African currencies are crashing and there is no easy way out

By:
on May 23, 2023
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  • Most African currencies are sitting at their lowest level on record.
  • The South African rand, Egypt pound, and Nigerian naira have all plunged.
  • The same is happening in Kenya, Rwanda, Uganda, and Ghana.

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African currencies are crashing to a record low, with some becoming almost worthless. A quick look at some of the most prominent currencies like the Kenya shilling, Rwanda franc, South African rand, Egyptian pound, Zimbabwe dollar, and Nigerian naira are all sitting at a record low. 

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African currencies are tumbling 

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African countries are facing their worst economic crisis in modern history. Just recently, Ghana, once a promising African country had to be bailed out by the IMF after it defaulted on its debt obligations. 

Other African countries are on the verge. South Africa, the most industrialized country in the continent, is facing substantial challenges as power outages jump. Nigeria, the biggest oil exporter in the country, is seeing sky-high inflation, as I wrote here.

Kenya, the biggest economy in East Africa, is also on the verge, with civil servants experiencing delayed salaries. The government owes billions of shillings to county governments and its suppliers. 

Egypt, another leading powerhouse, is going through a major economic crisis, with inflation surging to over 20%. The official unemployment rate has jumped to almost 8%. Analysts believe that the situation is much worse.

In Zimbabwe, the official currency has also crashed and attempts to launch a gold-backed token have not been highly successful. Other African countries like Uganda, Ethiopia, Sudan, Zambia, and Angola are all facing a major economic crisis.

Africa’s challenges are hard to deal with

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The challenge for African currencies is that the ongoing crisis is hard to deal with. For example, in South Africa, the government is struggling to save Eskom, the corrupt power monopoly. Manufacturing and mining output is also struggling.

The biggest challenge that Africa faces is that many countries have billions of dollars in loans that are set to mature soon. For example, Kenya is spending billions of shillings per month servicing its local and foreign debt. 

As the local currencies crash, it is becoming more expensive to service this debt. A country like Kenya is seeing its foreign debt jump by over 40 billion shillings when the local currency slips by 1 shilling against the dollar. When downgrading Kenya, Fitch wrote:

“Our decision to downgrade Kenya’s rating to ‘B’, from ‘B+’ in December 2022 reflected its persistent fiscal and external deficits, relatively high debt, deteriorating external liquidity, and high external financing costs.”

I believe that the current African currency crisis can be solved by debt renegotiations coupled with making investments in exports. Official statistics show that most countries run huge trade deficits. In all, Sub-Saharan Africa exports goods worth over $205 billion and imports goods worth over $249 billion. 

Interest rate hikes by key African central banks will not help to save these currencies. In fact, I believe that sustained rate hikes will make the situation worse by reducing access to capital.

In the near and longer term, I suspect that key African currencies like the South African rand, Kenya shilling, Zimbabwe dollar, and Nigerian naira will continue falling.

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