Source: Banknote World

Introduction

Earlier this year, the United Nations published an article titled "2024: A year of cautious hope for African economies facing worldwide challenges" under the "Economic Development" section. The article discussed the continent's potential to grow its economy to an average GDP of 3.5%, indicating a positive turn of events for the year. It's too early to ascertain but the figure seems very unlikely to become a reality.

If there’s one thing the world can all agree on, it’s that inflation is now a global problem. Every country is experiencing high inflation as a global economic pandemic. Over the last couple of years, the world has experienced an accelerating inflation rate with African countries suffering the most among all other countries. In some African countries, the situation has graduated from mere inflation to hyperinflation and this can be attributed to many factors. While the prediction by the IMF body implies an improvement in the African economy, there is no clear indication of sustainable actions being taken to control the adverse effects of this hyperinflation.

What is Hyperinflation?

Hyperinflation is the term used to describe a very high rate of inflation in which the cost of goods and services increases rapidly, leading to a quick devaluation of the currency involved. Hyperinflation can be characterized by various indicators such as frequent skyrocketing of the prices of goods and services, lack of confidence in the legal tender, decline in the purchasing power of the local currency, official or unofficial replacement of the local currency, and more.

Hyperinflation in Africa

Africa, as a continent, has suffered greatly from hyperinflation. Let’s examine some countries as case studies.

Zimbabwe:

Zimbabwe currently has one of the highest inflation rates in the world. The hyperinflation in Zimbabwe started in the early 2000s and has since gotten worse. The Zimbabwe Dollar (ZWD), which was the official legal tender for the country since 1980 was scrapped (demonetized) in 2009 after losing its value when the country reached an inflation peak in 2008. As a result of this, the country adopted various foreign currencies (US Dollar, South African rand, Euro) as the official means of exchange. The Zimbabwe dollar which was once more valuable than the United States dollar was forced to be exiled.

In 2019 (after a decade), the country, once again, suspended the multiple currency system and reintroduced a new legal tender - Real Time Gross Settlement dollar (RTGS), simply known as the Zimbabwe dollar but with the denotation ZWL. Again in 2020, after re-evaluation, the multi-currency legal tender system was brought back and this made foreign currencies predominant in the country. In 2023, Zimbabwe announced the introduction of digital currencies that will be backed by gold reserves.

In essence, Zimbabwe has gone through one of the most terrible cases of hyperinflation and currency devaluation. In recent years, the Ukraine war also contributed to the high inflation rate in Zimbabwe as fertilizer, which the country usually imports from Ukraine, doubled in price.

Sierra Leone:

Sierra Leone’s history of inflation started in the 80s and extended to the early 90s. It was contained in the early 2000s but resumed later on. Since 2021, Sierra Leone has experienced a high inflation rate causing an extreme increase in the prices of goods, leading to a depreciation of the country’s legal currency, and is expected to experience a further decline.

The cause of Sierra Leone’s inflation has been attributed to the excessive borrowing and the low levels of exports causing a reduction in the supply of foreign exchange.

The IMF WEO (World Economic Outlook) forecasted a 3-year cumulative inflation rate of 130% in 2024 for Sierra Leone, hence considering it a hyperinflationary country as of 31st December 2023.

Ghana:

According to a report released over three months ago, the IMF WEO forecasted a 3-year cumulative inflation rate of 133% for Ghana, hence considering it a hyperinflationary country as of 31st December 2023.

Ethiopia:

For the past four years, Ethiopia has been going through hyperinflation which has led to a huge decline in the purchasing power of the country’s currency - Ethiopian Birr (ETB). The inflation rate in Ethiopia was projected at 31.4% in 2023.

Source: Statista

Nigeria:

Based on the above Statista report in 2023, Nigeria ranks among the top 10 African countries with the highest inflation rates. Over the years and very recently, the country’s currency - the Naira has experienced a very big decline in value and this has greatly reduced the citizens’ confidence in the economy. In the past few weeks, the official exchange rate has moved from N900/$1 to N1400/$1.

The high rate of the currency’s depreciation has left the citizens wondering if there is still hope for the economy. Even with the Central Bank’s “commitment to revive the economy”, all hope seems to be lost. The IMF WEO, via a report published last year, stated that Nigeria is yet to be considered hyperinflationary but needs to be closely monitored.

Many other African countries are experiencing extreme levels of hyperinflation which begs the question “What can be done to revive the economy?”

Effect #1: Dollarization

Oxford Dictionary describes dollarization as the “process of aligning a country’s currency with the US dollar.” Dollarization is the (official or unofficial) preference for the use of a foreign currency (especially the US dollar) instead of a country’s legal tender or the process whereby a foreign currency is recognized as an official medium of exchange or a store of value in a country where it wasn’t previously used in such a manner.

Several African nations have seen varied degrees of dollarization as a result of things like inflation, unstable economies, and a lack of trust in local currencies. An extreme case of dollarization is a situation whereby the citizens of a country charge for goods and services (from their fellow countrymen) in these foreign currencies, e.g., the US dollar. The high rate of inflation has led to situations whereby people do not wish to be paid or safeguard their wealth in their local currencies for fear of further depreciation.

In an attempt to save the value of the naira, the CBN directed Deposits Money Banks to sell their excess dollar stock by February 1st and warned lenders against hoarding excess foreign currencies for profit, as seen in the Punch Newspaper. Furthermore, the EFCC set up a 7000-man special task force earlier this month to enforce laws that’ll see to the punishment of individuals or institutions that are hurting the value of the naira by charging or invoicing for their services in dollars. This includes private academic institutions. Several arrests have been reportedly made in Lagos and Port Harcourt already.

Effect #2: Crypto Adoption

Another obvious impact of hyperinflation and currency devaluation is the high interest in cryptocurrency, a type of currency not controlled by the government, but rather by the people (the market). As the value of African nations’ currencies keeps depreciating, the more the search for better alternatives increases. Crypto is one of such alternatives. It is no longer surprising why Nigeria, an African country keeps ranking in the list of top 10 countries with the highest rate of crypto adoption, even with the 2021 ban on digital assets in the country.

In situations where dollarization is persistent, people seek stablecoins (a type of cryptocurrency) as a store of value. This can be regarded as a positive effect of an unfortunate event.

Crypto has provided Africans with more financial freedom, inclusivity, and global opportunities to face harsh economic challenges. A look at Emurgo’s State of Web3.0 in Africa report will give you a better insight into how crypto, blockchain as a whole is faring in its long-lost home - Africa.

References

file:///C:/Users/Julia/Downloads/002-article-A006-en.pdf

https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ifrs/ey-ifrs-developments-22-hyperinflationary-economies-october-2023.pdf