Monetary Policy of the Central Bank: The case of South-Africa and Nigeria


the_nature_of_south_africa_by_hmsdexter

Which monetary policy should a central bank adopt when faced with both insubordinate inflation and weak economic growth?

According to Theory, the central bank to fight inflation must indeed increase interest rates. The effect of this policy, however, depends on the origin of inflation. That is why the central bank must be careful in adopting this measure. It is likely to slow or erode economic growth. If the central bank is more interested in targeting a certain measure of inflation, then it will choose a manipulation of interest rates. We will see the case of two African countries Nigeria and South Africa. The main source of dollar or currency in the country comes from oil exports. The other source of foreign currency comes from foreign investments in the country. When crude oil prices and foreign direct investment are down, the country has fewer currencies. In order to import products, economic agents with foreign currency months will therefore increase the cost of imported products, which will increase the overall price level. This phenomenon is known as cost inflation. After analyzing the origins of the inflation, it would be important to know how the real sector is doing?

NIGERIA

1. Prices

The latest publications of inflation statistics are alarming. Inflation rose from 18.5% in November to 18.6% in December, marking the largest increase since October 2005. Annual average inflation continued to rise, from 15.0% in November to 15, 7% in December, an increase of more than ten years. One of the reasons for this situation is the shortage of dollars caused by the fall in crude oil prices, Nigeria’s main export. The main source of dollar or currency in the country comes from oil exports. The other source of foreign currency comes from foreign investments in the country. When crude oil prices and foreign direct investment are down, the country has fewer currencies. In order to import products, economic agents will need more foreign currency. The shortage of external currency will led therefore to an increase the cost of imported products, which will affect the inflation rate. This phenomenon is known as cost inflation. After analyzing the origins of the inflation, it would be important to know how the real sector is doing?

2.The Gross Domestic Product (GDP)

According to the table below, the rate of growth of the GDP seems to rejoice itself in the negative zone. There is no need to have a PhD in economics to conclude that Nigeria experienced a recession during the year 2016.

3. The Central Bank and the interest rate

According to the situation of the real sector and the dynamic of inflation, the central bank of Nigeria is facing:

a.The highest price increase since October 2005.

b. Weak economic growth.

In such an atmosphere which monetary policy do we apply? To counter cost inflation, the central bank can raise interest rates. This is the normal route taken by this country for almost a year. It increased its rates from 11% in February to 12% in March. This rate will be maintained at the same level between March and June 2016 when from July 2016 to January 2017 it will rise to 14%. Despite its different manipulations of interest rates, inflation continued to climb showing the limitations of monetary policy. At the same time growth has continued to contract.

SOUTH AFRICA

1. Prices

According to the publications of the Central Bank of South Africa the rate of inflation climbed 6.6 in November 2016 to 6.8 in December. Unlike Nigeria, where the main source of inflation is linked to shortage of foreign exchange, inflation in South Africa (which enjoys fairly solid reserves) is the result of domestic factor (food, housing). In Nigeria, the strong correlation between gasoline prices and transport was the basis for rising inflation. In South Africa, transport cost inflation was negative in December 2016.

The Central Bank and the interest rate

According to the situation of the real sector and the dynamics of inflation, the Central Bank of South Africa therefore does the following:

a. The largest price increase 6.8% since February 2016 (7%).

b. economic growth.

In such an atmosphere which monetary policy to adopt? To combat cost inflation, the central bank can increase its interest rates. This is the normal route for this country. It increased its rates from 6.75% in February to 7% in March 2016. This rate will be maintained at 7% between March 2016 and January 2017. South Africa had succeeded in bringing its economy out of the red zone.

The different points of this analysis

a. One of the reasons for the rise in inflation is the shortage of dollars caused by the fall in crude oil prices, Nigeria’s main export when in South Africa inflation is the result of domestic factor (price increase of food and housing)

b. Nigeria experienced a recession during the year 2016 when South Africa remained stagnant toward the end of the year 2016. Despite its different manipulations of interest rates inflation in Nigeria continued to climb revealing the limitations of monetary policy. Nigerian should maybe try to look for a way to boost back growth through a sound fiscal policy.

 

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