It’s unprecedented! Since Tuesday, August 23, the euro has fallen below the parity threshold with the greenback, listing at 0.9901 dollars, i.e. its lowest level since November 29, 2002. A situation which is not without negative impacts on the economies of sub-Saharan Africa, particularly that of Senegal, have alerted the financial authorities.
Clouds are gathering over the European economy. After a slowdown in the purchasing managers’ indices in August, the European currency continues to evolve below parity with the dollar. At its lowest in 20 years, the euro rose briefly once morest the greenback on Tuesday evening and Wednesday, without really regaining strength. Since the start of the year, it has fallen by 12.5% once morest the dollar. Already on August 1, one unit of the European currency was trading at 1.027 dollars, or 639 FCfa.
But this situation hardly spares the CFA Franc, which is today pegged, notes the Ministry of Finance and Budget, in its latest watch and economic intelligence bulletin of August 24, 2022.
“The change in the balance of power between the two powerful Western currencies might have a significant impact on economies like that of Senegal. The fall of the euro once morest the dollar should, for example, improve the price competitiveness of goods exported by Senegal, in a context of rising commodity prices”.
However, it would increase the import bill. And, according to the document, the increase in the latter would have a negative impact on the trade balance and would lead to a reduction in community foreign exchange reserves (the BCEAO’s foreign exchange reserves fell from 6.6 months of imports of goods and services to 5 .2 months of imports in the first half of 2022) as well as an increase in the general level of prices, through the channel of imported inflation.
Worse, “this situation might lead to food crises”. In addition, “a 13.5% increase in dollar-denominated debt service is expected in one year, following exchange losses”.
It should be noted, however, that Senegal’s debt strategy, marked by a reduction in the share of debt in dollars in favor of the euro, has considerably reduced the country’s exposure to exchange rate risk, reassures the Ministry of finances, which argues that “the competent Senegalese public debt management services have likewise incorporated several assumptions into their scenarios, including a 30% depreciation once morest the dollar, in a proactive approach”.
The reasons for the fall of the euro
The document notes that the recent consolidation of the dollar once morest the euro can be explained by several factors. First, elements of a structural nature, essentially linked to the composition of the euro zone and the dominating role of the dollar in international trade. Then, economic factors that have caused fluctuations in the world economy, in relation to the current geopolitical situation. Indeed, the first cause of the fall of the euro once morest the dollar would be the combination of the scale and the disparity of the levels of indebtedness of the euro zone. Even if the debt ratio of the United States (125% of GDP) is higher than the euro zone average (95.6% of GDP), the latter remains high and hides a significant disparity between countries, perceptible through a debt to gdp ratio of almost 150% in Italy once morest 60% for Germany. This heterogeneous level of indebtedness, and therefore of solvency given the tightening of monetary policy and the increase in the spread, causes a monetary flight from the euro to the dollar, which thus becomes a safe haven. The American currency is, in particular, preferred by investors and used more as a foreign exchange reserve for central banks (59% in 2021, according to the IMF). Moreover, the listing of most raw materials, particularly oil, in dollars, mechanically increases the demand for this currency and therefore its value in relation to the main competing currencies. From an economic point of view, the Russian-Ukrainian war contributed to the fall of the common European currency (-9.11% since the beginning of the war).
The services of Minister Abdoulaye Daouda Diallo also recall that the sanctions on Russia have, in fact, firmed up energy prices and caused a negative shock on the current account of European countries as well as downward pressure on the euro. Germany has, in this context, experienced its first trade deficit since its reunification. In this context of high inflation in the euro zone and the United States, the Fed has been more responsive by raising its key rates several times from March 2022, reaching a level unprecedented since 1994. The difference interest rate resulting from this contributed to the strengthening of the dollar once morest the European currency.
In addition, the crisis of confidence noted in the euro zone negatively impacted the European currency. It stems, in part, from the non-optimality of the monetary zone, characterized by a lack of budgetary convergence which has created dissension between European States, particularly on the question of the public debt that certain countries have dug during the period of Covid-19. -19.
