The World Bank has advised the Central Banks of Nigeria, Ethiopia, and Uganda to adopt cautious monetary policies and avoid unorthodox interventions that could undermine their effectiveness. These unorthodox interventions include practices such as monetising the fiscal deficit, direct lending interventions, untargeted subsidy programs, and foreign exchange controls. The World Bank’s advice is driven by several factors:
Inflation remains a significant challenge for these countries, especially considering their underdeveloped financial systems, large informal sectors, and limited coordination between monetary and fiscal policies.
If monetary and fiscal policies are not well-coordinated to combat inflation, it can lead to the de-anchoring of inflation expectations. This, in turn, can fuel further inflation, necessitate higher interest rates, and negatively impact economic activity.
The inflation situation varies among these countries. Some countries, like South Africa, Kenya, and Uganda, are closer to achieving their central banks’ inflation targets and need to fine-tune monetary policies to control inflation without causing undue hardship or job losses. In contrast, countries like Ethiopia, Ghana, and Nigeria have high or rising inflation rates and must avoid unorthodox interventions.
Countries facing high inflation need to maintain independent central banks with clear mandates, transparent decision-making processes, and accountable authorities to effectively control inflation.
Coordinated efforts between fiscal and monetary policies are essential to achieving inflation targets and ensuring the sustainability of public finances.
Some countries are taking measures to mobilise domestic resources and address debt vulnerabilities to create fiscal space. However, in some regions, conflict and political instability are hindering investment and growth, contributing to economic instability.
The World Bank suggests that African policymakers should focus on four key pillars to design an inclusive growth strategy:
Achieving and maintaining macroeconomic stability is crucial for sustainable and inclusive growth. Reducing inflation to target levels while monitoring its impact on economic activity and employment is essential for central banks. Coordination with fiscal policy is crucial to avoid unintended consequences of monetary policy decisions.
Policy actions that rebuild fiscal buffers and reduce debt vulnerabilities can contribute to inflation stabilisation and the sustainability of fiscal and debt positions.
Efforts to mobilise domestic resources are essential for creating fiscal space and supporting economic recovery.
Addressing conflict and political instability in certain regions, such as the Sahel, is critical to promoting economic stability and growth.
In summary, the World Bank’s advice emphasises the importance of prudent monetary and fiscal policies, coordination between the two, and the need to adapt strategies to the specific inflationary challenges faced by different African countries. Additionally, efforts to strengthen fiscal positions and address external vulnerabilities are essential for promoting economic stability and inclusive growth in the region.
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