IMF Says Africa Must Enable Weak Currencies to Absorb Shocks

Updated on
  • Nigerian authorities must allow more flexibility on naira
  • Growth prospects for the region are better in medium term

Sub-Saharan African countries should allow their currencies to weaken to absorb shocks to their economies, the International Monetary Fund said, calling specifically on Nigerian authorities to allow more flexibility in the naira.

Resisting currency pressure depletes foreign-exchange reserves and results in weaker imports and economic growth, the Washington-based lender said in its Regional Economic Outlook for sub-Saharan Africa.

Sliding commodity prices have put African currencies from Ghana to Zambia under pressure, forcing governments to scale back spending as debt rises and prompting central banks to implement aggressive monetary policy tightening to curb inflation. Nigeria, Africa’s biggest oil producer, has resisted devaluing its currency despite a plunge in crude revenue, imposing foreign-currency controls instead that are undermining economic output.

“Interventions should be limited to disorderly movements of the exchange rate,” the IMF said. “Monetary policy should only respond to second-round effects, if any, of exchange rate pass-through and other upward shocks to inflation.”

Rising Debt

Nigeria’s central bank imposed foreign-exchange controls in February, helping to stabilize the naira at an average of 198 per dollar since then.

“The government should really ask whether this was the most effective and right way to adjust to what are considerable pressures coming out of the oil price decline,” Antoinette Sayeh, head of the Africa department at the IMF, said in an interview in Johannesburg on Tuesday. “We think there’s room to allow the exchange rate to help with the adjustment process. ”

The IMF is forecasting an economic expansion of 3.8 percent this year for the region and 4.3 percent in 2016, down from 5 percent last year. It’s possible growth can rebound to 5 percent in about three years time, Sayeh said.

“Prospects for the region are good in the medium term,” she said. “It’s just a difficult patch that sub-Saharan Africa is traveling through. It’s important to make sure that policies are put in place quickly to help to deal with those shocks.”

While government debt burdens are rising, the average for 45 sub-Saharan Africa countries is still below 40 percent of gross domestic product, with most of the debt being concessional loans, Sayeh said. 

Ghana is one country where debt sustainability is a risk, she said. The west African nation’s debt ratio stood at 62.4 percent of GDP in July, down from 71.3 percent in the previous month, according to government data.

“Ghana has to be particularly concerned and careful about how it manages” the debt, Sayeh said.

(Updates with comment from IMF official from sixth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE