Reality defies Forecasts: Inflation Rate on the Rise

Unfortunately Ghana is not following in the footsteps of yesterday’s announcement in Windhoek: Its annual consumer price inflation surged to a fresh three-year high in October, well above the government’s target band and in defiance of the central bank’s forecast of a fall towards the end of the year. Ghana Statistical Service attributed the increase to 13.1% from 11.9% in September in part to a cut in utility subsidies, but it also signals the country’s difficulties in managing the rapid growth of its economy. “There were substantial increases in the prices of water and utility products and that has pushed the inflation rate up,” said government statistician Philomena Nyarko, citing price rises in housing, gas, fuels, transport and clothing.

By contrast, food price inflation slowed to 6.9 percent in October from 8.9% the previous month, she said. The West African state produces gold, cocoa and oil and its political stability has encouraged investors to view it as one of the continent’s stars. But analysts say they are concerned about high budget deficits, which prompted Fitch ratings agency cut Ghana’s sovereign rating to B from B+ in October. The central bank said in September Ghana would likely miss some 2013 targets, including keeping consumer price inflation within 2 percentage points either side of 9 percent. The latest rise was partly due to government efforts to rebase inflation to better reflect pressures, so is not a surprise, said Razia Khan, head of Africa research at Standard Chartered, adding that it forecast inflation at 14% by year end.

“While we do not think the pressure will be long lasting necessarily, it does raise the risk of a near term rate hike. We had factored in another 100 basis points this cycle,” she said. A weaker than expected harvest may also explain why inflation has not fallen as forecast, said Joe Abbey, of the Centre for Policy Analysis.

h3. Strike Threat

While attention is focused on headline inflation, core inflation may also be creeping up which gives President John Mahama’s government an extra headache for next week’s budget, Abbey said. The main challenge facing the government is to maintain a strong growth rate, forecast at 7.9% for 2013, while limiting inflation and cutting a budget deficit towards a target of 6% of gross domestic product by 2015. A new deal on utility price rises hammered out at the weekend is evidence of the pressure on the government. Unions had threatened a general strike on November 18 if the government implemented a plan to raise utility prices by 79%.

The cut in utility subsidies and fuel subsidies is part of the government’s deficit reduction plan. It is also vital for the power sector, which has struggled to service a booming economy. Under the deal, utility prices will go up by 59%, which will saddle the government with an extra 400 million cedis in subsidies this year, economists said. The agreement seems to be a victory for unions. Strikes earlier this year held the government to its commitment to increase pay for public sector workers under a multi-year programme. But that programme has led to a spike in wage costs as a percentage of government spending.

“It highlights the challenges that the government faces in order to reduce the budget deficit,” Carmen Altenkirch, an analyst with Fitch commented.

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