• Pauline Yeukayi Murima (South Africa)

Monetary policy challenges in the emerging market economies on the African continent

Monetary policy is the first financial line of defense against several internal and external shocks that emerging economies are exposed to. However, emerging market economies face several challenges in designing monetary policy frameworks that work well in terms of promoting monetary and financial stability. Many emerging markets in Africa have underdeveloped financial markets and institutions, and per capita incomes that still lag far behind those of developed economies. The key institutional constraint is the lack of central banks' independence because the central banks being under a financial ministry politics is involved in this case. Central banks are always treading a fine line in terms of maintaining their legitimacy or independency in difficult circumstances.

Over time, the environment in which monetary policy operates has been transformed by global developments and increasingly African markets are constantly under pressure to stipulate monetary policies in environments that are deemed as uncertain. Monetary policies performed under such conditions pose a degree of discrepancies as to the uncertain environment for interpreting the economic indicators to provide a bias in the overall results of the economy. Besides the prevalence of uncertain environments in African markets, the role of expectations in the monetary transmission mechanism tends to give a bias in the interpretation of monetary markers.

The prevalence of bias in monetary markets driven by capital flows, uncertain environments, and the evolution of artificial financial intelligence transfer risk to the monetary policy indicators thereby posing a lot of challenges in African countries. One of the major challenges that these markets experience with the monetary policy is that the bias that is experienced by African markets in identifying precise economic indicators renders the monetary policy effective and redundant for use in these economies. The monetary policy by definition is the process of overseeing a nation's money supply to complete specific objectives such as restraining inflation or achieving full employment. Monetary policy can involve setting interest rates, margin requirements, capitalization standards for banks, and acting as the lender of last resort.

Once the monetary policy setting has emerged in African countries, its role is significantly downplayed (in an automatic frame), giving birth to a myriad of challenges ranging from lack of deposits in the form of cash to the banks by the population masses. Sprouting from this challenge is the challenge of underdevelopment of both capital markets and money markets. Since the markets will thus be lacking financial trade, notes, bills, and shares, barter and trade will thus be encouraged by the masses which again births a challenge of a non-monetized economic environment. Once an economy is non-monetized, the significance of the monetary policy becomes rampaged. inability to control credit effectively by the central bank, the emergence of foreign banks whose primary attraction is to sell foreign assets in an African country thereby harvesting massive premiums and promoting foreign investments.

In contrast to the foreign commercial banks sprouting in African countries, the local bankers or non-financial bank intermediaries will thus dominate the banking corporations, operating on a large scale yet diverted from the control of the monetary authority, thereby weakening the effectiveness of the monetary policy. These local commercial banks will also operate with ease under serious bank liquidity measures to avoid control by the central bank. This scenario thus encourages the ineffectiveness of the monetary policy. Once these economic conditions become prevalent, African markets are thus encouraged by the central bank to at least employ the fiscal policy in a bid to manage and control government income and expenditures, thereby encouraging the revitalization of African markets.