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

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.