Over the last few months, the value of some African currencies have been decimated.
“It’s been a sub-Saharan bloodbath in 2015, “says Aly Khan Satchu an analyst who runs an investment firm in Nairobi. “This sell-off has trashed petro-currencies like the Angola Kwanza and the [Nigerian] Naira is holding on by its fingernails but collapsing on the street.”
Over the past year, the naira has lost 20% of its value against the US dollar.
Meanwhile, the three biggest economies in east Africa are also reeling from similar currency fluctuations.
Kenya’s shilling has lost 8.8% in the last three months alone. And since the beginning of the year, this is how much the dollar has gained over the country’s currency.
A similar trend can be seen in Uganda.
And Tanzania.
So what explains this precipitous slide? One reason, analysts say, may be the potential rise of interest rates in the US. “Expectations are that Janet Yellen has her pistol cocked and is all ready to raise interest rates this year,” Satchu told Quartz.
This shift is creating a global context where investors are moving their dollars away from emerging markets and what they perceive to be less risky bets. “If you are Chinese, Japanese, from the Middle East and you’ve got a lot of spare cash, you wanna park it somewhere” where there that money will generate some decent returns, Manzi Rwegasira, head of strategy at National Microfinance Bank, Tanzania’s largest bank, told Quartz.
And for investors, with the likelihood of a rise in interest rates, that place is America. As a result of this, high demand for dollars is putting a lot of pressure on emerging markets currencies. “So what you’ve seen is, across the board, a lot of currencies are going down, particularly African currencies,” says Rwegasira.
On top of that there are structural realities that are having negative effects on the continent’s currencies. Most of Africa’s economies, beyond commodities, import more than they export (pdf). This has meant that the region tends to have significant current account deficits.
“We don’t produce clothes, we don’t produce cars,” Rwegasira told Quartz. “Now most of those products are paid for in dollars. And the stuff that we sell, we sell in dollars too. Even agricultural stuff that we sell out, we need to import the equipment. So our demand for dollars is greater than our supply of dollars coming in.”
Central Banks respond
Both Kenya and Uganda’s central banks have tried to halt their currencies’ slide by raising interest rates, reports Bloomberg.
But these efforts have struggled to have the desired effect. In Kenya, where for the year the shilling has lost 13% of its value, a widening of the current account deficit and declining numbers on tourism have contributed to the plunge, analysts say. This, despite efforts by the bank to inject dollars into the exchange market. “Monetary policy alone will not help this. There must be some determination on the fiscal side to help the shilling,” one currency trader in Nairobi told Reuters.
In Tanzania, the Bank of Tanzania (BoT) has also taken some steps to try and mitigate against the falling shilling. For example, it injected over $400 million into the market to buy the shilling in the hope the increase in demand in the currency will strengthen it.
The tactic did not quite work and there are fears that it could put a dent in the country’s reserves. And last week, the IMF advised against aggressive use of foreign exchange interventions.
In Nigeria, where the drop in off in oil prices over the last year has put the economy under pressure, the central bank governor is doing all he can to defend the naira. Last month he issued a ban on the use of local currency to buy certain imports which ranged from the random such as rice and tinned fish to the obvious like private jets. In fact many economists think the country to let the currency find its natural value by not being propped up by the central bank.
The currency crisis shows the continent is still susceptible to the dynamics of the global markets say analysts. While there has been significant growth over the past decade, this has been built largely on the back of commodity prices and less so on indigenous exports.
“If you are producing more of your own stuff internally, you’d have a stronger currency,” says Rwegasira.
The immediate challenge, going forward, is how will this impact inflation. So far the rate has stayed low at 5% in Tanzania. But with the shilling depreciating already the country has seen a rise in fuel prices, which could quite quickly raise the cost of living. That possibility is keeping the government up at night.