The International Monetary Fund (IMF) has revealed that the falling nature of the Naira and other currencies in Nigeria and other is responsible Sub-Saharan African countrie is responsible for the push up in public debts across Africa.
This revelation was made public on the IMF website on Monday evening.
The fund noted that with an average depreciation of nine per cent since January 2022, sub-Saharan African currencies have weakened against the US dollar.
The post read, “Most sub-Saharan African currencies have weakened against the US dollar, fanning inflationary pressures across the continent as import prices surge. This, together with a growth slowdown, leaves policymakers with difficult choices as they balance keeping inflation in check with a still-fragile recovery.
“As the Chart of the Week shows, the average depreciation for the region since January 2022 is about 8 per cent. The extent varies by country, however. Ghana’s cedi and Sierra Leone’s leone depreciated by more than 45 per cent.”
IMF further added that the depreciations were mostly driven by external factors, adding that lower risk appetite in global markets and interest rate hikes in the United States pushed investors away from the region towards safer and higher paying US treasury bonds.
While noting the high import costs in 2022, the IMF added that the large budget deficits had compounded the effects of these external shocks by increasing the demand for foreign exchange.
On the implications of weaker currencies, the Fund identified inflation and higher public debt.
The post read, “When currencies weaken against the US dollar, local prices rise, as much of what people buy, including essential items like food, are imported. More than two-thirds of imports are priced in US dollars for most countries in the region.
“A one percentage point increase in the rate of depreciation against the US dollar leads, on average, to an increase in inflation of 0.22 percentage points within the first year in the region. There is also evidence that inflationary pressures do not come down quickly when local currencies strengthen against the US dollar.
“Weaker currencies also push up public debt. About 40 per cent of public debt is external in sub-Saharan Africa and over 60 per cent of that debt is in US dollars for most countries. Since the beginning of the pandemic, exchange rate depreciations have contributed to the region’s rise in public debt by about 10 percentage points of GDP on average by end-2022, holding all else equal.”
Recall that the Naira has been experiencing a free fall since 2015 when it started falling from N196.92 in June 2015 to N414.72 in June 2022 thus contributing to the Country’s high inflation rate.
Checks show that in seven years, the naira depreciated by 52.52 per cent against the US dollar and other currencies.
The depreciation added N8.72tn to Nigeria’s external debt burden.