Research Articles Base: Inflation Case Analysis

An Investigation into the Effects of Inflation on Budgeting and Budgetary Control in the Public Sector

The Effects of Inflation on Budgeting and Budgetary Control: An Investigation into the Effects of Inflation on Budgeting and Budgetary Control in the Public Sector                         Inflation is generally defined as the sustained increase in the prices of goods and services. This economic phenomenon is an important concern as it impacts on the economic well-being of the population and the general economy. Inflation significantly lowers the purchasing power of money since only a few goods or services can be bought vis a vis a previous index of inflation, usually the Consumer Price Index. Inflation is unpredictable and can severely disrupt the economy. To control the level of inflation governments equip themselves with economic tools such as monetary policy, fiscal policy, price control, tariffs and monopolies. The primary and the commonly used tool is monetary policy because it has been proven over time as an effective tool against inflation. The monetary policy is carried out by the government controlled central bank. During periods of inflation, the central bank lowers interest rates in order to increase monetary supply and stimulate the economy. Price inflation also impacts on the ‘time vale of money’. Inflation rate increases will also cause a change in the rate of interests. For example, lenders increase interest rates during inflationary period to make up for the loss of the value of their money during the term of the loan. . (Price Inflation, 2004)             Inflation, since it is unpredictable and since it negatively impacts any financial entity big or small, is considered in the computation of a budget. Inflation is adjusted to reflect a realistic projection of inflationary rates over a period of time. Thus inflation and budgeting is inseparable (Economy Watch, n.d.) A budget is a plan that is expressed in monetary form. It shows computed projections on income, expenditure and capital. This monetary plan is approved before the budget period. Budgetary control on the other hand, is the comprehensive system of budgeting to aid management in carrying out its functions. (Slideshare, 2011). Budgetary control is important for planning, coordination and control. However, budgetary control includes budgets that are merely monetary estimates, it promotes efficiency in the management of the organization’s financial health. (Surajkumar, 2011). It is said, that. “budget is just the means, while budgetary control is the end (Anonymous, 2010).             Inflation impacts the government in many ways. Inflation increases revenues because the government has higher tax revenues. Inflation slows down the economy because with the exorbitant price increase people tend to buy less. Inflation will also devalue exchange rate versus foreign currency. It also makes products of imported goods cheaper while domestic products higher. Finally, with inflation, savings decrease because people are spending more for less number of goods and services leaving nothing for savings and thus hurting fixed rate investments. (Csanad, 2011)             Recognizing the effects of inflation, first world countries use the Model of Inflation Targeting to manage their economy. Inflation Targeting has five elements: 1. Public announcement for target of inflation; 2. Institutional commitment to price stability; 3. Information inclusive strategy; 4. Increased transparency, and; 5. Increased accountability. Inflation targeting is first adopted by New Zealand in 1999. Later a number of industrialized countries adopted the new model such as Canada, the United Kingdom, Sweden, Israel, Australia and Switzerland. (Mishkin, 2001). The model is increasingly popular because it combines two important aspects for a successful monetary policy. These are a “credible medium-term anchor for inflation” and flexibility in terms of its response to inflationary shocks. (Pétursson, 2004) The adoption of the Inflation Targeting Model helps central banks to bring inflation rates down. (Mishkin, 2001).             Generally the effects of inflation on public sector budgeting and budgetary control on any first world countries are the same such as: increase in government revenue, slowing down of the overall economic activity, devaluation of the exchange rate vis a vis a foreign currency, reduction in the revenues from domestic products because imported products are cheaper and decrease in the over-all savings. (Csanad, 2011).             Since revenues, income and capital are important elements in budgeting. And since, these are the very things that are affected during inflation. These are also the elements that should be adjusted for projected inflation. The effects of inflation on budget and budgetary control on any sector public or private on developed and developing countries are significantly painful and should not be taken for granted. The Inflation Targeting Model discussed is a helpful tool in cushioning the impacts inflation in the medium term.  REFERENCES Csanad, 2011. Effects of Inflation, the Positives and the Negatives. [online] Available at: <http://hubpages.com/hub/Effects-of-inflation> [Accessed 3 May 2011]. Economy Watch, n.d. Inflation and Capital Budgeting. [online] Available at: <http://www.economywatch.com/budget/types/inflation-capital.html>  [Accessed 3 May 2011]. Mishkin, FS., 2001. Inflation Targeting. [online] Available at: <http://www0.gsb.columbia.edu/faculty/fmishkin/PDFpapers/01ENCYC.pdf> [accessed 3 May 2011]. Pétursson, TG., 2004. The effects of inflation targeting on macroeconomic performance.  Central Bank of Iceland. Economics Department. Working Paper No.23. [online] Available at: <http://www.seðlabanki.is/uploads/files/WP-23.pdf> [Accessed 3 May 2011].   Slideshare, 2011. Budget and Budgetary Control. Slideshow.[online] Available at: <http://www.slideshare.net/ashishnangla/budget-and-budgetary-control-presentation> [Accessed 3 May 2011].   Surajkumar, P., 2011. A Study of “Budgetary Control System as a Tool of Finance Control”: Need and Importance. [online] Available at: <http://www.scribd.com/doc/13044904/Need-and-importance-of-budgetary-control-system> [Accessed 3 May 2011] .   ____, 2010. Objectives of Budgetary Control. [online] Available at: <http://www.quickfinancecheck.org/objectives-of-budgetary-control> [Accessed 3 May 2011]   ____, 2004. Price Inflation. [online] Available at: http://www.getobjects.com/Components/Finance/TVM/inflation.html>  [Accessed 3 May 2011].   Credit:ivythesis.typepad.com

An Investigation into the Effects of Inflation on Budgeting and Budgetary Control in the Public Sector

The Effects of Inflation on Budgeting and Budgetary Control : An Investigation into the Effects of Inflation on Budgeting and Budgetar...

EFFECTS OF EXCHANGE RATE FLUCTUATION ON THE GDP OF GHANA

EFFECTS OF EXCHANGE RATE FLUCTUATION ON THE GDP OF GHANA         There are many reasons why the exchange rate of a country is fluctuating; generally the economic downtrend of every nation has been affected entirely due to global economic crisis arising from different political, economic and social behavior which is necessarily changing, affecting the Gross Domestic Products among nations.       In Ghana there is a slight short term fluctuation rate of Cedi against dollar, currently at the end of November of 2010 it depreciated about 0.3 every year till it drops to the depreciation low of 5.1 this January of 2011. Still in January of 2011 against the pound sterling and euro there is a depreciation of 1.6 and 3.2 percent. Currently the exchange rate of Dollar is 1.52 and Pound Sterling Is 2.44 while Euro is 2.20 according to their banks.         The Governor of Central Bank in Ghana, Mr. Kwesi Ammisah- Arthur says that the occasional fluctuation in the exchange rate is normal but the bank will somehow manage the effects of such flows. The Governor has been very positive since the country has a very attractive destination, investment of foreign currencies will take place. They are hoping that the marketing of their respective local, foreign and international tourist travelers and business investor’s portfolio will improve and will lightly increase such rate.                 Generally the effect of fluctuation in exchange rate is a guide map to Gross Domestic Product poor determinant simply because of the law of supply and demand when the fluctuation rate is in effect the inflation increases and so does there is a decrease in buying power of businesses and the government this has been the basic concept of fluctuation and basically the commodities of goods and service for the common people will son arise. Only a few people usually those who are working abroad can benefit from the exchange rate since they brought dollars in the country and exchanging it higher than the usual rates. In the last five years Ghana had experience a non steady market trends and growth rate has the following figures; 2007 GDP is 6% 2008 = 5.5% 2009 = 7.3 %  2010= 4.10 and in 2011 = 4.7% this figures shows that the manifestation of exchange rate has largely impact the economic condition of the country and its Gross Domestic Products.       Fluctuation of exchange rate may result in the following: A negative effect or increase of price in imported goods. Actually the products we use will be affected heavily when the inflation increases due to the high increase of purchase of these common goods. Products like machineries, fertilizer and other highly usable agricultural products from other countries will tend to increase in price. While the export commodities will likely suffer due to the exchange rate diminishing return.       Decrease in business and economic activity is bound to happen, unfortunately if there is fluctuation continuity there are higher chances that some factories and business will likely to reduce their labor and material cost that results in low production and retrenchment in labor force, but basically an increase in exchange rate would mean a healthier community and sometimes a steady production of goods and service.        The common people can also be affected in the downtrend of economy of fluctuating exchange rate, if the production is low then there is a chance that the price index of most products including basic commodities like, Food, Non food, industrial and other consumer products will likely to increase.       Also the inflation rate of the country can affect the currency exchange in other countries. This amount of inflation will be compared to another country that results in the movement of exchange rate.       Not to exaggerate but actually the real effect of fluctuation rate can be a total countries economic meltdown or downfall. This can become a major economic problem, over the recent times when many countries have fallen and risen accordingly because of fluctuation. Fluctuation in itself targets the Gross Domestic Products which is the total economic gains of a country and you can just imagine what would happen if it will fall down the drain.          Positively there are also some factors that can contribute to the growth of GDP when fluctuation arises, as it has been declared by the Central Bank Governor of Ghana has said that they are going to attract local investors and take advantage of their tourism. Since there are times that businesses and international investors will tend to take advantage of the situation to put up their investment in such time that the exchange rate is low and the foreign investment is high. In summary all this has been the effect of exchange rate fluctuation on the GDP of Ghana.                     Credit:ivythesis.typepad.com

EFFECTS OF EXCHANGE RATE FLUCTUATION ON THE GDP OF GHANA

EFFECTS OF EXCHANGE RATE FLUCTUATION ON THE GDP OF GHANA There are many reasons why the exchange rate of a country is fluctuating;...