In May 2007, Ghana formally adopted an inflation-targeting framework for its monetary policy, announcing price stability as the central bank's primary objective. Only the second country in sub-Saharan Africa to adopt such a regime (after South Africa), Ghana has few regional models to follow, so the authorities have decided to draw on the experiences of a wide cross section of other countries.
“We've had bilateral assistance on inflation targeting from the Bank of England and others, but we thought it was time to see how other countries have been doing it,” said Maxwell Opoku-Afari, Advisor to the Governor of the Bank of Ghana, during a recent visit to the IMF. A four-person delegation studied the inflation-targeting models used in Brazil, Turkey, South Africa, Chile, and other countries.
At the beginning of the decade, Ghana was grappling with high inflation, large fiscal and external account deficits, and high external and domestic debt. In 1998-99, the country registered a poverty rate of about 58 percent.
The turning point, according to Opoku-Afari, came in 2002, when the authorities introduced a new monetary and fiscal policy framework. The Bank of Ghana Act 2002 gave operational independence to the central bank, established an implicit inflation-targeting framework, and created the Monetary Policy Committee to oversee the new policy.
Under Ghana's inflation-targeting regime, the monetary and fiscal authorities have made a joint institutional commitment to price stability as the primary goal of monetary policy, to which all other goals are subordinated. The numerical target range for inflation is announced in the context of the annual budget, and the Bank of Ghana communicates on a regular basis with the public and the markets about its goals and decisions. The current medium-term target for inflation is about 5 percent.
Because this monetary policy strategy is highly transparent, the central bank faces a greater degree of accountability for reaching its inflation targets than it otherwise would. Because the central bank and Ghana's Ministry of Finance jointly agree to the target, the accountability of the latter also increases.
“The anchor of our new macroeconomic framework was a reduction in domestic debt,” Opoku-Afari said. “As domestic debt decreased from about 31 percent of GDP in 2001 to 13.5 percent in 2006, we also saw inflation come down from about 62 percent in 2001 to around 12.7 percent today.” Ghana's five-year success with “implicit” inflation targeting —when a country establishes inflation targets but does not announce them as its primary monetary policy objective— encouraged the government to formally adopt the policy in 2007.
Opoku-Afari said that his team's week-long visit yielded valuable lessons. “One lesson that has come out strongly for most of the countries is the role of fiscal policy in trying to break the single-digit [inflation] barrier,” he said. Brazil and Chile represent particularly important case studies in inflation targeting, he said, because they have fiscal responsibility laws similar to the one Ghana has announced it will introduce.
Studying South Africa's well-established inflation-targeting system and Nigeria's experience is also useful, Opoku-Afari said. Although Nigeria has not yet formally adopted inflation targeting, the authorities have looked at an IMF-developed model. He noted that, with Ghana's discovery of oil last summer, some aspects of Nigeria's experience as an oil exporter will, in time, become relevant.
“Frontier” emerging market
Most of the economies whose experiences Ghana is studying are emerging market countries. “Ghana is no longer a typical low-income country,” noted Piroska M. Nagy, the IMF mission chief for the country. “It's not yet an emerging market, but it's in transition. It's at the frontier.”
Ghana's economy has been growing at an average of more than 6 percent a year and, with lower inflation, better fiscal discipline, and slightly higher growth—of about 7.5-8 percent a year—Ghana could achieve middle-income status by 2015.
But high growth is not to be taken for granted. To spur growth, and in the absence of a major scaling up of aid, the Ghanaian government issued a $750 million sovereign bond in late 2007 to bring in resources for investment in energy and transport infrastructure.
Maureen Burke IMF External Relations Department