INFLATION = When Nobody Is Buying Prices Drop

End-of-year inflation was 16 percent. It has been hailed as the best signal that President Mills´ tight fiscal policy is working. It has certainly worked - spending has been tight, consumption has been tight, chop money tight, tips tight, imports have been tight, the job market has been tight and the pockets have been tight. Even serial calling has suffered. I would sum the first year of Mills in economic terms as annus anorexia.

Ghanaians may recall that the Danquah Institute disagreed with the government and CEPA and forecasted that government would not even meet its revised end-of-year inflation target of 14.5%.

We went as far as to say that a better way to gauge the impact of government´s economic policy of 2009 on the average Ghanaian is to juxtapose the annual average rate of inflation to that of salary levels. On an average, Ghanaian workers received less than 10% pay increase last year. In fact the highest level of wage increase in the public sector was 17% in 2009. Some, like health workers and teachers, got about half of that figure.

We predicted that the annual average inflation rate for 2009 would be 19.47%. The figures from the Ghana Statistical Service last week indicated that inflation averaged 19.3% last year. I am proud to say
that DI´s research work and analysis on the economy last year were arguably more on point than any other. Yet, no one can be proud of the fact that Ghanaian workers in general got poorer last year - the first time this had happened en masse since 2003, at least, when wage increases started to out-pace the rise in prices of goods and services in real terms.

Despite, all these glaring statistics on the plight of the poor in Ghana, the NDC continues to call itself `social democrats´ who are there for the poorer masses. Now they are quick to say that the task
of sorting out the masses begins with sorting out the economy: stabilising the cedi and checking inflation. The concerns of the right are now the messages of the Ghanaian left!

But, really, should we be celebrating the fact that inflation has been falling consistently from the June 2009 high of 20.74% to the December 2009 rate of 15.97%? Inflation was 18.13% in December 2008. What was remarkable about the November and December 2009 inflation rates was that they went against the usual seasonal trend of higher inflation driven by Christmas shopping. Prices go up in December because everybody spends more, forcing demand to put pressure on supply.

The fall in inflation in the second half of last year has been driven by both non-food and food inflation. Food inflation was, of course, suppressed mainly by a good harvest. But another major cause of why
prices have not been rising is the simple fact that people are simply not buying enough. There is no money to spend; the disposable income of Ghanaians suffered severe beatings in 2009.

Figures of sales and purchases of the last quarter of 2009, if made available, would support this claim. I dare the Ghana Statistical Service to come out with figures on economic activity and let Ghanaians know whether or not we have anything to celebrate – apart from the fact that we survived it.

Basic economics tell us that inflation is primarily driven by demand out-pacing supply. So where supplies are available and people are simply not buying, retailers or wholesalers have no option but to
reduce prices to become competitive; even at the risk of not meeting their running costs.

Information from the Bank of Ghana last year indicated that both business and consumption confidence were low. We ended the year with some cautious flicker of ray of optimism that the economy had turned the corner and moving forward in the right direction to a Better Ghana.

Still, the data is curiously worrying. For example, interest rate on the 90-day treasury bill was 24.70% in December 2008, when inflation was 18.13%. By December 2009, with inflation at 16%, the yield was
higher at 25.90%. The Bank of Ghana has little option but to cut down the base rate by some two percentage points and impressed on the banks to follow suit.

Earlier last year, some of us were concerned about the trend which saw investors diverting their funds into T-Bills rather than investing in the productive side of the economy. Thus, by October 2009, the amount of cash invested in T-Bills by Ghanaians other the banks was GH¢800.20 million. It had almost doubled from the December 2008 figure of GH¢446.40 million.

However, by December 2009, while the yield remained high, non-bank holdings in T-Bills had dropped to GH¢661.30m. What this means is that people simply didn´t have the money to save despite the lure of high profits.

We are happy that our local currency is holding. Of course, it has been boosted by record high prices in both gold and cocoa - our main export commodities. This is good news. But, it is also true that people are simply not importing enough - either for production or consumption. When there is a fewer demand for dollars there is no reason for the dollar to be dearer.

A look at the following figures will tell us why. Total merchandise imports amounted to $6 billion in the first nine months of 2009, compared with $7.8 billion for 2008 (a decline of 23.4%). Non-oil import for the period was $4.9 billion compared with $5.8 billion in 2008. Oil imports for the period amounted to $1.1 billion as against the near double figure of $2 billion for 2008.

This is confirmed by lower foreign exchange purchases of $419.60m by December 2009 as compared to the higher figure of $482.50m by December 2008. The financial sector sold $414.50m foreign exchange in 2008 as compared to $405.70m by December last year.

President Mills has been able to achieve fiscal stability. But he did this by making Ghanaians poorer. The good news is that this low-demand-driven lowering of inflation should lead to interest rates falling and hopefully triggering higher economic activity. But, the signs have not been too promising - so far not so good.

Achieving partially impressive macro-economic figures on the back of mass impoverishment should not be the way for building a better Ghana. So far, the Mills of a better Ghana have been grinding slowly. We can only seek solace in the words of President Mills: "It will eventually get to its destination."