Economic Progress

Why inflation is one of Africa's most pressing challenges - and how to tackle it

The median of inflation rates across the region increased to almost 9% in August, according to the IMF.

The median of inflation rates across the region increased to almost 9% in August, according to the IMF. Image: Unsplash/Rob

Marijn A. Bolhuis
Economist, International Monetary Fund
Peter Kovacs
Economist, IMF
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on Economic Progress?
The Big Picture
Explore and monitor how Economic Progress is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Economic Progress

  • Dealing with a slow recovery from the pandemic, rising food, energy prices and high levels of public debt, Sub-Saharan Africa is facing difficult economic environments.
  • The median of inflation rates across the region increased to almost 9% in August, according to the IMF.
  • This was shaped by global commodity prices, swings in the exchange rate, global supply chain disruptions and natural disasters, it says.

Sub-Saharan Africa faces one of the most challenging economic environments in years, marked by a slow recovery from the pandemic, rising food and energy prices, and high levels of public debt. One of the most urgent issues confronting the region is the need to tackle decade-high levels of inflation—which are devastating incomes and food security—while also supporting growth.

While there are big differences between countries, the median of inflation rates in the region increased to almost 9 percent in August. And even though the rise has been less dramatic than in other parts of the world, and the drivers are different, inflation is nearly double pre-pandemic levels, risking social and political instability and worsening food insecurity.

Despite a rebound last year, the fallout from the pandemic has kept domestic economic activity in sub-Saharan Africa relatively muted, and we expect growth in the region to slow this year. Most countries in the region have lacked the resources to support and stimulate growth, in sharp contrast to richer countries elsewhere that could inject trillions of dollars into their economies.

Have you read?

In sub-Saharan Africa, inflation has been driven less by domestic activity than in advanced economies. Instead, external developments have shaped the path of inflation since the start of the pandemic. They include the sharp spike in global commodity prices, swings in the exchange rate, global supply chain disruptions, and natural disasters.

In the case of food, the prices of key staples such as maize and wheat have increased since 2019, contributing two-thirds of overall inflation in fragile states and one-half elsewhere in the region. Higher global energy prices and the strong dollar have also fed through to inflation indirectly, via transportation and tradable goods like household products.

By contrast, there have been only modest increases for the prices of goods and services that most reflect domestic demand pressures, so-called nontradables—which typically include any locally-produced services, such as in the hospitality, health, or education sectors.

Higher prices of food and tradable goods account for the bulk of rising inflation in sub-Saharan Africa
Higher prices of food and tradable goods account for the bulk of rising inflation in sub-Saharan Africa Image: Haver Analytics, IMF

With food and energy accounting for half of household consumption in sub-Saharan Africa, living costs across the region have spiraled. The IMF estimates that 12 percent of the region’s population will face acute food insecurity by the end of this year.

Many countries have therefore turned to subsidies and tax cuts to alleviate the squeeze in household incomes. These measures should be temporary and as well targeted as possible to maximize their impact and minimize their costs on already-stretched budgets.

Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies. Examples include Ghana, Malawi, Mozambique, Nigeria, Uganda and the economic and monetary unions for both Central and West Africa.

Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies
Central banks across the region had already started raising interest rates in response to rising inflation, capital outflows and currency depreciation resulting from monetary policy tightening in advanced economies Image: Haver Analytics, IMF

Monetary authorities also find themselves facing an increasingly delicate trade-off: raising rates to keep inflation in check will risk choking off credit for investment, depressing economic activity, and reducing incomes. Meanwhile, fiscal consolidation and the global slowdown weigh on domestic economic activity.

That means central banks should proceed with caution and raise interest rates gradually so as not to jeopardize the recovery. But policymakers must also not be complacent: countries where domestic demand pressures are acute, or inflation is very high may need to tighten faster or more decisively.

The same applies to countries where monetary policy credibility is weak, the currency is depreciating rapidly, or foreign exchange reserves are shrinking. While countries with exchange rates that are fixed or heavily managed have, so far, experienced lower inflation than those with more flexible regimes, their ability to control the pace of interest-rate increases is constrained by their currency arrangement.

There are some concerns that monetary policy could still be too accommodative, given that rate increases have not kept pace with inflation. Policy coordination can help. Fiscal consolidation has a role to play in countries where policy is too loose, as can a combination of rate increases and currency depreciation

Given sub-Saharan Africa’s fragile recovery, combined with the fact that domestic demand pressures have not so far been an important driver of inflation, policymakers must proceed with caution in coming months while closely monitoring inflation.

List showing Economic forecasts of Sub-Saharan African with GDP growth in percentages inflation
From 2021 to 2022, Sub-Saharan Africa's GDP growth decreased by more than 1%. Image: IMF
Discover

Beyond GDP: read the full transcript here

Loading...
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
Economic ProgressFinancial and Monetary SystemsAfrica
Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

The latest from the IMF on the global economy, and other economics stories to read

Joe Myers

April 12, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum