The Econmist - USA (2021-11-06)

66 Finance & economics TheEconomistNovember6th 2021

ital  outflows  and  a  tumbling  lira  (see

chart). The sinking currency, by raising the

cost of imports, has helped push up infla­

tion by about eight percentage points over

the  past  year,  to  a  rate  around  four  times

the central bank’s target.

Brazil  demonstrates  how  inflation  can

get out of hand despite the best efforts of a

central bank, because of fiscal woes. After

suffering hyperinflation in the early 1990s,

when the annual inflation rate approached

3,000%,  Brazil  placed  itself  on  a  firmer

macroeconomic  footing  by  adopting  bud­

get  reforms  and  enhancing  the  central

bank’s  independence.  But  from  2014  to

2016, and again over the past year, the abil­

ity of the central bank to fight inflation has

been  threatened  by  an  erosion  of  confi­

dence in the public finances.

Government  spending  in  Brazil  has

surged  since  the  onset  of  the  pandemic.

Jair  Bolsonaro,  the  president,  plans  to  ex­

tend relief payments despite roaring infla­

tion.  Worries  about  debt  sustainability

have  reduced  investors’  confidence,  lead­

ing to falling asset prices and a weaker cur­

rency.  Despite  booming  foreign  demand

for Brazil’s commodity exports, the real has

tumbled  by  nearly  30%  since  the  begin­

ning of 2020. 

Higher  import  prices  have  contributed

to  stubbornly  high  inflation,  forcing  the

central  bank  to  raise  its  benchmark  inter­

est  rate  by  nearly  six  percentage  points

since March. Yet interest rates may be ap­

proaching  levels  at  which  the  additional

fiscal cost they impose on the government

exacerbates  debt­sustainability  worries

and further weakens the currency, leaving

the central bank in a no­win situation. The

real has dropped by nearly 2.5% since late

October  alone—after  the  central  bank

raised interest rates by a full 1.5 percentage

points and promised to do the same again

at its next meeting in December.

What happens if neither monetary nor

fiscal policy can be counted upon for eco­

nomic discipline? Here Argentina provides

an  illustration.  The  government  has  long

relied on the printing press to cover budget

deficits, and has been in particular need of

monetary financing since defaulting on its

debt,  for  the  ninth  time  in  its  history,  in

May  2020.  Over  the  past  two  years  the

amount of money in circulation has risen

at  an  average  annual  rate  of  more  than

50%.  The  peso  has  fallen  by  over  60%

against  the  dollar  since  the  beginning  of

last year.

Argentina,  like  Brazil,  has  experienced

hyperinflation  in  recent  times.  Its  eco­

nomic  situation  may  yet  be  salvaged.  But

as policymakers in rich and poor countries

alike  confront  the  enormous  economic

and budgetary costs of covid­19, some may

be  tempted  to  depart  from  norms  around

monetary  and  fiscal  policy.The  result,  in

some  unhappy  places,couldbe  inflation

that is too hot to handle. n

More money, more problems

Sources:CentralBankofArgentina;IMF; Haver Analytics

300

250

200

150

100

50

2019 20 21

Monetary base, currency in circulation

January 2019=100

Argentina

Tu rke y

Brazil

Exchange rates against the $

% decrease, Jan 1st 2020-Oct 1st 2021

Argentina

Tu r ke y

Brazil

-40-50-60 -20-30 -10 0

Up, up and away

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PaymentsinAfrica

Turf wars

T

he paymentsfrenzy  is  going  global,

and  Africa  is  catching  the  bug.  So  far

this year four of the continent’s financial­

technology firms have reached or exceeded

billion­dollar  valuations,  more  than  dou­

bling  Africa’s  population  of  “unicorns”.

OPay,  a  mobile­payments  company,  ac­

quired  its  horn  in  August,  after  raising

funding  from  investors  including  Soft­

Bank,  a  Japanese  firm.  Other  recent  uni­

corns include Wave, a Senegal­based start­

up  that  runs  a  mobile­money  network;

Chipper  Cash,  which  offers  peer­to­peer

payments; and Flutterwave, which simpli­

fies  payments  for  businesses.  As  foreign

investment pours in, Africa’s fintech firms

are  expanding  both  across  the  continent

and into new services. 

Africa  is  an  obvious  choice  for  fintech

investors. They are betting that young Afri­

can  talent  can  innovate  its  way  out  of  the

region’s most pressing financial problems

faster  than  legacy  firms  can.  By  2025  the

continent  will  be  home  to  1.5bn  people,

most  of  whom  will  have  grown  up  in  the

era  of  the  internet.  Nigeria,  which  has  re­

ceived almost two­thirds of Africa’s fintech

investments this year, has a young and en­

trepreneurial  population.  But  more  than

half  of  Nigerians  do  not  have  a  bank  ac­

count. Across the continent, digitally liter­

ate  unbanked  (and  underbanked)  people,

who have long been largely ignored by con­

ventional  lenders,  are  instead  turning  to

the  upstarts.  In  Ivory  Coast,  for  example,

94% of pupils’ school fees were being paid

using mobile money by 2014. This makes it

fertile  territory  for  companies  like  Wave,

which moved into the country in April. 

One  reason  for  firms  to  expand  geo­

graphically  stems  from  the  African  Conti­

nental Free Trade Area, a deal that was first

agreed on in 2018 and which has now been

ratified  by  38  countries.  The  Pan­African

Payment  and  Settlement  System  was

launched in September as part of the deal,

in  order  to  make  the  region’s  many  sys­

tems  work  better  together.  As  a  conse­

quence,  investors  are  backing  firms  with

ambitions that extend beyond their home

countries.  Flutterwave  had  reached  more

than 33 African countries by the time of its

latest  funding  round  this  year;  those  tak­

Fintech firms vie for domination