Managing exchange rate fluctuations has been a constant battle for Africa. Most Sub-Saharan African currencies have been weakening against leading global currencies like the pound sterling and the US dollar. For most of the countries in Africa, the US dollar is the predominant medium of exchange and reserve currency. In 2023, the US dollar’s share in the Central Bank reserve currency of sub-Saharan Africa stood at around 78%. This excessive dependency on the US dollar– as the key currency for trade invoicing and external debt- has dragged many African economies into severe economic hardship.
According to an IMF report, almost 84% of exports, 67% of imports, and 60% of the external debt of most African nations are in dollars. As a result, even a slight appreciation of the dollar creates havoc in almost all currencies as manifested in higher inflation, larger debt, and a weaker trade balance. Moreover, the region’s exchange rate burden became heavier with the growing appetite for imports and external borrowing.
The recent World Bank report cited the currencies of Nigeria and Angola, Africa’s biggest oil producers, as the poorest performers on the continent. The worst-performing African currencies in 2023 included the Nigerian Naira, topping the list with a staggering 55% devaluation, followed by the Angolan Kwanza. The other African currencies that depreciated during the same time frame, listed in the report include South Sudan (33%), Burundi (27%), the Democratic Republic of Congo (18%), Kenya (16%), Zambia and Ghana (12%).
Numerous reasons are attributed to the depreciation. Weak economic fundamentals, interest rate differentials, political instability, etc are few among them. But largely, the depreciation was driven by external factors. Lower risk appetite and soaring interest rates in the US drove away investors from the continent. While export earnings suffered a severe setback due to the economic slowdown in major economies, Russia’s war in Ukraine and more recently the Israel-Palestine war pushed up import costs.
A common trait of the continent’s economies is the excessive reliance on imports which further fires up the demand for foreign exchange. The weakening of the currencies along with the surge in import prices fan inflationary pressures across the continent worsening budget deficits. Many among them recorded deficits of more than 5 % of gross domestic product in 2022. By the end of 2022, the region’s average public debt climbed to 10 percent of GDP.
The scarcity of foreign exchange also resulted in the flight of investors as they were unable to retrieve their money in foreign currency from the Central Bank. For instance, Emirates Airlines was forced to suspend its operations in Nigeria for more than a year when it could not repatriate USD 812 million from Nigeria.
African Governments are experimenting with various policy interventions to rein in the foreign exchange crisis. Central Bank of Nigeria announced its decision in October 2023 to inject USD 10 bn worth of foreign exchange into the market. Gold-rich Ghana adopted a ‘gold for oil’ policy last year to reduce pressure on its currency, the Cedi. Egypt has sought a barter agreement with Kenya.
To address the exchange rate crisis, Africa needs to adopt a multi-pronged strategy embracing policy reforms, institutional strengthening, and regional cooperation. Experts opine that the solution to the crisis lies at the continent’s doorstep- increasing intra-African trade and facilitating the African Monetary Union with a unified African currency.
A successful de-dollarisation and curbing of the excessive reliance on foreign currencies can be achieved only through the early implementation of a common African currency through the African Continental Free Trade Area (AfCTA) platform. It will not only promote locally produced goods but also support the local currencies and generate more jobs. Let this be a wake-up call for African leaders to prioritize the implementation of the Continental Free Trade Agreement. Only then can Africa hope to achieve economic stability and sustainable development.
