Director of the Institute of Statistical, Social and Economic Research (ISSER), Prof. Peter Quartey, has underscored that the recent hike in the policy rate by 100 basis points may help reduce inflation but also has the tendency to further increase lending rates in the country.
The ISSER Boss who was not surprised about the move by the MPC of the Bank of Ghana, explained that the Bank considered several variables such as exchange rate stability, inflation, inflation expectations, the fiscals as well as economic growth before arriving at the decisions. He elucidated that since inflation has risen in the past five consecutive months to 11% in October 2021, it was prudent for the Central Bank to manage inflationary expectations.
The ISSER Boss, who was commenting on the recent increment in the policy rate from 13.5% to 14.5%, told the Vaultz News in an interview that just like any policy decision, a hike in the policy rate comes with some advantages and disadvantages. Prof. Quartey explained that when the policy rate curtails how much people borrow and invest, it will have repercussions on output and employment.
“When you increase the policy rate, the bank rates will also go up; the lending rates go up and then the deposit rates. More especially, when the lending rate goes up, then it’s going to reduce how much people borrow to either consume or invest.
“That’s the negative side of increasing your rate. But the positive side is that it helps to curtail inflation. For businesses, a stable inflation is good. If you don’t manage future expectations and inflation, it’s going to also negatively affect businesses. There will be the need to curtail inflation through the policy rate. So, there are gains and costs for increasing your rate”.Prof. Peter Quartey
Government unlikely to meet 8% inflation target
Despite government making some revisions to its major macro-economic variables in the 2022 Budget statement, it still maintained its inflation target for the year at 8%. However, Prof. Quartey believes “we might miss it marginally”. He explained that a lot of things have changed in the global economy since the government made its forecast. According to him, oil prices and cargo freights are increasing which is affecting prices of both domestic and imported prices.
“We have imported inflation, influenced by oil prices, and also freight costs and other things. Then locally, because of the increase in fuel prices and other things, it also feeds into cost of production and that is also going to translate into higher inflation. The government’s target of course, was based on the expectations that oil prices was going to be around 50 dollars or so. But now, it’s around 70 dollars so the likelihood of meeting the 10% plus or minus 2 is very low. We might miss it marginally; in my view may be around 11 percent”.Prof. Peter Quartey
E-Levy to introduce inflationary tendencies
Speaking on inflationary expectations, the ISSER Boss disclosed that if the government goes ahead to introduce its proposed electronic levy at the rate of 1.75%, that will also impact on the country’s average prices of goods and services.
“I don’t expect government to still go ahead with the 1.75% E-levy. I think they should listen to good counsel. Yes, it’s good for government to raise money through e-payments but if you’re taxing, you need a price that more people will use the service. A rate of 0.5%, 0.75% is something that people will complain a little but they will use the service. If the E-levy is not implemented properly, if the rate is not reduced, it will introduce inflationary tendencies”.Prof. Peter Quartey
Prof. Quartey explained that once electronic transactions are taxed, businesses who make use of electronic payments in the course of their operations will pass the tax burden to the consumers by charging higher prices for their products and services. He also stated that the government may not realize its targeted revenues from this tax since people have alternative means of making payments.
“It ought to be implemented in such a way that the taxpayer will absorb it. We want to look at the elasticity of this tax, whether people will still consume or use the service or find alternatives. I will be happy to see an empirical study that underpins this advice that we should tax at 1. 75%. I’m yet to see any credible study”.Prof. Peter Quartey
The proposed E-Levy currently hangs in the balance amid controversies over the failure of Parliament to accept the 2022 budget statement presented by the Finance Minister on behalf of the government on November 17, 2021.