African Top Central Banks Turn on Governments to Curb Prices

Nigeria’s Central Bank Governor Lamido Sanusi
Nigeria’s Central Bank Governor Lamido Sanusi. Photographer: Jason Alden/Bloomberg

Central bankers in Africa’s biggest economies are admonishing their governments as spending plans subvert the power of monetary policy and threaten to quicken inflation at a time when Europe slips into a recession.

Nigeria’s Central Bank Governor Lamido Sanusi on Jan. 31 said lawmakers’ plans to raise spending beyond the 4.8 trillion naira ($30 billion) proposed by President Goodluck Jonathan is “inadvisable.” His counterpart in South Africa, Gill Marcus, said on Jan. 19 that above-inflation increases in power tariffs are “questionable.”

“The tighter fiscal policy is in South Africa or Nigeria, the more comfortable central banks will feel and the easier they will find it to cut rates if there are problems,” Charles Robertson, chief economist at Renaissance Capital in London, said in a telephone interview.

While policy makers in Australia, Indonesia, Israel and at the European Central Bank cut borrowing costs last year to support their economies, African central banks, such as Nigeria, Kenya and Uganda raised rates to bolster their currencies and curb prices. South Africa has kept its benchmark rate unchanged at 5.5 percent since November 2010.

Price-stability mandates in Nigeria and South Africa now argue in favor of higher borrowing costs as inflation stays above central bank targets. That threatens to curb economic growth in the two nations at a time when a worsening debt crisis in Europe, which buys a third of South Africa’s manufactured goods, crimps global demand.

‘Political Flak’

“Politicians are seen as good because they are increasing spending, leaving the central bank to take the political flak,” Stuart Culverhouse, chief economist of Exotix Ltd. in London, said in a phone interview.

In South Africa, the government is set to cut its growth forecast for 2012 to below 3 percent from 3.4 percent, Finance Minister Pravin Gordhan said on Jan. 26. Inflation, which reached 6.1 percent in December, is forecast to remain above the central bank’s 3 percent to 6 percent target range this year, Marcus said on Jan. 19.

Growth in Nigeria, Africa’s largest oil producer, will probably be capped at 7.2 percent this year from 7.7 percent in 2011, according to the government. The inflation rate, which was little changed at 10.3 percent in December, may climb to as high as 14.5 percent in the first half of the year because of rising fuel costs, Sanusi said on Jan. 31.

Chasing Opportunities

African currencies will probably benefit as investors seek higher-yielding assets, according to Aryam Vazquez, an emerging-markets economist at Wells Fargo & Co. in New York. South Africa’s rand has jumped 6.4 percent against the dollar this year, while Nigeria’s naira has risen 1.2 percent.

“As long as you have this very low-yield play in the developed world and flush liquidity conditions, investors will continue to chase the opportunities in places like Nigeria and South Africa,” Vazquez said.

The rand strengthened 0.6 percent to 7.5959 against the dollar as of 4:56 p.m. in Johannesburg while the naira was little changed at 160.44 on the interbank market.

Eskom Holdings SOC Ltd., the supplier of about 95 percent of South Africa’s electricity, won approval to raise prices an average 25 percent annually in the three years through 2012 to pay for a 500-billion rand ($65.8 billion) expansion program.

“Administered prices should not act as an inhibitor to growth and investment,” Governor Marcus said on Jan. 19.

Rate Bets

Government-determined prices, such as electricity, rose the most of any category in the consumer-price index in December, according to Statistics South Africa. Inflation, excluding administered prices, was 5 percent in December.

Investors are increasing bets South Africa’s central bank will raise rates as soon as a year from now. The yield on the forward-rate agreement due in 12 months has gained 12 basis points this year to 5.87 percent.

“The Reserve Bank is constrained,” Matthew Sharratt, an economist at Bank of America Merrill Lynch, said in an interview in Johannesburg. “It makes it a lot more difficult with continual increases in administered prices for the Reserve Bank to fulfill its inflation target mandate.”

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