How the US dollar's strength is undermining African growth

The US dollar has been strengthening against other major currencies in recent months, as the Federal Reserve raises interest rates and signals more tightening ahead. This has created a challenge for many African economies that depend on foreign currency inflows to finance their imports, service their debts, and attract foreign investors.

According to a report by Bloomberg, many African countries are facing a shortage of hard currency due to the Covid-19 pandemic, lower commodity prices, and reduced tourism and remittances. This has forced some of them to devalue their currencies or impose exchange controls to preserve their dollar reserves. However, these measures have negative consequences for their economic growth and stability.

For example, Nigeria, Africa’s largest economy, has devalued its naira by about 50% since March 2020, and has imposed multiple exchange rates and restrictions on access to dollars. This has reduced its purchasing power and increased inflation, which hit a four-year high of 18.2% in April. It has also created a gap between the official and black market exchange rates, which discourages investment and encourages capital flight.

Similarly, Ethiopia, Africa’s second-most populous nation, has devalued its birr by about 20% since October 2020, and has tightened its foreign exchange controls. This has increased the cost of imports and pushed up inflation, which reached 20.6% in March. It has also widened the spread between the official and parallel market exchange rates, which undermines confidence and transparency.

Some African countries have sought help from the International Monetary Fund (IMF) or Middle East countries to boost their dollar liquidity. The IMF has provided emergency loans and debt relief to many African countries, totaling about $34 billion since the start of the pandemic. However, these sources of funding may come with conditions or political risks.

For instance, Zambia, which defaulted on its external debt in November 2020, is in talks with the IMF for a bailout, but faces resistance from its creditors and domestic opposition. Sudan, which recently cleared its arrears to the IMF, is hoping to secure debt relief and access to new financing, but faces challenges from its fragile political transition and ongoing conflicts. Kenya, which received a $2.4 billion loan from the IMF in April, is facing criticism from its citizens and lawmakers over its rising debt burden and lack of transparency.

Some Middle East countries have also offered bilateral support or investments to some African countries, especially in the energy and infrastructure sectors. For example, Saudi Arabia has pledged $10 billion to South Africa for its energy projects, while the United Arab Emirates has invested $22 billion in Egypt for its development plans. However, these partnerships may also entail geopolitical implications or strategic interests.

The US dollar rally is expected to continue as the US economy recovers from the pandemic and the Fed maintains its hawkish stance. This will pose further challenges for many African economies that rely on foreign currency inflows. They will need to adopt sound macroeconomic policies, diversify their sources of income, and enhance their resilience to external shocks.

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