Accelerated growth - Inflation and Interest rate factors of Africa

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Dr. H. Kwame Afaglo © 2010

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. As expected the family food basket and ability to afford it for all families varies from state to state and status on the continent of Africa and other developing economies. Poverty eradication is been the focus of all governments from agrarian communities through mechanised towns and services driven cities. This holds for all countries, developed and developing economies alike, for as long as some number of their citizens are labelled poor. The terminology poverty eradication has undergone

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. philosophical transformations as poverty mitigation and of recent its pro-poor. The latter two terminologies emphases that poverty is perpetually going to be with humans, however the former school of thought believes in ending deprivation. This study is a hybrid of the two concepts which is accelerated growth. Pro-poor concept is associated with economies that have tailored their policies at mitigating and empowering their citizens to earn more than two US dollars ($2) a day.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. However, the pro-poor definition is relative to the economic position of the state or country. The relativity of the pro-poor definition would continuously keep some people and states or countries poor, despite the progression in their incomes above $2 a day. With accelerated growth, people and states would leap frog the poverty line. Hence, accelerated growth is the systematic process of creating the sufficient conditions that empowers individuals to generate and expand surplus.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Currently most African states have the necessary conditions for growth, nevertheless, accelerated growth requires sufficient conditions of which are parameters bound. Relevant topics under accelerated growth include the following; Fiscal and monetary policies - Inflation and interest rate, etc Agriculture and food sufficiency Infrastructural development Transportation Trade – emphasis intra-Africa trade Health Enterprise – emphasis on ‘off-record’ sector (informal). Housing Energy

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Consumer Price Index (CPI) Having discussed Health and Enterprises earlier and published as: http://www.wiziq.com/tutorial/50589-Short-Life-expectancy-in-Africans-Alarming and http://www.wiziq.com/tutorial/52647-Re-engineering-Informal-enterprises-in-Africa-Accelerated-growth respectively. This presentation would focus on an aspect of fiscal and monetary policies being Consumer Price Index (CPI) and Interest rates for economic growth.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Inflation and Interest rates are sensitive economic tools in managing a country. They (inflation and interest rate) are a lock and key relationship. In that, interest rate is the tool needed in fixing an unhealthy CPI as hyper-inflation or deflation. African states Consumer Price Index (CPI) is historically (last decade) been characterised with deflation to slow growth and hyper inflation. Generally, the CPI of Africa lacks the sufficient position for catalytic economic growth. The data on the next slide depicts the historical CPI for Africa for a decade.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Historical CPI of Africa Fig. 1 Sourced from IMF and IFS Although the continental average is shown a significant reduction in CPI, it is not sufficient to propel entrepreneurial drive, increase the velocity of money, increase employment and development in general. Based on earlier published material the

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. defined sufficient CPI for individual African states should be in the region of a maximum 5.8 per cent and minimum 1.8 per cent. Simply expressed as: [1.8% = CPI =5.8%] Fig. 2 Sourced from IMF and IFS

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Based on the graphical representation, it is clear that Africa’s CPI is generally higher than the maximum defined condition of accelerated growth. Hence the characterised slow economic growth of the continent is partly attributable to unhealthy CPI. As a continent with over fifty states, its worth grouping them on historical CPI bases for analytical purposes. Identifiably, there are four CPI groups, and namely: Healthy, Mixed, Unhealthy and Extremely unhealthy.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Healthy – Here, states that have maintained the defined accelerated growth CPI sufficient condition over the decade under study. Tunisia is the only state in Africa in this category, with their least CPI as 1.98 per cent, and as of year 2008 it recorded 5.26 per cent. Tunisia’s economic success is acknowledged globally and noted in Wikipedia as: ‘Tunisia is in the process of economic reform and… Prudent economic and fiscal planning have resulted in moderate but sustained growth for over a decade. ..In the World Economic Forum 2008/2009 Global Competitiveness Report, the country ranks first in Africa and 36th globally for economic competitiveness, well ahead of Portugal (43), Italy (49) and Greece (67).’ (2009)

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Mixed – CPI measurements are mostly within the sufficient condition and few times out but with a tolerance of ± 5 per cent. Implies CPI from – 3.2% to + 10.8%. States in this category in an alphabetical order are: Algeria, Benin, Burkina Faso, Cameroon, Cape Verde, Central African Republic, Congo Republic, Cote d’Ivoire, Djibouti, Equatorial Guinea, Mali, Mauritius, Morocco, Niger, Senegal, Seychelles, Tanzania, Togo and Uganda. These are the progressive and potentially vibrant economies.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Unhealthy – CPIs below 50% and out of Mixed and Healthy categories. States experiencing an unhealthy CPIs may at times record appreciable CPI, however this is not continuous. Included in this group are: Zambia, Congo Democratic Republic, Sudan, Sierra Leone, Sao Tome and Principe, Rwanda, South Africa, Nigeria, Namibia, Mozambique, Mauritania, Malawi, Madagascar, Libya, Liberia, Lesotho, Kenya, Guinea-Bissau, Guinea, Ghana, Gambia, Gabon, Ethiopia, Eritrea, Egypt, Chad, Burundi and Botswana.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Extremely unhealthy – Historical CPIs above 50 per cent and technically called hyper-inflation. Besides Zimbabwe, Angola is the other state that has experienced hyper-inflation in the ten years under study. Since all the states of Africa are unable to attain and remain consistent within the CPI sufficient condition of accelerated growth besides Tunisia, it calls for re-dressal using interest rate as the main tool. Accelerated growth is a concept that seeks to propel African states through emerging markets and ‘feeder states’ hold to developed economic status within defined time.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. States in the Mixed and Unhealthy to Extremely unhealthy groups are all major sources of raw material imports for developed and advanced developing economies. This account for, Africa been termed a ‘feeder continent’ for both material and human resources. Interest rate There are two phases of interest rate as ventral bank end and commercial bank position under this study. Inferring from the CPI sufficient condition, it is imperative that the two phases of interest rate must be closely linked and derived from the CPI condition of accelerated growth.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. With inflationary rates of African states mostly a Mixed and Unhealthy, its is the responsibility of ventral banks and commercial banks to mop out the high cash base of Africa, increase the velocity of money and provide facilities for entrepreneurial activities, resulting in economic buoyancy. Ventral bank position - Ventral banks are responsible for interest rate determination in juxtaposition with their respective governments. Base rate, Treasury bill, Savings rate, bonds and other tools are a prerogative of ventral banks for mopping out cash out of the economy or otherwise. Emphases would be placed on mopping

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. out cash and boosting business activities, because most Africa states are experiencing CPIs out of accelerated growth condition. It is recommended that the base rate as determined by ventral banks must be the minimum of the CPI condition, which is 1.8 per cent. Then Savings and Treasury bill (91 days) rates be equivalent to CPIs maximum condition as 5.8 per cent. These conditions must be achieved in a medium to long term and in a stage wise system as indicated on slides 22, 25 and 26. Expected end results of ventral banks interest rates condition are simply represented as: [Base rate = 1.8%] [Treasury bill (91 days) rate = 5.8%] [Savings rate = 5.8%]

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. With an extremely low base rate from ventral banks conversely to the situation prevailing currently, it would serve as sufficient condition for boosting business activities per commercial banks. That of Treasury bills and savings rate on the other hand pegged higher than base rate, it represents a faster and risk averse return for individuals and importantly mopping out of cash from the economy. Both would eventually result in significant drop in unhealthy CPIs, increase in employment and hasten velocity of money.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Commercial bank position – Of main distress is the prevailing high and unattractive commercial banks lending rates for business establishments, that has lead to a slowing down of African investments, continuous folding up of African owned enterprises, competitively slow market expansion of African transnational corporations, uncompetitive prices of African finished products and high unemployment rates. The proposed commercial bank lending rate should be cupped as the upper limit of CPI, being 5.8 per cent. Simple stated as: [Commercial bank lending rate = 5.8%] This would stimulate business activities with specific

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. reference to business establishments increase borrowings for product diversification as well as new territorial expansion (African market penetration), increase productivity and invariably reduce unemployment. As of year 2008, the commercial bank lending rates in Africa did range from the lowest as 6 per cent to a deterring high 32.4 per cent of which excludes Zimbabwe. It is evident that none of the states did meet the sufficient condition as proposed under accelerated growth (5.8 per cent). Further none of the ventral banks in Africa likewise did set the conducive pre-condition for the commercial banks as 1.8 per cent for accelerated growth. Ventral banks base rates were recorded as between 3.25 per cent to 28 per cent.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Because none of the Africa states did meet the proposed interest rates sufficient conditions for accelerated growth, it is imperative that the continent must embark on stringent economic measures. Implementing the tough fiscal policies must be lead by ventral banks and given full government support. Based on the wide variations in interest rates of states the stepwise scheme would be grouped in three categories. The three categories are derived from the CPI categorisations. Each stepwise scheme in achieving the desired sufficient conditions of accelerated growth is schematically represented as:

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Interest rate scheme, category A. Suitable for states with ventral bank base rates, less than 5.8 per cent and more than the recommended 1.8 per cent. Unfortunately, states within this bracket mostly have high unappreciable high CPI. Fig 3. Recommended interest rate for category A. C.b. stands for commercial bank and V.b as ventral bank.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. States in this category include; Morocco, Mali, Guinea-Bissau, Senegal, Cote d’Ivoire, Benin, Togo, Burkina Faso, Seychelles, Central African Republic, Cameroon, Gabon and Congo Democratic Republic. Since Libya and Algeria are relatively closer to attaining the accelerated growth interest rate condition but not the inflation, emphases be placed on mopping out cash from their system with ventral banks tools as Treasury bills, savings and bonds among others. Further they could introduce a relatively lower corporation tax to attract both

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. African Transnational corporations (ATNC) and non-African Transnational Corporations (TNC). Local investors need to be encouraged and trained as mentioned in earlier write up (Re-engineering the Informal enterprises in Africa – accelerated growth) for global market penetration. These tools would stimulate consumption and production, and subsequently accelerated growth. Interest rate scheme, category B States with base rates that ranged between 5.8 per cent and 10.8 per cent for year 2008 (reference year).

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Some of the states in this category could work towards category A and achieve the sufficient conditions a shade earlier. The proposed tough yet rewarding interest rates policies vis-à-vis time frame is shown below, with states in this category as; Egypt, Nigeria, Mozambique, Namibia and Burundi. Although Cape Verde and Gambia fall in this category their CPIs are comparable with category A. Hence they must design a hybridised scheme that would ensure they attain the desired sufficient condition. Fig. 4 proposed interest rate scheme. C.b. stands for commercial bank and V.b as ventral bank.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Interest rate scheme, category C Here, African states with ventral bank base rates higher than 10.8 per cent and unattractively high commercial bank lending rate. The recommended interest rate scheme is shown in the schematic below. Fig. 5 proposed interest rate scheme. C.b. stands for commercial bank and V.b as ventral bank. Tunisia is the only African state that has achieved the

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. sufficient condition in terms of inflation and interest rate ascribed for accelerated growth. Hence, Tunisia’s monetary and fiscal position becomes the learning point for all African states. Theoretically, should most and preferable all African states achieve the accelerated growth condition on inflation, interest rate and its follow-up favourable macroeconomic indicators as; governments running budget surplus vibrant business or enterprises operations ventral banks autonomy high employment rates Poverty amelioration Hasten velocity of money, etc.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. this would set the platform ready for the continent to shed-off its developing economy status for an advanced economy taxonomy. Besides the projected accelerated growth policy of empowering individuals out of need, it also underpins the planned African currency unification project, would eventually re-position her in the leading role of bargaining in international trade and other global interactive activities, of which has eluded her for over a century.

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Accelerated growth

Accelerated growth - Inflation and Interest rate factors of Africa. : Accelerated growth - Inflation and Interest rate factors of Africa. Reference Ahlenius, H. (2008) Pro-poor growth, absolute and relative definition Available from http://maps.grida.no/go/graphic/pro-poor-growth-absolute-and-relative-definition [Accessed 24 January 2010] The World Factbook (2009) Available from https://www.cia.gov/library/publications/the-world-factbook/geos/ag.html [Accessed 28 January 2010] Wikipedia (2009) Economy of Tunisia Available for http://en.wikipedia.org/wiki/Economy_of_Tunisia [Accessed 26 January 2010]