Relentless Inflation: The Scourge Returns
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?
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.
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.