This is how the US Fed increase in interest rates could affect Africa
The Federal Reserve Bank of the United States, known as the ‘Fed’ is pushing African economies to tighten their policies, due to an expected increase in U.S. interest rates from zero percent next month. Policy makers across Africa have been spurred to tighten their monetary policy to avoid inflationary threats.
The Bank of Ghana for the third time this year increased its policy rate to 26 percent. This comes as the West African country is battling high inflation rates, which exceeded the country’s estimated inflation, the fall in the value of the Cedi against the Dollar, as well as rising public debt.
South Africa, which is dependent on commodity exports, has also been hit by the fall in commodity market. The Rand to the US dollar has fallen to a new low of about 14 percent in the past weeks. The inflation of the country is expected to rise above the country’s expected rate of three percent to six percent in 2016. The country is yet to tighten its policies, but it is expected to do so by next week Tuesday.
Kenya for the second time cut its GDP growth forecasts for 2015, citing the effects of a tight monetary policy and El Nino rains.
According to speculation by economists, African countries are already tighten their policy in order not to be hit by the speculated increase in interest rates. In case it happens, here is a breakdown of the possible effects of the US fed increase in interest rates.
Indebted countries such as Ghana, Gambia and Zimbabwe will have to pay more for the money they have borrowed since their loans are dollar denominated. The government debt of Ghana, which is about 65 percent of its GDP, is higher than 39 percent average debt to GDP ratio for other African economies. This could mean doomsday for the West African country, which recently received a loan of about $918 million from IMF despite being in debt.
Emerging African markets
Investors in emerging markets will divert their money from this market to the United States thereby increasing the financial assets of US. This would in turn make them fall back into the list of developing countries since the global economy is not stabilized.
Exporters of commodities
Countries that are heavily dependent on commodity exports will not only be caught by a weak Chinese economy but also stronger US dollars. South Africa has already been affected by China’s slow down since the demand for commodities from the country fell this past September. Countries that export their commodities to US will be better off than others will since they will be getting more money for their commodities.
Bond issuers in the international market
Algeria, Angola, South Africa, Ghana, Kenya, Nigeria, Zambia, among others which engage in selling dollar denominated sovereign bonds are highly vulnerable. This is because they have issued bonds to the international market to get funds to run their economies. In other words, they will have to pay more when it is time to pay back.
According to economic expert, Ifediora Amobi, “countries that have taken concessionary loans will not be affected in anyway if the interest rate is increased.”
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