- The value of a currency influences mortgage rates, investment returns, grocery prices, and even employment opportunities.
- Zambia has made substantial steps in recent years to strengthen its currency through economic measures and foreign support.
- In addition to imposing a new mining tax and raising taxes on luxury products, Zambia’s government has taken initiatives to generate income.
Recent economic shocks have slowed growth, making it doubtful that economies will rebound to pre-crisis levels. Consequently, African economies have encountered numerous monetary and policy challenges. Still, Africa is undergoing a financial crisis due to rising inflation and the dominance of public debt.
Capital outflows from wealthier nations have impacted most African nations. Recent economic shocks and rising food and energy prices have exacerbated the situation.
Floating exchange rates in the majority of large economies depreciate the African currency. Currency rates are influenced by the economy, inflation, capital flows, and interest rate differentials. Frequently, currency exchange rates depend on economic performance or stability. Consequently, currency values vary.
Economies with a floating or fixed exchange rate benefit from currency adaptation and domestic monetary policy. Several African nations with flexible exchange rates have deficiencies that limit their benefits.
Flexible rates may counteract the advantages of dominant currency pricing, such as fixed export prices in US dollars. Moreover, shallow markets exacerbate exchange rate volatility. Wide bid-ask spreads suggest that foreign exchange markets in many African nations are thin. However, African economies are burdened by enormous foreign-currency liabilities.
Exchange rate depreciations have affected individuals and businesses due to significant currency mismatches on balance sheets. Inadequate central bank confidence has caused currency rate fluctuations, which have considerably impacted inflation.
More currency rate pass-through occurs in low-income countries than in rich economies. Given its reliance on food and energy imports, the currency depreciation in Africa is concerning.
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Currency depreciation in Africa and economic expansion
Most individuals are rarely affected by currency depreciation and exchange rates because they rarely use such systems. The majority of folks use local currencies. Exchange rates are relevant for international travel, remittances, and import/export transactions.
Monetary policy is determined by central banks based on a currency’s foreign exchange value. The value of a currency influences mortgage rates, investment returns, grocery prices, and even employment opportunities.
Economic Slowdown in Africa
Commerce affects the economy. Weaker currencies make imports more expensive and export more affordable for foreign consumers. Over time, weak currencies can alter trade balances.
A higher currency could reduce export competitiveness, make imports more affordable, exacerbate the trade deficit, and weaken the currency through self-adjustment. Before this, a strong currency may harm export-dependent businesses.
Most African currencies have dropped against the US dollar and other global benchmarks. The weakening of the African currency has enhanced export competitiveness while decreasing import capacity.
The majority of African nations are importers. The impact of local currencies on exports is negative. Depreciation of the African currency thus reduces exports and GDP growth.
Surging Inflation
Due to currency devaluation, inflation has been “imported” into import-dependent African nations. The inflationary burden in Africa is unparalleled. Throughout the continent, consumption exceeds output, risking a pandemic and underscoring the need for more efficient economies.
The Kenyan shilling has reached a record low of 124.05 US cents per dollar. Throughout the past year, the shilling declined. The requirement for dollars in the energy business exceeds exports and remittances, resulting in depreciation. The Kenyan central bank warns that major central bankers’ rapid tightening of monetary policy could exacerbate global inflationary pressures.
Foreign investment
Stable currencies and robust economies attract capital from abroad. Foreign investors require a stable currency. The devaluation of Africa’s currency terrifies investors.
Foreign investors purchase stakes in domestic companies or construct new facilities. FDI will assist oil-rich African nations through the current economic crisis. Europe, particularly Germany, desires to import oil and gas from Africa instead of Russia. As a result, European interest in African natural gas will increase FDI.
African governments favor FDI over foreign investment portfolios because FDI represents “hot money” that flees when economic conditions deteriorate. Any unfavorable event, such as a currency devaluation, may result in capital flight.
How to contain currency depreciation in Africa
Additional instruments may assist in minimizing short-term policy trade-offs amid shocks such as the Ukraine crisis. Foreign currency intervention, macroprudential policy measures, and capital flow controls promote monetary policy independence. Moreover, the solution enhanced financial and pricing sustainability. These instruments and reserves reduce production volatility.
Several economies face global financial contractions and other severe external financial shocks. Foreign exchange intervention can boost economic performance in fragile African nations by preventing currency depreciation. The measures of the government would mitigate inflationary and balance sheet implications. With the extra policy instrument, production would increase more than without it.
Lessons from Zambia’s Kwacha
The Kwacha is the official currency of Zambia. The country’s foreign exchange rate remained unsettled for a very long time. However, Zambia has made substantial steps in recent years to strengthen its currency through economic measures and foreign support.
Zambia has set an example for other African nations by efficiently controlling its currency. While facing numerous economic issues, such as a drop in copper prices and a large debt, the Kwacha exchange rate has remained reasonably constant.
Economic diversification
Efforts to diversify the country’s economy are one of the primary reasons for this stability. Historically, Zambia’s economy has relied significantly on copper mining, which accounts for a substantial amount of the country’s exports. In recent years, however, the government concentrated on investing in other industries, including agriculture, tourism, and manufacturing. This has helped reduce the nation’s reliance on copper and develop additional sources of income to stabilize the Kwacha.
Fiscal discipline
In addition to the government’s commitment to fiscal discipline, the success of Zambia’s currency management is also dependent on its fiscal responsibility. The administration has launched an austerity plan that includes cuts to public sector salaries and reductions in gasoline and fertilizer subsidies. In addition, the government has negotiated with creditors to restructure a portion of its debt and has gained support from foreign organizations such as the International Monetary Fund (IMF) and the World Bank. This has aided in lowering the debt-to-GDP ratio and putting the government on a more sustainable budgetary path.
Reducing the budget deficit and debt restructuring
In addition to imposing a new mining tax and raising taxes on luxury products, Zambia’s government has taken initiatives to generate income. This has helped reduce the country’s budget deficit and free up funds for other productive endeavors, such as infrastructure construction.
Zambia’s government has aggressively tackled the COVID-19 pandemic’s economic effects. In 2020, the government petitioned its creditors and international organizations for debt relief. Consequently, the IMF authorized a $1.2 billion debt reduction program for Zambiatoo to alleviate the country’s financial burden.
The bailout helped alleviate the economic effects of the pandemic and maintain a reasonably stable Kwacha exchange rate. It is essential to recognize that the nation still faces economic obstacles, and additional efforts are required to continue down this route.
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