Rising Interest Rates Impacting Currency Values Across Africa
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Last week, we discussed how African Central Banks have had to raise their interest rates in response to the US Federal Reserve’s rate hikes. Buttressing the discussion, the charts below capture changes in currency values for the past 90 days within which the US Fed has increased its interest rates twice, on 27 July and 21 September 2022. The transmission of the Fed increase in rates is an appreciation in dollar exchange rates against other currencies.
The charts show the impact of the US Fed rate increase on currency values in Nigeria, South Africa, Kenya, and Egypt. Notice the jump in the dollar exchange rate in July and September immediately after the hike in interest rates by the US Fed. While African Central Banks responded promptly by raising interest rates to ensure exchange rate stability, the upward trend of the charts shows there is still an appreciation in the US dollar relative to the domestic currency value.?
This appreciation of the US dollar has several implications for investment in African economies along with the threat of a recession. African-based companies who borrowed in dollars now have to repay obligations at a higher exchange rate, therefore repressing investment and employment in economies where citizens are already struggling to cope with the effects of higher inflation. African governments also face higher interest rates for dollar-denominated debt — this will further squeeze government spending, compounding the threat of a recession in the region.
What can African economies do? Given the current scenario, African Central Banks and Finance/Treasury ministries should expedite engagement with international loan vendors to restructure dollar-denominated debts to reduce the dollar-loan burden as well as to avoid debt defaults.?
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