Explained: How a weak dollar affects you

By Brian Okoth

The US dollar has registered a mixed performance among currencies in Africa.

In some countries, such as South Africa and Kenya, the local currencies have gained value against the US dollar.

In Egypt and Nigeria, for instance, the value of the local currencies remain relatively weak.

But, how does a weak dollar – in other words, a strong local currency – affect you?

How local currency becomes 'weak'

For illustration purposes only, we would use the Nigerian naira as the local currency.

Also note that we would use a hypothetical value of the naira, and not the real value against the dollar in the market today.

The higher the amount of a local currency against the dollar, the weaker it is.

Let us say in March 2024, the naira is exchanging at 1,400 against the US dollar, and in December it trades at 900.

Imports, exports done in dollars

Let us also say that in Nigeria, there is this person called Emeka, who is in the business of importing motor vehicle spare parts.

Imports and exports are largely done in dollars.

If the naira is strong – that is, it is trading at 900 against the dollar – it means that Emeka would need only 9 million naira to import spare parts worth 10,000 dollars.

However, if the naira is trading at 1,400 against the dollar, it means that Emeka would need 14 million naira to import spare parts worth 10,000 dollars.

Cost passed on to consumer

And, when imports are cheaper, it means that the cost passed on to the consumer is not as high as when the imports are expensive.

At the macro level, a strong local currency means that the value of public loans by government goes down. Most international loans are acquired in dollars or euros.

Let us say one of Nigeria's international loan obligations is 50 million US dollars. At an exchange rate of 900 naira per dollar, Nigeria would need 45 billion naira to offset the loan.

If the exchange rate is 1,400, Nigeria would need 70 billion naira to pay the loan. This means that the government is likely to increase taxes, or cut on development costs, to raise the extra money.

People in diaspora

A strong local currency, however, hurts exports as people purchasing goods from your country would have to part with more dollars to get your products. This might lead them to seek other alternatives.

For the people in diaspora, a strong local currency means that they have to part with more money while sending home some cash.

Let us say Chioma, who works abroad, usually sends home 500,000 naira every month.

If the exchange rate is 900, she would need about 560 dollars. However, if the exchange rate is 1,400, she would need only 360 dollars to send the same amount of money.