Africa: Rising Inflation in Africa Represents Priority Action Area

Addressing the rising inflation in Africa while supporting economic growth and cushioning the vulnerable against economic shocks requires an urgent but careful approach.

  • Multiple shocks have gripped a world economy already ravaged by the pandemic.
  • Sub-Saharan Africa has been facing one of the most difficult economic circumstances recently, with the pandemic’s delayed recovery, soaring energy and food prices, and increased public debt levels.
  • Central banks have already started raising interest rates in response to rising inflation in Africa, capital outflows, and currency devaluation caused by tighter monetary policy in industrialized countries.

A gloomy and an uncertain global economic outlook

Gloomy signs of progress in 2022 highlight a tentative global economic recovery in 2021 as risks started to manifest. Global production fell in the second quarter due to slowdowns in Russia and China. The United States (US) consumer spending also fell short of expectations.

Multiple shocks have gripped a world economy already ravaged by the pandemic. These shocks include higher-than-expected global inflation, particularly in the major global economies, causing tighter financial situations. A worse-than-expected slowdown in China has reflected COVID-19 lockdowns and outbreaks. Moreover, the global economy has had to confront additional negative spillovers from the Ukraine conflict.

The risks to the global economic outlook remain overwhelmingly tilted to the downside. The war in Ukraine has led to sudden disruptions in gas imports from Russia. Inflation has proven harder to bring down than anticipated. Consequently, labour markets remain tighter than expected. Moreover, tighter global financial conditions have induced debt distress in emerging markets and developing economies.

Challenging economic situation in sub-Saharan Africa

Sub-Saharan Africa has been facing one of the most difficult economic circumstances recently, with the pandemic’s delayed recovery, soaring energy and food prices, and increased public debt levels. One of Africa’s most pressing concerns is the need to address decade-high inflation levels that are wreaking havoc on food security and income security while simultaneously fostering development.

While significant disparities exist across nations, the region’s median inflation rate surged to about 9 per cent in August. Moreover, the increase has been less dramatic than in other areas of the world for different reasons. However, inflation is roughly twice pre-pandemic levels, threatening political and social instability and deepening food insecurity.

Despite a recovery last year, the pandemic’s aftermath has left domestic economic activity in Sub-Saharan Africa generally subdued, and experts predict the region’s GDP will decelerate this year. Most African nations have lacked the means to sustain and encourage development, in contrast to wealthy countries elsewhere, with billions of dollars to reinvest in their economies.

The rising inflation in Africa has been fueled less by domestic activity than in advanced economies. Conversely, since the onset of the pandemic, external forces have determined the direction of inflation. They include a sudden increase in commodity prices, currency fluctuations, global supply chain disruptions, and natural calamities.

Food and commodities prices characterize rising inflation in Africa

Regarding food, major staples like wheat and maize have seen their prices rise consistently in price since 2019. Consequently, they account for two-thirds of total inflation in fragile nations and one-half elsewhere in the continent. Higher global fuel prices and a strong dollar have contributed to indirect inflation through transport and tradable items, including household products.

In contrast, the pricing of products and services that most reflect domestic demand pressures, known as non-tradables–which often include any domestically produced services, such as those in the education, health, and hospitality sectors–have only seen minor spikes.

With food and energy accounting for half of the household consumption in sub-Saharan Africa, living costs across the region have spiralled. The IMF estimates that 12 per cent of the region’s population will face acute food insecurity by the end of this year.

Many countries have therefore turned to subsidies and tax cuts to alleviate the squeeze in household incomes. However, governments must remember that these interventions should be temporary and precisely targeted to optimize their impact and minimize their already-strained budgetary expenses.

For instance, this realization led Kenyan President Dr William Ruto to halt the previous administration’s food and energy subsidies. This is aimed at containing the growing inflationary pressures and resetting the country on an economic growth path. The President has noted Kenya’s economy could no longer sustain consumption subsidies.

This policy shift indicates that food and fuel prices will be determined by the supply and demand market forces. On fuel subsidy alone, Kenyan taxpayers spent a total of $1.186 billion and a whopping $495 million in the last four months of President Kenyatta’s administration. If the subsidy continued to the end of the 2022/23 fiscal year, it would have cost the taxpayer $2.31 billion, equal to the entire national government development budget.

Monetary authorities working to stem rising inflation

Central banks have already started raising interest rates in response to rising inflation in Africa, capital outflows, and currency devaluation caused by tighter monetary policy in industrialized countries. Ghana, Malawi, Mozambique, Nigeria, Uganda, and the Central and West African economic and monetary unions are examples.

Monetary authorities face an increasingly tricky trade-off: raising interest rates to keep inflation under control risks choking off credit for investment, dampening economic activity, and diminishing incomes. Meanwhile, fiscal restraint and the global economic slump hurt domestic economic activity.

That implies central banks must move cautiously and steadily increase interest rates to avoid jeopardizing economic recovery. However, policymakers must not be complacent. Nations with acute domestic demand pressures or high inflation might need to tighten more quickly or aggressively.

The same is true for nations with low monetary policy credibility. These nations have their currencies fast declining and foreign exchange reserves dwindling. Countries with fixed or carefully controlled exchange rates have experienced lower inflation than those with accommodative regimes. However, their currency arrangement limits their capacity to control the pace of interest-rate hikes.

Some worry that monetary policy is still excessively accommodating, given that rate hikes have not matched inflation. Policy cooperation may be beneficial. Fiscal consolidation and a mix of rate rises and currency depreciation may play a role in nations where policy is overly permissive.

The shaky economic recovery in Africa and domestic demand constraints have not significantly fueled inflation so far. However, in the coming months, governments and policymakers must carefully monitor and prioritise tackling the rising inflation in Africa.

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