Financial expert calls for rise in interest rate to compensate investors

Inflation rate in Ghana is expected to hit above 15% by March, throwing out the government's vision of achieving a single digit inflation rate of 8.8% this year, if world crude oil prices escalate above the average $60 per barrel.

With the increase in fuel prices between 5% and 11.36%, February inflation is expected to surpass the 14.6% inflation rate recorded in January, as a result of international crude oil prices, prices of finished product imports, as well as the operations of the Tema Oil Refinery.

According to Francis Nyoagbe, a financial analyst with the Strategic African Securities (SAS), "Even though we have seen petrol prices increase and inflation is expected to increase, the full effect of the fuel price hikes on inflation would be felt over a period of time, predictably in March".

During this same period last year, fuel prices went up by 50%, resulting in an inflationary rate of 14%, representing a 3.6% rise on the January figure. This rise continued in March to 16.7%.

The increase in the inflationary rate is expected because over 50% of the items considered in the calculation of inflationary rate in Ghana are from the food and beverage industry where fuel price adjustments are affected directly through high transportation costs.

Francis Nyoagbe said the fuel price hike would affect the money market too.

He told the Business Chronicle that the economy would experience some modest shocks, but milder than what was experienced the same period last year.

"Last year, we got a shock on the economy but this year was just a fifth of last year's. We will have some limited amount of inflation shock but not as much as we experienced last year".

According to him, all this would depend on the world market prices of crude.

As analysts say world crude oil prices would stabilize around $60 per barrel, fuel prices would decrease if it continues the downward trend, but the vice versa is also true.

Mr. Nyoagbe said, "The expectation is that inflation would rise as a result of the relatively high increase in petroleum price of about 10%. For this reason we expect interest rates on money market instruments to rise to compensate investors for expected rise in inflation, so that investors do not lose in real terms".

He further remarked that expectation of single digit inflation would be in doubt if the world market price of crude oil continued to rise, especially above the $60 mark per barrel.

He however maintained that if the world crude oil prices continue to cool down, then the single digit inflation of 8.8% target would be achievable.

On the effect of the fuel price increases, the financial expert said the economy would need realignment by increasing interest rates of money market instruments otherwise investors in those would lose out in real terms.

The National Petroleum Authority (NPA), in line with international crude oil prices, that of finished product imports as well as the operations of the Tema Oil Refinery, adjusted fuel prices in Ghana upwards on Friday by between 5% and 11.36%.

The price of premium petrol increased from ?31,800 per gallon to ?34,850 representing a 9.59% increase.

The price of gas oil was also adjusted upwards from ?28,950 per gallon to ?32,000 signifying an increment of 10.54% while the price of kerosene rose by 11.36% from ?22,000 in the last quarter of 2005 to ?24,500.

Premix gasoline and Liquefied Petroleum (LP) Gas also went up from ?20,000 per gallon and ?74,999 per 14.5 kg to ?21,000 and ?80,000 respectively. Premix gasoline recorded a 5% increase whiles LP Gas had a 6.67% increase.

In arriving at the new ex-refinery prices, the Chairman of NPA, Prof. Ivan Addae Mensah, in a press release read on his behalf by a board member and Dean of the Law Faculty of the University of Ghana, Prof. Nii Ashie Kotey, said the NPA reviewed the prices in accordance with the price developments in the world oil market, the prices of finished product imports as well as the operations of the Tema Oil Refinery (TOR).

During the price review of the fourth quarter of 2005, crude oil price closed the month (December 2005), at an average of $56.87 per barrel.

He said it was expected that the downward trend would continue in the month of January 2006, but it did not.

"A sudden change in the international market situation and production disruptions in Nigeria, coupled with the controversies in the Middle East and Southern America, led to fears of possible supply disruptions," he stressed.

Last week, the year-on-year inflation measured by the Consumer Price Index (CPI) dropped slightly from 14.8% recorded in December 2005 by 0.2% to 14.6%, according to Ghana Statistical Service release in Accra.