## Evolution and Challenges for Monetary Policy in Africa

_IMF News, May 20, 2025_

## Source details

**Canonical URL:** [Evolution and Challenges for Monetary Policy in Africa](https://www.imf.org/en/news/articles/2025/05/17/sp051725-evolution-and-challenges-for-monetary-policy-in-africa)

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## Bibliographic details
- Authors: Abebe Aemro Selassie Speech Resources Abebe Aemro Selassie News Related Links Republic
- Published: May 20, 2025

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### 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.*

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## References

- [Abebe Aemro Selassie](https://www.imf.org/en/About/senior-officials/Bios/abebe-selassie)
- [Republic of Mozambique and the IMF](http://www.imf.org/external/country/MOZ/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2025/05/17/sp051725-evolution-and-challenges-for-monetary-policy-in-africa_