As the world continues readjusting in the face of the after-shocks of the Covid-19 pandemic, most African currencies are continuously losing value against other global trading currencies resulting in the loss of value and purchasing power on the continent. Weak currencies against the dollar, the sterling pound, and other regional trading currencies are having damaging effects on the purchasing power of many across the continent.
According to a recent World Bank report, the Nigerian Naira and Angolan Kwanza have been among the worst affected currencies in terms of valuation. The two have taken hits of over 40% despite Angola and Nigeria being the two top oil-producing countries on the continent. Their weak currencies have affected the ease of doing business in both Angola and Nigeria.
The World Bank report says ‘the weakening of the naira was triggered by the central bank’s decision to remove trading restrictions on the official market’ while for the Kwanza, ‘the central bank decided to stop defending the currency as a result of low oil prices and greater debt payments.’
The huge gap between supply and demand for foreign currencies in many African countries is one of the major issues. Once there is a shortage of foreign exchange, people have to turn to alternative sources, such as the black market.
Black market rates are always worse than official rates meaning only wealthy companies and individuals can afford to use them for imports, raw materials, tuition, medical expenses, tourism, and so on.
Another factor is the huge reliance on imports, a common factor among many African nations. Many African countries import way more finished goods than they export. As a result, they need foreign currencies like the US dollar or the Chinese yuan to pay the international suppliers of those goods, increasing demand for foreign exchange, and reducing the reliance on the local currency.
The dollarisation of the economy is not uncommon in parts of the continent. In countries like Sierra Leone, some goods and services are priced in US dollars at grocery stores, thereby increasing the demand for dollars and reducing demand for the leone, the local currency.
Foreign exchange scarcity or higher exchange rates force manufacturers to pay more to import their raw materials, which increases the cost of production.
In most cases, the final consumer bears the additional costs via increased prices in the shops and higher transport costs.
Businesses suspend operations and investors take fright when they cannot retrieve their money in foreign currency from the central bank.
One such example is Emirates Airlines. It suspended operations in Nigeria for more than a year after it found it could not repatriate $85m in funds from ticket sales trapped in the country.
In Kenya, Central Bank Governor Kamau Thugge said the country’s currency has been overvalued for long; this is despite losing more than 16% to the dollar in recent months. Mr Thugge says the country’s foreign exchange reserves cover less than four months’ imports.
This depreciation makes imports more expensive and adds to Kenya’s debt burden, which stood at more than 10 Trillion shillings (64.4 billion euros) at the end of June which is around two-thirds of the gross domestic product.
President William Ruto has introduced a series of tax hikes and new taxes designed to increase government revenue and restore the country’s room for maneuver.
But these measures are taking a heavy toll on purchasing power, generating incomprehension and discontent among the population, even though he had promised during the presidential campaign to ease the financial difficulties of the poorest Kenyans.
The Kenyan economy was seriously shaken by COVID-19, followed by the shockwaves of the war in Ukraine and a historic drought in the Horn of Africa. Economic growth slowed to 4.8% last year, compared with 7.6% in 2021, and growth forecasts for 2023 are lower than for 2022.
Meanwhile, Zambia’s central bank said it would increase the amount of foreign currency deposits that banks must hold, to build up the country’s foreign exchange reserves and support the value of the local kwacha currency.
The impact of the weak currencies has sparked renewed debate about the full implementation of the Continental Free Trade Agreement (AfCFTA) as a way of ditching reliance on foreign currencies to trade.
Established in 2018 AfCFTA aims to create a single market for goods and services and boost intra-African trade and investment. Once it’s fully up and running it will be the biggest free trade area in the world in terms of population, covering a market of 1.3 billion people.
During the first Africa Climate Summit (ACS), there were lengthy and meaningful discussions around the importance of reforming financial systems to enable post-disaster reconstruction, strengthening the African Adaptation Initiative, and delivering the UNFCCC Loss and Damage Fund. Additionally, leaders highlighted the necessity of financial investments in universal coverage of early warning and early action systems for disaster risk reduction.
Africa faces a significant adaptation funding gap, with the African Development Bank estimating the cost of climate-related disasters to be between USD 7 billion to USD 15 billion annually, projected to rise to USD 50 billion by 2030.
To address these challenges, African countries need to raise USD124 billion annually by 2030, but they currently receive only USD28 billion a year. The summit aims to emphasize the urgency of prioritizing adaptation investment as a development imperative for Africa and the world.
Private capital, estimated at USD 630 billion per year, was identified as a potential source of investment, particularly in agriculture.
There is also the small issue of the divide between the poor and the rich as a result of the myriad of problems associated with weak currencies. While some in the middle class have happily watched the value of their homes rise, those on more modest incomes trying to stretch paychecks to afford rent, gas, and food see no silver lining. Inflation has worsened the gap between the working class and the middle class. Governments need to do significantly more on their respective weak currencies to give some semblance of power to the people when purchasing or exchanging goods at marketplaces.
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