Dinar, cedi, dirham, naira, CFA franc… Top and bottom of African currencies

By Yara Rizk
Posted on Wednesday, 26 October 2022 13:28

The Ghanaian cedi has been awarded the 'title' of the continent's worst performing currency in 2022. © Adobe Stock

An astronomical drop in value, irregularity, fragile stability... African currencies have been shaky in 2022. This trend could become even more pronounced.

Even though the Covid-19 pandemic has still not had its final word and the war in Ukraine has been going on for almost eight months, inflation is considerable and affects all the world’s economies to varying degrees. In order to radically contain it, the world’s largest economy has adopted an aggressive monetary tightening policy. At the end of September, the US Federal Reserve (FED) significantly increased its key rate – to 3.25% from 0.25% a year earlier – which boosted the dollar.

This appreciation is impacting all markets, especially the most fragile economies, which are more or less tied to the US dollar. “The global tightening led by the FED is causing a revaluation of currencies, markets and credit conditions, particularly in emerging markets,” Moody’s analysts told us.

Given that Bloomberg has just awarded Ghana’s currency the unfortunate title of “the continent’s worst performing currency in 2022”, how have other African currencies reacted to the various crises and the FED’s tightening of the screws? Here’s a look at the situation.

Ghana’s Cedi: the situation is getting worse

Since January 2022, the cedi has lost 47% of its value against the US dollar. This is a new record for the Ghanaian currency, which has never reached such low levels. In other words: it now takes almost 13 cedis to obtain 1 dollar today, whereas it took just over six on 1 January. This is because Ghana is an import-dependent economy. As a result, the country buys more foreign currency than it receives from its exports (trade deficit). Daniel Adeniyi Sodimu, a sub-Saharan Africa economic analyst at FrontierView, says this is also due to a flight of portfolio investments: “Foreign investors have withdrawn from the Ghanaian market, as they have lost confidence in it.”

According to Bloomberg’s analysis, the cedi became the weakest currency in the world in October. This depreciation has also accelerated inflation, which was already on the rise in the country. In September, the general price increase reached 37.2%. The statistics office has since changed the way it measures this index. To curb inflation, the Ghanaian Central Bank had to increase its interest rate by 10 basis points to 24.5% in less than a year. At the same time, the country’s debt, which continues to swell, has reached $38bn. “All the major rating agencies have downgraded the country’s sovereign debt several times in 2022,” says the economist.

Faced with this stagnation, and despite the initial reluctance of Nana Akufo-Addo’s government, the Ghanaian authorities have been in talks with the IMF since the beginning of October regarding $3bn in financial aid. On 20 October, the Fund announced in a statement that it had “made good progress in identifying specific policies that would restore macroeconomic stability and lay the foundation for stronger and more inclusive growth”.

Nigerian Naira: unbalanced ecosystem

On 18 October, Bank of America (BofA) said the naira would further depreciate, as its current exchange rate against the dollar is well above its fair value. According to the same source, the Nigerian currency is overvalued by up to 20%. Between December 2021 and October 2022, the official exchange rate increased by 10%, but it increased by over 30% on the black market. On the official market, a US dollar goes for about 436 naira, while on the parallel market, it is worth 745-750 naira. This unstable situation is damaging the economy and paralysing investment.

The most significant factor behind the depreciation is the rising demand for the dollar – whose value continues to increase – as well as the distorting national exchange rate policy. Muda Yusuf, the director-general of the Centre pour la Promotion de l’Entreprise Privée (CPPE), says: “What is needed is a fundamental reform of the foreign exchange ecosystem. As a reminder, Abuja operates a multiple exchange rate regime dominated by a controlled official exchange rate and a parallel market where currency is freely traded.”

As Sodimu says, Nigeria’s oil production problems (cargo theft and pipeline vandalism) have “prevented the country from benefiting from the rise in crude oil prices that should have supported the currency”. The expert feels that the naira and the Nigerian economy as a whole can only be consolidated by diversifying exports “away from oil and other commodities whose world prices are volatile”.

Moroccan dirham: dependent on the euro/dollar parity

Although the exchange rate policy of Moroccan banks and the number of currencies have not changed since September 2021, the context is now quite different. The interest rates of the US (FED) and European (ECB) central banks, which continue to increase, directly impact the dirham, which depreciates mechanically (11 dirhams are needed to obtain 1 US dollar, against 8.8 dirhams in 2020). It is worth noting that the dirham has been indexed to a basket based on 40% on the dollar and 60% on the euro since 2015.

In addition to Morocco’s trade balance being in deficit, the country is a victim of imported inflation. As a result, the Central Bank has increased its reference rate by 50 points, bringing it to 2%.

These conditions weigh heavily on the kingdom’s economy. According to the IMF, growth has been at almost zero (+0.8%) in 2022 and the trade deficit is 56% compared to 23% in 2020.

CFA franc: slow depreciation

By domino effect, the CFA franc, which is directly indexed to the euro at a fixed parity, follows the same variations as the European currency against the dollar. To date, it costs 672 CFA francs for one dollar, compared with 615 CFA francs in 2020.

Although exporting countries seem to be the big winners from this parity, widespread inflation acts as a counterweight.

For example, although oil and gas producing countries, such as the Republic of Congo, Gabon, Niger, Cameroon and soon Senegal, manage to make more profit, the extra margin is quickly sucked away by the need for subsidies, as Abebe Aemro Selassie, the IMF’s Africa director, recently told us: “Revenues from selling crude oil will be absorbed by subsidies.”

Especially since, even if these countries export barrels of crude oil, they end up importing the refined product in dollars. To do this, they are obliged to buy in US currency, which works against their currency.

Algerian Dinar: a rollercoaster ride

Within the space of seven years, the Algerian currency has lost 35% of its value against the dollar. The reasons for this fall are diverse. Many experts believe that the policy of printing money, which was adopted in 2017, is largely responsible for this. Between 2017 and 2019, more than 6,500bn dinars ($48.3bn) were injected into the economy. As Algeria is a major hydrocarbon exporter, the fall in crude oil prices over the periods 2014-2016 and 2018-2020 has also had detrimental consequences.

Today, the Algerian currency seems to be recovering, despite OPEC+’s decision to limit its hydrocarbon production, but also despite euro-dollar fluctuations (Algiers has a managed exchange rate system) and the volume of imports. According to a 31 August Fitch Solutions rating, the dinar is expected to appreciate to 136.30 dinars to the dollar by the end of 2022 from the current 141 dinars. “The first such appreciation since 2007,” the rating agency says, adding that this appreciation “will slow inflation”, much of which is imported.

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