Runaway inflation is the most challenging macroeconomic problem facing SA and many other countries in Sub-Saharan Africa and restoring price stability is key for the region — as it is for the US and Europe, says the World Bank’s chief economist for Africa, Andrew Dabalen.
He was launching the World Bank’s latest Africa Pulse report, which said the Russia-Ukraine conflict had accelerated already upward trending inflation in Sub-Sahara and this was weighing on economic activity by depressing business investment and household consumption.
“Inflation erodes the purchasing power of poor people, increases poverty, amplifies food insecurity and widens inequality. It is therefore imperative to tame inflationary pressures otherwise inflation could lead to social unrest, intensify conflict and ultimately ignite political instability,” said the World Bank, which notes food insecurity in the region has intensified, with 140-million now acutely food insecure.
The report found the average inflation rate for Sub-Saharan Africa jumped from 7.8% in January to 12.6% in July, driven by global increases in food and fuel prices as well as by currency depreciation. Twenty-nine of 33 countries in Sub-Saharan Africa had inflation rates of over 5%, including 17 with double-digit inflation. Soaring food prices had severely affected poor households, which allocate 40% of their spending to food.
The report notes that interest rate hikes in the region have been one of several factors contributing to slower growth. The World Bank has taken its 2022 growth forecast for Sub-Saharan Africa down from 4.1% in January to just 3.3%, rising to 3.5% in 2023 and 3.9% in 2024.
Emerging markets generally have been significantly affected by the aggressive interest rate hikes that the US Federal Reserve and Europe’s central banks have implemented to bring down inflation. These have caused money to flow out of a lot of emerging markets to the US and Europe, depressing economic activity and investment in emerging markets. They have also increased debt service costs for these countries, taking away money that could have been invested in developmental spending, as well as putting pressure on their currencies which has fed into inflation, Dabalen said in an interview with Business Day on Tuesday.
Going into the IMF/World Bank annual meetings, which start in Washington DC on October 10, one of the questions will be whether advanced country central banks should take more account of the adverse effect their actions might have on emerging markets.
Dabalen said it was very tempting to urge major economies to co-ordinate with poor countries and take them into consideration on monetary policy, but this was the wrong way to think about the issue.
“If the Fed doesn’t bring inflation under control in the US, it could trigger far worse consequences for poorer countries, because it could end with years of high inflation and low growth, which could be very destabilising,” he said.
“The most important thing the central banks of major countries can do is bring inflation under control. And our own countries [in Sub-Saharan Africa] need to think about how to manage inflation and debt,” Dabalen said.
Debt distress
The World Bank’s report also zeroes in on the debt distress faced by Sub-Saharan African countries such as Zambia, which defaulted on its debt. Eight countries in the region are in debt distress and cannot service their debt, with another 14 at high risk of debt distress.
Dabalen said countries must reprioritise spending and focus on the efficiency and quality of their spending, and must be careful about what types of debt they took on.
But the global community also needed to provide relief for highly indebted countries. The World Bank will invest $170bn into the economies of Sub-Saharan Africa over the 15 months to June 2023 to build climate resilience and tackle food insecurity and other development challenges.
On SA, he said the Reserve Bank was doing what most responsible central banks should do, which is to be clear, credible and if necessary, aggressive in fighting inflation. But with the World Bank now projecting SA will grow by only 1.9% this year, Dabalen said SA had to implement structural reforms to lift growth.
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