Africa’s Inflation Among Region’s Most Urgent Challenges
IMF Blog, October 20, 2022
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Bibliographic details
- Authors: Marijn Bolhuis, Peter Kovacs
- Published: October 20, 2022
Overview and context
- Sub-Saharan Africa faces a slow recovery from the pandemic, rising food and energy prices, and high levels of public debt.
- One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation—which are devastating incomes and food security—while also supporting growth.
- The median of inflation rates in the region increased to almost 9 percent in August.
- Inflation is nearly double pre-pandemic levels, risking social and political instability and worsening food insecurity.
- Despite a rebound last year, domestic economic activity in sub-Saharan Africa has remained relatively muted, and growth in the region is expected to slow this year.
- Most countries in the region have lacked the resources to support and stimulate growth, in sharp contrast to richer countries elsewhere.
Drivers of inflation
- Inflation in sub-Saharan Africa has been driven less by domestic activity and more by external developments since the start of the pandemic, including:
- the sharp spike in global commodity prices,
- swings in the exchange rate,
- global supply chain disruptions,
- natural disasters.
- Food prices: prices of key staples such as maize and wheat have increased since 2019, contributing two-thirds of overall inflation in fragile states and one-half elsewhere in the region.
- Energy and exchange rate effects: higher global energy prices and the strong dollar have fed through to inflation indirectly, via transportation and tradable goods like household products.
- Nontradables (locally-produced services such as hospitality, health, education) have shown only modest price increases, indicating limited domestic demand pressures so far.
Impacts on households and food security
- With food and energy accounting for half of household consumption in sub-Saharan Africa, living costs across the region have spiraled.
- The IMF estimates that 12 percent of the region’s population will face acute food insecurity by the end of this year.
- Many countries have turned to subsidies and tax cuts to alleviate the squeeze in household incomes; these measures should be temporary and as well targeted as possible to maximize impact and minimize costs on already-stretched budgets.
Monetary and fiscal responses observed
- Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies.
- Examples of countries and areas that have raised rates include Ghana, Malawi, Mozambique, Nigeria, Uganda and the economic and monetary unions for both Central and West Africa.
- Monetary authorities face a delicate trade-off: raising rates to keep inflation in check risks choking off credit for investment, depressing economic activity, and reducing incomes.
- Fiscal consolidation and the global slowdown further weigh on domestic economic activity.
- Some concerns exist that monetary policy could still be too accommodative, given that rate increases have not kept pace with inflation.
- Countries with fixed or heavily managed exchange rates have, so far, experienced lower inflation than those with more flexible regimes, but their ability to control the pace of interest-rate increases is constrained by their currency arrangement.
Policy recommendations and considerations
- Central banks should proceed with caution and raise interest rates gradually so as not to jeopardize the recovery.
- Policymakers must not be complacent: countries where domestic demand pressures are acute, or inflation is very high may need to tighten faster or more decisively.
- The same applies where monetary policy credibility is weak, the currency is depreciating rapidly, or foreign exchange reserves are shrinking.
- Policy coordination can help; fiscal consolidation has a role to play in countries where policy is too loose.
- A combination of rate increases and currency depreciation may be appropriate in some cases.
- Subsidies and tax cuts used to protect vulnerable households should be temporary and well targeted.
Outlook and monitoring
- Given sub-Saharan Africa’s fragile recovery and the fact that domestic demand pressures have not so far been an important driver of inflation, policymakers must proceed with caution in coming months while closely monitoring inflation.
This blog draws on the October 2022 Regional Economic Outlook for Sub-Saharan Africa and reflects additional research contributions from Seung Mo Choi, Samson M’boueke, and Cleary Haines.
Content in this bundle
- Building A More Food-Secure Sub-Saharan Africa
- Tackling Rising Inflation in Sub-Saharan Africa