The Initial Policy Response to COVID-19 from African Central Banks

In response to COVID-19, African central banks have deployed a variety of monetary policy tools, including lowering policy rates, reducing capital requirements, providing various liquidity support measures to the banking sector, allowing loan deferrals and refinancing frameworks for distressed firms, and introducing new support measures mobile money and digital finance.

 

The COVID-19 pandemic has caused both demand and supply-side shocks to African economies. In many African countries, central banks have taken a leading role in crafting a policy response to these shocks. Their efforts have aimed at ensuring financial sector stability while also preventing financial fallout for both corporates and households.

There are several tools African central banks have deployed so far. These tools include lowering policy rates, reducing capital requirements, providing various liquidity support measures to the banking sector, and allowing loan deferrals and refinancing frameworks for distressed firms. Additionally, mobile money and e-payment support measures were introduced by many African central banks to facilitate economic activity during lockdowns and to slow the spread of COVID-19 by limiting contact with paper money and coins.

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COVID-19 Africa Watch’s monetary policy tracker documents these various monetary policy measures across African countries. The tracker provides an overview of which countries have used the tools listed above. In this piece, we provide further details of the diversity of monetary policy measures put to use to date by African central banks in response to the COVID-19 pandemic.

  • Policy rate reduction: 27 African central banks have reduced their policy rates in response to the sudden economic contraction caused by COVID-19. In Morocco and South Africa, interest rates dropped to record lows, and a number of central banks have cut rates multiple times in response to the pandemic. Algeria, the Gambia, Kenya, Mauritius, Morocco, Mozambique, Uganda, and Zimbabwe reduced the key policy rate twice. Eswatini, Lesotho, Namibia, and South Africa reduced their interest rates three times.
  • Reduction in bank capital requirements: 17 African central banks have reduced bank capital requirements in an attempt to improve the availability of bank credit to struggling businesses. The Bank of Botswana, for example, reduced the primary reserve requirement to 2.5 percent from 5 percent, which is expected to release P1.6 billion (2.7 percent of GDP or around US$130 million) in liquidity to support economic activity. Likewise, the Central Bank of the Gambia reduced the statutory reserve ratio by two percentage points to 13 percent, which released over D700 million (0.8 percent of GDP or about US$14 million) in liquidity. Several central banks, including Lesotho, also announced they will defer implementing elements of the Basel II requirements.
  • Additional liquidity support measures: 27 central banks have implemented liquidity support measures other than (or in addition to) reducing bank capital requirements. Out of this group, many have extended their treasury bond purchase windows to support the government’s short-term budgetary needs, while also establishing dedicated bank lending and liquidity assistance frameworks to attempt to ensure market liquidity. For example, the National Bank of Angola extended guarantees of the overnight lending facility for commercial banks up to Kz 100 billion (about US$ 171 million, 1.7% of GDP) in an attempt to ensure market stability. Other measures include he Bank of Malawi’s Emergency Liquidity Assistance facility for banks; the Bank of Sierra Leone’s decision to create a Le500 billion (about US$51 million, 1.3% of GDP) Special Credit Facility to offer a concessionary interest rate and to double the reserve requirement maintenance period to 28 days from 14 days; and the Central Bank of Seychelles extension of the loan maturity for banks for up to three years.
  • Loan deferral and refinancing frameworks: 22 central banks have allowed some form of loan deferral or have offered systemic loan refinancing frameworks. An example of these kinds of measures includes allowing commercial banks to restructure existing loan portfolios, as the central banks in Egypt, Eswatini, Lesotho, Ethiopia, Kenya, Mauritius, and Morocco have done. Similarly, the Bank of Botswana has provided a collateral pool with a pre-determined haircut for all corporate bonds listed on the Botswana Stock Exchange, while the Democratic Republic of Congo (DRC) has created a dedicated collateralized funding facility. Regional central banks have taken similar steps. The Bank of Central African States (BEAC), for example, has announced guarantee schemes for refinancing for bank loans. Likewise, the West African Regional Central Bank (BCEAO) has also provided a 3-month refinancing window for selected companies registered in the member states.
  • Exchange rate measures: Most African central banks have maintained a floating exchange rate regime, while six central banks have introduced measures to stabilize their exchange rates. For example, the Central Bank of Nigeria adjusted its exchange rate by 15 percent in response to the sudden shock to the FX supply, while Morocco doubled the allowed fluctuation of the dirham to +/-5 percent.
  • Mobile payment and fintech support measures: 16 African central banks have announced a formal policy to encourage cashless payment transactions and/or introduced various other forms of fintech support policies in response to the COVID-19 pandemic. Four central banks – Egypt, Ghana, Kenya, and Tanzania – increased maximum limits on daily transactions, while nine – Egypt, Lesotho, Liberia, Malawi, Mozambique, Nigeria, Rwanda, Tanzania, Tunisia – completely waived or reduced the mobile payment fees.

Closing thoughts
In response to the COVID-19 pandemic, many African central banks responded swiftly and introduced a diverse set of policy measures, as detailed above. It is likely too early to assess the impacts of these measures fully, but collectively they do underscore the gravity of the economic challenge countries across the continent are facing. Our team at COVID-19 Africa Watch is monitoring these developments as well as the emerging analysis of their effects. We will frequently update our Africa Monetary Policy Tracker here and welcome input from readers. We hope that by documenting central bank policy decisions in response to COVID-19, we can help lay the groundwork for useful analysis and an improved policy response.

 

About the authors

Bayasa Rentsendorj is an Associate Director in the Milken Institute’s Global Market Development practice, where he focuses on developing innovative solutions to enhance access to finance and develop capital markets in frontier and emerging market countries.

John Schellhase is an Associate Director for Global Market Development at the Milken Institute, where he manages advisory projects and partnerships with policymaking bodies in developing and emerging market countries.

COVID-19 Africa Watch tracks major developments and policy announcements from across the continent and also offers a curated selection of analysis on how the pandemic will impact African economies and development efforts. The site is a project of the Milken Institute’s Global Market Development Practice.

The views and opinions expressed in this publication are solely those of the author. They do not purport to reflect the opinions or views of COVID-19 Africa Watch or any affiliated organization.

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