IMF Survey: IMF Helps Ghana Learn From Others on Inflation Targets
IMF News, February 14, 2008
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- Authors: Maureen Burke IMF Survey
- Published: February 14, 2008
Overview
- Ghana formally adopted an inflation targeting framework in May 2007, announcing price stability as the central bank's primary objective.
- The IMF shared cross-country experience on inflation targeting with a four-person delegation from the Bank of Ghana, who studied models used in Brazil, Turkey, South Africa, Chile, and other countries.
- Ghana aims to reach middle-income status by 2015.
Institutional reforms and the inflation-targeting framework
- Key legislative and institutional changes:
- Bank of Ghana Act 2002 gave operational independence to the central bank and created a Monetary Policy Committee (MPC).
- The Act established an implicit inflation targeting framework that later became formal policy.
- Operational features of Ghana's inflation-targeting regime:
- Monetary and fiscal authorities have a joint institutional commitment to price stability as the primary goal of monetary policy.
- The numerical target range for inflation is announced in the context of the annual budget.
- The Bank of Ghana communicates regularly with the public and the markets about its goals and decisions.
- The current medium-term goal is around 5 percent inflation.
Cross-country lessons and comparative experience
- Delegation insights and comparative focuses:
- Brazil and Chile: important case studies because of fiscal responsibility laws; Ghana is assessing how such laws were formulated and what might work for Ghana.
- South Africa: studied for its well-established inflation targeting system as a regional model.
- Nigeria: examined for oil-exporting country experience and for IMF-developed modeling; with Ghana's recent oil discovery, Nigeria's experience is expected to become relevant.
- Turkey: observed for how it brought inflation down to below 10 percent in an economy with similar structures and challenges.
- Broad lesson emphasized by the delegation:
- The role of fiscal policy is critical in efforts to break the single-digit inflation barrier.
Macroeconomic outcomes, growth, and risks
- Historical macroeconomic context and outcomes:
- At the beginning of the decade, Ghana faced high inflation, large fiscal and external deficits, and high external and domestic debt.
- In 1998-99, Ghana registered a poverty rate of around 58 percent.
- Domestic debt decreased from about 31 percent of GDP in 2001 to 13.5 percent in 2006.
- Inflation declined from about 62 percent in 2001 to around 12.7 percent today.
- Ghana's economy has been growing at an average of over 6 percent a year.
- With lower inflation, better fiscal discipline, and slightly higher growth—around 7.5-8 percent a year—the government could meet its goal of achieving middle-income status by 2015.
- Poverty is now less than half its level of the late 1990s, and Ghana is on track to meet the Millennium Development Goal for poverty reduction.
- Recent financing and associated risks:
- In late 2007, the Ghanaian government issued a $750 million sovereign bond to finance infrastructure investment in energy and transport via public-private partnerships.
- Acknowledged trade-offs: taking on more debt entails some risk given past debt relief under the Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiatives.
- The government remains vigilant to preserve debt sustainability and focuses macroeconomic policy on keeping Ghana's total debt—both external and domestic—sustainable.
- Forward-looking considerations:
- Oil discovery implies that in "3 to 4 years" Ghana will begin factoring in oil revenue, making some aspects of Nigeria's experience increasingly relevant.
Policy implications and recommendations
- Maintain fiscal discipline as a complement to inflation targeting; fiscal policy is crucial to achieving single-digit inflation.
- Consider adopting fiscal responsibility laws modeled on relevant international examples (e.g., Brazil, Chile), adapted to Ghana's institutional context.
- Preserve central bank operational independence and transparent communication to strengthen accountability for inflation targets.
- Use revenue from the $750 million sovereign bond to prioritize "growth-catalytic" infrastructure (energy and transport) developed through public-private partnerships, while monitoring debt sustainability.
- Study comparable emerging market experiences (Turkey, South Africa, Brazil, Chile, Nigeria) to tailor policy design as Ghana transitions toward an oil-influenced economy.
IMF Survey: IMF Helps Ghana Learn From Others on Inflation Targets — February 14, 2008