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Can immaculate disinflation happen in Africa?

In economics, rules don’t always apply. That’s because economies change; they’re are dynamic, not static. Take the US, for example, which is now witnessing a rare economic phenomenon that has been coined immaculate disinflation.

An African woman purchases groceries

America has managed the impossible and produced disinflation in such circumstances, but nowhere in Africa have we seen the same effect. Unsurprising, with interest rates over 25%. (CARE International)

Immaculate disinflation occurs when inflation slows without causing a rise in unemployment. In economic history, this is a rare occurrence because of the sacrifice ratio. The sacrifice ratio says every reduction in inflation is likely to spike unemployment in an economy.

In the United States, inflation has now dropped from 9.1% in June 2022, to 3.2% as July of 2023. Yet, unemployment fell from 3.6% in June 2022, to 3.5% in July 2023. This goes against basic economic norms.

Theoretically, what is happening in the US is truly immaculate. When inflation surges, monetary policy dictates that a nations’ Central Bank will raise interest rates as a lever to decrease the money supply. Everything else constant, the decreased money supply will reduce consumption, lowering demand for goods and services, thus reducing prices. But, demand for goods and services is directly linked to the demand for labor. If aggregate consumption drops, that is people demand less goods and services, companies produce less, and demand for labor goes down. When demand for labor goes down, unemployment goes up. 

In the US, higher interest rates have brought inflation down, but not raised unemployment. This is partly because of the wealth American’s have amassed, which regardless of inflation, has only slowed consumption marginally. It’s also because interest rates on deposits now stand at only 5 percent, and lending at only 7 percent approximately. 

In contrast, nowhere across Africa have we witnessed immaculate disinflation. High interest rates, double digit interest rates, deployed in several African nations to fight rampant inflation has spiked unemployment. 

Across Africa, interest rates have gone to record levels. Angola, Gambia, Mozambique, Nigeria, Egypt, Sierra Leone, Liberia, Malawi, Congo, Sudan, and Ghana, all now have interest rates in excess of 18 percent on average. Nigeria, Egypt, Liberia, Malawi, Sudan, have higher than average interest rates ranging between 22 and 30 percent. And, this is interest on deposits, and government securities, meaning average lending rates are now often in excess of 25 percent. 

Economic slowdown with interest rates on borrowing as high as 25 percent is inevitable. After all, what project can an African investor take on that can recoup his capital in under 4 years? Most investments making returns in excess of 25 percent per annum will be few in number, or seemingly illegitimate. 

Interest rates on borrowing at 25% will decimate consumers and producers alike. They will disincentivize consumers and producers from borrowing making high unemployment a certainty. Nothing immaculate happens when interest rates on borrowing are over 25%. 


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