Understanding inflation in Ghana

Alium Aboubakary Brahima, Tamale, Ghana
September 12, 2024

Inflation rate in Ghana was 22.1 percent on September 6, 2024; a consistent decline which started in November 2023, when inflation was 26.4 percent. This suggests that the country has been able to halve inflation between 2022 and 2024. Since the first quarter of 2024, inflation has declined for 5 consecutive months by 5.4 percentage points. Two years ago, the inflation rate was 54.1 percent (in December 2022). The Ghana Statistical Services (GSS) uses a basket of goods and services to capture the average rise in price levels. It sets a base year for measurement and generates the Consumer Price Index (CPI) as a measure of the aggregate price level in the national economy.

The GSS applies the United Nations’s Classification of Individual Consumption According to Purpose (COICOP - 2018 Manual). Applying the COICOP, the GSS collects monthly prices for 47,877 products from 16 regions. After gathering prices in 57 markets and from 8,337 outlets, GSS statisticians form a hierarchy of products, which contains 13 divisions, 44 groups, 98 classes, 156 subclasses and 307 items. As a precaution against double counting, each item can only be part of one subclass, and each subclass can only be part of one class. Housing and utilities and also transport, followed by food, were the major contributors of inflation in 2023.

Data collection

GSS staff travel around the country to collect prices across outlets (supermarkets, restaurants, business entities, and administrative offices), where households of walks of life purchase goods and services. For every product, the survey generates the price, quantity, and information from the labels of package products. Mastery of local languages, especially in rural areas, is crucial during interactions between data collectors and respondents.

The surveys yield a disaggregated presentation of inflation into core, headline, food and non-food inflation figures. Data from the survey present inflation figures for items produced in Ghana, for imported items, and for each of the 16 regions of Ghana. In December 2023, for example, the country recorded an inflation rate of 51.1 percent for locally produced items and a rate of 61.9 percent for imported items. The same data show that Greater Accra, Bono, Central and Eastern regions have been pockets of high food inflation since 2022, with rates over 65 percent.

In Ghana, the current bout of high inflation stems primarily from pre-existing vulnerabilities, structural weaknesses in the economy (for example Import dependency) and external shocks. Over the past three decades, the country has grappled with hyperinflation in the early 1980s and frequent sharp spikes in the two decades that followed. Since independence, in 1957, Ghanaian authorities have implemented 17 waves of reforms over the years with the support of the International Monetary Fund (IMF). These successive reforms eventually began to pay off, and between 2008 and 2019, inflation hovered between 7.00 percent (despite increases in 2013 to 2016). However, the disruptions of the COVID-19 pandemic exacerbated pre-existing vulnerabilities, bringing Ghana back to a period of high inflation.

Data from the Ghana Statistical Servce (GSS) shows that since December 2022, consumer goods, utilities, housing and food have become the main components of the inflation circuit, with transportation and hydrocarbons, speficifically, acting as receptors and transmitters². But external contagion is an important driver of inflation. Between 2020 and 2023, for example, the prices of wheat, fertilizers, and hydrocarbons significantly contributed to high inflation. Prices, including those of goods and also of transport logistics, rose by 72.3 percent between 2021 and 2023³ as the COVID-19 pandemic paralyzed import. At first, authorities responded with an expansion of the money supply. This took the form of monetary financing, which reached 4.4 percent of the GDP in 2020. According to the IMF, this ‟large monetary financing of the government pushed inflation up to 54 percent in December 2022”⁴. The government has subsequently, abandoned this approach in favor of a tighter monetary policy.

Policy reform and monetary response

In 2007, the Bank of Ghana adopted an Inflation Targeting (IT) framework. The goal of the IT framework is to ensure medium-term price stability and to support a flexible exchange rate regime. In terms of procedure, the Government, and the Central Bank set the medium-term inflation target together ⁶. But the Bank of Ghana deploys its policy tools to attain the target. In exceptional circumstances, the Monetary Policy Committee (MPC) has the power to announce other prudential measures ⁷. The medium-term inflation target is eight (plus or minus two) percent ⁸ for the end of 2026.

In recent years, the Bank of Ghana and the Government jointly set the medium-term inflation target while the Bank of Ghana uses policy tools to achieve it. Ghanaian authorities say that they want the country’s inflation policy to also spur sustainable economic growth.

The government has indicated that it wants to reinforce this working relationship with a sustained improvement of macroeconomic fundamentals, for example by restoring fiscal balance, improving revenue collection and by controlling spending. Ghana has the backing of the International Monetary Fund (IMF). At the monetary level, the Bank of Ghana has implemented a series of rate hikes since May 2021 when the interest rate was 13.5 percent. Interest rates gradually increased and reached 30 percent in Septembre 2023. The Central Bank also built reserves, made a firm commitment to end monetary financing and tightened control on the domestic currency exchange to fight parallel or non-official FX.

Since 2022, the country has targetted the price of certain categories of goods and specifically hydrocarbon products to curb inflation.

Managing external contagions

The lingering effects of the COVID-19 pandemic and the ongoing Ukraine-Russia war expose the vulnerability of Ghana to external shocks. Despite noticeable dynamic adjustments and structural corrections in the economy, the two events continue to destabilize the global logistics and supply networks, especially for manufacturing inputs and machine components. They offer yet other evidence that external economic and political events are a major source of risks for Ghana because the country is ‟highly dependent on imports”⁹. The government enforced a temporary moratorium on non-essential imported items and revitalized the policy of import substitution and to reduce import dependency. However, the limited productive capacity ¹⁰ of Ghana continues to slow the effectiveness of these policies.

On the other hand, Ghana's economic relations with its neighbors and regional peers is a blessing in terms of intra-African and intra-regional trade. But these economic exchanges also carries inflationary transmitters. The country's economy is inextricably linked to those of the member states of the Economic Community of West Africa (ECOWAS). As the third largest economy in West Africa (After Nigeria and Cote d'Ivoire), Ghana hosts the headquarters of African Continental Free Trade Area (AfCFTA).

However, although the Ghana's intra-African trade is lower compared to trade with other continents (Europe, Asia, America, Oceania), Ghanaian authorities and companies expect this trade to grow in the next decade. In 2023, Ghana's exports to African countries represented 22 percent of its total exports and 9.1 percent of its total imports¹¹. The country's economy is vulnerable to price movements in ECOWAS Nigeria, Cote d'Ivoire, Togo and Sahel countries such as Burkina Faso, Mali and Niger. ECOWAS countries are bound by economic convergence criteria in view of the creation of a common currency called the ‟Eco”. However, divergent domestic policies means that the member countries cannot align their inflation policies to fence off exogenous shocks.

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