Market anticipates drop in headline inflation as positive indicators boost economic outlook
The economic landscape of Ghana is poised for a transformative shift as the nation experiences positive indicators and embarks on strategic measures to enhance stability and foster sustainable growth. With the highly anticipated release of the Consumer Price Index (CPI) figures for May 2023 by the Ghana Statistical Service (GSS), market observers are eagerly awaiting the potential further drop in the headline inflation rate, signaling encouraging signs for the economy.
A Confluence of Factors Driving Inflation Reduction
The anticipated decline in the headline inflation rate is driven by a confluence of factors that have had a positive impact on the Ghanaian economy. Firstly, the favorable base effect, resulting from the comparison to previous high inflation rates, sets the stage for a potential decrease in consumer prices. Additionally, the decrease in global crude oil prices has helped alleviate inflationary pressures, as Ghana, being a net importer of oil, benefits from reduced import costs. Furthermore, the relative stability of the Ghanaian cedi against major currencies, including the US dollar, has contributed to a more favorable pricing environment for goods and services.
April 2023: A Steady Decline in Consumer Inflation
Preliminary data from April 2023 revealed a steady decline in consumer inflation, further supporting the notion of a promising downward trend in prices. The Consumer Price Index, as reported by the GSS, showed a decrease to 41.2 percent compared to 45 percent in March. This gradual slowdown in the rate of price increases indicates a positive trajectory for inflation control measures and their effectiveness in curbing rising costs.
Private Sector Expansion Bolsters Economic Outlook
Another significant development is the continued expansion of Ghana’s private sector, as demonstrated by the S&P Global Ghana Purchasing Managers’ Index (PMI). In May 2023, the PMI stood at a near 1-1/2-year high of 51.3, unchanged from the previous month. This expansion is driven by robust new orders growth, reaching its fastest pace since September 2021, buoyed by improved demand amid the sustained slowdown in inflation. As a result, companies have been able to expand their purchasing activity and employment, effectively managing backlogs of work. Moreover, the improved availability of raw materials has contributed to a series-record improvement in suppliers’ delivery times. Both input costs and selling prices have experienced a significant deceleration, providing further impetus for the private sector’s growth.
Monetary Policy and Fiscal Measures: A Synchronized Approach
In its commitment to maintain price stability and mitigate inflationary pressures, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) decided to maintain the Monetary Policy Rate (MPR) at 29.5 percent. The decision was underpinned by the rapid easing of underlying inflationary pressures and decreasing inflation expectations. The IMF’s recommendation to tighten financing conditions by raising the policy rate to a record high of 29.5 percent and increasing the Cash Reserve Ratio (CRR) to 14 percent has been instrumental in aligning monetary policy with fiscal objectives.
Moody’s Upgrade: A Vote of Confidence in Ghana’s Fiscal Management
In a positive development for Ghana’s credit rating, Moody’s Investors Service recently upgraded the country’s local currency long-term issuer rating from Ca to Caa3, maintaining a stable outlook. This upgrade is a testament to the success of the government’s primary local currency debt restructuring, which has reduced the anticipated losses on local currency debt in the future. The debt exchange has provided Ghana with much-needed fiscal relief and reduced the necessity for further debt restructuring in the near- to medium-term. However, the Caa3 rating still underscores the existing risk of potential default until Ghana addresses its remaining local currency debt and restructures its foreign currency debt.
Balanced Outlook Amid Ongoing Challenges
While the combination of declining inflation, positive economic indicators, and government’s debt restructuring efforts has created a balanced outlook for Ghana’s economy, challenges persist. The negotiation process for restructuring foreign currency debt remains a critical factor, as does the ability to access local currency funding without limitations. However, the expectation of a smooth foreign currency debt restructuring process, coupled with fiscal and external adjustment supported by the IMF, contributes to the overall positive sentiment surrounding Ghana’s economic prospects.
Looking Ahead: A Promising Path Towards Stability and Growth
As Ghana progresses on its journey towards economic stability and growth, stakeholders remain cautiously optimistic about the nation’s future. The anticipated further drop in the headline inflation rate, combined with the private sector’s expansion, prudent monetary policy measures, and improved credit rating, sets the stage for a promising path ahead. Ghana is poised to leverage its positive economic momentum, build resilience, and unlock its full potential as an emerging market economy. With ongoing efforts to address challenges and embrace opportunities, Ghana is positioning itself as a beacon of stability and growth in the region and beyond.
I hope the inflation will drop to say 37% or 38%.