Central banks and debt: emerging risks to the effectiveness of monetary policy in Africa?

Updated 26 November 2018: the new pdf version contains revisions to graph 2 and Tables A5 and A7. 

In a period of rising trade protectionism and higher interest rates abroad, there is renewed urgency to ensure that debt, already on an upward path, does not impede the effectiveness of monetary policy in African countries. While central banks can affect the level and composition of debt held or owed by the financial sector if they have supervisory powers, they can only influence government debt indirectly, notably through communications. Advising the government and state-owned companies on debt management and macroeconomic developments might help slow a build-up in debt. Should debt nevertheless rise, certain institutional arrangements, such as rules against direct funding of the government budget, setting an inflation target for monetary policy, and operational independence, could help protect the effectiveness of monetary policy. Pursuing reforms that implement such arrangements could be one way forward for some African central banks.

JEL Classification: E58, F34, H63