The majority of sub-Saharan African currencies have depreciated in comparison to the US dollar. Unfortunately, the most important reason for this is wars, natural disasters and political conflicts developing on a global scale.
Since the economy of sub-Saharan Africa is based on imports to a large extent, even the slightest increase in exchange rate has a direct and hard impact on the country’s economies.
External influences were largely responsible for the depreciations in the region. To give more concrete examples of this, we refer to America’s interest rate hike, the widespread effects of the Russia-Ukraine war on a global scale, and the Israeli-Palestinian tensions that are emerging today. While many developed countries announced a decline in their growth rates after 2020-2021, a financial crisis in African countries, whose economies lag behind, is also inevitable.
Wheat, gas and energy prices, which made a huge upward leap, especially with Russia’s move against Ukraine, also reduced the global purchasing power and caused serious shocks in the countries that supply raw materials from abroad. The consequences of these external shocks have been worsened by enormous budget shortfalls, resulting in a larger demand for foreign currency.
Strain on exchange rates
Almost half of the countries in the locale had deficits higher than 5 percent of their gross domestic product in 2022, posing a major strain on their exchange rates. Among sub-Saharan countries whose economies are largely based on imports, the most negative factor is the connection of food prices with the US Dollar. When foreign exchange rates debilitate against the US dollar, basic life costs rise, as much of what individuals purchase, counting fundamental things like nourishment, are imported.
Since the majority of the products are imported, their prices in the markets are made in US dollars. This reduces the purchasing power of local people. Of course, this increase in exchange rates directly drags the public external debt towards an increasing trend. This causes the state to demand more taxes from the people, causing the people to become even more economically squeezed.
Unfortunately, we actually see a vicious circle here, and the biggest blow in this cycle is always dealt to the local community. All the factors we have mentioned here are among the primary factors that trigger inflation in countries.
More affordable prices
Due to economic conditions, many commercial enterprises have begun to purchase products that they previously procured from Europe from Far Eastern countries. Significant increases in Euro and Dollar exchange rates automatically hit market prices and reduce trade. This has pushed merchants to seek to supply similar products at more affordable prices. It has already brought in China and its regional neighbours, which have been on their way to having an important say in trade on the African continent in the last 20 years, to a more important point.
Countries with the most remarkable decrease in the import cover ratio in 2023 and 2024 encompassed Angola, Nigeria, Kenya, Tanzania, Rwanda, Ghana, and the Gambia. This has caused the devaluation risk of managed float exchange rates such as the Nigerian Naira, the Angolan Kwanza and the Kenyan Shilling to increase. In 2024, exchange rate issues will continue to be a major factor. Sub-Saharan African currencies are more exposed to a stronger US dollar, causing variations in global commodity prices and widening interest rate gaps.
On the other hand, we can consider the West and Central African countries that are in commercial proximity with France a little luckier. This is because the Euro-indexed fixed exchange rate situation in those countries is clearly in a better position, at least in terms of predicting the economic situation within the country. The threat of the CFA franc being devalued or detached from the Euro in the WAEMU and CEMAC zones is minuscule. We predict France will keep on ensuring unlimited transformation from CFA francs into euros for the foreseeable future.
Let us look at the economies that changed the most in Sub-Saharan Africa in 2023:
We now consider techniques for businesses to counteract currency risk while operating in foreign countries. Pre-planning is an integral part of international transfers and overseas payments. You can attain a desirable exchange rate and secure your funds by making currency trades at the ideal time.
Generating profits and being successful in foreign exchange is all dependant on judicious preparation and finding the optimal currency hedging solution for your needs based on present market conditions. To succeed in the exchange market, business owners must stay updated. To make sure the currency rate hasn’t dropped negatively, stay alert to the rate in the country where you are buying or working.
If the exchange rate shifts in a country where you are selling your products, and the foreign currency strengthens against the US dollar or Euro, that would mean that your products are effectively on sale without you having to reduce the price. Because this could be a chance for you to make a profit, you should consider boosting your advertising efforts during this period.
