Central banks and finance ministries must stand ready to head off threats of inflationary pressure from rising food prices that could undermine an otherwise “positive” outlook for growth in sub-Saharan Africa, the World Bank said yesterday.
The bank also warned that a default by a eurozone member state would trigger a slump in European consumer and business confidence that would deliver a blow to growth in Africa.
The Bank upgraded its forecast for growth across sub-Saharan Africa (SSA). Its forecasts, contained in its Global Economic Prospects report, showed growth in SSA of 5.0% this year accelerating to 5.7% in both 2012 and 2013, up from its January forecasts of 4.7%, 5.3% and 5.5% respectively.
“It is a positive story,” report author Andrew Burns told Emerging Markets, adding that the region had been successful in withstanding the impact of the surge in food prices last year thanks to good harvests.
“But if next year is a good crop year but not a great crop year you are not going to have that same local impact helping to minimise the impact of global prices,” he said.
“We expect that the food pressure that we observed in 2010 to continue in sub-Saharan Africa and if international prices rise any further then the situation could become quite serious.”
He said the inflation debate in SSA countries was more “tricky” than in middle income countries such as Brazil and India because there was less evidence of domestically-driven inflation outside food and fuel.
He said central banks could only afford to “look through” short-term price spikes if inflation expectations were well-anchored. “There are a number of countries in sub-Saharan Africa where it is not obvious that they are well-anchored,” he said. “Countries have recent experience of high inflation and the mechanisms for central banks to communicate are relatively small.”
The problem was compounded by the fact that the weight of food and fuel in the average household’s consumption basket was large. “Where there are indications of second-round effects developing, then monetary policy tightening is required,” he said.
However he added: “We are not saying that countries should tighten policy strongly now but we are saying they need to be very careful and very prudent to ensure that these prices pressures don’t generalize within the economy.”
Burns said countries had room to make great use of fiscal policy to head off the threat from rising prices. “Policy has been tightening but could be tightening more quickly,” he said. “This would also help rebuild some of the buffers that were drained in the reaction to the crisis.”
The Bank also warned a further downturn in the eurozone financial crisis could hit economic growth in Africa. It said a stress test run by the European Central Bank showed a sovereign debt restructuring would cut eurozone growth by 2 percentage points.
Burns said the impact on developing countries would be “significant”. “We see the impact of growth of between 1.5% and 2% as a result of that with countries in sub-Saharan Africa being at the lower end of that range,” he said.