Ghana’s 2024 end-year inflation surged to end December at 23.8% marking a fourth consecutive rise after a previous five months of decline.
This end-year inflation rate did not only swerve but also significantly exceeded the projections from key institutions both local and international. The development while signifying the continuous rise in the cost of living for Ghanaians, especially the low-income earners and vulnerable groups also questions the predictability of Ghana’s macroeconomic environment.
A predictable macroeconomic environment is generally considered suitable for economic growth and development for businesses and households. This type of business environment fosters investor confidence, as well as businesses and households making it possible for the making of long-term decisions, planning, and investments.
With these benefits, the development in which major institutions missed the target for inflation is a cause of concern for many businesses and households.
The Projections
The High Street Journal is considering five major institutions that targeted inflation for 2024 but failed.
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Government
Let’s start with the government. The central administration’s 2024 Mid-Year budget targeted ending the year with an inflation rate of 15%. At the end of the year, the 23.8% means the government missed the target by 8.8 percentage points.
Bank of Ghana
The Bank of Ghana, also with its inflation targeting regime at the start of the year initially projected inflation to end 2024 at around 13-15%. However, global and local developments necessitated a revision of this target over the year. The Central Bank revised its target to a less ambitious one, projecting to end the year at 18%. However, this target was also missed by 5.8 percentage points.
Fitch Solutions
One international ratings agency that projected Ghana’s inflation for 2024 is Fitch Solutions. The UK-based firm in its Ghana Inflation 2024 Consumer Outlook forecasted a 20.8% end-year inflation for Ghana. Although this target was close, it also missed the target by 3 percentage points.
International Monetary Fund (IMF)
The International Monetary Fund’s (IMF) Inflation Outlook for Ghana also forecasted an end-year rate of 19.5%. A target that was also missed by 4.3 percentage points.
World Bank
The institution that got very close to reality was the World Bank. Forecasting Ghana to end the year with an inflation rate of 23.2% in its Africa Pulse Report in October, it missed the target by just 0.6 percentage points.
What Went Wrong?
Many analysts attribute Ghana’s inflation woes to two key factors. One of these factors is food prices. It is apparent that inflation in Ghana is mostly fuelled by food prices which culminates into higher food inflation and hence driving the overall national inflation.
A trend analysis of Ghana Statistical Services’ monthly inflation data confirms that food inflation is the principal driver of inflation in Ghana. This highlights the inherent challenges in the country’s agricultural production and supply chain management leading to more than expected rise in food prices.
The next factor driving inflation in Ghana is the depreciation of the local currency. With Ghana being a heavily import-dependent economy, the cedi is always at war with other major trading currencies. As the local currency weakened, the cost of imports surged, driving up prices across.
Additionally, fluctuations in global energy prices, coupled with inefficiencies in the domestic energy sector further exacerbated inflationary pressures.
Business & Household Impact
For businesses, higher-than-anticipated inflation negatively disrupts operational costs making it more expensive to procure raw materials, pay for utilities, and others. These rising costs often eat into profit margins, forcing businesses to either raise prices, which can reduce demand, or absorb the costs, which strains their financial stability.
Uncertainty surrounding inflation also complicates planning and investment decisions, as businesses struggle to predict future costs and revenues. This can hinder expansion, reduce job creation, and, in some cases, lead to downsizing or closures, particularly for small and medium enterprises that lack financial resilience.
Higher inflation erodes the purchasing power of households making it more expensive to buy goods and services, especially essentials like food, transportation, and healthcare. Fixed incomes, such as salaries or pensions, lose value in real terms, leaving families with less disposable income and forcing them to cut back on non-essential spending. Moreover, inflation disproportionately impacts lower-income households, which spend a larger portion of their income on necessities, increasing financial stress and exacerbating inequalities.
A Call to Action
The effectiveness of the inflation-targeting regime of the Bank of Ghana has come under scrutiny for some time now. Economists like Dr. John Kwakye at the Institute of Economic Affairs (IEA) have been strong advocates against the inflation control regime of the Central Bank.
Dr. John Kwakye, who has worked at the Bank of Ghana, over the years is certain that the tools of the Central Bank only focus on the demand side of the problem neglecting the supply side where the main drivers of inflation are found. With this, the Central Bank may need to adopt a more aggressive monetary policy stance to stabilize the currency and anchor inflation expectations.
On the side of the government, investments in agriculture that also address supply chain bottlenecks are very critical to boosting food production and reducing food price inflation. There should be a conscious policy aimed at addressing the country’s food challenges in the long term.
As Ghana grapples with these economic challenges, coordinated efforts will be essential to restore price stability and mitigate the financial burden on its citizens.
