Debtor African countries to benefit, as dollar depreciation to accelerate in second half of 2023 —Report

The United States dollar depreciation is expected to accelerate in the second half of this year, reducing the fiscal incidence of external debt servicing for African countries.

A latest report by the African Export-Import Bank (Afreximbank) predicted that dollar depreciation would continue and even accelerate in the second half of this year as the downshift in United States (U.S) market yields took hold.

The report, released this month, is titled “Africa’s 2023 Growth Prospects: Securing Growth Resilience in a Polycrisis World.”

The dollar has weakened after United States Federal Reserve officials signalled the central bank was nearing the end of its tightening cycle.

Several Fed officials said on Monday that the Central Bank would likely need to raise interest rates further to bring down still-high inflation, but the end to its current monetary policy tightening cycle is getting close.

Read more: Afreximbank report shows hard currency bond issuances by African countries plummet $6 billion in 2022

The report, therefore, stated that: “the depreciation of the dollar —which began in late 2022 as uncertainty surrounding inflation and volatility abated—will continue and even accelerate in the second half of this year as the downshift in US market yields takes hold.

“Recent developments in the U.S banking sector, which led the Fed to back off from jumbo rate hikes and return to a more incremental approach in March, may demarcate a shift in monetary policy.

With the significant overvaluation of the dollar against most currencies having peaked last year, the greenback’s accelerated depreciation as monetary policy shifts will act as a fiscally neutral stimulus to emerging markets and developing economies.

For Africa, according to the report, this would reduce the fiscal incidence of external debt servicing as loans became less expensive measured in local currencies as most countries were ‘price-takers’ and run structurally large current account deficits.

This in turn would increase countries’ fiscal space and alleviate pressure on foreign exchange reserves as the external account improves.

The report further stated that dollar depreciation would also reduce the risk of sovereign and corporate defaults to maintain the most vulnerable countries on an expansionary trajectory.

“Moreover, the weakening of the dollar and a shift in monetary policy by systemically important central bank —the Fed is again providing liquidity through its discount window and other channels—could also increase appetite for African assets,” the report stated.

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