The consequence of African currencies in a free fall
As the world economy stumbles toward global recession, driven by a strong dollar, national currency devaluation is becoming the norm not the exception.
An employee of the South African National Mint company inspects a coin die. (Creative Commons)
African currencies specifically, continue to depreciate against the dollar virtually without exception. With approximately fifty percent of all international trade undertaken in dollars, a strong greenback is leading to import inflation all across Africa, and in countries that are heavily import dependent.
Top among the worst hit currencies on the African continent is Ghana’s cedi. The cedi has lost 40% of its value against the dollar so far in 2022. Also, in 2022, the South African rand has depreciated by 9%, the Kenyan shilling declined by 6%, the Egyptian pound has lost between 20 to 25 percent of its value, and Nigeria’s Naira depreciated by 22.4 per cent in the parallel market.
Of course, it’s not just Africa that’s feeling the pain. The British pound has fallen to its lowest level against the dollar since 1985 and the Japanese yen is at its weakest since 1998. The euro, meanwhile, dropped below parity with the dollar for the first time since 2002 in late August.
But, the euro’s depreciation directly affects the 14 predominantly West African countries that use the CFA franc, which is pegged to the European single currency at a fixed rate. For these West African countries, when the Euro rebounds, they will find relative relief as they are pegged currencies.
The Ghanaian Cedi, the Kenyan shiling, the South African rand, the Nigerian Nira, and the Egyptian pound are likely not to see a significant rebound. They rarely do. When these currencies adjust downward, their upward rebound tends to be muted. Once these currencies depreciate, they tend not to show significant appreciation thereafter.
So, what does this mean for citizens of these countries? It likely means that the purchase power parity of their domestic currency holding will remain forever altered. This means that the same basket of goods they consume will now be more expensive to them in comparison to other nations with no relief forthcoming in the short term.
Let me give you an example. At the start of 2022, if you had 1 million Egyptian pounds it was worth approximately $55,000 (exchange rate of $1=LE18). Today, that 1 million Egyptian pounds is worth $40,000 ($1=LE25). Your net loss is $15,000 of what used to be $55,000 in savings in the first three quarters of 2022. This means it will cost you about 27 percent more to buy the same goods and services in a traded currency with your domestic savings. It also means you are unlikely to recover most of this depreciation in purchasing power in the near future.
This is quite a hit and it’s affecting Ghanaians, Nigerians, South Africans, and Egyptians alike which represent Africa’s strongest economies.
Facing these significant losses in savings, the concern is aggregate consumption will drop. When this happens aggregate demand for goods and services goes down too, inducing producers to produce less. In turn, producers demand less labor leading to higher unemployment.
So, what’s the fix? To increase the value of their currency, countries could try several policies. The first, is to sell foreign exchange assets, and purchase their own currency. The second is to raise interest rates (attract hot money flows). The third, is to reduce inflation (make exports more competitive). And, the fourth is supply-side policies to increase long-term competitiveness.
But, none of these actions will likely generate short term relief. This implies that for now consumers across a variety of African countries will see hardship that is at least in part the result of exogenous shocks. However, any exchange rate devaluation always points to a weakness within the real economy that requires a long term fix.
If the affected countries want to ensure long run prosperity for their citizens, and recoup the wealth its nations have literally lost overnight, the best time to start advancing on structural reforms for the real economy is now.