Shock to disinflation trend temporary; inflation to soon resume decline – Courage Boti
In a surprising turn of events, Ghana’s inflation, after experiencing four consecutive months of disinflation, veered off course in May 2023, showing an increase of 100 basis points to reach 42.2% year-on-year. However, according to Courage Boti, Research Lead at GCB Capital, this deviation from the disinflation trend is expected to be temporary.
Boti argues that the upward price pressures resulting from the second-round effects of utility tariff hikes, the 2.5% increase in the Value Added Tax (VAT), and the rollout of three revenue measures from May 1, 2023, outweighed the pull factors, thus contributing to the marginal climb in the headline inflation rate.
Boti further elaborates that the anticipated second-round effects and the delayed impact of the revenue and tariff measures, along with the recent upward adjustments to utility tariffs for Q2 2023, which took effect from June 1, 2023, are likely to lead to another marginal increase in headline inflation for June and potentially July 2023.
However, the outlook remains positive as Boti expects inflation to resume a declining trajectory thereafter. This expectation is supported by the favorable base drift and easing price pressures from the primary drivers of inflation.
Moreover, the official commencement of the International Monetary Fund (IMF) program is anticipated to tighten fiscal and monetary controls, with specific focus on the memorandum on Zero Central Bank deficit financing. This measure, combined with the continued tight monetary policy stance, is expected to play a crucial role in sustaining disinflation and anchoring inflation expectations lower. The implementation of these measures is seen as a significant step towards achieving long-term price stability.
However, it is important to note that the lingering effects of the new revenue measures and tariff adjustments could persist for some time before gradually dissipating. This could potentially moderate the pace of disinflation in the second half of 2022. As Ghana’s economy adjusts to these structural changes, the gradual easing of price pressures is expected to pave the way for a more sustainable disinflationary trend in the medium term.
The current inflationary episode highlights the challenges faced by policymakers in managing price stability while implementing necessary fiscal and economic reforms. Nevertheless, market participants and investors remain cautiously optimistic, as the combination of favorable base effects, the IMF program’s impact, and the authorities’ commitment to prudent fiscal and monetary policies provide a solid foundation for sustained disinflation and the eventual stabilization of Ghana’s economy.
