African Currencies Are Under Pressure Amid Higher-for-Longer US Interest Rates

IMF Blog, May 15, 2023

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Most sub-Saharan African currencies have weakened against the US dollar, fanning inflationary pressures across the continent as import prices surge.
The average depreciation for the region since January 2022 is about 8 percent.
The extent of depreciation varies by country; Ghana’s cedi and Sierra Leone’s leone depreciated by more than 45 percent.
The blog is based on an analytical note from the IMF’s Regional Economic Outlook for sub-Saharan Africa.

External factors dominated depreciations:
- Lower risk appetite in global markets and interest rate hikes in the United States pushed investors away from the region towards safer and higher paying US treasury bonds.
- Foreign exchange earnings declined as demand for the region’s exports dropped because of the economic slowdown in major economies.
- High oil and food prices, partly due to Russia’s war in Ukraine, pushed up import costs in 2022.
Domestic fiscal factors compounded external shocks:
- Large budget deficits increased the demand for foreign exchange; about half of the countries in the region had deficits exceeding 5 percent of gross domestic product in 2022, putting pressure on their exchange rates.

Imports and inflation:
- More than two-thirds of imports are priced in US dollars for most countries in the region.
- A 1 percentage point increase in the rate of depreciation against the US dollar leads, on average, to an increase in inflation of 0.22 percentage points within the first year in the region.
- There is evidence that inflationary pressures do not come down quickly when local currencies strengthen against the US dollar.
Public debt:
- About 40 percent of public debt is external in sub-Saharan Africa and over 60 percent of that debt is in US dollars for most countries.
- 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.
- Growth and inflation helped to contain the public debt increase to about 6 percent of GDP during the same period.
Policy response constraints:
- Many central banks have supplied foreign exchange to importers from their reserves to prop up currencies, but reserve buffers are running low in many countries, limiting further intervention.
- Administrative measures such as foreign exchange rationing or banning foreign currency transactions have been applied, but these measures can be highly distortive and create opportunities for corruption.

Exchange rate and monetary policy:
- Given that the external shocks are expected to persist, countries where exchange rates are not pegged (fixed) to a currency have little choice but to let the exchange rate adjust and tighten monetary policy to fight inflation.
- Countries with pegged exchange rates will need to adjust monetary policy in line with the country of the peg.
Fiscal and structural policy:
- 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.

Source: IMF blog post "African Currencies Are Under Pressure Amid Higher-for-Longer US Interest Rates" (May 15, 2023).