When it comes to African currencies, what happens when David can’t coexist with Goliath?

Since early 2022, numerous African currencies have been flailing. Several un-pegged African currencies have lost significant value relative to the US dollar. In turn, this has fueled inflation in African economies large and small. 

Several African nations need to find a way out of the David and Goliath relationship between their domestic currencies and the dollar, lest they become the next Argentina. (Public domain)

Un-pegged African currencies depreciated against the dollar by approximately 7 percent since January 2022. However, countries like Nigeria, Egypt and Ghana are witnessing much more severe currency depreciation. 

When African currencies weaken against the dollar, this significantly increases the cost of imports for a continent that is import dependent. For example, many of Africa’s largest economies are dependent on food imports, and when the dollar gains ground, food inflation takes hold. But, it’s not just food prices that have been on the rise. Approximately two thirds of Africa’s imports are priced in US dollars, so a strong dollar means goods and services become more expensive across the board.

One significant challenge devaluation poses for African countries is approximately 65 percent of their external debt is in US dollars. When the currencies of African nations lose value against the dollar, this leads budget deficits to rise as debt service becomes more expensive. 

African countries whose exchange rates are not fixed to a stronger national currency are now in a bind. They have to tighten monetary policy to combat inflation leading to higher interest rates. In turn, higher interest rates are lowering demand for goods and services, and making it more expensive for the private sector to borrow.

On the African continent, countries whose exchange rates are pegged haven’t seen this kind of volatility. Francophone West African nations with pegged currencies seem to have weathered this storm. This is why several African countries are working so hard to become members of BRICS, or the so called New Development Bank. Their hope is that a new BRICS supported currency will allow them to overcome the wild currency swings they regularly face against the US dollar. 

Until a BRICS currency comes to be, and this won’t be in the short term, several African nations are looking closely at the economic relationship that has developed between China and Argentina. 

Argentina’s strengthened ties with China allowed it to make a $2.7 billion debt payment to the IMF in yuan. This is now being closely examined by several African nations seeking a formula for debt relief. With the Central Bank of Argentina also announcing that Argentines are now able to open savings and checking accounts in yuan, African nations are also not lost to this as a vehicle for preserving the wealth of their citizens. 

Several African nations need to find a way out of the David and Goliath relationship between their domestic currencies and the dollar. If David can’t find a way to coexist with Goliath, the next Argentina will likely be an African MIC.