Is Africa going to have free money?

All that glitters is not gold.

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The ECB announced recently that it’ll kick off its 60 billion euro-a-month bond purchases ($66.3 bn) today. This stimulus program, a quantitative easing, is expected to involve euro-denominated public sector securities in the secondary market, as well as securities from the corporate arena such as asset-backed securities.

Quantitative easing, not new to most Central Banks these days, although common with Japan some decades ago, is a monetary policy undertaken by Central Banks when the standard monetary policy, purchasing bonds and thereby expanding the money supply, has proved ineffective. In recent years, we have seen European countries reduce their rates to much below the lower bound, to negative values.

Why quantitative easing? As I said earlier, because standard monetary policy has failed. When Central Banks are purchasing corporate bonds and assets in lieu of its own issued bonds, the prices of those assets rise and their yields fall. The monetary base increases and thence the money supply. That means there will be much money in circulation. Many persons claim this is tantamount to printing money. It is also done to stimulate spending, discourage savings and stimulate the economy to a recovery. Eventually, all these measures prove effective when banks lend this liquid money.

Quantitative easing is also used to curtail deflationary pressures on the economy.

So, with banks having high liquidity, they’re ready to give out money both locally and globally. Africa will not be left out of the lending spree.

Nigeria, South Africa, Ghana, Kenya and other African economies that have been in favorable ratings recently will expect to receive European money as loans. Will it be free?

Even when those lending rates are low, it is not free. Like in the past, it could create a spirit of “cheap loans” amongst developing country borrowers, making them increase their debt portfolio unreasonably. To maintain or increase growth, they’d have to do with some rise in inflation. Not so bad, though.

Until European recovery occurs as expected.

Too bad if the Governors of African Central Banks are not prudent. A former Indian foreign secretary, Shyam Saran, believes most of this money flowing to developing economies will be in portfolios, and not foreign direct investments. Thence, developing countries have to anticipate distortions and manage them appropriately. Portfolio investments can take flight on a whim. African economies do not have the investment climate that fosters much confidence.

Policy responses by developing countries matter when European economies start going back to tighter monetary policies. African economies should be expecting negative spillover effects when this happens. Capital inflows will reduce. Although this might not be significant but they are cautioned to exercise prudential economic management and investment in the sectors that will best allow structural change.

So, the money will not be free after all. The ECB is looking for a way to give herself time to bounce back and be competitive again.