Monetary management in sub-Saharan Africa : a comparative analysis

Common problems have included excessive credit creation, expanding public sector deficits, rising inflation, de facto and de jure exchange depreciation, currency substitution and capital flight, rapid increases in external debt, and the failure of key financial institutions. This report examines the potential for selected sub-Saharan countries (Malawi, Ghana, Nigeria, Senegal, and The Gambia) to make a transition to a system of indirect (i.e., market-based) monetary control. It states that four conditions are required: (1) a realistic public sector borrowing requirement and monetary program; (2) a central bank able to control the monetary base; (3) a well-understood mechanism by which changes in monetary policy are transmitted to the real economy; and (4) special efforts by the central bank and government to regenerate confidence in the financial system. The report discusses particular actions that must be taken to achieve each of these conditions. It concludes that some of the countries studied should not introduce indirect monetary control without further improvement in their financial markets.