Introduction
In the words of Charles Adu Boahen, "Western views of monetary policy don't always fit the African experience." This viewpoint captures the broader debate on the application of monetary policy in varied economic settings. As global inflationary pressures mount, central banks, irrespective of their geographical location, are in search of stability using monetary policy tools they know best. However, as Boahen correctly points out, the African context necessitates careful evaluation of its specific problems and strengths when employing such tools.
Whilst Charles Adu Boahen acknowledges the impact of fiscal dominance on inflation, he goes on to explain that this must be viewed in the context of African governments facing formidable challenges in raising sufficient tax revenue to fund their budgets in highly informal economies while also keeping inflation in check. As such, with large budget deficits, high debt levels, and heavy reliance on debt financing, many African nations struggle to balance the costs of paying for much-needed social programs and infrastructure with the risks of runaway inflation, according to Charles Adu Boahen.
He went on to say, "We must acknowledge the good intentions behind these spending programs, which aim to lift millions out of poverty and deprivation." In the face of immense human suffering across the continent, investments in healthcare, education, infrastructure, and other essential services are morally justified and essential. While fiscal discipline is critical, deep cuts to social programs would only exacerbate hardship for the most vulnerable, particularly in the face of external shocks such as pandemics, wars, commodity price volatility, and the impact of climate change on agriculture and food prices, to name a few.
As a result, African governments need to come up with well-designed and effective policies and tools as they attempt to strike a careful balance between managing inflation and caring for their citizens. The path forward must allow for targeted but measured investments in pro-poor initiatives, protection of the marginalized, and equitable growth.
Strengthening the institutional independence of central banks, boosting coordination between fiscal and monetary authorities, and promoting structural reforms to spur economic growth can all help ease inflationary pressures. This would also create fiscal space for vital social expenditures while maintaining price stability over the long run.
Adu Boahen recalls the old adage "garbage in, garbage out." If the appropriate policy measures are to be adopted, all inputs must be accurately quantified, and the data collection process must be robust and reliable. "You can't manage what you can't measure," as Peter Drucker always says. Indeed, we must ask why monetary policy measures enacted in the West appear to be considerably more effective in reducing inflation, implying that the response mechanism is effective and works well, whereas, in Africa, the response to these same monetary policy measures has been slow or non-existent.
So, the question is, are we measuring accurately, and are we measuring the right things in Africa?
With care, ingenuity, and compassion and the implementation of the right policies customized for African economies, based on the use of the right data and close coordination between the fiscal and monetary authorities, African nations can uplift their people whilst keeping inflation under control. However, we must recognize the magnitude of the challenges the managers of African economies face and support their efforts to chart a course that is both economically prudent and socially just within our unique environment. Not only does the well-being of millions hang in the balance, but so does our policy credibility in this global economy, according to Charles Adu Boahen.
Africa's post-colonial history is littered with examples of political upheaval, economic challenges, and attempts at nation-building on the back of economic institutions established by and inherited from colonial governments.
Central banks, as crucial economic institutions, were frequently at the forefront of these difficulties. Some nations, benefiting from periods of relative stability and visionary leadership following independence and once they became republics, built strong, independent, and credible central banks; others, as seen in most francophone countries, ceded management and control of monetary policy and management of these institutions to their colonialists. Since then, these institutions have been critical in economic policymaking, inflation control, and financial sector stability in their respective countries.
"These Central Banks have been especially challenged over the last couple of years, as Western and developing economies alike have been dealing with increasing and fluctuating inflationary pressures post the COVID pandemic," states Charles Adu Boahen. This global dilemma has prompted central banks the world over to employ a variety of monetary policy strategies aimed at containing inflation, with varying degrees of success. While the use of these measures has resulted in a commensurately positive response in the West, the response in African developing countries has been mediocre at best, if at all. This clearly indicates that perhaps the one-size-fits-all application of Western-style monetary policy tools, as is, to African economies may be a mistake. Boahen cautions, "Applying these Western models to African economies without tailoring them to address the unique characteristics of African economies, might not be the optimal strategy nor yield the best results, for a variety of reasons."
Inflation baskets and the composition and weighting thereof are important tools for monitoring price changes to inform monetary policy decisions. However, building effective baskets in Africa and the contents thereof may require different considerations than in developed economies to be able to measure inflation more accurately. Given the unique characteristics of most African countries, as well as differences in demographics and economic activity within each country from region to region, how does one determine what exactly should go into the basket and the weighting thereof within the African context, not to mention the vast difference in the level of informality as one moves from more urban to more rural areas? Oku, Spray, and Unsal's recent IMF analysis in September 2022 on African food prices raised serious worries for Africa, where food and tradables account for a large share of the consumer basket. This increases vulnerability to inflation concerns, especially when monetary frameworks are weak. Food inflation has been a major inflation driver in Sub-Saharan Africa, accounting for over 40% of the consumer basket.
In Africa, consumption patterns vary greatly by income level. Poorer households spend more on food, while wealthier households spend more on education and healthcare. As such, finding a representative national average is problematic. Supply shocks from climate, instability, etc., also impact inflation, reducing the signaling value of price indexes and the effectiveness of monetary policy.
Compared to developed countries, African baskets tend to outweigh food due to higher income share spent on necessities while underrepresenting housing and utilities, which may introduce some bias into the inflation calculation. Additionally, basket updates are infrequent, typically only once a decade, which may also impact the accuracy and may not reflect changes to the economic structure, especially in developing economies. For example, the growth of fintech and mobile money has been unprecedented in the last decade in Africa, which may not have been captured with infrequent updates.
These features have implications for monetary policy design and targeting in Africa. The higher food weight means central banks need to carefully consider food price shocks and whether they are temporary or permanent in nature in determining policy. The instability also hinders setting and achieving inflation targets, which explains why some central banks resort to targeting a band rather than a specific target number. Overall, the unique attributes of African inflation baskets must be considered when designing monetary policy tools.
There is also the challenge of how the data is collected once the components of the basket have been determined and the weightings applied. Due to a lack of infrastructure and the informal nature of African economies, data gathering across the country can be fraught with challenges, leading to an increased reliance on guestimates and extrapolations. For example, due to all these challenges and the lack of infrastructure and resources, most African countries conduct a population census once every ten years, with some going as long as 20 years without a census. Or the challenges most African countries faced during COVID. Due to insufficient (healthcare) infrastructure and testing facilities, African countries struggled to determine the number of infections during the COVID-19 pandemic. The WHO anticipated in October 2021 that due to these challenges, 6 out of 7 COVID cases would go undetected. This also impeded African governments' ability to properly manage the outbreak and effectively allocate the meager resources at their disposal to battle the pandemic and save lives. Once again, Peter Drucker comes to mind, "You can't manage what you can't measure."
Africa is unique. Africa is defined by the legacy of colonialism, varied governance structures, and a tapestry of cultures. Remittances, for example, play an important role in countries such as Ghana, Nigeria, and Kenya, and their impact on monetary policy may differ from that of Western economies where such inflows are less pronounced. Similarly, the fixed exchange rate of the CFA franc in several West African nations exemplifies monetary peculiarities that are not always mirrored in Western economies.
Natural resources lie at the heart of Africa's economic variety. From Nigeria's oil-rich deltas to Botswana's diamond mines and South Africa's gold deposits, each country has carved out an economic niche for itself. However, it is not only about minerals and fossil fuels. Kenya, for example, thrives on agriculture, exporting tea and flowers, but Ethiopia is world-renowned for its coffee. Egypt, on the other hand, has a strong tourism basis, with the pyramids and the Nile serving as global attractions. "When it comes to monetary policy tools, when you have high inflation, the goal is to prevent the economy from overheating," says Boahen, but the tools to achieve this in a resource-rich country may differ from those in an agrarian economy, not to mention differences within the country, between rural and urban, formal and informal.
Africa's place in the global trade matrix highlights the continent's economic diversity. While countries bordering the Mediterranean have strong trading relations with Europe, those in the East are becoming more linked to Asia, particularly China. This complex trade environment has an impact on currency values, balance of payments, and general monetary dynamics. Countries that rely substantially on foreign aid or are indebted to international organizations frequently find their monetary policies tied to external situations. Such reliance can occasionally trump domestic considerations.
According to data from the United Nations Conference on Trade and Development (UNCTAD), 84% of Africa's raw materials were exported unprocessed in 2019, while 87% of imported goods were processed goods. This trend highlights a significant deficiency in adding value to local resources, resulting in job and revenue losses. Furthermore, it exposes Africa's economy to the whims of global commodity prices and encourages a significant reliance on imports and an insatiable thirst for FX. This value-addition shortfall is exacerbated by high operational costs, trade barriers, and a disparity in infrastructure and industrial prowess. Though some African nations are forging a route toward export-oriented manufacturing, the road ahead requires increased investments across the continent in infrastructure, business-friendly reforms, and workforce skill development.
In the words of Adu Boahen, "This isn't just about cutting down on imports; it's about harnessing more value from local resources to bolster economic resilience against risks like currency devaluation when import costs soar." Infrastructure is also key. The dependency on road transportation in Africa, particularly in Ghana, is evident in data that points out that the transport sector in Ghana is dominated by road transportation, which accounts for more than 80% of the movement of goods and people daily. In some estimations, road transport accounts for 96 to 98% of the overall national delivery of people and goods. This heavy reliance on road transport is due to a lack of alternative infrastructural support in rail, air, and inland water transport sectors. A study by Naazie, Braimah, and Atindana on the effect of bad roads on transportation in Ghana found that more than 80% of the daily movement of goods and people was done by road transportation.
The inadequacy of infrastructure has had a tangible economic impact. For instance, in Ghana, transportation was identified as a leading driver of inflation. Between 2022 and 2023, hikes in fuel prices due to increased world market prices post the Russia-Ukraine War led to increased transportation costs, which led to increases in food prices and inflation.
The rise of technology-driven economies in Africa adds another layer to this diverse economic tapestry. Nations like Rwanda and Ghana are pushing for a digital economy, and the success of mobile money platforms like M-Pesa in Kenya and Momo in Ghana points towards a new economic paradigm. Such innovations necessitate modern, adaptable monetary strategies.
A significant segment of Africa's economy operates outside formal structures. As Boahen observed, "Western perspectives often fall short in capturing the nuances of the African context." This is especially true of the informal sector. The urban-rural divide further accentuates this diversity, with bustling cities contrasted against vast rural landscapes where agriculture remains the primary livelihood. This dichotomy has led to varied economic behaviors and consumption patterns, making a one-size-fits-all monetary policy approach less effective.
For example, the banking situation in Ghana differs significantly from that of some Western countries. According to Statista data from 2023, only about 39% of Ghanaians over the age of 15 have bank accounts, compared to over 90% in places like Denmark, Germany, and the United States. Some reasons for the lower banking rates in Ghana include fewer bank branches, limited access overall, and high costs.
According to Statista data from 2023, nearly 60% of Ghanaians now have mobile money accounts, allowing financial transactions without a traditional bank account. As Boahen stated, where traditional banking is lacking, mobile money and fintech solutions are helping more Ghanaians access financial services and overcoming barriers like lack of IDs and infrastructure, particularly in rural areas.
However, there is still a lot to be done. For example, fintechs in Ghana are not allowed to take deposits or provide credit without partnering with a bank.
While the goal remains consistent—economic stability and growth—the roadmap to achieve it varies. Boahen emphasizes that there are "intricacies that must shape monetary policy in Africa and the implementation thereof." Embracing these intricacies means integrating Western models, not as wholesale solutions, but as components tailored to fit the African narrative. This synthesis respects global norms while catering to local realities.
In the realm of monetary policy, understanding is key. As Charles Adu Boahen posits, recognizing the diverse economic realities of Africa and innovating accordingly is crucial. A more holistic and effective monetary policy framework and the right tools to implement and measure can be designed by bridging global norms with the unique tapestry of African economies. Given this vast economic landscape, it's evident that a singular monetary policy approach will and does not work and may even be counterproductive. Recognizing and embracing this diversity is essential. Only by tailoring monetary policies to the specific needs and strengths of each country can Africa truly harness its economic potential and ensure sustainable growth and stability.
