AFRICA'S CURRENCY PROBLEM: CAN COUNTRIES INDUSTRIALISE WITHOUT STRONGER CURRENCIES?
How do exchange-rate instability, dollar dependence, imported machinery and foreign-exchange shortages affect African factories—and what can governments realistically do about them?
The most important misconception: a stronger currency is not the same as a stronger economy-
A currency can appreciate while domestic factories remain uncompetitive. It can also depreciate while some exporters become more competitive. The exchange rate is one part of the industrialisation equation, not a complete measure of economic strength.
The African Development Bank reported in March 2026 that 28 African currencies had strengthened significantly against the US dollar during 2025, while depreciation slowed in several others. That movement is an important reminder that currency conditions can change, but it does not establish that manufacturing competitiveness improved across all those economies.
The relevant question is whether a currency's value is consistent with an economy's productive capacity, inflation, external earnings and financing needs.
An artificially overvalued currency can make imported machinery temporarily cheaper while undermining domestic manufacturers and encouraging imports. An excessively weak and volatile currency can make machinery, fuel, spare parts and foreign-currency debt unaffordable.
The policy objective should therefore be a credible, reasonably stable exchange-rate environment that supports productive investment—not a stronger exchange rate at any price.
Why devaluation alone cannot create export competitiveness
The United Nations Economic Commission for Africa's May 2026 study examined quarterly data from 54 African countries over 2003–2023. It found that depreciation generally improved exports, but the effect was modest, delayed and varied by economic structure. Its conclusion was that exchange-rate adjustments alone are insufficient to improve external trade balances.
Why is the effect limited?
Imagine two countries that both allow their currencies to depreciate by 20%.
Country A has reliable electricity, efficient ports, trained workers, local suppliers and factories able to expand production.
Country B has frequent power outages, expensive freight, limited industrial finance and factories that depend heavily on imported inputs.
Country A may use the exchange-rate adjustment to win orders and increase output. Country B may simply experience higher costs for machinery, fuel, chemicals and spare parts.
This is why exchange-rate policy must be coordinated with industrial policy. Competitive prices matter, but businesses must also be able to deliver the goods.
A practical scorecard for governments
A government seeking to support industrialisation should monitor the exchange rate alongside the economic conditions that determine whether firms can invest and export.
Indicator | What policymakers should ask |
|---|---|
Exchange-rate volatility | Can firms estimate their costs and prices several months ahead? |
Inflation and monetary credibility | Are depreciation shocks feeding into persistent price increases? |
Foreign-exchange reserves | Can essential imports and external payments be managed through plausible shocks? |
Import dependence | Which machinery, components and raw materials are essential to domestic production? |
Export diversification | Can the country earn foreign currency beyond a narrow range of commodities? |
Domestic supplier capacity | Can firms gradually replace imported inputs where local production is competitive? |
Industrial credit | Can firms obtain working capital and investment loans at viable rates? |
Export performance | Are firms increasing volumes, productivity and market access—not merely receiving more local currency for the same exports? |
These indicators should be evaluated together. A currency may be stable because a government is using reserves heavily, for example, while the underlying shortage of foreign exchange remains unresolved. Conversely, a period of exchange-rate adjustment may be part of a broader reform that improves access to foreign currency over time.
The goal is to identify whether the economy is becoming more resilient—not simply whether the currency is rising or falling.
What African governments can realistically do
The policy challenge is to reduce the damage caused by currency instability without making imported industrial inputs inaccessible or exhausting foreign-exchange reserves trying to defend an unsustainable exchange rate.
A practical programme has seven elements.
Maintain credible monetary and fiscal policies. Central banks need clear inflation objectives, reliable communication and appropriate monetary tools. Governments must avoid persistent deficit financing that undermines those objectives.
Improve the functioning of foreign-exchange markets. Transparent allocation, credible price discovery and timely access to foreign currency can reduce uncertainty and incentives to use parallel markets. Reform should be sequenced to manage inflation and protect vulnerable households.
Prioritise productive imports transparently. Where foreign exchange is scarce, governments should avoid arbitrary political allocation. They can improve customs administration, trade finance and import planning while distinguishing essential production inputs from lower-priority demand.
Expand foreign-exchange earnings. Diversify exports into processed agricultural goods, manufactured products, tourism, business services and other sectors suited to each economy. More diverse earnings can reduce vulnerability to commodity-price shocks.
Reduce unnecessary import dependence. Build competitive local capacity in selected inputs—such as packaging, processed materials, basic chemicals and industrial components—where reliable supply and sufficient demand make production viable. Import substitution should not become an excuse for permanently expensive or poor-quality products.
Expand currency-risk management. Develop forward contracts, swaps and other suitable hedging instruments where markets and institutions can support them. Better hedging can help firms manage uncertainty between ordering machinery and paying for delivery.
Make regional trade easier. Improve cross-border logistics, customs coordination and regional payment systems so African firms can trade without every transaction depending unnecessarily on an external intermediary currency.
One existing initiative is the Pan-African Payment and Settlement System, developed by Afreximbank with the AfCFTA Secretariat. It enables participating banks and businesses to settle eligible intra-African transactions in local currencies, potentially reducing conversion costs and dependence on third-country currencies. It does not eliminate the need for foreign exchange when a business imports equipment from outside Africa.
Industrial strength must come before currency prestige
Africa does not need every currency to become stronger against the dollar before industrialisation can succeed. It needs currencies that are supported by credible institutions, manageable inflation, functioning foreign-exchange markets and economies capable of producing goods and services that customers will buy.
A stable currency can make planning easier. But stability without competitiveness can protect an unproductive economic structure, while depreciation without productive capacity can make factories more expensive to operate.
The deeper objective is to build an economy that can earn foreign currency through diversified production, access imported technology on predictable terms, finance investment sustainably and withstand external shocks without repeatedly interrupting industrial development.
That requires more than central-bank intervention. It requires power infrastructure, skilled workers, domestic suppliers, competitive logistics, sound public finances and firms able to sell into regional and global markets.
The ultimate measure of success is not the number of local-currency units exchanged for one dollar. It is whether African businesses can plan, invest, produce and export with increasing reliability—and whether the economy becomes less vulnerable to the next external shock.
By Jugo Ikeji Uju
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