policy Committee's rates.
Mr Speaker, the intentions of the policy rate, mostly, is to determine or give direction as to where inflation should be, that is if the inflation is high, the plan is to raise monetary policy rates so that there will be more appetite or the appetite of investors will go up and liquidity will be mopped to invest in securities. But then, normally, one does not get this expectation and we should not forget that our market is not efficient, mature, and dynamic.
Mr Speaker, one side which we need to look at is the fact that our country, Ghana, is still largely import dependent and as the Monetary Policy Committee is doing its best to mop up liquidity in order to control inflation, we will have strong demand for hard currencies. People are putting their monies in dollars, euro, and other hard currencies and in so doing, weakening our cedi. So, it goes round and comes back to hit us, as we are weakening our local currency by investing in other currencies. So,
Mr Speaker, one way to address this issue of anomaly is to look inward into how we push to depend on our own produce and the things that we need locally. One of them that was championed and has been championed well, which I recommend we continue, is the One District One Factory (1D1F), which was put across by our ex-President Nana Addo Dankwa Akufo-Addo. This program alone could change the scene and allow these policy measures get their desired results.
Mr Speaker, another point that was put across by my Hon Friend is the issue of Government securities normally having higher yields than those issued by private entities.
Mr Speaker, this is not the expectation of many because as it is said, we expect Government securities to be risk-free, but we know around the world, it is not always the case. We have had some corporate institutions that have never reneged on their obligations, whereas the opposite is what we have seen in other jurisdictions.
So, yes, the theory is strong, and I do align with my Hon Friend; however, these anomalies happen because of these challenges of some sovereigns not meeting their obligations. Whereas some corporate bodies meet their obligations, have better ratings, and, of course, have their yields being lower as expected.
Mr speaker, not to repeat what my other Colleagues have put across, I support the Hon Member’s submission and what I would add is, we need to do more; we need to domesticate more, and produce more locally to support our currency to avoid this put through from foreign currencies that we invest so much in and in other words, bringing inflation through the backdoor to our economy.
Mr Speaker, I thank you very much.
Hon Francis-Xavier Kojo Sosu
Madina
Thank you very much, Rt Hon Speaker. I rise to make brief contributions towards “Dealing with the Fundamental Economic Anomalies in Ghana”, the Statement ably made by our Colleague, Dr Stephen Amoah.
Mr Speaker, generally, I agree with the Statement that he has made because if one looks at the economic history of Ghana, I do not think that there has been any success or anytime that we have recorded success in using monetary policies to deal with inflation. It has always been the opposite and I agree largely with my Colleagues that have argued that there is the need for us to increase production. In fact, economics beyond the textbooks and beyond all the big jargons is a very simple thing. We are having issues of scarcity so we need to prioritise our expenditure and look at our national priorities in terms of skills.
Mr Speaker, as has been argued before in this Chamber, indeed, if one is importing more than one is producing, definitely, there is going to be problems with inflation. If we talk about import substitution, what are we talking about? We are simply talking about one generating sufficient local industries that produce things that are being imported. Once one can do that, it reduces the pressure on the foreign currency, which makes it easier for one to deal with inflation and that is why I agree perfectly with the maker of the Statement.
Mr Speaker, particularly when one looks at the third paragraph of the Statement, on the first page, the maker pointed out some statistics and with your permission, this is what it says, ‘‘Policy rate increased from 12.92 per cent in 2011 to 25 per cent in 2016 with their respective inflationary rate increasing from 8.73 per cent to 17. 51 per cent.”
Mr Speaker, the committee of the Bank of Ghana brings these policies as a way of targeting inflation. It means that, irrespective of how grandeur the policy rate or the monetary policy is, it has never achieved its goal. Indeed, when one looks at the same statistics that he gave us from 2021 to 2023, the relationship is the same.
So, let us accept the fact that monetary policies have not achieved the ultimate goal of dealing with inflation and that we must go back to the root which is production, production, production. We need to invest more into industries, create the local economy, make sure we reduce the rice importation, reduce the chicken importation, and invest through the 24- Hour Economy. We need to produce more chicken, more rice, and more agro products that would substitute for these things that we always import.
Mr Speaker, I believe that this anomaly in our economy would definitely be addressed.
Thank you very much for the opportunity to contribute to this Statement, Mr Speaker.
Hon Abdul Kabiru Tiah Mahama
Walewale
Thank you very much, Mr Speaker and I also want to join my Colleagues to thank the maker of this Statement for bringing to the fore this important issue of how monetary policy is not performing its expected role of reducing inflation within the broader perspective or within the broader policy of inflation anchoring or inflation targeting.
Mr Speaker, Ghana has the inflation target of 8 per cent plus or minus 2 per cent within the International Monetary Fund (IMF) programme. In other words, we are expected to do 8 per cent inflation rate and one of the tools the Central Bank uses to achieve this is the policy rate. The policy rate is expected to achieve its objective only when the fiscal angle of the whole economic mechanism is put into play. If there is no coherence, if there is inconsistency, if there is no hegemony between the fiscal policy and the monetary policy, one does not expect the monetary policy to achieve its objective.
Mr Speaker, if for instance, the objective of monetary policy is to mop up excess liquidity in the system, and in this regard, the dominant borrower in the economy is the Central Government, irrespective of how much we hike interest rate, the Central Government would still have to go and borrow in order to finance salaries, wages, compensations and other debt services.
Therefore, because there is this continuous cycle of Government hato borrow in order to satisfy certain key expenditure handles, irrespective of the Central Bank’s hike in the interest rate, one would still find Government coming in to borrow until we are able to address this problem. We can address that by gravitating towards a system where we can have a relatively optimal revenue to Gross Domestic Product (GDP) level in line with other best practices. If the revenue coming in matches the expenditure, we would be able to mitigate this particular anaemic fiscal policy we have been experiencing.
Mr Speaker, we would also need to note that inflation is a stubborn cat and it does not listen to the language of the monetary policy makers. I agree totally with the other contributors that, it would take the fiscal policy, that is the real sector, the production of goods and services and the concept of Say’s law that implies that supply creates its own demand. In other words, when we put much effort into the production, we would be able to draft down prices of goods and services to contain the rate of inflation.
Mr Speaker, the stability of our currency also determines inflation. This is the component we refer to as imported inflation. Imported inflation in the sense that, we can do all the things right; we can increase the policy rate; money in circulation could be reduced; demand push inflation would probably be tamed, but if the basket of goods and services we consume in this country is imported, foreign exchanges losses alone is going to increase prices of goods and services.
So, Mr Speaker, we would have to do something about the stability of our currency in order to address this anomaly highlighted by our Colleague. Mr speaker, the anomaly is present but we need to also ask why the United States of America (USA) federal reserve is having a negative correlation between the federal reserve rate and inflation. This is because whenever inflation is galloping and the USA federal reserve has the policy rate, one would find a corresponding decline in the prices of goods and services, but in our case, as presented by the maker and the data thereof, we do not see that. Probably we would need to ask this relevant question and have some of the answers proffered.
Mr Speaker, across the board, quantitative easing and quantitative tightening have been measures classical economists or classical micro-economic theorists use. These important tools are important for the management of economy.
Economic management would have to be done with the combination of these tools, quantitative easing which is in other words reducing the policy rate and quantitative tightening which is hiking the policy rate. We have been using this but it has not generated effective returns in terms of the relevant economic indicators. We would have to look at how we manage this tool appropriately to address the issue of inflation.
Mr Speaker, we are not working in introspection and I would conclude by saying that whereas we lament that the policy rate is not giving us the required returns which is the reduction in inflation. We must also ask the question, but for the policy rate, what would have happened to the economy? This is where I think that the call for engagement between the Central Bank and the relevant Committees of Parliament would come in handy because the counterfactual is not known.
If the Central Bank did not hike the policy rate, we would not know what would have happened. This would take genuine intensive and collaborative effort between the Central Bank, the Government and Parliament which has oversight to bring to force. I would support the proposal and the call to the Speaker that we have an engagement between the Finance Committee with the Central Bank to look at this whole issue of the policy failure with over six decades of implementation following the free-market economy system we have subscribed to.
Mr Speaker, I thank the maker for this great Statement and I would also join the multitude in urging you to take this matter seriously because the success of President John Dramani Mahama’s Government is going to be determined by the exchange rate and how down or low interest rates are.
If the monetary policy is failing them and the fiscal policy is not also doing well, we would come to this Chamber and lament about how the Government was not able to achieve some of the grandeur promises they made to the good people of Ghana.
Hon George Kweku Ricketts-Hagan
Cape Coast South
Thank you, Mr Speaker. First of all, I would thank the maker of the Statement for what I think is extremely important and begins to open up a serious debate on this relationship between policy rate and inflation.
Mr Speaker, I think one of the fundamental problems that we have faced in this country is making our policy rate work—I have already started, do you want me to stop? Mr Speaker, we have failed fundamentally because we have not been able to understand the type of inflation and I mean the managers of the economy have not really understood the kind of inflation that we have been dealing with, especially in the last five years.
Mr Speaker, inflation comes in many ways and the old textbook methodology of dealing with inflation has changed in the modern day of modern economics. Inflation, traditionally and originally, used to be demand-driven and that is why this arrangement between interest rate and inflation of policy rate was actually put in place because one can then use the money supply which is basically what interest rate is, to take money out of the system or put it in depending on the heat that the economy is generating as a result of inflation.
But when the inflation is coming from different places other than the traditional demand inflation, which is what happened to us during the COVID19 pandemic, then it is difficult to use monetary policy to address that problem because we have supply chain disruption with inflation coming from the supply side, the demand side and also the exchange rate.
What the Central Bank did in 2020, which in my opinion was a mistake, was to try and resolve inflation by trying to deal with the demand and supply side and not allowing the Ministry of Finance, which is responsible for the supply side because the supply side was fiscal, but left the space for the Central Bank to do that. The Central Bank ended up pumping money to address a problem that had nothing to do with them. It was a bad prescription given to a sickness they had no idea of and that is what caused us the problem that we are in.
Historically, we have had a problem with interest rates or policy rates not exactly being proportional to the traditional arrangement in textbooks. Normally, interest rate should be proportional to inflation, therefore, whichever direction inflation moves is where interest rate would also move to be able to address it—But when one has a situation where inflation is really becoming exponential but policy rate is not dealing with it, then the problem is more than the demand side. We have a serious challenge side problem.
Mr Speaker, Dr Amoah mentioned the United States system. When one has the Treasury addressing inflation, they do their bit. Inflation can go up no matter how the Treasury or the Federal Reserve is doing. This is because the Federal Reserve is doing its bit and the Treasury is also doing its bit. In the last five years in Ghana, the Central Bank got it completely wrong in doing monetary policy and fiscal policy all in monetary policy. That is why we ended up with so much money being spent by the Central Bank.
How would they end up in debt? It is unimaginable that the Central Bank which is the bank of last resort is actually losing money and has no one to bail it out because they were using money to solve the problem that should have been done by the fiscal side. That is why we got into this mess and this conversation is a serious one which we need to look at.
Mr Speaker, is inflation targeting still a thing to do? In my opinion, it is no! Because one cannot target inflation with monetary policy any longer. We would have to look where the inflation is coming from and use all the tools available; the fiscal and monetary policy. Also, one has to look at how to deal with inflation when it comes from their exchange rate because the exchange rate has inflation.
If the currency is depreciating it means that the component of inflation in the exchange rate would also be going up and that would feed—If one is using monetary policy to try and address those problems, one would always get it wrong so it is about we sitting down and rethink—Our Central Bank needs to rethink about how they use monetary policy to try and address inflation and I must commend the maker of the Statement for bringing something that I believe in the next few years would begin to change economics the way we think about it here in Ghana because it has moved from the old economics to a modern day economics which the managers do not seem to have grasped the fundamentals of it.
Mr Speaker, with these few words, I would end here. Thank you
Hon Mohammed Amin Adam
Karaga
Mr Speaker, the Statement in respect of inflation targeting is a very important Statement because inflation targeting has become debatable throughout the world as a vehicle for containing inflation. Other countries have other modules; for example, we used to have the currency peg which was a system by which a country peg its currency to the currency of a low inflation country, but the problem with that was that the problems or solutions in one’s country are tied to the country whose currency you have pegged yours against.
Mr Speaker, so many countries run away from the currency peg module. Others would tie it to growth, but we decided to do inflation targeting which is defining an inflation path by using interest rate to drag inflation towards that path to the desired inflation target. It is not only used in Ghana. Many other countries, including some of the advanced countries, are using inflation targeting, and it has worked for us so far. There have been problems, but it has worked well for us so far.
Mr Speaker, this is not to say that there are no problems associated with inflation targeting. For example, its focus on inflation is at the expense of other economic variables such as growth and employment. If one wants to use rates to drive down inflation, one may face some rigidities, and one is structural rigidity. When rates are higher, they do not incentivise production because the private sector that makes production is crowded out, and when rates are lower, it intends to drive inflation down. It also does not incentivise production because of the structural rigidities in our economy. Because of our structural rigidities, our economy does not really respond to policy change, and that is the problem one would find with inflation targeting, whether it is bringing about rate increases or rate decreases.
Mr Speaker, the other issue with inflation targeting is its limited flexibility in response to shocks. We have experienced a number of shocks, and, with this, I associated with the Deputy Majority Leader. Whether it is supply chain shocks or financial crisis, inflation targeting has a limited capacity to respond to those shocks because of its focus on inflation, and this is why central banks will normally respond. So, this is why I disagree with him. Central banks would respond when inflation targeting is not achieving its desired objective because of the shocks associated with the economy. These shocks are mostly shocks that are external to the economy, so if our Central Bank responded by putting more money into the market, I do not see anything wrong with that.
Mr Speaker, so, our Central Bank acted responsibly because the Budget is so tight, and where the Budget is tight and the country is facing a crisis, there is no reason the Central Bank should not respond. Whether they responded in excess of what they should have done or not is something we can discuss, but, as far as the response by the Central Bank is concerned, it acted responsibly as a Central Bank, so I do not see any problem with that.
Mr Speaker, this is where exchange rates affect our inflation. When we had crisis globally, such as the RussiaUkraine war which caused logistical constraint globally, inflation rose significantly across the world to the extent that median inflation in the advanced countries went over 7.5 per cent. When advanced countries are recording 7.5 per cent median inflation, countries that normally would record one per cent or less than one percent recording 7.5 median inflation, then I wonder why anybody would have problems with the levels of inflation. Ghana recorded it during that crisis because, through the exchange rate, we suffered with our inflation increasing.
Mr Speaker, the reason was also that, because of inflation increasing globally, the advanced countries and their central banks did that. They raised rates and, by raising rates, their financial instruments became more attractive, so investors investing in Ghana and other open economies drew their investment to take advantage of the profits in the advanced countries. That led to our exchange rate suffering; the cedi suffered because of scarcity of foreign exchange as a result of the withdrawal from our market. In that case, which body has responsibility for exchange rate management? Again, it is the Bank of Ghana, which is the Central Bank. So, the response by the Central Bank, in my view, was very responsible, and we should commend them for coming to the support of our Government and our country to ensure that the effect was not as pronounced as it would have been.
Mr Speaker, what we need to do if inflation targeting has to play its role is for us to promote policy coordination between the Central Bank and the Ministry of Finance. Monetary policy and fiscal policy coordination is so critical for us. I do not see that coordination. The Central Bank is independent; the Government does not dictate to the Central Bank. Yet the policies of the Central Bank, if they are not coordinated with the policies of the Ministry of Finance or the Government, the economy suffers eventually, and players in the economy: consumers, suppliers would all suffer as a result.
Mr Speaker, let me give an example. There have been times the Ministry of Finance went to the market for treasury bills (T-Bills), and we got uncovered options and shortfalls, but, at the same time, the Bank of Ghana, through the Bank of Ghana Bills, is getting oversubscribed. So, Bank of Ghana will go to the market because they want to take out excess liquidity, yet the Ministry of Finance that wants money to finance the Budget goes to the market, and we encounter uncovered options. So, why would the two bodies be on the market looking for the same money which we need to finance our Budget? So, because of the lack monetary policy and fiscal policy coordination, the Budget suffers, yet inflation is not being addressed, so what we call second round effects become the order of the day, which we need to be addressing.
Mr Speaker, inflation targeting is not a bad model, but it has problems that we can address. Before we get to addressing these problems entirely, what we need is a policy coordination between monetary policy and fiscal policy.
I thank you, Mr Speaker, for the opportunity.
Hon Othniel Ekow Kwainoe
Ekumfi
Thank you, Mr Speaker, for the opportunity.
Mr Speaker, clearly the maker of the Statement has demonstrated how monetary policy has not necessarily been very effective in its objective of dealing with inflation. I would like to highlight that if one looks at the basket of goods and services for the determination of inflation, we have health, education, food, tourism, and all sorts in the basket. Now, if one looks at all these in the basket, they are weighted, and food remains a very huge component of the determination of inflation.
Therefore, I think it would make a lot of impact if we commit resources, especially, to looking at dealing with the element of food cost because of its potential impact on inflation. Because if one looks at the other elements within this basket, all the economic factors, interest rates and exchange rates to some extent play a role on how it impacts them. But I am more concerned about the food impact because it carries a lot of weight.
Therefore, as a country, if we put a lot of resources in there to ensure that food is in abundance, production is going on well and we are reducing our dependence on imported goods, clearly, on the face of it, we are likely to make an impact straight away, while we are able to deal with issues of collaboration between the fiscal and monetary space. So that they are able to work in tandem and get the desired results out of it.
Mr Speaker, my simple submission is that we need to really take a closer look at the food component of the inflation basket and be able to deal with it. Just like what President John Dramani Mahama says about creating farm banks and putting enough investment into agriculture so that we can make the desired impact as far as inflation is concerned.
Mr Speaker, thank you very much.
Hon Frederick Addy
Suaman
Mr Speaker, thank you for the opportunity to contribute to the Statement made by my senior Colleague, Dr Stephen Amoah.
Mr Speaker, I would act in accordance with Order 93(5). The economic policy anomaly has an adverse effect on the cost of doing business in Ghana. In addition, it affects production which is critical to meet aggregate demand. It also affects employment opportunities and industrial performance. I would like to add my voice to the proposal that, stakeholder bodies come together to help correct the basic but important anomaly.
Mr Speaker, thank you.
Hon Eric Edem Agbana
Ketu North
Mr Speaker, thank you very much for the opportunity to contribute to this very important Statement made by my former boss at the Microfinance and Loan Centre (MASLOC) and senior Colleague, Dr Stephen Amoah.
Mr Speaker, for all of us who have had the opportunity to sit in Economic Policy class, it is trite knowledge that the structure of Ghana’s economy is not balanced. It makes it very difficult for any economic policy to be successful, especially ones that are aimed at reducing inflation and there are several reasons that account for this. From the Statement read, it is clear that monetary policy has failed to lead to a reduction of downward inflation because of the structure of our economy.
One of the reasons is that monetary policy basically has a delayed impact. In economies that are well-structured, monetary policy takes between six to 12 months to have a direct impact on the economy. But when one looks at the structure of our economy, where there is high deficit, high borrowing and fiscal indiscipline by the Central Government, it is difficult to control inflation.
But how can we solve this problem?
Mr Speaker, there are a number of ways that, as a developing country, we can approach this issue and ensure that we resolve the challenges with the structure of our economy. I am happy that the Government in only a couple of days ago announced that there would be a National Economic Forum to assess the structure of Ghana’s economy and determine how to change this structure to ensure that development comes to us at a lesser cost and for us to achieve lesser inflation rates than it is now.
Mr Speaker, one of the things that we have to focus on is for us to improve on import substitution. As we speak today, a look at our economy, where we import about US$1.5 billion worth of rice annually when we have the capacity to produce enough rice to feed this country—When one imports over US$850 million worth of tomatoes from neighbouring Burkina Faso, there is no way their monetary policy rate can lead to reducing their inflation. We have to look at local production and how to boost production here in the country to address that challenge.
Number two, is the issue of the cedi’s depreciation. In the past, we have seen governments issue directives, asking government institutions and the private sector, encouraging them to ensure that we have cedi denominations in terms of fee payments and all of that. Today, when one visits a lot of public institutions, even in our educational sector, prices of goods and services are priced in dollars. When that happens and many people are demanding for dollars, cedi depreciation would continue to increase and that would not help us to achieve the inflation that we are looking for.
Mr Speaker, I am happy that in contributing to this Statement, there seems to be a general consensus on both sides of the House, that there is a need for us to address the structural challenges that confront our economy. I believe that it must begin with improving on our agricultural production, especially with staple foods and items that we import on a daily basis as rice, tomatoes and others.
Mr Speaker, when you come to my constituency, Ketu North, we used to be the foremost municipal or district in terms of rice production. But as we speak today, because successive governments have failed to invest in even maintaining the Weta Irrigation Scheme, we have lost over 200 hectares of rice farmlands to climate change and also the fact that the canals have not been distilled and farmers have lost their farmlands. Any serious government that is purposed to reduce inflation and address the structural challenges with our economy must look at how to boost agricultural production in our country.
I respectfully submit that when the Committees of Parliament are formed, the Committee on Food Agriculture and Cocoa Affairs should take a critical look at how we can ensure that production is increased, irrigation is improved and areas where drought has affected the production of agricultural produce over the last couple of years, all these challenges can be addressed.
I look forward to a day where we can produce enough to feed this country. I so submit
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