Planet earth is in difficult times. Not only is climate change threatening its sustainability, but a strain of novel coronavirus — Covid-19 — is also threatening life on earth.  Covid-19 has placed a mandatory injunction on human activities, virtually slapping a brake on the world economy. A global recession is looming; global economic outlook has been revised downwards and it seems the world is still far from ending the Covid-19 pandemic.


Monetary policy is needed in this time to slow the impact of Covid-19 on economies. Monetary policy involves the use of policy measures by central banks, with the aim of controlling the growth, supply and cost of money to achieve a predetermined target— inflation, interest rate —to ensure a healthy economy for economic activities. The tool kits of monetary policy must be employed in its widest breadth to prevent a total collapse of economies. Central banks must apply tools that will keep firms in business and prevent a long-lasting impact of the coronavirus. Monetary policy needs to continue to stimulate businesses and investments in the economy. So, what are some possible monetary policies to help African countries sustain their economies in the wake of Covid-19?


At the turn of the new decade, Africa’s economic outlook was bright. Its real GDP growth, estimated at 3.4 percent for 2019, was projected to accelerate to 3.9 percent in 2020 and to 4.1 percent in 2021. With the measures adopted by most countries to contain the spread of      Covid-19, which includes closure of borders and partial or total lockdown, economic activities will take a dip. The United Nations Economic Commission for Africa (UNECA) has estimated that Africa may lose half of its GDP growth (from 3.2% to 1.8%), particularly due to supply chain disruptions, shrinking investments and low remittances to the continent.


Using the Conventional Monetary Policy Tools

All central banks have at their disposal conventional tools used in influencing the macroeconomy. Among these tools are the Central banks’ monetary policy rate, discount rate, and more recently, forward guidance.


In this pandemic, the economy needs to be spurred intentionally. Central banks must deliberately reduce or loosen monetary policy to keep the wheels of the private sector running. The monetary policy rate is a benchmark for other short-term rates in an economy, and also affects longer-term rates. As such, reducing the rate will lower the cost of borrowing in the economy. With the private sector eager to sustain their profit margins, the lower interest rates will trigger the appetite to borrow for investment activities. The investment activities may not be as huge as expected given the containment measures in place, however, the level of investment and economic activities needed to sustain the economy from collapse can be achieved. It is easier to stimulate an economy that is on a slow or stagnant growth trajectory than an economy that needs to come out of a recession.


The discount rate which is the rate central banks charge commercial banks for loans must also be reduced. With country borders closed, trade activities will be affected, hence, the financial flow that characterizes commercial banks will be impacted. Without significant financial transactions, the banking systems in most African economies will suffer. Reducing the discount rate works in two ways. Foremost, commercial banks which are receiving funds at lower rates are more likely to give out loans to businesses without overemphasizing their creditworthiness.  It will take a lot of gut, and high-risk tolerance for even businesses in essential supplies to borrow from commercial banks in this uncertain time. To motivate businesses to take on the extra risks that come with this Covid-19 period, interest rates charged on these loans must be low enough to allow businesses to break-even. This can be achieved if African central banks take the bold step of reducing their discount rates.


Economic actors are mostly rational and will act on the basis of speculation. This is the time where speculations of lockdowns are causing panic buying in some African economies. It will be of greater benefit if African central banks deploy their forward guidance tools more frequently. Honed during the great recession era, forward guidance offers information to the public on the future path of monetary policy. It helps economic agents to be reliably informed on the central banks plans and possible actions. This enables firms to plan for their activities with some level of certainty. Central banks should communicate frequently with the general public on key tools such as interest rates and other stimulus packages. The banks should make information easily accessible to economic actors. In a nutshell, there should be no room for non-sourced speculations.


Should African central banks be more unconventional? 

The financial crises that hit the global economy pushed the limits of central banking. Unconventional tools such as quantitative easing and helicopter money were adopted at some point in time to fight recessions. These unconventional policies, prima facie, require strong economies since they involve huge spending and are not for faint-hearted governments. Can African central banks adopt such unconventional policies to mitigate the effects of Covid-19?


Leading the growth charge in Africa are six economies which are among the world’s 10 fastest in growth: Rwanda, Ethiopia, Côte d’Ivoire, Ghana, Tanzania, and Benin. These economies cannot compare to the advanced economies that have adopted more unconventional policies. Purchasing of government and corporate      bonds by central banks (quantitative easing) can maintain or mitigate the impact of Covid-19 on spending levels, but involves huge sums of money to purchase large volumes of assets to achieve its goal.


A final part of the unconventional policy suite involves the central banks printing money and giving it to the government so it can send out cheques to the nation’s taxpayers —”helicopter money”. The aim is to quickly boost a flaccid economy by putting money directly into people’s pockets. With the spread of Covid-19 being controlled with lockdowns, people are unable to generate income for their expenditure. Governments are faced with providing extra cash to these people and helicopter money is an option.


Conventional or Unconventional Monetary Policies?

Considering the nature and fundamentals of most African economies, it will best serve the continent if conventional policies are aggressively pursued instead of unconventional policies. African economies are not battling lower inflation rates like most advanced economies. The general price levels are high as such, a fall in demand through lower spending can be a glimmer of positivity from the Covid-19 pandemic. What is necessary is to sustain investments and firms to prevent them from going out of business and this can be achieved through conventional policies.


Interest rates in many African economies have not reached the zero-bound levels. Hence there is more room for further cuts or loosening to promote economic activities. African economies are already saddled with high debt levels. Pursuing unconventional policies are costly and have the tendency of debt monetization.  For example, printing money under “Helicopter money” can lead to post pandemic inflation spirals, and also set a bad precedent for printing money for government debt if not well managed.


With Covid-19 continuing to ravage country economies, proactive policies must be put in place by central banks to mitigate its effect on economic activities. African central banks will be better-off if conventional policies are pursued aggressively in this time.


The views expressed in this article are those of the author alone and not the Future Africa Forum.