Weak currencies drive up the cost of living in sub-Saharan Africa

by MMC
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  • By Nkechi Ogbonna
  • BBC News, Lagos

Legend,

Arinola Omolayo says customers are buying much less due to sharp rise in food prices

Arinola Omolayo owns a frozen food store in Ogba, a suburb of Lagos, Nigeria’s commercial hub, where she sells mainly imported chicken, fish and turkey.

She says she used to be happy to come to the store, “but now I feel reluctant.”

The reason is the soaring food prices. Frozen chicken now costs around 3,400 naira ($4; £3.50) per kilo, an increase of more than 26% in the last three months.

“Customers who used to buy 1 kg of fish or chicken now ask for half a kilo… my big customers, I usually supply them… 3 to 4 kg, now they hardly buy 1 kg,” she says.

Her suppliers attribute the rising prices to the rising U.S. dollar, she says, adding that it has made her products very difficult to sell.

Prices of food, transport and raw materials in Nigeria have been forced up by the fall of the naira, causing exchange rates to soar and inflation to rise.

Nigeria is not alone. Most sub-Saharan African currencies are weakening against other global trading currencies like the British pound and the US dollar, leading to a loss of value and purchasing power of these local currencies on the continent.

Image source, Getty Images

Legend,

The naira fell by almost 40% against the US dollar between December 31, 2022 and September 15, 2023.

In October, the World Bank published a report in which he said the currencies of Nigeria and Angola, Africa’s largest oil producers, were the two worst performing on the continent.

The naira and kwanza lost almost 40% of their value against the US dollar between December 31, 2022 and September 15, 2023.

“The weakening of the naira was triggered by the central bank’s decision to remove trade restrictions on the official market,” the World Bank said.

“For the kwanza, it was the central bank’s decision to stop defending the currency due to weak oil prices and increasing debt repayments.”

The report lists other African currencies that fell significantly over the same period, including those of South Sudan (33%), Burundi (27%), the Democratic Republic of Congo (18%), Kenya (16%), Zambia and Ghana. (12%) and Rwanda (11%).

In Zambia, the copper capital of Africa, the price of staple foods including maize, meat, fish and the popular dried pumpkin leaves have increased by more than 14% in the past five months.

In some cases, prices have doubled, putting products out of reach for some in a country where more than 60% of the 20 million residents are classified as poor, according to the national statistics agency. Many people survive on less than $2 a day.

Why are these currencies collapsing?

The huge gap between supply and demand of foreign currencies in these countries is a major problem.

When there is a shortage of foreign currency, people must turn to alternative sources, such as the black market.

Black market rates are consistently worse than official rates, meaning only wealthy businesses and individuals can afford to use them for imports, raw materials, school fees, medical expenses, tourism, etc.

Another factor is the huge dependence on imports, a factor common to many African countries.

Many African countries import far more finished products than they export. As a result, they need foreign currencies like the US dollar or Chinese yuan to pay international suppliers of these goods, thereby increasing the demand for foreign exchange and reducing dependence on the local currency.

Dollarization of the economy is not uncommon in some parts of the continent.

In countries like Sierra Leone, some goods and services are sold in US dollars in grocery stores, thereby increasing the demand for dollars and reducing the demand for leone, the local currency.

How does this affect people?

Scarcity of foreign exchange or higher exchange rates force manufacturers to pay more to import their raw materials, increasing the cost of production.

Image source, Getty Images

Legend,

Fuel is just one of the commodities whose prices have skyrocketed

In most cases, the end consumer bears the additional costs through higher prices in stores and higher transportation costs.

Businesses suspend operations and investors become afraid when they cannot get their money in foreign currencies from the central bank.

One such example is Emirates Airlines. It suspended operations in Nigeria for more than a year after finding it could not repatriate $85 million in funds from ticket sales stuck in the country.

The International Air Transport Association said that in total, carriers had $812 million stranded in Nigeria, more than any other country – and almost half of the global total.

Of course, one would think that oil producing countries like Nigeria and Angola have vast amounts of money and foreign exchange since oil is sold in US dollars.

However, their governments have accumulated enormous debts that must be repaid and which are eating into their foreign currency reserves. Many countries also spend huge sums of money to massively subsidize local fuel and energy prices.

As a result, these countries do not really benefit from the surge in oil prices on the world market.

What are governments doing?

Nigeria’s central bank announced it would inject $10 billion worth of foreign exchange into the market, mainly from crude oil sales and foreign investment.

This sum will be used to pay foreign currency debts that were previously impossible to settle due to limits on the amount of foreign currency that can be used.

Africa’s largest economy also lifted a ban on 43 imported goods, including rice, cement and steel products, which people were previously barred from buying in foreign currency.

This meant that these importers were turning to the black market, driving up prices.

The aim of the easing is to reduce demand for foreign currencies, but local manufacturers are opposed to it, fearing it will harm their competitiveness.

Neighboring gold-rich Ghana implemented its gold-for-oil policy late last year. The government uses gold rather than cash to buy oil. The idea is to reduce pressure on the weak Ghanaian cedi and provide cheaper fuel in exchange for gold.

So far, the program has saved the country about $5 billion in foreign exchange reserves, the government said in August.

Egypt has requested a barter deal with the world’s largest exporter of black tea, Kenya. This involves trading goods for goods, while Egypt saves its foreign exchange reserves, relying less on the US dollar.

Legend,

Muda Yusuf says African countries need to trade more with each other to support local currencies

Earlier this month, Zambia’s central bank announced it would increase the amount of foreign currency deposits that banks must hold, in a bid to build the country’s foreign exchange reserves and support the value of the local currency , the kwacha.

The impact of weak local currencies has sparked renewed debate on the full implementation of the Continental Free Trade Agreement (AfCFTA) as a means of moving away from reliance on foreign currencies for trade.

Created in 2018, the AfCFTA aims to create a single market for goods and services and boost intra-African trade and investment. Once fully operational, it will become the world’s largest free trade zone by population, covering a market of 1.3 billion people.

Muda Yusuf, director of the Center for the Promotion of Private Enterprise in Nigeria, says African countries need to trade with each other and buy locally made products to support local currencies.

Legend,

Price surge hits Arinola Omolayo’s business

But to match global standards for goods and services, Africa must “strengthen its productivity and competitiveness, both in terms of price and quality,” he says.

The lack of infrastructure also makes trade in Africa more difficult.

“The continent has low rail and road connectivity, which are more important than air transport, due to the volume of trade. This must be a priority to update the continental free trade agreement,” Mr Yusuf said.

Back in Lagos, it is clear how the price hike has hurt business at Arinola Omolayo’s store.

While we were talking, no customers came to buy anything.

“If it was while I was busy with sales, I wouldn’t even have time to give you this interview,” she says.

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