Inflation risks in the southern African region are skewed to the upside as an escalation of the Hamas-Israel war could cause a spike in oil prices and most African currencies remain at weak levels against the US dollar relative to a year ago, while El Niño weather trends result in below-average rainfall throughout the summer cropping season could ratchet up food prices.
Due to the removal of fuel subsidies by governments, fuel prices have risen in countries such as Angola, Cameroon, Kenya and Uganda. While oil prices could rise in the coming months, they are forecast to decrease towards the end of the year. We forecast global oil prices to average $84.13 in Q2 2024, $81.72 in Q3 2024 and $80.05 in Q4 2024.
This brings the annual average to $82.23 for this year. Hence, fuel prices in most African countries are expected to rise at the same time that domestic currencies remain weak against the greenback.
A virus outbreak, excessive rains that delay harvesting and wildfires have reduced cocoa supply from the globe’s largest suppliers: Ghana and Côte d’Ivoire. Together with Nigeria and Cameroon, these four west African countries account for over 70% of the global cocoa bean supply. Given that consumer demand for cocoa goods is strong — especially in the US — the price outlook on cocoa remains positive for the coming months.
Lower rainfall in west African countries could lead to subpar beans in terms of size and also lower quantity, providing upward impetus to cocoa prices. Hence, other African countries will likely face higher consumer prices for chocolates and baking goods amongst other products.
Annual inflation in Angola reached a two-year high in March, with food and healthcare costs driving the headline figure to 26%. In addition, the passthrough of last year’s acute currency devaluation to inflation is likely to continue until the end of H1 2024.
Lower food and transport prices allowed annual headline inflation in Botswana to slow to 2.6% in March. Although, a slightly weaker pula exchange rate and weak regional harvests due to El Niño induced weather patterns are expected to lift inflation figures in the coming months.
Mozambique’s annual headline inflation rate for March fell to 3% – the lowest level since November 2020 – amid a continued decline in food prices and exchange rate stability.
Skyrocketing food price growth steered the annual March headline inflation figure in Zambia to the highest level in more than two years – reaching 13.7%. The country declared the ongoing drought a national disaster in February this year, as nearly half the country’s crop area has been destroyed.
The drought has also deteriorated the country’s hydropower generation capabilities, which is expected to weigh on economic growth this year. Power parastatal Zesco warned miners that they may have to cut their power demand by 20%.
In South Africa, inflation eased to 5.3% y/y in March, kept close to the upper limit of the target range as a result of elevated utilities, food and transport prices. Two-year ahead inflation expectations in South Africa remain in the top half of the central bank’s target range.
Furthermore, annual headline inflation in Namibia moderated to 4.5% in March on account of easing food and transport prices. While we forecast inflation to average 4.9% this year, we expect consumer prices will continue to face periods of upward pressure due to rising global oil prices, a weak currency and adverse weather events.
In east Africa, El Niño weather patterns have brought above-average rainfall, replenishing domestic food stocks in Kenya, Rwanda, Uganda and Burundi. In Ethiopia, annual inflation slowed to 26.2% in March – its lowest level since June 2021 – and was mainly assisted by high base effects.
Annual inflation in Tanzania remained low at 3% in March, balanced by rising fuel prices and falling food prices. The increase in local fuel prices can be ascribed to higher import premiums at the Dar es Salaam port and the increased use of euros as a means of payment for imports.
Despite a relatively weak domestic currency in Rwanda, declining food prices outweighed gains in utility charges, leading to a softer headline figure. Indeed, inflation fell to a two-and-a-half-year low in March at 0.6% y/y.
Although interest rates are a blunt instrument in the face of cost-push pressures, the central banks in Angola (100 bps), Egypt (600 bps), Kenya (50 bps), Malawi (200 bps), Nigeria (600 bps), Tanzania (50 bps), Uganda (75 bps) and Zambia (150 bps) have hiked their benchmark interest rates since the start of the year. Ghana (100 bps) was the first African country to cut interest rates in 2024.
The Bank of Mozambique followed suit and became the first African central bank to cut its key policy rate twice this year, having cut by 75 bps in both January and March. Central banks that have kept rates unchanged thus far include the Bank of Central African States (i.e. Chad, Cameroon, Central African Republic, Equatorial Guinea, Gabon and Republic of Congo), the Gambia, Mauritius, Namibia, Rwanda, South Sudan, South Africa and Tunisia. Going forward, we expect the South African Reserve Bank, as well as the Bank of Namibia, to cut the repo rate by 50 bps in Q4 2024.
*Theo Klein is an Economist at Oxford Economics Africa
