Sub-Saharan African (SSA) countries have depreciated against the United States dollar (USD) by an average of 8% since January 2022, according to the global lender International Monetary Fund. Consequently, inflationary pressures across the region are higher.
“Most sub-Saharan African currencies have weakened against the U.S. dollar, fanning inflationary pressures across the continent as import prices surge. This, together with a growth slowdown, leaves policymakers with difficult choices as they balance keeping inflation in check with a still-fragile recovery,” the global lender said.
- Per the report, the depreciation in the region is mainly driven by external factors like foreign exchange earnings and high oil and food prices, partly due to the Russian-Ukraine conflict.
- In addition, lower risk appetite in global markets and interest rate hikes in the U.S. have pushed investors away from the region to U.S. treasury bonds.
- The IMF further explained that the large budget deficit in the region aggravated the effects of these “external shocks.”
- While the average depreciation across the region since January 2022 is 8%, countries like Ghana and Sierra Leone have had it far worse. The Ghanaian cedi and Sierra Leonean leone have depreciated by more than 45%, IMF data shows.
- Many Sub-Saharan African countries are import-dependent for essential items, including food, and, as a result, local prices tend to rise when currencies weaken against the USD. Notably, more than two-thirds of imports are priced in USD for most countries, according to the IMF.
- The international lender explained that a one percentage point depreciation against the USD leads to an average inflation rise of 0.22 percentage points within the first year.
“There is also evidence that inflationary pressures do not come down quickly when local currencies strengthen against the U.S. dollar,” the IMF said.
On public debt
- Weaker currencies also push up public debts. The IMF added that about 40% of public debt is external in SSA, and over 60% is in USD.
“Since the beginning of the pandemic, exchange rate depreciations have contributed to the region’s rise in public debt by about 10 percentage points of GDP on average by end-2022, holding all else equal.”
On central banks’ inadequate interventions
- The IMF highlighted some measures central banks have taken to prop up depreciating currencies, including some central banks supplying foreign exchange to importers from their reserves. To this, the loophole found is that reserve buffers are running low in some countries, leaving barely enough room for continuous intervention.
- Other administrative measures, including foreign exchange rationing or banking foreign currency transactions, are considered highly distortive by the Fund and may create room for corruption.
- The IMF finalized that countries where exchange rates are not pegged to a currency have little choice but to let the exchange rate adjust and tighten monetary policies to fight inflation.
“Countries with pegged exchange rates will need to adjust monetary policy in line with the country of the peg. In both country groups, fiscal consolidation can help to rein in external imbalances and limit the increase in debt related to currency depreciation. Structural reforms can help to boost growth,” the IMF report said.