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Does the decline in inflation mean that Ghana's economic woes are finally over?

It seems like inflation in Ghana has slowed considerably, which brings some relief to economic life for Ghanaian consumers and businesses.

According to Business Insider Africa, since the year began, Ghana has hopped from one economic complication to the other. The country for more than half of the year grappled with some economic shortcomings, including a two-decade high inflation rate. However, the past few months have seen the Gold Coast regaining some ground.

Ghana Inflation Rate

Source: National Bureau of Statistics of Ghana

In January Ghana’s inflation rate, according to the data from the country’s National Bureau of Statistics, was 53.6% and a month later it dropped to 52.8%. Since then, the country’s inflation rate has been in a steady decline, with October’s numbers coming in at a 14-month low.

To combat inflation, the Bank of Ghana has been applying contractionary monetary policies. The Bank of Ghana has steadily increased the Monetary Policy Rate (MPR) from 16% in January 2022 to 30% in November 2023. This aims to reduce the money supply in circulation, making borrowing more expensive and encouraging saving, ultimately dampening demand and inflationary pressures. Moreover, the Cash Reserve Ratio (CRR) requires banks to hold a specific percentage of their deposits as reserves at the central bank. By raising the CRR from 12% to 15% in November 2023, the Bank of Ghana further reduces liquidity in the financial system.

With inflation under control, the Ghanaian economy could experience renewed growth, leading to job creation and improved living standards.

It is undeniable that the Ghanaian economy has made significant progress during its recovery process. It is still recovering. But the question to ask is the following: will the expected renewed growth be sustainable?

The Ghanaian economy is a debt-based economy like all the economies in the world. It relies on consumer spending to prop up economic growth. Once inflation decreases to “sustainable levels,” the Ghanaian central bank will try to encourage growth by stimulating aggregate demand by increasing the money supply and the Ghanaian government will increase spending, which will result in government deficits. This will then lead to an increase in inflation on the monetary-policy side and to an increase in the national debt on the fiscal-policy side.

According to Statista, Ghana’s national debt is expected to increase by $44.4 billion between 2023 and 2028, reaching $106.19 billion in 2028. The Ghanaian national debt has reached 92.4% of its debt-to-GDP ratio in 2022, which clearly makes the country overleveraged, and its national debt unsustainable. And in December 2022, the Ghanaian government defaulted on its external debt, which deeply impacted its creditworthiness on the international bond market.

The fundamental problem is that both, the Ghanaian government and the Bank of Ghana, will try to stimulate economic growth by tapping into aggregate demand rather than aggregate supply. Tapping on aggregate demand does not increase supply. It only makes the prices of goods and services more expensive than they should be. And Ghanaian consumers will soon be the ones to incur the cost of this forthcoming artificial increase in prices. This will then cancel all the work done to bring inflation down and stabilize the economy as monetary authorities and the government will be the very same people to bring the Ghanaian economy once again to difficult times once it is stable.

Thus, the economic woes of Ghana are not done. In fact, they will resurface as soon as the economy is stable. This then makes the whole economy fundamentally unsustainable for long-term growth.


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