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Thursday, February 22, 2024

Are recent inflationary pressures in Gambia imported or domestically generated? What can be done in either case?

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By Lamin Momodou Manneh
Senior Special Adviser to the Governor,
Central Bank of the Gambia


The resurgence of inflationary pressures in the Gambia over the past two to three years has spurned a number of articles in the national newspapers as well as regular pronouncements by the national authorities on the subject matter. As it is generally known by now, the progressively accelerating pace of inflation the country has been experiencing since 2020 was first triggered by the outbreak of COVID 19 in late 2019, aggravated by the global ripple effects of Russia’s invasion of Ukraine in early 2022. In a way, this article by my humble self is a continuation of that practice and builds on some of the earlier publications. The article will be in two parts: the first part will be of a general nature, seeking to contribute to provision of conceptual clarifications and simplification for the general public of the different aspects of the phenomenon of inflation, its main underlying causes and how governments normally strive to contain it. The second part will focus mainly on the case of the Gambia, and will seek to shed better light on the major causes of the resurgence of inflation in the country, the efficacy of the policy measures deployed so far to contain it and some proposals for reinforcing these responses.

 I would like to point out from the outset that this article is not intended to be an academic one at all. I say this because delving into the phenomenon of inflation could easily become a walk down the “high and complicated theoretical lane.” This is because the theory of inflation is closely intertwined with growth, monetary economics, exchange rate and financial assets theories, which are among the most technical and complex areas of the economics discipline. Moreover, there are many possible causes and measures of inflation, each with its unique theoretical underpinnings and implications for the right policy choices.

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 Thus, in order to discern the true underlying causes of inflation in a given context and at a specific time, one will necessarily find himself or herself delving into the Monetarist theories (a la Milton Friedman) vs Keynesian or Structuralist ones. Yet, as it is being experienced presently, inflation everywhere is easily a very practical matter, since it’s impact on people’s lives is normally felt in real time: high and persisting levels of inflation torment the minds of governments and their policy makers, notably the Central Banks, and burns through the budgets of producers and pockets and financial assets of consumers alike. Thus, in trying to contribute to shedding more light on the phenomenon of inflation in the Gambia, especially for the general public, it is essential to do this with simplified language, stripped of the complicated theoretical expositions better suited to academic arena or high-level policy discussions. On the other hand, given the seriousness of inflation, which impacts on peoples’ livelihoods and lives, overly populist approaches, which tend to politicize the issue, should also be discouraged as much as possible.

In the ongoing bout of serious inflationary pressures that are being felt across the globe, the political standing of governments in developed and developing countries alike have been threatened, producers have been seriously challenged by supply chain disruptions and rising input costs, particularly of oil, energy and basic food commodities, while the frustration of consumers has triggered widespread civil unrests in many countries.

Here in the Gambia, one of the loudest complaints being heard among the general populace is against the high and persistently rising prices of a wide range of goods and services. Although headline inflation in the country has moderated to 18.0% in October 2023 from 18.4% in July 2023 and 18.5% in September 2023 respectively, it is still much higher than the desired level of 5 to 6%. It is imperative that this high level of inflation is brought down to within the targeted thresholds in order to prevent further deteriorations in the standard of living of the population and prevent the derailing of the country’s socioeconomic recovery and restoration on the path of sustainable growth.

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In this connection, it is fair to acknowledge at this stage the ongoing herculean efforts being made by the Government of the Gambia, especially through the Central Bank, to curb the persisting inflationary pressures. For instance, the above-cited moderation in inflationary pressures in the country is due largely to the dexterous deployment of monetary policy tools by the Monetary Authority. The recent curbing of expenditures and fiscal consolidation measures by the Government have also been important contributory factors in the slowing down of the rate of inflation. But it is unquestionable that such measures need to be sustained and even deepened in order to attain the desired target of single digit inflation rates.

The underlying objective of this article is to contribute to that process. However, we deem it useful to first start with a few simple definitional and conceptual clarifications regarding the phenomenon of inflation, its possible causes and typical approaches adopted by Governments to respond to it both historically and presently as well as in different contexts, before specifically focusing on the Gambian situation in Part 2, as noted above

What is inflation? What are the usual underlying causes and how do governments normally tackle it?

In the economic literature, different definitions of inflation can be found, but the essential elements of the phenomenon invariably underpin each of them. Simply put, inflation can be defined as high and, in many cases, sustained increases in the prices of a range of goods and services consumed in a country or region over a particular period. Another pertinent element of inflation is that this upward movement of prices could be significantly unstable in many circumstances, and the undesirability of this will also be explained shortly.

The adverse effects of inflation may be better conveyed if one looks at “the other side of the coin” of rising prices, which is that they constitute a decline of purchasing power, and hence the standard of living of the population, during the period inflation is prevailing. This important point is aptly captured by Investopedia in the following words: “The rate at which purchasing power drops can be reflected in the average price increase of a basket (or collection) of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases”.

It is also useful to understand how inflation is usually measured. In this regard, we would like to note from the outset that many measures of inflation exist and they include the Consumer Price Index (CPI), the Wholesale Price Index (WPI) and Producer Price Index (PPI). While each of these measures of inflation is self – explanatory, we will shed some light on them. By far, the most commonly used measure of inflation is the Consumer Price Index (CPI). It captures the “weighted average of prices of a basket of goods and services that are of primary consumer needs”. These comprise mainly transportation costs, basic food items, apparel, rent, fuel, utilities such as electricity, water and sanitation as well as medical and other essential services, hair care and labor. The CPI is thus representative of consumer spending patterns and given that consumption accounts for the lion’s share of total spending by most ordinary people (up to 80% in most cases), any increases in the prices of its constituting items is usually acutely felt by the majority of a country’s population.

 In respect to the Wholesale Price Index (WPI), this measures the changes of prices of goods before they reach the retail stage. Sales at the wholesale stage are normally done in bulk. On the other hand, the PPI measures the average change in selling prices of goods and services sold to domestic producers of intermediate goods and services. It reflects the prevailing input cost conditions facing producers in a country.

We also deem it useful to highlight two other important concepts of inflation, namely headline inflation and core inflation, respectively. Starting with headline inflation, it includes the prices of all items, as in the CPI for instance. Core inflation on the other hand, excludes from the basket of commodities represented by the CPI goods and services that are considered to be volatile, with their prices changing almost on a daily basis. Such commodities include food and beverages, vegetables, fuel and light crude oil. With the removal of these volatile commodities, the core inflation exhibits much less fluctuations and captures better the underlying long run inflationary trends in an economy.

Thus, prima facie, core inflation provides a more solid basis for medium to long term planning strategies for economies. It is mostly used by the more advanced countries, notably the US. The concept of headline inflation is predominantly used by developing countries, including the Gambia. However, a number of analysts point to the fact that fluctuations in the prices of commodities, particularly food and fuel, are increasingly becoming a permanent feature even in the advanced economies, as demonstrated in the past couple of years, and thus there may be inclination to also pay more attention to the concept and measure of headline inflation globally.

The views expressed in this article are not necessarily those of the Central Bank of the Gambia

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