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Inflation rose again in Togo, and the solutions proposed by the government won't reduce prices

According to the Togolese economic newspaper Togo First, Togo recorded an inflation rate of 7.1% in March 2023, up by 0.7% compared to the previous month. And according to the National Institute of Statistics, and Economic and Demographic Studies (INSEED) of Togo, which released the figure, the increase was driven by food prices, which rose 1.3%, and services such as restaurants and hotels, which rose by 0.8%.

While 7.1% overall may not seem extremely high as an inflation rate compared with a country such as Zimbabwe, which has an inflation rate of over 100%, it is important to take into account that Togo is a very small country of only 8.85 million people. If we have to put the scope of this number into perspective, the Togolese population is more or less equivalent to that of New York City (about 8 million people). Thus, for a small country such as Togo, having an inflation rate nearing 10% is a lot and problematic.

Togo's Consumer Price Index

Source: National Institute of Statistics and Economic and Demographic Studies

The Consumer Price Index in Togo remained unchanged at 126 index points in May 2023. The maximum level was 112 index points and the minimum was 91.2 index points. 126 index points indicate that Togo’s CPI is far above its nominal rate, and its economy is being seriously affected by the relentless increase in prices as we could observe. In fact, inflation surged in Togo since 2020. And there are several factors that led to this economic doldrums.

The increased food prices have been raised in Togo due to a number of factors, including the war in Ukraine, which has disrupted the global food markets, leading to higher prices for wheat, corn, and other commodities; and a drought, which Togo has been experiencing in recent months due to a reduction in crop yields.

The price of energy has also been rising in Togo, due to factors such as the global economic recovery. Indeed, The global economy is recovering from the COVID-19 pandemic, which has led to increased demand for energy. Sanction on Russia also affected energy prices. Indeed, the United States and its allies have imposed sanctions on Russia, which has led to higher energy prices.

The depreciation of the CFA Franc also contributed to the surge in inflation rate. As a matter of fact, the depreciation of the CFA Franc against the dollar has made imported goods more expensive, thus, reducing the purchasing power of ordinary Togolese.

The Togolese government has, however, taken a number of measures to address the issue of inflation. This includes:

(1) Raising interest rates. The Central Bank of West African States, known in French as BCEAO (Banque Centrale des Etats D’Afrique de l’Ouest) has raised interest rates in an effort to slow down the growth of the money supply. The CFA Franc is pegged to the Euro. Now the European Central Bank raised interest rates, the BCEAO is compelled to keep increasing interest rates in order to keep the credit market tight. It is understandable that raising interest rates is a necessary mesure to bring inflation down.

(2) The Togolese government imposed Import controls on a number of goods in an effort to reduce the supply of imported goods and lower prices. The problem of import controls is that it prevents free trade. Import controls are essentially tariffs, and tariffs are price ceilings. The problem with price ceilings is that they distort the allocation of resources as they make consumers pay higher prices for the local goods sold to them. If the goal of the Togolese government is to reduce the price of imported goods, then imposing a price ceiling will not solve the problem. It will exacerbate the issue.

3) The Togolese government planned on providing subsidies to farmers and food producers in an effort to lower the cost of food. Again, here the Togolese government attempts to interfere with the market. Such an intervention will once again distort the allocation of resources. Farm subsidies inflate the price of land as well as rent. Farmlands are mostly rented; it will mainly benefit landowners than farmers. Meanwhile, higher prices for land and higher rents make it harder for new farmers to enter the field.

While the intention to address the issue of inflation is commendable, the solution proposed to address such an issue are problematic because they will distort the market mechanisms. These solutions proposed by the Togolese government will only worsen the problem of inflation rather than solve it.

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