Will The Deflation Story Skip Africa?
Sure, Zimbabwe’s inflation has recently been estimated at 89.7 sextillion (that’s a one with 21 zeroes after it) percent, but given plummeting commodities and the global recession, surely inflation is going to turn the corner in the rest of Africa. After all, yours truly recently pointed out that deflation, rather than inflation, may now be the bigger risk to prices. And I still think that’s the case for the world in general. But inflation is a local phenomenon, and in Africa especially, I think there are a few reasons inflation will remain stubbornly high, though I still think it’ll come down from 2008 levels in the year ahead.
First, monetary policy transmission mechanisms in Africa are weak, and central banks can’t expect to just hike rates and see inflation fall. For example, a shallow interbank lending market means the central bank’s benchmark interest rate doesn’t necessarily play a big role in determining bank lending rates in many countries. This may be one reason a lot of countries – Angola, Tanzania, Zambia and the CFA franc zone, for example – don’t bother with a policy interest rate. Furthermore, a lot of countries have small banking sectors, relative to GDP, meaning changes in lending don’t necessarily have as big an impact on the amount of money in the economy. Now that inflation has reached double digits in the majority of the bigger African economies, it will prove harder to get rid of, especially since it’s not just the price of food and energy which is rising now.
The second piece of food for thought is currency depreciation. With the exception of the pegged Angolan kwanza, major currencies across the region are tumbling. Even the steady Nigerian naira, which has mostly traded within 0.2% of NGN117.75/US$ since April has fallen more than 7% over the last few days, despite the country’s enormous foreign reserves (around US$60bn, or 18 months of import cover). African currencies are being hit by risk aversion (the region does not have the best reputation for stability), as well as falling commodity prices, exports of which are a major source of forex. Africa’s domestic manufacturing sector is relatively weak, so lots of secondary goods have to imported from abroad. Weaker currencies will only make these goods more expensive.
Finally, there’s growth. A slower economy forces suppliers to put off price increases or cut prices to clear inventories, and Business Monitor International is predicting slower growth in the region, along with the rest of the world. That said, while Africa is hardly insulated, it’s probably less integrated with the global economy than most other regions now, and growth is not likely to be hit as hard as it will be for emerging Europe and Asia, for example. In fact, the region most likely to stand firm against the global downturn is the Middle East, where accumulated oil wealth will help absorb the economic shocks. It’s notable then, that this region has some of the highest inflation in the world – after Africa.