Impact of Inflation in West Africa

Nigeria. Nigeria’s official Customer Price Index (CPI) increased by 0.89% to 18.60% in June, from 17.71% in May. This is the fifth consecutive monthly increase this year and the highest inflation level in over five years. Rising inflation was caused by severe currency depreciation in the face of rising global interest rates and persisting supply chain disruptions to major food and fuel commodities. On a month-on-month basis, the inflation rate climbed by 0.04% to 1.82% in June from 1.78% the previous month. Surging inflation is expected to strain consumer spending power and decrease living standards. Additionally, as inflation remains above interest rates, a negative real return environment will remain a disincentive to investors..

On July 19, the Monetary Policy Committee (MPC) concluded its 286th meeting, with the chairman announcing the unanimous decision of the committee to continue combatting inflation. The MPC decided to further increase the Monetary Policy Rate (MPR) by 100 bps, bringing it to 14.0% while maintaining Cash Reserve Ratio (CRR) at 27.5%, the Asymmetric corridor at +100/-700 basis point around the MPR, and the Liquidity ratio was retained at 30.0%. Due to the rate increase, borrowing money from banks will cost more for individuals and corporates. 

Ghana

Ghana’s annual inflation rate accelerated for the 13th consecutive month to 29.8% in June 2022, up from 27.6% in May on sustained food and fuel price increase. This is the highest reading since December 2003. The rate has now exceeded the Central Bank’s target band of 6% to 10% for 10 months. Sustained inflationary pressures in Ghana are harmful to the economy, particularly for household consumers as the cost of living increases. The social unrest caused by consumers’ declining standard of living is likely to worsen and have an impact on the country’s economic activity. The rise in negative real returns on investment in the country as inflation remains higher than interest rates would also have an impact on investment inflows. This would have an impact on the economy’s growth trajectory. 

The Ghanaian parliament has approved a $750.0 million loan facility between the Government and the African Export-Import Bank (Afreximbank). The proceeds of the loan will finance critical infrastructure as captured in the 2022 budget.

Ivory Coast

Ivory Coast has allocated CFAfr29 billion ($45.3 million) to subsidize inputs for cotton production in order to mitigate the impact of rising fertilizer prices on the sector. The government will subsidise prices for NPK and Urea fertilizers, as well as insecticides, after fertilizer prices skyrocketed following Russia’s invasion of Ukraine, driving up costs for cotton growers. Subsidising the price of agricultural inputs for the cotton sector will increase their usage, which is expected to improve yields and raise cotton production in Ivory Coast. Increased cotton output bodes well for higher export revenue, especially at a time when global prices are high. This will increase the income level of cotton farmers and positively impact the country’s fiscal and external balances. Cotton exports constitute about 2.5% of total export earnings in Ivory Coast and the sector employs over 130,000 farmers who mostly live in the northern region, characterized by low development and high poverty.  

According to Bloomberg, the Kenyan Revenue Authority released a notice setting the excise tax rates for specific goods and services. The notice provides a 10.0% excise tax rate on specific imported goods among others. 

Uganda

The Economist Intelligence Unit (EIU) is projecting that the Bank of Uganda (BoU) will hike its interest rate by another 100 bps to 9.5%p.a. before the end of the year 2022. Earlier this month, the Apex Bank raised its Monetary Policy Rate by 100 bps to 8.5%p.a. to contain rising inflation. The spike in the headline inflation of Uganda to 6.8% could embolden the BoU to continue its monetary tightening stance. A higher interest rate is expected to reduce inflationary pressures, ease the pressure on consumer’s income and bolster their spending power. However, a rate increase could be countercyclical as consumer and business borrowing may decline due to the high cost of borrowing. The decline in consumer and investment demand may stymie output growth.

In an effort to keep inflation under control, Uganda’s finance ministry has stated that the country will not spend the entire amount budgeted for Capital Expenditure (CAPEX) in the first quarter of the fiscal year 2022-2023.

Zambia

Zambia is set to hold a second meeting with its official creditors this month in line with efforts to restructure its debt and enable access to funds from the IMF and the World Bank. The first meeting was held on June 16 but negotiations had been slow due to the large number of Zambia’s creditors, according to the finance minister. A successful meeting with Zambia’s creditors will facilitate the realization of the country’s debt restructuring agenda. This will help alleviate Zambia’s debt burden and resolve its debt crisis. It will also boost creditors’ confidence and increase the chances of accessing concessional financing from multilateral organisations such as the World Bank and the IMF. This will provide additional budgetary support to the Government and support Zambia’s long-term economic growth. 

Cameroon

The Cameroon government is struggling to meet its fuel subsidy payment obligations, leading to fuel shortages across the country. Fuel subsidies in Cameroon totalled CFAfr317 billion ($490 million) in the first half of 2022, exceeding the CFAfr120 billion ($185.5 million) allocated in the initial 2022 budget due to high global prices. The EIU expects the government to maintain the fuel subsidy in order to temper rising inflationary prices and for subsidy payments in 2022 to exceed the revised budget allocation of CFAfr625.4bn ($966.7 million). As the government works to keep fuel prices under control, it is likely to struggle to cover the cost of the subsidy. This would exacerbate the country’s fuel shortages and have an impact on business activities. The government’s prioritization of the subsidy payment would also affect the country’s expenditure level, increasing the government’s fiscal burden and reducing available funds for other capital projects in the economy. However, the EIU expects the fiscal deficit to narrow to 3.2% of GDP in 2022 due to revenue boost from commodity export earnings.

The Democratic Republic of the Congo  

The Democratic Republic of Congo government has announced plans to offer 30 oil and gas blocs for licensing, almost double the initially planned 16 oil blocs to be auctioned. As part of its efforts to develop its hydrocarbon industry, the government intends to offer 27 oil blocs and 3 gas blocs in the licensing round. The planned oil and gas licensing round in DR Congo is supportive of the development of DR Congo’s oil and gas sector. This bodes well for increased productivity and job creation. The prospect of commercial production of crude oil and natural gas will boost the country’s fiscal revenues and export earnings, which will promote exchange rate stability in DR Congo. Increased investment in the oil and gas sector will also have a positive multiplier effect on overall economic activities, which will bolster economic growth and facilitate long term economic development.

The Gambia

The government of the Gambia has announced the prohibition of all timber exports and has permanently revoked all export licences for timber. The decision is part of efforts by the country to comply with the protection given to rosewood, an ornamental timber close to extinction, by the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). The Gambia is one of the five largest global exporters of rosewood. Between 2017 and 2020, the country exported an estimated $50 million worth of timber to China. Therefore, the ban on all timber exports will lower export revenue and widen the Gambia’s current account deficit. The EIU expects the country’s current-account deficit to widen to 8.1% of GDP in 2022 from 4.5% in the previous year. Furthermore, the ban is likely to promote illicit timber trading and smuggling given the heavy reliance of the separatist group, Mouvement des Forces Démocratiques de la Casamance (MFDC) on timber trading.

Tanzania

The International Monetary Fund (IMF)’s board has approved a $1.1 billion extended credit facility for Tanzania and plans to disburse $151.7 million immediately. The financing is the country’s first IMF policy-reform funding program in a decade.

The credit facility will help with economic recovery and address the negative impact of the Russian-Ukraine conflict. It will also improve macroeconomic stability and support structural reforms. SOURCE: UBA