The World Bank on Wednesday advised the Central Banks of Nigeria, Ethiopia, and Uganda to avoid unorthodox interventions that might render their monetary policies ineffective.
Such unorthodox interventions include monetising the fiscal deficit, direct lending interventions, untargeted subsidy programs, or foreign exchange controls.
According to the World Bank, inflation remains a challenge for monetary authorities in the region, particularly for countries with underdeveloped financial systems, a large informal sector, and lack of monetary-fiscal policy coordination.
“If monetary and fiscal actions are not adequately coordinated to bring down inflation, the risk of de-anchoring inflation expectations would fuel further inflation, accelerate interest rate increases, and exacerbate the deceleration of economic activity,” the World Bank said.
In its Africa’s Pulse report, the World Bank said after peaking in 2022, inflation has been receding in the majority of Sub-Saharan African countries—although at different speeds.
For those countries where inflation is within striking distance or already inside the central bank’s target band (for instance, South Africa, Kenya, and Uganda), fine-tuning monetary policy to get inflation under control without causing unnecessary hardship and job losses is essential.
In contrast, countries with rates of inflation that are high (two-digit rates) or have not peaked yet (for example, Ethiopia, Ghana, and Nigeria) need to avoid unorthodox interventions that might render their monetary policies ineffective—such as monetarization of the fiscal deficit, direct lending interventions, untargeted subsidy programs, or foreign exchange controls.
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For these countries, independent Central Banks with a clear mandate, transparent decision-making, and accountable authorities are essential to curb inflation.
Fiscal policies should be coordinated with monetary measures to achieve inflation targets and ensure the sustainability of public finances.
The World Bank noted that Sub-Saharan African countries still face inflationary pressures, although to different degrees and lack the fiscal ammunition to support the recovery adequately.
Efforts to mobilize resources domestically and address debt vulnerabilities contribute to creating fiscal space in some countries. In others, conflict and political instability are holding back investment and growth and contributing to greater economic instability—particularly in the Sahel region.
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Against this background, African policymakers must design an inclusive growth strategy around four pillars.
First, it said macroeconomic stability is critical for sustained and inclusive growth. Reducing inflation to target levels while monitoring its impact on economic activity and employment is essential for Central Banks.
Coordination with fiscal policy is crucial to avoid unintended consequences of monetary policy decisions. Hence, policy actions that rebuild fiscal buffers and reduce debt vulnerabilities may contribute to inflation stabilization and the sustainability of fiscal and debt positions, the World Bank said.
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