In a shocking twist of events, the African Development Bank’s annual report has just unveiled the truth behind the depreciation of Leone in Sierra Leone. This revelation has sent shockwaves through the region, as other West African nations also faced extended exchange rate depreciations during the international commodity price surge of 2022.
But what caused this currency chaos? The West African Development Outlook report sheds light on the intricate exchange rate landscape that led to this downfall. It turns out that a combination of factors, including the US Federal Reserve’s interest rate hikes, global uncertainty, depleting international reserves, widening trade deficits, and inflation due to Russia’s actions in Ukraine, all played a role in the depreciation of West African currencies against the mighty US dollar.
Ghana’s cedi took a massive hit, plummeting by a staggering 33.6% against the US dollar. Investor trust dwindled as the country’s debt mounted, and foreign exchange demand impacted its reserves. Sierra Leone also suffered, with its currency depreciating by 24.3%, while Nigeria saw its parallel market exchange rate drop by nearly one-third, widening the gap between official and parallel rates.
The consequences were dire. Imported food and fuel costs skyrocketed, burdening the already struggling economies. However, not all countries were caught in this currency storm. Liberia managed to stay steady thanks to proactive measures by the central bank, increased private remittances, and effective government fiscal operations.
Meanwhile, non-resource-intensive countries like The Gambia and Cabo Verde faced their own challenges. The Gambian dalasi depreciated by 6.7% due to a growing need for foreign currency for imports, while the Cabo Verdean escudo linked to the euro depreciated by 11.8% because of a growing current account deficit.
But amidst the chaos, there was a glimmer of hope. The Guinean franc outperformed other West African currencies, appreciating by 3.7% against the US dollar. How did they do it? Foreign exchange inflows and strategic central bank interventions in the exchange market played a crucial role. The Guinean franc’s strength was further reinforced by the return of export profits and foreign exchange market reforms aimed at bolstering the currency.
The currency chaos in West Africa has left nations reeling, but it also serves as a wake-up call. It’s time for these nations to take decisive action, strengthen their economies, and protect their currencies from future storms. Only then can they rise above the chaos and pave the way for a brighter future.