The World Bank has cautioned some African central banks against risky monetary initiatives that could jeopardize their economic stability and growth. The warning comes amid the region’s rising challenges of inflation, fiscal deficits, and debt sustainability.
The Washington-based institution singled out Nigeria, Ethiopia, and Uganda as countries that should avoid measures such as monetizing the fiscal deficit, direct lending interventions, untargeted subsidy programs, and foreign exchange controls. According to the World Bank, these initiatives could undermine the effectiveness and credibility of monetary policy and create distortions in the financial sector.
The World Bank highlighted the significant problem of inflation that monetary authorities in the region face, especially in countries with underdeveloped financial systems, a large informal sector, and a lack of coordination between monetary and fiscal policies. The organization stressed the possible consequences and stated, “If monetary and fiscal actions are not adequately coordinated to bring down inflation, the risk of de-anchoring inflation expectations would fuel further inflation, accelerate interest rate increases, and exacerbate the deceleration of economic activity.”
The World Bank’s warning echoes the concerns other international organizations and experts raised about the risks of unconventional monetary policies in Africa. For instance, the International Monetary Fund (IMF) has advised Nigeria to phase out its central bank’s financing of the government budget deficit, which amounted to 4.5% of GDP in 2022. The IMF also urged Ethiopia to limit its direct advances from the central bank to the government and to adopt a flexible exchange rate regime. Similarly, the African Development Bank (AfDB) has called for prudent fiscal and monetary policies to contain inflationary pressures and safeguard macroeconomic stability in Uganda.
In its Africa’s Pulse report, the World Bank emphasized the ongoing inflationary challenges most of the region’s countries face. The report, which examines the continent’s short-term economic prospects and development issues, projected that inflation would remain high at 7.5% for 2023 in Sub-Saharan Africa, despite a slight decline from 9.3% in 2022. The report attributed the inflationary difficulties to various factors, including a global demand slowdown, eased supply chain disruptions, lower commodity prices, and tighter monetary policies.
The report also expressed worry over the slow progress of measures to consolidate fiscal policies in many countries with regard to fiscal issues. For over two-thirds of the countries in the region in 2023, budget deficits are still higher than before the pandemic. The World Bank stressed the urgent need to address these issues and the necessity of “domestic resource mobilization and efficient spending” to reduce the risks associated with fiscal and debt sustainability, curb inflation, and create space for development expenditures.
The report acknowledged some countries’ efforts to implement tax reforms, such as those in Kenya and Ghana, and subsidy reforms in Angola and Nigeria, demonstrating the region’s commitment to fiscal consolidation. Additionally, a new trend in the region is using digital technologies for tax administration and compliance.
The World Bank urged African central banks to adopt sound monetary policies that are consistent with their objectives and mandates and to enhance their communication and transparency to anchor inflation expectations and foster confidence. The organization also recommended strengthening central banks’ institutional frameworks and operational independence to ensure their effectiveness and accountability.
The World Bank’s advice is critical when African countries face multiple shocks from the COVID-19 pandemic, climate change, security threats, and social unrest. The organization expressed optimism that with appropriate policy actions and international support, African countries can overcome these challenges and achieve a resilient and inclusive recovery.
Source: Business Insider Africa
