THE key elements that disturb economic stability are high inflation and the depreciation of a currency. For any economy to register the needed growth, there is the need to manage inflation and the depreciation of one’s currency against major international currencies.
With Ghana becoming an oil-producing country, concerns have been expressed as to the effects this will have on the monetary and fiscal policies, particularly inflation.
But the Governor of the Bank of Ghana (BoG), Mr Kwesi Bekoe Amissah-Arthur, has given assurance that the central bank is adequately prepared to avert the depreciation of the cedi, which might arise from the two perceived phenomena.
According to him, there was the likelihood that as a result of the Single Spine Salary Structure (SSSS) and the sale of crude oil, more money would be put into circulation, thereby threatening the stability of the cedi and the current single-digit inflationary rate that has been chalked up.
The basic theoretical cause of inflation, it has been said, depends on the forces of demand and supply and this cannot be in doubt. And if there is high supply of money as is expected to happen in our case and a low demand for it, then there is bound to be a problem.
This will obviously shoot up the prices of goods and services, which, in turn, will lead to a drop or fall in the value of the cedi.
But the good news, according to Mr Amissah-Arthur, is that the BoG had budgeted adequate resources to mop up the excess liquidity in the economy, which might come about as a result of the SSSS, oil and cocoa purchases in the country.
All the same, the DAILY GRAPHIC would wish to caution that we should not lose sight of the myriad of causes of inflation.
The BoG should, therefore, be upbeat in its credit role as explained by the central bank governor, employing certain fiscal tools such as the open market operations, the issuance, buying and selling of bonds and bills to avoid the free fall of the cedi and runaway rate of inflation resulting from the upsurge in money supply in the economy.
One way of doing this is to set the interest rate at a favourable level at which it will lend money to the other banks because if the rate is high, then the people and the business community would be less inclined to borrow, which will affect overall production and, for that matter, our development.
It is obvious that the increase in money supply, if not matched with a corresponding appreciation in the demand of goods and services, would have a concomitant and devastating effect on the stability of the cedi and the rate of inflation.
The BoG governor said the reduction in the base rate had led to a positive response by other commercial banks in the country, which, as a result, have reduced their lending rates to ensure that the manufacturing, industrial and commercial sectors contract loans at favourable rates to expand their operations.
But the truth is that the base rates of some of the banks are still high and something ought to be done to reduce it to an appreciable level.
The DAILY GRAPHIC, therefore, implores the central bank to strike a balance as it tries to react to the monetary and fiscal issues of the country.
We appreciate the fact that the reduction in the base rate, coupled with the stabilisation of the cedi and the reduction in the inflationary rate, are positive incentives for investment in the country.
It is thus incumbent on the commercial banks to immediately adjust their lending rates to levels that will support the government’s efforts at bringing down inflation further down to promote the growth of the economy to attract the needed investment for the development of the country.
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