High Public Debt Worsening Inflation in Sierra Leone, Others – IMF

The International Monetary Fund says the high public debt level of Sierra Leone and other Sub-Saharan African countries is worsening inflation in the various countries.

The IMF disclosed this in a blogpost titled, ‘How Africa Can Navigate Growing Monetary Policy Challenges’ released on Monday.

According to it, Sub-Saharan African countries are faced with monetary policy challenges.

It said, “Sub-Saharan African countries face important monetary policy challenges. The pandemic dented economic growth, and even now the recovery is likely to leave output below the pre-crisis trend this year. Several countries in the region have also seen inflation increase, a challenge that is in some cases compounded by fiscal dominance emanating from high public debt levels.

“Many of these economies may also face capital outflows as the major central banks in advanced economies withdraw policy stimulus and raise interest rates in the period ahead.

“The economic impact of the conflict raging in Ukraine—including the attendant sharp rise in energy and food prices—is likely to further intensify the challenges.”

The Washington-based lender said countries with managed or free-floating exchange rate regimes could benefit from allowing currencies to adjust while focusing monetary policy on domestic objectives.

According to it, many countries in sub-Saharan Africa with floating exchange rate regimes have characteristics and vulnerabilities that can limit the benefits of fully flexible rates.

It said shallow markets could amplify exchange rate movements and yield excessive volatility.

It said, “High foreign-currency-denominated liabilities are also a key vulnerability in several economies. In the presence of large currency mismatches on balance sheets, exchange rate depreciation can undermine the financial health of corporates and households.

“And weak central bank credibility can cause exchange rate changes to have a bigger effect on inflation (high pass-through). Such currency mismatches and high pass-through can cause output and inflation to move in opposite directions following shocks, thereby worsening the tradeoffs that policymakers face.

“There is also evidence that the exchange rate pass-through in low-income countries is substantially higher than it is in more advanced economies, which poses a particular problem given the often heavy dependence on food and energy imports.”