Impacts of Inflation on Sub Saharan Africa

Inflation and its consequence in sub-Saharan Africa

Introduction

Most African countries have large proportions of their populations between the ages of 15 to 35 years. Even though this indicate that these countries can look forward to a large pool of youthful labour force, it also implies that governments will need to provide a large range of social, medical, and educational services, and to create employment for these entrants to the labour market.

Majority of these countries after gaining independence from their colonial masters fell into disarray, with Wars and conflict being the norms, coupled with rampant political instability. Hence causing tremendous destruction to the little industrial facilities that were left by the colonial masters together with a heavy human casualties.

Since the mid-1990s most African countries have recorded significant rate of economic growth, with their economies embarking on the path of economic prosperity. But the high growth rates in most of these countries have not been accompanied by high and rising savings ratio over time. In addition to low savings rate, many countries have also not registered high investment ratio.

This rapid rates of economic growth will only contribute to higher levels of economic development and higher standards of living if the benefits of growth are enjoyed by larger sections of the population. Employment generation is generally disappointing. With high rates of population growth and massive rural-urban migration, the urban unemployment rates are high. Even with the implementation of family planning programs, population growth rates in most of these African countries have increased. In addition, educational attainments of the labour force have been gradually rising for some African countries.

Decades on, the economic growth in most if not all countries in Africa has been fuel by the extraction and export of natural resources for which Africa is known to have in abundance. Furthermore, Africa is not only endowed with a considerable amount of natural resources, but also with a very energetic and youthful population whose growth rate is increasing gradually. Unemployment rate is high and most of the population is engaged in subsistence agriculture and mostly residing in the rural areas. Illiteracy rate is high amongst its residence resulting in an ever recycling poverty.

In the recent past, economies around the world are facing rapid increases in commodity prices. In some countries this rapid hike in prices have wipeout most of the income earned by household on food and other basic necessities. Thus living the vast majority of people on fixed income unable to meet their other needs, hence they face a decline in their living standards. Inflation is often defined to mean a general increase in all prices. Even though this definition fails to emphasize a key fact-namely that inflation increases uncertainty. A chief measure of price inflation is theinflation rate, the annualized percentage change in a generalprice index(normally theConsumer Price Index) over time. With a general increase in the price level, fewer goods and services could now be bought by each unit of a currency. Consequently, inflation also reflects an erosion in the purchasing powerof money.

While few African countries have experienced the double-digit inflation, in some individual cases, recorded inflation has been much higher. Record two-digit inflation has been observed in at least four countries – Malawi, Ethiopia, Sudan and South Sudan, between the ranges 21 to 79 percent in the year 2012. The average inflation rate has increased markedly, sometimes five-fold in some countries with harsh social and economic consequences. In other cases the effective controls to keeping inflation in check was introduce but lead to unmet demand which shows up in the form of unusually large real money balances as was the case in Zimbabwe.

Undoubtedly, the state of inflation expectations greatly influences actual inflation and as a result influences the central bank’s ability to achieve price stability. This rate of inflationwhich the public expects to exist in the future isnot possible to measure accurately. So measuring it when they have become de-anchored is certainly not easy, and this is just one of the many uncertainties that economist face and which makes monetary policy making interesting. Whenever expected inflation is a factor in an economic decision, uncertainty about inflation is also likely to be a factor. The uncertainty created about future inflation is indeed one of the most important costs of inflation. Without this uncertainty, economic agents could better plan for the future. This uncertainty confuses the decision making of economic agents and hence reduces economic well-being.

Research background

As it stands presently, economies around the world are facing rapid increases in commodity prices. In some countries this rapid hike in prices have wipeout most of the income earned by household on food and other basic necessities. Thus living the vast majority of people on fixed income unable to meet their other needs, hence they face a decline in their living standards.

As inflation persist, more and more people are seeing a reduction in both their revenue earned and their living standard. This had in many places lead to social unrest, revolutions and an increase in crime rate. Inflation is seen as a breeding ground for instability, as it affect wages, prices, interest rate, investments and unemployment, which are the back bone of any economy.

For many governments, maintaining social harmony, peace and security and an improvement in the standard of living of it citizens are their utmost concern. Therefore, curbing inflation to an acceptable rate and be able to reduce the uncertainty about inflation, while at the same time predict future inflation accurately is the number one interest of government and policymakers.

Inflation and real economic activity

The short-run relationship between real economic activity and inflation still remains unresolved on the scientific discuss. None the less, what people believe to be the prevailing rate of inflation is bound to affect their behavior. Base on the concept that the behavior of current and future inflation has it significance on past inflation it implies that changes in inflation have long lasting effects on future inflation, separate from any effects it has on expected inflation, unemployment or other economic variables. Such long-lasting effect, which is a natural part of the dynamics and structure of the economy, poses a challenge for authorities in their bid to reduce inflation by reducing people’s expectations. Inherent inflation persistence would make economic strategy problematic, and the real economic costs becomes even greater, as one tries to bring down inflation faster.

The conduct of monetary policy had surface as an alternative explanation primarily resulting to inflation persistence. People’s evolution of inflation expectations revolves around the conduct of policy evolution. If policy conduct shifts significantly and persistently, expectations will evolve as the public became informed about the changes. Another possibility is that the nature of the shocks hitting the economy can result to inflation persistence. If these shocks are themselves persistent, in the sense that unfavorable shocks tend to be accompanied by more unfavorable shocks, then persistence shocks can lead to persistence in inflation.

Statement of the problem

Monetary policy as it is practiced these days has been criticized simply because the policy framework and its implementation are found to be unsatisfactory. Profound structural changes are taking place nowadays, including the growing liberalization of markets all over the world, but there are growing concerns about social cohesion and the adverse implications of persistent inflation and unemployment, implying the need for particular attention on proper policy and its direct and indirect effects on the conditions of social groups and classes. How to use economic policy in order to enable improvement of social conditions, without undermining stabilization and competitiveness has never been important.

Since gaining independence, the African continent had faced a series of problems ranging from public strikes, civil disobedience, civil war, and political instability to misguided development policy. These problems and incidences have wreak havoc not just on the economy and infrastructure of those states, but also on the culture and mindset of their people.

Whenever inflation and expected inflation are factors in an economic decision, uncertainty about inflation is also likely to be a factor. The uncertainty it creates about future inflation is one of the most important costs of inflation. This uncertainty shadows the decision making of economic agents and reduces economic well-being. Without this uncertainty, economic agents could better plan for the future. By injecting unnecessary uncertainty into the economic system, inflation may interfere with the efficient manner of satisfying consumers and in so doing, impose substantial costs on society by forcing consumers and business firms to use markets in a way they would not otherwise have used it. It is this disruption of transaction, consumption, and production patterns that help explain why inflation is dislike by the public. Moreover, with persistently high inflation there is the danger that inflation may become self-generating because of changing expectations about future inflation.

To reduce inflation, undesirable readjustment such as higher interest rates and deflationary fiscal policy are often requires. Reducing inflation also has costs associated with it including lost output and higher rates of unemployment. As a result, it is important for governments to control inflation, because inflation has consequence that can bring about a recession.

Thus raising the population of Africa out of poverty and set these countries to the part of sustainable economic growth and development is of vital importance and requires a well-defined, properly structured economic development policy that will cater for all sectors in the economy to ensure a sustainable development.

Objective of the study

Much attention in the analysis of stabilization and structural adjustment programs in developing countries has focused on the political incentives and institutional constraints faced by policymakers. Therefore the rationale for a study such as this can be expressed as follows:

• To develop an appropriate monetary reform policy system that answers to the frustration of government and policy makers in targeting inflation.
• To device a proper model that will concentrate on managing the expectations of inflation in the sub-Sahara countries.
• To create a mechanism that addresses the uncertainties associated with inflation in the sub-Sahara countries.
• To formulate and establish a well-structured strategy to educate policy makers on the welfare cost of inflation and its consequence on the society in the sub-Sahara countries.

Significance and Justification of the study

Our concept of Inflation, it expectation, it uncertainty and it cost, is based on our experience and knowledge of the subject matter. With this view in mind, the researcher sees the important of the work to future researchers that may be interested in carrying out similar study. The work will breaks fresh ground in many directions.

This work intends to propose, proper and well guided policies that will focus the attention of the authorities to set targets, which they believe will put them in the trajectory for development. In Africa, there has been a rather elusive empirical evidence on changes in inflation persistence. This warrants the need to develop the human resources that will focus on the much needed development policies for the continent. Such is my research interest and my career vision; to become a policy analyst. To meet the macroeconomics policy analysis and management so needed in the continent of Africa.