This Bulletin examines how global monetary shocks in 2013 affected a range of emerging and sub-Saharan African (SSA) countries, and analyses potential policy issues in responding to these. These policies include the potential role of exchange rate policy as one of a range of policies that African countries can use to respond to global monetary shocks.
It provides a macro-economic update on selected key variables such as gross domestic product (GDP), trade, current account and government balances, and vulnerability, but also on private capital flows. The bulletin uses data from a variety of sources, including the World Bank, IMF, African Development Bank and other similar institutions.
Key Findings:
- This Bulletin confirms that African countries benefited from monetary easing in developed countries, but that as such quantitative easing (QE) is rolled back they are likely to suffer some less benign consequences. They will find it more difficult to attract investors for their sovereign bonds as more developed country investors find higher yields in their own countries and the costs for African governments are likely to go up.
- SSA is much more financially integrated today than a decade ago, and much more reliant on short-term bond and equity inflows than even 3–4 years ago.
- The main source of instability in 2013 was the timing, extent and expectations of the reversal of unconventional monetary policies in developed countries, especially the United States.
- While the impact has been slight so far, the actual tapering of monetary support is likely to lead to weaker conditions which may make it more costly and difficult to attract short-term capital in countries with weak fundamentals (e.g. high current account and government deficits).
Recommendations:
The study suggests several general policies for African countries to consider in responding to short-term capital flows.
- Use macro-economic policies (fiscal, monetary and exchange rate) to smooth the potential impact of increased inflows on increased inflation, exchange rate appreciation and fiscal expansion and to limit volatility.
- Develop financial sector policies to manage, regulate and maximise the potential of short-term equity and private bond flows.
- Ensure the proceeds of government bonds are used to invest in developing productive capacities or to fund a cost-lowering restructuring of debt flows.
- Monitor global monetary conditions in order to determine the appropriate timing of bond issuances.
- Consider the use of capital account management measures in cases of excessive volatility, but these may only be needed if the above policies are exhausted or do not work.
