A woman walks out of a currency exchange shop displaying a giant US dollar banknote in the Zamalek ...
African countries are finding it increasingly difficult to obtain hard currencies to buy imports and make payments to overseas investors as the region becomes an unintended victim of the developed world’s post-pandemic fight against inflation. Ironically, the situation has kindled inflation rates as high as 30% as the continent’s own currencies weaken, and there is no quick fix: it would take increased exports and creation of domestic production to replace imports to counteract the trend.
“The proximate reason for a dollar shortage is the pressure on the balance of payments as a result of the so-called rolling crisis impacting many African economies,” says Christopher Adam, professor of development economics at the University of Oxford. The crises stem from pandemic-related supply-chain disruptions and the subsequent global recession that resulted in sharply lower prices for Africa’s key exports and also a halt in tourism, a key source of dollar inflows, he adds.
“The resurgence of global inflation and the resulting tight monetary policy has seen prices for key imports and the cost of foreign borrowing rise sharply,” Adam says. “On top of this, Russia’s invasion of Ukraine saw prices for oil, food and fertilizer spike.”
Local importers and non-resident investors typically require hard currencies–mainly U.S. dollars–to respectively pay suppliers or repatriate investment proceeds. In countries with currency controls, the dollars come from central banks, which obtain them from exports, overseas remittances, overseas loans and tourism.
But several months of dollar outflows from the economies of some of Africa’s top investment destinations like Egypt, Nigeria and Kenya, with little or no boost to exports have put a strain on central-bank foreign exchange reserves and left local currencies under immense pressure. The Egyptian pound has lost 20% of its value against the dollar this year while Nigeria’s naira is down 39% since June 14, when the central bank removed the peg against the greenback and unified multiple foreign-exchange rates. The rising costs of living as imports become more expensive in local-currency terms has increased operating expenses for companies, slowed economic growth and discouraged fresh investment. Whether a country maintains currency controls or not, the result is much the same.
“If countries seek to run a fixed exchange rate, then the shortage may be tangible, but if the exchange rate is flexible, it presents itself as a sharp depreciation” in a domestic currency, says Oxford’s Adam. What the African economies need is a resumption of investment that would directly ease the hard-currency shortage and–if correctly targeted–allow the countries to increase their output of exports and invest in capacity to replace imports with domestic goods. That is not going to happen overnight in a world where advanced economies will grow no faster than 1.4% through 2024, according to the International Monetary Fund (IMF) and where U.S. Treasury bonds yield about 5% for maturities of two years or less, with no currency risk for dollar-based investors. Global growth, which was 3.4% in 2022 is projected to slow to 2.8% this year and 3% in 2024, limiting investor appetite for r
Interventions in the foreign exchange market to ease the pressures have helped but also significantly drained foreign-exchange reserves, fueling other control measures, including multiple exchange rates, increased hard-currency rationing and import deals that rely less on foreign exchange.
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