Iran War May Trigger African Currency Devaluations, BMI Says

The conflict in the Middle East could spark another round of devaluations in Africa as rising energy costs limit authorities’ ability to defend their currencies, according to BMI, a unit of Fitch Solutions Inc.

Burundi’s franc and Malawi’s kwacha are most vulnerable as high energy import costs erode buffers, according to Orson Gard, a senior emerging- and frontier-market analyst at BMI.

The Iran war already threatens to unleash renewed inflationary pressures as oil prices surge, risking an end to a policy easing cycle across the continent. A wave of devaluations last hit the region from 2023, affecting to , and Ethiopia. The Egyptian pound this week fell to its weakest level against the dollar since July.

“We consider countries with an already-strained external position and considerable currency overvaluation (in real effective exchange rate terms) to be at most risk of weakness in an escalatory US-Iran conflict scenario,” Gard said. “Should the US-Iran war escalate and last longer than we currently anticipate, the likelihood of a significant devaluation would increase substantially.”

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Burundi is one of sub-Saharan Africa’s “most exposed currencies” because of its reliance on imported oil and “critically low” reserve buffers due to the central bank’s strategy of managing the franc’s exchange rate, Gard said.

While authorities will likely try to maintain a gradual depreciation of the franc, a prolonged Middle East war would increase the likelihood of a “significant devaluation” similar to the one seen in 2023 , he said. That year, the franc lost more than a quarter of its value within a month.

The Malawian kwacha is also “highly exposed,” with similar risks to Burundi including foreign-exchange reserves of less than one month’s import cover. “We see limited scope for policymakers to defend the kwacha’s value in the event of an external shock,” Gard said.

Other frontier-market currencies, like the Democratic Republic of Congo ’s franc and Mauritius ’ rupee, would also face pressure due to idiosyncratic factors such as shortages of key industrial inputs and rising freight costs, he said.

The impact on Africa’s major currencies would be uneven, Gard said, with oil exporters like Nigeria and Angola seeing gains and importers like South Africa and Kenya facing depreciatory pressures, Gard wrote.