African central banks have resolved to change the approach used to control prices amidst external shocks that threaten the future of investments on the continent.
One of the approaches being mooted by experts is a shift from monetary aggregate targeting to inflation targeting in the context of a flexible exchange rate.
Arto Kovanen, Technical Assistance Advisor on Monetary and Capital Markets Department at International Monetary Fund said while both models have price stability as a long term objective, monetary aggregate targeting operates for money reserve as primary short term objective while inflation targeting operates under policy rate as short term objective.
He said that according to the recent meeting in Washington in April this year, many central banks showed a need to move away from monetary to inflation targeting as it is not adequate to address current needs.
IMF pledged to help provide technical assistance in a wide range of reforms to facilitate smooth and successful move to inflation targeting in Sub-Saharan Africa.
Some of the benefits expected from inflation targeting are that the promotion of transparency and accountability helps develop longer-term financial instruments.
Governors were concerned that inflation will make Africans poorer unless their incomes increase faster than inflation.
Experts say that persistent rise in commodity prices would frustrate the objective of attaining long term economic growth, because it hinders people’s ability and willingness to save and invest and businesses with long term returns.
It was noted that effective commitment to an inflation target hinges on how implemented, and depends on macro-financial conditions.
Recently, the government selected a team of 11 to conduct macro-prudential assessment and stress testing in the banking sector, identify, monitor and publish associated risks.
The team from the central bank is composed of monetary experts to take suitable measures to prevent inflation from rising.
Thomas Kigabo, Chief Economist at the central bank, said the institution intends to develop the financial sector in a bid to develop the payment systems to reduce the level of currency in circulation out of the banking system and increase the bankers’ capacity in policy oriented researches.
The experience shared from Latin America where IT was adopted indicates that inflation targets have outperformed the rest in keeping inflation low and stable.
It is said that implementation of IT requires coordination between fiscal and monetary policy, well functioning money and foreign exchange markets and development of technical capacity including to forecast inflation and to understand the transmission channels.
Government has in the past adopted a system to bring on board key stakeholders involved in economic management to coordinate policies and actions, a move that helped to mitigate the impact of supply shocks on inflation.
Kigabo said the central bank is challenged by the instability of money demand and money multiplier, lack of flexibility in the implementation of the monetary programmes, and weak monetary transmission mechanism and an important lag in the relationship between money supply and prices.
In an interview with Kornelio Koriom Mayik, Governor of the central bank of Southern Sudan, his institution expects to learn from other countries that are more advanced.
“We are only one year with no experience but we hope to learn from our counterparts who are well established and share similar economic conditions,” he said recently during the African central bank governors meeting in Kigali.
Ismael Dem from West Africa said the major problem has been to contain inflation because of external shocks and crisis in Mali and Guinea Bissau.
“Inflation reached 10 per cent in Mali because of the crisis and it’s a great challenge to contain it especially with the supply shock where we rely on imports of food stuffs like milk and rice,” said Dem in an interview.
The transition to IT may not be practical because of constraints including institutional, capacity, macroeconomic and market development that require proper institutional settings for policy implementation.