Evolution and Challenges for Monetary Policy in Africa
IMF News, May 20, 2025
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- Authors: Abebe Aemro Selassie Speech Resources Abebe Aemro Selassie News Related Links Republic
- Published: May 20, 2025
Overview
- Keynote Address for the 50th Anniversary of the Banco de Moçambique by Abebe Aemro Selassie, May 20, 2025.
- Focus: evolution of central bank credibility and monetary policy in sub-Saharan Africa (SSA), with specific references to Mozambique.
- Two central current challenges highlighted: adverse supply shocks (e.g., pandemic, Russia’s invasion of Ukraine) and growing domestic government financing needs as external financing becomes scarce.
Evolution of inflation in sub-Saharan Africa: stylized facts
- Historical averages:
- For the typical SSA economy, inflation in the 1980s and 1990s averaged 10 percent.
- This halved to around 5 percent after 2000.
- Dispersion changes:
- Inflation range across countries declined from 80 percentage points (1980s–1990s) to 24 percentage points (post-2000).
- Share of countries by inflation bracket:
- Low inflation (< 10 percent) share: 50 percent in the 1980s and 1990s; three-fourths in the 2010s; reversed somewhat since 2020.
- External and structural influences:
- Decline in global inflation and improvements in monetary policy frameworks contributed to lower inflation in SSA.
- Small open economies in SSA are price takers for tradable goods; imported goods represent a large fraction of consumption baskets.
- Mozambique-specific figures:
- Average inflation during 1980-99: 38 percent.
- Average inflation during 2017-24: 7 percent.
- Inflation reached 13 percent year-on-year in August 2022 and decelerated to 6 percent by July 2023.
- Price level increase since 2020: 30 percent.
- Food prices are 40 percent higher than in 2000.
- Summary point:
- Historic successes in controlling inflation have been substantial, but recent shocks expose vulnerabilities of small open economies with high food weights in consumption baskets.
Monetary aggregates: trends and relationships
- Policy frameworks (de jure vs de facto):
- Of 45 SSA countries: about 22 target the exchange rate, 14 target monetary aggregates, and 5 have inflation-targeting frameworks (IMF AREAER).
- Noted divergence: more countries have de jure flexible exchange rate regimes, but the number with de facto flexible rates has declined sharply.
- Correlation noted: since 2020, in countries with exchange rate depreciation vis-à-vis the US dollar, inflation has been higher—with a correlation coefficient of some 80 percent.
- Broad money growth and real money balances:
- Median SSA broad money growth: around 15 percent for both 1980-99 and 2000-24.
- Mozambique broad money growth: 35 percent during 1980-99; 19 percent in more recent decades.
- For the typical SSA country, money growth exceeded inflation in both 1980–1999 and 2000–2024.
- Real money growth averaged 5 percent in 1980–1999 and rose to 9 percent in 2000–2024 for the typical SSA country.
- Advanced economies show lower money growth and inflation but similar real money growth rates relative to emerging markets.
- Mozambique: money growth lagged inflation during 1980–1999, but reversed in 2000–2024 to align more closely with SSA median.
- Financial deepening (broad money as share of GDP):
- For the average SSA country: broad money hovered around 15 percent of GDP during 1990–1999 and then doubled by 2024.
- Mozambique: about 20 percent of GDP in the 1990s; broad money grew to reach 50 percent by 2015 and has remained stable in recent years.
- Takeaway:
- A large discrepancy between de facto and de jure monetary policy frameworks undermines clarity, credibility, and transparency of monetary regimes.
Monetary policy dilemmas and transmission challenges
- Adverse supply shocks:
- Shocks (commodity price spikes, supply-chain disruptions) raise the price level, increase inflation, reduce output, and erode real incomes—posing a tradeoff for monetary policy between price stability and supporting activity.
- Example: Mozambique’s policy response—policy rate raised to 17.25 percent by September 2022 following inflation spike to 13 percent in August 2022; inflation decelerated to 6 percent by July 2023.
- Price-level effects: overall price level up 30 percent since 2020 in Mozambique; food prices up 40 percent since 2000.
- Downward nominal rigidities imply monetary policy cannot restore pre-shock price levels without large output/employment costs.
- Fiscal coordination need:
- Fiscal policy is best placed to protect vulnerable households through targeted transfers; however, Mozambique’s government spending on the INAS cash transfers program has declined sharply (Figure 12 referenced).
- Rising domestic government financing and crowding out:
- Government financing from banking system has been systematically positive in most SSA countries since 2008, and very strongly so since 2015.
- Share of bank credit to government (median SSA country): increased from 20 percent in 2010 to 35 percent in 2023.
- Mozambique: share of bank credit to government went from -5 percent in 2010 to 45 percent in 2023.
- Consequences:
- Crowding out of private sector credit, potential negative effects on investment and productivity.
- Greater dependence of commodity sectors on external financing while non-commodity sectors rely on domestic financing—potentially widening sectoral disparities.
- Higher concentration of public debt in banks raises vulnerability to sovereign debt crises and can weaken monetary policy transmission.
- Central banks may face tradeoffs between price stability and financial stability when banking sectors hold large shares of public debt.
Policy implications and recommendations (implicit from address)
- Preserve and strengthen monetary policy credibility and transparency by aligning de jure frameworks with de facto practice to improve clarity of objectives and expectations anchoring.
- Enhance coordination between central banks and fiscal authorities, especially to:
- Use targeted fiscal transfers to protect vulnerable households from supply-driven price-level shocks.
- Limit ad hoc reliance on domestic bank financing to avoid crowding out and preserve monetary transmission.
- Monitor and manage banking sector exposure to sovereign debt to reduce systemic vulnerability and maintain effective monetary policy transmission.
- Recognize limits of monetary policy in reversing price-level increases caused by supply shocks, and prioritize fiscal and social measures to address distributive impacts.
Source: Evolution and Challenges for Monetary Policy in Africa — Keynote Address for the 50th Anniversary of the Banco de Moçambique By Abebe Aemro Selassie, May 20, 2025.