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The US Dollar is Getting Stronger: African Countries are Feeling the Pain and have Few Policy Options



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By Prof. Jonathan Munemo

The US dollar has been advancing rapidly in response to the Federal Reserve’s resolve to keep raising policy rates for longer to regain control of stubbornly high inflation. This has far reaching consequences. The US dollar is prominently used around the world as an international medium of exchange and as a global reserve currency.

The dollar is strengthening as Africa is already being hit hard by rising inflation triggered by war in Ukraine. As dollar power increases, it is amplifying inflationary pressures across the continent. That’s making it even more difficult for central banks to tame high inflation. Additional pain will be felt as the dollar’s strength ripples through Africa, causing a squeeze on trade volumes, tighter trade financing conditions and burgeoning sovereign debts alongside surging debt-servicing costs.

Another concern is the risk of what’s been termed the dollar doom loop. As the dollar gains strength, it becomes a drag on global economic activity, pressuring other currencies to weaken and fuelling even higher dollar strength. This outcome further weighs on economic activity, reinforcing currency weakness, setting in motion a self-reinforcing feedback doom loop. One negative outcome triggers another.

Already concerns about a dollar doom loop have been raised for the global economy. Unfortunately, African countries have few options for responding to the strong dollar. And most are challenging. They could keep raising interest rates to fend off currency depreciation pressures from the strong dollar. But, in doing so, policy makers face a difficult balancing act as lifting rates must be carefully calibrated to avoid spurring an economic downturn.

An alternative option is to try to contain currency depreciation pressures by intervening in the currency market using foreign exchange reserves. That’s also challenging. Many African countries have seen their surplus reserves depleted after large pandemic-spurred public spending support program and more expensive payments on their commodity imports.

The impact

The value of the US dollar has risen substantially since March 2022 when the Fed started its aggressive rate hiking campaign in a bid to tackle stubbornly high inflation. The Federal Reserve dollar index, which measures the strength of the greenback against the currencies of a broad group of other major currencies, has risen steeply.

The index has appreciated by about 10% since March, as Fed officials are laser-focused on fighting inflation. This has weakened African currencies. The extent varies by country. For example, Ghana’s cedi, the Egyptian pound and the Zimbabwean dollar have slumped sharply and are now included among the top ten worst-performing currencies of 2022. Other currencies including the Kenyan shilling and South Africa’s rand have also buckled under the pressure of a strong dollar. The dollar’s strength comes as Africa is being hit hard by surging global food and energy prices incited by Russia’s war in Ukraine. Central banks across the region have been tightening interest rates to tackle the war-driven rise in inflation.

The dollar’s advance is intensifying inflation woes by weakening African countries’ currencies and thereby driving up dollar denominated prices of imports. As the dollar climbs higher in value, it amplifies inflationary pressures. In turn that’s making it even more difficult for central banks to curb high inflation.

Although a strong dollar does improve competitiveness of African exports, the gains from weaker currencies may end up not being substantial. That’s because exports are often invoiced in US dollars. So, while currency weakening makes goods cheaper in domestic currency terms, this does not always translate into cheaper goods for foreign buyers who pay in US dollars. US dollar invoicing is also a prominent feature of trade financing in developing countries. Companies engaged in merchandise trade are heavily dependent on bank finance for working capital, due to the difference in timing between incurring costs and receiving payments. A stronger dollar tightens trade financing conditions, constraining access to financing for firms. This offsets any improvement in export competitiveness, further dampening foreign trade.

In-depth studies on trade finance across Africa have been conducted by the African Development Bank. The International Finance Corporation and World Trade Organization also conducted a joint study focusing on Côte d’Ivoire, Ghana, Nigeria and Senegal. These studies find that banks identify lack of sufficient dollar and euro liquidity as an important constraint for financing trade. By tightening trade financing conditions, a strong dollar further compounds working capital constraints for companies. Rapidly increasing US interest rates are a major driver of accelerating dollar strength. This has tightened financial conditions considerably for African governments with high levels of dollar-denominated debt. Higher interest rates increase debt-servicing burdens, and have heightened concerns about debt sustainability, especially for the more than 20 African countries that IMF and World Bank consider to be at high risk of, or already in, debt distress.

Already, African loans to large creditors such as China are facing mounting repayment pressure. Most of these loans are on commercial terms and denominated in US dollars.

Response options

How should African countries respond to the strong dollar? Options are few – and challenging. In the short term, there are two main options for African countries. Unfortunately, neither is a silver bullet. The first is to keep raising interest rates to fend off currency depreciation pressures from the strong dollar. However, if policy rates keep going up, they will squeeze output and could cause recession in some African economies.

Lifting rates must be done carefully to avoid an economic downturn. The second option is to stem currency depreciation pressures by intervening in the currency market. This requires using foreign exchange reserves to support the currency. This option is not widely available. Many African countries have depleted their surplus reserves after large public spending programmes during the COVID pandemic and more expensive payments on their commodity imports. As a result foreign-currency reserves are already perilously low in a number of countries.

According to the International Monetary Fund, one-quarter of sub-Saharan African countries have reserves below three months of imports and more than three-quarters have reserves below five months. Given that weaker currencies increase the buying power of travellers from abroad, one option would be to boost tourism to help shore up local currencies in the medium term.

Jonathan Munemo is a Professor of Economics, Salisbury University

Courtesy: The Conversation


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Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria




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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website:

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.



Abba Musa Mamman Lagos


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10 Megatrends Shaping the World in 2024




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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.

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Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know




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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford

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