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Deflating inflation
Tito Mboweni
Published: 26-OCT-04

In a paper delivered at the Jackson Hole conference in 2003, Professor Kenneth Rogoff, who was at the time the Economic Counsellor and Director of the Research Department of the International Monetary Fund (IMF), describes how over the last ten years global inflation has dropped from about 30% per annum to below 4% per annum.

In the economically advanced countries, inflation averaged 9% in the first half of the 1980s and 2% since the beginning of this decade. Following on this success, the developing world has performed even better. While inflation averaged around 30% in developing countries in the first half of the 1980s, it was on average below 6% in the first few years of this decade.

Recent estimates and forecasts by the IMF indicate that for 2003, inflation in Africa averaged 10,3% . It is expected to decline to 8,6% in 2004. Bearing in mind that average inflation in Africa was around 40% in the early 1990s, this is quite an achievement.

Nonetheless, if the average inflation rate of 10,3% for Africa in 2003 is compared to 2,7% for developing countries in Asia, it is clear that there is still room for improvement. Consequently, the pursuit of price stability is a major challenge for governments and central banks in Africa.

The worldwide success in bringing inflation down to more acceptable levels cannot be ascribed to monetary policy alone. It is certainly also a consequence of other important factors such as more prudent fiscal policy, the easing of trade barriers, greater competition, productivity improvements and changing public expectations of inflation. While the causality regarding inflationary expectations is not totally clear, it does appear plausible that success in the quest for price stability is rewarded with further success as inflationary expectations adjust downwards, influencing the overall price setting mechanism or chain.

These expectations also depend on the credibility of the central bank. Whatever other factors influence the inflation rate, one can hardly deny that the execution of monetary policy in pursuit of price stability is a core function of central banks in all modern economies. The credibility of central banks depends to a large extent on whether they are perceived as either consistently applying monetary policy in a fair, dynamic, flexible and socially responsible manner or whether they are perceived as institutions staffed by arrogant, narrow-minded unelected bureaucrats.

Almost in passing, one would like to refer to the phenomenon of “dollarisation”. In some countries foreign currency, usually the US dollar, is preferred to domestic currency. One is not convinced that this would happen if the central bank has earned its stripes as a consistent inflation fighter.

There has been a growing consensus that high and variable inflation distorts decision-making in the economy, leading to a misallocation of resources and bad economic performance. Inflation also tends to lead to an unequal redistribution of wealth to the benefit of the wealthy who can hedge themselves against inflation and to the detriment of the poor who have neither the resources nor the skills to protect themselves.

An emphasis on the pursuit of low inflation as an important challenge facing central banks in Africa would be incomplete without at least a reference to inflation targeting. Following the successful example set by New Zealand, a growing number of countries have in recent years adopted inflation targeting as a framework or anchor for monetary policy.

While it should be acknowledged that not all countries in Africa might be ready to adopt inflation targeting, it follows quite logically from the pursuit of price stability. Many African countries could probably benefit from working towards adopting an inflation targeting monetary policy framework. It is important to emphasise that governments and not central banks should ideally decide on the target and the central bank should implement such a framework.

Despite acting with due regard to the short-term impact of monetary policy on production and employment, the SA Reserve Bank keeps its focus firmly on inflation. This steadfast approach has been rewarded with success and since September 2003, the twelve-month percentage change in CPIX, the official measure for inflation targeting purposes, has been inside the 3% to 6% official target range.

In reflecting on the challenges facing central banks in Africa, one cannot but notice the overarching need for capacity building. To face all these challenges and others that have not been touched upon in this address will place significant demands on the staff of central banks. The training and development of staff is in reality a further important challenge facing our central banks.

Tito Mboweni is Governor of the Reserve Bank of South Africa. This is an edited version of an address titled “challenges of central banking in Africa” delivered at a conference to commemorate the bank of Zambia’s 40th annivesary.





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