Speech

Evolution and Challenges for Monetary Policy in Africa

May 20, 2025

Bom dia!

The struggles going on here in Mozambique were pivotal in my personal political awakening in the late 1970s as a 12–13-year-old. It has been great in more recent years to have had the privilege to come and visit this beautiful country and its people. And even greater honor to have been asked to give this address on this important occasion commemorating the 50th Anniversary of the Banco de Moçambique.

Feliz aniversário do Banco de Moçambique!

Back to the matter at hand though. The topic I was asked to address today by Governor Zandamela is the evolution of central bank credibility and monetary policy, with a particular focus to the current context in our region.

Gauging the credibility of monetary policy is difficult in the best of circumstances, much less in a setting where measures of inflation expectations are scant and exogenous shocks with consequential effects on output and inflation frequent, as is the case here in Mozambique and indeed much the rest of the Continent.

So what I have opted to do is consider the evolution of inflation over the years, whose control is central bank’s main goal or one of the main goals. By and large, this endeavor has been a successful one over the years. But the last couple of years have shown that this success is not to be taken for granted.

From there, I consider the evolution of monetary aggregates. While an increasing number of central banks that do not have fixed exchange rates have now shifted to inflation-targeting directly, more than 60 percent of such countries state that they are targeting monetary aggregates. The hope is that we might be able to glean something about the credibility of monetary policy even if very indirectly.

Finally, I will discuss two important challenges for monetary policy at the current juncture: the adverse supply shocks of recent years that have caused significant social and economic dislocation; and the growing domestic financing needs of governments as external financing has become scarce.

Evolution of inflation in sub-Saharan Africa: some stylized facts

For the typical sub-Saharan economy, inflation in the 1980s and 1990s averaged 10 percent (Figure 1). This halved to around 5 percent after 2000. But the average number does not capture all the gains countries made in managing inflation. The dispersion of inflation performances narrowed, with the inflation range across countries going from 80 percentage points in the first period to 24 percentage points in the second (Figure 2). Inflation performance has been much more homogeneous across countries since 2000.

Some of this is of course the region following global inflation trends. But also due to important improvements in monetary policy frameworks and other reforms towards greater macroeconomic stability.

• The blue line shows that the decline in inflation since 2000 was a widespread phenomenon also outside SSA. Low inflation in the rest of the world helped to achieve low inflation in SSA as most economies in the region are small and open which means that they are price takers of tradable goods and that imported goods account for a big fraction of the consumption basket.
• Mozambique followed this trend, going from being one of the countries with highest inflation in SSA to one below the median for the region. Average inflation in Mozambique during 1980-99 was 38 percent compared to 7 percent during 2017-24.

Another way to see the gains on controlling inflation is to look at the share of countries with inflation below 10 percent (low inflation), between 10 percent and 20 percent (moderate inflation), and above 20 percent (high inflation). The percentage of countries with low inflation went from 50 percent in the 1980s and 1990s to three-fourths in the 2010s (Figure 3), reversing a bit since 2020 (Figures 4 and 5). As elsewhere, the shocks since the pandemic, including food and fuel price spike following Russia’s invasion of Ukraine has been a source of significant inflationary pressure in the region.

In summary, while the fight against inflation has been remarkably successful, recent developments show the vulnerability of our region’s small open economies where food has a significant weight in the consumption basket to external shocks.

Monetary Aggregates: Quo Vadis?

In the not-too-distant past, monetary authorities had two main choices for intermediate targets: preannounced paths for the exchange rate or for monetary aggregates, which could then be combined with a flexible exchange rate regime. The main point is of course to have a nominal anchor to limit inconsistent policies, anchor expectations and foster transparency.

Over the years of course countries have been migrating to inflation targeting, as the relationship between monetary aggregates and inflation weakened given financial innovation and other structural trends. Our region though still has a higher share of countries indicating that they target money aggregates according to the IMF AREAER. In particular, of the 45 countries of SSA, about half (22) target the exchange rate, one-third (14) target monetary aggregates, and only 5 have inflation-targeting frameworks.

Broad money growth for the median country in SSA has been relatively stable when we compare 1980-99 with 2000-24, around 15 percent (Figure 6). In contrast, broad money growth in Mozambique during 1980-99 was 35 percent compared to 19 percent in the most recent decades. Remarkably, the money multiplier in the region, has been stable for most countries, Mozambique being once again an exception here with some strong movements related to reserve requirements.

What about the relationship between money growth and inflation? For the typical country in Sub-Saharan Africa (SSA), money growth exceeded inflation during both 1980–1999 and 2000–2024. As a result, real money growth averaged 5 percent in the earlier period and rose to 9 percent in the later one. While increases in population and income typically drive up the demand for real money balances, the monetary economics literature also emphasizes that real money demand tends to decline as inflation rises. The lower inflation rates observed during 2000–2024 likely contributed to higher holdings of real money balances. These numbers are very similar to those of emerging markets outside Africa, while advanced economies present lower money growth and inflation rates for both periods, but with similar rates for real money growth (Figure 7).

Unlike the typical SSA country, Mozambique experienced money growth that lagged inflation during 1980–1999. In an environment of high inflation, real money balances can decline despite growth in population and income. However, this relationship reversed in the 2000–2024 period, when real broad money growth in Mozambique aligned more closely with the SSA median. This shift reflects a more stable macroeconomic environment and improved monetary conditions.

Broad money as a share of GDP is a commonly used indicator of financial deepening (Figure 8). In both Sub-Saharan Africa (SSA) and Mozambique, financial deepening gained momentum starting in the early 2000s, coinciding with a period of accelerated GDP growth across the region. As economies expand, the demand for financial services typically rises, fostering the development of a more diverse range of financial products and a more robust financial infrastructure. This trend also reflects the impact of financial inclusion initiatives aimed at expanding access to financial services.

For the average SSA country, broad money hovered around 15 percent of GDP during 1990–1999. It then increased steadily, doubling by 2024. Mozambique’s progress has been even more remarkable: from about 20 percent of GDP in the 1990s, broad money grew rapidly to reach 50 percent by 2015. Despite facing both domestic and external shocks, this level has remained stable in recent years.

Earlier, I emphasized the importance of a nominal anchor and noted that countries opting for monetary aggregates often pair them with flexible exchange rates. A striking trend in Sub-Saharan Africa in recent years has been the divergence between official policy and actual practice: while more countries have adopted de jure flexible exchange rate regimes, the number with de facto flexible rates has declined sharply (Figure 9). To some degree, the degree of exchange rate flexibility in the period before 2015 may be overstated. From the early 2000s to around 2015/16 was a period of elevated commodity prices, much capital inflows to the region that put appreciation pressure on exchange rates which countries often tolerated. It is depreciation pressures that have tended to be resisted. And this fear of floating is understandable. For instance, since 2020, in countries with exchange rate depreciation vis-à-vis the US dollar, inflation has been higher—with a correlation coefficient of some 80 percent.

An important takeaway from the preceding discussion is the large discrepancy between de facto and de jure monetary policy frameworks, which tends to make these frameworks more opaque and less effective, because it undermines desirable features such as a clear objective, credibility and transparency.

Monetary Policy Dilemmas

I want to now turn to two important and fairly widespread challenges for monetary policy at the current juncture in the region: the adverse supply shocks of recent years that have caused significant social and economic dislocation; and the growing domestic financing needs of governments as external financing has become scarce.

Central banks have to navigate shocks like spikes in commodity prices or a disruption in supply chains that increase the price of imports. These shocks typically result in a jump in the price level, a rise in inflation, a decline in output, and an erosion of real incomes. This creates a dilemma for monetary policy which most people in this room know all too well. But the scope of the shock and dilemma it poses is something we often lose sight of.

Take the case of Mozambique. The country had to navigate a significant surge in inflation in the wake of Russia’s invasion of Ukraine. The Bank of Mozambique responded decisively with a sharp increase in the policy rate. Inflation reached 13 percent year-on-year in August 2022 and the Bank of Mozambique took the policy rate to 17.25 percent by September 2022. By July 2023, inflation had decelerated to 6 percent (Figure 10).

Although inflation in Mozambique (as elsewhere) has been declining since 2022, there has still been a remarkable jump in the price level in the last few years: the increase since 2020 here has been 30 percent (Figure 11). Food prices are now 40 percent higher than they were in 2000. The discontent that we have been witnessing in many countries around the world are not too surprising against this backdrop.

Monetary policy of course should not (perhaps even cannot) take the price level back to what it was in 2020. Downward rigidities in prices mean it would be very costly in terms of the loss in economic activity and employment. The truth is that it takes time for real incomes to recover from sudden shocks in price levels.

How then should the dislocation from the price surge of recent years be addressed? To my mind, this is where coordination with the Ministry of Finance is paramount in the face of such developments. Fiscal policy is best placed to alleviate the adverse effects of such development on the most vulnerable households, notably by deploying targeted transfers to them. Here in Mozambique though, unfortunately, the budget has not been able to do this. Indeed, government spending on its cash transfers program to the most vulnerable, the INAS program, has instead declined sharply (Figure 12).

The other challenge relates to the increasing recourse of governments to domestic sources, mainly banks, to finance deficits and make up for constrained external financing.

The government financing from the banking system, including central banks, has been systematically positive in most SSA countries since 2008, and very strongly so since 2015. Again, taking Mozambique as an example, the government has been relying much more on the domestic banking system since access to international markets has been constrained by the hidden debt event.

The first implication is the crowding out of the private sector. The share of bank credit going to the government in the median SSA country increased from 20 percent in 2010 to 35 percent in 2023, while in Mozambique, it went from -5 percent to 45 percent in the same period. Such developments often have significant consequences in terms of investment and productivity. It may even contribute to undermining the diversification that most of our economies so desperately need. External financing tends to be more readily available for commodity exporting projects. In contrast, the non-commodity part of the economy relies more on domestic financing. The more the government taps the domestic market, the less financing there is available to the non-commodity part of the economy, leading to disparities between commodity and non-commodity growth.

The marked increase in domestic banks’ holdings of government debt poses an additional challenge for central banks (Figure 13). Financial systems in the region risk becoming more vulnerable to a sovereign debt crisis. This might push central banks into an area in which financial stability and the pursuit of price stability are no longer complementary but instead contradictory. But even before it becomes a financial stability event, the high concentration of public debt in banks’ balance sheets can also weaken monetary policy transmission, which makes the task of central banks even more challenging.

In sum, for this generation of policymakers, how to navigate these challenges is among the toughest challenges that we face. Success will not just have a big bearing on how monetary policy credibility evolves in the region, but also on economic activity and job creation.

A luta continua; vitória é certa.