The causes and consequences of depreciating exchange rates

2023 has been a challenging year for many Sub-Saharan African countries because of the depreciation in their exchange rates. Nigeria and Angola are the two biggest losers with the Nigerian naira and the Angolan kwanza losing nearly 40% of their value against the US dollar. But other countries have also seen significant depreciations in their currencies: South Sudan (33%), Burundi (27%), Democratic Republic of Congo (18%), Kenya (16%), Zambia (12%), Ghana (12%) and Rwanda (11%).

An important reason for the depreciating values of Sub-Saharan nations' exchange rates is the weak trading position many of the countries are in. A country like Angola, for example, has oil to export but imports a high proportion of manufactured goods like machinery, computers, mobile phones and cars. To buy imported manufactured goods a country such as Angola needs foreign currency like the US dollar and this structural weakness puts downward pressure on its exchange rate. Sub-Saharan countries also have significant amounts of external debt owed to more developed countries and the debt servicing costs put further downward pressure on their currencies. The cost of servicing external debt has increased over the last 12 months because of rising global interest rates. 

A depreciating currency has a significant impact on the populations of sub-Saharan countries that face rising prices for imported goods. This is made worse by the shortages of foreign currency that force many people to buy foreign currency in parallel markets where the exchange rate is significantly lower than the official rate. Businesses in these countries have seen their costs increase because a depreciating exchange rate increases the costs of imported raw materials and components. 

Governments in Sub-Saharan countries are in a challenging policy situation because of their depreciating currencies. They are forced to keep domestic interest rates relatively high to prevent further currency depreciation and this removes monetary policy as a policy option for domestic policy objectives. In addition, rising debt servicing payments restrict the use of fiscal policy. The solution to their currency difficulties is probably some kind of supply-side policies that reduce Sub-Saharan countries' dependency on imported manufactured goods. 

Possible questions to discuss with a class

1. What is meant by the term depreciating exchange rate?

2. Why does a dependency on imported manufactured goods lead to a depreciation in the exchange rates of Sub-Saharan African Countries?

3. How does a depreciating exchange rate increase the price of imported goods?

4. Discuss the supply-side policies the governments of Sub-Saharan African countries might use to reduce their reliance on imported manufactured goods.