Inflation is back.
Covid has ravaged our economies and scrambled supply chains. Russia invaded Ukraine upended global commodities markets. The impact of these on the global economy is that inflation is back. Prices across the board are rising, and Africa has not escaped this phenomenon, it is causing real pain, as protests across the continent show. However, Africa is in a real bind, our governments don’t have the financial firepower to cushion their citizens easily, and the causes of inflation are beyond our control in the short term.
Much like the coronavirus pandemic there are some tough choices to make. These must be tailored to our context. Outside help will be hard to come by, and for the long term, there are lessons to be learned to ensure that we use the current situation to make sure we never end up here again.
Another crisis fewer options
The current inflationary crisis is problematic because its causes are not native to the continent. Meaning that the tools at our disposal to deal with it in the short term are limited. The primary drivers of inflation are the global supply chain disruptions caused by the pandemic which have not been resolved. Second the war in Ukraine has meant that two of the world’s largest suppliers of oil, gas, wheat, fertilizer, and cooking oil have suddenly stopped shipping those commodities driving the prices of food and energy up all over the world. Africa is a net importer of wheat, fertilizer, oil and gas, and cooking oil, less supply and higher prices will have broad impacts throughout the economy. Third, the developed world’s response to inflation has been for their central banks to raise interest rates, and the Federal Reserve Bank in the USA has been particularly aggressive. This has strengthened the dollar in relation to African currencies, making buying global commodities or goods in global markets more expensive, while at the same time making dollar denominated debt payments more expensive, meaning our governments have even less money to spend on other priorities.
The causes of the current inflationary crisis are not homegrown and that severely limits the tools available to African Governments to mitigate it. Interest rate rises, the tool most commonly used to fight inflation, is effective when the cause of inflation is too much demand or an overheating economy. That is not the case here, and despite African central banks raising rates it won’t have much impact beyond dampening already weak economies. Governments have tried to use what little fiscal space they have to subsides fuel and other basic commodities. However, this too will have little impact as African governments do not have the financial firepower to do much else beyond cushion the impact of inflation rather than shield people from it.
Short Term fixes
So, what can we do in the short-term? Despite limited options there are a few things that African governments can do ease some of the pressure inflation is putting on their people. First is to look at their tax regimes, many countries levy various combinations of VAT, Excise and import duties on fuel, fertiliser, and basic food commodities. Examining and reducing those in the short term will provide some price relief, though the government may lose some revenue its much simpler and cheaper than providing subsidies.
Second, is to apply subsidies where they will have the most impact, do not subsidize fuel, that’s a losing battle with global commodity markets, rather subsidise commodities like fertilizer to ensure farmers can produce as much food as possible domestically and ease some of the pressure caused by imported food prices. Target support at public transport providers both formal and informal to enable them to keep their prices affordable. We need to spend our little money where it has the biggest impact, not where it generates the best PR.
Third help your private sector strengthen and diversify their supply chains, make your embassies and consulates available to support local companies trying to find cheaper supply alternatives or even bring the power of state to bear through diplomatic ties or credit guarantees to lower the risk and the prices local businesses have to pay for global inputs.
Fourth, governments and central banks must be honest with their people and businesses, explain why what is happening, is happening and how it is being dealt with. Managing expectations or guiding markets can be just as effective as many policy interventions.
These measures won’t stop inflation. However, they will mitigate it. Which is better than simply copying what others are doing and raising interest rates, doling out cathartic subsidies and crossing our fingers hoping for a break.
Long term solutions
I have written previously that the pandemic showed us that we cannot rely on the rest of the world to help in a crisis especially when they too are affected. The inflation-crisis is global and in Washington, London, and Brussels they are far more worried about their own people than what it is doing to the ability of poor Africans to put food on the table. Thus, we must take a step back and look at the structural issues that have landed us in this predicament and aim to fix them so that next time the global economy is thrown into turmoil we are not turned into basket cases
1. Diversify, diversify diversify
It is critical that Africa learn from and rectify a key mistake. Over reliance on small number of suppliers will hurt when that supply is restricted. It is key that Africa deliberately looks to develop alternative sources of wheat, fertilizer, cooking oils and energy. This needs to be done both domestically, regionally, and internationally. How can we strengthen the domestic production of these goods, can we identify regional suppliers and use the ACFTA or regional economic blocs to access that supply and can we make sure there is regional and ideological diversity among our global suppliers so that if one of them ever faces crisis it is not transmitted wholesale onto the shelves of African shops?
This diversification must also extend to what we consume, President Museveni of Uganda may have sounded insensitive when he told Ugandans to eat cassava instead of bread if the price of bread is too high, but he was not wrong. If we can nudge African consumers to use goods and products that can be grown or made cheaply here, it is the ultimate insulation from supply-side driven inflation that we are experiencing now.
2. Develop domestic debt markets
A massive problem facing governments with large amounts of foreign loans (e.g., Zambia, Kenya, Ghana etc.) is the weakening of their currencies, locking them into a vicious cycle of a strengthening dollar draining money out of the country as debt payments become more expensive. Strengthening domestic local currency debt markets will ease this pressure in the future, and while every country may not be able to develop a fully fledged bond market, that need not be an issue. African countries can issue debt in other African countries with better developed markets, it may not be ideal, but it would be cheaper for Zambia to issue Rand denominated debt rather than dollar debts.
3. Tax systems that make sense
As pointed out previously, in many African countries the tax systems are reinforcing rather than mitigating inflation. African governments need to take a step back and look at those tax systems to identify where they do more harm than good (e.g., taxes on basic commodities) but also identifying taxes that can be used as policy levers. Raised or lowered as appropriate when needed.
4. Africanise monetary policy
By this I mean there must be a recognition that monetary policy in Africa cannot simply copy what happens in Washington or London, or blindly implement what the IMF recommends. It is clear that our fiscal and monetary policies must be better collaborated to ensure that our debt strategies are geared to tap domestic sources as far as possible. That interventions in currency markets are timed and designed to have the least impact on citizens and that interest rates are used when appropriate in reaction to conditions and developments in our markets. To do this we must reassess the African approach to monetary policy, with the questions of what affects our citizens, markets and businesses at the centre.
5. Fuel
Often the largest contributor to inflation is rising fuel prices. It is not possible to completely get rid of the need for oil and gas but concerted long term action can ensure that demand for oil and gas is reduced. Further reducing African economies exposure to oil price driven inflation.
What parts of our transport systems can we electrify, make more efficient or switch to alternative fuels? How and where do we invest in biofuels and renewables? What’s needed to make our energy systems more efficient? All big questions, but worth answering not only to reduce exposure to price spikes but also to make a contribution to mitigating climate change.
Rebuilding for resilience
Inflation is painful, and we are all feeling it. From a policy perspective it is tricky to solve when it driven by factors outside of our control like wars in Europe and highly optimised supply chains falling apart. However, our policy cupboard being is not empty. There are things African governments can do in the short term to ease the pain, but it will not be a cure all and they must be honest about that.
In the long term, we must rebuild African economies with resilience in mind. Not just against pandemics but against an increasingly uncertain world where crises and economic shocks are more commonplace. There will be situations in the near future that will increase inflationary pressure globally and on African economies. We must diversify and contextualize our approach to economic policy making to ensure that this rebuilding for resilience is done with the African context, citizens, and businesses at its centre.
Africa will face inflationary crises in the future, lets use this one to make sure we are prepared for them
Also published on Medium.