Empowering Small and Growing Businesses: Addressing Sub-Saharan African Currency Depreciation's Impact on Access to Finance

Most Sub-Saharan African currencies have depreciated recently against major currencies. The erosion in value has reduced purchasing power for imports across the continent, posing significant challenges to economic stability and financial resilience in the region.

From the chart, most African currencies have depreciated by more than 10% against the US dollar. In general, Nigeria’s naira has been the worst performing currency in Africa, depreciating by a staggering 238% over the period. The performance is due to a shift in FX policy last year when the Central Bank of Nigeria decided to float the naira, where the currency's value is determined by supply and demand forces.

Why are these currencies plummeting? Clearly, there is a huge gap between the supply and demand for foreign currencies in these countries.?

Many African nations are net importers, with the import-export imbalance being as high as $11bn in Kenya as of 2023. This reliance on imports sustains the demand for hard currencies in these countries.??

Another demand-driven reason for deterioration has been the need to accumulate hard currency for debt repayment. Since 2006, 21 African countries have issued Eurobonds worth over $155 billion on the international bond markets. Kenya, Senegal, Ivory Coast and Ethiopia have their Eurobonds maturing later this year and this necessitates accumulation of foreign reserves which drives up the demand thereof.

On the supply side, interest rate hikes in the United States have attracted dollar investors who prefer to place their capital in the? safer, higher paying US treasuries and away from opportunities in emerging markets. This further reduces the volume of hard currency circulating in emerging markets.

Small and Growing Businesses (“SGBs”) in Africa, especially those in manufacturing that heavily rely on importation of raw materials, continue to bear the brunt of this situation. As the local currency weakens, lending institutions may be more cautious in extending credit due to increased risks associated with exchange rate fluctuations. Consequently, SGBs face heightened challenges in securing funding for their operations, hindering their ability to invest in innovation, infrastructure, and human capital development. This perpetuates a cycle of limited economic growth and employment opportunities within the region. Without adequate support and intervention, the potential of SGBs to drive sustainable development and poverty alleviation in Africa remains significantly constrained.

The impact of weakening local currencies has sparked renewed debate about the full implementation of the Continental Free Trade Agreement (AfCFTA) as a way of ditching reliance on foreign currencies to trade.

In the immediate term, we need development institutions that fund African financial institutions to consider funding in local currency. This will reduce the negative impact of currency deterioration on SGBs, as the financial institutions don't have to price this risk in their products.