Historically, inflation rates have been highly volatile throughout the Southern African Development Community (SADC). Although a natural phenomenon of markets worldwide, the gradual increase in the price of goods and services can harm developing economies if left unchecked. A low, stable level of inflation is ideal, allowing small businesses to grow without drastically reducing the savings and purchasing power of a population.
In order to control inflation in the region, and thereby promote greater macroeconomic stability, SADC established the Memorandum of Understanding on Macroeconomic Convergence in 2002, which is now the Annex 2 of the Protocol on Finance and Investment.
Inflation and the Protocol
In Article 3 of Annex 2, the Protocol on Finance and Investment specifies that Member States of SADC converge on economic policies that promote stability in line with a sound institutional framework. As part of this convergence, Member States agree to restrict inflation to low and stable levels. Likewise, Member States are encouraged to monitor their rates of inflation as an indicator of Macroeconomic Convergence, as similarly regulated economies should experience similar levels of inflation.
Member States have performed exceptionally well at stabilising inflation since SADC passed the Memorandum of Understanding in 2002. The average rate of inflation for the region decreased from 29% in 2002 to 7.7% in 2012. Most Member States currently experience single-digit rates of inflation – a substantial change from the 1990s and early 2000s. While only Seychelles and Zimbabwe are expected to record inflation below the 5% target set for 2012, the current level of inflation in the region is still a significant achievement. The appreciation of the South African rand against the US dollar since 2008 has led directly to price increases among that nation’s key trading partners, such as Zimbabwe, Botswana, and Mozambique.
Inflation still remains an area of concern for Economic Development in the region. While the rate of inflation has greatly subsided in most SADC Member States, it remains high in comparison with nations outside the region. Furthermore, although inflation has dropped, interest rates remain high, which can hinder borrowing and Investment. However, high interest rates are a direct result of the tight monetary policies intended to curb inflation.
Many of the challenges outlined above stem from the level of Economic Development in the SADC region. Most Member States are still developing their economies and infrastructure, which contributes to volatility in inflation. In line with this development, the following factors have been shown to influence inflation in the SADC region.
- Food and energy costs;
- Wage increases;
- High utility charges; and
- Exchange rate movements against the US dollar.
Food and energy costs, in particular, make up a significant portion of personal expenses in the SADC region. Therefore, any change in prices of these items influences the economy in a more direct way than in developed nations where food and energy constitute a lower percentage of all goods sold. Unfortunately, unreliable rainfall and frequent droughts throughout the region greatly impact food production, which in-turn contributes to unpredictable, fluctuating food prices. Furthermore, global increases in oil prices have also contributed to inflation, as the majority of SADC Member States are oil importers.
The falling value of the US dollar has also spurred inflation since 2008, as local currencies appreciate against it. In order to soften these inflationary effects, some Member States such as Mozambique and Mauritius have instituted price controls and subsidies. While they have been beneficial in constraining inflation in the short term, prices may surge once these controls have been removed.
With the current success of SADC policies, maintaining a focus on Macroeconomic Convergence offers the best solution to addressing the development challenges that create inflation in the region.