Inflation to gallop this month — Reversed benchmark values, increased VAT among causes

The month of December last year brought some hope as the battered cedi and fuel prices trended downwards for the first time in many months.

While the local currency regained more than 63 per cent of its value from the dollar for instance to trade below GH¢10, fuel prices also ended a surge towards GH¢16 to an average of GH¢11.50 within the same period under review.

With these two developments in the economy, analysts and industry watchers project that end month inflation for January will slow down.

This means they expected the rate at which the rate at which prices of goods and services change in the country to keep rising, at least for another couple of months. However, these projected increases will be at a decreasing rate before it finally begins to trend downwards.

The December CPI as announced by the Ghana Statistical Service has showed this trend as the general price levels hit new record high of 54.1 per cent last month.

On a month-on-month basis, the increase was 3.8 per cent as compared to the October to November month-to month increase of 8.3 per cent

Major drivers of December inflation

Last month’s inflation was driven by the housing, water, electricity, gas and other fuels division which recorded an inflation rate of 82.34 per cent.

This was followed by furnishings, household equipment (71.52 per cent); transport (71.42 per cent); personal care, social protection and miscellaneous goods and services (60.94 per cent); and food and non-alcoholic beverages (59.71 per cent).

All these divisions recorded inflation rates higher than the national average of 54.1 per cent.

The insurance and financial services and restaurants and accommodation service divisions recorded the lowest inflation rates of 10.76 per cent and 9.18 per cent, respectively.

Food inflation

Food inflation also increased from 55.3 per cent in November to 59.7 per cent for December, while non-food inflation also increased from 46.5 per cent to 49.9 per cent.

Inflation for locally produced items was 51.1 per cent while that of imported items was 61.9 per cent.

The food inflation of 59.7 per cent was driven by water which recorded an inflation rate of 94.2 per cent.

This was followed by fruit and vegetable juices (84.6 per cent); milk, other dairy products and eggs (82.2 per cent); tea, mate and other plant products for infusion (77.7 per cent); sugar, confectionery and desserts (76 per cent); cereals and cereal products (72.3 per cent); fish and other seafood (65.7 per cent); and ready-made food (59.8 per cent).

Others are live animals and meat (59.4 per cent); oils and fats (58.8 per cent); fruits and nuts (56.4 per cent); soft drinks (49.5 per cent); coffee and coffee substitutes (49.1 per cent); vegetables, tubers, and pulses (36.2 per cent); and cocoa drinks (28.2 per cent).

Can this be sustained?

Since October, the country had witnessed a slow down in the increase in inflation rate. This is a positive development as it brought down the heat within the market and helped to water down speculations which often compelled traders to keep their prices high.

There are questions as to whether the latest development within the tax regime can help to maintain the decreased increase in inflation rate within the last quarter of last year.

The Benchmark Value Discount Policy (BVDP) was introduced in April 2019 by the government as a policy to make Ghanaian ports competitive, reduce smuggling and increase government’s revenue from the ports.

The BVDP originally provided a 30 per cent discount on the home delivery value (HDV) of vehicles and 50 per cent discount on the delivery or benchmark values of all other imports into the country. This was later revised to 10 per cent for vehicle imports and 30 per cent for general goods imports in 2022.

However, the government, in the 2023 Budget Statement, completely phased out the BVDP for this year as part of measures to increase domestic tax revenue.

What is the change?

A complete reversal of the discount policy means that no discount will be offered on the benchmark value of all imports from the effective date of implementation — that is, zero per cent discount on the HDV of vehicles and zero per cent discount on the benchmark values of all other imports.

The total HDVs and benchmark values or free on board (FOB) values will thus be considered for import duty assessment subject to the GRA’s existing risk management procedures.

The reversal policy took effect and applicable for all imports from January 1, 2023.

Observations

A Deloitte Ghana analysis shows that the reversal of the discount policy means that 100 per cent value of imports will be considered for the assessment of duties. This is in view of the fact that imported inflation as earlier indicated was 619 per cent before the reversal.

This is likely to increase cost of imports and may directly affect general price of goods in the country. Coupled with global increase in prices, and fluctuating foreign exchange rates, businesses, as signalled by the Ghana Union of Traders Association (GUTA), are going to pass on the cost at the ports on the imported goods, thereby further increasing the prices of imported products.

There is also an increase in the Value Added Tax (VAT) rate by an additional 2.5 per cent. That is also going to reflect in the general prices levels for this month.

Conclusion

The World Bank has also projected that the cedi is likely to be stressed again if the country’s current account deficit is not reduced to sustainable levels.

The cedi is already under pressure and gradually losing grounds albeit, the Bank of Ghana is artificially managing the fall by supplying some more dollars to the commercial banks.

There has been a drop by half, the amount of dollars required by Bulk Oil Companies (BDCs) to import fuel.

Reports said the central bank released US$200 million, half of what the BDCs require to import finished products for the next window. This means that the BDCs will have to find money from other sources, mostly the black market, to meet its demand to import.

These developments, among many others, will have a ripple effect on the general price levels and end the slow increase in inflation.

The means that this month, inflation will likely increase at an increasing rate to end the slow rise in the rate since October last year.

The Graphic Business can project the rate of inflation rising above the December figure by about 4.8 per cent for the month of January.