The effects of currency depreciation against the US dollar can extend far beyond the foreign exchange market. A weakened currency can drive up the daily cost of living for households and businesses in African countries that rely heavily on imports.
A recent example of this pressure played out in Ghana. On 20 August, Reuters reported that the cedi had fallen to 11.00 cedis per dollar, compared with 10.90 cedis a week earlier, driven by strong dollar demand from foreign investors and local companies.
At a recent Bank of Ghana auction, bids totalling $399 million were submitted against an allocation of just $125 million, signalling that demand for foreign exchange remains elevated.
Ethiopia, meanwhile, has spent approximately $2.2 billion this year in an effort to prop up its currency, but the intervention has so far failed to prevent the birr from hitting record lows.
The birr has fallen 3.2% against the dollar this year, to nearly 162 birr per dollar, making it the worst-performing currency among the 23 African currencies tracked by Bloomberg. Pressure has intensified as rising oil prices have increased Ethiopia's import costs and constrained the availability of foreign exchange.
The Ethiopian central bank's most recent intervention attracted bids equivalent to roughly four times the amount of dollars on offer, underscoring the intensity of demand for foreign currency.
This type of exchange rate pressure can have wide-ranging effects on an economy.
A weaker domestic currency forces importers to spend more local currency to purchase the same volume of dollar-denominated goods. In countries that import oil, machinery, food, medicines, and other essential goods, that cost increase ultimately reaches consumers as businesses pass on a portion of their expenses through higher prices.
Manufacturers and companies dependent on imported equipment or raw materials also face higher operating costs, while smaller businesses may find it harder to absorb those additional burdens.
Governments and companies with dollar-denominated debt likewise face a heavier debt-servicing burden, as they require more domestic currency to repay the same dollar-denominated loan.
For consumers, a weaker currency can translate into a loss of purchasing power, particularly when the goods they depend on are imported or contain imported components.
The recent trajectory of the cedi illustrates how exchange rate pressure can rapidly ripple through an economy. A depreciating currency carries consequences for prices, businesses, public finances, and household budgets alike.
The following are Africa's countries with the weakest currencies in August, according to data from the Forbes currency calculator.
Source: Business Insider Africa
Source: Diário Económico
Original article: https://www.diarioeconomico.co.mz/?p=536054
