Why government’s economic policy won’t work

terkper budget
Photo: thebftonline.com

I already wrote about Kwame Ofori Asomaning here. The private equity manager is the only mainstream voice against the IMF-endorsed austerity policies that the government is using to weather the storm of low commodity prices, high debt and expensive credit on the international market.

In the last article I pointed to his two lengthy and educational pieces for the Business & Financial Times arguing against deficit targeting. Find them here and here.

He’s out with another article. This time he argues against the assertion that his call for government to run higher deficits to grow the economy will cause hyperinflation. He argues that Ghana is in stagflation i.e. we have both high inflation and high unemployment. The Phillips curve posits a trade-off between inflation and unemployment however that is not being seen in Ghana as unemployment doesn’t seem to be reducing even as inflation is running out of control.

Asomaning argues that loosening monetary policy will only lead to inflation when we have full employment. But when there is huge unemployment then the economy has the capacity to absorb and grow. And a growing economy needs money!

He points to the fact that the constant increase of the policy rate of the MPC (12.5% to 26% since February 2012) has woefully failed to rein in inflation (8.64% to 17.4% since February 2012). This he attributes to the fact that inflation is due to the rising cost of factors of production and not an oversupply of money. It is cost-push not demand-pull.

Ghana’s economic growth has slowed. From 14% in 2011 to 4.1% in 2015. Asomaning wants an increase in money supply to tackle this. Totally the opposite of what government is doing now. The tightening of monetary policy is also sending government debt yields so high that it’s much better to put your money in treasury bills than to brave the power cuts, cut-throat borrowing costs and other costs of production to build the businesses that create jobs.

Although for the most part I’m inclined to agree with Mr Asomaning, I think he should’ve touched on what loosening monetary policy at this time will have on our exchange rate. What would the effect be on the costs of imports and how will that affect the cost-push inflation we’re suffering? Also there is the fear of the capital flight already happening in emerging economies getting worse if government tries to veer from the tightening which foreign investors expect.

However, I think Asomaning’s suggestions should be tried. At least after the increase in electricity tariffs, the policy rate should be lowered to reduce borrowing costs. (Banks suffering  from high non-performing loans however must be monitored in how they give out new loans.) With the IMF pessimistic about the prospects of Sub-Saharan Africa, it is clear that we need a way to address the unemployment challenge and Asomaning’s suggestions are at the least, worth considering.

PS: I first used the word “stagflation” to describe Ghana’s situation in my first post about Asomaning. I’m delighted he also sees it that way.


Jerome Kuseh

Accountant | Economist-in-Training | Finance Blogger

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