By Caroline Moyo
Harare – The African Development Bank (AfDB) projects that SADC’s year-on-year inflation rate will fall to 6,8 percent by the end of 2021, underpinned by tighter monetary policy measures being rolled out by central banks across the Southern African region.
The lender anticipates spending cuts by governments as they try to maintain fiscal discipline this year.
SADC’s central banks are targeting a low, stable single digit inflation of between three and seven percent to bolster economies’ capacity to address falling output and pockets of exchange rate depreciation in some countries.
“The inflation rate is one of the indicators used to measure Southern Africa macroeconomic convergence,” the AfDB says in its report titled Southern Africa Economic Outlook released this week.
It says economies had been able to contain the inflation rate below the SADC macroeconomic convergence target of a single digit from 2011 to 2019, except for 2016.
“Having declined from 6,9 percent in 2011 to 5,7 percent in 2015, inflation increased sharply to 11 percent in 2016 before declining to 7,1 percent in 2018. In 2019, inflation jumped up to 9,8 percent. However, inflation is projected to rise in 2020 to 12,5 percent before dropping to 6,8 percent by 2021 due to some renewal of tighter monetary policy and lower government expenditure.”
Two factors that could drive the inflationary surge under COVID-19 include several economic stimulus packages announced by governments to fight the pandemic and central banks’ moves to cut interest rates and encourage consumption.
Central banks in Zambia and South Africa have cut Repo rates already, but Zimbabwe three weeks ago moved its policy rate up to 40 percent, from 30 percent most of last year.
“Since mid-2019, Botswana, Namibia, South Africa and Zimbabwe have cut their benchmark repo rates as inflationary pressures eased,” says the AfDB.
“With COVID-19, interest rates in the region’s major economy – South Africa was reduced to a historical low. Easing inflationary pressures have also been aided by declining consumer spending associated with consolidation measures and firm’s scaling back on investment expenditures. For example, in the worst-case scenario, inflation in South Africa are projected at 5,2 percent and 4,6 percent in 2020 and 2021 respectively.
“Tight monetary policy in many countries made it possible to reduce inflation, with single-digit inflation projected in countries such as Botswana, Eswatini, Mozambique and Namibia for 2019 and 2020. Except for Angola and Zimbabwe, all the countries are forecast to continue enjoying single-digit inflation in 2020 and 2021.
“In São Tomé & Príncipe, the peg of the national currency, the dobra, to the euro helped keep inflation low. Zambia’s inflationary pressures were largely pushed by exchange rate depreciation and food price increases. All the region’s countries experienced a depreciation of their currencies against the US dollar except for Mozambique and São Tomé & Príncipe.
“Three countries that had significant depreciation of their currencies between 2017 and 2019 were Angola (95 percent), Zambia (30,5 percent) and Madagascar (14 percent),” notes the AfDB.