As global inflation soars, African economies are starting to feel the heat as US dollar and the British Pound among other depended currencies have appreciated.
This comes as the American Federal Reserve’s policymaking Federal Open Market Committee this week announced another aggressive move in its fight to bring inflation back to its 2% target, hiking its target federal funds rate by 75 basis points. The Bank of England also announced a 50 basis-point increase in its target interest rate, saying that “should the outlook suggest more persistent inflationary pressures, including from stronger demand, its Monetary Policy Committee will respond forcefully, as necessary.”
As a result, the lack of availability of foreign currency, especially the US-dollar in the banking sector that uses a subsidized exchange rate, has led to a wider price gap in the secondary market or the so-called Black Market, analysts claim. The reparations on African economies apart from the appreciation of the US dollar against African currencies include: increase of inflation rates, higher food and import prices, higher cost of debt service, increase of domestic interest rates.
Already, the South Africa Reserve Bank hiked its target rate by 75 basis points this week, with two members of its monetary policy committee actually voting for a 100 basis-point increase. “Guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future,” it said in the press statement released on 22 September 2022.
The US FOMC also published members’ quarterly economic forecasts as well as their projection for the future path of interest rates. The federal funds rate is predicted to be above 4% by the end of this year, and rise even further in 2023. Inflation is not expected to drop back down to 2% until 2025.
It is reported that most African governments are now stuck in a catch-22 situation as many developing economies exited the pandemic with less than full recovery and high debt levels. According to analysts, increasing the exchange rate will lead to an even more higher cost of living and inflation will skyrocket. On the other hand, maintaining the subsidized rates will deplete the reserves of their already debt-ridden economies.
Below is a sample of the current exchange rate gaps in Africa’s most affected economies.
Sudanese Pound
Official rate: 577
Black Market Rate: 760
Variance: 30%
Nigerian Naira
Official rate: 430
Black Market Rate: 715
Variance: 66%
Ethiopian Birr
Official rate: 54
Black Market Rate: 113
Variance: 100%
Zimbabwe Dollar
Official rate: 362
Black Market Rate: 800
Variance: 220%
