According to the International Monetary Fund, Nigeria and other Sub-Saharan African nations’ weaker currencies are driving rising state debt.
The IMF reported that since January 2022, sub-Saharan African currencies have declined compared to the US dollar by an average of 9%.
“Most sub-Saharan African currencies have weakened against the US dollar, fanning inflationary pressures across the continent as import prices surge. This, together with a growth slowdown, leaves policymakers with difficult choices as they balance keeping inflation in check with a still-fragile recovery.
“As the Chart of the Week shows, the average depreciation for the region since January 2022 is about 8 percent. The extent varies by country, however. Ghana’s cedi and Sierra Leone’s leone depreciated by more than 45 percent.”
The IMF also stated that external factors were mostly to blame for the depreciations, noting that decreased risk appetite on international markets and interest rate increases in the US drove investors away from the region and into safer and better-paying US treasury bonds.
The IMF noted the high import costs in 2022 and said that by raising the demand for foreign currency, the huge budget deficits had exacerbated the effects of these external shocks.
“When currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, is imported. More than two-thirds of imports are priced in US dollars for most countries in the region.
“A one 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 also evidence that inflationary pressures do not come down quickly when local currencies strengthen against the US dollar.
“Weaker currencies also push up 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 the end of 2022, holding all else equal.”
