IMF blames slow action for rising inflation in region

Inflation in both Kenya and Uganda is in danger of getting out of control unless firm action is taken by the respective governments.

That’s the key message from the IMF’s new Regional Economic Outlook for sub-Saharan Africa which nevertheless predicted a rosy picture for the region if inflation is tackled.

The IMF predicts that Kenyan economic growth will hit 5.3 per cent this year, rising to 6.1 per cent in 2012, while the figures from Tanzania are 6.1 per cent for both years.

In Uganda economic growth is predicted to fall from 6.4 per cent this year to 5.5 per cent in 2012.

But it is the issue of inflationary pressures on the East African region which most worries economists at the IMF.

Describing inflation rates of 16 per cent in Kenya and 21 per cent in Uganda as “worrying”, the IMF says that the trigger for Kenya and Uganda’s current difficulties was a combination of drought conditions and the surge in global food and fuel prices.

It adds that “with the economies already at close to full capacity, and the monetary policy responses to the shock not consistently robust, both food and non-food price increases have escalated.”

The IMF says that the surge in inflation in Kenya and Uganda “points to the dangers of (governments) delaying the monetary policy response to shocks.

It adds that the result of delay in taking action has seen inflation accelerating sharply and currencies have come under “significant” pressure.

“Only a handful of countries have so far adjusted monetary policy in response to faster inflation and, even then, not decisively,” the IMF report says.

“In most cases, interest rates are little changed from the levels they were lowered to during the global financial crisis.

Especially in countries that are running at close to capacity or where there have been serious signs of policy slippage, monetary policy needs to be tightened decisively to reduce the risks of entrenching inflationary expectations and creating unsustainable macroeconomic imbalances.

“Fiscal policy will play an important role in supporting monetary policy to avoid overheating and the possible reversal of several years’ hard-won gains in sub-Saharan Africa.”

Overall however, the IMF is painting a positive economic growth forecast for sub-Saharan Africa as a whole, saying growth rates are set to maintain their current pace in 2012, supported by higher commodity prices and rising export demand.

In many of Africa’s low-income countries, growth is also being boosted by domestic demand and by adding value to exports, the report says.

The outlook, released on Wednesday, estimates that sub-Saharan Africa will grow by 5.25 per cent in 2011 and 5.75 per cent in 2012.

However, this projection assumes that the global economy will regain some of its momentum in the coming months. If not, then Africa will not be immune and growth could falter.

The report also highlights the increasing involvement of Chinese investment in Africa which was up from just one per cent of all FDI in 2003 to 16 per cent at the end of 2008.

In background studies published in the outlook, the IMF also highlights the quality and breadth of the region’s recent growth episode. These studies point to rising consumption of the poorest households, especially in countries where growth has been sustained at high levels, and the opportunities for intensifying trade with new growth markets.

In many of sub-Saharan Africa’s low-income countries, “growth is being supported by buoyant domestic demand along with export diversification into higher–value added production and to fast-growing emerging markets,” the IMF says.

Drought in the horn

However, higher food and fuel prices are bringing considerable difficulties, especially for the urban poor, and drought in the Horn of Africa is imposing untold hardships on households in that region.

The IMF says that the drought has probably cost Kenya around 0.5 per cent of economic growth this year.

In its outlook for the region, the IMF underlines the importance of aligning fiscal policy with financing and debt sustainability considerations, and draws attention to countries’ absorptive and project execution capacities.

For middle-income countries and others where growth is expected to be more subdued, and where output and employment are still below their pre-crisis levels, there is a strong case for maintaining a supportive policy stance provided there are no binding financing constraints.

In spite of promising growth prospects for the region, the outlook said a note of caution is warranted in the event that downside risks to the global economy materialise.