African currencies are under pressure amid higher-for-longer US interest rates

 The weakening of sub-Saharan African currencies against the US dollar has led to inflationary pressures across the continent, as import prices have surged. This has made it harder to curb inflation given the region's dependence on imports. The extent of currency depreciation varies by country, with Ghana's cedi and Sierra Leone's leone depreciating by over 45%. External factors such as lower risk appetite in global markets and US interest rate hikes have contributed to the depreciation, as have high oil and food prices, partly due to Russia's war in Ukraine. Large budget deficits have compounded the effects of these external shocks by increasing the demand for foreign exchange. 

Weaker currencies also push up public debt, as about 40% of public debt is external in sub-Saharan Africa, and over 60% of that debt is in US dollars for most countries. Central banks in the region have tried to prop up their currencies by supplying foreign exchange to importers from their reserves, but with reserve buffers running low in many countries, there is little room to continue intervening in foreign exchange markets. Administrative measures such as foreign exchange rationing or banning foreign currency transactions can be highly distortive and create opportunities for corruption. 

To address the issue, countries where exchange rates are not pegged to a currency have little choice but to let the exchange rate adjust and tighten monetary policy to fight inflation, while 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, while structural reforms can help to boost growth.

#African, #currencies, #inflation, #economics

Reference

Kemoe, L., Mama, M. M., Mighri, H., & Quayyum, S. (2023, May 15). African currencies are under pressure amid higher-for-longer US interest rates. IMF. https://www.imf.org/en/Blogs/Articles/2023/05/15/african-currencies-are-under-pressure-amid-higher-for-longer-us-interest-rates?utm_medium=email&utm_source=govdelivery