27 August 2014

Ghana's Official Inflation and Exchange Rate Data Are Not Credible

AN EXAMINATION of recent data on inflation released by the Ghana Statistical Service as well as exchange rate data reported by the Bank of Ghana raises serious concerns. The Bank of Ghana (BoG) would have us believe that since June 17 this year, the exchange rate of the cedi to the US dollar has remained unchanged at some GH¢3.02 per US dollar.

According to the BoG, the exchange rate has remained fixed at this rate over the last three months. A simple look at the interbank market exchange rates indicates that the cedi has not only been depreciating daily, but is currently trading between GH¢3.7 and GH¢4.1 per dollar with an average of some GH¢3.8 per US dollar.

Table 1 above shows US $ quotations from a sample of 13 Banks on 13th August 2014. The story is not much different at the forex bureaux or the black market. So why in the face of all this evidence is the Bank of Ghana insisting that the exchange rate is some GH¢3.03 to the dollar? Can anyone in Ghana today look you in the eye and tell you the cedi exchange rate has been unchanged in the last three months?

Where in Ghana today can you buy a dollar at close to GH¢3.03? The large spread between the Bank of Ghana exchange rate and the interbank exchange rate indicates that the Bank of Ghana rate is being administratively set and not market driven. The BoG exchange rate is unchanged even in the face of an increase in the pipeline of demands for foreign exchange that it cannot meet.

Price should normally increase when demand exceeds supply but this is not what we are observing in the BoG forex market. It is on the basis of this fixing of the exchange rate by the BoG that the Minister of Communications (on behalf of government) claims that the cedi has only depreciated by some 22.9% in 2014 and not 40% as reported by the Financial Times of London and Reuters.

This claim by the government was a rather embarrassing rebuttal because the cedi has actually depreciated by some 40% in 2014 using the interbank rates or the forex bureau rates and the whole world knows it. At the end of December 2013 the cedi was GH¢2.2 per US dollar. Today, it is averaging some GH¢3.8 on the interbank and forex bureau markets. This represents a depreciation of over 40%.

The Bank of Ghana rate is irrelevant in this regard because it is clearly not market determined. If you go to the market to buy tomatoes and one seller tells you that the price is GH¢3.00 per bag but has no tomatoes for sale while the other seller tells you it is GH¢4.00 per bag and you can have what you want, which price is the effective price of tomatoes on the market?

Also, a look at the reported inflation numbers suggests that something is not right. The rate of increase of prices in 2014 by our collective experience is clearly the highest in recent times, underpinned by the 40% depreciation of the exchange so far this year, increases in petroleum, utility and transportation prices, etc. The prices of most goods and services have virtually doubled and continue to increase daily.

This notwithstanding, the Ghana Statistical service data on inflation suggests that price increases in 2014 are slower than they were last year (2013). Between January and July 2014 inflation increased by only 1.5% (13.8% to15.3%) after all the increases in petroleum, utilities and other prices we have witnessed. For the same period in 2013, inflation increased by 1.7%. This means that we were experiencing marginally faster price increases in 2013 than in 2014. Unfortunately this data does not capture our collective experience.

Almost every individual, household, business would tell you that prices are increasing much faster this year than has been observed in many years. So why is the Statistical Service data not capturing this? In 2008, when the depreciation for the entire year was some 20%, half the rate that it is currently, inflation for January to July increased by 5.5% (from 12.81% to 18.31%). During this period, petroleum prices for example increased by just 1.03%. In January to July 2014 on the other hand petroleum prices have increased by some 48% along with other prices but the impact on inflation has been only1.5%.

Something is not quite right and the GSS should take another look at the numbers and procedures to make sure they are capturing price developments adequately. In response to the economic fundamentals, interest rates on the money markets have also increased significantly this year. Notwithstanding the massive exchange rate depreciation and increase in interest rates, inflation has only increased marginally.

As I have pointed out before, Whenever you have exchange rate depreciation and interest rates moving in one direction and inflation appearing unresponsive to these movements, such a disconnect should be a cause for concern. The statistics on exchange rates from the Bank of Ghana and inflation from the GSS are in my humble opinion, not credible. Any shopper in Makola in Accra, or markets in Kumasi, Akatsi, Techiman, Cape Coast, Wa, Bunkpurugu, or Bolga markets would laugh at you if you tell them that average prices of food and non-food items have gone up by an average of only 1.5% so far in 2014 and that prices are not increasing as much this year as they were last year (2013).

We need reliable data to manage the economy prudently. If the data is wrong, important policy decisions based on such data would be wrong. It is therefore important that when we observe such situations we point them out so that corrective actions can be taken to save all of us from suffering the adverse effects of wrong policy decisions based on such unreliable data. I know that I risk sounding like a broken record on this issue but a broken record is always better than a broken economy.


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