Monetary policy in Africa has become more orthodox

FOR MORE than a month protesters in Sudan have defied tear-gas and bullets to demand the resignation of Omar al-Bashir, the president. The unrest began with demonstrations against soaring food prices; inflation is above 70%. There is turbulence, too, in Zimbabwe, where the central bank’s “bond notes”, a kind of local dollar, are reviving memories of hyperinflation. Protests broke out on January 14th after the government raised fuel prices. The crackdown was lethal and swift.

Such crises grab headlines. But they obscure a big shift. In Africa, as in advanced economies, inflation has fallen over the long term. In the 1980s a fifth of countries south of the Sahara endured average annual inflation of at least 20%. This decade only the two Sudans have (the rate in Zimbabwe is tricky to measure). Runaway prices are now the exception, not the rule.

African countries took different routes to orthodoxy. Inflation is rarely a problem for the 15 in west and central Africa with currencies pegged to the euro. They have imported central-bank credibility from Europe. Elsewhere, monetary policy was reformed in the 1990s under the guidance of the IMF. Governments gave more independence to central banks. Some let exchange rates float. And they stopped printing so much money. In the 1990s central banks in sub-Saharan Africa printed money worth 12% of GDP a year to help finance governments; by 2015 that had fallen to 3%.

But African central bankers still have a harder task than their rich-world counterparts. Two-fifths of the consumption baskets used to calculate inflation in the region consist of food; for rich countries the average is 15%. When rains fail, food output declines and prices surge. Shocks come from abroad, too, when currencies tumble or import prices spike. High inflation often used to stem from macroeconomic indiscipline. Now, though inflation is in single digits, its trajectory can be harder to control. Pricey power and inefficient farms make inflation hard to cut, says Ernest Addison, the governor of the Bank of Ghana.

Supply shocks also create a nasty trade-off for monetary policy. In the rich world volatility is often caused by shifts in demand. If the government spends more, that both stimulates output and leads to higher prices. In Africa, by contrast, frequent squeezes on supply mean that inflation and output move in opposite directions. A drought may push up prices while shrinking production. That can mean central banks have to tighten when the economy is in a trough.

In most of Africa, markets for stocks and bonds are small. Only a fifth of firms have access to a bank loan or formal credit. Monetary policy therefore has a limited impact on financial conditions, and takes effect slowly. It works partly by nudging banks to lend more (or less). An IMF study finds that this effect is only half as strong in Uganda as it is in advanced economies.

Many countries in the region still set targets for growth in the money supply. But financial innovations such as mobile money mean that the rate at which money changes hands has become unpredictable, snapping the link between monetary aggregates and inflation. Central banks often miss their targets, in ways that can be hard to decipher. They might do better to focus on an explicit inflation target, using interest rates as their main tool. That is easier to communicate to the public, so has more effect. Some countries, including Ghana and Uganda, have already made this switch.

Some worry that too narrow a focus on prices could stifle development. The typical inflation target in Africa is around 5-8%. Yet studies find that inflation starts to drag on growth in poor countries only when it hits 15-20%. Some economists therefore urge a more flexible approach that places greater weight on other objectives, such as job creation.

Take the example of Uganda, which has a notoriously hawkish central bank. In 2011, as commodity shocks and an election pushed inflation to 25%, it raised its main interest rate by ten percentage points. Traders shut up shop; businesses laid off workers. The bank was using a hammer to kill a mosquito, says Ramathan Ggoobi of Makerere University Business School. But high inflation helps nobody, retorts Adam Mugume, the head of research at the Bank of Uganda. Constraints such as bad roads and rain-dependent farms limit economic growth to around 6%; above that, the economy overheats and inflation rises.

Debate about central-bank objectives is healthy. In other ways, however, politics is less helpful. One problem is new laws, such as a cap on commercial-lending rates imposed by the Kenyan parliament in 2016. The move infuriated the country’s central bank, which complains that monetary policy has become less effective as a result. Another political headache is banking supervision, which is typically done by central banks. The Bank of Uganda is mired in lawsuits and official probes after some controversial bank closures.

Politics also intrudes in a third way: public debt. Many countries’ borrowing has risen sharply in the past decade. Last year the region’s median fiscal deficit was 3.5%, including foreign grants. That revives pressures to turn on the printing presses. All told, there is “growing concern” about African banks’ hard-won autonomy, says Benno Ndulu, a former governor of the Bank of Tanzania. That is a shame. Their task is hard enough as it is.