While there’s jubilation over the cedi’s recent stability, certain aspects of the economy may be paying dearly for the gains due to the approach by the Bank of Ghana (BoG) to drive down inflation through the exchange rate.
Senior Lecturer and Economist at the University of Ghana Business School, Professor Godfred Alufar Bokpin, is raising spirited concerns about the Bank of Ghana’s current approach to driving down inflation through a deliberate strengthening of the cedi, warning that the strategy could severely undermine local production and job creation.
The economist says that while the Central Bank may be aiming to tame inflation by stabilizing the exchange rate, the ripple effect of that policy is promoting importation at the expense of local goods, a situation highly discouraged due to its impact on the productive sectors of the economy.
He is therefore kicking against the approach of the Central Bank, which only focuses on the demand side of the coin without any recourse to the supply side.
“If the consideration is that we can drive down inflation to the end-of-year target, and we look at it that we can’t get that down from the supply end because the economy’s supply capacity is restricted, severely constrained. If that is the approach, then I will not go with the strengthening of the currency in the manner they are doing it,” he remarked.
Exchange Rate and Inflation Relationship
Prof. Bokpin acknowledges the longstanding relationship between exchange rates and inflation. He explains that a stronger cedi helps reduce the cost of imports, thereby easing inflationary pressures. This is because inflation for imported items becomes lower relative to locally produced items.
But he cautioned that such gains are only short-term and come with long-term trade-offs for the economy.
Citing recent data to buttress his argument, Prof. Bokpin revealed that since November 2023, inflation on locally produced items has surpassed inflation on imported goods. This, he says, is not only counterproductive to Ghana’s industrialization drive but also a blow to job creation efforts.
“From November 2023, inflation on locally produced items is higher than imported inflation. So, if you drag down the exchange rate, it only makes imports cheaper. Okay, to the extent that we are promoting an import-oriented economy, I would say go with that part. But that is not what we want to do,” he analysed.
He continued, “That strategy does not create jobs. But, of course, it will help us to bring inflation down from that point of view. That only makes imports cheaper. That only makes imported inflation lower than locally produced.”
“You are far better off in this country if you were importing and paying all the duties at the port rather than producing here,” he lamented. “When you do it that way, you are only outsourcing the productive capacity of the economy to other countries.”
The Need for Supply-Side Interventions
Prof. Bokpin insists that the approach of the Central Bank fails to tackle the root causes of inflation. He calls for a more balanced approach that incorporates supply-oriented policies to address structural bottlenecks limiting production in the local economy.
He is urging policymakers to focus on enhancing Ghana’s productive capacity rather than relying solely on currency appreciation to manage inflation. This move, he is convinced, can be unsustainable in the long term.
“Inflation, what is it basically? Aggregate demand exceeds aggregate supply. So, you solve that by addressing both the demand and supply sides. But supply-oriented policies will not coexist with what we are doing right now,” he explained.
The Bottomline
Prof. Bokpin’s stance is a caution to the government and policymakers that while the current approach may offer a temporary relief, it is not sustainable for an economy that grapples with persistent inflation and currency instability. Prof. Bokpin calls for a balanced approach to tackle the menace of inflation without trading local production for lower inflation.
His call resonates with other economists, including Dr. John Kwakye of the IEA, who believes that just focusing on demand-oriented policies to fight inflation is not sustainable and also ineffective in the long run.
