A mainstay of economic management in the developed world, the use of monetary policy in Africa has undergone many changes in recent times, changing from a monetarist approach of containing the integrity of the domestic currency against the US$ (Monetary Aggregates), to now being used to control domestic price levels (Inflation Targets).
Why has there been the change? The ‘Lost Decade’ in African development in the 1980′s and 1990′s, when most African economies underwent Structural Adjustment Programmes, governments and monetary authorities were tasked with amassing foreign currency reserves to cover their trade deficits (that is to have enough foreign currency to pay for imports, a good amount was 4 months cover), and this meant they sought to keep their currencies at levels that would bring in the most foreign currency. During this decade, foreign currency inflows were not high, and thus it was possible to champion this form of monetary policy.
Come the new century, there was an upturn in fortunes for the African continent. Trade increased due to the commodity price boom (oil, minerals), increased aid flows and debt relief (HIPC scheme and increased aid payments), increased foreign direct investment and capital flows (Rise of China and multinationals capitalising on the billion plus population in Africa). All these compounded, rendered the monetary policy at the time problematic as it flew against the stream of change. To address this, and take into account the new reality of rapid economic growth, monetary authorities changed to Inflation Targets as the new policy.
Thus far, only one country has taken the Inflation Target policy as a major route to sustain growth, South Africa. Inflation Targeting implies varying the interest rates to cool (save money) or heat (spend money) the economy to achieve the inflation target. The advantage of this, it creates a stable environment for business to expand and thrive (certainty in returns) which sustains growth and stability. However, there is a major criticism, it ignores exogenous spikes to inflation (oil boom in 2003 and food price increases in 2007), and it doesn’t reflect the dynamism of an emerging economy (creates jobless growth as in South Africa).
A more in depth analysis of the drawbacks of monetary policy is presented by John Weeks of SOAS, where the far distance between the formal economy and informal economy mean the impact and relevance of Monetary Policy in Africa, makes it an exercise in futility until both are more aligned and integrated.
So what is the future of Monetary Policy in Africa? Definitely a more flexible and mixed approach, simply targeting inflation without job creation for ballooning populations stokes pressures for the future. The other forms of Monetary Policy such as The Gold Standard or Fixed Exchange Rates have proven to be antiquated in the contemporary world, what is required is for individual countries to take into account what their own circumstances are. It will be very interesting to see how the East African Community addresses this, with the integration of their economies one step closer in tandem, an inclusive Monetary Policy to help all members will show the way for other countries and trading blocs.