Almost All Sub-Saharan Currencies Depreciated Against The Dollar In Q1: Reasons Why

In Q1’2023, all of the select Sub-Saharan currencies depreciated against the US Dollar, similar to the trend witnessed in FY’2022.

The depreciation trend is attributable to the elevated inflationary pressures in the region, high debt servicing costs that continue to dwindle foreign exchange reserves, and monetary policy tightening by advanced economies such as the United States Federal Reserve and the European Central Bank.

In March 2023, the USA increased its interest rate by 25.0 bps to the range of 4.75%-5.00% from 4.50% -4.75%. Similarly, in March 2023, the European Central Bank increased its benchmark rate by 50.0 bps to 3.50%, from 3.00%.

The high-interest rates in developed countries have led to massive capital outflows as investors both institutional and individual seek to take advantage of the higher returns offered in developed economies.

Further, the elevated inflationary pressures in most economies in the region put pressure on the value of local currencies due to expensive importation.

Below is a table showing the performance of select African currencies against the US Dollar:

The Ghanaian Cedi was the worst-performing currency in Q1’2023 and the largest decliner over the last twelve months, depreciating by 17.3% and 57.5%, respectively.

The depreciation of the Cedi was a result of a deteriorated macroeconomic environment driven by the high debt unsustainability concerns, with the total public debt to GDP as of March 2023 coming in at 93.5%, similar to what was recorded in November 2022.

Additionally, the country’s currency performance has been weighed down by the elevated inflationary pressures with February 2023 inflation coming in at 52.8%, way above the Ghana Central Bank target rate of 8.0% – 10.0%, and,

The Kenya Shilling depreciated by 7.2% in Q1’2023 to close at Kshs 132.3 against the US Dollar, compared to Kshs 123.4 recorded at the beginning of the year, driven by increased dollar demand from importers, especially oil and energy sectors against a slower supply of hard currency.

Additionally, the declining foreign reserves have continued to weigh down on the value of the shilling, with foreign exchange reserves currently standing at USD 6.4 as of 31 March 2023, equivalent to 3.6 months of import cover and below the statutory requirement of maintaining at least 4.0 months of import.

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