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Inflation should be Viewed as Public Enemy Number 1: Here’s why



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By Jannie Rossouw

Inflation is a process of sustained increases in the general price level over a period of time, typically 12 months. Inflation can be calculated for a country, for specific regions in a country and for different income and demographic groups, for instance pensioners. These different calculations are important because the spending patterns of regions and groups differ. That means that their rates of inflation also differ. It is therefore important for each household to have a clear understanding of its own inflation rate.

A number of countries allow for the development of this improved understanding. For example, South African households can use an Internet tool such as the personal inflation calculator of Statistics SA . A personal inflation calculator, based on the spending patterns of household, is also available for the Euro areaCanada and New Zealand.

The phrase describing inflation as ‘enemy number one’ is borrowed from the research done by South African businessman Dr Anton Rupert on the world-wide inflation problem suffered in the 1970s. He described inflation this way due to its distortive impact on the economies of countries and the wealth and financial well-being of households. But the word inflation has a much earlier origin. Its first use was in the US between 1830 and 1860, when the US dollar started losing value. In short, people experience inflation as sustained price increases. Prices continue to increase and the same amount of money buys less goods and services over time.

Why is it so bad?

Inflation is bad because people on fixed incomes such as pensioners get poorer over time. The buying power of their money is eroded. A further problem is that borrowers enjoy an advantage over savers. With high inflation, the capital value of savings is eroded, while the real burden of borrowing declines. It becomes easier to repay debt. Although interest rates increase with higher inflation, the real value of the amount borrowed that has to be repaid, declines as percentage of salaries that are adjusted for inflation.

Governments are the largest borrowers in the world. They are therefore the major beneficiaries of inflation, as the real value of their debt is eroded at the expense of the taxpayers in their countries. Tax collections increase with higher inflation and government debt becomes a smaller percentage of government revenue raised from taxes.

Who manages inflation and what instruments can they use?

Central banks have responsibility for containing inflation. They use the level of interest rates to contain inflation. This responsibility for containing inflation is most noticeable in countries that use inflation targeting. In these countries, central banks adjust interest rates in line with the rate of inflation and its expected future level to contain it to the target range.

To contain inflation, central banks must keep interest rates above the inflation. This difference between the rate of inflation and the interest rate is called the real rate). When the rate of inflation accelerates and is expected to continue this trend, the central bank’s policy response is a higher interest rate level (both nominal and real), commensurate with the change in the inflation trajectory.

What can go wrong?

Central banks can make wrong assumptions and use wrong projections in their assessment of future inflation. This can lead them to set interest rates at an inappropriate level. An example is the recent acceleration in the inflation rate in the US to a level above 8%. At an average of around 3% per annum, the US inflation rate was at a very low level for the last four decades). Recently the rate accelerated to above 8%, without an appropriate policy response by the US Federal Reserve.  As a result, US inflation could become a persistent problem.

This unexpected acceleration in prices caught US households by surprise. Many households (for instance pensioners) who assumed that inflation would remain under control, are now faced with much higher expenses without a commensurate increase in income. It is therefore important that central banks are constantly vigilant and respond to accelerating inflation. Inevitably, this implies setting interest rates at an appropriate real level above the rate of inflation.

The real rate of interest rates can be calculated in several ways. The simplest and easiest way to calculate is by deducting the rate of inflation from the nominal interest rate. Some African countries suffer persistent inflation problems, with rates much higher than in developed economies. The Zimbabwean inflation rate for the year to April 2022 accelerated to 96.4% , while Ghana’s inflation rate was 19.4% over the same period.

Countries suffering high inflation experience exchange rate pressure, with declining currency values. The exchange rate of the currency will remain under downward pressure as long as high inflation persists. Owing to high inflation, investment in the country becomes unattractive. The demand for the currency therefore declines, which puts the exchange rate of the country with high inflation under pressure.

The Ghanaian currency has already depreciated by 18% against the US dollar this year. A further value decline is expected for the rest of this year. Over the past year, the Zimbabwean RTGS dollar has lost more than half its value against the US dollar). Owing to sharp currency depreciation, the domestic prices of imported goods and services in countries like Ghana and Zimbabwe have increased sharply and continue to increase each time the currency depreciates. Consumers in those countries who earn income in local currency experience increasing difficulty to afford imported goods and services.

The trust deficit

A problem in an environment of sustained inflation is that people do not trust the official published rate of inflation. Inflation rates are distrusted for several reasons. The first is a general distrust of government conduct. This results in a view  that inflation rates are manipulated by government agencies responsible for their publication to report lower price increases than is actually the case.

Secondly, increased prices for goods such as fuel that receive considerable publicity, lead to perceptions of general price increases. This problem is linked to the fact that price increases are much more visible to consumers and attract more attention than price declines.

Lastly, inflation measures price increases on a cumulative basis, using each previous year’s price level as the base for calculations. This implies that each previous year’s inflated price level is used to measure the rate of inflation in the next year. Over time the cumulative effect of sustained inflation becomes quite large.

This can be explained in a different way. With a sustained inflation rate constant at 5% per annum, the intuitive perception is that prices will double every 20 years. In practice, however, under these conditions, prices will double every 14.4 years. Price increases therefore exceed the perceptions of consumers. Given the negative impact of inflation, it is in the interest of all consumers that the authorities should always apply policies that prevent price increases or keep such increases to a minimum level.

Inflation does not make people wealthy, despite the fact the governments and borrowers enjoy benefits from inflation. Which is why the description that inflation is public enemy number 1 is so accurate.

Jannie Rossouw  is a visiting Professor at the Business School, University of the Witwatersrand

Courtesy: The Conversation

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Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria




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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website:

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.



Abba Musa Mamman Lagos


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10 Megatrends Shaping the World in 2024




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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.

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Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know




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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford

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