Tax Cuts, Cedi Stability Fetters Inflation

The stability of the local currency and the abolishing of ‘nuisance’ taxes by government are the main causes of the drop in inflation, Dr. Ebo Turkson, Senior Economist at the University of Ghana has said.

Inflation dropped from 13.2 percent in February to 12.8 percent in March, a monthly change rate of 1.3 percent.

“Most likely what would have accounted for the drop this time is the reduction in some taxes that the government outlined in the 2017 budget. That is what we have been saying for the past four years that you can stabilize your economy by not over-taxing, because taxing itself doesn’t necessarily reduce your fiscal deficit.

Secondly, if you look at the past one month, the cedi has been appreciating; and there has been reduction in fuel prices as well,” Dr. Turkson told the B&FT.

After a torrid performance by the local currency against the US dollar for a greater part of the first quarter of this year, the cedi has regained more than one percent of its lost value over the past week to lower the rate the of fall.

The cedi, as at March 10th, was trading at GH¢4.603 with the greenback on the interbank market, indicating a year-to-date depreciation of 8.6 percent -- the peak of the cedi’s troubled performance in the first quarter.

The sale of a three-year one billion cedis bond to only domestic investors at a yield of 21.5 percent proved a catalyst for the cedi’s turnaround; with the local currency regaining 1.3 percent of its value from March 10-17 to lower the year-to-date depreciation to about 7.4 percent.

At Thursday April 11th, the cedi was trading at GH¢4.2063 with the dollar on the interbank market, indicating a further gain and the lowering of the year-to-date depreciation.

Dr. Turkson believes the economy is responding to some policies and decisions announced by the government in the 2017 budget.

Some of the tax incentives contained in the 2017 budget include the abolishing of the 1 percent Special Import Levy; abolishing the 17.5 percent VAT/NHIL on financial services; abolishing the 17.5 percent VAT/NHIL on selected imported medicines that are not produced locally; abolishing of the 17.5 percent VAT/NHIL on domestic airline tickets; and the reduction in the special petroleum tax rate from 17.5 percent to 15 percent.

The economist, however, warned that the downward trend may not continue forever, owing to a possible increment in food prices in the future, and the influence of other external factors.

 “The downward trend will not continue forever. At a point where we eat deeper into the lean season as farmers prepare for harvest somewhere in August, we will find out that food prices will increase a little bit and that will also push up inflation a little bit.

External factors also have a role to play. If oil prices remain subdued then we will have some gains in terms of inflation. If Treasury bill rates are not increasing and interest rates are also not reducing, we should expect more stability in thy economy,” he noted.

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