Economies around the world today are faced with the daunting task of dealing with elevated inflation, birthed out of both food and energy supply shocks, and co-parented by both the COVID-19 and the Russia-Ukraine invasion. Economists around the world are yet to figure out ways to solve the problem. Goldman President John Waldron admitted that; “This is among - if not the most - complex, dynamic environments I’ve ever seen in my career. The confluence of the number of shocks to the system to me is unprecedented.”

The Governor of the bank of Ghana, Dr Ernest Addison, in a recent interview with Bloomberg described the situation as “baffling”. He said, “I think that it is an issue which, in a sense, is baffling for all of us. A year ago, inflation was at single digits, around 7.5 per cent, and a year later, we are in the high ends of double digits”.

Central banks in both advanced, and emerging and developing economies have resorted to incremental adjustments in policy rates. The MPC of the central bank in Ghana increased the policy rates from 17% to 19%. This has been received with mixed reactions as institutions like the IEA welcomed the upward adjustment as necessary, while other economists bemoaned that the upward adjustment in policy rates will affect growth and exacerbate the already crippling economy.

A multi-faceted approach - dealing with the short to long term. 

Even though the IEA welcomes the new policy rate, it further cautions that raising policy rate alone is not the panacea to Ghana’s inflationary pressures. The Research Director of the institute, Dr. John Kwabena Kwakye, said the solution to all the inflationary challenges facing the economy, requires a multi-faceted approach, and the most important is to solve the structural weaknesses. He stated that, “The only way to find a solution to the recurrent problems is to address the economy’s weak structural fundamentals. This should be done through transformation of the colonial-type economy to a vibrant industrialized economy”. There are also fundamental issues that needs to be addressed otherwise we will always be at the mercy of external shocks. There is the need to solve macro-economic problems i.e., high fiscal deficits and public debts, exchange rate instability, high rate of unemployment.

The governor of the bank of Ghana agrees that the recent price pressures requires that new tools either than what the country is used to be deployed to contain the rise and its persistence.

The intriguing case of Africa and that of Ghana.

It is evident from the trends that the larger part of Africa’s inflationary pressures is driven by what has become known as the “imported inflation”. This means prices of imported goods are increasing at a faster rate than that of locally produced items and because of the large dependence on imported commodities, it is evident that Africa and Ghana are in a grave situation. Our large dependence on imports is making us endure a quicker pace of price increases.

Aggressive policy rates or Aggressive industries?

According to the IEA, Ghana requires concrete policies and programs that institutes sustainable industries which adds value to raw materials and leverage natural resources for rapid growth.

Adversity has the potential of giving rise to innovation, hence this situation must be seen as a wakeup call for innovative actions. We cannot keep relying on our narrow tax base and borrowing but rather by leveraging our vast natural resource wealth to take ownership of it. 

To reecho the words of Dr. John Kwabena Kwakye, the director of the IEA, he emphasized that “Ghana is less industrialized now than it was in 1970”. We must Boost local production considering the arable lands in Africa and strengthen our Agro-value chain. It is unfortunate that the region is a heavy importer of edibles, including cooking oil and fats, cereals, fruits, and vegetables, etc. Interestingly, these are the set of items driving up the imported inflation.

Deliberate effort is needed to increase food production and ensure storage and preservation of excess produce, especially during the peak seasons so that there will be stocks available to cushion prices amidst shocks and during the lean seasons.

Key Considerations 

The key here is to develop the local production to meet the demand to curtail imports and further dampen price pressures. This will be within the medium to long term, but within the short term, tax intervention from the government on imported goods will be necessary to help cushion the price burdens on citizens and businesses. But the focus must be the aggressive efforts to revamp local production. This requires both the efforts of the public sector, ie, government and central bank, and the private sector.