AfDB and East African Central Banks Look to Easing Inflationary Pressures in 2012 for the Region

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Date: 15/02/2012
Location: Nairobi, Kenya

The high inflation rates that that have been plaguing the countries of East Africa recently could start to fall in 2012 and eventually reach single-digit level, a meeting organised by the African Development Bank (AfDB) in Nairobi heard today.The seminar on ‘Inflation Dynamics in East Africa’ brought together the governors and high officials from the central banks of Kenya, Rwanda, Tanzania and Nigeria to discuss the bout of high inflation recently suffered in the region. The seminar was opened by the acting minister of finance of Kenya, Robinson Githae and chaired by Mthuli Ncube, AfDB chief economist and vice president.

The participants pointed out that the region’s successful record on economic growth and the resultant demand had helped fuel this inflation as well as an expansion of private and public borrowing.

An AfDB recent study called “inflation dynamics in selected East African countries” has found that inflation in East Africa topped nearly 40 percent in Ethiopia, and was in the upper teens in Kenya and Tanzania and was mainly driven by supply shocks, external factors and policy variables such as loose monetary policy and exchange rate depreciation. Nonetheless, the outlook for 2012 shows easing inflationary pressures, with the prospect of a fall to single digit inflation in the medium term, mainly underpinned by central bank intervention through tight monetary policy. The trade-off between growth and inflation is a challenge to the East Africa’s central banks.  

Of particular concern was that food prices were mainly responsible for the surge in headline inflation, and it was acknowledged that reforming agriculture and improving post-harvest storage facilities to ensure food security should be at the top of the policy agenda to gain price stability on a sustained basis.

The general consensus was that controlling inflation in the region and in Africa generally would remain challenging using traditional central bank instruments such as open market operations or any of its variants. Despite rising incomes, currency outside the banking system is still predominant, preventing central banks from influencing broad money through the usual channels.

What has complicated matters in the region is that the growth in intra-regional trade has not been accompanied by spatial price convergence, leading to speculative trading across borders. Greater regional coordination could therefore facilitate inter-border trade so that all markets are properly serviced.

An issue that has also attracted policy discussion was the demand for foreign exchange that arose from the strong desire by national governments to improve infrastructure and meet the millennium development goals.  These factors in turn contributed to the current inflation through the depreciation of the local currency. Other structural factors such as financial innovation, velocity of circulation and supply constraints may also have affected contributed to an increase in prices.