Africa May Ignore IMF Rate Call

| Monday November 1, 2010 00:00

The pressure to achieve growth is likely to be particularly acute in countries such as Nigeria, Zambia and Uganda that face elections next year.

While inflation concerns may gradually increase in some African nations, early rate hikes would go against many central banks' drive to get street banks to lower their lending rates.

'The IMF has said it's maybe time to tighten a bit, but I think we probably won't see too much tightening in the short term,' said Brian Mugabe, head of research at pan-African brokerage Imara. 'A lot of the central banks have been trying to encourage more lending, and increasing rates is not likely to help that.'

The IMF said on Monday last week that sub-Saharan [African] countries should temper the expansionary policies introduced in reaction to the 2008/09 financial and economic crisis to build up their defences against any future shocks to their systems.

But the only central bank that appears to have heeded the message is Botswana -- and even there the diamond producer stopped short of a rate increase this week, instead increasing bank reserve requirements from 5 percent to 6.5 percent.

While Nigeria's central bank surprised investors with a 25 basis point increase in its benchmark rate last month, analysts described it at the time as only a token move against inflation, now at 13.6 percent.

More determined monetary policy action in Africa's most populous nation will have to wait until the ruling People's Democratic Party (PDP) chooses its candidate for president, they added. That will in all likelihood be incumbent Goodluck Jonathan, but it is unclear when the decision will be made, with parliament approving a constitutional amendment on Thursday that allows the scheduled January election to be delayed to April.

That means monetary and fiscal policy is unlikely to change any time soon.

'In Nigeria, I really think it's going to be unlikely until the PDP nominates Jonathan,' said Coura Fall, frontier Africa analyst at Citibank in Johannesburg. 'It's more a question of elections and political interference.'

In Uganda and Zambia -- where, like Nigeria, central banks have shouted themselves hoarse over the last year to get banks to lower commercial lending rates -- likely tight election contests make monetary tightening and less spending unlikely.

A bumper harvest in Zambia has also helped keep a lid on food inflation, while the kwacha's ZMK= 12 percent gain against the dollar since June has slashed the cost of imports, all of which reduces the need for interest rate hikes.

Mixed MessagesThe IMF's cautionary message, delivered at a conference in Nairobi on Monday [last week], was even clouded by some of its own projections earlier in the month, notably a trimming of next year's regional growth forecast to 5.5 percent from 5.9 percent.

Lingering concerns about economic conditions in the United States and Europe -- the main trading partner of Kenya, east Africa's biggest economy -- are another cloud of uncertainty hanging over the medium-term horizon. Still, inflation may not be firmly in check in many of Africa's nascent capital markets, so rate hikes may eventually be needed -- but not in the near-term.

Kenya's central bank left its key rate on hold at 6 percent a month ago, despite a forecast drought that has many analysts thinking food price increases, a major component of most African inflation baskets, could be on the way.-(Reuters)