A Bloomberg report has stated that the current continent-wide scarcity of the United States dollar is further pushing many already beleaguered African countries into deeper economic crises.
Amid a deepening shortage of hard currency on the continent, the report stated that governments are now turning to bartering, currency devaluations, central bank exchange controls, and help from the International Monetary Fund (IMF) and Middle East to shore up their balance sheets.
The dollar shortage is also hurting consumers and local businesses as import costs soar, fuelling inflation, the report noted.
“In Nigeria, prices of prescription drugs for conditions such as hypertension and diabetes have tripled in the past year. One of Zimbabwe’s biggest retailers, OK Zimbabwe, said sales volumes are now below break-even point due to rising costs and an exchange rate which has driven customers to the informal sector.
“And in Malawi, the price of corn, a food staple, has more than doubled over the past year,” it stated.
In the same vein, it noted that investors are rewarding nations whose efforts to boost dollar liquidity are paying of, but are punishing those that can’t guarantee access to the currency they need to invest and repatriate returns.
They are also steering clear of countries without adequate reserves to cover import costs or debt repayments. “African currencies are the worst performers in the world this year, with about a dozen sliding at least 15 per cent against the dollar,” it added.
In Nigeria, the country’s longest-dated naira bond, it said, was trading at a record 18 percent yield.
But, the report stressed that higher domestic yields aren’t attracting foreign buyers, who worry about depreciating local currencies and difficulties in repatriating returns.
Also, in Zambia, for example, foreign holdings of domestic debt fell from 29 per cent at the end of 2021 to around 22 per cent currently, partly due to the restructuring process as well as liquidity issues.
“Dollar holdings are part of the value proposition,” said the Country Risk Manager at the Economist Intelligence Unit, Benedict Craven.
“Will investors be able to trade using foreign exchange from official sources? Will they be able to expatriate their dividends abroad? These questions are separating where investment is going,” he added.
The dollar squeeze has played out most obviously in local currencies. Eurobond issuers who were forced to devalue this year include Egypt, Nigeria and Angola.
Dwindling capital inflows have also seen the likes of Kenya’s shilling and Zambia’s kwacha weaken to record lows versus the greenback. The former has sizable dollar-debt repayments due next year, while the latter is in default on its eurobonds.
Kenya’s dollar bonds have handed investors losses of 2.1 per cent since the beginning of July, when US Treasury rates started rising as the “higher-for-longer” interest-rate narrative took hold.
That compares with the 1.7 per cent average loss for emerging and frontier peers in a Bloomberg sovereign dollar bond index. Nairobi’s benchmark stock index has slumped 32 per cent in 2023, the most among 92 global markets tracked by Bloomberg, while the shilling has declined 19 per cent.
In Zambia, Mozambique and Nigeria, the inability to access foreign financing has forced governments to ramp up domestic issuance in shallow markets, pushing up the cost of borrowing. African sovereigns have been locked out of international debt capital markets since April 2022.
However, in some cases, the IMF is coming to the rescue. It said last week it will expand financing to Kenya by $938 million to bolster its reserves, ahead of a $2 billion eurobond maturity in June. That sent yields on the 2024 notes tumbling almost 200 basis points in four days through Friday — though they remain well above 14 per cent.
On the other hand, countries with less pressing foreign-exchange needs are becoming more appealing, Bloomberg stated.
“Countries with less punishing dollar-denominated loan amounts and bond repayments, and large stocks of foreign reserves, are most attractive,” said David Omojomolo, Africa economist at Capital Economics. “And more so those that have made large FX adjustments already,” he added.
James Emejo and Emmanuel Addeh in Abuja