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IMF Highlights Impact of Depreciating Currencies on Public Debt in Sub-Saharan Africa

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IMF - Investors King

The International Monetary Fund (IMF) has recently emphasized the repercussions of weaker currencies on public debt in Sub-Saharan Africa.

In a report published on the IMF’s website, the organization sheds light on the detrimental effects of currency depreciation in the region.

According to the IMF, most sub-Saharan African currencies have weakened against the US dollar, leading to inflationary pressures as import prices surge. This, coupled with a slowdown in economic growth, poses challenging choices for policymakers as they strive to maintain inflation control while supporting the fragile recovery.

The average depreciation in the region since January 2022 is around 8 percent, varying across countries. Notably, the currencies of Ghana and Sierra Leone have depreciated by more than 45 percent.

External factors, such as reduced risk appetite in global markets and interest rate hikes in the United States, have been major drivers of currency depreciations. These factors have redirected investors toward safer and higher-yielding US treasury bonds, contributing to the weakening of sub-Saharan African currencies.

The IMF highlights that weaker currencies have significant implications for inflation and public debt. When currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, are imported. Importantly, a significant proportion of imports in most countries in the region is priced in US dollars.

The report reveals that a one percentage point increase in the rate of depreciation against the US dollar leads to an average inflation increase of 0.22 percentage points within the first year in the region. Furthermore, inflationary pressures persist even when local currencies strengthen against the US dollar.

Weaker currencies also contribute to the rise in public debt. In sub-Saharan Africa, about 40 percent of public debt is external, with more than 60 percent of that debt denominated in US dollars. The IMF estimates that exchange rate depreciations since the beginning of the pandemic have contributed to an average increase of around 10 percentage points of GDP in the region’s public debt by the end of 2022.

Nigeria provides a notable example, as the depreciation of the naira against the US dollar has added to the country’s external debt burden. Over the past seven years, the naira has depreciated by 52.52 percent, exacerbating the challenges faced by Nigeria.

The IMF’s report underscores the urgency for policymakers in Sub-Saharan Africa to address the structural issues behind currency depreciation and implement measures to mitigate the negative consequences on public debt. Economic reforms, diversification efforts, and attracting investment are crucial for these countries to build resilience and foster sustainable economic growth in the face of external shocks.

By navigating the complexities of currency depreciation and taking appropriate actions, Sub-Saharan African nations can strive for economic stability and lay the foundation for a prosperous future.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Economy

Nigeria’s Plan to Review Oil Companies’ Gas Flaring Strategies

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Oil

Nigeria is ramping up its efforts to address environmental concerns in the oil and gas sector with a comprehensive plan to review gas flaring strategies of international and indigenous oil companies.

The Minister of State for Environment, Dr. Iziaq Salako, announced this initiative during a national stakeholders engagement meeting on methane mitigation and reduction held in Abuja, Investors King reports.

Gas flaring, a common practice in the oil industry, releases methane—a potent greenhouse gas—into the atmosphere, contributing to climate change and posing health risks to communities near oil facilities.

Nigeria aims to end routine gas flaring by 2030, aligning with global climate goals and commitments.

Dr. Salako explained the importance of reducing methane emissions and highlighted the detrimental effects on public health, food security, and economic development.

He outlined practical steps being taken to tackle methane emissions, including the development of methane guidelines and the engagement of government institutions.

The ministry, through the National Oil Spill Detection and Response Agency, will conduct periodic reviews of oil companies’ plans to ensure compliance with the gas flaring deadline.

Deloitte management consultants will assist in conducting comprehensive forensic audits to scrutinize the legitimacy of forward-contracted transactions.

President Bola Tinubu’s commitment to environmental sustainability underscores the government’s dedication to addressing climate change and fulfilling its multilateral environmental agreements.

The engagement event served as a platform for stakeholders to discuss methane mitigation strategies, existing policies, and implementation challenges.

Collaboration and dialogue among diverse sectors are crucial in charting a unified course towards sustainable methane reduction in Nigeria’s oil and gas industry.

As the country navigates its environmental agenda, ensuring accountability and transparency in gas flaring practices remains paramount for achieving a greener and healthier future.

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Economy

Interest Rate Jumps to 24.75% as CBN Takes Aggressive Stance Against Inflation

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Dr. Olayemi Michael Cardoso

The Central Bank of Nigeria (CBN) has announced a significant increase in the monetary policy rate, known as the interest rate, to 24.75%.

This move disclosed by CBN Governor Olayemi Cardoso during the 294th Meeting of the Monetary Policy Committee press briefing in Abuja, represents a bold step by the apex bank to address the mounting inflationary pressures faced by the country.

With inflation soaring to 31.70% in February, the CBN aims to moderate this upward trend by tightening its monetary policy stance.

This decision follows the previous hike in the interest rate to 22.75% in February, showcasing the CBN’s commitment to combatting inflationary forces.

While the bank opted to maintain the Cash Reserve Ratio at 45%, the significant increase in the interest rate underscores the urgency of the situation and the need for decisive action.

Governor Cardoso emphasized that these measures are essential to stabilize the economy and safeguard the purchasing power of the Nigerian currency.

The 294th MPC marks the second meeting under Governor Cardoso’s leadership, indicating a proactive approach to addressing economic challenges.

The next MPC meeting is scheduled for May 20th and 21st, 2024, highlighting the ongoing commitment of the CBN to navigate Nigeria’s economic landscape amidst inflationary pressures.

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Economy

Nigeria Braces for 10th Consecutive Interest Rate Hike by Central Bank

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Central Bank of Nigeria (CBN)

As Nigeria grapples with persistently high inflation, the Central Bank of Nigeria (CBN) is gearing up to implement its tenth consecutive interest rate hike in a bid to curb the soaring prices and attract investment.

Analysts surveyed by Bloomberg are anticipating a substantial 125 basis-point increase in the key rate to 24%, marking one of the most significant adjustments in the current tightening cycle.

The decision, expected to be announced by Governor Olayemi Cardoso on Tuesday at 2 p.m. in Abuja, comes on the heels of inflation accelerating to 31.7% in February, far surpassing the central bank’s target range of 9%.

This surge has been primarily attributed to the sharp depreciation of the naira, prompting authorities to devalue the currency twice since June to narrow the gap with the unofficial market rate and encourage investor confidence.

While these measures have seen the naira strengthen in recent days and bolstered investment inflows, including a fourfold increase in overseas remittances and significant foreign investor portfolio asset purchases, there remains a palpable need for more decisive action.

Giulia Pellegrini, a senior portfolio manager at Allianz Global Investors, emphasized the necessity for the CBN to intensify its tightening efforts to regain foreign investors’ confidence in the local bond market.

While acknowledging the positive strides made by the central bank, Pellegrini stressed the importance of a more assertive approach to prevent the diversion of investor attention to other frontier markets.

As the Nigerian economy navigates through these challenging times, the impending interest rate hike signals the CBN’s determination to address inflation head-on and foster a more stable economic environment.

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