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Cost of living to hit African nations harder than rich ones

January 23, 2023

Africa will continue to suffer a tough year as cost of living soars despite positive signs on inflation, a result of a high import bill and low wages.

In many African countries, headline inflation appears to have peaked last year and is already decelerating, but situations unique to developing and low-income nations in Africa, especially, might continue to affect livelihoods for the rest of the year, pundits gathered at the World Economic Forum (WEF) in Davos, Switzerland, said this week.

War and conflict

For instance, food expenditures gobble up a higher proportion of household incomes in the developing world compared with richer countries, and with wages also relatively lower, the cost-of-living crisis will be bigger for African countries than the richer ones, for example.

Gita Gopinath, the International Monetary Fund’s First Deputy Executive Director, said prices will still remain high for most of 2023 because even though inflation is slowing down, there is no deflation, meaning that commodity prices are still rising, just slower, and the impact differs between countries and households.

“Food prices have come down, but they are still about 30 percent above 2019 levels, and we are likely to see the retail prices of food going up, especially in the developing world,” Ms Gonipath said while speaking at the forum’s session on “Stemming the Cost-of-Living Crisis” on Tuesday.

Main components

Laura Tyson, an economics professor at the University of California, Berkeley, said the inflation of main components of costs of living – food, housing, and energy – exacerbated a poverty problem throughout the world as wages did not improve correspondingly.

“We have seen an increase in the number of people living in poverty instead of a reduction because the inflation worsened a problem that existed before and that we haven’t solved,” she said at the same session in Davos.

This bleak picture is evident in the region, where despite inflation peaking last November in most of the countries, citizens are still grappling with high food and fuel prices.

Climate factor

Indeed, in moves lauded by both World Bank and IMF, the region’s central banks, like others globally, have hiked their policy rates to tame soaring inflation that was mainly occasioned by the conflict in Eastern Europe.

Nonetheless, food and energy prices remain significantly higher than pre-pandemic levels and wages have stagnated, resulting in a drop in real income, according to a recent report by UN Economic Commission for Africa (ECA).

Based on the ECA report, the Ukraine crisis, coupled with devastating climate catastrophes on the continent, was projected to push at least 310 million Africans, over a third of the population, into hunger by the end of 2022, with several others facing extreme food insecurity.

In some developed economies, however, the cost-of-living crisis is expected to be milder in 2023 as inflation rates relent following the tightening of monetary policies. Germany is one of them.

Speaking during the same session in Davos, Christian Lindner, the German finance minister, said their government had set aside €200 billion ($217 billion) to cushion citizens from the high cost of living but they might not need all of it as the situation has significantly improved.

Structural changes

“The price levels are lower than we expected. We have less hardship cases, and my expectation is that we won’t need the whole protective shield of €200 billion, which is good news,” Lindner said.

Globally, the cost-of-living crisis has become the most dreaded risk to people’s survival and wellbeing over the next two years, the WEF’s Global Risks Report released in Davos shows.

Natural disasters and extreme weather events, which disproportionately affect Africa, is the second most cited risk, according to the survey. Experts, globally, are pessimistic that, if not adequately addressed, the risks will continue to pose volatility and turbulence in the globe’s financial markets further slowing recovery.

“Such pessimism is understandable. Risks that are more severe in the short term are embedding structural changes to the economic and geopolitical landscape that will accelerate other global threats faced over the next 10 years,” said Saadia Zahidi, WEF’s managing director.

Multiple interventions

Ms Zahidi and other attendees of the WEF in Davos called for multiple interventions by businesses and governments to help stem the growing cost of living crisis, each suggesting a different approach.

Allan Jope, the CEO of Unilever, urged businesses to raise wages and governments to focus on improving productivity to fight the longstanding inequality.

“Cost-of-living crisis disproportionately impacts those at the bottom of the pyramid. There is so much talk about tightening rates, and stimulus spending but the only way to break the long-term trend of rising inequality is productivity,” he said.

Lindner said from the European perspective, governments need to promote competitiveness among businesses so that firms can pay wages and improve livelihoods.

Ms Tyson said addressing issues related to cheaper housing is key to addressing the problem, because high cost of housing increases the vulnerability of the poorest to economic shocks.

Gopinath, however, argued that attempts to reduce inflation will likely result in rising unemployment rates, urging countries to stick to monetary policy to bring down the costs of living without losing jobs.

theeastafrican