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The broader economic impact of currency depreciation on imports and consumer purchasing power, black child

Erosion of import-dependent businesses’ profitability and competitiveness

Currency depreciation significantly increases the cost of imports, squeezing profit margins for businesses reliant on imported inputs.
For instance, in Ghana, the cedi’s 55% depreciation against the US dollar in 2022 led to a 43.7% inflation rate for imported items in October 2022, compared to 39.1% for locally produced goods. This disparity forces import-dependent firms to either absorb higher costs, potentially leading to financial distress, or pass them on to consumers, risking reduced demand. Consequently, many businesses struggle to maintain operations, with some Ghanaian importers reporting difficulties in financing planned shipments due to the increased costs of importing and clearing goods at ports.

Erosion of import-dependent businesses’ profitability and competitiveness

As currency depreciation drives up prices of imported goods and contributes to overall inflation, consumer purchasing power diminishes, leading to altered consumption patterns.

 In Nigeria, for example, where the naira lost nearly 40% of its value against the US dollar between December 2022 and September 2023, retailers report significant changes in consumer behavior. Customers who previously purchased 1kg of imported frozen chicken now opt for half a kilo, while bulk buyers have reduced their purchases from 3-4kg to barely 1kg. This shift not only affects businesses’ sales volumes but also reshapes the market landscape, potentially favoring local alternatives and necessitating strategic adaptations from importers and retailers.

Macroeconomic imbalances and policy challenges:

Persistent currency depreciation can exacerbate macroeconomic instabilities, creating a challenging environment for businesses and consumers alike. In the Democratic Republic of Congo (DRC), currency depreciation contributed to a surge in inflation, reaching an estimated 19.1% in 2023. This prompted the Central Bank of Congo to raise its key interest rate from 11% to 25% in October 2023. Such monetary tightening, while necessary to curb inflation, can lead to higher borrowing costs for businesses, potentially stifling investment and growth. Moreover, currency depreciation often widens current account deficits, as seen in the DRC where the deficit expanded from 1% of GDP in 2021 to 6.4% in 2022, further straining foreign exchange reserves and perpetuating a cycle of currency weakness.