Do you often ask yourself “Why are African currencies so weak?”, well, we do and if you intend to know why then this guide is for you. We will also consider what African countries can do to better their currencies.
A currency is generally defined as a medium of exchange, which is issued and controlled by the government of a country.
It’s not just paper money and coins, but also all other circulating banknotes and coins. Plus deposits with commercial banks and official money market funds.
This can be cash or something more convenient such as credit cards or debit cards.
Africa has been going through a volatile economic period for years. The continent has about 54 countries, each with its currency and central bank, regulated by the African Union (AU). The AU is meant to have an integrated market like the European Union but this hasn’t happened yet.
What determines a strong currency?
A country’s currency can be strong or weak depending on the nation’s economy. A strong currency is the result of a stable economy and high foreign reserves, whereas a weak currency indicates an unstable economy and low foreign reserves.
Factors such as exports, imports, exports surplus and deficit are key to determining a stable or unstable economy.
If a nation’s currency becomes stronger that means that it has a positive trade balance which means that it exports more than it imports from other countries.
When a nation exports more than it imports from other countries, it also means that has a positive current account balance.
A nation’s current account balance represents the difference between money flowing into and out of a country from trade and services.
The current account is a strong indicator of the nation’s economic health.
It is measured in terms of the trade balances. (a nation’s exports of goods and services minus her imports), net international income and net current transfers.
A strong currency leads to a better quality of life for the citizens which in turn increases consumer confidence.
Why are African currencies so weak?
African countries’ currencies are weak and depreciating. This hurts the African economy in general with trade, industrial production and foreign investment all suffering.
Weakness in most African currencies is majorly due to the following factors
1. Dependency on Export of Raw materials
Africa’s raw materials are exported outside the continent for processing, but the finished products are imported back.
This is a problem because it reduces the revenue that Africa makes from its natural resources.
If Africa doesn’t diversify its markets and start producing finished goods, then it will continue to face this problem.
One of the best ways that Africa can solve this problem is to encourage investment in infrastructure by foreign companies.
This will allow African governments to invest in education, training and research facilities for workers. With a trained workforce, countries will be able to produce finished goods to export and generate greater
Africa countries depend heavily on their exports of raw materials to developing nations, who often pay in dollars or euros. This means that these countries have significant currency risks when they receive payment.
The African countries have been plagued by weak currencies for so many years. Their currencies are weak because their economies are weak, and all the economic policies that have been implemented over time have only made things worse.
The first bad policy was encouraging importation. The African countries (specifically those in sub-Saharan Africa) have been importing much more than what they export.
So basically, the governments were encouraging their citizens to spend more on imported goods and services from other countries instead of spending locally.
This is one of the primary causes of a weak currency because it’s making the country poorer in terms of foreign exchange
3. Interest rate
The low-interest rate is one of the causes of weak currency in Africa. To attract foreign investors, a country needs to have a high-interest rate on investment, Because foreign investors can get a better return by investing in that country, high-interest rates serve to support a strong currency.
This is not the case in most African countries, you gain almost nothing by investing in many African countries.
One of the best ways to solve this problem is to encourage the private sector to invest in infrastructure by providing loans at a low-interest rate. This will help develop the country.
4. Bad economic policies
The economic policies of the African continent are not good enough for them to be able to compete in a global market for goods and services.
The bad economic policies have also made their currencies weaker than the American dollar.
Central banks in most African countries have been following bad economic policies, leading to weak currencies, which in turn led to high inflation levels that have negatively affected the people living in those countries.
Will there be a change? We don’t think so, African countries seem not to learn from their past mistakes, you expect them to pick a clue from the wrong decision taken before but they never will, rather, they come up with worst decisions than before.
5. Political instability
If you are in a country that has a weak currency, it is important to understand how political instability affects the value of your money.
Political instability refers to a situation in which the government of a country is unable or unwilling to take control of the country.
The result of this is an unstable economy because the government cannot make decisions about taxes, trade deals and other economic factors that affect its citizens.
This leads to a weak currency which means that foreign investors avoid investing in the country and risk-taking local companies will not do business there.
This then leads to less revenue for the government too. This is the case in most African countries.
Take Nigerian for instance, the most populated black nation, Since the beginning of the year 2021, the currency of Nigeria has depreciated by almost 25% against the dollar.
This is due to political instability and a lack of confidence in the government’s economic policy, which is why foreign investors choose to invest elsewhere.
The government has tried to intervene, but with little success. The Nigerian central bank raised interest rates to a whopping 22.5%, which had the exact opposite effect they wanted.
Investors don’t want to put their money into a country that has such high-interest rates and inflation, so they have taken their money out of the country instead.
6. High rate of corruption
The term “weak currency” is often used to describe the situation when the value of a particular currency is lower than that of another. However, the term fails to reflect the real problem of weak currencies.
In many cases, the concept of weak currency is related to the political and economic instability in a particular country.
The economic situation in most African countries can be characterized by high rates of corruption, which significantly influence the economy and reduce the value of most African countries’ currency.
The poor governance and high level of corruption are some of the reasons why countries such as Nigeria, Zimbabwe, South Africa and others have been struggling and the strength of their currencies going down.
How to strengthen African currencies
To salvage what is left of African currencies, the continent and its leaders need to understand what should be done, while it seems they don’t, Africa needs to wake up from its economic slumber.
When currencies depreciate, foreign goods become more expensive and local goods become less competitive in international markets.
This can hurt the economy by reducing exports and increasing imports, thus lowering Gross Domestic Product (GDP).
African countries need to put in place measures to facilitate the processing of their natural resources. Thus they can export more than they import and therefore generate more revenue from production.
Since a country’s balance of payments must always balance if its exports rise faster than its imports. The difference is made up by an increase in foreign exchange reserves.
African countries should consider increasing gold holdings or assets denominated in foreign currencies.
In certain circumstances countries may also wish to restrict the growth of their money supplies; this helps them to achieve their monetary policy aims without having to adjust interest rates.
Leaders in Africa should consider deploying a people-orientated method of revenue generation, thanks to a youthful workforce, most African countries are dominated by a youthful population.
The leaders need to engage the youths and create more employment opportunities.
Summary Why are African currencies so weak
Currency is the monetary unit of a country that is used within a country to buy things and services. Currencies are also used to buy from other countries and also to pay debts. This currency helps in trade between countries.
Each country has its currency and poor economic fundamentals, among other things, are to blame for the weakness of most African currencies.