CEM REPORT, FINANCE | The International Monetary Fund has said that currency depreciations contributed to a rise in inflation and public debt in Sub-Saharan African countries.
This is as the body advised African countries to seek concessionary funding as a way out of falling external reserves.
The fund also recommends that countries that have sufficient external reserves but multiple exchange rates can support the forex market via interventions but risk reduction of their reserves.
The recommendation was made by the IMF director of the Africa department, Abebe Selassie.
“In some cases, for countries that have sufficient reserve buffers, the use of foreign exchange intervention can reduce the volatility of the exchange rate. For instance, for those with shallow foreign exchange markets, weak monetary policy credibility, and large foreign exchange mismatches, foreign exchange intervention can temporarily reduce some of the costs associated with excessive exchange rate movements. However, countries can easily run out of reserves if exchange rate pressures persist because of fundamental forces.”
Nigeria falls into this category and has supported the official market with forex. However, Nigeria’s external reserves have gone from about $39 billion a year ago to $36.4 billion recently.
The fund also said that in the face of rising global interest rates and limited access to funding, African countries should adopt currency adjustments (devaluation).
It also recommended countries that face inflation pressures induced by exchange rate devaluation should continue to tighten monetary policy and that countries that have government spending-induced inflation cut back on spending.
“There are certainly some reasons for sub-Saharan African countries to resist exchange rate pressures, including an elevated share of foreign-currency debt and weakly anchored inflation. But countries have to adjust to new fundamentals of higher global interest rates and tighter financing conditions that are expected to last into the foreseeable future. For most countries, the low levels of reserves limit the scope for interventions.”
“Policymakers can take several steps to mitigate possible adverse impacts on the economy as a result of the necessary currency adjustments. In countries where inflation is aggravated by the exchange rate passthrough, tighter monetary policy will help alleviate the pressure by keeping inflation expectations in check and stem capital outflows while attracting inflows. Where fiscal imbalances are key drivers of exchange rate pressures, fiscal consolidation can help to rein in external imbalances and contain the increase in debt related to currency depreciation.”
