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20.01.2007 General News

Gov't Cautioned Against Low Inflation

By Edmund Mingle
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DR. John Asafu-Adjaye, an Associate Professor of Economics at the University of Queensland in Australia, has cautioned the government against targeting a very low single digit inflation since that could be counter-productive.

'The danger in a single-digit minded attempt to keep inflation low is that it could compromise economic growth,' he said.

Dr Asafu-Adjaye, who is also a senior fellow of the Institute of Economic Affairs (IEA), gave the caution in a paper at a roundtable discussion on the topic 'Analysis of Ghana’s inflationary process' at the IEA in Accra on Thursday.

Ghana aims at reducing its present inflation rate hovering around 10.5 per cent to a single digit as part of the convergence criteria for the take off of the West Africa common currency, but the economist says the nation needs to tread with caution in attaining the single digit.

He said a key question at the present stage of Ghana’s development was whether an inflation of say three per cent would be beneficial to the country.

Although low inflation is desirable for an economy, he explained that 'an overly aggressive anti-inflationary stance has the potential to dampen aggregate demand, causing firms to reduce production which could then stagnate economic growth.'

He noted that for the inflation reduction to be successful, it has to be accompanied by an accelerated structural reforms such as an enhanced deregulation and institutional reforms.

He observed that the Bank of Ghana’s inflation targeting had been largely successful with a single digit target within reach but suggested that when that is achieved measures need to be put in place to avoid further reductions in inflation.

Major barriers to business such as inadequate access to credit, he suggested should be urgently removed to enable both producers and consumers to reap the benefits of low inflation.

He noted that although money plays a major role in the inflationary process, the central bank must reduce its attention on the money supply variable and target variables such as investment and employment, which could enhance economic growth and reduce poverty.

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