Why monetary policy is irrelevant in Africa south of the Sahara

CDPR (SOAS) A policy note by SOAS argues that the effectiveness of monetary policy relies on a viable domestic market for trading public securities, and a commercial banking sector willing and able to lend to the private sector. However, the paper deems that with the exception of South Africa, no country in the sub-Saharan region has these necessary conditions.

The author argues that for over a third of the countries in sub-Saharan Africa, monetary policy is obviously irrelevant because they share a common currency. Thus, they have no national central banks. On the other hand, sixteen countries in the region do not issue public bonds or have no domestic market for public securities. In addition, domestic bond markets in the region lack the institutional mechanisms to facilitate and safeguard foreign capital flows.

The paper concludes with the following findings:

  • the reality in sub-Saharan Africa is that, with very few exceptions, monetary policy has no meaningful impact on inflation or the real exchange rate
  • still, monetary policy that is committed to maintaining high real rates of interest does have adverse consequences
  • in this respect, the IMF is lobbying for inflation-retarding high real rates of interest
  • yet, this lobbying ends up reinforcing the diversion of public funds into debt servicing, and the main beneficiaries are a few large and powerful domestic commercial banks
  • actually, one of the fundamental rules of debt management (the real interest rate on public debt should not exceed the real growth rate of the economy) is violated
  • thus, the country’s rate of economic growth is unnecessarily constrained, without having achieved any mitigating benefits through lowering inflation and maintaining a competitive exchange rate

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