Fix Africa’s Macro Economic Instability with Independent and Credible Central Banks

Elements of Macro Economic Instability. The International Monetary Fund (IMF) characterizes macro-economic instability with absence of balance, disequilibrium, or inability to be financed sustainably for key economic relationships like aggregate demand and supply, balance of payments (current, capital, and financial accounts), government revenues and expenditure, savings, and investment. Causes include external shocks like terms of trade as commodity prices plummet, capital flight from interest rate disparities or geopolitics of catastrophes like Covid19, Russia-Ukraine and Middle East wars and US tariffs trade war. Self-inflicted choice of policies be they fiscal, monetary, macroprudential, trade or investment can drive instability. Key markets and sectors like banking may fail from elevated NPLs, Mark to Market bond losses, excessive cost of funds, low growth of credit to private sector, interbank market freeze and bank runs.

Real GDP growth and per capita income may contract or stagnate. Inflation (price of goods and services) may be double digit high and galloping. Interest rates (price of money) could be usuriously high. FX rate (price of foreign currencies) could be hyper depreciating.

Current account deficits may widen beyond five percent of GDP benchmark. Foreign reserves may get depleted below the three-month imports’ threshold. Budget deficit may be above the three percent of GDP standard. Sovereign credit ratings may be downgraded to default status.

GDP recessions, prohibitive cost of living, high interest rates, and currency depreciations

GDP contraction drives many people into poverty and unemployment. Sudan civil war since April 2023 between The Sudanese Armed Forces (SAF) and the Rapid Support Forces (RSF) saw real GDP contract to negative 20.8 percent in 2023 and negative 23.4 percent in 2024.

South Sudan’s GDP per capita has decelerated calamitously by negative 76.5 percent from $1,080.1 in 2025 to $351 in 2024.

On the other hand, Zimbabwe hyper-inflation rose to 686.8 percent in 2024, South Sudan 216.5, Sudan 151.1, Burundi 36.3, and Nigeria 30.

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Countries battling high inflation react by hiking their central bank monetary policy rates to reduce money supply.

Reserve Bank of Zimbabwe’s stands at 35 percent, Bank of Ghana 28, Central Bank of Nigeria 27.5, Reserve Bank of Malawi 26, and Central Bank of Egypt 25.5.

Between 2020 and 2023, the Zimbabwe Dollar depreciated and devalued by 6,737 percent against the USD$, South Sudan Pound 461, Egyptian Pound 94, and Nigerian Naira 80.

Unsustainable current account deficits and absence of imports cover

Malawi’s high double digit current account deficit stood at – 21.8 percent of GDP ($2.6bn) in 2024, Maldives -17.9 ($1.3bn), Namibia -15.4 ($2.1bn), Burundi -13.6 ($0.6bn), Rwanda -12.7 ($1.8bn) and Mozambique -11.6 ($2.5bn).

In addition, Liberia stood at -21.1 percent of GDP ($1bn), Guinea -19.1 ($4.9bn) and Senegal – 12.1 ($4bn). Zimbabwe struggles to buffer its FX reserves to cushion vulnerability to exogenous shocks at a mere 0.1 months of imports cover (USD$ 115.5m) in 2023.

South Sudan 0.2 months (US$ 72.9m). Burundi 0.7 months (US$ 90.3m). Ethiopia 1 month (US$ 2bn). Djibouti 1.1 months (US$ 502m).

Low fiscal space, high public debt default distress and low credit ratings.

Countries with high debt to GDP ratios near or above 100 percent suffer high risk of debt distress if most of the loans are foreign and commercial (Eurobonds, syndicated or project finance), has high inflation, high interest rates, currency depreciation, wide current account deficit and dwindled FX reserves.

Moreover, countries with high fiscal deficits above three percent of GDP are prone to restructuring their debt or defaulting.

Maldives stands at -15.2 percent of GDP, Algeria -14.4, Senegal -11.7, Botswana -10.3, Malawi -8.1, and Ghana -7.7. IMF project Sudan debt to GDP at a high of 252 percent, Maldives 141, Senegal 111, Mozambique 101, Rwanda 78, and Kenya 68.3.

Also, Mozambique defaulted over 2016-2017 with Moody’s speculative grade- very high-risk sovereign rating of Caa3 (-Ve outlook) in July 2016. Zambia defaulted in October 2020 with Moody’s speculative grade- very near to default credit rating of Ca (Stable outlook) in April 2020.

Ghana defaulted in December 2022 with Moody’s speculative grade- very near to default credit rating of Ca (Stable outlook) in November 2022.

Similarly, Ethiopia defaulted in December 2023 with Moody’s speculative grade- very high-risk sovereign rating of Caa3 (Stable outlook) in September 2023.

The Six Tenets of an Independent and Credible Central Bank

Oxford Academic defines Central bank independence as, ‘the degree to which a central bank can make monetary policy decisions free from political interference.’

An NBER paper defines central bank credibility as, ‘commitment to follow well-articulated and transparent rules and policy goals’’ like inflation targeting, exchange rate pegs, money supply targets, quantitative easing, real versus nominal objectives.

What’s more, independence is paramount in core mandates of central banks including price and FX stability, employment and GDP growth, financial stability, supervision and regulation, banker to government, issuer of currency, managing money supply, lender of last resort, fiscal discipline, and debt sustainability.

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Legal independence ringfences constitutional autonomy of central bank to pursue its core mandates without political interference.

Institutional independence insulates central bank corporate governance, responsibility and accountability including best practices in appointment of board members, tenor, terms of service and mechanics of making policy decisions.

Goal independence gives central bank freedom to identify its primary goals.

Financial independence ensures central bank has full autonomy in controlling its budget, assets, liabilities, incomes, and expenditure.

On the other hand, operational (functional) independence gives freedom to implement monetary policy and day-to-day operations in setting interest rates, managing money supply etc.

Personnel independence offers liberty for merit-based selection and appointments, governors, and key staff with long fixed terms of service and difficult to remove only for serious misconduct thus guaranteeing autonomy in making long term national interest decisions.

Global Independent Central Banks and Macro Economic Stability

The US Federal Reserve Bank, European Central Bank, Swiss National Bank, Sweden’s Sveriges Riksbank, Bank of England and Bank of Canada have over the years proven ability to target low and stable inflation of 2 percent and single digit interest rates.

The USA Fed has successfully managed to maximize full employment around the 4 percent Non-Accelerating Inflation Rate of Unemployment (NAIRU).

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