The US dollar plays a pivotal role in global trade, accounting for 80 percent of international monetary transactions. This dominance means that even minor fluctuations in the USD can have widespread effects on the world economy.
African markets, in particular, face heightened vulnerability due to their heavy reliance on the USD in trade and finance, which exposes them to currency volatility and limits policy flexibility and financing options. Currency devaluation is a persistent issue in emerging markets, where local currencies often face greater volatility and downward pressure compared to widely-used currencies like the USD. Dependence on the USD for trade and debt payments can exacerbate devaluation, leading to higher import costs and increased difficulty in servicing USD-denominated debt.
Emerging economies with trade deficits may experience a continuous outflow of USD to cover import expenses, further devaluing their currencies. This cycle can worsen external imbalances, fueling trade disputes and financial instability.
The impact of the dollar shortage is most evident in the devaluations of local currencies, with countries such as Egypt, Nigeria, and Angola being forced to devalue this year as Eurobond issuers. The weakening of Kenya’s shilling and Zambia’s kwacha against the US dollar is a result of diminishing capital inflows. Kenya is set to make significant repayments on its dollar debts next year, while Zambia has failed to meet its obligations on Eurobonds. The inability to secure foreign financing has led governments in Zambia, Mozambique, and Nigeria to escalate their domestic borrowing in shallow markets, consequently driving up the cost of borrowing.
The reports highlighted that the rising import costs due to the dollar shortage are causing inflation, which is negatively impacting consumers and local businesses. For example, over the last year, the cost of medications for illnesses like high blood pressure and diabetes has increased threefold in Nigeria. The sales volumes of many prominent African retailers have declined to a point where they are no longer covering costs, largely because of rising expenses and a currency exchange rate that is causing customers to turn to the informal sector.
According to my opinion, a shortage of US dollars (USD) is on the rise in Africa due to various reasons:
Several systemic issues have arisen in Africa as a consequence of the scarcity of the USD ;
There is no doubt that the US dollar will stay as the primary currency for settlements in the short run, but the recent BRICS Summit brought into focus the interest in Africa as a continent. Investments in trade partnerships and currency clearings, particularly with the Indian Rupee and the Chinese Yuan, are being prioritised by China and India. The majority of financial transactions in Africa are processed by Western banks based in the US and Europe, however, it is important to acknowledge that the four biggest banks globally are Chinese. This inevitably provides us with clear evidence that China will increase its power in Africa even further in the near future.
The focal point of the conversation was the deficiency of U.S. dollars in African countries like Angola. Angola, an oil-producing nation, is grappling with a deficit of foreign exchange, mainly due to a decrease in supply from the national treasury. The insufficiency has been made more severe by higher payments on external debts, limiting the government’s ability to meet the market’s requirement for currency.
To tackle this issue, Angola is looking into the possibility of using funds from a Chinese escrow account to repay loans, potentially increasing the availability of dollars in the market. Nevertheless, the scenario continues to be intricate, with the market keeping a close eye on any changes that could ease the shortage of foreign exchange.
Many African central banks have previously raised cash reserves as a defense against inflation, but there is mounting anticipation for a potential lowering of policy rates to promote lending and economic activity. With real interest rates currently at elevated levels, lowering rates could provide essential support to borrowers and businesses. By implementing strategic measures and wise financial strategies, the area can navigate through challenges caused by the scarcity of U.S. dollars and rising inflation.
