FIVE sub-Saharan African central banks have bucked a global trend by increasing borrowing costs this year to ward off inflation and defend their currencies. They’ve had little success.
On Tuesday, Uganda’s central bank boosted its benchmark rate by 100 basis points for the second time this year, while Namibia raised its repurchase rate by 25 basis points on Wednesday. Angola, Kenya and Ghana have also tightened monetary policy and South Africa has indicated it will follow suit soon. Brazil is the only major emerging market outside Africa to have increased rates in 2015.
While Federal Reserve Chair Janet Yellen announced an unchanged monetary policy stance on Wednesday, the prospect of U.S. rates rising later this year has placed currencies globally under pressure.
African nations have fared worse than most due to the compounding effect of lower prices of commodities that account for the bulk of their exports. The price of Brent crude oil is down 44% over the past 12 months, while copper has dropped 14% in London trading.
“Many sub-Saharan economies are paying a heavy price for not having implemented tighter fiscal and monetary policies when market conditions were favourable,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
“It’s one thing for vulnerable sub-Saharan economies to hike rates,” he said. “It’s quite another to restore financial stability at a time when market sentiment remains fragile, oil prices have fallen sharply and the Fed is preparing to hike rates.”
Ghana’s cedi has tumbled 26% this year against the dollar, Angola’s kwanza and Uganda’s shilling have fallen 14% and Kenya’s shilling has declined 7.2%. Namibia’s dollar, which is pegged to South Africa’s rand, is down 5.7%. While inflation has slowed in Namibia during the course of this year, its been accelerating in the other five nations.
At least 15 central banks in sub-Saharan Africa set interest rates monitored by Bloomberg.
Some African governments have to shoulder part of the blame for the deterioration in their currencies, said Razia Khan, head of Africa macroeconomic research at Standard Chartered Plc in London.
“There has been a material deterioration in fiscal policy across a number of countries,” she said by e-mail. “Plans for increased spending and the admission of larger-than-expected fiscal deficits will keep up the pressure on monetary policy in order to compensate and deliver some semblance of macroeconomic stability.”
The benchmark lending rate stands at 22% in Ghana, 13% in Uganda, 10% in Kenya, 9.25% in Angola, 6.5% in Namibia and 5.75% in South Africa. U.S. rates have been near zero since 2008.
“The model of increasing interest rates to strengthen your exchange rate can only take you so far,” Antoon de Klerk, a fund manager at Investec Asset Management, said by phone from London on Wednesday. “If you continue importing and people see your exchange rate depreciate from year to year, as happened in Ghana, then it does not matter if you pay 9 or 10 or 11% for money, it’s simply not enough to attract capital.”
The International Monetary Fund last month lowered its 2015 growth outlook for sub-Saharan Africa by 1.25 percentage points to 4.5%. While higher interest rates may damp consumer demand and further dull the region’s economic prospects, the effect will be limited, said Cobus de Hart, an analyst at NKC African Economics.
“In a lot of African countries, growth is primarily driven by primary industries,” such as mineral extraction, he said by phone from Paarl, near Cape Town. “The effect of higher interest rates is not as large as compared with more developed countries.”
Central banks in countries such as Ghana and Kenya are raising rates to defend their currencies and reduce price pressures on imports rather than target consumer demand, according to Yvonne Mhango, an economist at Renaissance Capital.
“Very few households borrow to consume in sub-Saharan Africa,” she said by phone from Johannesburg on Wednesday. “In terms of the feed-through to GDP growth in those countries, tightening of monetary policy is relatively weak.”
Several other African countries may also have to raise rates as concerns over a depreciating currency and deteriorating inflation outlook outweigh those about growth. Top of the list are Mozambique, where the new metical has dropped 15% this year against the dollar, and Zambia, which has seen a 14% decline in the value of its kwacha.
“Longer-term, a stable macroeconomic backdrop is the best guarantee of future growth,” said Standard Chartered’s Khan. “There is no compelling growth argument to suggest that African central banks should not be tightening in response to a deteriorating inflation outlook. Things just do not work that way.”
—With assistance from David Malingha Doya in Nairobi.