## Tackling Rising Inflation in Sub-Saharan Africa

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**Canonical URL:** [Tackling Rising Inflation in Sub-Saharan Africa](https://www.imf.org/-/media/files/publications/reo/afr/2022/october/english/risinginflationnote.pdf)

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### Inflation trends and main drivers
- Median inflation reached almost 9 percent as of July 2022 compared with a prepandemic (2009–19) average of a little more than 5 percent.
- Although currently high, median inflation remains below the peak of 12 percent in the region during the global financial crisis.
- External factors have been the major drivers of inflation over the past year, including global food prices, oil prices, and supply chain disruptions.
- Food inflation has averaged more than 10 percent since the second half of 2021.
- Food inflation has contributed up to two-thirds to inflation in fragile states and one-half elsewhere.
- Domestic energy inflation has remained contained so far, reflecting largely incomplete pass-through, likely because of subsidies and price controls; however, higher global energy prices have fed through indirectly to food price and core inflation.
- Non-tradable core inflation (reflecting domestic demand-side pressures and inflation expectations) has been relatively subdued; tradable goods have been a major contributor to core inflation.
- Domestic demand pressures have remained subdued across the region overall, with notable exceptions where fiscal policy has been loose (for example, Ethiopia and Ghana).
- An econometric regression (change in headline inflation on international food prices, oil prices, the Global Supply Chain Pressure Index, and exchange rates) finds that (1) external factors have a large explanatory power and (2) residuals (capturing domestic factors) have not been above average in the recent period.
- One-quarter of sub-Saharan African countries have reserves below 3 months of imports and more than three-quarters have reserves below 5 months.

### Monetary policy stance and recent actions
- More than two-thirds of sub-Saharan African economies have already started to raise monetary policy rates since the second half of 2021 (for example, the Central African Economic and Monetary Union, Ghana, Kenya, Malawi, Mozambique, Nigeria, Uganda, and the West African Economic and Monetary Union).
- The increase in policy rates has, so far, not been commensurate with the increase in inflation, signaling that real short-term interest rates (measured ex-post) are still decreasing in many countries.
- Figure examples (change in monetary policy rate and change in inflation since December 2021) include data labels such as GHA (21.3, 7.5), MWI (14.0, 2.0), SLE (12.2, 1.75), RWA (14.0, 1.5).
- Countries with pegged or heavily managed exchange rates have, so far, experienced lower inflation (particularly for tradable goods) than those with more flexible exchange rates; monthly median inflation averaged 5½ among peggers compared to 9½ among floaters between January and July 2022.
- Central banks face a trade-off between supporting a fragile recovery and containing inflation; output in sub-Saharan Africa is still significantly below its prepandemic trend.
- Empirical analysis using the Ball (1994) methodology suggests that, in the past, the sacrifice ratio for sub-Saharan African countries has been lower than for advanced economies.

### Guidance on the appropriate pace of tightening
- Central banks in many countries should raise policy rates cautiously given that the recovery is still fragile and domestic demand pressures have not been the main driver of inflation for most countries.
  - Looking ahead, demand is expected to remain soft, including as a result of fiscal consolidation.
  - Countries should closely monitor inflation developments to detect the emergence of second-round effects and monitor the level of foreign exchange reserves.
- Some countries may need to tighten faster or more decisively, including:
  - (1) countries where domestic demand pressures are acute or inflation is very high (Ethiopia, Ghana, Malawi, Nigeria, Zimbabwe);
  - (2) countries with less credible monetary policy frameworks, where inflation expectations are less well anchored;
  - (3) countries experiencing large capital outflows and rapid currency depreciation that fuel inflation by increasing import prices and de-anchoring expectations.
- Countries with pegs or heavily managed floats have constrained ability to control the pace of monetary policy tightening because of their currency arrangement.

### Role of exchange rate policy and other macro policies
- In many countries with flexible exchange rates, some depreciation could absorb part of the shock and help macroeconomic adjustment, alleviating pressure to raise interest rates.
- The IMF’s External Balance Assessment indicates external positions in many sub-Saharan African countries are weaker than warranted by fundamentals and the exchange rate for the median country tends to be overvalued.
- Large exchange rate movements that produce volatile inflation may risk de-anchoring inflation expectations and undermining financial stability, especially in countries with significant foreign currency exposure on public and private sector balance sheets.
- Foreign exchange interventions to reduce excessive volatility could be justified to help preserve domestic price stability but only for those countries with sufficient international reserves.
- In the few countries with excessively loose fiscal policy, fiscal consolidation should also be part of the disinflation strategy.

### Risks, trade-offs, and monitoring priorities
- Even if initial global shocks are temporary, food and energy inflation can have a significant and long-lasting impact on inflation expectations, which are difficult to measure in most African countries.
- Second-round effects (wage demands and subsequent price increases) are a key risk given the high share of food, energy, and tradable goods in consumption baskets; poorer households are disproportionately affected.
- Disinflation costs may be higher in the current context because:
  - (1) monetary policy tightening will compound existing social hardships from food insecurity and the pandemic;
  - (2) global growth slowdown means external demand will not offset domestic contraction; and
  - (3) the large size of recent global supply shocks raises the risk of inflation expectations de-anchoring compared to past episodes.
- Policymakers should assess country-specific trade-offs by closely monitoring inflation developments and expectations and by taking into account domestic demand pressures, monetary policy credibility, exchange rate regime, and currency movements.

*International Monetary Fund. October 2022. Regional Economic Outlook: Sub-Saharan Africa — "Tackling Rising Inflation in Sub-Saharan Africa."*

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_Source: https://www.imf.org/-/media/files/publications/reo/afr/2022/october/english/risinginflationnote.pdf_