IMF Survey : Commodity Price Drop Puts Pressure on Monetary Policy in Low-Income Countries

October 20, 2015

  • Modernizing monetary policy part of the reform agenda
  • Changes in monetary policy can take time but should not be avoided
  • Clear legal frameworks and capacity building are very important

While much attention has been paid to monetary policy reforms in advanced economies in recent years, problems facing low- and lower-middle income countries seeking to stabilize their economies remain largely under researched, said Maurice Obstfeld, the IMF’s chief economist.

A family of cocoa growers helps with drying cocoa beans in Ghana. The Governor of the Bank of Ghana says big fluctuations in the price of cocoa is complicating monetary policy implementation (STAFF/Reuters/Corbis).

A family of cocoa growers helps with drying cocoa beans in Ghana. The Governor of the Bank of Ghana says big fluctuations in the price of cocoa is complicating monetary policy implementation (STAFF/Reuters/Corbis).


Obstfeld’s comments came while moderating a panel discussion entitled, Monetary Policy Frameworks in Low-Income and Developing Countries, during the IMF-World Bank Annual Meetings.

“Many low and lower-middle income countries have made progress on a number of fronts including stabilizing inflation rates,” Obstfeld said, but added that good monetary policy will be necessary if this group of countries is to achieve rapid, stable, sustainable, and inclusive growth.

“For many of these countries, the issue is how monetary policy frameworks evolve and what is the best implementation strategy; as they grow, reform, evolve their financial sectors and integrate even more into the global economy,” Obstfeld said. The challenge is to make policy more effective at achieving price stability, by having a clear framework for making policy decisions, effective operations and a transparent communication strategy.

Challenges to monetary policy

Panelist Kofi Wampah, Governor of the Bank of Ghana, said monetary policy in low, and lower-middle income countries faces important challenges, including exogenous shocks that can hit the country’s reserves and lead to volatile exchange rates. Ghana’s economy has indeed been hit hard by the falling commodity prices.“Three commodities form 80 percent of exports; gold, cocoa, and oil,” Wampah said, “therefore the price shocks have had a significant effect on the country’s reserves and accelerated volatility in some cases. For example, between 2012 and now, gold shocks have led to a loss of more than $2 billion in revenue, while shocks in cocoa prices have resulted in more than $1 billion in revenue. These fluctuations complicate monetary policy implementation,” he said.

Wampah also stressed the importance of communicating new ways of implementing policy to the public and the media. He emphasized the need to build capacity in central banks in low-income countries, while acknowledging the challenges of modernizing policy frameworks in the context of IMF supported programs.

Other participants included Central Bank Governors from Botswana and Paraguay, and Obstfeld noted their experiences and challenges were quite different from those in advanced economies. “This is not material that you generally find in theoretical papers about transition, but it seems really critical to the success of the transition to a modern monetary policy framework,” Obstfeld said.

Modern frameworks can help

Botswana’s Central Bank Governor, Linah Mohohlo, noted price stability should be the primary objective of monetary policy, though there has to be sufficient external support to help nurture the foundations of policy credibility, especially for those central banks with a limited track record. “In my country the numerical objective range for inflation was adopted in 2002, but it wasn’t until 11 years later that that target was achieved,” Mohohlo said.

In Moholo’s view, there’s a compelling need for caution at all stages of developing a policy framework through its practical implementation. “The urge to move rapidly towards a more grown up policy may be strong, but it should be resisted so that the temptation for running before walking can be avoided,” she said.

Carlos Fernández Valdovinos, Paraguay’s Central Bank Governor, however, described his country’s recent experience of moving into a modern monetary policy framework as more of a learn-by-doing process. “If you wait until you fill all the pre-conditions, you’ll never get there,” Valdovinos said.

And Valdovinos’ advice to countries seeking to make the transition came in the form of a list of five lessons learned from their experience, all beginning with the letter C: Challenging, Control of inflation, Coordination, Capacity building, and Communication. But he concluded his presentation using a different letter to share the most important lesson he’d learned about modernizing monetary frameworks, “Not a C anymore, but a J. For Just do it,” Valdovinos said.

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