African nations are finding hard currency to buy imports and pay foreign investors as the region becomes an unintended victim of the developed world’s battle against inflation after the pandemic. I feel it is getting harder. Ironically, with the continent’s own currency depreciating, the situation has driven inflation to as high as 30%, and there is no quick fix. Countering this trend will require increasing exports and creating domestic production to replace imports.
“The main reason for the dollar shortage is the pressure on the balance of payments as a result of the so-called rolling crisis that has affected many African economies,” said Christopher Adam, professor of development economics at the University of Oxford. The crisis was caused by the pandemic-related supply chain disruptions and ensuing global recession, which caused sharp declines in the prices of key African exports and the shutdown of tourism, a major source of dollar inflows. He added.
“The resurgence of global inflation and the associated tightening of monetary policy have led to sharp increases in the prices of key imports and the cost of borrowing from abroad,” Adam said. “Additionally, the Russian invasion of Ukraine has led to higher oil, food and fertilizer prices.”
Local importers and non-resident investors typically require hard currency (mostly US dollars) to pay suppliers or repatriate investment returns, respectively. In countries with currency controls, dollars are supplied by the central bank, and the central bank raises dollars from exports, overseas remittances, foreign loans, tourism, etc.
But months of dollar outflows from some of Africa’s key investment destination economies, such as Egypt, Nigeria and Kenya, have seen little or no export boost, strained central bank reserves and Currencies remain under tremendous pressure. The Egyptian pound has lost 20% of its value against the dollar this year, and the Nigerian naira has fallen 39% since June 14, when the central bank ended its peg to the dollar and unified multiple foreign exchange rates. The high cost of imports in local currency terms raises the cost of living, increases operating costs for businesses, slows economic growth and discourages new investment. The results are about the same regardless of whether a country maintains currency control or not.
“If countries aim to operate with fixed exchange rates, shortfalls may become apparent, but if exchange rates are flexible, they will show up as large depreciations in local currency terms,” said Adam, from the University of Oxford. Point out. What African economies need is a resumption of investment that directly alleviates hard currency shortages and, if properly targeted, allows countries to increase export production and invest in their capacity to replace imports with domestic products. to do According to the International Monetary Fund (IMF), in a world where advanced economies grow below 1.4% by 2024 and U.S. Treasuries with maturities of two years or less yield around 5%, that won’t happen overnight. do not have. No currency risk for dollar-based investors. Global growth is expected to slow from 3.4% in 2022 to 2.8% this year and 3% in 2024, limiting investors’ risk appetite.
Interventions in the foreign exchange market to relieve pressure have helped, but have significantly depleted foreign exchange reserves, multiple exchange rates, increased hard currency rations, and import transactions that have made them less dependent on foreign currencies. and other regulatory measures such as
The International Monetary Fund has proposed several measures governments can take to mitigate this impact. Sub-Saharan Africa April Outlook, but they will all require the sacrifice of the people of the affected countries. When inflation is the result of a weaker currency, policymakers can tighten monetary terms, usually achieved by raising interest rates. While this is good for attracting foreign investors, it poses a problem for domestic borrowers. Governments with budget deficits can cut them, but this requires either cutting spending or raising taxes, neither of which is popular with voters. A more satisfying solution would be to accelerate economic growth and attract renewed interest from foreign investors, but not until the US Federal Reserve and other major central banks have finished raising rates and started to show signs of lower rates. , is unlikely.
“For the foreseeable future, dollar dependence will remain,” Adam said. That’s it,’ he said.
dollar, euro, yen
Most African countries belong to the World Bank’s low- and middle-income bracket and need imports of capital goods such as factory and agricultural machinery to keep their economies running. Payments are typically made in dollars, euros and yen, resulting in continued pressure on local currencies. To compensate for foreign exchange risk, foreign investors are seeking higher yields on domestic currency bonds and stock market returns well above inflation levels.
“If a local rate of 9% is unattractive to domestic investors given high inflation, foreign investors will be willing to pay for it,” said Abdulzeez Kuranga, a macroeconomic strategist at Lagos-based Cordros Securities. There is no reason to be attracted.”
Egypt, the third largest economy among Africa’s major economies, has a balance of payments deficit of $10.5 billion in 2022, including trade in goods and services, investment flows and asset transfers, and a sharp decline in financial transactions with African countries. This was a reversal from the previous year. The rest of the world had an inflow of $1.9 billion. This reflects, at least in part, investors withdrawing funds, reversing monetary easing policies introduced during the COVID-19 pandemic, according to central bank data. It indicates that it is likely to take advantage of interest rate hikes in advanced economies that are on the rise.
The Egyptian pound has been devalued three times since Russia invaded Ukraine in February 2022, but the dollar continues to be in short supply, increasing demand on the black market, where hard currencies are more expensive.
Africa’s largest economy, Nigeria, has a balance of payments deficit of $840 million in 2022, following a surplus of $3.75 billion the previous year, according to the central bank. Africa’s largest oil exporter benefited from rising international oil prices, but fell to a six-year low in foreign investment inflows, causing slowdowns in exchange rates.
Nigeria has a long history of strict exchange rate regimes. However, President Bola Tinub, who took office in May, immediately lifted the naira-dollar peg, abolished expensive fuel subsidies, and reviewed the multi-peg currency system, including the suspension of central bank governor Godwin Emefierre. started. The suspended banker, who is currently detained by the Nigerian secret police “for some investigative reason,” oversaw the exchange of high-denomination notes for new notes months before Mr. Tinub’s election. It had caused a severe shortage of cash-based domestic currency in circulation. economic.
The dollar shortage has also spread to other countries, including Ghana, Zimbabwe, Zambia and Kenya, the last of which signed a deal with oil exporters in March to temporarily ease currency shortages.
The deal will allow Africa’s seventh-largest economy to import petroleum products on credit from Saudi Arabia and the United Arab Emirates for six months, adding hundreds of millions of dollars to its monthly fuel import costs. can be suppressed.
“In recent years, when people were lending money to Egypt, Nigeria, or Kenya, those economies had a lot of dollars flowing into them, and their currencies were holding strong. , the dollar stops flowing and all of a sudden there is no support for those currencies,” said Charlie Robertson, head of macro strategy at investment firm FIM Partners. “We are seeing countries react and have to react because the dollar is no longer available.”
the consumer pays
Whether due to market forces or changes in currency controls, the resulting currency devaluation hurts consumers who have to cut back on imports. For example, imports to Nigeria fell 6% year-on-year in the first quarter. This is primarily the result of lower demand for boilers, machinery and appliances. “Currencies have depreciated significantly to improve current accounts so that the dollar does not drain out of the economies of both countries,” Robertson said. “That’s why people buy less foreign stuff.” The combination of a weaker currency and slower economic growth gives investors mixed signals.
In Nigeria and Egypt, nominal half-year stock returns of 18.96% and 21.01%, respectively, versus 15.91% for the S&P 500 index, while weaker currencies allow foreign investors to buy more stocks with a given hard currency than recently become.
The sub-Saharan economy is still growing, according to IMFHowever, it is expected to slow from 3.9% to 3.6% in 2022. A recovery to 4.2% in 2024 could enable earnings growth to support share prices in some sectors, Kuranga said.
“In Ghana, growth is expected to increase in 2024 compared to 2023, driven primarily by the services sector amid low base effects from previous years,” said Kuranga. “Investors can focus on companies operating in the services sector that are expected to benefit the most in terms of revenue.” The situation in the local currency credit market is even more dire.
Two weeks ago, Nigeria’s central bank set the one-year treasury bill rate at 8.24%, beating the equivalent U.S. bond yield of 5.33%. However, inflation is running at an annual rate of 22%, resulting in a negative real return on investment. The same is true in Egypt, where the central bank sold government bonds this week at 23.5% against inflation of 32.75%.
Send me your safety tips.
