The Sunday Mail
FIVE sub-Saharan African central banks have bucked a global trend by increasing borrowing costs this year to ward off inflation and defend their currencies.
They have had little success.
Last Tuesday, Uganda’s central bank boosted its benchmark rate by 100 basis points for the second time this year, while Namibia raised its repurchase rate by 25 basis points last week.
Kenya, Angola and Ghana have also tightened monetary policy and SA has indicated it will follow suit soon.
Brazil is the only major emerging market outside Africa to have increased rates this year.
While Federal Reserve chairwoman Janet Yellen announced an unchanged monetary policy stance, the prospect of US rates rising later this year has placed currencies globally under pressure.
African nations have fared worse than most due to the compounding effect of lower prices of commodities that account for the bulk of their exports.
The price of Brent crude oil is down 44 percent over the past 12 months, while copper has dropped 14 percent in London trading.
“Many sub-Saharan economies are paying a heavy price for not having implemented tighter fiscal and monetary policies when market conditions were favourable,” said Nicholas Spiro, MD of Spiro Sovereign Strategy.
“It’s one thing for vulnerable sub-Saharan economies to hike rates. It’s another to restore financial stability at a time when market sentiment remains fragile, oil prices have fallen sharply and the Fed is preparing to hike rates.”
Ghana’s cedi has tumbled 26 percent this year against the dollar, Angola’s kwanza and Uganda’s shilling have fallen 14 percent and Kenya’s shilling has declined 7.2 percent . Namibia’s dollar, which is pegged to SA’s rand, is down 5.7 percent .
While inflation has slowed in Namibia during the course of this year, it has been accelerating in the other five nations.
At least 15 central banks in sub-Saharan Africa set interest rates monitored by Bloomberg.
Some African governments have to shoulder part of the blame for the deterioration in their currencies, said Razia Khan, head of Africa macroeconomic research at Standard Chartered in London.
“There has been a material deterioration in fiscal policy across a number of countries.
“Plans for increased spending and the admission of larger-than-expected fiscal deficits will keep up the pressure on monetary policy in order to compensate and deliver some semblance of macroeconomic stability.”
The benchmark lending rate stands at 22 percent in Ghana, 13 percent in Uganda, 10 percent in Kenya, 9.25 percent in Angola, 6.5 percent in Namibia and 5.75 percent in SA. US rates have been near zero since 2008.
“The model of increasing interest rates to strengthen your exchange rate can only take you so far,” Antoon de Klerk, a fund manager at Investec Asset Management said.
“If you continue importing and people see your exchange rate depreciate from year to year, as happened in Ghana, then it does not matter if you pay 9 percent , 10 percent or 11 percent for money, it’s simply not enough to attract capital.”
The International Monetary Fund last month lowered its growth outlook for sub-Saharan Africa by 1.25 percentage points to 4.5 percent for this year.
While higher rates may damp consumer demand and further dull the region’s economic prospects, the effect will be limited, said Cobus de Hart, an analyst at NKC African Economics.
“In a lot of African countries, growth is primarily driven by primary industries, such as mineral extraction,” he said. “The effect of higher interest rates is not as large as compared with more developed countries.”
Central banks in countries such as Ghana and Kenya are raising rates to defend their currencies and reduce price pressures on imports rather than target consumer demand, said Yvonne Mhango, an economist at Renaissance Capital. “Very few households borrow to consume in sub-Saharan Africa.”
Several other African countries may also have to raise rates as concerns over a depreciating currency and deteriorating inflation outlook outweigh those about growth. Top of the list are Mozambique, where the new metical has dropped 15% this year against the dollar, and Zambia, which has seen a 14% decline in the value of its kwacha.
“Longer term, a stable macroeconomic backdrop is the best guarantee of future growth,” said Ms Khan.-Bloomberg
