Commodity Price Drop Puts Pressure on Monetary Policy in Low-Income Countries

Modernizing monetary policy part of the reform agenda

Changes in monetary policy can take time but should not be avoided

Clear legal frameworks and capacity building are very important

Obstfeld’s comments came while moderating a panel discussion entitled, Monetary Policy Frameworks in Low-Income and Developing Countries, during the IMF-World Bank Annual Meetings.

“Many low and lower-middle income countries have made progress on a number of fronts including stabilizing inflation rates,” Obstfeld said, but added that good monetary policy will be necessary if this group of countries is to achieve rapid, stable, sustainable, and inclusive growth.

“For many of these countries, the issue is how monetary policy frameworks evolve and what is the best implementation strategy; as they grow, reform, evolve their financial sectors and integrate even more into the global economy,” Obstfeld said. The challenge is to make policy more effective at achieving price stability, by having a clear framework for making policy decisions, effective operations and a transparent communication strategy.

Challenges to monetary policy

Panelist Kofi Wampah, Governor of the Bank of Ghana, said monetary policy in low, and lower-middle income countries faces important challenges, including exogenous shocks that can hit the country’s reserves and lead to volatile exchange rates. Ghana’s economy has indeed been hit hard by the falling commodity prices.“Three commodities form 80 percent of exports; gold, cocoa, and oil,” Wampah said, “therefore the price shocks have had a significant effect on the country’s reserves and accelerated volatility in some cases. For example, between 2012 and now, gold shocks have led to a loss of more than $2 billion in revenue, while shocks in cocoa prices have resulted in more than $1 billion in revenue. These fluctuations complicate monetary policy implementation,” he said.

Wampah also stressed the importance of communicating new ways of implementing policy to the public and the media. He emphasized the need to build capacity in central banks in low-income countries, while acknowledging the challenges of modernizing policy frameworks in the context of IMF supported programs.

Other participants included Central Bank Governors from Botswana and Paraguay, and Obstfeld...