We can’t eat our cake and have it, or can we?

On Friday, 28 May 2010, the Center for Policy Analysis (CEPA) cautioned the government on how the rapid reduction in inflation could adversely affect output and employment (Myjoyonline, 28 May 2010). CEPA estimates that by reducing inflation from 20% in 2008 to 16% in 2009, the nation lost 4.0 percentage points in gross domestic product. Further, the country will lose 5.7 percentage points of output if the projected December 2010 inflation rate of 10.3% is achieved. Interesting, yet scary revelations. CEPA cannot be wrong, at least, not on this!

The naturally pertinent question is: Is the reduction in inflation worth the output (and employment) being sacrificed?

Well, I will endeavor to spare the reader of economic jargons. In the 2010 Budget Statement, the Minister of Finance and Economic Planning spelled out the game plan for the year. Monetary policy was to target inflation reduction to less than 10% in the medium term. They would also try to stabilize the exchange rate to “acceptable levels”, whilst at the same time reducing government deficit (one of the President’s pledge was to reduce fiscal deficits through reduced government spending). *Mutatis mutandis*, commercial bank interest rates would decline so that the private sector can access credit to support economic growth.

Indeed, the Bank of Ghana’s role, as per their mission (“to pursue sound monetary and financial policies aimed at price stability and create an enabling environment for sustainable economic growth”), is to reduce inflation. I think they are doing just that. With end of year inflation target of 9.2%, we have witnessed consecutive decline of inflation in the past 10 months, with the rate at 11.66% in April and 13.3% in March. The April rate of inflation is also believed to be the lowest in 27 months. The prime rate, which was increased to 18.5% in the first quarter of last year, now stands at 15% (still very high), having been reduced a couple of times.

If projections/targets are anything to go by, one would expect CEPA to commend the government for the apparent success chalked in reducing inflation, thus far. But CEPA’s concern, for me, is a genuine one. Why should we be sacrificing output for inflation? Our policy experts at CEPA, Bank of Ghana, and the Ministry of Finance and Economic Planning all know the time-tested trade-off between inflation and unemployment. By choosing to pursue restrictive fiscal policy (by reducing government spending) contemporaneously with contractionary monetary policy (by mopping up excess cash in circulation)*, *these experts knew well before hand that we would most likely experience losses in output (and employment).

We seem to worship inflation so much, to the extent that our politicians make too much noise about it. We seem to want to do anything in our power to reduce inflation, somehow, neglecting the ramifications therein, which we are well aware of. Perhaps, we are still in the stabilization stage, as our politicians would have us believe. Reducing inflation, ensuring stable exchange rates (which have actually been fairly stable in the last several quarters), and a generally stable macroeconomy. When are we taking off? When are we going to start growing the economy again?

Already, we hear very often that “Ghana is hard”. The youth leave school, and cannot readily find jobs. I don’t want to believe we want to continue this way; reducing inflation at the expense of output and employment. At least, for many of us, “we don’t eat inflation”. Hopefully, the economy is fairly stable now. It is time to create jobs and increase output. It is time to let us feel the inflation reduction in our pockets.

I have always thought that combined restrictive monetary and fiscal policy in a time immediately following a global economic decay was not very seemly and healthy. Indeed, we were made to believe that the Ghanaian economy has been robust to external shocks that emanated from the credit crisis elsewhere. I think we should concentrate on growing the economy, creating jobs, while ensuring minimal levels of inflation. To keep fighting inflation at the detriment of output and employment is not in our best interest.

Iddisah Sulemana

*(The author holds a Master’s Degree in Economics from The University of Akron, Ohio, USA. He can be reached at iddisah@gmail.com)*