Relentless Inflation: The Scourge Returns
Dec 1st 2011
In the 1970s and 80s most African countries suffered from scourges of high inflation. During the period between the mid-1990s and the early 2000s, inflation was brought under control thanks to better macroeconomic management. However, recently the specter of hyperinflation is back. In particular, inflation rates in East African countries such as Kenya, Uganda and Ethiopia almost doubled or tripled over the past year.
Inflation rates (%) in selected African countries
Source : Central Banks and National Statistical Offices
Ethiopia: Inflation in Ethiopia reached a record 40.6% in August year-on-year compared to 38.1% and 39.2% in June and July. Several factors explain acceleration in inflation. The most important ones include large domestic borrowing to finance public projects, drought and rise in imports of heavy duty items.
Uganda: In a statement released on September 30, the Ugandan Bureau of Statistics noted that inflation grew to 28.3% in September (year-on-year) compared to 21.4% in August. The cost of food is 50.4% higher in September 2011 compared to a year earlier. These levels are said to be the highest in more than 18 years. The rise in core inflation is partly attributed to the growth in the energy imports bill, while additional factors fueling inflation included volatility in the exchange rate market and a falling Shilling.
Kenya: The Kenyan Bureau of Statistics announced on September 29 that inflation grew to 17.6% in September (year-on-year) from 16.7% in August. The latest figure brings the tally to an 11 consecutive month rise in inflation. Apart from food supply shortfalls, the fall in the Kenyan Shilling has contributed to a rising import bill.
Rwanda: The country enjoyed low level of inflation during 2010 due to increases in domestic food supply. However, in 2011 drought related food shortages in the East African region and rising fuel prices have led to higher price of imports. Additionally, lax monetary policy including lower borrowing cost has contributed to increased private sector credit and the resurgence of inflation.
Tanzania: Inflation rate in Tanzania is rising largely due to supply factors. Sporadic rainfall at the end of 2010 contributed to poor harvests countrywide and disrupted the domestic electricity generation, thereby triggering the escalation of inflation. Inflation grew every month in 2011 and stood at 14.1% in August, year on year.
Nigeria: Inflation in Nigeria has been high in the low double digits since 2008 mainly due to high food prices and government spending. The inflation rate declined to single digit at 9.4% in July 2011 thanks to tightening monetary policy and reduced government spending.
What are the main causes?
Imported Inflation
Continuing increases in energy prices have put pressure on fuel prices. Furthermore, shrinking global inventories of grains since 2003 and natural disasters including flooding and droughts have put additional pressure on food prices. These price shocks have led to higher inflation and the deterioration of current account deficits in countries that rely on food and fuels imports. A soaring import bill has led to new trade imbalances, higher fiscal deficits, imported inflation and other macroeconomic imbalances.
Weakened Macroeconomic Management
Other than the generally accepted causes such as the hike in food and fuel prices, inflationary financing of budget deficits and exchange rate depreciation may interact to produce an inflation spiral. Efforts made by the central bank to finance fiscal deficits through easing monetary policy may raise prices and erode foreign reserves, thereby leading to currency depreciation. This is the case for countries where the central bank has limited access to borrowing in the international capital markets. In spite of the rally in inflation, monetary policy remains accommodative in most countries in Africa.
Structural factors
Sustained economic growth and purchasing power over the past decade may have added to rise in demand. However, poor transport networks and distribution systems have resulted in supply constraints on agricultural products in many African countries that fuelled inflation particularly food prices.
Comments
Post your comments
Mthuli Ncube
Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.
1. The producer gets paid. First, they know that you cannot smuggle commodities (be it sugar, maize, fuel, or cattle) if the producer is not happy. So they ensure that the producers are paid. All that sugar that is smuggled around the region is not stolen from the stores…Likewise, the Tanzanian and Uganda farmers who grow the food that is “smuggled” to Kenya, actually get paid.
2. They have ‘incredible customer care’. A few weeks ago at the Kenya/Uganda border, I spoke to a smuggler. He explained that the sharp depreciation of the Uganda shilling had increased the cost of a range of Kenyan goods for his Ugandan clients. So, in order to keep his customers happy, he smuggles to ensure that he does not pass on the resulting “exchange and tax distortions” to them.
3. Smart use of smart phones. Smugglers have finally brought the power of Google maps and smart phones together to foil the anti-smuggling police lurking in the bushes to ambush them. Those skills shouldn’t remain in the jungle. Their place is on the world technology stage. If I were an East African president or finance minister, I would invite a few smugglers to breakfast and soak in their wisdom. They know many clever things the rest of us don’t.
While inflation across the GHEA is driven in part by global food prices increases, it also reflects the actual and perceived shortage of food locally and in the region. As early as March 2011, governments sought to control inflation by banning the export of staples from their territories.
Ethiopia started the trend, as the Ethiopian Times blog reported on March 19, 2011:
“In just seven months since the government lifted the ban on the export of maize, one of the most widely consumed cereals in Ethiopia. A decision was made to re-impose the restriction on the sector because pressure from Food Price Index (FPI) had started to take a toll in the general inflation.”
Tanzania followed the move two months later in May 2011.
“Tanzania announced a food export ban in May after unregulated trade caused shortages that helped drive the rate of inflation to 14,1% in August. The government blamed food shortages in some parts of the country and high prices in urban centres on distribution constraints.”
In an August meeting of EAC’s agriculture ministers, Tanzania’s deputy minister for Agriculture, Food Security and Cooperatives, Christopher Chiza noted that although the country had a surplus of 1.1 million bags of cereals, including maize, the amount may not be sufficient to allow for export. In September, the export of sugar was also banned as an additional measure to tame the spiraling prices.
Kenya's response was to stop the export of seeds, “following a shortage of maize seed in the agriculture growing regions of Western and Rift Valley during the planting season early this year [2011].” The country’s Assistant Agriculture Minister, Kareke Mbiuki, was quoted justifying the restrictions on seed exports;
“We are aware that our government has banned seed exports to other EAC member states but that does not mean that we do not abide by the requirements of a common market that allows for free movement of goods.”
Uganda stayed its hand, continued to allow food exports and received the following praise from the IMF;
"Uganda deserves a lot of credit for resisting the temptation of limiting the export of food to remain the food basket of the region."
Once export bans are instituted, they must be enforced. And attempts at enforcing the bans had led to a rise in informal cross border trade (read: smuggling). According to the FEWS NET/FAO/WFP Joint Cross‐Border Market and Trade Monitoring Initiative, the share of food commodities that was traded formally across GHEA’s borders fell from 76% in 2010 to 63% (January-June) and further to 42% in the July to September 2011 period!
Tanzanian authorities in particular have worked hard to stop the informal cross-border trade in cereals and sugar. The Prime Minister suggested in September that the army would be deployed to police the country’s boundaries.
“The Prime Minister, Mr. Mizengo Pinda, has said the government may use the army to control the smuggling of sugar after it has emerged that the racket is a hard nut to crack by the police."
A few weeks later, in mid-October 2011 some success was reported when 23 sugar-laden vehicles were impounded at the Tanzania/Kenya border under suspicion of attempting to cross into Kenya with the commodity. Given that sugar prices in Kenya were 53% higher than the government-controlled retail prices in Tanzania, it is not surprising that smuggling was such an attractive business proposition. Indeed, the ‘cat and mouse’ game between government enforcers and the cross-borer traders led to some creative solutions for getting sugar across the border.
“…[T]he RC [Regional Commissioner] was informed that after tightening the noose on smugglers who used to ferry goods to Kenya through Holili border post from Himo Township, smugglers have shamelessly started using coffins to smuggle maize and sugar to Kenya.”
On October 11, 2011 the government of Tanzania lifted the ban on the export of grains to the region. The sugar ban remained in place.