Macroeconomic stability: Do we 'eat' inflation?

It might take just a short while for us to again relapse into the old way of playing down the value of a stable economy. Today, I hear everyone call on the government to do all it can to stabilise the economy.

Is it the case of “you don’t know the value of what you have until you lose it”?

Times when we as a country played down the value of a stable economy and chastised governments who sort to take harsh decisions to ensure a stable macroeconomic environment.

The common refrain in those periods were “na inflation na yԑbԑdi?” to wit “are we going to eat inflation when we are hungry?”. These were comments to protest against steps by governments to stabilise the economy and they were usually followed by another popular refrain “we want money in our pockets”.

The periods between 2004 and 2007,  as well as 2009 and 2011 are the recent examples of how we blatantly disregarded the value of a stable economy, and literally taunted the governments of the day because we argued that the lower inflation and a more stable currency, with the attendant marginal drops in interest rates, were meaningless to the ‘ordinary Ghanaian’.

Even painstaking explanation from government in trying to draw the link between a stable economic environment and income were discounted. Some even argued that indicators being touted as signs of a more stable environment were cooked and had no bearing on the life of the ‘ordinary Ghanaian”.

I guess the experiences of the later part of last year and whole of this year have thought us to respect the value of a stable economic environment and the fact that it is worth every sacrifice, not only to attain it but more importantly to sustain it.

Let me give possible reasons why we have played down the value of a stable economic environment. Obviously, by human nature we do not value what we have until we lose it and so the moments that the cedi depreciation against the dollar were less than five per cent for the entire year, as it happened in some years including 2006, 2010 and 2011(1.1. per cent in 2006, 3.1 per cent in 2010 and 4.9 per cent in 2011), we felt pursuing macro stability was a needless pain to bear.

But I think a major reason why many of us place less value on a stable economy is the fact that we don’t have real evidence of its benefit on our lives. I am sure we know the importance and worth of macro stability but we are yet to experience it in real terms, the kind of impact it has on lives.

The experience of this year, as depicted in the exchange rate deterioration, with the attendant rising cost of living, might be a useful lesson for us to jealously guard a stable macroeconomic environment when we next have one. ‘When’, because I know that we will surely return to a stable regime soon but the real test remains sustaining it. That brings me back to my second reason. 

If we had experienced an uninterrupted period of a stable economy, spanning a period above even six years, we would have had a better appreciation of it. My point being that, giving our history of rudely interrupted stable regimes, there is always a wait and see attitude by actors before they tag along. For instance, when inflation drops and Monetary Policy Committee of the Bank of Ghana reduces the policy rate, one hardly sees a corresponding reduction in interest rates by Financial Institutions.

There is normally a lag even if there will ever be a reduction and the reduction is hardly proportionate to the fall in the policy rate. It does make a lot of sense for the actors such as the Financial Institutions to behave that way. 

Imagine they grant a loan over three to five-year period at a rate corresponding to the fall in policy rate and by the next year or two, the policy rate goes up (which does happens), what happens to the facility that the banks gave out? So a result of this uncertainty in the stability of the economy, Financial Institutions and the various other actors cautiously, are slow to react positively to that downward trend, and so though there is that momentary stability, the benefit is not transmitted to the public.

This explains why you would hear people say, there is stability but interest rates are high or the usual refrain “the stability does not affect the ordinary man”.

But in order to experience the benefit of a stable economy, we need a prolonged period of stability. Indeed if macroeconomic stability becomes the norm, we would begin to “feel it in our pockets”. And if you asked your relations abroad in countries of consistent low inflation regime, they would tell you how beneficial it is.

But while we are unable to experience the real benefits of a stable regime, at least we know the pains of an unstable regime, as we are experiencing this year.  My fear though is how quickly we might forget the pains of today, and relapse to our beloved refrain of the supposed disconnect between economic stability and our lives, when we get out of the current situation.

A third reason, I want to attempt giving, is the historical nature of the year-on-year inflation, which is what we normally report on , although the Ghana Statistical Service does provide the monthly inflation and other indices.

The year-on-year inflation, which currently stands at 15.3 per cent, measures what happens (changes in general price levels) for instance in the month of July this year in comparison with the month of July 2013. 

This is largely historical and for a country like Ghana, with such volatility in price levels, there might be some disconnect of a sort between the rate of inflation as announced and what we experience today.

This is the thinking, I believe that instigated renowned Investment Banker, Togbe Afede XIV, in 2003 to trigger a debate on whether the year-on-year inflation was the most appropriate way, considering our peculiar volatile economic environment. I am talking about what was largely seen as the astute Investment Banker’s diatribe on inflation. 

But here again if we have a long period of low inflation like our next door neighbour, the Ivory Coast, which has a current rate of inflation of under 1 per cent (0.9 per cent) and yes! if you are surprised, with an average inflation of 2.84 per cent since 2000, we would have had a better appreciation of inflation, despite the historical nature of the year-on-year measurement.

The pains of today, thanks to the macro instability, (which is not the worse anyway) as shown particularly in the cedi depreciation, should spur us to resolve never again to underestimate the importance of a stable regime.

We must realise that every pain to return the economy to a stable regime of low inflation, stable currency, lower deficit, reduced government borrowing from the domestic market among others, will be worth it.

If government’s intended plan to seek support from the International Monetary Fund (IMF) comes to pass, we would begin a process to stabilise the economy. That process will be biting but essential and it will be a useful pain to bear. 

The challenge that I foresee is the fact that the IMF programme, if it does come on (very likely it will come on), will run into the next general elections. Asking government to be prudent and possibly run an austere programme in an election year, will be the heaviest cross the government of the day will have to carry and she will need all the public support to take all the steps needed to return to a stable macroeconomic environment.

The public support for government to pursue a stable environment is very crucial because it will influence a sincere process, devoid of haste, to achieve the desired result by cutting corners.

I am of the opinion that our macro stability efforts have been short-lived because governments of the day are in a hurry to show favourable economic indicators because of the public outcry which is usually jaundiced by partisan discussions.

Over the past decade, we have focused heavily on the use of Monetary Policy to fight inflation. Such an approach gives us quick results. However those results have turned out to be very unsustainable. 

My position, which is shared by many business people, is for us to reduce what appears to be ‘over-concentration’ on Monetary Policy to fight inflation. Governments of the day must deliberately decide to fight inflation by boosting production. If we produce more, we are equally guaranteed a stable price regime and in an even more sustainable manner.

To use an analogy that sounds simplistic. The early days of mobile telephony in Ghana was associated with difficulty in getting a SIM card, in other words, the supply was below the demand and so prices of SIM cards were exceedingly high.

However, since the system stabilised with more operators, implying a boost in supply or production, the telecommunication sector has enjoyed the best price stability ever. Consistently for several years, telecommunication has reported zero inflation. But of course that did not happen overnight but it has been sustained for several years and actually taken for granted.

If we can opt to approach inflation by adopting a deliberate policy to address it through the supply end, it will definitely take a longer time but when it does happen, we would enjoy the longest period of price stability as it pertains with my analogy.

I know this is a fact too basic not to be appreciated by the managers of our economy. But the tenacity to take this path in the face of the kind of partisan politics we play; the less appreciation of the value of macro stability and the four-year presidential term is what is lacking so far. A government can only dare to use this supply end approach, if it has backing from the populace, not in terms of votes but the patience to allow the implementation of such policies, which are medium and long term in nature, could transcend governments.

Today, everyone is crying, including those who ideally should be benefiting from a depreciating local currency.

The best lesson we should and must learn is to appreciate the importance of a sustainable stable macroeconomic environment and to know that yes “macroeconomic stability yԑdi” to wit “we eat macroeconomic stability”. So that regardless of the government of the day, we don’t protest unduly when they are taking proper measures to stabilise the environment but rather lend our support.

I also wish that as we resume another journey of stability through the IMF programme, we can revive the debate on the need to water down significantly the emphasis on the use of Monetary Policy to fight inflation. I have no qualms with the use of Monetary Policy to bring down inflation but I have a huge problem with what appears to be over-reliance on it, such that sometimes it even conflicts with what is being done on the fiscal side.

May the bitter lessons of today bless us to never again play down on macro stability and as we plan to begin another trip down stability, may we all join the debate, to depart from our old ways and adopt a more sustainable approach even if the results will come years after. GB

The author works with El deD Consult, a Marketing Communications firm

Email: info@el-ded.com