With inflation gripping the global economy, poverty-stricken Sub-Saharan Africa is one of the regions facing the steepest climbs. Despite the pandemic being in the rear-view mirror, the magnitude of the fallout from the health crisis among African nations like Ghana and Nigeria is still unfolding. Meanwhile, policymakers are using all their firepower to tame soaring inflation while a long-term recovery seemingly remains out of grasp.
According to the World Bank’s income classification system, the number of countries falling into the low-income category was more than halved between 1990 and 2022, falling from 51 to 25, respectively. However, despite some strides, Sub-Saharan African households can’t meet their basic needs: of the world’s 25 low-income economies, 21 belonged to this region as of 2020. Close to 66% of the Sub-Saharan African population survives on just $3.20 per day, though this segment has declined from three-quarters of the population roughly 30 years ago.
The pandemic has created a one-step forward, two-steps back scenario for low-income nations. Poverty rates are estimated to rise by 10% in the wake of the COVID-19 pandemic, but no single region will be affected more than Sub-Saharan Africa. Despite a regional economic expansion of 4.5% in the second half of 2021, a one-two punch of rising energy and grocery prices has created new headwinds. As a result, several Sub-Saharan African economies are in danger of slipping back into the low-income territory by year-end.
According to a Bloomberg poll, countries like Ghana, Nigeria, and Kenya will suffer higher inflation than previously thought as estimates continue to get revised upward. With inflation forecasts painting a grim picture for the rest of the year, Central bankers in Sub-Saharan Africa are attempting to fight fire with fire.
Ghana’s Economic Turmoil
Ghana’s economy is seeing the worst of it. In July, Ghana’s economy saw its inflation rate soar to nearly 32%, a pace it has not experienced in almost two decades. Worse, inflation projections rose to nearly 27% in a few short months from slightly more than 19% in the spring.
Ghana Vice President Dr. Mahamudu Bawumia argues that a perfect storm of banking reforms, the COVID-19 pandemic, and the Russia/Ukraine war are to blame for Ghana’s economic turmoil. VP Bawumia points to a banking system that in 2018/2019 was on the brink of collapse, saying the country had to pour billions of dollars into rescuing it. The health crisis only exacerbated the problem, in response to which he said officials were more concerned with “saving lives” than “fiscal discipline.”
It was a combination of these internal and external events that VP Bawumia says caused Ghana to fall into crisis. He blames the previous administration. However, Johns Hopkins Economist Steve Hanke is not buying it, suggesting that conditions are even worse than they seem. By his measure, Ghana’s inflation rate is more like 78.2% for the year, the sixth highest level anywhere globally. Hanke advises Ghana to install a currency board to address what he described as an “economic death spiral.”
While inflation has skyrocketed, Ghana’s local currency, the cedi, has fallen precipitously and lost close to 50% to the U.S. dollar year-to-date. This performance positions the cedi as one of the single worst-performing currencies in the world, second only to Sri Lanka’s rupee.
The Bank of Ghana responded hawkishly by lifting its benchmark policy rate by 3%, or 300 basis points, to 22% on the heels of an emergency session held in mid-August. Ghana is one of over two-dozen Sub-Saharan African nations to have raised interest rates this year.
Meanwhile, Ghana is looking to the International Monetary Fund (IMF) for relief, requesting $3 billion in capital to steady its ailing economy. According to IMF Managing Director Kristalina Georgieva, the fund is prepared to help “stabilize” Ghana’s economy, paving the way for more robust growth, and help the nation’s most vulnerable.
Nigeria a Mixed Bag
Nigeria’s economy is not looking too much better. Africa’s biggest economy saw its inflation rate rise to 19.6% in July, its highest level in 17 years. That means that in mid-summer, Nigerians were doling out almost 20% more for items like bread, cereal, fuel, and transportation compared to the year-ago period. The nation, on Africa’s West Coast, has seen its inflation rate increase without interruption in the past six months.
One illustration that struck a chord with the public was a tweet by Tayo Oviosu, founder and group CEO of money app Paga. He showed the difference between old and new packs of coaster biscuits made by Newbisco, saying the recent and noticeably smaller package is how the manufacturer is dealing with inflation. The tweet received over 1,200 “likes” on Twitter and dozens of comments.
Nevertheless, Nigeria’s economy expanded by a surprise 3.5% in the second quarter, outpacing a 3.1% increase in GDP in Q1. While Nigeria is Africa’s largest crude oil producer, most of the growth came from non-oil sectors of the economy, including technology, financial services, transportation, agriculture, and food/beverages/tobacco, according to the National Bureau of Statistics.
The Bloomberg survey reveals that economists expect more pain ahead for Nigeria, with the average inflation rates expected to persist at 18% and 14.6% in 2022 and 2023, respectively. The broader outlook is similarly grim as economists predict inflationary conditions in much of the region will get worse before they get better, prompting policymakers to focus their immediate efforts on thwarting inflation over any longer-term economic recovery. Angola is the only economy in the Sub-Saharan African region to escape the worst, with economists lowering their inflation forecast. Check this Gerelin Terzo of Sharemoney for more details.
Sub-Saharan Africa’s Young Population
The Sub-Saharan African region could potentially have an influential role in the growth of the global economy. Despite high poverty levels among the older generation, Sub-Saharan Africa’s young population is on the rise, with close to 70% and over 40% of the region’s citizens under the ages of 30 and 15, respectively. Put another way, nearly 25% of the world’s young population resides in Sub-Saharan African economies.
Higher incomes in the region would create a virtuous cycle in which the young generation could earn more and consume more in these nations as they grow older and establish their own families. As a result, consumer demand would strengthen alongside capital goods globally for the foreseeable future, offsetting the weaker demand dynamics set in motion by aging populations globally.
So, regions like Sub-Saharan Africa, with growing young populations, have the potential to lower the risk of the global economy becoming stuck in a downturn in the next 50 years. But first, they must emerge from the post-pandemic economic crisis stronger than they were before.